Dear Momentum Stocks Weekly Subscriber,
Wall Street closed shop early last week for the holidays, and most traders took extended vacations on Friday instead of fighting with the bulls.
I mentioned the week before that the action would flush out the weaker hands and that a bottom was possibly in. Last week’s follow-through was a perfect read on the bears’ bluff.
However, cards and chips are still on the table as we wind down the last week of trading for 2014 and the start of 2015. A few of my year-end targets for the major indexes from February are back in play, and momentum seems strong.
The suit-and-ties are once again late to the party and could get antsy to play catch up. Traders and mutual funds managers could open new positions over the next three days to show they were in some positions for 2014 and for 2015’s books. The bears still need to be respected following the December lows, but I have provided the warnings signs I’m watching in order to stay a step ahead of them.
The Dow added 23 points, or 0.1%, to finish at 18,053 on Friday. The blue-chips traded to an all-time record high of 18,103, and I have talked about a possible run to 18,200-18,350 coming over the near term. Support is building a base at 18,000, as the index has held this level for three-straight sessions. There is additional help at 17,900-17,800 on a dip below 18,000. The Dow came into the year at 16,576 and is up 1,477 points, or 9%, with three trading days left.
The S&P 500 jumped 7 points, or 0.3%, to end at 2,088. The index came within 8 points of nailing my February year-end target of 2,100 after sailing just past 2,092. There is additional fluff to 2,020-2,025 and continued record highs before a possible pullback as long as near-term support at 2,075 holds. For the year, the index has gained 240 points, or 13%, after starting 2014 at 1,848.
The Nasdaq advanced 33 points, or 0.7%, to close at 4,806. Tech cleared resistance at 4,800 after a five-day battle with the bears to reach a fresh 52-week high and a nearly 15-year peak of 4,814. The bulls have reclaimed my year-end target zone for the Nasdaq from February to trigger 4,800-5,000. The upper end of this target is still in play over the near-term on continued momentum. Short-term support is at 4,750-4,700 on a pullback. The Nasdaq was at 4,176 at the start of January and has surged 630 points, or 15%, year to date.
The Russell 2000 roared 8 points, or 0.7%, to settle at 1,215. The small-caps also posted a record high after kissing 1,217. I have mentioned that the bulls could roam to 1,225 once 1,200 cleared. A continued breakout and “new money” could spark a January run to 1,250 if 1,225 clears. A close below 1,200-1,190 bears watching, as it could lead to a back test to 1,175. The Russell 2000 ended 2013 at 1,163 and is higher by 52 points, or 4%, this year.
The S&P Volatility Index ($VIX, 14.50, up 0.13) held 15 after trading to a high of 14.84 on Friday. The bulls pushed a low of 14.13, and I have talked about the need to get below 13.50-12.50 to confirm a continued rally into January. If the bears reclaim 15, there would be additional risk to 17.50, which would be the first warning sign that momentum is fading.
The Russell 2000 scored a fresh all-time record high on Friday and rejoined the Dow and S&P 500 on their continued trip into blue-sky territory. The S&P 500 has now triggered 53 intraday record highs this year, while the Dow has scored 38 record closing highs.
The Nasdaq has made fresh 52-week peaks and nearly 15-year highs this year. However, this is the one major index that hasn’t reached record highs and is still 7% away from its all-time intraday high of 5,132. This level was reached on March 10, 2000, with the index closing at 5,048. The closing high is 5% away.
The Monday/Friday closes have returned to being bullish, as the Dow ended a three-session Monday losing skid last week. The December slide nearly matched the September/October pullback of four-straight before the bulls won five of six afterwards.
The Friday closes have remained bullish, as the Dow has edged higher in the past two Fridays following the 315-point drop mid-month. The bulls have won nine of 11 Fridays since mid-October. Even more impressive is the fact that the Dow has closed higher in 15 of 18 past sessions since back-to-back Friday pullbacks in August.
The Santa Claus rally officially started on Friday, and the bulls didn’t let Wall Street down. I mentioned that the talking heads would associate the run to all-time highs ahead of Christmas with the Santa surge, but they missed getting back in coming off of the lows. This historical trend starts the last five days of December and lasts into the first two days of January.
Of course, higher highs aren’t guaranteed and, if the Santa rally doesn’t continue, it could be a signal that a short-term market top is in. It could also be a warning sign for rougher waters in January.
Financial stocks continue to show strength and are another bullish sign. The Financial Select Spiders (XLF, $24.95, flat) made a nice recovery following the mid-December test to $23.55 and the 50-day moving average. I have talked about a run to $30 possibly coming in 2015 for the index. Near-term support is at $24.75-$24.50. I also mentioned that this sector needed to stay strong to help support continued new highs in the overall market. A break below $24 would suggest a top is in.
The biotech sector showed some weakness last week and is a developing situation that warrants monitoring. The Market Vector Biotech (BBH, $116.60, up $2.69) rebounded 2% Friday following the test to $112 early last week. However, the closes below the 50-day moving average keeps $110 and the 100-day moving average in play if $115-$114.75 fails to hold.
The good news is that the small-caps continue to lead the market higher, and tech is back in rally mode. I expect the Nasdaq and Russell 2000 to continue to pave the way for higher highs. I mentioned the XLF and BBH as additional clues to watch for to confirm strength or a sudden sign of market weakness.
While the last trading day of the year has been bearish 70% of the time over the past decade, the past two years have ended on a higher note. The S&P 500 rallied seven and 24 points in 2013 and 2012 for an average gain of nearly 1%. However, the prior last trading days in Decembers were won by the bears in seven of eight years.
Additionally, the S&P dropped 1% on its first day of trading this year to 1,831 but made a run to 1,850 by mid-January. The intraday low of 1,823 on Jan. 6 represented a 1.5% move from the low, but this level was breached two weeks later and led to a nasty pullback.
We have a lot of new subscribers, so I wanted to remind everyone that you can catch up on all of my thoughts for December by reading the past three Monday updates. All of them are easy reads and should give you a great feel on how I see the market.
The most important update is the Dec. 8 Issue, as it covers the 10-year charts and possible price targets for 2015. I officially make my year-end targets for the major indexes in February, as I like to wait until the dust from January has settled.
In 2013, this was one of the few newsletters that called for the Dow to make a run from 13,000 to 16,000. For 2014, there were no major brokerage firms calling for Nasdaq 4,800-5,000 or S&P 2,100, as I covered all of Wall Street’s major price targets earlier this month.
Most of the “bullish” suit-and-ties are already pricing in their typical 7%-8% advance for next year and have predicted volatility. I mentioned that they do the same math every year because it’s the historic return for the market, which is what fund managers try to make clients every year.
The slick-talking suits are right about one thing, and that is to expect volatility. My “early” bullish price targets from earlier this month for 2015 are very aggressive once again, but I gave a very bearish scenario as well.
I have repeatedly said all year (and last) that a bear market won’t happen until a break below the 10-year uptrend lines occurs.
I will be doing more detailed chart work next week to provide a fresher update and additional possible near-term “fluff” targets. With all-time highs still in the mix, resistance is hard to define, which is why I say there is additional fluff. I also call fluff “blue-sky territory,” but the bulls will be reaching for the moon before possibly coming back down to earth.
Last week I said:
“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.”
Write these numbers down and keep them by your computer, on your bathroom mirror or in your wallet or purse. If these levels come back into play in January, or during the first quarter, it would be time to start considering going short for a much deeper pullback.
Until then, I’m riding shotgun with the bulls into January. I warned that February can always be a tricky month to trade, but, by then, the portfolio should have locked in some nice gains.
From desk to press, futures are shaping up like this: Dow (-47); S&P 500 (-4.5); Nasdaq 100 (-5.5).
Chapter 1. Undervalued AT&T (T) Should Rebound in 2015
Utilities and telecom providers can be safe investments that offer steady income in the form of dividends, giving nervous investors a place to hide in uncertain times. As investors have become nervous in 2014, utilities have been some of the best performers. However, telecom providers have not fared as well. While utilities are up 17.4% year-to-date, telecom providers are up just 4.3% year-to-date and why Telecom could stage a comeback in 2015. AT&T (T, $34.17, up $0.21) may be able to weather any uncertainty in the market as shares look strong and may just surprise Wall Street.
The $177 billion telecommunications giant based in Dallas, Texas is leading provider of wireless, Wi-Fi, high speed internet, voice and cloud-based services. It also claims to have “the nation’s most reliable 4G LTE network” and offers broadband subscription television services. The company operates in the United States and internationally and is the second largest provider of mobile telephones. Additionally, AT&T is largest provider of fixed telephone in the U.S. and worldwide, it has nearly 120 million mobile customers.
The company has also has a strategic relationship with IBM to provide businesses with a source for network security and threat management.
The history of AT&T is rich and interesting, as noted by several sources including Wikipedia.
In 1874, Bell Patent Association was established to protect the patent rights of Alexander Graham Bell after he invented the telephone system. It became Bell Telephone Company in 1875, which later created a separate company, AT&T (American Telephone and Telegraph Company), on March 3, 1885. AT&T was formed to create a nationwide long-distance network with a commercially viable cost-structure. It acquired Bell Telephone Company in 1899 and became the primary phone company in the U.S.
Throughout most of the 20th century, AT&T held a monopoly on phone service in the U.S. It began buying up many of the smaller telephone companies including Western Union. In the Kingsbury Commitment of 1913, the company agreed to not acquire any more independent phone companies without the approval of the Interstate Commerce Commission (ICC).
In 1918, the federal government nationalized the telecommunications industry, under the premise of national security and that everyone in the country should have phone service. Rates were regulated so that customers in large cities would pay higher rates to subsidize those in more remote areas. AT&T’s president was appointed to manage the telephone system with the company getting a percentage of the telephone revenues. Although nationalization ended a year later, competitors were forbidden from installing new lines to compete, with state governments believing that telephone service was a natural monopoly and that one firm could better serve the public than two or more. AT&T’s market share grew.
On Jan. 8, 1982, the United States Department of Justice won an antitrust suit against the company and forced it to split. Its local operations were split into seven independent Regional Bell Operating Companies (RBOCs). The resulting companies were Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell, and U.S. West. AT&T also held investments in Cincinnati Bell (CBB) and Southern New England Telephone (SNET). Both became fully independent companies following the breakup. Each newly formed company held a share of the rights to the Bell trademark.
The remaining AT&T, reduced in value by about 70%, consisted of its long distance operations. As a result of the breakup, it lost some market share to competitors MCI and Sprint. In 1994, AT&T purchased the nation’s largest cellular carrier, McCaw Cellular, for $11.5 billion and renamed it AT&T Wireless. In 1995, the company purchased long-distance provider Alaska Communications System. Expanding into internet services, it acquired significant cable assets.
In 1998, it acquired TCI in a $48 billion all-stock transaction, planning to merge its consumer long distance, wireless, and internet services with TCI’s cable, telecommunications, and high-speed internet business. In 2000, the company acquired MediaOne for about $44 billion, thus becoming the largest U.S. cable television provider serving more than 40% of pay-TV customers.
The problem with these acquisitions caused the company to take on a lot of debt. With long-distance rates falling and the market for telecommunications services weakening, AT&T had to sell assets. On July 9, 2001, it spun off AT&T Wireless in what was then the world’s largest initial public offering. Later that year they spun off their cable TV assets as AT&T Broadband and Liberty Media (LMCA). AT&T Broadband was acquired by Comcast (CMCSA) in 2002, and AT&T Wireless merged with Cingular Wireless LLC, a joint venture between SBC Communications and BellSouth, in 2004.
The company was bought by SBC Communications in 2005 for over $16 billion. Prior to the buyout of its former parent, Southwestern Bell, which changed its name to SBC in 1995, had acquired three former RBOCs: Pacific Telesis in 1997, SNET in 1998, and Ameritech in 1999. SBC changed its name to AT&T upon the closure of the merger on November 18, 2005. In 2006, it purchased BellSouth for approximately $67 billion. Thus, as a result of the purchase, Cingular Wireless became a wholly owned subsidiary of AT&T, which changed its name to AT&T Mobility.
As for the remaining RBOCs, NYNEX was acquired by Bell Atlantic in 1997. In 2000, Bell Atlantic acquired GTE, the largest independent telephone company, and renamed itself Verizon (VZ). In 2000, U.S. West was acquired by Qwest Communications, a Denver-based fiber optics long-distance company. CenturyLink (CTL), which had acquired some Wisconsin Bell lines from Ameritech in 1998, bought Qwest in April 2011 for $10.6 billion. Thus, the RBOCs eventually became part of one of three companies: AT&T (T), Verizon (VZ), and CenturyLink (CTL).
In 2007, AT&T focused more and more of its wireless and internet businesses as sales in the landline business was declining. In June, it acquired the wireless division of Dobson Communications, which provides service in the U.S. under the name Cellular One primarily in rural areas of Alaska, Arizona, California, Kansas, Kentucky, Maryland, Michigan, Minnesota, Missouri, New York, Ohio, Oklahoma, Pennsylvania, Texas, Virginia, West Virginia and Wisconsin. In October, it acquired Interwise, a leading global provider of voice, web, and video conferencing services to businesses, for $121 million. And in December, AT&T acquired Edge Wireless, a regional GSM (2G) carrier in the Pacific Northwest.
From 2008 to 2013, the company made three more acquisitions and one failed takeover.
- On December 12, 2008, it acquired Wayport, a major provider of internet hotspots, increasing its public Wi-Fi to 20,000 hotspots, the most of any U.S. provider.
- On December 20, 2011, it bought $1.93 billion worth of spectrum from Qualcomm (QCOM) to expand its 4G wireless services.
- It tried but failed to acquire T-Mobile USA (TMUS) for $39 billion from Deutsche Telekom (DTEGY).
- On July 12, 2013, it acquired Leap Wireless for $1.2 billion, adding 5.3 million subscribers.
In May of 2014, the company agreed to acquire #1 satellite TV broadcaster Direct TV (DTV) for $48.5 billion. The deal is not expected to close till sometime between March and June of 2015. Speculation is that it aims to offer Direct TV’s Sunday Ticket rights for its wireless subscribers. Combined, DirecTV and AT&T have more than 26 million video subscribers in the U.S., more than Comcast’s (CMCSA) 22.5 million subscribers.
On Oct. 22, 2014, the company released third-quarter earnings for the period ending Sept. 30.
- Revenue increased 2% to $32.96 billion as compared to $32.16 billion a year ago.
- Non-GAAP net income was $0.63 per share, down from $0.64 per share a year ago.
- This fell short of meeting analysts’ estimates of $0.64 per share on $33.25 billion.
- Net profit was $3 billion, down form a profit of $3.81 billion a year ago.
- It added over 2 million new wireless and wireline high-speed broadband connections.
- AT&T lowered its full-year 2014 revenue growth forecast to 3%-4% from 5%.
- Analysts estimate fourth-quarter earnings of $0.60 on $34.44 billion.
It will release fourth-quarter earnings after the close on Tuesday, Jan.27, 2015.
Revenue has been nearly flat over the last three years. Analysts expect revenue to rise slightly in the fourth quarter and fall in the first quarter. Revenue does seem to hit a peak in the fourth quarter if you look at the reports from December 2012 and December 2013. Analysts also expect earnings to bottom in the fourth quarter. This is also consistent with the past. Both are bullish signs.
However, a red flag is that total expense seems to be on the rise. The slopes of fourth-quarter revenue and earnings from 2013-2014 are nearly identical to those of the first quarter from 2013-2014. Thus, the revenue estimate seems probable.
In November, President Obama asked the FCC to reclassify the internet and mobile broadband as a public utility under Title II telecommunications regulations, a move opposed by broadband providers. The goal of the law is to allow fairness, openness, and freedom of the internet by allowing FCC regulation. Title II-based rules could be proposed by March. It would be interesting to see how these new rules may affect AT&T, but it could be a slight negative for the company.
Recently, AT&T made a $1.7 billion purchase of Mexican local cellphone company Iusacell. This was a good play on a growing Latin America market.
At $34.17, the stock is slightly above its median target of $34.00 made by the 25 analysts recorded by Thomson/First Call. Mean target is $34.90, high target of $40.00, and low target is $25.00. Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock is 2.8, unchanged from a week ago.
The long-term graph looks bullish as shares have formed a symmetric triangle. The stock could be ready to break resistance and head higher. A very bullish price target would be about $50-$51 around mid-2015 if $40 clears.
The short-term graph also looks more bullish than bearish. Shares are near support and have momentum to first resistance and possibly second resistance. The stock rose three out of the four times the MFI, RSI, Stochastic %K, and W%R were at similar levels, as indicated by the orange line. The MACD formed a bullish upward cross not too long ago.
The MFI, RSI, Stochastic %K, and W%R are all in or near overbought territory and still need to be watched.
Chapter 4. Momentum Stocks Weekly Play List
All prices given in this update are current as of Dec. 26, 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, $17.98, flat)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: N/A
Exit Target: $20+
Stop Target: $15
Current Dividend Yield: 1.1%
Action: Near-term resistance is at $17.75 was cleared ahead of Christmas. Shares traded to a fresh 52-week high of $18.10 on Thursday.
I have recommended BAC six or seven times over the past few years and started when shares were near $5. The last recommendation came this past October at $16.23. The trade was stopped out at $17 in mid-November for a 5% gain. I still like shares at current levels as I expect $20 to trip at some point in 2015.
I may sell a deep in-the-money call option to lower the cost basis on a close below $17.75-$17.50. Additional support is at $17 and the 50-day moving average.
JDS Uniphase (JDSU, $13.92, down $0.09)
Original Entry Price: $14.07 (12/19/14)
Lowered Price from selling options: N/A
Exit Target: $18+
Stop Target: $10
Action: A mini-trading range has formed with resistance at $14-$14.25. 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 and the 50-day moving average.
You can read my full write-up on JDSU from the Dec. 8 issue by clicking here. Shares could make a run to $19 over the six to 12 months. I may sell a call option against the once shares clear $16. Aggressive subscribers can feel comfortable getting in the position at current levels while conservative traders can wait for a break out of the trading range.
Brocade Communications Systems (BRCD, $11.86, down $0.01)
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 made a fresh 52-week peak of $11.95, and I talked about a near-term run to $12 coning. If this level clears, a run to $13-$13.50 could be in the works.
Support is at $11.75-$11.50 on a pullback. There is risk to $11 and the 50-day moving average on a close below $11.40. New members can wait for a move past $12 to confirm momentum or wait for a possible pullback to support.
AT&T (T, $34.17, up $0.21)
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 $34 and the 50-day moving average last Wednesday and are in a strong uptrend following the mid-December low of $32.07. The next wave of resistance is at $34.50-$34.75.
I have a near-term target of $35-$36 for the stock and where I would like to sell a possible call option against the shares. However, I don’t want to sell an option while shares are rolling.
Support is at $33.75 and a drop back below this level would suggest momentum is fading. I will also consider selling a deep in-the-money March call option on a close below $33.50 to play the possible pullback to $32.
The dividend is yielding 6% and should attract investors looking for a stock with tremendous upside to at least $40, at some point in 2015. This would represent a gain of 20% from current levels with the dividend. This is a “conservative” price target but one that could push $50 in 2015-2016. Shares are still a “Strong Buy” despite AT&T being one of the Dow’s worst 10 performers year-to-date.
I recently talked about the dogs of the Dow as investors put AT&T in the doghouse this year. Competition in the sector is cutthroat but reliability and customer service should keep AT&T in the mix. I also like the deal with DISH.
Discovery Laboratories (DSCO, $1.18, 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 $1.13 twice last week and dipped below short-term support at $1.20. There is additional risk to $1. Resistance is at $1.20-$1.25.
I still like buying the shares at current levels but I would wait to sell the DSCO April 2 calls against them until shares clear $1.60.
On Nov. 11, I suggested buying DSCO at $1.60 while selling the 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, $7.00, down $0.03) 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: Resistance is at $7.20-$7.25. Support is at $6.75 and the 50-day moving average.
Last week, I updated my in-depth article on why PZZI is my top pick heading into next year. New members can read this update by clicking here. Pizza Inn offers one of the best risk/ reward trades heading into 2015 without all of the market noise.
Huttig Building Products (HBP, $3.27, up $0.03) 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 tested resistance at $3.50 on Friday after struggling with $3.20-$3.25 throughout last week. There is additional risk to $2.75 on a drop below $3.
Conservative traders can wait for a possible pullback to $3-$2.75 to start new positions. 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, $2.82, up $0.02) stock trade
Original Entry Price: $3.00 (6/9/14)
Lowered Price from Selling Options: N/A
Exit Target: $5
Stop Target: $1
Action: Resistance at $3 continues to be trouble. A close above this level would be bullish for a run to $3.25-$3.50. Support is at $2.70-$2.60 and the 50-day moving average.
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.
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