In This Issue:
Dear Momentum Stocks Weekly Subscriber,
The market rebounded last Monday, but the bulls failed to hold near-term resistance, and the VIX stayed above 15. The bears followed up by doing damage on Tuesday and Wednesday, but the action in the small-caps mid-week went unnoticed.
The indices rebounded again on Thursday, but Friday’s pullback still has Wall Street calling for a selloff. The headlines will say that the bears got their second weekly win, but higher highs are still in store if the break out of the current trading range goes the bulls’ way.
The Dow dropped 145 points, or 0.8%, to finish at 17,749 on Friday. The blue-chips fell below shaky support at 17,800 thirty minutes into the session while testing a low of 17,629. Backup support at 17,600 and the 100-day moving average held, but the close below the 50-day moving average was slightly bearish. There is additional risk to 17,300-17,250 and the 200-day moving average on a fall below 17,600. A recovery of 17,800 to start the week keeps 17,900-18,000 in play.
The S&P 500 sank 12 points, or 0.6%, to end at 2,053. The index traded in negative territory throughout the session and tested 2,041 intraday. Support at 2,040 and the 100-day moving average was solid, but the failure to hold 2,060 and the 50-day moving average on Friday was a bummer. There would be additional risk to 2,025-2,000 and the 200-day moving average on dips below 2,040, but I’m hoping Thursday and Friday’s low of 2,041 may have formed a “soft” double bottom. Continued closes above 2,060 keep 2,075-2,085 in the mix.
The Nasdaq fell 21 points, or 0.4%, to settle just under 4,872. Tech saw a little daylight on the open and reached a peak of 4,904 before fading to a low of 4,842. Near-term support at 4,850 was stretched, but the close above this level was slightly bullish. There is additional risk to 4,800 and the 50-day moving average if the bears get below 4,850 again. Resistance is at 4,900-4,925, and closes above these levels this week could lead to a short sweet spot for the market.
The Russell 2000 slipped a little over 4 points, or 0.4%, to close at 1,232. The small-caps made a slight trip into positive territory by a tenth of a point before a backtest to 1,220. Friday’s action was slightly bullish, as I wanted to see 1,225-1,220 hold on a pullback. The index held its 50-day moving average and the 1,200 level after back-to-back tests to 1,206 last week. This was a very bullish sign, along with Friday’s close above 1,230. Although there is still downside risk on a lower Monday close, the 52-week high of 1,243 is just 1% away. If this level clears, Wall Street will be forced to play catch-up as the first quarter comes to a close.
The S&P 500 Volatility Index ($VIX, 16.00, up 0.58) stayed elevated after trading to a high of 16.74 on Friday. I have been warning that any closes above 17.50 could lead to a jump to 20-22, but the bulls held this level throughout last week. If the bulls can get below 15 to start the week, it would be a nice signal that higher highs are in store. I will have more on the VIX in a minute.
The Financial Select SPDR (XLF, $24.32, down $0.17) went into a “bear trap” following the dips to $23.82 and $23.86 last week. This was a slightly bearish development, as a mini “death cross” is forming. This happens when the 50-day moving average falls below the 100-day moving average (or 200-day moving average).
Tuesday and Wednesday’s pullback came ahead of the Federal Reserve’s stress tests and, while the rebound back above $24 on Thursday was bullish, the sector remains an anomaly.
The second part of the bank stress tests were released after Wednesday’s close, and they didn’t go as smoothly as the first round. The 31 banks that were in focus passed last week’s tests with flying colors, but some weren’t as fortunate this time around.
For the most part, 29 banks passed the Federal Reserve’s annual tests, with three of them needing to alter their plans. Deutsche Bank Trust and Santander Holdings failed outright, but, overall, this may be one of the “safest” sectors in the market.
While there could be some near-term pain, the financial stocks will gain once the Fed starts raising rates. I have also mentioned that closes for the XLF above $24.50 would be a big deal, and Thursday’s high reached $24.51. There is still a chance that $25-$25.50 will trip if the major moving averages hold support this month.
The Dow Jones Transportation Average ($TRAN, 8,945, down 60) failed to recover its 50-day moving average to start the week, which was a troubling sign despite Monday’s overall market rebound.
Tuesday’s 130-point drubbing and close just below 8,800 was scary, but Wednesday and Thursday’s rebound back to 8,900-9,000 was bullish.
I have warned of additional risk to 8,600 and the 200-day moving average on continued closes below 8,800. A mini “death cross” is also forming, as the 50-day moving average is in danger of falling below the 100-day moving average. A move back above 9,000-9,025 this week would be helpful in supporting a run higher for the market.
While the action in March has been bearish on the surface, there were bullish signs last week that kept a mini trading range intact. The major indices had a strong February that lasted into the first trading day for March.
I have been warning of a possible trading range developing coming into the month, and I have also mentioned the possibility of a “sweet spot” that could come afterwards.
The backtest to the 50-day moving averages was nearly a given and, while the MAs have been stretched to a degree on the Dow and S&P, they are holding for the most part. The choppy, volatile action has once again confused Wall Street, as there is concern for an additional 5%-10% pullback. While this can still happen, the suit-and-ties are hoping for a correction so they can get in the game.
I talked about volatility returning in March, and it remains to be seen how this trading range will unravel.
The buying opportunity Wall Street has once again begged for is here. The problem is that most of the suits and ties don’t read the charts, so they don’t know when a buying opportunity is presenting itself.
Of course, the slick-talking pros that have called for a selloff are patting themselves on the back and are feeling good. I’m still hopeful that the bulls can buck the trend once again, as the action could get extremely volatile with the Fed speaking this week.
Wall Street is fretting over whether the Fed will remain “patient” ahead of Wednesday’s statement. The removal of this word from the policy meetings might be the green light that a rate hike is coming soon.
Most of the higher-ups have penciled in an interest rate increase that could come as soon as June. Analysts are worried that the market might fall further on interest rates hikes.
The worry here is a June rate hike, but, if Janet Yellen can somehow spin things into September, the market might respond in a different way. I have argued that a quarter-point rate hike isn’t that big of a deal in the grand scheme of things. Regardless, it has heightened volatility over the past week.
More on the VIX: The bears have held the 15 level for six-straight days, and this has produced the trading range I warned about coming into March. The bulls pushed a low of 12.86 in late February and 12.87 in early March. This may have formed the temporary bearish “double bottom” that led to the backtest to 17.19 last week.
The setup here is an easy one and probably the most telling market sign we will get this week. If the VIX closes above 17.50, it could lead to panic selling. If the VIX closes below 15 in consecutive sessions, it would be a very bullish sign for a retest to 13.50-12.50.
This would produce the “sweet spot” I have been hoping for that sometimes accompanies the month of March. I’m also prepared to go short or use put options, as the end of March can be bearish. However, we need further clues before going aggressively short.
This week is setting up to be one of those “hope for the best, but prepare for the worst” scenarios.
From desk to press, futures look like this: Dow (+67); S&P 500 (+9); Nasdaq 100 (+16).
Rigel Pharmaceuticals’ Unique Business Strategy
Rigel Pharmaceuticals (RIGL, $3.60, up $0.04) has a partnership with Bristol-Myers Squibb (BMY), and the approval of lung cancer drug, Opdivo, was a big bonus. The possible approval of the drug wasn’t expected until June.
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 is a $3 billion a year drug market category.
Rigal also has a partnership with AstraZeneca for the development of an asthma drug and recently received a “milestone” payment of nearly $6 million.
Rigal has five other drugs in development stages in their pipeline and forms “collaborations” with other companies to bring their drug 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+ in the near-term. The current market cap for the company is just over $300 billion and a $1 billion valuation would have shares trading between $10-$11.
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 on a number of factors. The general statement of a biotech bubble is a little premature and is a cop-out to 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.
Momentum Stocks Weekly Play List
All prices given in this update are current as of March 13, 2015
The Momentum Stocks Weekly Closed Trade Track Record for 2015 is 8-0, for a 100% win rate (125-17, or 88% win rate, overall since the start of 2011).
View the entire list of open and closed trades by clicking here.
Rigel Pharmaceuticals (RIGL, $3.60, up $0.04)
Original Entry Price: $3.72 (3/10/15)
Lowered Price from Selling Options: N/A
Exit Target: $6
Return: -3%
Stop Target: $2
Action: Resistance is at $3.75-$3.80 and a close above the latter should lead to a run to $4.00. Near-term support is at $3.40. A close below this level could lead to $3.20-$3.00.
Discovery Laboratories (DSCO, $1.70, flat)
Original Entry Price: $1.68 (3/5/15)
Lowered Price from Selling Options: N/A
Exit Target: $3
Return: 1%
Stop Target: $1
Action: Resistance is at $1.80. Shares tested $1.82 twice last week and a close above $1.85 likely gets $2.00 in play. Near-term support is at $1.60 and the 200-day moving average. A close below this level gets $1.50-$1.40 in play.
The company is announcing earnings on Tuesday, and Wall Street is looking for a loss of 14 cents a share on revenue of $430,000. I will be listening and watching the conference call for other tidbits of information. The webcast will be live on the company’s website on Tuesday at 8:30 a.m. EST.
You can read my full update on DSCO from March 9 by clicking here.
Dot Hill Systems (HILL, $4.99, up $0.01)
Original Entry Price: $4.25 (3/4/15)
Lowered Price from Selling Options: N/A
Exit Target: $5.00-$7.00
Return: 17%
Stop Target: Raise from $4.50 to $4.75 (Stop Limit)
Action: Raise the Stop Limit from $4.50 to $4.75.
Shares traded to a high of $5.00 on Friday before finishing slightly below this level. A close above this level likely gets the 52-week high of $5.33 in the picture. A close below $4.80 will likely trigger the raised Stop Limit of $4.75.
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.
Flextronics (FLEX, $11.69, up $0.14)
Original Entry Price: $12.24 (3/2/15)
Lowered Price from Selling Options: N/S
Exit Target: $15.00
Return: -4%
Stop Target: $9.00
FLEX July 13 calls (FLEX150717C00013000, $0.30, up $0.05)
Entry Price: $0.50 (3/2/2015)
Exit Target: $1.00
Return: -40%
Stop Target: None
Action: Support is at $11.50 and the 50-day moving average. There is risk to $11.25-$11.00 and the 100/200-day moving averages on continued closes below $11.50. Resistance is at $11.75-$12.00.
You can read my thoughts on FLEX in the Trade Alert from March 2.
Bank of America (BAC, $16.09, flat)
Original Entry Price: $17.63 (12/19/14)
Lowered Price from selling options: $17.28
Exit Target: $20+
Return: -7%
Stop Target: $15.00
Current Dividend Yield: 1.3%
Action: Resistance is at $16.15-$16.25 and the 50/200-day moving average. A close above the latter should get $16.50-$16.75 in the picture. Support is at $16.00-$15.75.
I want to wait for $17 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.
Bank of America paid a 5-cent dividend on March 4. This lowered the cost basis of the trade to $17.28.
JDS Uniphase (JDSU, $13.63, down $0.20)
Wrote the JDSU March 14 calls (JDSU150320C00014000, $0.09, down $0.06)
Original Entry Price: $14.07 (12/19/14)
Lowered Price from selling options: $13.54
Exit Target: $18.00+
Return: 1%
Stop Target: $10.00
Action: The JDSU March 14 calls expire this Friday. If shares are above the $14 level of the strike price, our JDSU shares will be “called away” for a 3% profit.
Resistance is at $13.75-$14.00. Support is at $13.50 followed by $13.25 and the 50- and 100-day moving averages.
We sold the March 14 calls for 23 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, $1.70, flat)
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: $2.00
Return: 42%
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 the $2 strike price by April, the trade will make 67%.
Rave Restaurant Group (RAVE, $14.84, down $0.11) Stock Trade
Original Entry Price: $8 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $20.00
Return: 86%
Stop Target: Raise from $11 to $11.75 (Stop Limit)
Action: Raise the Stop Limit from $11 to $11.75.
Shares exploded to a fresh 52-week high of $15.00 midweek and followed that up with a run to $16.20 on Thursday.
Near-term support has moved from $12.50 to $14.00, and I wouldn’t be surprised to see a back test to this level. Resistance is at $15.25-$16.00.
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. I mentioned my year-end target is $20 for the stock but I have a feeling I may be raising it again down the road.
For new subscribers, you can read my February earnings update on RAVE and why this stock is a multi-year hold. I started recommending shares of RAVE, then ticker symbol PZZI, at $4.50, in February 2012.
Huttig Building Products (HBP, $2.95, down $0.04) Stock Trade
Original Entry Price: $4 (8/13/14)
Lowered Price from Selling Options: No options available
Exit Target: $6+
Return: -26%
Stop Target: $2.00 (Stop Limit)
Action: Shares traded down to $2.81 on Thursday and Friday. A close below this level will likely get the 52-week low of $2.70 in play. Resistance is at $3.00-$3.10.
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