Option Investor
Newsletter

Daily Newsletter, Tuesday, 4/21/2015

Table of Contents

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

Market Wrap

Earnings Weighing Heavy on Market

by Jim Brown

Click here to email Jim Brown

On the surface companies may be reporting better than expected earnings but expectations were really low. Sales revenue is continuing to be a serious challenge and lower revenue eventually leads to lower earnings. The rising number of revenue misses is causing some investors to move to the sidelines.

Market Statistics

The AAII Investor Sentiment Survey hit a milestone this week. The proportion of individual investors that described their six-month outlook as neutral is above 45% for the second consecutive week. This is the first time in more than 26 years that has occurred. This last occurred on January 27th, 1989. Neutral sentiment has now been above the historical average of 30.5% for 15 consecutive weeks. Investors with a bullish outlook rose to 32.1% but still below its historical average of 39%. Bearish sentiment declined to 22.8% with the historical average at 30.5%.

More than 22% of respondents said events in the Middle East were affecting their market outlook. Another 19% said events in Europe were a concern with the strong dollar bothering 15% and the global economy another 11%.

Apparently the permanently bullish individual investor is reconsidering his outlook but they have not turned bearish. They are confused about where the market is headed given the geopolitical issues and the weak earnings and guidance. This is especially evident in the choppy trading and low volume.


The news today that a high frequency trader in the UK was arrested for causing the Flash Crash in May of 2010 could be a new reason for traders to fear the market again. Navinder Singh Sarao was arrested and charged with 10 counts of commodities fraud, 10 counts of commodities manipulation, wire fraud and one count of spoofing. The U.S. is requesting extradition to the USA. The CFTC also filed civil charges calling him a "very significant player in the market."

Sarao is thought to have made $40 million from his scheme to crash the futures market. The complaint say Sarao used an automated trading program to manipulate the market using the E-Mini S&P-500 futures contracts on the Chicago mercantile Exchange (CME) while trading from his home in London.

The trader used a layering strategy where his program placed multiple high volume sell orders at different prices to make it look like there was a large volume of orders being dumped on the market. This causes other traders following the market move to sell their positions and begin to short the market. His phony orders were modified or replaced 19,000 times during the crash and covered 20 million contracts. The rest of the global market only traded a total of 19 million contracts on May 6th. His multiple orders to sell were placed at several ticks under the actual market but close enough simulate actual trades when they disappeared as actual trades dipped to his spoofed price.

He has continued trading and spoofing the E-Minis over the last 5 years but with smaller volume. However, the CFTC claims he engaged in market manipulation and spoofing on about 400 days between 2010 and into 2014. Even with his lowered trade rate he was the fifth largest trader of E-Mini's in the world. Spoofing was made illegal in the 2010 Dodd-Frank legislation. The CFTC said there are probably others doing this same thing today. "If there was one, there can be hundreds. Why can't there be hundreds of people doing this same thing all over the world?" While regulators don't blame Sarao for the entire crash they do believe his spoofing caused other large institutions and high frequency trading programs to dump large orders into the market. The 2010 SEC report blamed a single large trade from Kansas's Waddell & Reed Financial for setting off the crash. After today's arrest that claim is likely to change.

Waddell & Reed's computers triggered a sale of 75,000 S&P futures contracts when the market began to crash as part of a strategy to hedge an existing equity position. The value of that order was $4.5 billion. The algorithm was programmed to sell the E-Minis so that the sell volume was only equal to 9% of the total volume, calculated over the previous minute. The high volume spoofing artificially inflated the global volume by triggering program trades globally. That rapid spike in volume allowed the Waddell & Reed program to sell the 75,000 contracts over a period of less than 20 minutes. Over the prior 12 months a sell program of that size had been triggered only twice and neither time did it cause a major market disruption. In the flash crash the rapid acceleration of the selling in the E-Minis caused the cross-market arbitrageurs to rapidly liquidate equivalent positions in the underlying equities. Selling volume increased more than 1000% in only a matter of minutes.

Since institutions and funds can own thousands of contracts of the S&P futures as part of their investment strategies, a sudden downdraft in those futures can trigger automated sell programs. One event leads to another and the crash was born.

The picture below is the "home" of "Nav Sarao Futures Limited" west of London.


Bill Gross made news today by claiming that German debt is now the "short of a lifetime." The 10-year Bund was yielding .94% on Tuesday morning, up +19.8% from Monday as a result of the Gross comments. The shorter German maturities either already have a negative yield or very close to it. Gross said it was only a matter of time before the trend would reverse. Once the ECB halts its QE program or even begins talking about halting it as the Fed did with its taper, the debt will be sold hard as money rotates back into risk assets. Gross is anticipating a 10-15% return over a 1-2 year period. Doug Kass said last week, "Near zero to negative sovereign debt yields in Europe represent the bubble of all investment bubbles, dwarfing even the Nasdaq bubble of 16 years ago. Mark my words I will make a fortune shorting these bonds at some point in time...probably much sooner than later."

The economic calendar had only one entry today and it was a lagging indicator. The regional employment report showed that unemployment declined in 23 states and Washington DC in March. Another 15 states were unchanged with 18 states showing employment increases. The states with the biggest declines had the strongest ties to the energy sector. Analysts claim more than 100,000 energy workers were laid off in Q1. For instance, Texas lost -25,400 jobs, Pennsylvania -12,700 and Oklahoma -12,900. The report was ignored.

The calendar for Wednesday has Existing Home Sales and Thursday is New Home Sales. Those are the high points for the rest of the week. The Kansas Fed Mfg Survey is of interest but likely to be ignored.


The calendar that matters for the rest of the week is the earnings calendar. There are several large cap techs and Dow components to report and continued earnings misses could sink the market.


Harley Davidson (HOG) reported earnings of $1.27 that beat estimates for $1.25. Revenue declined to $1.67 billion from $1.73 billion but still beat estimates for $1.58 billion. However, shares dropped hard after the company said shipments would decline because of heavy discounting by competitors. Harley said they were not going to compete with the strong discounts and shipment growth would grow only 2-4% in 2015, down from prior estimates for 4-6% growth. In Q2 they expect to ship between 83,000-88,000 motorcycles, down from 92,217 in the same quarter in 2014.


United Technology (UTX) reported a +20% rise in earnings to $1.58 but the strong dollar knocked them down to $1.51. Analysts were expecting $1.45. Revenue fell -1% to $14.5 billion and missed estimates for $14.9 billion. The company blamed the weakness on the continued currency headwinds. UTX reaffirmed its full-year outlook for earnings of $6.85-$7.05 and analysts are expecting $6.98. Shares initially rallied to $119 but fell back to close at $107 and a fractional gain.


Lockheed Martin (LMT) posted earnings of $2.74, down -6% from $2.87 in the year ago quarter. Analysts were expecting $2.48. Revenue of $10.11 billion missed estimates for $10.21 billion. The company said revenue was down because fewer airplanes were delivered and the impact of the dollar. Shares declined fractionally.


Under Armour (UA) reported earnings of 5 cents that matched analyst estimates. Revenue rose +25% to $804.9 million and barely beating estimates for $802 million. However, revenue from apparel, their largest product category, rose only +21% compared to +30% in the comparison quarter. The company said gross margins would be flat after previously saying they would improve. The dollar was to blame. They are projecting a 23% rise in sales in 2015 and that would be the lowest since 2009. Shares of UA declined -5%.


After the bell Yahoo (YHOO) reported a -60% drop in earnings to 15 cents that missed estimates for 18 cents. Revenue of $1.04 billion also missed estimates for $1.06 billion. CEO Marissa Myer said, "Yahoo is amidst a multi-year transformation to return an iconic company to greatness." Unfortunately she has about three more quarters to accomplish that feat or she will be replaced. The Yahoo board is not favorable to leaving a CEO in place that can't make the changes needed. She has already had 2 years and historically 3 is about the limit for troubled companies. Myer increased costs by about $500 million a year since she has been in charge.

Display advertising revenue fell -7% and the price per ad declined -17%. On the bright side search revenue rose +20% with search volume at a five-year high thanks to a partnership with Mozilla. Yahoo received 43,000 job applications in Q1. Yahoo signed a new agreement with Microsoft that allows either company to terminate the search partnership at any time starting later this summer.

After falling -15% in afterhours shares recovered to end slightly positive for the session.


Amgen (AMGN) reported earnings of $2.48 that beat estimates of $2.10. Revenue of $5.03 billion rose +11% and beat estimates of $4.91 billion. The company said strong performance of Enbrel and Prolia helped power the gains. The company raised full year revenue guidance to $21 billion. Shares of AMGN rose +$4 in afterhours.


Chipotle Mexican (CMG) posted earnings of $3.88 that beat estimates for $3.66. However, revenue of $1.09 billion missed estimates for $1.11 billion. Same store sales rose +10.4% but that was less than estimates for +11.8%. Same store sales averaged a +16.8% increase in 2014. The company only reiterated the same guidance it gave last quarter and said they were still struggling to find more pork and that was limiting sales in some areas. Shares declined about -$36 after the report.

They are probably going to have trouble finding chicken in the months ahead. More than 7.8 million chickens have been killed because of exposure to the bird flu. More are expected as the virus is transmitted by wild birds from state to state.


YUM Brands (YUM) reported earnings of 80 cents compared to estimates for 72 cents. Revenue of $2.62 billion missed estimates of $2.64 billion. Same store sales in China declined -12% but analysts were expecting -14.4%. They are still suffering from a meat sourcing issue where a supplier sent them out of date meat products. Same store sales declined an average of -16% in 2014. YUM has 6,700 stores in China, which are mostly KFC and Pizza Hut stores. Shares of YUM rallied +$3 after the report.


VMware (VMW) reported earnings of 86 cents on an 11% increase in revenue to $1.51 billion. That was the slowest revenue growth in seven quarters. Analysts were expecting 84 cents and $1.5 billion. They blamed the strong dollar for impacting overseas sales. Shares initially declined more than $2 in afterhours but rebounded to close flat.


Gilead Sciences (GILD) spiked $4.50 on a call by Bernstein for the company to buy Vertex (VRTX). Gilead has a surplus of cash but their Hep-C franchise is not going to last forever. Bernstein said buying Vertex would give them a pipeline of new drugs. Bernstein expects Gilead's cash inflows to decline 30-40% between 2017-2021 as its drugs go off patent. Vertex has a promising Cystic Fibrosis drug called Cayston and the commercial infrastructure to capitalize on it. Gilead has more experience in developing multiple drug combinations and that would be needed to take Cayston to the next level. This is another high dollar drug that sells for $250k-$300K per year for the average patient. Bernstein did their homework and pointed out several associated drugs that Gilead and Vertex could combine to create a longer lasting franchise.

Gilead only has a PE of about 10 today despite the huge inflow of cash from their new Hep-C drugs. They could easily afford Vertex even if they had to pay a hefty premium. Maxim's Jason Kolbert disagreed with the Bernstein analysis saying Vertex is already fairly valued and there are better CF drugs in the pipeline from other companies. This is what makes a market. Gilead shares rallied +$4 and VRTX +$6.65.



In other biotech news Perrigo (PRGO) said it would not accept Mylan's (MYL) $29 billion offer. Mylan offered to buy Perrigo for $205 per share in cash and stock. Perrigo said the offer was too low and did not value the company's assets correctly as well as the benefits from the recently closed Omega acquisition.


Mylan is also under attack as Teva Pharmaceuticals (TEVA) offered to pay $82 per share for Mylan. That values the company at $40.1 billion and a 21% premium over Monday's closing price. If Teva is successful in its hostile bid for Mylan it would create the dominant global generic drug company. It would be the largest in the world and be able to dramatically cut costs by demanding concessions from suppliers. In the U.S. 7 out of 8 prescriptions are filled with generics. Mylan markets more than 1,800 generic drugs.


Markets

Despite the Nasdaq's gain of +19 points thanks to the biotech news, Tuesday was not a good day in the markets. Monday's "inside day" where the highs and lows were inside the highs and lows from Friday was due purely to a short squeeze. There was no follow through today and volume was very low. In fact the volume on Monday was only 5.6 billion shares and today was 5.8 billion. Investors are definitely pulling back from the market and there are multiple reasons.

Weak earning will get most of the blame but the market technicals are still deteriorating. The market has failed to recapture the highs made in February and each attempt has resulted in a lower high. Since the October rebound culminated just after Thanksgiving at 2075 on the S&P the market has traded sideways with severe fits of volatility. Normally when there is prolonged volatility the market ends up with a directional move. Here we are five months later and today's close was only 22 points above the 2075 post Thanksgiving close.

As I wrote at the beginning of this commentary the majority of investors are confused and have turned neutral on the market. Every failed rally kicks a few more undecided traders to the curb to wait for a direction. At the risk of repeating myself we need a correction in order to clear the cobwebs and set the market up for a new move. However, a correction going into the summer doldrums risks setting us up for the same lackluster market action several months from now only at a lower level.

The S&P is struggling at the 2100-2110 level. The opening spike this morning topped out at 2109.64 and it was immediately sold with the index ending the day only 3 points off the low for the day.

Friday's dramatic drop gave us a clear support level at 2075 and the action over the last two weeks has given us a clear picture of resistance at 2100-2110. Until these levels break the market is trapped in neutral with no direction.


The Dow was dragged lower by Travelers (TRV) after they posted a -14% decline in earnings of $2.55 that match some estimates. Revenue of $6.63 billion missed estimates of $6.78 billion. The company tried to offset the negativity in the stock by announcing the addition of $5 billion to their stock buyback program. It did not help and Travelers shares declined -4.26 to knock about -32 points off the Dow.

Dupont (DD) reported earnings of $1.34 that beat estimates for $1.31 but revenue of $9.17 declined -9% and missed estimates of $9.41 billion. Their forecast worsened with the company saying the strong dollar would now knock 80 cents off full year earnings compared to the previous 60 cent forecast. They now expect earnings to come in at the low end of their prior forecast. Shares declined -$2 and knocked another -15 points off the Dow.

The index spiked to strong resistance at 18,100 at the open and it was immediately sold. The selling persisted all day to close near the lows. With another round of Dow components reporting on Wednesday the outlook is not much better. Even if they do report positive earnings there will be continued drag from those already reported including GE, GS, IBM, DD, TRV, INTC, VZ, etc.

Resistance remains 18,100 with support at Friday's lows at 17,750.



The Nasdaq Composite posted a +19 point gain thanks to the rally in the various biotech stocks. Only about 5 of the top 25 gainers were in a different sector. This enabled the Nasdaq to close back over 5000 but right in line with the highs from last week. Can the Nasdaq move to new high with only one sector contributing the gains? Yes, as long as those gains continue to be outsized moves. The instant the sector takes a rest the index could crash if there is no positive help from another sector.

Fortunately the semiconductors are starting to show life but resistance on the $SOX is right at 710 and today's high. It will be a tough job for the chip stocks to take over the leadership without a catalyst to drive them. In the biotechs we are seeing potential acquisitions almost every day but not so in the chip sector.



Resistance on the Nasdaq remains 5026 with initial support at 4950.


The small cap Russell 2000 has lost its mojo. The index has failed to recover last week's high at 1275 and today's action was lackluster with a fractional loss. They are not selling them off yet but investors have definitely quit buying. If the Russell declines below 1250 and support from Friday it would indicate the game has changed and we should begin forecasting a steeper drop.


I remain neutral on the market. I am not ready to pull the plug and turn bearish but there are far more bearish stocks than bullish stocks today. In researching for the other newsletters yesterday I looked at more than 800 individual stock charts. The vast majority were showing a bearish trend. If that majority continues to broaden and the number of stocks leading us higher begins to dwindle then we will eventually move lower.

You have to ask yourself today, "Why buy?" What reasons do investors have to be bullish on the market? Earnings are a negative. Economics are weak. The Fed meeting is next week and while they are not likely to raise rates they will definitely talk about raising rates in the near future. If they name June as a potential date the market will not react well. The market is projecting September or longer. The geopolitical events of Greece, Iran, Yemen, Russia, Ukraine, etc are still clouds over the market.

They say bull markets climb a wall of worry. If they do it over the next couple weeks it will be rock climb rather than a simple wall of worry. I continue to recommend holding a minimum number of long positions and keep your stops tight.

Remember, the market never goes in the direction you expect and when it does decide to move it moves in a hurry. Also, the market does not need a reason to correct.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

 


New Option Plays

Outperforming Its Peers In Tech

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Analog Devices, Inc. - ADI - close: 64.37 change: +0.65

Stop Loss: 62.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.0 million
Entry on April -- at $---.--
Listed on April 21, 2015
Time Frame: Exit PRIOR to earnings in late May
New Positions: Yes, see below

Company Description

Why We Like It:
ADI looks like a strong relative strength trade. The SOX semiconductor index is up +3.0% year to date. The NASDAQ composite is up +5.8%. Yet shares of ADI have surged +15.9% to hit new 14-year highs.

The company's products convert analog signals into digital information. These signal processing integrated circuits are used in just about everything from industrial equipment, automobiles, consumer equipment, and communication products.

According to the company, "Innovation, performance, and excellence are the cultural pillars on which Analog Devices has built one of the longest standing, highest growth companies within the technology sector. Acknowledged industry-wide as the world leader in data conversion and signal conditioning technology, Analog Devices serves over 100,000 customers, representing virtually all types of electronic equipment. Analog Devices is headquartered in Norwood, Massachusetts, with design and manufacturing facilities throughout the world."

Looking at ADI's earnings performance last year they tended to be relatively flat or slightly above analysts' estimates. Business seemed to be improving last quarter. ADI reported their Q1 results on February 17, 2015. Wall Street was expecting $0.61 a share on revenues of $760.5 million. ADI beat the estimates with a profit of $0.63 a share, a +18.8% improvement from a year ago. Revenues grew +23% to $772 million.

Management raised their dividend by 8% to $0.40 a share. They also raised their Q2 guidance above Wall Street expectations. Following this February earnings report the stock received a parade of price target upgrades. Wall Street now expects ADI earnings to rise from $1.98 a share in 2014 to $2.92 a share in 2015. According to Thomson Reuters estimates for 2016 are $3.23 a share (+11%) on revenues of $3.5 billion (+6%).

The stock surged to new highs again on March 30th. This was a reaction to a big upgrade from Barclays' analyst Blayne Curtis. Curtis said, "We believe Analog Devices has secured a win with a high accuracy converter to drive 3D touch in upcoming (Apple) iPhones and iPads." This design win will mean big business for ADI. It will also allow Apple introduce their new 3D/Force Tough technology. This allows users to do different tasks based on how much pressure they apply to their touch screen. Curtis also raised his price target on ADI from $55 to $70.

Technically shares of ADI are consolidating below resistance near $65.00 with a bullish pattern of higher lows. The point & figure chart is already bullish and forecasting a long-term target of $81.00. If ADI can breakout past $65.00 we want to jump on board. Tonight we're suggesting a trigger to buy calls at $65.25.

Trigger @ $65.25

- Suggested Positions -

Buy the JUN $65 CALL (ADI150619C65) current ask $2.10
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

No Follow-Through Higher

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market struggled with any follow-through on yesterday's bounce. Meanwhile investors have mixed feelings how they want to interpret the weak earnings picture thanks to the strong U.S. dollar.

AAP, CTRP, and GPN all hit our bullish entry triggers.

PANW has been removed.

We want to exit our CAH trade tomorrow morning.


Current Portfolio:


CALL Play Updates

Advance Auto Parts - AAP - close: 152.40 change: +0.00

Stop Loss: 147.75
Target(s): To Be Determined
Current Option Gain/Loss: -15.8%
Average Daily Volume = 891 thousand
Entry on April 21 at $154.00
Listed on April 20, 2015
Time Frame: Exit PRIOR to earnings on May 21st
New Positions: see below

Comments:
04/21/15: Shares of AAP gapped open higher and then spiked toward new two-month highs this morning. The rally failed at $154.66 but that was enough to hit our suggested entry point at $154.00. AAP spent the rest of the day hovering in the $152.20-153.00 area.

I am suggesting investors wait for a new rally past $154.00 before launching new positions.

Trade Description: April 20, 2015:
According to Sterne Agee analysts Ali Faghri and Michael Ward the combination of cheap gasoline and mother nature have created a bullish environment for auto part retailers.

Gasoline is off its early 2015 lows but it's still trading near four year lows. Today a gallon of gas is more than $1.00 less than the prior three years. Cheaper gas means more miles driven. The number of miles driven by Americans has risen 11 months in a row. The most recent data has hit levels not seen since 2007. Higher miles driven means more demand for replacement parts, maintenance, and repair work. That means more business for companies like AAP.

Meanwhile the weather has been a boon for auto parts makers. The harsh winter tends to reduce traffic but it's harder on vehicles and roads. The snow, gravel, and in some areas of the country road salt, increase wear and tear on your car. The freezing temperatures and precipitation generate more pot holes and road hazards, which also increase wear on your car. Now that we're into spring and the weather is improving we should see miles driven rise even further.

One company that should benefit is AAP. They're in the services sector with a chain of auto parts stores. According to the company, "Headquartered in Roanoke, Va., Advance Auto Parts, Inc., the largest automotive aftermarket parts provider in North America, serves both the professional installer and do-it-yourself customers. As of January 3, 2015 Advance operated 5,261 stores and 111 Worldpac branches and served approximately 1,325 independently-owned Carquest branded stores in the United States, Puerto Rico, the U.S. Virgin Islands and Canada. Advance employs approximately 73,000 Team Members."

It is worth pointing out that AAP's most recent earnings report was a disappointment. They reported Q4 earnings on February 12th. Earnings were up +104% to $1.37 per share. Revenues soared +48% to $2.09 billion. Yet in spite of these huge improvements AAP still missed analysts' expectations. It was the first earnings miss in more than two years. If that wasn't bad enough management then lowered their earnings and revenue guidance for 2015. Not surprisingly the stock was crushed the next day.

RBC Capital Markets analyst Scot Ciccarelli is still bullish on the stock. He noted that AAP's big acquisition of General Parts International last year has delivered cost synergies above expectations. Scot believes AAP offers "the best appreciation potential in the automotive aftermarket retail space."

Not everyone agrees. Daryl Boehringer, with Cleveland Research, believes that AAP is having trouble with its General Parts merger. According to Boehringer, he is, "more cautious on the near-term performance of the company as disruptions associated with the integration of GPI (entering the 'heavy-lifting' stage) appear to be having a fairly meaningful negative impact on the business... the large size and scope of the GPI integration will likely cause disruptions to AAP's business that make an upside earnings scenario less achievable."

If price is truth then the long-term trend favors the bulls. Shares of AAP did see a correction from $163 down to $143 but bounced off technical support at its rising 200-dma (and long-term trend line). Today shares are breaking through resistance at the 50-dma and look poised to keep climbing.

We believe this rebound will continue. However, we want to see a rally past the simple 100-dma, currently at $153.80. Tonight we're suggesting a trigger to buy calls at $154.00.

- Suggested Positions -

Long JUN $160 CALL (AAP150619C160) entry $3.80

04/21/15 triggered @ $154.00
Option Format: symbol-year-month-day-call-strike


Cardinal Health, Inc. - CAH - close: 90.35 change: +0.21

Stop Loss: 87.75
Target(s): To Be Determined
Current Option Gain/Loss: -31.8%
Average Daily Volume = 1.7 million
Entry on March 30 at $90.55
Listed on March 28, 2015
Time Frame: Exit PRIOR to earnings on April 30th
New Positions: see below

Comments:
04/21/15: We have been patiently waiting for CAH to breakout past resistance near $91.50. Unfortunately it looks like we may run out of time. CAH has earnings coming up on April 30th.

Tonight we've decided to cut our losses and exit this trade tomorrow morning.

- Suggested Positions -

Long MAY $90 CALL (CAH150515C90) entry $2.86

04/21/15 prepare to exit tomorrow morning
03/30/15 triggered @ 90.55
Option Format: symbol-year-month-day-call-strike


Ctrip.com - CTRP - close: 65.16 change: +1.61

Stop Loss: 61.30
Target(s): To Be Determined
Current Option Gain/Loss: -8.8%
Average Daily Volume = 2.9 million
Entry on April 21 at $65.15
Listed on April 14, 2015
Time Frame: 3 to 5 weeks, Exit PRIOR to earnings in May
New Positions: see below

Comments:
04/21/15: Our CTRP trade is finally open. Shares displayed relative strength with a +2.5% gain and a breakout past resistance near $65.00. The stock hit our suggested entry point at $65.15.

Trade Description: April 14, 2015;
The Chinese economy grew +7.4% last year. Today estimates are suggesting +7.0% for 2015, the slowest pace in 24 years. One area that is outperforming the broader economy is travel. Travel is expected to grow twice as fast. Leading the way is CTRP, China's largest online travel provider.

CTRP is part of the services sector. According to the company, "Ctrip.com International, Ltd. is a leading travel service provider of accommodation reservation, transportation ticketing, packaged tours, and corporate travel management in China. It is the largest online consolidator of accommodations and transportation tickets in China in terms of transaction volume. Ctrip aggregates comprehensive travel related information and offers its services through an advanced transaction and service platform consisting of its mobile apps, Internet websites and centralized, toll-free, 24-hour customer service center. Ctrip enables business and leisure travelers to make informed and cost-effective bookings. It also helps customers book vacation packages and guided tours. In addition, through its corporate travel management services, Ctrip helps corporate clients effectively manage their travel requirements. Since its inception in 1999, Ctrip has experienced substantial growth and become one of the best-known travel brands in China."

The company's most recent earnings report sparked quite a reaction. CTRP reported its Q4 and fiscal year 2014 results on March 19th. Analysts were expecting a loss of $0.09 a share on revenues of $306.29 million. CTRP delivered a loss of $0.11. Investors ignored the miss thanks to revenues rising +33% to $308.37 million.

James Liang, Chairman of the Board and Chief Executive Officer of Ctrip, commented on his company's results saying, "In the fourth quarter of 2014, our main business lines demonstrated strong momentum. Accommodation reservation and transportation ticketing services reached 53% and 102% year-over-year volume growth respectively. Total GMV of packaged tour business reached RMB13 billion in 2014. Our new initiatives have propelled the expansion in our market share. Cumulative mobile app downloads reached nearly 600 million by the end of the year, growing over 70% from the previous quarter. Over 70% of transactions were made through mobile platforms during the Chinese New Year holiday. 2015 could be another exciting year. We will continue to focus on technology, service quality and efficiency, product comprehensiveness and price competitiveness, to create greater value for our customers, our partners, our employees and ultimately, our investors."

What really caught the market's attention was CTRP's guidance. The company expects Q1 revenues to surge +40% to +50%. That would be the highest growth rate since 2010 and above Wall Street's estimates for +30%. Mr. Liang said that CTRP owns about 5% of the travel market in China. Longer-term he believes CTRP could have about 20% of the market but it will be a much bigger market with travel expected to grow +500%.

Shares of CTRP gapped open higher from $46.00 to $55.00 and hit $60 a few days after its earnings report. Today shares are consolidating sideways below resistance near $65.00. Traders just bought the dip at its rising 10-dma this morning.

We want to hop on board if CTRP breaks through $65.00. Tonight we're listing an entry point to buy calls at $65.15.

- Suggested Positions -

Long MAY $65 CALL (CTRP150515C65) entry $3.29

04/21/15 triggered @ 65.15
Option Format: symbol-year-month-day-call-strike


G-III Apparel Group, Ltd. - GIII - close: 117.47 change: +0.91

Stop Loss: 113.85
Target(s): To Be Determined
Current Option Gain/Loss: -32.8%
Average Daily Volume = 207 thousand
Entry on April 09 at $116.77
Listed on April 08, 2015
Time Frame: Exit PRIOR to the 2:1 split on May 4th
New Positions: Yes, see below

Comments:
04/21/15: GIII also showed some relative strength today and posted a +0.78% gain. A rally past $118.00 should be a breakout past the very short-term trend of lower highs.

I'm not suggesting new positions at current levels. We want to exit prior to the stock split on May 4th.

Trade Description: April 8, 2015:
GIII has been showing relative strength and could deliver a strong pre-stock split rally. The company is in the consumer goods sector. They make apparel.

The company describes itself as, "G-III is a leading manufacturer and distributor of outerwear, dresses, sportswear, swimwear, women's suits, women’s performance wear, footwear, luggage, women's handbags, small leather goods and cold weather accessories under licensed brands, owned brands and private label brands. G-III sells swimwear, resort wear, and related accessories under our own Vilebrequin brand. G-III also sells outerwear, dresses, and performance wear under our own Andrew Marc and Marc New York brands, and has licensed these brands to select third parties in certain product categories.

G-III has fashion licenses under the Calvin Klein, Kenneth Cole, Cole Haan, Guess?, Tommy Hilfiger, Jones New York, Jessica Simpson, Vince Camuto, Ivanka Trump, Ellen Tracy, Kensie, Levi's and Dockers brands. Through our team sports business, we have licenses with the National Football League, National Basketball Association, Major League Baseball, National Hockey League, Touch by Alyssa Milano and more than 100 U.S. colleges and universities. Our other owned brands include Bass, G.H. Bass, G-III Sports by Carl Banks, Eliza J, Black Rivet and Jessica Howard. G-III also operates retail stores under the Wilsons Leather, Bass, G.H. Bass & Co., Vilebrequin and Calvin Klein Performance names."

Looking at GIII's earnings performance last year the company has beaten Wall Street's bottom line earnings estimates four quarters in a row and usually by a wide margin. GIII also beat analysts' revenue estimates three out of the last four quarters. When GIII reported its Q3 results back in December they raised guidance above Wall Street expectations.

Their most recent report was their Q4 results on March 24th. Earnings were up +58% from a year ago to $0.98 a share. That was 15 cents above estimates. For their fiscal year 2015, which ended on January 31st, GIII said adjusted earnings were up +21% while revenues were up +23% from a year ago.

In their earnings press release Morris Goldfarb, G-III's Chairman, Chief Executive Officer and President, said, "Fiscal 2015 was another strong year of sales and profit growth for G-III. We drove strong performances across our portfolio of businesses, solidified our market position, and successfully executed across a range of strategic initiatives, including the integration and repositioning of the G.H. Bass business we acquired in the fourth quarter of last year. We are pleased to have achieved another record year for both net sales and net income per share."

The stock did see a little profit taking when management offered conservative guidance but traders bought the dip a couple of days later. Now the stock is hitting new all-time highs.

Yesterday morning, April 7th, GIII announced a 2-for-1 stock split. The shareholder record date is April 20th. GIII should begin trading post-split on Monday, May 4th. Shares look like they could produce a strong pre-split run up. We want to hop on board for the next three weeks and exit prior to the split date. Tonight we're suggesting a trigger to buy calls at $116.65.

- Suggested Positions -

Long MAY $120 CALL (GIII150515C120) entry $2.90

04/13/15 new stop @ 113.85
04/09/15 triggered @ 116.77, on a midday gap higher
Suggested entry was $116.65
Option Format: symbol-year-month-day-call-strike


Global Payments Inc. - GPN - close: 101.63 change: +1.34

Stop Loss: 98.25
Target(s): To Be Determined
Current Option Gain/Loss: +8.8%
Average Daily Volume = 589 thousand
Entry on April 21 at $101.05
Listed on April 18, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
04/21/15: We were fortunate enough to see shares of GPN also display relative strength today. The stock rallied +1.3% with a surge to new all-time highs. Our trigger to launch bullish positions was hit at $101.05.

Trade Description: April 18, 2015:
GPN is in the services sector. They provide money transfers and electronic payment solutions.

According to the company website, "Global Payments Inc. (GPN) is a leading worldwide provider of payment technology services that delivers innovative solutions driven by customer needs globally. Our partnerships, technologies and employee expertise enable us to provide a broad range of products and services that allow our customers to accept all payment types across a variety of distribution channels in many markets around the world. Headquartered in Atlanta, Georgia with more than 4,300 employees worldwide, Global Payments is a Fortune 1000 Company with merchants and partners in 29 countries throughout North America, Europe, the Asia-Pacific region and Brazil."

The company has been consistently delivering strong earnings growth. GPN has beaten Wall Street's expectations and guided higher the last three quarters in a row. Their most recent report was April 8th when GPN delivered their 2015 Q3 results. Earnings were up +18.7% to $1.14 a share. Revenues were up +8% to $665 million. Growth was driven by strong performances in the U.S. and their Asia-Pacific operations.

Management raised their forecast again. They see 2015 earnings in the $4.77-4.84 range, which would be +8% to +10% growth. They're forecasting 2015 revenues in the $2.75-2.80 billion range or +16% to +18% growth.

GPN management is also shareholder friendly and has been significantly boosting their stock buy back program. They recently announced an accelerated share repurchase program up to $100 million.

The stock has rallied on the strong earnings results and buyback news. Today GPN is hovering near all-time highs around psychological resistance at the $100 level. It was impressive that GPN did not participate in the market's widespread sell-off on Friday. We want to be ready to hop on board if GPN can rally past resistance at $100.

Tonight we're suggesting a trigger to buy calls at $101.05.

- Suggested Positions -

Long AUG $105 CALL (GPN150821C105) entry $2.85

04/21/15 triggered @ 101.05
Option Format: symbol-year-month-day-call-strike


iShares Russell 2000 ETF - IWM - close: 125.52 change: -0.13

Stop Loss: 124.85
Target(s): To Be Determined
Current Option Gain/Loss: +8.8%
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:
04/21/15: The early morning rally attempt in the IWM failed. Thankfully there was not any follow through lower. Shares of the small cap ETF spent most of the day consolidating sideways.

Tonight we are going to take a very defensive approach and raise the stop loss to $124.85. More aggressive traders may want to keep their stop below Friday's low of $123.82 instead. That would give the IWM more room to maneuver.

No new positions at this time.

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

04/21/15 new stop @ 124.85
04/07/15 new stop @ 122.85
04/04/15 new stop @ 121.65
03/27/15 triggered @ 123.05
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Big Lots Inc. - BIG - close: 47.04 change: +0.32

Stop Loss: 50.05
Target(s): To Be Determined
Current Option Gain/Loss: -28.9%
Average Daily Volume = 1.1 million
Entry on April 14 at $46.85
Listed on April 13, 2015
Time Frame: Exit PRIOR to May option expiration
New Positions: see below

Comments:
04/21/15: BIG posted its second gain in a row but the bounce might be stalling near $47.00 and its simple 10-dma.

No new positions at this time.

Trade Description: April 13, 2015:
Momentum for this retail name is clearly rolling over. According to the company's latest press release, "Big Lots Inc. (BIG) is a unique, non-traditional discount retailer operating 1,460 Big Lots stores in 48 states with product assortments in the merchandise categories of Food, Consumables, Furniture & Home Decor, Seasonal, Soft Home, Hard Home, and Electronics & Accessories. Our vision is to be recognized for providing an outstanding shopping experience for our customers, valuing and developing our associates, and creating growth for our shareholders."

The company's earnings results have been mixed. The huge sell-off on December 5th was a reaction to its Q3 earnings. BIG lost $0.06 per share, which was worse than expected and revenues were essentially flat. The fourth quarter was significantly better with BIG delivering a profit of $1.76 per share compared to estimates of $1.75. Revenues were up +1.4% and were in-line with estimates of $1.59 billion. Comparable store sales were up to +2.9% in the fourth quarter.

Unfortunately, management guided lower for Q1 and the rest of their fiscal 2016. Their forecast of $2.75-2.90 in earnings is below Wall Street's $2.96 estimate. Comparable store sales are going to be in the low single digits. The company tried to soften the bad news by raising their dividend and adding to their stock buyback program.

The post-earnings rally didn't last. Shares of BIG have rolled over and now the path of least resistance is lower. The $46.00 level, along with the simple 200-dma, is potential support but we are expecting this weakness in BIG to accelerate. Tonight we are listing a trigger to buy puts at $46.85 with an initial stop loss at $50.05.

- Suggested Positions -

Long MAY $47.50 PUT (BIG150515P4750) entry $1.90

04/14/15 triggered @ $46.85
Option Format: symbol-year-month-day-call-strike


Jack in the Box, Inc. - JACK - close: 91.59 change: -0.32

Stop Loss: 95.05
Target(s): To Be Determined
Current Option Gain/Loss: -23.3%
Average Daily Volume = 564 thousand
Entry on April 17 at $91.88
Listed on April 16, 2015
Time Frame: 2 to 4 weeks, exit PRIOR to earnings in mid May
New Positions: see below

Comments:
04/21/15: Shares of JACK continued to sink, underperforming the market with a -0.34% decline. Tomorrow could be interesting. Both CMG and YUM reported earnings tonight. CMG beat the bottom line but missed Wall Street's revenue estimate. YUM beat the bottom line estimate while revenues were in-line with estimates. CMG is down sharply after hours while YUM is up sharply. The question now is which one will influence trading in JACK tomorrow?

No new positions at this time.

Trade Description: April 16, 2015:
It's a burger-eat-burger world out there in the fast-food business. Jack in the Box is small fries compared to its larger rivals like McDonalds (36,258 locations) and Wendy's (6,515 locations). Let's not forget heavy weights like Taco Bell, Burger King, Subway, Dairy Queen, and a handful of pizza chains. JACK only has about 2,200 restaurants but it also has a secret weapon and that is the Qdoba Mexican Grill restaurant with about 600 locations. Chipotle Mexican Grill has almost 1,800 locations.

Some of that intense competition being felt by McDonalds and Chipotle Mexican Grill is coming from Jack in the Box and its Qdoba brand, which is growing sharply. A majority of their Qdoba franchisees own multiple stores with 10, 20 even 40 stores common. Enterprising business owners don't open additional stores if the original stores are not working. To have so many owners with high numbers of stores suggests the franchise is consistently profitable.

To be profitable they need solid customer traffic, good food and decent margins. Shares of JACK have been one of the best performers on the S&P over the last couple of years because the company has been posting solid earnings and growth.

With analysts cutting earnings estimates for McDonalds and Chipotle because of competition in the sector it makes sense to look at what has happened at JACK. Over the last quarter and the last year not a single analyst has lowered their earnings estimates for JACK. According to Zacks there has been a noticeable trend of raising estimates. JACK is expected to grow +16% to +20% this year and in 2016. JACK has beaten earnings by an average of 6% over the last four quarters.

Because of the drop in gasoline prices consumers have more money in their pocket. Some of that money is going to end up in the cash registers at these fast food outlets. Customers are also trending towards healthier foods and away from the mass produced burgers and fries at McDonalds. Did you know there are 19 ingredients in McDonalds fries? Surely you didn't think they were just potatoes and grease? Restaurants like JACK and Chipotle are capitalizing on the healthy food craze. JACK store sales rose an average of 5.7% over the last three quarters but Qdoba sales rose +13% for the year and +7.7% in Q4. Zacks rates JACK as a strong buy.

The company plans to open 15 new Jack in the Box stores in 2015. They're also cashing in on Qdoba's success and planning to open 50 to 60 new Qdoba locations. That compares to just 12 new Jacks and 38 new Qdobas in 2014.

It's also worth noting that JACK has an active share buyback program and they reduced the share count by 10% over the last four quarters. Earnings growth rose +20% in Q3 after three years of consecutive earnings growth of more than 30%.

JACK's most recent earnings report was February 17th, when they reported their 2015 Q1 results. Analysts were expecting a profit of $0.87 a share on revenues of $461.2 million. JACK delivered earnings of $0.93 a share. That's a +24% improvement from a year ago. Revenues were up +4.1% to $468.6 million, above estimates. Their operating margins improved 1% to 19.3%.

Management expects same-store sales at Jack in the Box to surge from +0.9% a year ago to +5% to +7% in Q2. Qdoba same-store sales are forecasted to be in the +7% to +9% range. The company raised full-year 2015 guidance to $2.85-2.97 a share compared to Wall Street estimates of $2.84.

Everything I just wrote about JACK is bullish. The company is growing. They're profitable and seem to be stealing market share from its rivals. Yet right now the market doesn't care. Shares of JACK have been underperforming the major indices since they peaked on March 25th at round-number resistance near the $100.00 level. There was a technical bounce off its 50-dma several days ago but that has faded.

Traders seem to be selling the rallies in JACK now. Today's display of relative weakness (-0.6%) also left JACK below technical support at its 50-dma for the first time since August 2014.

I'm longer-term bullish on JACK. Bloomberg just published an article this week on how consumer spending at restaurants and bars was more than spending on groceries for the first time ever in March 2015. The data suggests that younger, millennial consumers are more willing to spend on eating out. There is a bug in this data. The Commerce Department is not counting companies like Wal-mart, Target, or Costco as grocery stores even though they all have significant grocery businesses.

On a short-term basis JACK looks weak. The point & figure chart just turned bearish this month. We are suggesting a trigger to buy puts at $91.90.

- Suggested Positions -

Long MAY $90 PUT (JACK150515P90) entry $3.00

04/17/15 triggered on gap down at $91.88, trigger was $91.90
Option Format: symbol-year-month-day-call-strike


Orbital ATK, Inc. - OA - close: 74.38 change: +0.19

Stop Loss: 76.55
Target(s): To Be Determined
Current Option Gain/Loss: -20.3%
Average Daily Volume = n/a
Entry on April 16 at $74.25
Listed on April 15, 2015
Time Frame: 3 to 4 weeks, exit PRIOR to earnings in mid May
New Positions: see below

Comments:
04/21/15: Tuesday delivered a relatively quiet session for OA. Shares bounced along the $74.00 level. The intraday high failed to hit resistance near $75.00. A drop below today's low of $73.86 could be used as a new entry point.

Trade Description: April 15, 2015:
On a long-term basis many of the defense and aerospace companies have been juggernauts with huge gains over the last couple of years. That's in spite of lower U.S. military budgets. Yet on a short-term basis the group is underperforming.

OA is part of the industrial goods sector. The company is a merger between Orbital Sciences and ATK. ATK spun off its small firearms business into a new company called Vista Outdoor. According to OA, "Orbital ATK is a global leader in aerospace and defense technologies. The company designs, builds and delivers space, defense and aviation systems for customers around the world, both as a prime contractor and merchant supplier. Its main products include launch vehicles and related propulsion systems; missile products, subsystems and defense electronics; precision weapons, armament systems and ammunition; satellites and associated space components and services; and advanced aerospace structures. Headquartered in Dulles, Virginia, Orbital ATK employs more than 12,000 people in 20 states across the United States and in several international locations."

I am longer-term bullish on the defense and aerospace stocks. Yet shorter-term they are clearly underperforming the major indices. The S&P 500 and the Dow Industrials are both nearing their all-time highs. The NASDAQ is trading near its 15-year highs and the small cap Russell 2000 just hit a new record high today. Yet the major defense-related names have been trending lower the last couple of weeks.

Technically OA has been developing a trend of lower highs. Today the stock just broke down under key, round-number support at $75.00. If this pullback continues we could see OA drop toward the $69-70 zone.

Tonight we're suggesting a trigger to buy puts at $74.25. We'll try and limit our risk with an initial stop loss at $76.55. Earnings are coming up in mid May. There is no official date set. We will plan on exiting prior to their earnings announcement.

- Suggested Positions -

Long MAY $75 PUT (OA150515P75) entry $3.20

04/16/15 triggered @ 74.25
Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

Palo Alto Networks, Inc. - PANW - close: 154.37 change: +7.86

Stop Loss: 137.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.3 million
Entry on April -- at $---.--
Listed on April 11, 2015
Time Frame: Exit PRIOR to earnings in late May
New Positions: see below

Comments:
04/21/15: PANW did not want to cooperate with us. We tried waiting for a breakout past $150 and shares faded lower. We tried buying a dip near support around $140-141 and the stock bounced instead.

Cybersecurity stocks were showing relative strength today. PANW also received an analyst upgrade. This combination launched PANW higher with a big +5.3% gain.

We do not want to chase it here. Since our play is not open we are removing PANW as a candidate. Personally, I would keep PANW on your radar screen. Broken resistance near $150.00 should be new support. Traders could watch for a dip to $150.00 and then buy a bounce.

Trade did not open.

04/21/15 removed from the newsletter, suggested entry was $141.45
04/18/15 Strategy Update: Change the entry trigger from $150.55 to buy a dip at $141.45. change the stop loss to $137.45. change the option strike from June $155 call to the June $150 call
Option Format: symbol-year-month-day-call-strike

chart: