Option Investor
Newsletter

Daily Newsletter, Monday, 4/6/2015

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Economics Or Earnings

by Thomas Hughes

Click here to email Thomas Hughes
Weak jobs creation in March did not derail the bull market.

Introduction

Weak jobs creation was the talk of the day and largely to blame for today's weak opening. While it was enough to send the bulls ducking for cover it was not sufficient to keep the bulls at bay. The news was shrugged off for any of a number of reasons including the possibility the FOMC would hold off on raising interest rates, the FOMC minutes due out this week and impending earning season. Whatever the reason the market blasted off the early lows.

Early morning trading was light due to holiday market closures in Europe. Asian indices were mixed but primarily in the green. Our markets were deep in the red and indicated to open more than a half percent below last week's close. When the opening bell sounded the market did indeed move sharply lower but the selling did not last. Within the first two minutes of trading support had been triggered and the bulls were charging higher.

Market Statistics

The market moved higher from that point onward with barely a pause until hitting the day's high near 1:45PM. From then on the indices tread water holding near the early high until about a half hour before the close of trading. At that time the markets began to pull back from the highs, shedding about a third of today's gains. Despite the late day decline the markets were able to move higher and close in the green.

Economic Calendar

The Economy

Only one economic release today, ISM services. This was released at 10AM and added additional relief to the market. The reported headline is 56.5, slightly below expectations of 56.9 and last month's unrevised figure. While mildly below projections the number is still well above the expansionary 50 level and data within the report suggests further expansion is on the way. The employment and new orders components rose, employment by 0.2%.

Moody's Survey of Business Confidence surged to yet another new high in this week's report. The headline figure is 44, up more than 3 points from last week. In the summary Moody's Economist Mark Zandi downplays the new high but reveals positives within the data. According to him...

"Businesses remain upbeat, particularly in the U.S. The recent slowing in U.S. growth is not evident in the survey results. Indeed, hiring intentions posted a record high last week. Businesses also remain optimistic about investment, and demand for office space is strong. Credit is widely available, and pricing is sturdy, despite heightened deflation concerns in much of the developed world"


The Moody's report and the ISM both support continued strength in the labor market, if not in actual job creation. The NFP of last week is a reminder that job creation is an important part of the labor market but not all of it. While jobs creation fell in March so did jobless claims and the level of lay-offs' at the same time wages increased modestly and unemployment remained unchanged, a combination that does not indicate underlying weakness in labor. Based on the aggregate of the data the March NFP is a one-off and not a trend but of course I will be keeping a close watch on this and all the rest of the labor data.

This week is very light on economic data of any kind. There are only a few reports due out including weekly jobless claims, JOLT's, Wholesale Inventories, Import/Export Prices and the FOMC Minutes. The minutes may be this weeks most important single piece of data but the JOLTs and labor picture will also remain in focus.

The Oil Index

The Saudis have been steadfast promoters of the idea OPEC would not support oil prices with production cuts but have seemingly bypassed that sentiment today. They announced a new move to increase the price of oil to its Asian customers by decreasing the discount offered to them. While not a significant change to the supply/demand picture this will no doubt help support oil prices, at least in the near term. The news caused WTI and Brent to surge nearly 6% each. WTI settled today above $52, Brent above $58 with the spread narrowing to near $6.

The Oil Index moved higher along with the underlying commodity. A rise in oil is no doubt a boon to the troubled oil sector which is expected to lead the market with declines in earnings this year. The index gained more than 2.25% in today's session and moved above resistance at 1,350. The indicators are bullish and confirm the move with a target near 1,400. This is the top of the 4 month range and the next area of resistance. The index could remain range bound for the next few weeks up to and until the major oil companies release earnings. Expect them to be bad and look to the guidance for indications of what to expect later in the year. BP and Exxon both report in the last week of this month.


The Gold Index

Gold prices got a big boost from the weak NFP report. The data led to drop in dollar values that have sent gold up above $1200 yet again. The move may be temporary however as dollar weakness is not something expected to last. For one thing, the FOMC is on the path leading to interest rate hikes while the ECB and BOJ are still actively pursuing QE policies. What is important to watch this week is economic data and the FOMC minutes. They will both fuel speculation over the rate hike; if the hike looks closer the dollar could rise back toward the recent high and pressure gold lower. In any event we are looking at $1200 as support and $1225 as potential resistant.

The gold miners got a lift from today's rise in gold prices. The miners ETF GDX gained more than 3.25% in today's action and moved back above the short term 30 day moving average. Today's candle is a spinning top, a sign of indecision, but when taken along with the indicators and longer term analysis of the charts looks more bullish than not.

In the near term both indicators are bullish and moving higher in confirmation of today's gains; stochastic is forming a strong bullish crossover and MACD is on the rise. In the short term today's move is the second bounce of a test of long term support, the first occurring last month. In the slightly longer term these two bounces are the second of two double bottoms in a greater long term double bottom the first occurring Nov/Dec last year.

If this is the actual bottom of the gold sector could lead to significant gains in the coming years. Current target is the top of the 6 month range near $20.50 with $22.50 a possibility if resistance can be broken. The miners begin reporting in 2 weeks with the bulk of reporting due the last week of this month.


In The News, Story Stocks and Earnings

Earnings! Earnings begin again this week with Alcoa on Wednesday. The expectations are not good but the market may be looking past this quarter and into the 2nd quarter and 2nd half already. According to Factset the expected blended growth rate for the S&P 500 is -4.6%, steady from last week.So far 19 S&P companies have reported for the first quarter of 2015; 16 have reported EPS growth above the expected blended rate, 12 have beaten on sales. Five more are expected to report this week, including Alcoa.

Ex-energy the blended rate has crept up marginally from last week to 1.26%. I may be grasping at straws with this look at earnings but I think it relevant when one sector is expected to decline by -64%, and the next biggest loser is expected to decline by only -10%.

Looking out to the next quarter, the full year and next year things are also looking a lot better than the headline expectations for first quarter 2015. We are expected to see some decline next quarter but less than half of what we are expecting this quarter. We are expecting overall earnings growth of 2.4% for the 2015 calendar year and a whopping 12.4% for calendar year 2016. The three biggest drivers for these gains are expanding margins, the consumer and housing.

Alcoa, reports on Wednesday after the bell. The company is expected to report earnings near $0.25, flat from the previous quarter due to a decline in aluminum prices. Sales and outlook are expected to be good. Today the stock gained more than 1.5% in a move up from recently set lows. The indicators are bullish with a target near the short term moving average about 2.5% above today's close.


Herbalife received notice it was under investigation. Company execs received notices from federal agencies requesting information into their practices. The news caused the embattled stock to fall sharply in the pre-market session but it was able to regain the loss and close with a gain of more than 1%.


Tesla Motors reported record first quarter deliveries of its electric cars. The new sent the stock shooting up by more than 6% to a new one month high. This is in advance of an expected announcement/product release due out later this week.


Duke Energy announced a huge new stock buy back program. The program, valued at $1.5 billion, is expected to close by the end of the third quarter. The news sent shares of Duke, which yields over 4%, up by more than a full percent in the pre-market session. This move was extended after the open and carried the stock above the short term moving average and to new 30 day high.


The Indices

Today's move was led by the broad market S&P 500 which gained 0.66%. The index made this gain after a move down to test support in the first minutes of open trading. Support was found between 2,050 and 2,060 and the resulting rally carried the index 30 points from bottom to top. Today's move confirmed support but was capped by resistance near 2,090 and the December all-time high. The market appears to be settling into a range between these levels and could remain there until the earnings picture for the first quarter becomes clearer. The indicators are weak but appear to be winding up in anticipation of larger market movement that is probably earnings related; stochastic is trending in the middle portion of its range while MACD momentum is approaching equilibrium. The market could go either way from here but the trends are up and expectations for the future are positive so I remain bullish.


The Dow Jones Industrial Average matched the S&P 500 with a gain of 0.66%. The blue chip index moved in a large range today, testing support and meeting resistance, in similar fashion as well. The index appears to be forming a base of support near 17,750 but this level could easily break down in the face of weaker than expected earnings and/or outlook. The indicators are consistent with support at this level and still set up for a potential trend following entry but a break above resistance at 18,000 is needed to help confirm. If the market begins to move lower, support at 17,750 is important in the short term and could take the index down to 17,250 if broken.


The NASDAQ Composite made the next biggest gain, 0.62%. The tech heavy index appears to be confirming long term support above 4,800 with today's move and regained the short term moving average. The indicators are still weak but like the broad market and the blue chips are consistent with support within a longer term uptrend. They are also set up for a potential trend following entry. If one develops it could take the index to new highs, the caveat being that technical resistance just above 5,000 will need to be broken.


Moving on to the Dow Jones Transportation Average today's market action wasn't all ice-cream and rainbows; the transports did not participate in today's rally and closed with a loss of -0.45%. Today's action created a doji candle and left it sitting at the bottom of the 6 month trading range and a 6 month low. The indicators are weak and pointing lower but at this time still consistent with support. It is looking like support for the transports is being tested and may be tested further but I will need to see a definitive break below 8566, with confirming market conditions, before getting bearish. A break below support would find the long term trend line within 50 points where next support is likely to be found.


The markets are winding up for a move but what move exactly will come down to earnings and expectations. Earnings are going to be bad, we know this, it's been coming for a while and could lead to a correction. We also know that the expectations for the rest of the year are still OK if not good, which would make any correction that happens now a buying opportunity. What we don't know is just how bad earnings for the first quarter are going to actually be, and we don't know how good the rest of the year is going to be, which leaves a lot of room for speculation and the possibility for a very volatile earnings season. The best thing I can say now is sit back and wait until the picture gets clearer, which may happen on Wednesday with the FOMC Minutes or with Alcoa's report after the bell.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Selling The Rallies

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Avis Budget Group, Inc. - CAR - close: 56.53 change: -0.90

Stop Loss: 60.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.7 million
Entry on April -- at $---.--
Listed on April 06, 2015
Time Frame: exit PRIOR to May option expiration
New Positions: Yes, see below

Company Description

Why We Like It:
Investors sentiment for CAR seems to have soured. The company operates in a competitive, low-margin industry.

According to the company, "Avis Budget Group, Inc. (CAR) is a leading global provider of vehicle rental services, both through its Avis and Budget brands, which have more than 10,000 rental locations in approximately 175 countries around the world, and through its Zipcar brand, which is the world's leading car sharing network, with more than 900,000 members. Avis Budget Group operates most of its car rental offices in North America, Europe and Australia directly, and operates primarily through licensees in other parts of the world. Avis Budget Group has approximately 30,000 employees and is headquartered in Parsippany, N.J."

Another challenge is the broader transportation industry. Many market analysts view the transportation industries as a barometer of the wider economy. Fuel prices are significantly lower than they were a year ago. This is a net positive for the transports. This effect seems to be priced in. Now the weight of a slowing U.S. economy appears to be dragging the transportation average lower. Today saw the Dow Jones Transportation Average breakdown below key support at the 8,600 level.

Looking at CAR, the company's last three earnings reports have been mixed. They managed to beat Wall Street's earnings estimates on the bottom line three quarters in a row. Revenues are slowing down. Q2 revenues came in above estimates. Q3 revenues were up +6% but were just a hair below estimates. Q4 revenues were up +2% and missed estimates. Part of the problem is currency headwinds. The surging dollar has damaged their revenue growth. CAR's guidance when they reported Q4 earnings in February forecasted 2015 revenues below analysts' estimates.

Meanwhile traders have been selling the rallies. The late December rally failed near $68.00, marking a lower high from its 2014 peak. The rally failed again a few days later. The post-earnings spike in February produced another lower high. Now we see the oversold bounce from support near $56.00 has already rolled over. The point & figure chart is bearish and forecasting at $45.00 target.

Tonight we are suggesting a trigger to buy puts at $55.85. We will plan on exiting prior to May option expiration or CAR's earnings report in May (whichever comes first).

Trigger @ $55.85

- Suggested Positions -

Buy the MAY $55 PUT (CAR150515P55) current ask $1.70
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:



In Play Updates and Reviews

Bad News Is Still Good News?

by James Brown

Click here to email James Brown

Editor's Note:

The stock market shrugged off the disastrous job data from March. Traders quickly bought the spike down on Monday morning and all the major indices closed in positive territory.

It seems that investors still believe that bad economic news is still good news for the stock market because the bad data pushes the Fed's next rate hike further into the future.

JACK hit our stop loss.

PTCT hit our entry trigger.


Current Portfolio:


CALL Play Updates

Cardinal Health, Inc. - CAH - close: 89.93 change: +0.33

Stop Loss: 87.75
Target(s): To Be Determined
Current Option Gain/Loss: -19.6%
Average Daily Volume = 1.7 million
Entry on March 30 at $90.55
Listed on March 28, 2015
Time Frame: We might exit prior to CAH earnings
(potentially April 30th)
New Positions: see below

Comments:
04/06/15: CAH bounced off its morning spike lower near $88.75. Unfortunately shares lagged behind the broader market. CAH only gained +0.36% versus the S&P 500's +0.66% gain. The $91.50 level is short-term resistance. I'm not suggesting new positions at this time.

Trade Description: March 28, 2015:
The big healthcare names have shown significant relative strength over the last couple of years. That momentum has carried into 2015 and shares of CAH are outperforming the broader market with a +11% gain year to date.

You might have heard about CAH recently since the company made headlines in early March. Here's a brief description of the company, "Headquartered in Dublin, Ohio, Cardinal Health, Inc. (CAH) is a $91 billion health care services company that improves the cost-effectiveness of health care. As the business behind health care, Cardinal Health helps pharmacies, hospitals, ambulatory surgery centers, clinical laboratories and physician offices focus on patient care while reducing costs, enhancing efficiency and improving quality. Cardinal Health is an essential link in the health care supply chain, providing pharmaceuticals and medical products and services to more than 100,000 locations each day and is also the industry-leading direct-to-home medical supplies distributor. The company is a leading manufacturer of medical and surgical products, including gloves, surgical apparel and fluid management products. In addition, the company operates the nation's largest network of radiopharmacies that dispense products to aid in the early diagnosis and treatment of disease."

Management has been doing a good job with the earnings game. The last three quarters in a row have seen CAH beat Wall Street estimates on both the top and bottom line. Their next report should be the end of April.

On March 2, 2015 CAH made the news with their $2 billion acquisition of Cordis. Here's an except from the company's press release:

Cardinal Health today announced plans to acquire Johnson & Johnson's Cordis business, a leading global manufacturer of cardiology and endovascular devices, for $1.944 billion in cash, or approximately $1.594 billion, net of the present value of tax benefits. The acquisition is expected to be financed with a combination of $1.0 billion in new senior unsecured notes and the remainder with existing cash. The transaction is expected to close in the United States and key non-U.S. countries towards the end of calendar 2015.
CAH is forecasting this acquisition will add more than $0.20 per share to the company's 2017 earnings. They expect synergies to be more than $100 million by the end of fiscal 2018.

CAH's chairman and CEO, George Barrett, commented on the acquisition,

"We are extremely excited about the acquisition of Cordis. This is a significant step forward in our cardiovascular strategy. Cordis brings with it a long and proud legacy of cardiovascular innovation. This move highlights our commitment to address a major pain point in healthcare systems through innovative new approaches to the management of physician preference items. This acquisition follows a sequence of strategic moves for Cardinal Health in the areas of cardiology, wound management and orthopedics. We are well-positioned to help customers standardize around mature medical devices, while bringing them innovative solutions around supply chain management, inventory optimization, and work flow tools and data to support the most effective management of the patient...

With an aging population and the accompanying demand for less invasive medical treatments, health systems around the world are searching for the best way to bring quality care to their patients in the most cost-effective way. The acquisition of Cordis reinforces our strategic position to address this need and strengthens an important growth driver in the Cardinal Health portfolio."

Moody's Investors Service, a credit rating agency, commented on the deal and said it would be credit positive for CAH. Meanwhile a couple of analyst firms upgraded their price targets on CAH following the story with new targets at $105 and $107.

Technically shares of CAH have been trading in a bullish pattern of higher lows and higher highs. Investors just bought the dip at $88.00 near its trend line of support. We want to hop on board and tonight we are suggesting a trigger to buy calls at $90.55.

- Suggested Positions -

Long MAY $90 CALL (CAH150515C90) entry $2.86

03/30/15 triggered @ 90.55
Option Format: symbol-year-month-day-call-strike


iShares Russell 2000 ETF - IWM - close: 125.20 change: +0.55

Stop Loss: 121.65
Target(s): To Be Determined
Current Option Gain/Loss: +36.6%
Average Daily Volume = 32.7 million
Entry on March 27 at $123.05
Listed on March 26, 2015
Time Frame: Exit prior to May option expiration
New Positions: see below

Comments:
04/06/15: The IWM briefly traded below $124.00 this morning before bouncing back into the green. If this rally continues we could see the IWM testing new all-time highs near $126.30 soon.

Trade Description: March 26, 2015:
The IWM is the exchange traded fund (ETF) that mimics the small cap Russell 2000 index ($RUT). Last year we saw the Russell 2000 underperform its large cap rivals. The S&P 500 delivered a +11.5% gain in 2014 while the $RUT only rose +3.6%. The situation has changed this year. As of last week's high the $RUT was up +5.3% compared to a +2.3% gain in the S&P 500.

Investors have been drawn to small cap companies because they will endure the impact of a strong dollar better than the large caps. Many of the large cap S&P 500 companies are big multi-national firms. Almost 50% of revenues for S&P 500 components are overseas. Yet only 20% of revenues for Russell 2000 companies are outside the U.S. At the same time the U.S. economy, while growing slowly, is still growing faster than Europe.

Technically the IWM was holding up pretty well until Wednesday's market-wide plunge. Traders bought the dip today near its trend of higher lows. The point & figure chart for the IWM is still bullish and forecasting a long-term target of $154.00. We think stocks could see a bounce soon and the IWM could be a great way to play it. Tonight we are suggesting a trigger to buy calls at $123.05. We'll start this trade with a stop at $119.65.

- Suggested Positions -

Long MAY $125 CALL (IWM150515C125) entry $1.94

04/04/15 new stop @ 121.65
03/27/15 triggered @ 123.05
Option Format: symbol-year-month-day-call-strike


Lennox International - LII - close: 112.09 change: +0.03

Stop Loss: 106.75
Target(s): To Be Determined
Current Option Gain/Loss: -2.0%
Average Daily Volume = 417 thousand
Entry on March 23 at $110.96
Listed on March 19, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
04/06/15: Hmm... most of the stock market spiked lower at the open this morning. LII actually spiked higher. While the broader market rebounded into positive territory LII merely faded lower.

I don't see any changes from my recent comments. No new positions at this time.

Trade Description: March 19, 2015:
LII has been in business for over one hundred years. Lennox Intl. is part of the industrial goods sector. They offer residential cooling and heating products as well as commercial cooling and heating equipment. They are considered a global leader in the heating, air conditioning, and refrigeration markets. The residential business generates just over half of their annual sales.

The last couple of quarters have seen steady growth for LII. You can see the big gap higher in the stock price back in October 2014. That was a reaction to its Q3 earnings results. Their most recent report was February 2nd, 2015 where LII delivered its Q4 results.

Analysts were expecting a profit of $0.99 a share on revenues of $790 million. LII reported earnings per shares grew +32% to $1.02. Revenues were up +8.4% to $812.8 million, led by +13% sales growth in their residential segment.

Chairman and CEO Todd Bluedorn commented on his company's results,

"2014 was a year of strong growth and record profitability for Lennox International, led by 10% revenue growth at constant currency and 31% profit growth in our Residential business. In the fourth quarter, the company's momentum continued, with revenue up 10% at constant currency and total segment profit up 24%. Growth in the quarter continued to be led by Residential, with revenue up 14% at constant currency and profit up 57% from the prior-year quarter. In Commercial, revenue rose 8% at constant currency. Commercial profit was essentially flat with the prior-year quarter on headwinds from customer mix, foreign exchange, and investments related to our entrance in the VRF market. In Refrigeration, revenue was up 8% at constant currency. As expected, Refrigeration profit was down from the prior-year quarter by 45% due to the repeal of the carbon tax in Australia, North America product mix, and a negative impact from foreign exchange. We continue to expect Refrigeration revenue, margin and profit to be up in 2015 on continued growth in North America and improvement in Australia in the second half of the year. For the company overall in 2015, we expect another strong year of growth and record profitability, with strong cash generation for investments to drive growth as well as to return cash to shareholders."
Last year LII earnings rose more than +20% to $4.23 a share. They are forecasting $5.20-5.60 per shares in 2015 (+22.9% to +32.3%) versus Wall Street estimates of $5.42 per share.

Shares have been a steady performer the last few months with a bullish trend of higher lows and higher highs. The point & figure chart is bullish with a $140 target. Today shares of LII are hovering just below round-number resistance at $110. We are suggesting a trigger to buy calls at $110.25.

- Suggested Positions -

Long JUN $115 CALL (LII150619C115) entry $2.55

03/23/15 triggered on gap open at $110.96, suggested entry was $110.25
Option Format: symbol-year-month-day-call-strike


Nike, Inc. - NKE - close: 99.73 change: +0.07

Stop Loss: 97.40
Target(s): To Be Determined
Current Option Gain/Loss: -35.8%
Average Daily Volume = 3.6 million
Entry on March 30 at $101.23
Listed on March 26, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
04/06/15: I'm starting to worry about NKE. Shares did not participate in the market's rally today. The stock briefly traded above its 10-dma and then fell back to close below the $100.00 level. On a positive note the stock did bounce off its 20-dma this morning. That's the third time in less than two weeks.

I am not suggesting new positions at this time.

Trade Description: March 26, 2015:
In the athletic footwear and apparel industry Nike is the 800-pound gorilla with annual sales of more than $30 billion. According to the company, "NIKE, Inc., based near Beaverton, Oregon, is the world’s leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. Wholly-owned NIKE, Inc. subsidiaries include Converse Inc., which designs, markets and distributes athletic lifestyle footwear, apparel and accessories, and Hurley International LLC, which designs, markets and distributes surf and youth lifestyle footwear, apparel and accessories."

The company's most recent earnings report was March 19th, after the closing bell. NKE reported its Q3 2015 results. Analysts were expecting a profit of $0.84 a share on revenues of $7.62 billion. NKE delivered a profit of +0.89 a share or +16% from a year ago. Revenues were up +7% to $7.46 billion. However, if you back out the currency headwinds, their revenues were up +13%.

The company reported sales growth across every geographical region. Their gross margins improved 140 basis points to 45.9 percent. Management said their online sales are soaring. Nike.com saw its revenues jump +42% last quarter.

The current quarter is NKE's 2015 Q4 (March-July) and the company said orders for Q4 in North America are up +15%, which is above analysts' estimates of +11.6%. Orders from China are up +11%, also above estimates. In the company's earnings release NKE said, "As of the end of the quarter, worldwide futures orders for NIKE Brand athletic footwear and apparel scheduled for delivery from March 2015 through July 2015 were 2 percent higher than orders reported for the same period last year. Excluding currency changes, reported orders would have increased 11 percent."

One big concern is the U.S. dollar. Sales in Europe were up +21% but when you factor in euro weakness and dollar strength that sales growth drops to +10%. The strength in the U.S. dollar is a major headwind but after NKE's Q3 results Wall Street feels that the company is managing the currency impact very well. The company is forecasting low double digit sales growth in the current quarter.

Wall Street applauded the results and shares of NKE gapped open higher on March 20th to hit all-time highs. There was a parade of bullish analyst comments. Several firms raised their price target on NKE. Here's a brief list of new price target: $106, $110, $115, $116.00. The point & figure chart is more optimistic as it is forecasting at $125.00 target.

Shares of NKE have seen some profit taking, which isn't a surprise considering the market's four-day decline. However, now that NKE has filled the gap, traders bought the dip. This could be an entry point. We are suggesting a trigger to buy calls at $100.25.

- Suggested Positions -

Long MAY $100 CALL (NKE150515C100) entry $3.35

03/30/15 triggered on gap open at $101.23, suggested entry was $100.25
Option Format: symbol-year-month-day-call-strike


PTC Therapeutics, Inc. - PTCT - close: 66.11 change: +1.25

Stop Loss: 59.75
Target(s): To Be Determined
Current Option Gain/Loss: -9.1%
Average Daily Volume = 551 thousand
Entry on April 06 at $65.25
Listed on April 04, 2015
Time Frame: Exit prior to earnings in May
New Positions: see below

Comments:
04/06/15: Our aggressive trade on PTCT is open. Shares did breakout past resistance at $65.00 and hit our suggested entry point at $65.25. The stock displayed relative strength with a +1.9% gain.

Trade Description: April 4, 2015:
Healthcare stocks have been market leaders but biotechs have sprinted past their healthcare brethren. PTCT saw big gains off its 2014 lows and has continued to outperform in 2015, even after its recent correction.

Here's a brief description of PTCT, "PTC is a global biopharmaceutical company focused on the discovery, development and commercialization of orally administered, proprietary small molecule drugs targeting an area of RNA biology we refer to as post-transcriptional control. Post-transcriptional control processes are the regulatory events that occur in cells during and after a messenger RNA is copied from DNA through the transcription process. PTC has received conditional marketing authorization in the European Economic Area for Translarna for the treatment of nonsense mutation Duchenne muscular dystrophy in ambulatory patients aged five years and older.

PTC's internally discovered pipeline addresses multiple therapeutic areas, including rare disorders, oncology and infectious diseases. PTC has discovered all of its compounds currently under development using its proprietary technologies. PTC plans to continue to develop these compounds both on its own and through selective collaboration arrangements with leading pharmaceutical and biotechnology companies."

You can view PTCT's pipeline data on the company's website.

Most of the excitement for PTCT appears to be focused on its Ataluren drug. It's a treatment for Duchenne muscular dystrophy caused by nonsense mutations. The drug is already approved on a conditional basis in Europe. Right now PTCT is performing a Phase III study. Results are expected in the fourth quarter of 2015. This could be a HUGE event for the company and the stock. Success will likely send the stock soaring while disappointing results could crush shares.

A few weeks ago the stock was rocketing higher thanks to takeover speculation. Analysts were painting a takeover target on PTCT and speculating that Biomarin Pharmaceuticals, Shire, or Vertex Pharmaceuticals might be suitors. It is still just speculation at this point. It would be a big gamble to buy PTCT now before its Phase III study was complete but if you are a potential acquirer then the price will go up if the study is a success.

The Street.com published an interesting note on PTCT's CEO Stu Peltz selling all of his stock in the company (about 47,000 shares). If he believes in the future of PTCT's pipeline, why would he sell? If he believes his company could be acquired by a rival, why would he sell? The other side of the coin is that executives with a lot of stock should diversify their wealth. He does still have stock options but selling his current stake could be seen as a big negative.

Technically PTCT has already seen a -20% correction from its March highs. On the plus side the action over the last two weeks looks like a bullish double bottom. Today the point & figure chart is bearish but a move above $65.00 would generate a new buy signal. The most recent data listed short interest at 14% of the very small 25.5 million share float so PTCT could see some short covering on a breakout.

The long-term trend is bullish and short-term PTCT looks ready to bounce. I want to warn readers that this is a higher-risk, more aggressive trade. We always consider biotech stocks to be higher-risk. The news about the CEO selling his stock generates doubt about the company's short-term future. Cautious traders may want to sit this one out. We're suggesting a trigger to launch small positions at $65.25.

*small positions* - Suggested Positions -

Long MAY $70 CALL (PTCT150515C70) entry $4.40

04/06/15 triggered @ 65.25
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Alkermes plc - ALKS - close: 60.09 change: -0.01

Stop Loss: 64.15
Target(s): To Be Determined
Current Option Gain/Loss: +48.8%
Average Daily Volume = 1.26 million
Entry on March 25 at $64.90
Listed on March 23, 2015
Time Frame: exit PRIOR to May option expiration
New Positions: see below

Comments:
04/06/15: This morning ALKS announced positive topline results from its complete six-month Phase 2 clinical trial of ALKS 3831 in schizophrenia. The market did not respond to the news, at least not very much. Instead of spiking lower with the broader market ALKS did start the day with a rally. However, the rally failed near last Thursday's high and ALKS faded back toward unchanged on the day and closed on round-number support at $60.00.

I am not suggesting new positions.

Trade Description: March 23, 2015:
Biotech stocks have been some of the market's best performers, especially off the October 2014 lows. The group may have gotten ahead of itself with significant gains in recent weeks. The last couple of days the biotech ETFs are flashing what might signal a potential top. Meanwhile one stock that has been underperforming its peers is ALKS.

You might not be familiar with ALKS. The company is part of the healthcare sector. According to their marketing materials, "Alkermes plc is a fully integrated, global biopharmaceutical company developing innovative medicines for the treatment of central nervous system (CNS) diseases. The company has a diversified commercial product portfolio and a substantial clinical pipeline of product candidates for chronic diseases that include schizophrenia, depression, addiction and multiple sclerosis. Headquartered in Dublin, Ireland, Alkermes plc has an R&D center in Waltham, Massachusetts; a research and manufacturing facility in Athlone, Ireland; and manufacturing facilities in Gainesville, Georgia and Wilmington, Ohio."

The company's most recent earnings report was February 24th. They beat expectations on both the top and bottom line. Unfortunate for shareholders management lowered their 2015 revenue guidance. Since its report shares have broken down. The stock has seen a couple of analyst downgrades (or lowered price targets). The point & figure chart has turned bearish and is currently forecasting at $54.00 target.

You can see the gap down on the earnings news. ALKS struggled to rebound and when it did traders immediately sold the stock at resistance. Now it's on the verge of breaking down bellow support near $65.00. The $60.00 level is potential support but there is a chance shares drop toward their 200-dma closer to $55. Tonight we are suggesting a trigger to buy puts at $64.90.

I want to remind readers that biotech stocks can be volatile. We should consider this a more aggressive, higher-risk trade.

- Suggested Positions -

Long MAY $60 PUT (ALKS150515P60) entry $2.15

04/01/15 new stop @ 64.15, potential bullish reversal, consider an immediate exit to lock in potential gains now.
03/31/15 new stop @ 65.25
03/28/15 new stop @ 67.65
03/25/15 triggered @ 64.90
Option Format: symbol-year-month-day-call-strike


Copa Holdings - CPA - close: 99.96 change: +2.43

Stop Loss: 103.05
Target(s): To Be Determined
Current Option Gain/Loss: -31.9%
Average Daily Volume = 624 thousand
Entry on April 02 at $97.75
Listed on April 01, 2015
Time Frame: Exit prior to earnings in May
New Positions: see below

Comments:
04/06/15: Uh-oh! Our CPA trade might be in trouble. The broader Dow Jones Transportation Average broke down under key support at the 8,600 level. The XAL airline index also underperformed the market with a loss although not as poorly as the transportation index.

Shares of CPA are moving the opposite direction. Shares surged off their morning lows and closed with a +2.5% gain. The stock ended the day testing round-number resistance at $100.00. What worries me, besides the relative strength today, is that today's session has created a bullish-engulfing candlestick reversal pattern. More conservative traders will want to seriously consider lowering their stop loss. I am not suggesting new positions at this time.

Trade Description: April 1, 2015:
There are plenty of opinions on oil and if the commodity has found a bottom or not. The plunge in oil prices last year was a huge boon for the airlines as jet fuel is a major expense. The impact of low oil prices may already be factored in. It's worth noting that the price of crude oil hit new relative lows in mid March while the XAL airline index formed a new lower high instead.

CPA is a regional airline. Here's a brief description, "Copa Holdings is a leading Latin American provider of passenger and cargo services. The Company, through its operating subsidiaries, provides service to 73 destinations in 30 countries in North, Central and South America and the Caribbean with one of the youngest and most modern fleets in the industry."

CPA has been underperforming its peers in the airline industry for a while. Thus far the XAL airline index is down -4.4% in 2015 and down about -8% from its multi-year highs in January. CPA is down -5.2% for the year but it's down -19% from its 2015 highs and down -40% from its early 2014 highs.

Earnings have been a mixed bag the last couple of quarters. CPA reported its 2014 Q3 results on November 20th. Earnings beat estimates. Yet revenues were down -0.5% and below Wall Street estimates. CPA's Q4 report was February 12th. Earnings plunged from $3.20 a year ago down to $2.83 (-11.5%). Revenues fell -3.9%.

This week Deutsche Bank has downgraded the airlines as a group. Rising capacity and a slowing global economy will hurt business. Traders are bearish on CPA. The most recent data listed short interest at 14% of the small 33.3 million share float.

Technically CPA is bearish with a pattern of lower highs and lower lows. Today the stock broke down below key support at the $100.00 mark. The point & figure chart is bearish and forecasting an $80.00 target. Today's low was $98.03. We are suggesting a trigger to buy puts at $97.75.

- Suggested Positions -

Long MAY $95 PUT (CPA150515P95) entry $3.60

04/06/15 Warning! CPA has created a potential bullish reversal pattern
04/02/15 triggered @ 97.75
Option Format: symbol-year-month-day-call-strike


Michael Kors - KORS - close: 63.50 change: +0.11

Stop Loss: 65.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.5 million
Entry on April -- at $---.--
Listed on April 04, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
04/06/15: KORS did not participate in the market's widespread bounce. Shares only gained +0.17% versus the NASDAQ's +0.6%. I don't see any changes from the weekend newsletter's new play description. Our suggested entry point for bearish positions is $62.90.

Trade Description: April 4, 2015:
Luxury retail brand names like KORS have seen their stocks get crushed over the last several months. Shares of KORS were big performers for the bulls the first two plus years from its late 2011 IPO. Unfortunately the stock peaked in 2014. Investors worried about over exposure and slowing growth.

According to the company, "Michael Kors is a world-renowned, award-winning designer of luxury accessories and ready-to-wear. His namesake company, established in 1981, currently produces a range of products through his Michael Kors and MICHAEL Michael Kors labels, including accessories, footwear, watches, jewelry, men’s and women’s ready-to-wear and a full line of fragrance products."

Make no mistake, KORS is still growing. Last August they reported a strong earnings report that beat on both the top and bottom line. While management guided lower short-term they raised guidance for 2015. A few months later when KORS reports earnings in November 2014 they beat estimates again with revenues soaring +42% and KORS announced a $1 billion stock buyback program. However, their outlook on 2015 had tarnished a bit and they lowered comparable store sales growth from the high teens to mid teens.

KORS most recent earnings report was February 5th. Earnings per share grew +32%. Their results of $1.48 per share beat estimates by 15 cents. Revenues grew +30.9% to $1.26 billion but that actually missed Wall Street estimates thanks to foreign currency issues.

What troubles investors is the slowdown in KORS' growth. Globally their comparable store sales grew +8.6%. Most companies would probably be excited for that number. Yet analysts were expecting +12.6%. The slowdown appeared to accelerate in North America. Same-store sales plunged from +24% growth to +6.8%. KORS is also facing margin pressure with both gross margin and its operating profit sliding.

KORS management will tell you that the company is doing great and just reported its 35th quarter in a row of same-store sales growth. However, the number crunchers on Wall Street will point out that it was the first time in five years that same-store sales growth did not rise by double-digit percentages.

A big concern among analysts is that KORS could be losing its appeal because it's growing so fast. Last year they added 114 new stores and ended 2014 with 509 retail locations. They're starting to become too common. KORS is losing its cachet.

Management also lowered their guidance for Q4 (current quarter) to $0.89-0.92 a share versus estimates of $0.94. They also see revenues below expectations.

A Credit Suisse analyst is worried that KORS is depending too much on its promotions and discounts to generate sales. Meanwhile a Piper Jaffray analyst just downgraded KORS on April 1st because they see domestic sales sliding sharply with North America comparable store sales falling from 21% to 6% in the last three quarters.

Technically shares of KORS are in a bear market. They also have a bearish trend of lower highs and lower lows. The point & figure chart is bearish and forecasting at $54.00 target. Thursday's low was $63.21. We are suggesting at trigger to buy puts at $62.90.

Trigger @ $62.90

- Suggested Positions -

Buy the MAY $60 PUT (KORS150515P60)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

Jack in the Box, Inc. - JACK - close: 95.12 change: -0.22

Stop Loss: 94.45
Target(s): To Be Determined
Current Option Gain/Loss: -38.2%
Average Daily Volume = 616 thousand
Entry on March 27 at $96.25
Listed on March 24, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
04/06/15: JACK has been underperforming the last few days, which is why we have been raising our stop loss. Shares displayed relative weakness today with a -0.23% loss. The market's spike lower this morning pushed JACK to $94.45, which happens to be our stop loss.

- Suggested Positions -

JUN $100 CALL (JACK150619C100) entry $3.40 exit $2.10 (-38.2%)

04/06/15 stopped out
04/01/15 new stop @ 94.45
03/27/15 triggered @ 96.25
03/26/15 strategy update: Move the entry trigger from $100.25 to $96.25, move the stop loss from $95.75 to $93.85
We will adjust the option strike to the 2015 June $100 call
Option Format: symbol-year-month-day-call-strike

chart: