In This Issue:
Dear Momentum Stocks Weekly Subscriber,
The bears got the weekly win and made Wall Street nervous to start the month of June. However, the damage was limited, as the small-caps and financial stocks offered clues that the bulls aren’t done running.
The Dow dipped 56 points, or 0.3%, to end at 17,849 on Friday. The blue-chips fell to a low of 17,822 but held support at 17,800 on the open. The rebound to 17,940 shortly afterward offered a good clue that the bulls would fight, but they failed to hold the 100-day moving average. There is additional risk to 17,600 and the 200-day moving average on a close below 17,800. Resistance is at 17,900-18,000 and the 50-day moving average. For the week, the Dow lost 161 points, or nearly 1%.
The S&P 500 slipped 3 points, or 0.1%, to settle at 2,092. The index tested a low of 2,085 at the start of trading, with support at 2,080-2,075 and the 100-day moving average holding. A close below the latter could lead to 2,050 and the 200-day moving average. Resistance is at 2,100 and the 50-day moving average, followed by 2,115-2,125. The index gave back 15 points, or less than 1%, last week.
The Nasdaq climbed 9 points, or 0.2%, to close at 5,068. Tech got bombed at the start of trading, as the bears pushed back-up support at 5,025-5,000 and the 50-day moving average. The trip to 5,025 was followed by a run to 5,075-5,100, with the bulls reaching 5,074. The drop below the 5,050 level was recovered and then some, which was a bullish sign. The next 50-point move will probably have the bulls or bears saying “uncle,” which could lead to a powerful breakout or breakdown sometime this month. For the week, the Nasdaq declined less than 2 points.
The Russell 2000 soared nearly 10 points, or 0.8%, to finish at 1,261. The small-caps showed the most strength on Friday after the bears pushed a low of 1,242. The bulls responded by recovering the 1,250 level shortly afterwards and making a beautiful run into the close to clear and hold 1,260. There is additional risk to 1,225-1,200 if and when 1,240 cracks, but the bulls are back on track to push fresh all-time highs. This was perhaps the most bullish clue from last week besides the financial stocks. The index looks poised to test 1,275-1,280 this week, with a possible run a 1,300 into late June or early July. The small-caps gained 15 points for the week, or more than 1%.
The S&P 500 Volatility Index ($VIX, 14.21, down 0.50) was squeezed past 15 again, as the bears pushed a high of 15.65. The bulls held the 15 level for the 19th-straight session, and I have repeatedly said that we won’t turn bearish until the VIX closes above 17.50. The bulls aren’t out of the woods, however, as they need to get the VIX below 13.50-12.50 to get new market highs in play.
For new subscribers, I spend a ton of time analyzing the VIX because it continues to be a reliable indicator. For longer-term subscribers that have followed me for years, the VIX has been our bread-and-butter for predicting trading ranges, breakouts and breakdowns. For the knuckleheads who say the VIX is broken, don’t stop believing, and keep the bad press coming.
The market noise and selloff hype picked up steam last week, but the overall results show a much different and still-bright picture. Of course, the Fed talk of a possible interest hike reached a boil following Friday’s jobs report. The headlines tilted toward job growth acceleration in May, with wages ticking higher.
The good news had the talking heads predicting an interest rate hike in September, while others were guessing for a year-end bump. I have mentioned that the financial stocks have some of corporate America’s best balance sheets following the bank stress tests from earlier this year and that they would benefit from a rising-rate environment. The group was strong on Friday.
The Fed has been “warning” us that it will raise rates this year and, while most of the suits-and-ties have predicted that it could come in September, October or December, I have been on record saying that I wouldn’t be surprised to see a quarter-point rate hike in June.
The Fed’s next meeting is next week, June 16-17, and the two-day event could produce some fireworks. While the threshold to raise rates is very low and the bias to do so very high, it would be the perfect time to throw the market a curveball.
The talk is that the indexes will correct once the Fed pulls the trigger on hiking rates. I haven’t bought into this theory, as I have said it would benefit the banks. A rising-rate environment could also spur a housing recovery we haven’t seen in a while, as buyers on the fence convert to home ownership.
I have always considered owning a house a priority because it is your home base in this world. For the people that want to rent, that is fine, but renting really isn’t a bill you want to be paying when you are retired and in your golden years.
Ben Bernanke recently said that an interest rate hike would be a good move and should be viewed as a positive sign. In late May, he echoed these words:
“I don’t know when (the rate hike will come), but when that begins, that’s good news, not bad news because it means the U.S. economy is strong enough.”
I know Big Ben says he does not know when rates will rise, but surely he has a clue (sly grin). Perhaps his words were another “warning shot” to prepare Wall Street for a rate hike. I have mentioned that the Fed hasn’t hiked rates in nine years.
The Greece debt crisis turned out to be another joke, as the country missed another due date. A 300-million euro payment was skipped, as Greece said they would now make the four payments due this month, totaling 1.6 billion euros, by June 30.
With even bigger payments looming in the months ahead, it’s time for this madness to end as well. The European Commission needs to cut its continued losses and unwind the country off of the euro. This headwind might cause some short-term stress, but it would be beneficial for our stock market in the long term.
Apple (AAPL, $128.65, down $0.71) could sway tech higher or lower, as its developer conference kicks off this week. The stock has the fifth-biggest price weighting in the Dow and will have a major impact on the price action. I said throughout 2014 that Apple needed to be added to the Dow if the index were to reach 20,000 in 2015 or early 2016.
As a side note, earlier this year, activist investor Carl Icahn said that a market correction was looming and a pullback was coming. However, he has also said that Apple shares are worth $200. I might not be as smart as Carl, but my simple math tells me that Apple at $200 should translate to Dow 20,000.
Goldman Sachs (GS, $210.45, up $1.58), the heaviest Dow component, triggered a fresh 52-week peak just south of $212 on Friday. We have exposure to the financial sector and, while I don’t usually trade options on stocks over $100, I do like the GS July 220 calls (GS150717C00220000, $1.56, up $0.28) as a possible short-term trade. The GS July 225 calls (GS150717C00225000, $0.65, up $0.05) also look tempting.
Shares of “Golden Slacks” could make a run into the $230-$240 zone by mid-July, and the aforementioned options would be gold mines on the possibly explosive move. If shares were to reach $230 by mid-July, the aforementioned options would be $10 and $5 in the money, respectively. This would represent massive triple-digit gains, and the risk/reward looks compelling.
The big debate besides interest rates and Greece is how overvalued the market is. While it makes great fodder, even if the market is overvalued, it has been at more extreme levels in past years. Price action is more important than peoples’ opinions on the market.
I have talked about the suits-and-ties, celebrities and money-fund managers that have repeatedly said a market “top” is in during the past few years. I have also mentioned the number of times they have changed their minds after begging for a 10% correction. However, when there has been a 5%-8% dip, these so-called market pundits have failed to step up to the plate.
Right now, the S&P 500 currently trades at 18 or 19 times earnings. The Nasdaq is trading at roughly 33 times earnings. At the peak of the dot-com bubble back in 2000, the S&P was trading at a much higher double-digit earnings multiple, while tech was pushing a multiple in the high hundreds. In other words, the market can continue to be overvalued, and is nowhere near past levels of overvalued hype.
This week promises to be exciting, as does the rest of June. The current sector rotation and divergence has Wall Street confused once again, but they don’t study the market like I do. Retail and restaurant stocks have taken a beating on the rise in oil prices, or so analysts say, but I have been highlighting the strength in the financial and small-cap stocks.
I have talked about a run to all-time highs continuing into mid-June, and here we are. Of course, I would love to say that a summer rally is also on the horizon, but hot summer days can create tension and volatility and make the Fed zombies rise.
While I won’t be afraid to go short or use put options if and when the mighty selloff arrives, I still remain bullish, and our current trades are in great shape.
From desk to press, futures look like this: Dow (-7); S&P 500 (-2); Nasdaq 100 (-4).
Chapter 1. Momentum Stocks Weekly Play List
All prices given in this update are current as of June 5, 2015. I hereby disclose that I will be participating in the following trade(s).
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 18-0, for a 100% win rate (131-17, or 89% win rate, overall since the start of 2011).
Rave Restaurant Group (RAVE, $11.18, up $0.33)
Original Entry Price: $11.35 (6/3/2015)
Lowered Price from Selling Options: N/A
Exit Target: $15+
Stop Target: $8.00
Action: I don’t often say, “It’s time to back the truck up,” but I’m getting close to uttering those words. I mentioned that the restaurants stocks have taken a licking, and the pullback in Rave Restaurant Group (RAVE) is an exciting buying opportunity but also somewhat scary.
It’s rare that one gets the opportunity to invest in a company that is showing tremendous growth on a trend that never fades. I have avoided the burger-and-chicken chain wars, as I favor an investment in the pizza space, specifically RAVE’s concept.
Rave Restaurant Group recently opened its 50th store, and I have mentioned that the company projects to open nearly 500 stores during the next three to five years.
I first started recommending RAVE, formally known as Pizza Inn Holdings (PZZI), when shares were below $5.00 in 2012. Since that time, subscribers have banked profits of 57.5%, 42%, 31.67%, 28.7% and 40.3% over the last three years.
Although I would have preferred to stay long by holding a core position along the way, I also have protected profits and have not missed any of the stock’s move from $4.00 to its 52-week high of $16.20.
At current levels, shares are off 31% from their recent peak and look like a pretty good discount. It might be hard to buy into this type of weakness, but I started nibbling once we were stopped out of our previous trade at $12.60.
Shaky support is at $11.00 as there is risk to $10.50-$10.25 and the 200-day moving average on continued weakness. I would like to see a floor of support, or base, build at $11.00-$10.75 this week. Resistance is at $11.50-$12.00. Continued closes above the latter would be a bullish sign the selling pressure has abated.
Rigel Pharmaceuticals (RIGL, $3.68, up $0.10)
Original Entry Price: $3.51 (6/2/2015)
Lowered Price from Selling Options: N/A
Exit Target: $4.00-$5.00
Stop Target: $2.00
Action: Resistance is at $3.75 followed by $4.00 and the 50-day moving average. Fresh support is at $3.50 followed by $3.30-$3.25 and the 100-day moving average.
The golden crosses formed in March and April with the 50- and 100-day moving averages crossing above the 200-day moving average. These are bullish signs a major breakout is coming.
Rigel Pharmaceuticals has a partnership with Bristol-Myers Squibb (BMY), and the recent approval of lung cancer drug, Opdivo, was a big bonus.
Obviously, Bristol-Myers is the better-known company, but Rigel could be the better way to play the potential of a billion-dollar drug.
The niche lung cancer treatment Opdivo is expected to compete in a $3 billion-per-year drug market category.
Rigel also has a partnership with AstraZeneca for the development of an asthma drug and recently received a “milestone” payment of nearly $6 million.
Rigel has five other drugs in development stages in their pipeline and forms “collaborations” with other companies to bring their drugs to market. In other words, think of Rigel as the “brains” behind a drug, while its partners do the legwork and heavy lifting.
The company business model is setup to earn money through layered royalties. Said another way, the better a drug does in sales, the bigger their slice of that pie will be based on total revenue.
With quicker-than-expected approval for Opdivo, shares could make a run at $5+ by September. The current market cap for the company is just over $300 billion, and a $1 billion valuation would have shares trading between $10.00-$1100. In other words, a takeover target of $1 billion would get shares into double-digits. I will talk more about M&A activity next week, but Rigel is one of my favorite biotech speculative plays on a takeover target or buyout.
The slick-talking pros say the biotech sector is overvalued and is forming tiny bubbles. While this may be true for the broader sector, an individual stock’s valuation is determined by a number of factors. The general statement of a biotech bubble is a little premature and is a cop-out for the ones who don’t read and research the sector.
Biotech stocks are valued more on their pipeline and potential drug sales. With that said, Rigel offers great risk/reward at current levels.
Dot Hill Systems (HILL, $7.43, down $0.06)
Original Entry Price: $7.10 (5/21/2015)
Lowered Price from Selling Options: N/A
Exit Target: $14.00-$15.00
Stop Target: $5.00
Action: Shares tested $7.50 and the 52-week high on Friday. Resistance is at $7.50-$7.75 and a run to $8.00-$10.00 appears to be in the works. Support is at $7.25-$7.00.
You can read my full write-up on HILL in the May 26 Issue.
Original Entry Price: $12.55 (5/19/2015)
Lowered Price from Selling Options: N/A
Exit Target: $15+
Stop Target: $10.00
Action: Support at $12.00 and the 100-day moving average was stretched following last week’s test to $11.93. There is risk to $11.40-$11.30 and the 200-day moving average on a close below $11.80-$11.75. Resistance is at $12.25-$12.50 and 50-day moving average. A close above the latter should get 52-week highs north of $12.86 in play.
Psychemedics (PMD, $14.86, up $0.09)
Original Entry Price: $15.67 (5/5/2015)
Lowered Price from Selling Options and dividends: No options available
Exit Target: $18.00-$20.00
Stop Target: $12.00
Action: Shares surged 8% on Monday to close at $15.51. The high of $15.74 came close to taking out the 50-day moving average. PMD spent the rest of the week back-testing support at $14.00 and the 200-day moving average. There is additional risk to $13.75-$13.50 on continued closes below $14.00. Resistance is at $15.50-$15.75.
The stock currently yields 4.2% and pays a 60-cent annual dividend. Psychemedics provides drug testing services for companies and organizations through the analysis of hair samples. It is a more accurate way of detecting abuse for illegal drugs and helps companies manage these types of issues.
Wells Fargo (WFC, $56.61, up $0.47)
WFC October 60 calls (WFC151016C00060000, $0.83, up $0.07)
Entry Price: $0.67 (5/5/2015)
Exit Target: $1.35
Stop Target: $0.70 (Stop Limit)
Action: Set a Stop Limit at $0.70 to protect profits.
WFC shares traded to a fresh 52-week high and all-time high of $57.22 on Friday. The major moving averages are starting to curl higher following a couple months of flat lining. This appears to be a bullish sign and it’s why I love the breakout into blue-sky territory.
Near-term support is at $56.50 and it’s where I would like to see a new floor form. However, there is risk to $56.00-$55.50 on a back test.
Discovery Laboratories (DSCO, $0.84, up $0.05)
Original Entry Price: $1.68 (3/5/2015)
Lowered Price from Selling Options: N/A
Exit Target: $3.00
Stop Target: $0.50
Action: Shares traded to a low of $0.78 last Thursday but held $0.80 into Friday’s close. Resistance is at $1.00.
Bank of America (BAC, $17.19, up $0.41)
Original Entry Price: $17.63 (12/19/2014)
Lowered Price from selling options and dividends: $17.28
Exit Target: $20+
Stop Target: $15.00
Current Dividend Yield: 1.3%
Action: Shares made a strong move above resistance at $16.75-$17.00 with Friday’s 2% surge. Shares look poised to make a run at $18.00 and the 52-week high of $18.21.
Support has moved up to $16.80-$16.60 followed by $16.40 and the 200-day moving average. A golden cross has formed with the 50-day moving average crossing above the 100-day moving average.
We previously sold to open (wrote) the BAC January 18 calls for 30 cents on Jan. 2, 2015, to reduce the cost basis to $17.33, and the calls expired for the full premium on Jan. 16, 2015.
Bank of America paid a 5-cent dividend on March 4. This lowered the cost basis of the trade to $17.28.
Huttig Building Products (HBP, $3.18, down $0.08)
Original Entry Price: $4 (8/13/2014)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Stop Target: $2.00 (Stop Limit)
Action: Support is at $3.00 on continued weakness. A close below this level could lead to $2.75-$2.70 and 52-week lows. Resistance is at $3.25 and the 100-day moving average.
The company recently reported better-than-expected earnings in late April and shares traded to a high of $4.12 on the news. The discount in shares looks good for subscribers who want to start new positions.
Rambus (RMBS, $15.20, down $0.06)
Original Entry Price: $17.83 (11/14/2011)
Lowered Price from Selling Options: $16.38
Exit Target: $15+
Stop Target: $9.00
Action: Resistance is at $15.50. A close above this level could lead to a run to $17.00-$18.00. Near-term support is at $15.00-$14.50 followed by $14.00 and the 50-day moving average.
We previously sold to open (wrote) the RMBS December 20 calls for $1.45 on Nov. 14, 2011 to reduce the cost basis to $16.38.
Trades on Hold (6): 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 do not recommend adding to these positions or opening new positions, but if you are already holding the stocks, we recently opened covered calls on these positions. If you missed the alert, you can find it here.
AKS Steel Holding (AKS, May 2011) – We sold to open (wrote) the AKS September 6 calls (AKS150918C00006000) on 4/30/2015 for 40 cents. Continue to hold.
DryShips (DRYS, January 2011) – We sold to open (wrote) the DRYS September 1 calls (DRYS150918C00001000) on 4/30/2015 for 5 cents. Continue to hold.
Bebe Stores (BEBE, February 2012) – We sold to open (wrote) the BEBE September 4 calls (BEBE150918C00004000) on 4/30/2015 for 35 cents. Continue to hold.
Vivus (VVUS, July 2012) – We sold to open (wrote) the VVUS September 4 calls (VVUS150918C00004000) on 4/30/2015 for 10 cents. Continue to hold.
Zynga (ZNGA, March 2014) – We sold to open (wrote) the ZNGA September 3 calls (ZNGA150918C00003000) on 4/30/2015 for 16 cents. Continue to hold.
Galena Biopharma (GALE, February 2014) – We sold to open (wrote) the GALE October 2 calls (GALE151016C00002000) on 4/30/2015 for 15 cents. GALE shares surged 13% on Friday to clear $2.00 on heavy volume. Barron’s reported the company could have lucrative contracts coming and its breast cancer drug could be a blockbuster. The GALE October 2 calls jumped 58% on Friday and are at 60 cents. This trade is capped at $2.00 if GALE shares are called away, so I could start new positions on continued strength. For now, continue to hold.
Momentum Stocks Weekly