The week of December option expiration turned out to be one of the most volatile and exciting of the year. The bulls and bears were tossing triple-digit blows on the major indexes with dizzying 2%-3% intraday swings.
The flush of the weaker hands I had warned about coming into the month played out like a fiddle but took a week longer than I expected. The talking heads were fretting over continued downside risk and wild price movements despite the V-shaped recovery into Friday’s close.
I mentioned coming into last week that a bottom could be forming. The game plan is unfolding like a championship blueprint for higher highs, but the bears have shown some bite. Perhaps their hibernation started last Wednesday following a classic “double bottom” signal across the board.
The Dow gained 26 points, or 0.2%, to close at 17,804 on Friday. The blue-chips traded into near-term resistance at 17,800-17,900 after reaching a peak of 17,874. Last week’s low touched 17,067 and 17,069, which was the green light that support at 17,000 would hold. Last week’s drop below the 50-day moving average led to a quick test of the 100-day moving average, but the bounce off of support was solid. The 52-week and all-time high for the Dow is at 17,991, and a pop past 17,900 should get 18,000 in play. I talked about “fluff” up to 18,200-18,350 on an overshoot coming into December. Short-term support will try to hold at 17,600, with 17,400-17,350 serving as backup.
The S&P 500 added 9 points, or 0.5%, to end at 2,070. The index nearly posted its 50th record high following a push to 2,077 and resistance at 2,075. I warned of risk to 1,975 coming into last week, and the bears reached 1,972 on Tuesday. 1,973 was Wednesday’s low ahead of the Fed’s minutes. The nearly 100-point, or 5%, recovery from the bottom also tested the 50-day and 100-day moving averages. My year-end target of 2,100 from February is a little over 1% away from triggering. The recent all-time from Dec. 5 is 2,079. Support is at 2,050-2,025 on a pullback.
The Nasdaq advanced 17 points, or 0.4%, to finish at 4,765. Tech tested its 50-day and 100-day moving averages following the freefall to 4,547 and 4,550 before Friday’s high of 4,782. The bulls nearly held 4,775 into the close, but they at least held 4,750, as all I wanted to see was a 3-point follow-through win to end the week. Resistance is at 4,800, with the 52-week and 14-year high at 4,810 reached at the end of November. The bulls fell short of dancing into my February year-end target zone of 4,800-5,000 (again) for the Nasdaq, but they came close. The party should be back on as long as 4,725-4,700 holds this week, and especially today, on any weakness. There is additional support at 4,650, and a close below this level would signal continued volatility.
The Russell 2000 jumped nearly 4 points, or 0.3%, to settle at 1,196. The small-caps gave one of the best clues that a market bottom might form quickly following a back test to 1,140 to start the week, with only a one-point loss on Tuesday’s overall market slide. The lows of 1,138 and 1,134 were a little worrisome, but my downside target of 1,140-1,135 held steady. While there was further risk to 1,125, I mentioned earlier this month not to get nervous on any selloff unless 1,100 was cracked. This is the lower level of the 10-year uptrend line I covered on Dec. 8. The rebound back above multiple layers of support and recovery above 1,180 was also a bullish signal that a run to 1,200 could come. Friday’s high came within spitting distance of 1,199. The 52-week and all-time high is 1,213.
The S&P Volatility Index ($VIX, 16.49, down 0.32) has been my best friend for years, although it is often bashed by the slick-talking pros. The VIX tested 15 at the start of December, and I warned that a close above this level could lead to a test to 17.50 and then 20-25. The bears pushed 20 the prior week and 24.93, 25.20 and 24.61 to start last week and into the Fed minutes. The VIX is still in a “danger zone,” as the aforementioned levels are still in play on another pop past 17.50. The bulls need to get back below 15 this week and 13.50 by year-end to ensure smooth sailing into January.
The bears started last week off with a Monday win and tested further support levels following a failed bullish breakout on the open. The slick-talking pros called it a “dead cat” bounce and were worried over oil’s drop to double-nickels.
Tuesday’s was one of the wildest sessions of the week, with triple-digit hourly swings on the Dow, while the Nasdaq nearly pulled off its own 100-point intraday swing from high to low.
The small-caps slipped a point on Tuesday’s crazy shakedown, which was a slightly bullish clue. The VIX tested 25 at the start of the week but finished lower before Tuesday’s peak at 25.20 and close below this level.
These were the two most important clues I focused on heading into Wednesday’s Fed announcement. Wall Street anxiously awaited the Fed’s updated policy but seemed “shocked” and “relieved” following the mid-week announcement to stand pat on interest rates.
The Fed added fuel to the bulls’ fire following their decision to maintain interest rates. Janet Yellen is carrying the Ben Bernanke torch like a gold medalist at the Olympics, as she soothed Wall Street and reminded everyone to be “patient.” The indexes did get a little shaky while she was speaking, but, by the close, Wall Street was gelling.
Thursday’s action was even better. Futures were up huge ahead of the open, which was also a decent sign of a follow-through rally. I really wanted to see the bulls hold fresh support, and they did more than that after clearing several layers of resistance across the board.
I was banking on a higher Friday, as I mentioned last week that the session was usually one in which the bulls roamed.
The Dow closed lower last Monday to extend the bears’ streak to three-straight wins, which was another unwanted curveball. However, Friday’s continued run to previous record highs was the fourth Friday win in five weeks for the blue-chips.
The Dow came into December at 17,828, the S&P 500 started at 2,067, the Nasdaq was at 4,791 and the Russell 2000 was 1,173.
So far, the December lows have been Dow 17,067 and 17,069 on back-to-back days last week. The S&P 500 kissed 1,972 and 1,973 last week, while the Nasdaq danced with 4,547 and 4,550. The Russell 2000 traded down to 1,138 and 1,134. These numbers were perfect “double-bottoms” in today’s fast-paced and volatile market.
The Dow and Nasdaq are still slightly lower for the month, while the S&P is showing a slight gain. The Russell is up 2%, and I said that it could lead the way higher from mid-December and into January.
The Financial Select Spiders (XLF, $24.68, up $0.02) tested a low of $23.68 and $23.75 before zooming 2% on the Fed’s comments and reclaiming $24. This level was breeched on Monday before the mid-week recovery and Friday’s push to $25. The recent 52-week high is from Dec. 8.
While headlines can be attributed to the market’s volatility and bullish rebound, I was relying on both technical levels and bullish news to confirm that a bottom would form.
The market gods blessed those who did their homework and bought into weakness, but nothing is a given anymore. The wild card now is Russia and how Putin plays the hand he is being dealt with a collapsing currency and lower oil prices.
Political headlines here at home remain the joker heading into 2015. President Obama used his executive powers and made a deal with Cuba before the zombies packed up for the Christmas and New Year holiday. Hopefully, by the time Washington gets back from its vacation, the bulls will be rocking and there will be no major curveballs. February is always a tricky month to trade, but most government officials take extended vacations deep into January.
I will worry about those events when the time comes, but, for now, it is time to enjoy the holidays ourselves.
The Santa Claus rally officially starts the day after Christmas, or this coming Friday, but the day before Christmas is usually bullish as well. I wouldn’t be surprised to see the possibility of a more normal trading range into Wednesday with less volatility. I mentioned that the talking heads would get the Santa rally confused with the facts and what they were calling a snap-back rally — just like they do every year. Hopefully, new highs are set by year-end and into January, as some slick-talking pros were saying to “sell” into last week’s highs.
I would like to thank everyone that has recently signed on and those who are new subscribers, along with continued blessings to those that have traded beside me over the years. This year has been challenging and super rewarding, but the homework has paid off, as the portfolio recommendations provided us stellar market returns.
I promise to do my best and to work even harder in 2015 to provide you with the best double- and triple-digit returns in the business. I also hope everyone takes advantage of the exclusive offers I have been sending you.
If you are a recent and new subscriber, the easiest way to catch up with me, my style and a very quick review of December is to read the past few Monday updates. You will see that I was cautious of the December pullback. The updated 10-year charts are in the Dec. 8 Issue, and they are my most important pieces of art, as they provide a sneak peak at how 2015 might play out — good or bad.
Side Note: Last year, on Dec. 23, the Russell experienced a “whacky” 5% move that was later wiped away from the history books.
The index was at 1,146 and zoomed past 1,200 before “officially” settling that day at 1,157.
Here were my thoughts on Dec. 23, 2013 from my Mid-Market Update:
“The Russell 2000 opened at 1,212.81 and kissed 1,213.49 in the opening minutes before coming back down to earth. The 5% move could have been a rebalancing act and either marks the high for the year or is one hell of a clue this level will be triggered in January.”
Here is my chart work from the week after:
The index has struggled with the 1,200 level all year following a high of 1,182 in January, 1,195 in March, 1,213 in early July, 1,183 in September and 1,191 in November. For 2014, the Russell 2000 is higher by 3% after coming into the year at 1,163.
I doubt there will be another “fat-finger” incident or one of these unexplainable events this week, but I wanted to bring this to your attention. However, given the current volatility, nothing can be ruled out.
I do believe the market could have another 5% move to the upside into mid- to late-January as long as support stabilizes.
Ahead of the open, futures look like this: Dow (+34); S&P 500 (+2.5); Nasdaq 100 (+1.5).
Special Notice: The market closes early on Wednesday at 1 p.m. Eastern. Christmas is on Thursday, and the market is closed all day.
A full day on Friday is scheduled, but Wall Street will be a ghost town. I will be working, of course, and watching the positions and may have possible Trade Alerts if needed.
Chapter 1. Pizza Inn (PZZI): My Top Pick for 2015
Here is an in-depth look I wrote for why PZZI is my number one stock pick for 2015. It has been updated to include previous comments from a few months ago:
Earlier this year, I made a road trip to Pie Five, one of Pizza Inn‘s (PZZI) trademarked brands, to learn more about their story and, more importantly, try their pizza.
My first impression was that it was very clean and bright and that the store was located in a great area. When I first walked in, I was greeted by a bevy of pizza choices from the company’s hand-crafted menu, but their aim is that you will create your own perfect pie. And, yes, it feels like the Chipotle (CMG) of pizza shops.
Pie Five’s goal is to have you stuffing your face with the perfect pie in less than five minutes. This is important to note because it doesn’t take five minutes to cook your pizza — it takes under two minutes.
The first thing I did was figure out what type of crust and sauce I wanted. When I walked up to order, there were four different kinds of crust to choose from and several sauces. The creation of my pie was underway once I selected the crust.
I was very impressed with the pizza toppings, as everything looked very fresh. I went the lazy route and tried one of their latest pizza creations, the Meatball Ricotta Pie. I did swap out the cheeses and, after it was created, I was asked if it looked good to go — in the oven.
The shop also had a salad and dessert station, and a pie and a salad was only $6.99 at the location I visited.
Now here’s the kicker: As I was getting ready to check-out, my pizza was already waiting for me. They asked me if I wanted some “Magic Dust” on it. The Magic Dust was a parmesan cheese coating that was sprinkled on my fresh, hot and ready pie. I gave it a shot and ordered a peach tea with my lunch.
I wanted to wash my hands before I dove into my pie, so I checked out the store’s restrooms, as well. They were very clean and modern, with a super-slick sink and hand-dryer.
At this point, my mouth was watering thinking about the beautiful pie I had just been handed. The anticipation was just too much, and so I quickly went back to my seat to take an $8,000 bite (based on the stock price at the time and the number of shares I owned). I wanted it to be good. I wanted the crust to pop and for the toppings to deliver.
And, man, did Pie Five’s knock it out of the park! It was excellent. Needless to say, it was instant gratification. I tried the pan crust as well as the thin-crust pizza, and both were fantastic.
The store I visited had a great staff and a very friendly DO (Director of Operations). When I asked how business was and if they can keep up when they are busy, he told me that their lunch lines are out the door Monday through Friday and that they can easily roll through a crowd.
The Virginia location was starting to get really busy for its dinner rush, and he was right, as his staff did well handling the volume of customers I saw rolling through during my visit. There were no waiting customers as the pies were being cranked out.
Pie Five’s also has its own Wi-Fi connection, free refills with its drinks and a dynamic rewards program. I didn’t talk numbers with the DO regarding what their store might do in a week, but I counted the number of seats they had and ran some of my own calculations for what their store might be grossing.
I still had some of my pie left over from my visit and decided to do another test later on that night. Amazingly, the pizza tasted fresh right out of the box. Yes, a slice of cold pizza. I heated the last piece in the oven, which actually took longer than when they created my original pizza, and it was bingo as well.
Of course, managing the bottom line is always important for any company and franchises, so I was pleased to see Pie Five’s recent results came in better-than-expected.
Although the company reported a first-quarter loss of 3 cents a share, it was a penny higher than analysts’ estimates for a loss of 4 cents a share. Revenues came in at $11.3 million versus expectations just north of $10 million for the quarter.
The company only had a handful of Pie Five units over the past few quarters, but this number will substantially grow over the next three to five years. The company is also shedding some of its older models and the underperforming Pizza Inn stores to improve its operations. I wouldn’t be surprised to see a change from the iconic name brand Pizza Inn to “Pie Five” or “Pie Five Pizza” at some point in 2015.
The first Pie Five Pizza location opened in June 2011 in Fort Worth, Texas. With recent multi-unit agreements signed in Colorado and Kentucky, the number of company-owned restaurants is on track to reach 100 over the next five years. The explosive growth will come from franchising, as more than 300 restaurant openings are projected over the same period. Pizza Inn gets a nice upfront fee in addition to royalties, which is a beautiful way to expand growth while taking less risk.
There are roughly 30 locations open for business in nine states, and the current growth plans will include 16 states and the nation’s capital. This still leaves the door open for future expansion across all states, which would be the obvious goal for a reinvented pizza company.
The company also footprints overseas, but I would expect them to establish a loyal base here at home before expanding internationally.
If you were wondering how Pie Five can cook a pizza in under two minutes, it’s due to their patent process ovens. They heat up to 700 degrees and can bake a pie in one minute and 45 seconds.
The fast-casual pizza market is growing like a weed, and current projections for openings of fast-casual pizza joints over the next five years are as high as 2,000. Pie Five could be the leader in this revolutionary change, as it has a significant leg-up on its competition.
The company also has a top-notch management team, with CEO Randy Gier leading the way. He previously held positions as the chief marketing officer at Yum Restaurants International overlooking their Pizza Hut and KFC divisions. He also worked for Dr. Pepper/Snapple Group (DPS) and Borden Dairy Company.
Mr. Gier is a hands-on manager, but not in a bad way. He has built a great track record over the years and has implemented slick operating procedures that have helped lead the company to success.
He is able to monitor the company’s POS (Point of Sales) system to track revenues and inventory from each store from his mobile device. He can also see which employees are working and when. This is a pretty slick way for the captain of a ship to run and manage their crew.
Tim Mullany serves as CFO and held a previous position with Restaurants Unlimited. Steve Link is VP of Operations and has past ties to Subway and Ruby’s diner. Perry Jones, Vice President of real estate, is a bagel icon after his successful run with Einstein Brothers Bagels and work growing the brand names of others to over 800 units.
With a market-cap of just $65 million, this is considered a micro-cap stock by Wall Street’s standards. Needless to say, the suit-and-ties are uninterested, as there is no current Wall Street coverage (according to Thomson/First Call).
Rival Papa Murphy’s Holding (FRSH) sports a market-cap of $171 million and offers customers an alternative to create their pizza and then take it home. I haven’t been to a Papa Murphy’s, so I can’t pass judgment, but what’s the point of going through all the trouble of going there and then taking a pizza home to cook it?
Pizza Inn and its $65 million market-cap have stayed under Wall Street’s radar, but shares have traded publicly for over two decades.
However, it is possible to teach an old dog new tricks — just ask IMAX (IMAX). I started coverage of IMAX ahead of the 3D boom in 2008 when it was a money-losing company year after year and shares were under $3. Look at them now.
Pizza Inn was a struggling pizza chain before reinventing itself. The company has done a tremendous job of eliminating its long-term debt and has nearly $3 million in its cash coffers.
Shares recently closed above their 50-day moving average and are trying to build a nice support base at $7. There is short-term risk to $6.75-$6.50, but shares are in a solid uptrend following a low of $6.12 in early November.
My first recommendation came when shares were at $4.50 in February 2012. Although shares are up 55% from my initial recommendation, they are down 19% from the 52-week high of $8.63. Shares surged past $9 in November 2013 and are down 22% from this peak.
I believe shares will trip low- to mid-double-digits at some point in 2015. If shares clear $7.50-$8.00 over the near term, momentum could easily carry shares past $9 and make a run at $10. This would represent roughly a 30%-40% return from current levels.
If all goes well and Pie Five Pizza has a smooth 2015, a price tag of $14 is easily reachable. I would reserve that bet for 2016, which would create a 100% return over a two-year time period. Conservative traders could cut losses if shares fall below $5. Aggressive traders could leave a stop at $3.50, and a test to these levels would suggest investors are jumping off of the bandwagon.
Insiders own 35% of the company’s shares and institutional ownership is clocking in at just under 15%. I love the fact shares are still under-discovered, although one investment firm recently downgraded the stock to sell from hold. However, I doubt they have done the homework I have over the last two years to learn this company’s business model.
If you have missed the Chipotle burrito train over the past decade, then find the time to hop on this fast casual pizza-pie explosion. Pie Five offers one of the best risk/reward trades heading into 2015 without all of the market noise.
Chapter 3. Momentum Stocks Weekly Play List
All prices given in this update are current as of Dec. 19, 2014.
The Momentum Stocks Weekly Closed Trade Track Record for 2014 is 32-10, for a 76% win rate (117-17, or 87% win rate, overall since the start of 2011).
You can view the entire list of open and closed trades on our website. View the trades by clicking here.
Bank of America (BAC, $17.62, up $0.09)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: N/A
Exit Target: $20+
Stop Target: $15
Current Dividend Yield: 1.2%
Action: I have recommended BAC numerous times over the past few years and the last recommendation came in October at $16.23. The trade was stopped out at $17 in mid-November for a 5% gain.
Near-term resistance is at $17.75 and Friday’s peak reached $17.70. The 52-week high is at $18.03 and where I could sell a call option to lower the cost basis. New subscribers can buy up to these levels in case they missed Friday’s entry point. Support is at $17.40 and a close below this level could lead to a back test to $17.
JDS Uniphase (JDSU, $13.93, down $0.08)
Original Entry Price: $14.07 (12/19/14)
Lowered Price from selling options: N/A
Exit Target: $18+
Stop Target: $10
Action: If you didn’t get in this trade on Friday, then do so this week and ahead of Christmas.
Shares tested $14.25 before closing below $14 to end the week. The 52-week peak is at $14.99. Near-term support is at $13.75 and a drop below this level could lead to $13.50-$13.25.
You can read my full write-up on JDSU from the Dec. 8 issue by clicking here. Shares are on the verge of a breakout and could make a run to $19 over the 6-12 months. I may open a covered call on JDSU once shares clear $16.
Brocade Communications Systems (BRCD, $11.60, up $0.14)
Original Entry Price: $11.47 (12/5/14)
Lowered Price from selling options: N/A
Exit Target: $15+
Stop Target: $10
Current Dividend Yield: 1.3%
Action: Shares jumped 5% for the week following a midweek low of $10.86. The 52-week peak is at $11.77 and a close above this level should get $12 in the mix.
Support is at $11.40 on a pullback but there is risk to $11.20-$11 on a close below this level. New subscribers can feel comfortable opening positions at current levels.
AT&T (T, $33.54, up $0.03)
Original Entry Price: $33.88 (12/5/14)
Lowered Price from dividends/ selling options: N/A
Exit Target: $40
Stop Target: $30
Current Dividend Yield: 5.7%
Action: Shares cleared $33 on Thursday’s 2.5% move and their 200-day moving average on Friday. Although this level failed to hold after a high of $33.75, the action was bullish. A run past $34 and the 50-day and 100-day moving averages is likely once $33.75 clears again.
The dividend is yielding 6% and should attract investors looking for a safe stock with tremendous upside to $40 at some point in 2015. Shares are still a buy with $33-$32.75 serving as short-term support.
Discovery Laboratories (DSCO, $1.26, up $0.01)
Sold to open the DSCO April 2 calls (2015) (DSCO150417C00002000, $0.10, flat)
Original Entry Price: $1.60 (11/11/14)
Lowered Price from selling options: $1.20
Exit Target: $2
Stop Target: None
Action: Shares tested a low of $1.19 on Friday and held short-term support at $1.20. There is risk to $1 on continued closes below $1.25. Resistance is at $1.30-$1.35. I still like the position at current levels but I would recommend waiting to sell the DSCO April 2 calls until shares clear $1.60.
On Nov. 11, I suggested buying DSCO at $1.60 while selling to open the DSCO April 2 calls for 40 cents. This lowered the cost basis of the trade to $1.20. If shares are “called-away” at $2 by next April, the trade will make 67%.
Pizza Inn Holdings (PZZI, $6.92, down $0.07) Stock Trades
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $12
Stop Target: $5
Original Entry Price: $8.10 (10/11/13)
Lowered Price from Selling Options: No options available
Exit Target: $12+
Stop Target: $5
Action: Shares could be on the verge of a major move as a symmetrical triangle is forming. A close above $7.20 and the 100-day moving average could lead to a breakout to $8+. A drop below $6.75 would be bearish and likely lead to a back test to $6.
Huttig Building Products (HBP, $3.10, down $0.05) Stock Trade
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Stop Target: $2 (Stop Limit)
Action: Shares spiked to resistance at $3.50 several times on Friday after struggling with $3.20-$3.25 throughout last week. There is additional risk to $2.75 on a drop below $3.
To establish new positions, conservative traders can wait for a possible pullback to $2.75 and to ensure $3 holds. Aggressive traders can get in now for the possible run past $3.50 and back to $4 in 2015.
Read my original write-up for HBP by clicking here.
Limelight Networks (LLNW, $2.84, down $0.01) stock trade
Original Entry Price: $3.00 (6/9/14)
Lowered Price from Selling Options: N/A
Exit Target: $5
Stop Target: $1
Action: Shares stayed in a tight range last week and struggled at $2.90. Resistance is at $3 and a close above this level would be bullish for a run to $3.25-$3.50. Support is at $2.70-$2.65. New subscribers can start positions at current levels for a run to $5-$6 in 2015. The company turned down a buyout offer north of $6 earlier this year.
Read about why I feel Limelight is a continued takeover target going into 2015 by clicking here.
Trades on Hold: These are trades that are still open in the portfolio but are down from the original recommended price. These trades are on “hold” and are not a buy until I bring back coverage of the stock. This means I would not open any new positions. I’m still keeping track of the trades and will record the results accordingly when a trade closes. I like all of these stocks going into 2015 but the fundamentals (and momentum) need to improve. I will update them at month’s end.
AKS Steel Holding (AKS, May 2011), DryShips (DRYS, January 2011), Rambus (RMBS, November 2011), Bebe Stores (BEBE, February 2012), Vivus (VVUS, July 2012), Zynga (ZNGA, March 2014), Galena Biopharma (GALE, February 2014)
Momentum Stocks Weekly