Dear Momentum Stocks Weekly Subscriber,
Last week got off to a strong start as the market continued its record rally from February. The Nasdaq recovered and closed above 5,000 on Monday for the first time in 15 years. However, the celebration was short-lived, as the index spent a total of just 45 minutes above this level.
Tuesday’s pullback based on geopolitical gibberish held fresh support, and Wednesday’s pullback was a wait-and-see moment ahead of the bank stress tests.
Thursday’s action was bullish before the bank stress test results, as the market snapped a two-session slide. After the close, it was announced that all 31 major banks passed the required tests to withstand an economic downturn. While a second judgment will come this week from the Federal Reserve, the news was bullish.
Friday’s nonfarm payrolls report was the wild card, as Wall Street was expecting weaker-than-expected numbers. Its collective jaw dropped when it saw that the economy added nearly 300,000 jobs last month. The unemployment rate dropped to 5.5%, and the headlines immediately started asking when the Fed would hike rates.
Although a quarter-point rate hike is now nearly a given by June, traders took profits, and the market had one of its worst days of the year. The damage gave the bears their first weekly win in five weeks and created the buying opportunity that the suits and ties have been waiting for.
The Dow dropped 279 points, or 1.5%, to close at 17,856 on Friday. The blue-chips traded in negative territory throughout the session and touched a low of 17,825. The close below 18,100-18,000 was the first in 10 sessions, but the 50-day moving average held. I warned of risk to 17,800 on a drop below 18,000 again, with further weakness to 17,600 and the 100-day moving average. The 200-day moving average was tested on the first trading day of February and would be in play on a close below 17,600. A return above 18,000-18,100 to start the week would be a bullish sign.
The S&P 500 sank nearly 30 points, or 1.4%, to finish at 2,071. The index fell to a low of 2,067 and closed below 2,100-2,095 for the first in 14 sessions. I mentioned that near-term support at 2,090-2,075 would be tested on a close back below 2,100 last week. The 50-day moving average held by 5 points, but there is additional risk to 2,060-2,050 and the 100-day moving average.
The 200-day moving average was also tested in February and has moved up 20 points to sit just under 2,000. This would represent another 3%-4% drop from current levels, which is where much of Wall Street would love to get into the market. I would like to see a close above 2,075, at least, on Monday, followed by 2,090 by Friday, before we can say that higher highs are back in play.
The Nasdaq tanked 55 points, or 1.1%, to end at 4,927. Tech tried to hold positive territory on Friday, but the minor intraday pop turned progressively worse into the closing bell. I warned that there is risk to support at 4,950-4,925 on continued dips below 4,975, and Friday’s low touched 4,918. The 50-day moving average is just below 4,800 and represents a 3% decline from current levels. A close below 4,900 will likely get this level in the mix. The bulls need to recover 4,950-4,975 before talk of 5,000 returns.
The Russell 2000 tumbled over 16 points, or 1.4%, to settle at 1,217. The small-caps traded down to 1,216 on Friday and closed below 1,230-1,225 for the first time in 13 sessions. The bulls need to hold 1,210-1,200 and the 50-day moving average to start Monday’s session or the index faces risk to 1,175 and the 100-day moving average quickly. The 200-day moving average isn’t far behind, and a test to 1,160-1,150 would likely come if 1,175-1,170 fails over the near term. A 1% move to start the week and a recovery of 1,225-1,230 would signal that Wall Street missed the dip.
The S&P 500 Volatility Index ($VIX, 15.20, up 1.16) gave warnings signs throughout last week following the failed attempt to get below 12.50. I talked about how February’s rally would carry the VIX back below 15 but that the bulls needed to get below 13.50-12.50 to confirm higher highs into March. Last Monday’s low reached 12.87, but Tuesday’s close back above 13.50 stalled the rally. I am expecting the VIX to test 17.50 on further weakness, and a close above 20-21 would have me looking at bearish positions. For now, try to relax, as another close below 15-14.75 and the 200-day moving average would be bullish.
March is historically a bullish month, but Wall Street and the talking heads were throwing the baby out with the bathwater on Friday. Traders were selling stocks without asking questions, as the action marked the second worst day of the year for the Dow. On Jan. 5, the blue-chips fell 331 points.
The important message from the charts above and a point I want to make is that all of the major indexes held their respective 50-day moving averages. The VIX close above 15 was troublesome, but no major damage was done.
Although Friday was a bummer, I was thrilled to see that Apple (AAPL) will join the Dow and replace AT&T (T) in the index. The change will take place on March 19.
I have been cheerleading for this move and have mentioned this story off and on over the past year. From Feb. 23, 2015:
“The Dow came into 2015 at 17,823 and added 8% last year. The blue-chips could have some new members this year, although there has been no official word. I have talked how Apple (AAPL) would be the best candidate, but other companies should be considered to reflect more of a global index. I know it’s wishful thinking for the NYSE, but Apple’s addition could easily translate into Dow 20,000. This would represent a gain of 12% for the index.”
From Sept. 15, 2014:
“There is a good chance that the Dow finishes the year above 18,000 as long as the major moving averages hold. I have talked about the blue-chips reaching 19,000 if Apple (AAPL, $101.66, up $0.23) shares were added to the Dow 30, but that may or may not happen this year. The NYSE needs a splashy “new” addition, and Apple fits that headline.”
A dollar move in a Dow stock currently represents a 6-7 point move on the index. While the pundits will say that the Dow added Apple at its peak, I disagree. In fact, if Apple makes a run to $200 this year or next, the Dow will be at 20,000 easily, as long as the rest of the blue-chips pull their weight.
The Dow Jones Transportation Average ($TRAN, 8,907, down 96) tried to recover and hold the 9,100 level going into last week, but the four-day slide afterwards and Friday’s 1% drop was troublesome. The bears cracked the 50-day moving average and came within a stone’s throw of clearing the 100-day moving average. There is additional support at 8,800 on a close below 8,900, but there would be additional risk to 8,600 and the 200-day moving average if 8,900-8,800 fails to hold this week.
The Financial Select SPDR (XLF, $24.35, down $0.09) made higher highs and higher lows throughout the week following the Dodd-Frank law bank stress tests results. The XLF reached $24.66 on Friday and has been holding the 50-day moving average since early February.
I mentioned that the bigger hurdle would be this Wednesday’s results from the Federal Reserve. While there could be a few bad apples, overall, the banks should get another passing grade.
A mini-trading range has been in play for a month, and a close above $24.75-$25 this week would be bullish for the XLF. A close below $24 and the 50-day moving average would be a bearish development.
The month of March is usually positive for the market, as the S&P has advanced 67% of the time during the past two decades. The average gain of 1.5% is impressive, but volatile swings have taken place in recent years. The index fell over 2% the second week of last March but recovered to push higher highs into April.
The S&P has not had a 10% correction in three and a half years and, while there will be one at some point this year or next, it’s way too early to say the market has reached its peak.
While I will agree there are “expensive” stocks in the market, the companies that aren’t meeting Wall Street’s expectations are getting punished. Momentum stocks have been hit both ways, as the stronger ones have pushed higher highs, with the weaker ones setting or testing fresh 52-week lows.
This is the case for the market, as it has been getting stronger following the 15-year rebound to Nasdaq 5,000. To put 2015 versus the year 2000 in perspective, Cisco (CSCO) shares have a current price-to-earnings (PE) ratio of 17. In 2000, the PE for shares reached a high of 125. Yahoo! (YHOO) shares have a current PE ratio south of 6 versus a PE valuation north of 400 in 2000. And, finally, there’s Intel (INTC), which is trading at a current PE ratio of 14. In 2000, the PE peaked north of 40.
Hopefully this simplifies a few things, but it doesn’t mean the market can’t go lower from current levels.
Also from last week:
“The important number to remember on any pullback will be 17,754. This is the Dow’s 50-day moving average. This would represent a 378-point, or 2%, loss from current levels. The talking heads will panic on a 300-point move if the first week of March starts with a pullback… A 2% drop, followed by a 4%-5% run to my higher price targets is also possible, and that is my “plan C.” ”
Last week’s dip represented nearly a 2% dip for the market, so I wasn’t nervous about the end-of-the-week pullback. I used February’s run to record all-time highs to lock in a number of profitable positions and set Stop Limits to protect the gains.
If there is additional weakness and a break below the 50-day moving averages, I will likely wait to see if the 100- and 200-day moving averages hold before starting additional bullish trades. I don’t mind riding with the bears when forced, but the traders that have tried to short this market recently have been punished.
While Wall Street is hesitant to go long, I’m on the opposite end and still cautious about going short in this market. A possible trading range could also be developing, and there will be plenty of money to be made if and when there is a 10%-20% pullback.
In the meantime, I have adopted the Fed’s now-famous catch phrase, as “patience” will be needed over the next few weeks. I will be building out my Watch List for both bullish and bearish trades while waiting for the dust to settle, so stay locked and loaded for both New Trades and/or Profit Alerts.
From desk to press, futures look like this: Dow (+4); S&P 500 (+1); Nasdaq 100 (+4).
Discovery Laboratories (DSCO) Getting Discovered
In the past two years, Discovery Laboratories (DSCO) has announced Q4 earnings during the second week of March. While I haven’t been able to confirm if it will announce earnings this week, I’m expecting the company is planning to do so.
As far as the numbers, expect another quarterly loss. The little to no coverage Wall Street has provided has penciled-in a $0.14 loss per share on revenue of $430,000. The company has lost money for the past four quarters, but the losses have come in “better-than-expected” the past two quarters.
I started recommending covered calls on shares of DSCO in January 2014 while holding the stock because the premiums were juicy. The three trades in 2014 made 8%, 3% and 10%, respectively, with another trade being added in November. I suggested adding to positions last week following the recent strength in the stock and because the shares we bought in November could be “called-away.”
Although trading stocks under $5 can be risky, knowing a company’s story is what makes them worth the risk. Back in the day, it was rare to see options trade on stocks under $5 but, nowadays, it is a little more common following 2008’s market turmoil.
I have used the juicy premiums in longer-term DSCO call options to lower the cost basis of the trades while I have waited for the company’s drug pipeline to develop. Writing a call option against your shares can also be thought of as a “dividend” in my book because it puts cash back into your account and lowers the cost basis of the trade.
I have talked about and have kept track of Discovery Laboratories’ top two drugs, Surfaxin and Aerosurf since bringing you their stories. Surfaxin was the company’s first FDA approved drug but sales have been soft and haven’t met expectations.
Aerosurf is Discovery’s other drug and the one I’m more excited about. The drug targets prevention of respiratory distress syndrome (RDS) in premature infants and is currently in phase “2a” trials. The company has stated those results were expected to end during the last quarter of 2014.
Discovery Laboratories hasn’t updated the suits and ties on the news and has likely waited for earnings to be released. The company can then have a Q&A during its conference call but more important data will still have to be collected for Aerosurf to make it to Phase 3 trials.
Aerosurf’s first test trial in over 40 individuals was to evaluate the safety and tolerability of the drug, it is part of a two-step shuffle as phase “2b” is scheduled to be completed by the end of this year. This part of the trial should provide additional information, or proof of concept, to move into Phase 3.
The company’s goal is to use Aerosurf effectively to disperse the active ingredients throughout the lungs to prevent of RDS. To help them with this project, Discovery partnered with Battelle, a company that specializes in medical device equipment, help develop Aerosurf.
It was a smart move as Discovery doesn’t have to worry about another manufacturing process. Battelle has been around for over 85 years and brings a ton of expertise to the partnership.
As drugs enter phase 1, phase 2, and phase 3 trials, wild price swings can occur. A measure of success in biotech seems to be based on billion dollar drugs, and there are estimates Aerosurf sales could reach over $1 billion per year, if the drug passes additional major hurdles.
Investing in small-cap stocks with market caps of $100 million or less is always a risky endeavors. Investing in biotech stocks compounds the risks even more as companies are in need of developing drugs before running out of money.
By using options, I have avoided some of the risks in both these categories. The trade from November is on track to make 67% if our shares are called away. I haven’t sold options on last week’s fresh position as I would like to see shares clear $2 before doing so. This would also close the November trade, and some risk will be taken off the table if cleared.
Average daily volume is roughly 375,000 shares traded a day with over a million trading in a single session in late February. The company has a market cap just north of $150 million and, with the potential of a billion dollar drug developing over the next few year, the risk/reward aspects of trading DSCO with options has been a great way to produce income while waiting for the development of the company’s pipeline.
Below is a three-year chart for the stock. The break above the 50-week moving average was bullish and shows a close above $1.85 and the 100-week average should lead to a run into the $2.-$2.25 range.
Momentum Stocks Weekly Play List
All prices given in this update are current as of March 6, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 6-0, for a 100% win rate (123-17, or 88% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
The March options have 11 days before expiration. The JDSU trade is our only trade with open March options.
The April options have 39 days before they expire. The DSCO trade from November will be in play next month.
The July options have more than four months (130 days) before they expire, and FLEX has plenty of time to challenge the mid-teens by then.
The Momentum Stocks Weekly portfolio will be in great shape as we wait for the shakeout and the next sure trend to develop. While it could be short in nature, a pullback or trading range could transpire over the next week or so, but I’m still bullish on the market.
I could add New Trades this week but I don’t like to trade just to trade. The portfolio has gotten off to a great start for 2015 so there is no need to rush the action. There are a few stocks I believe are on the verge of nice moves over the near-term and this year so stay tuned. I also have a few short candidates I’m watching to possibly add as short positions as the fundamentals are breaking down in some companies I’m following.
Discovery Laboratories (DSCO, $1.78, up $0.02)
Original Entry Price: $1.68 (3/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $3
Return: 6%
Stop Target: $1
Action: Shares tested $1.79 on Thursday/ Friday and a close above $1.80 likely gets $2 in play. The 52-week high is at $2.72. Near-term support is at $1.70 followed by $1.60 and the 200-day moving average.
Limelight Networks (LLNW, $3.51, down $0.18)
Original Entry Price: $3.45 (3/4/15)
Lowered Price from Selling Options: N/A
Return: 2%
Stop Target: $3.51 (Stop Limit) triggered on March 6.
Action: The Stop Limit of $3.51 triggered as shares dipped to $3.50 on Friday. Close LLNW at current levels if you have not already done so.
While disappointed, I wanted to make sure support held instead of losing money. I still like the longer-term outlook for LLNW and the company’s takeover potential. A back test was nearly a given following last week’s breakout to $3.81. I will be back to trade the name but may wait for $3.75 to clear again before getting back in.
Dot Hill Systems (HILL, $4.67, down $0.02)
Original Entry Price: $4.25 (3/4/15)
Lowered Price from Selling Options: N/A
Exit Target: $5-$7
Return: 10%
Stop Target: $4.50 (Stop Limit)
Action: Shares traded to a high of $4.80 on Friday before finishing slightly lower. A dip below $4.60 could lead to a back test to $4.40 and the 50-day moving average. The Stop Limit of $4.50 held as the low reached $4.62. I like this trade longer-term and could add LEAP options if and when shares clear $5. New subscribers can start early positions on continued closes above $4.75.
“I wanted to get into this trade ahead of earnings that were announced last week. In January, the company raised guidance and said earnings for 4Q would come in at $0.11-$0.13, up from $0.07-$0.12 a share on revenue of $62-$68 million.
“Analysts were expecting earnings of $0.09 a share on revenue of $66 million and yawned at the prior upside earnings forecast.
“Dot Hill Systems delivered on its promise as numbers came in at $0.13 a share on sales of $68 million.
“Wall Street rewarded the better-than-expected results as shares rallied 9% on the news on Thursday.
“I was hoping to see HILL make a run past $5 on this ‘unforgotten reminder,’ and my upper-end price target is at $7. Thursday’s high reached $4.75, and I would like to see some follow through today.
“This was meant as a quick and “safer” earnings trade, which is why I recommended the stock and not the options. I’m looking at longer-term options to play a continued run higher and could add some if shares crack $5.
“In the meantime, I have set a Stop Limit at $4.50. I will continue to ride shares higher if momentum sticks but have set a stop to protect profits.”
Flextronics (FLEX, $11.76, down $0.20)
Original Entry Price: $12.24 (3/2/15)
Lowered Price from Selling Options: N/A
Exit Target: $15
Return: -4%
Stop Target: $9
FLEX July 13 calls (FLEX150717C00013000, $0.35, down $0.05)
Entry Price: $0.50 (3/2/2015)
Exit Target: $1.00
Return: -30%
Stop Target: None
Action: Shares held short-term support at $11.75 following Friday’s dip to $11.70. There is additional support at $11.50 and the 50-day moving average. A move below this level would be bearish. Resistance is at $12-$12.25.
You can read my thoughts on FLEX in the Trade Alert from March 2. I’m hoping the company gets a piece of Apple’s iWatch pie as a component maker. Apple will be releasing the details of its upcoming watch today.
Array BioPharma (ARRY, $8.06, down $0.18)
Original Entry Price: $8.17 (2/12/15)
Lowered Price from Selling Options: N/A
Exit Target: $9.10 (Limit Order)
Return: -1%
Stop Target: $6
Action: Shares traded to a high of $8.59 last week and showed signs of a breakout before another back test to $8. Support is at $7.75-$7.50. A close below $7 would be bearish.
Resistance is at $8.25-$8.50 and a close above the latter would be bullish. I have a near-term target of $9+. New subscribers should wait for $8.50 to hold before initiating new positions.
BlackBerry (BBRY, $10.67, down $0.22)
Original Entry Price: $10.03 (1/29/15)
Lowered Price from Selling Options: $9.79
Exit Target: $12+
Return: 9%
Stop Target: Raise from $10 to $10.40 (Stop Limit).
Action: Raise the Stop Limit from $10 to $10.40. If triggered, the return will be 6% as we lowered the cost basis to $9.79 by selling a call option.
The weekly March 11 calls expired on Friday, and we kept 100% of the premium we collected at the start of the covered call. I will likely wait a few days before possibly writing another call option and to see if the Stop Limit holds.
Shares traded to a high of $11.45 on Tuesday before closing below $11. This may have represented a short-term top. Support is at $10.50 and the 50-day moving average following Friday’s close below $10.75. Additional help is at $10.25 and the 100-day moving average. Resistance is at $10.75-$11.
We previously wrote the BBRY March 11 (weekly) calls for 24 cents on Feb. 26, 2015 to reduce the cost basis to $9.79.
Bank of America (BAC, $16.22, up $0.22)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.33
Exit Target: $20+
Return: -6%
Stop Target: $15
Current Dividend Yield: 1.3%
Action: Shares surged to a high of $16.62 on Friday before getting dragged back by the overall market downturn. The company was a clear winner on the stress test review, and Wall street is expecting a raised dividend could be coming.
Shares fell 2 cents short at clearing their 100-day moving average on Friday’s move but failed to hold the 50-day moving average. Resistance is at $16.50-$16.75 on continued strength but a break below $16 and the 200-day moving average would be bearish.
I want to wait for $17-$17.25 to clear before possibly writing another call option.
We previously sold to open 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.
JDS Uniphase (JDSU, $13.89, up $0.57)
Wrote the JDSU March 14 calls (JDSU150320C00014000, $0.35, up $0.12)
Original Entry Price: $14.07 (12/19/14)
Lowered Price from selling options: $13.54
Exit Target: $18+
Return: 3%
Stop Target: $10
Action: Shares reached a high of $14.01 on Friday while clearing its 50-day moving average. Resistance is at $14-$14.25 and a close above the latter could lead to a run at the 52-week high at $14.99. Support is at $13.50-$13.25 and the 100-day moving average on a drop back below $13.75.
If $14 clears and holds into late March, the position will be “called away.”
We sold the March 24 calls for 24 cents on Feb. 26, 2015 to reduce the cost basis to $13.54. If shares are called away in late-March at $14, the trade will make 3%.
We previously sold to open the JDSU February 15 calls for 30 cents on Jan. 2, 2015, to reduce the cost basis to $13.77.
Discovery Laboratories (DSCO, $1.78, up $0.02)
Wrote the DSCO April 2 calls (DSCO150417C00002000, $0.30, flat)
Original Entry Price: $1.60 (11/11/14)
Lowered Price from selling options: $1.20
Exit Target: $2
Return: 48%
Stop Target: None
Action: Continue to hold.
On Nov. 11, 2014, 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 April, the trade will make 67%.
Rave Restaurant Group (RAVE, $12.75, down $0.19)
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20
Return: 59%
Stop Target: $11 (Stop Limit)
Action: Shares reached a high of $13.65 on Tuesday before falling back below $13 the following session. Last Thursday and Friday’s low touched $12.53 and $12.63, respectively. Short-term support at $12.50 held but there is risk to $12.25-$12 on a close below this level.
The company is on track to open a new Pie Five location every week this year and I continue to love the long-term prospects for Rave Restaurant Group. My year-end price target is $20 and would still represent another 50+% return if reached. I started recommending shares of RAVE, then ticker symbol PZZI, at $4.50, in February 2012.
Huttig Building Products (HBP, $3.13, up $0.02)
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -22%
Stop Target: $2 (Stop Limit)
Action: Support is at $3 but there is risk to $2.75 on a close below this level. Resistance is at $3.10 followed by $3.25-$3.30 and the 50- and 100-day moving averages.
Trades on Hold (7): 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)
Trade on!
Rick Rouse
Editor
Momentum Stocks Weekly