Option Investor
Newsletter

Daily Newsletter, Monday, 8/31/2015

Table of Contents

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

Market Wrap

Still Waiting For The Fed

by Thomas Hughes

Click here to email Thomas Hughes
Lots of news impacted today's trading but the market is still just waiting on the Fed.

Introduction

There were quite a few headlines to impact today's markets ranging from Chinese government support of financial markets to weak international economic data to declining earnings expectations to oil prices. Take your pick for which one moved markets more, in the end traders are still waiting on the Fed to see if and when they will actually raise interest rates.

Starting in Asia both Japan and China made headlines today. Japan released PMI data that was much weaker than expected. Official readings came in at -0.6%, a half percent below consensus. This, added to new announcements from the Chinese government, helped send most indices lower. The Nikkei lost -1.28%, the Hang Send fell -0.78% but the mainland Shang Hai index actually gained a little.

The news from China, per a report in the Financial Times, is that government will stop trying to support the market through equity purchases and focus instead on activities and people who are undermining it (the market). So far it looks like several hundred have already been arrested in connection to creating market rumors, adding to volatility and/or out-right fraud. Those arrested include bloggers, the media, accountants, investors and officials working in the financial system.

Market Statistics

European indices were pressured lower on the Asia news, although they had some of their own data to consider. New data shows that Eurozone inflation grew at only 0.2%, unchanged from last month, and raised talk of additional stimulus. EU economists largely agree that the ECB will not meet its inflation targets for the year, which could spur them into action. The ECB is meeting this week with an expected announcement and press conference on Thursday.

Futures trading here at home was a little volatile. The major indices were indicated to open about a half percent lower for most of the morning. There was one or two attempts to move the trade higher but these failed.

At the open the indices quickly lost a half percent and then continued to fall to the lows of the day, near a full percent below Friday's close. Bottom was hit shortly after 10, the market rallied from then until 11:42 at which time resistance was hit. The move higher was driven largely by the energy sector and the rebound in oil prices, resistance was slightly below last week's closing prices.

After hitting the days high the market traded sideways for an hour or so, until about 1:15. This was followed by a decline to the earlier lows that hit bottom mid afternoon. Another small bounce ensued but was not enough to recover today's losses, leaving the indices near the bottom of today's range.

Economic Calendar

The Economy

Only one piece of official economic data today, Chicago PMI. The index came in at 54.4, slightly below expectations and last months reading of 54.7. Analysts had been expecting it to hold steady. Despite the decline the number is expansionary and consistent with rebound following weakness seen earlier this year. Most of the decline is due to softness in New Orders and Production but a strong Inventories number helped to counter balance it. Employment rose to the highest level in 5 months but remains in contraction territory for this study.

Moody's Survey of Business Confidence gained 0.2% to reach 44.4. This is just below the 4 month high set two weeks ago and the fourth highest reading of all time. Moody's economist Mark Zandi says there is no indication recent market volatility is affecting business sentiment, that sentiment is steady at/near all time highs and that US businesses are reporting strong sales, investment and hiring, as they have been all year.


We got a new report from Factset this week, after two weeks without. As of last Friday 490 S&P 500 companies had reported earnings this season with 5 more expected this week. Of those who have reported 74% have beaten on earnings estimates, above average, and only 50% have beaten on revenue estimates, below average. The blended rate of earnings growth for the 2nd quarter now stands at -0.7%, up 0.3% from last report but unchanged from last week (there was no report last week). So far 9 of the 10 sectors are reporting growth better than expected, led by the healthcare sector which has more than doubled expectations.

Ex-energy the blended rate jumps to 5.8%, consistent with expectations. Looking out to the third quarter things are not beginning to look better. Expectations for the entire S&P earnings growth have now fallen to -4.1% due to downward revisions to 9 of the 10 sectors, including energy. However, based on trends and the low bar that analysts are setting, we can expect to see third quarter earnings growth come in closer to 0% and possibly even turn positive with ex-energy growth in the range of 2.6% to 6.6%. Analysts still expect to see strong earnings growth return in the 4th quarter, with revenue growth returning in the first quarter of 2016. 2016 full year growth expectations remain above 10.5%.

The Oil Index

Oil prices continue to bounce back. Prices had been under pressure in early trading but a combination of reports helped to spark a rally that took WTI more than 8% higher. WTI is now trading back above $49 but this move may be more short covering/near term reaction than a change in fundamentals. I say this because of three reasons, all found in today's headlines.

The first is that US production declined from its peak set earlier this year. The second is that OPEC said in its monthly newsletter it was ready to talk to other producers in an effort to stabilize prices. The third is that Russia/Putin is talking to Venezuela/Maduro about the same thing, what they can do to stabilize prices. OK, production did fall in July, but remains near all time high levels, with supply and storage at high levels. OPEC has said this same thing before, maybe they mean it more than before but at this time no other producer has stepped up to join them. Finally, what can Russia and Venezuela do to curb supply without hurting themselves? Needless to say I am wary of the bounce and expect to see a test of support sometime in the near future.

The Oil Index got a boost from the rise in oil but only about a tenth compared to what we saw in WTI prices. The index gained 0.83%, extending its bounce from recent lows and confirming near term support at 1100. The index is now moving higher after hitting a long term low and has now also regained the 61.8% retracement level. The indicators are rolling over into a possible bullish signal but have yet to confirm and still have significant resistance above. Strength in the recent bearish MACD peak could lead to a retest of the recent low despite higher oil prices, stochastic remains divergent from the low and consistent with a potential reversal from the recent down trend. Current target is near 1175, near the short term moving average and a near-term support level breached earlier this month.


The Gold Index

Gold prices were mostly flat, near $1130, in today's session. Price is stuck between rate hike or not with little sign of rising inflation and a fountain of fed speak to drive volatility. This week's data is likely to spur more speculation and that is before you consider the Beige Book release on Wednesday. On the one hand you have signs that the economy continues to improve, if slow and steady. On the other inflation is still largely absent. In between we have repeated, and conflicting, opinions being issued by the Fed governors.

The gold miners lost a little ground today but basically are flat from last week. The miners ETF GDX fell 1.1% but remain above support levels hit last Thursday. The ETF is bouncing from support with mixed indicators that could be setting up for a retest of the highs set two weeks ago. Bullish momentum is in decline but remains bullish, the most recent peak fairly strong compared to the last 8 months but not extreme. Stochastic %D is moving lower in the range but suggestive of support at these levels, near $13. The ETF is below the short term moving average, which could provide resistance on an upside move with additional resistance targets just above.

However,with the FOMC meeting just 3 weeks away and so much speculation on dollar value, rate hikes and the economy it is very possible for gold to remain in a range around $1130 and the GDX to range between $13 and $15.


In The News, Story Stocks and Earnings

Not too much in the way of actual business news today but there was some. The biggest headline this morning was a new $4.48 billion stake in Phillips 66 taken by Warren Buffet and Berkshire Hathaway. The move is seen as calling a possible bottom in oil by some and as merely a smart way to play oil while prices are down by others. Phillips is a refiner and as such benefiting from the lower cost of oil. According to FactSet, the refiners have seen a 45% increase in earnings growth in 2nd quarter while the energy sector as a whole saw earnings decline by 55.6%. Shares of Phillips 66 jumped on the news, gaining 2.38%, to trade above the short term moving average.


Netflix also made the news today. The online streaming service announced it was not renewing a deal with EPIX which would take some high profile content off of the site. The reason, according to company execs, is because those movies were already available on other services such as Amazon and therefore not exclusive to Netflix. The company is going to be focusing on exclusive content in its efforts to drive business.... but the move may yet have a negative impact on revenue. Shares of the stock responded by dropping 2.24% but was able to hold above the short term moving average.


There aren't a whole lot of earnings reports this week but there are one or two to take note of. One is Costco, reporting on Wednesday. The discount warehouse is expected to report in the range of $1.66, slightly better than last years $1.52. Based on monthly sales reports we can expect to see sales run in the range of +1% to +3% over last year at this time.


The Indices

The indices went on a wild ride today, not as wild as last week but still a little volatile. The day's range was greater than 1% and trading action left prices near the bottom of the range. Today's move was led by the NASDAQ Composite which closed with a loss of -1.07%. The tech heavy index wrestled with a resistance level reached with last week's bounce and was not able to hold it. Price action appears to have hit a near term top, or at least a place to pause, with a chance of moving lower to retest recent lows. The indicators are mixed at this time but suggest such a test is possible if not likely. MACD momentum is still bearish with the most recent peak an extreme for the year and convergent with lower prices. Stochastic is iffy in that it is making a bullish crossover at this time, but the crossover could be setting up for another move lower just as easily as it could be leading the index higher.

If this is the halfway point in the bounce we can expect to see the index move up as much as 500 points in the near term with a target above the long term up trend line and near the current all time high. If this is a near term top and we see a retest of support that target is roughly 500 points today's close, at or near the low set last week. Of course, a third possibility exists. The shift in momentum could take us up to retest resistance in the range between the trend line and the all time, and then take us back down to test support.


The next largest decline on the day was in the S&P 500. The broad market fell -0.84% in a move that confirms resistance at 1985. The indicators are bearish with momentum convergent with a retest of the recent low so a retest is looking very possible. Add in the latest estimates for 3rd quarter earnings and a retest appears even more likely. On the flipside, stochastic remains consistent with an underlying bull market and support with several targets for support between today's close and the recent low near 1960, 1920 and 1900.


The Dow Jones Transportation Average made the third largest decline today, 0.80%. The transports also appear to be cresting a near term peak, or entering a consolidation zone, with support targets near 7750. The indicators are mixed but are consistent with such a consolidation/test of support. MACD momentum is bearish and retreating from an extreme peak, suggesting lower prices are on the way. Stochastic is forming a weak/early bullish entry signal and is consistent with support at or near recent lows.


The Dow Jones Industrial Average made the smallest decline in today's session, only -0.69 at the close of the day. The blue chips created a small black candle with a small amount of lower wick, with price action centered around the 16,580 resistance line and bouncing off of the 16,500 level. The indicators are much the same as the other indices, consistent with a bounce but suggestive of a retest of support. The index appears to be positioned near the middle of a potential range with an upper target near 17,250 and lower target near the recent lows.


The bounce is on. The question today is, is the bounce only half over or has it already reached its first peak. The indices all appear to be in similar straits, roughly halfway from their recent low and halfway to potentially strong resistance levels with mixed indicators. If what we have seen is only a corrective action within a greater bull market then the indicators are consistent with a shift of momentum that is trend following and leading them indices higher. If the correction is a sign of underlying weakness in the economy then the indicators are set up for another bearish signal and retest of current lows or new lows.

I am still bullish on the economy. The recovery is ongoing and in its early phases. The data supports long term steady and continued growth. There are no troubling hot spots that lead me to think bubble and little reason to expect a crash, at least not domestically.

Aside from the day to day news and other near term factors, what I think is causing this turmoil is two things. First, earnings growth is poor. No doubt earnings are better than expected but earnings growth is poor, at least for now. Expectations for later this year and next year are quite good but we still have one more quarter of weak, tepid, lack luster earnings.

Second, the FOMC. The FOMC and their rate hike is causing the market and the globe a lot of stress. They can't be firm on when it's coming and that is making it hard for business and investors to make decisions. At the same time we are getting way too much Fed speak from the wings. The governors, in my humble opinion, should not be allowed to make the kinds of comments they do unless it is through one of their official channels, like the policy statement, the minutes or the Beige Book. All these random comments, interviews and speeches are doing nothing to calm the market and a lot to help roil it.

Not much in the way of earnings this week but there is a lot in the way of data. Tomorrow is auto sales, ISM and construction spending. Wednesday is the ADP employment report, and the Beige Book. Thursday is Challenger and jobless claims and then on Friday the all important jobs report. Each will add to FOMC speculation . . . if it leads to a September rate hike remember, its the first rate hike after years of 0% policy and a sign of economic stability, not the end of economic expansion.

Until then, remember the trend!

Thomas Hughes


New Option Plays

The Oversold Bounce Is Failing

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Jack In The Box - JACK - close: 78.18 change: -3.59

Stop Loss: 82.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 677 thousand
Entry on August -- at $---.--
Listed on August 31, 2015
Time Frame: Exit PRIOR to October option expiration
New Positions: Yes, see below

Company Description

Trade Description:
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, a fast-casual restaurant with about 600 locations. Fast-casual restaurant rival 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.

Customers are 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? This trend may not help the Jack in the box brand but it's good news for Qdoba. Restaurants like Qdoba and Chipotle are capitalizing on the healthy food craze.

Management is trying to be shareholder friendly. They have an active share buyback program and they reduced the share count by 10% over the last few quarters. In their Q2 earnings report (May 13th) the company raised their quarterly dividend by +50%.

JACK reported its Q1 2015 earnings on February 17th. 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 raised their 2015 guidance.

The company did it again in May with their Q2 report. Estimates were for $0.66 per share on revenues of $356 million. JACK reported $0.69 per share with revenues up +5.0% to $358 million. That is a +35.2% earnings improvement from a year ago. Their consolidated restaurant operating margins improved 210 basis points to 20.6%. Plus, management raised their 2015 guidance again.

If we stopped right here the story for JACK looks pretty bullish. They definitely seem to be outgrowing their competition. However, the picture appeared to change in the third quarter.

It looks like growth slowed down a bit too much for the market's liking. JACK reported its Q3 earnings on August 5th. Earnings were $0.76 per share. That beat analysts' estimates by three cents. Revenues only rose +3.2% to $359.5 million, which was essentially in-line with estimates. JACK is still seeing strong same-store sales growth with Q3's SSS up +7.3% for their Jack in the Box brand and +7.7% for the Qdoba business. Management said they are only expecting +3.5-5.5% same-store sales growth for Jack in the Box and +5.0-7.0% growth for Qdoba in the fourth quarter.

Investors must have been expecting more from the company because they sold JACK after its earnings report. Shares corrected pretty fast with a -$10.00 drop in following week. JACK was trying to hold support near $85.00 and then the market collapsed. Last Monday saw shares of JACK plunge to an intraday low of $63.94. The oversold bounce just failed at its 10-dma.

Technically JACK looks broken. After incredible gains over the last couple of years JACK is now in a bear market. The peak in August was a lower high. The breakdown under major support near $85 and its 200-dma was bearish. Now JACK has broken one of its long-term trend lines of support. It looks like JACK has further to fall. Today's low was $78.00. Last Wednesday's low was $77.81. I am suggesting a trigger to buy puts at $77.70.

Trigger @ $77.70

- Suggested Positions -

Buy the OCT $75 PUT (JACK151016P75) current ask $2.35
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:

Weekly Chart:



In Play Updates and Reviews

Stocks End August With A Whimper

by James Brown

Click here to email James Brown

Editor's Note:

August 2015 was the most volatile month for the U.S. market in four years. After a big bounce off last Monday's lows the major indices have spent the last couple of sessions churning sideways.

STMP hit our bullish entry trigger at $83.55.


Current Portfolio:


CALL Play Updates

The Walt Disney Co. - DIS - close: 101.88 change: -0.60

Stop Loss: None. No stop at this time.
Target(s): To Be Determined
Current Option Gain/Loss: -4.4%
Average Daily Volume = 8.5 million
Entry on August 27 at $101.35
Listed on August 24, 2015
Time Frame: Exit PRIOR to October option expiration
New Positions: see below

Comments:
08/31/15: Monday was a quiet day on Wall Street and shares of DIS churned sideways. Shares did bounce off their 10-dma this morning but gains faded and DIS settled with a -0.58% loss.

I am not suggesting new positions at this time.

Trade Description: August 24, 2015:
We are bringing DIS back. The sell-off from its August high has been extreme. At its low today near $90.00 DIS was down -26% from its high. The retreat offers a lot of opportunity. Jump to the bottom of this play update for our entry point strategy.

Disney reported earnings on August 4th and beat the street with earnings of $1.45 compared to estimates for $1.42. The very next day shares fell -$11.00 to $110. The sell-off in DIS stock has continued thanks to a global market meltdown.

We think this pullback in the stock is way overdone. Disney posted $13.1 billion in revenue compared to estimates for $13.2 billion. That minor miss was not the reason for the huge decline in the stock. Disney said revenues in its cable products rose +5% BUT they had seen some pressure from online streaming. Subscription growth to the ESPN cable bundle had slowed, not declined, just slowed.

There are multiple reasons. There are no major sporting events this summer like the World Cup, Olympics, etc. Some consumers are cutting the cord to cable because they are now getting their TV programming from Netflix, Hulu, etc. Cable is expensive compared to the streaming options. The drop off in ESPN growth is not related specifically to Disney. CEO Bob Iger said subscriptions would pick back up in 2016 and expand sharply in 2017 thanks to a flood of sporting events due to come online next year.

Disney has already purchased the rights to nearly every sporting event available in the next five years but the old contracts with the prior rights holders have yet to expire. As those contracts expire and the new Disney contracts begin the content on ESPN will surge.

This slowdown in ESPN growth should be ignored. This is just a small part of the Disney empire and everything else is growing like crazy. Parks and resorts revenue rose +4%. Consumer products revenue rose +6% thanks to Frozen, Avengers and Star Wars merchandise. The only weak spot was interactive gaming, which declined -$58 million to $208 million. Disney expects that to rebound in Q4 as new games are released and holiday shopping begins.

The real key here is the theme parks, cruises and most of all the movie franchises. They have five Star Wars movies in the pipeline and the one opening this December is expected to gross $2.2 billion and provide Disney with more than $1 billion in profits. This is just one of the blockbusters they have scheduled.

Analysts are claiming Disney shares could add 25% before the end of December because of their strong movie schedule and coming attractions. The Avengers movie in April was a hit and added greatly to their Q2 earnings. However, that will just be a drop in the bucket compared to the money they are going to make on the Star Wars reboot in December. That is the first of five Star Wars movies on the calendar. Remember, Disney now has Marvel, Pixar and Star Wars (Lucasfilm) all under the same roof.

Disney Movie Schedule (partial)

Dec. 18, 2015 - "Star Wars: Episode VII - The Force Awakens"
2016 - "The Incredibles 2"
2016 - "Frozen" sequel
April 29, 2016 - "Captain America: Civil War"
June 17, 2016 - "Finding Dory"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Late 2017 - "Thor: Ragnarok"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

The four-week drop in DIS' stock has sent shares back to their 2015 lows. During the panic this morning investors bought the dip at round-number support near $90.00 (FYI: the February 2015 low was $90.06). When the market bounced DIS rallied more than +10% only to stall at round-number resistance at $100.00. DIS closed right in the middle of this $90-100 trading range today.

We want to be ready no matter what direction DIS moves. That's why we are listing two different entry point strategies.

Our first plan is to buy calls on a dip at $91.00 should DIS dip toward today's low. The second entry trigger is to buy calls on a breakout at $101.00 since the $100 level was resistance.

We are not listing a stop loss tonight. The market volatility has been extreme. The intraday moves in the market are a little ridiculous and nearly impossible to trade around if you're not glued to your screen and day trading. You can manage your risk by limiting your position size. We'll add a stop loss once the dust settles, likely in a couple of days.

- Suggested Positions -

Long OCT $105 CALL (DIS151016C105) entry $2.52

08/27/15 triggered on gap open at $101.35, suggested entry was $101.00
Option Format: symbol-year-month-day-call-strike


Facebook, Inc. - FB - close: 89.43 change: -1.58

Stop Loss: No stop at the moment (See August 24th update)
Target(s): To Be Determined
Current Option Gain/Loss: +338.1%
Average Daily Volume = 27.3 million
Entry on August 24 at $77.03
Listed on August 20, 2015
Time Frame: Exit PRIOR to October option expiration
New Positions: see below

Comments:
08/31/15: I cautioned readers in the weekend newsletter that we should not be surprised to see a dip in FB. The stock fell toward its 10-dma before paring its losses. Shares did underperform the broader market with a -1.7% decline. I suspect the $87.50 level is short-term support as long as the broader market doesn't accelerate lower.

No new positions at this time.

Trade Description:
Facebook needs no introduction. It is the largest social media platform on the planet. As of June 30th, 2015 the company reported 1.49 billion monthly active users and 968 million daily active users. If FB were a country that makes them the most populous country on the planet. China has 1.35 billion while India has 1.25 billion people.

Earlier this year (March) the company announced a new mobile payment service through FB's messenger app. The new service will compete with similar programs through PayPal, Apple Pay, and Google Wallet.

Meanwhile business at FB is great. According to IBD, FB's Q4 earnings, announced in January, were up +69% from a year ago. Revenues were up +49%. The company released their Q1 results on April 22nd. Earnings were up +20% to $0.42 per share, which beat estimates. Revenues were up +41.6% to $3.54 billion in the first quarter.

FB's Q2 results, announced July 29th, were also better than expected. Earnings were $0.50 per share, which was three cents above estimates. Revenues surged +39% to $4.04 billion, above expectations. Daily active users were up +17%. Mobile daily active users were up +29%. Monthly actives were up +13%. Wall Street expects income to surge next year with +12% profit growth in 2015 but +32% profit growth in 2016.

FB continues to see growth among its niche properties. The company bought Instagram for $1 billion in 2012. Last late year Instagram surpassed Twitter with more than 300 million active users. FB is also a dominant player in the messenger industry with more than 600 million users on WhatsApp and 145 million users on Facebook Messenger.

FB has not yet started to truly monetize its WhatsApp and Messenger properties. It's just now starting to include ads in Instagram. Eventually, with audiences this big, FB will be able to generate a lot of cash through additional advertising. On the subject of Instagram advertising, FB just released the advertising API for the photo-sharing service in August 2015. The API or application programming interface will allow third-party marketers to plug into the system to buy advertising. Instagram could soon rival Google and Twitter for the online ad market. According to EMarketer, Instagram will surpass Google and Twitter for U.S. mobile display ad revenue by 2017.

Since we are talking about advertising, this year has seen FB jump into the video ad market with both feet and it's off to a strong start. FB claims that it's already up to four billion video views a day. They had 315 billion video views in Q1 2015. That's pretty significant. YouTube had 756 billion video views in Q1 but YouTube has been around for ten years (FYI: YouTube is owned by Google). FB has only recently focused on video.

Wall Street is growing more optimistic as FB develops its blooming video ad business, its Instagram business, and messaging properties. In the last several weeks the stock has seen a number of price target upgrades. Bank of America upped their FB price target from $95 to $105. Cantor Fitzergerald upped theirs to $100. Brean Capital raised theirs to $108. Piper Jaffray upgraded their FB target to $120.

After surging to new highs in mid July shares of FB had been consolidating sideways in the $92-99 zone. The stock broke down through the bottom of that trading range today with a -4.98% plunge toward technical support at the simple 50-dma. The broader market looks very vulnerable right now with the S&P 500, the NASDAQ composite, and the small cap Russell 2000 all piercing key support levels with today's sell-off. If this market weakness continues we want to take advantage of it.

Stocks tend to overreact to big market moves, especially to the downside. FB is no exception. When traders panic they sell everything. We want to be ready to buy FB when it nears support. Prior resistance near $85-86 should be new support. Tonight we are suggesting a buy-the-dip trigger to buy FB calls at $85.50. If triggered we'll start with a stop at $81.40, just below the simple 200-dma.

- Suggested Positions -

Long OCT $90 CALL (FB151016C90) entry $1.05

08/27/15 Zuckerberg announced that FB hit a new milestone - one billion people used FB in a single day.
08/24/15 Strategy Update = remove the stop loss. Expect more volatility
08/24/15 Trade opens. FB gapped down at $77.03.
08/22/15 Adjusted entry point. FB missed our buy-the-dip trigger at $85.50 by a few cents on Friday. We want to buy calls at the opening bell on Monday morning, August 24th.
Option Format: symbol-year-month-day-call-strike


iShares Russell 2000 ETF - IWM - close: 115.20 change: -0.42

Stop Loss: No stop at the moment (See August 24th update)
Target(s): To Be Determined
Current Option Gain/Loss: +14.9%
Average Daily Volume = 31 million
Entry on August 25 at $114.05
Listed on August 22, 2015
Time Frame: Exit PRIOR to October option expiration
New Positions: see below

Comments:
08/31/15: The small cap index fared a little bit better than its large cap rivals. The IWM only lost -0.3% today. The $116.00 level is starting to look like short-term resistance.

No new positions at this time.

Trade Description: August 22, 2015:
Stocks are getting crushed. Worries about a slowing Chinese economy worsened this week. This China concern combined with uncertainty about the Federal Reserve raising rates was enough of a catalyst to spark a serious sell-off. The U.S. market just experienced its worst weekly decline in more than four years.

Friday's action looks like a capitulation sell-off. Volume soared. It was the heaviest volume day of the year. Most of that volume was down volume. The S&P 500 posted zero new highs on Friday. All ten sectors were in the red. The two-day (Thursday-Friday) decline has pushed all of the major U.S. indices into negative territory for 2015 (although the NASDAQ composite is only -0.6% year to date).

The Dow Jones Industrial Average and the NASDAQ-100 index are both in correction territory, which is a decline of more than -10% from its highs. The small cap Russell 2000 index also hit correction territory on Friday. The tone on Friday was fearful with the volatility index (VIX), a.k.a. the fear gauge, soaring +46% to a new high for 2015. One CNBC commentator described the action on Friday as investors just "puking" up stocks to get out of the market.

According to 18th century British nobleman Baron Rothschild, "The time to buy is when there's blood in the streets." We think Friday's market sell-off qualifies as a "bloody" day for stocks.

Did you notice that the Dow Industrials, the NASDAQ composite, and the S&P 500 were all down -3.1% (or worse) but the small cap Russell 2000 index was only down -1.3% on Friday? This relative strength is a reflection of investors' fears. If China is the bogeyman then no one wants big multi-nationals that do a lot of business overseas. Small cap companies tend to be more U.S. focused. They do less business overseas and should have less exposure to China or a rising U.S. dollar.

Tonight we are suggesting a bullish trade to buy calls on the IWM, which is the small cap Russell 2000 ETF. The afternoon peak on Friday was $116.66 for the IWM. We are suggesting a trigger to buy calls if the IWM trades at $116.85 or higher.

Please note that this is just a trade. We are not calling a bottom for the stock market. On a short-term basis stocks are very oversold and due for a bounce. The big cap indices (S&P 500, NASDAQ, and Dow Industrials) all closed on their low for the day. Normally that's a bearish indication for the next trading day. There is a very good chance that stocks see another spike lower on Monday morning before bouncing. That's one reason why we are suggesting a trigger to buy IWM calls on a bounce.

- Suggested Positions -

Long NOV $115 CALL (IWM151120C115) entry $4.15

08/25/15 Trade opened this morning. The IWM gapped higher at $114.05
08/24/15 Adjust Entry Strategy = new entry = buy IWM calls at the opening bell tomorrow (Tuesday, August 25th). No stop loss at the moment.
Previous entry trigger was $116.85
08/24/15 Adjust option strike = use the November $115 calls
Option Format: symbol-year-month-day-call-strike


Netflix, Inc. - NFLX - close: 115.03 change: -2.60

Stop Loss: None. No stop at this time.
Target(s): To Be Determined
Current Option Gain/Loss: -11.5%
Average Daily Volume = 8.0 million
Entry on August 27 at $114.94
Listed on August 25, 2015
Time Frame: Exit PRIOR to Earnings in October
New Positions: see below

Comments:
08/31/15: NFLX was making headlines today when they decided to not renew their contract with Epix. Back in 2010 NFLX signed a $1 billion deal with Epix to license their movies. By canceling their Epix contract the NFLX service will lose a few high-profile movies. It looks like rival Hulu was happy to pay Epix for them as most of the movies will now be available on Hulu. Personally I don't see this as being a major catalyst for NFLX either way.

No new positions at this time.

Trade Description: August 25, 2015:
Some of the market's best-loved stocks have been crushed in the last couple of weeks. NFLX is one of them but this big decline offers a big opportunity.

If you're not familiar with NFLX, here is a brief summary from the company, "Netflix is the world's leading Internet television network with over 62 million members in over 50 countries enjoying more than 100 million hours of TV shows and movies per day, including original series, documentaries and feature films. Members can watch as much as they want, anytime, anywhere, on nearly any Internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments."

NFLX is cashing in on a massive sea change in consumer media viewing habits. Traditional TV is dead. Cable is worried as more and more consumers "cut their cord" and only consume media on streaming services. NFLX is the leading streaming service in the world.

The company said their customers watched over 10 billion hours of streaming content in the first quarter of 2015. That is a +20% jump from a year ago. The company has been focused on building up their own original content creation and expanding overseas. Just this week NFLX announced a deal with Japanese company SoftBank that would bring NFLX to Japan. Softbank is a bit of a technology conglomerate with stakes in multiple companies. One of their biggest investments is an 80% stake in Sprint (S). NFLX also struck a deal with T-Mobile. There seems to be a trend here of consumers, Netflix, and their smart phones.

The carnage over the last several days has been brutal. Shares of NFLX have plunged from its recent highs above $125.00 to almost $85.00 during Monday's market crash. Today the stock bounced with a range of $101.52-107.88. There is no denying the volatility in NFLX's stock. However, multiple analysts have said that investors should buy the "market darlings" like NFLX during this sell-off. They believe stocks like NFLX will outperform in the next few weeks and over the next few months.

Prior to the market's crash over the last few days analysts were upgrading their price targets on NFLX into the $140 area.

Tonight we are listing two different entry triggers to buy calls.

NOTE: This is an aggressive, higher-risk trade. NFLX options are expensive and the stock is volatile. We are not listing a stop loss at this time. Traders can try and limit their risk by adjusting their position size.

If NFLX rallies from current levels then we want to buy calls if shares traded at $110.65. We'll use the November $120 call.

If NFXL sinks from current levels then we want to buy calls on a dip at $92.00. We'll use the November $100 call.

- Suggested Positions -

Long NOV $120 CALL (NFLX151120C120) entry $12.65

08/27/15 Trade is open. NFLX gapped higher at $114.94
08/26/15 removed the gap-open disclaimer on entry points for NFLX
Option Format: symbol-year-month-day-call-strike


Post Holdings, Inc. - POST - close: 65.28 change: -0.78

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on August -- at $---.--
Listed on August 29, 2015
Time Frame: Exit PRIOR to October option expiration
New Positions: Yes, see below

Comments:
08/31/15: POST spent most of the day hovering near its highs before fading to a -1.1% decline. There is no change from the new play description. Our suggested entry point to buy calls is $66.55.

Trade Description: August 29, 2015:
Shares of ready-to-eat cereal maker POST have shown surprising strength this month and the last few days during the market turmoil. POST is also poised to be one of the better performing stocks this year with a +57% gain year to date.

POST is in the consumer goods sector. According to the company, "Post Holdings, Inc., headquartered in St. Louis, Missouri, is a consumer packaged goods holding company operating in the center-of-the-store, private label, refrigerated and active nutrition food categories. Through its Post Consumer Brands business, Post is a leader in the ready-to-eat cereal category and offers a broad portfolio that includes recognized brands such as Honey Bunches of Oats(R), Pebbles(TM), Great Grains(R), Grape-Nuts(R), Honeycomb(R), Frosted Mini Spooners(R), Golden Puffs(R), Cinnamon Toasters(R), Fruity Dyno-Bites(R), Cocoa Dyno-Bites(R), Berry Colossal Crunch(R) and Malt-O-Meal(R) hot wheat cereal.

Post's Michael Foods Group supplies value-added egg products, refrigerated potato products, cheese and other dairy case products and dry pasta products to the foodservice, food ingredient and private label retail channels and markets retail brands including All Whites(R), Better'n Eggs(R), Simply Potatoes(R) and Crystal Farms(R). Post's active nutrition platform aids consumers in adopting healthier lifestyles through brands such as PowerBar(R), Premier Protein(R) and Dymatize(R). Post's Private Brands Group manufactures private label peanut butter and other nut butters, dried fruits, baking and snacking nuts, cereal and granola."

The earnings picture has improved significantly. Back in February 2015 POST reported its Q1 results that missed estimates by a wide margin. Yet the last couple of quarters the company has seen earnings and revenues soar. Their Q2 report said revenues were up +140%. Their Q3 results, announced on August 6th, reported revenue growth of +91%. Earnings were $0.27 per share, which was $0.20 better than expected. Management raised their full year guidance from $585-610 million up to $635-650 million. A lot of POST's revenue growth has been due to its aggressive acquisition strategy but Wall Street doesn't seem to care.

As a matter of fact, Wall Street has ignored POST's warnings about its egg supply. The company uses a lot of eggs and the U.S. egg-production industry has been hammered by an outbreak of Avian Influenza (AI). The last significant outbreak of AI was back in the early 1980s. According to CNN the current outbreak has been causing havoc since December 2014 and 35 million egg-laying hens have been killed. The price of eggs surged this summer but looks like it may have peaked.

Back in May this year POST warned that the outbreak had infected a significant portion of their company-owned flocks and 35% of their egg commitments could be impacted. Fortunately, a few weeks later they said the damage may be down to just 25% of their egg supply but they still expected a $20 million hit to earnings. The market doesn't seem to care.

Instead POST seems to be getting a boost from the crop outlook for the rest of 2015. The USDA raised their estimates for crop productions. The harvest this year could see record soybean numbers. Corn could produce the third largest crop on record. This is pushing commodity prices lower, which is a bullish tailwind for cereal makers like POST.

Shares of POST have been very strong this month. The market's reaction to their Q3 results produced a bullish breakout in POST with a rally past resistance near $55.00 and a surge to all-time highs. When the market crashed late last week and this past Monday, shares of POST did see a decline but it was minor compared to the rest of the market. POST didn't even dip to support at $60.00.

Today POST is surging. Shares are poised to breakout past their mid-August high. If that happens POST could see more short covering. The most recent data listed short interest at 19% of the 54.2 million share float. The point & figure chart is bullish and forecasting at $78.00 target. Tonight we are suggesting a trigger to open bullish positions at $66.55.

Trigger @ $66.55

- Suggested Positions -

Buy the OCT $70 CALL (POST151016C70)

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


Skechers USA Inc. - SKX - close: 140.74 change: -1.24

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.3 million
Entry on August -- at $---.--
Listed on August 27, 2015
Time Frame: Exit PRIOR to the 3-for-1 stock split in mid October
New Positions: Yes, see below

Comments:
08/31/15: SKX spent Monday's session bouncing along support near $140.00.

Our suggested entry point to buy calls is at $145.15.

Trade Description: August 27, 2015:
SKX seems to be doing everything right and investors have noticed. Shares are one of the best performing stocks this year. At its early August high near $160.00 a share SKX was up +190% for the year. Today SKX is only up +158% year to date. The company is growing faster than rivals Nike (NKE), Under Armour (UA), and Adidas.

SKX is in the consumer goods sector. According to the company, "SKECHERS USA, Inc., based in Manhattan Beach, California, designs, develops and markets a diverse range of lifestyle footwear for men, women and children, as well as performance footwear for men and women. SKECHERS footwear is available in the United States and over 120 countries and territories worldwide via department and specialty stores, more than 1,100 SKECHERS retail stores, and the Company's e-commerce website. The Company manages its international business through a network of global distributors, joint venture partners in Asia, and 12 wholly-owned subsidiaries in Brazil, Canada, Chile, Japan and throughout Europe."

Earnings have been great. SKX reported their Q1 results on April 22nd. Results of $1.10 per share beat estimates by nine cents. Revenues soared +40% to $768 million, above expectations. Their Q1 earnings were +80% higher from a year ago. These results were in spite of the West Coast port slowdown.

The winning results continued in the second quarter. SKX reported their Q2 results on July 29th and they were record-breaking for the company. Wall Street was expecting a profit of $1.01 per share on revenues of $740 million. SKX blew those numbers away with a profit of $1.55 per share. That's a +128% improvement from a year ago. Revenues were up +36.4% to $800 million.

Under Armour's revenues were up only +28% and Nike's were only up +5%. It probably helped that SKX was able to pass along a +9% increase in their average selling price.

Naturally management was bullish. David Weinberg, chief operating officer and chief financial officer, commented on his company's quarterly results, saying,

"Our record first half of 2015 follows a record 2014, and is a result of the universal demand for our wide assortment of diverse footwear collections for men, women and kids. At no other time in the history of our company have so many product lines resonated with consumers, giving us a broad base to continue to build upon and grow. With increased year-over-year backlogs at the end of June, strong incoming order rates and July sales, as well as the positive sell-through reports from wholesale and an additional 125 to 135 Company-owned and third-party-owned Skechers retail stores planned to open later this year, we believe that we will continue to achieve new sales and profit records through 2015. With $513.9 million in cash, inventories in line with sales, and improved efficiencies and capacity in both our North American and European distribution centers, we believe we are well prepared for our planned growth. We remain comfortable with the analysts' current consensus estimates for the back half of 2015."
Shares of SKX soared to new highs following their Q2 results. A month later, August 21st, SKX announced a 3-for-1 stock split. Here's a bit from their press release, the "Board of Directors has approved a three-for-one split of the Company's Class A and Class B common stock that will be distributed in the form of a stock dividend." The stock split is subject to shareholder approval. They're holding a shareholder meeting on September 24th, 2015. If approved the stock split should take place on October 16th.

Odds are pretty good that SKX could see a run up into its stock split. During the market's recent turmoil SKX managed to maintain its long-term up trend. Shares filled the gap from late July and bounced off support near $120.00. Today's high was $144.86. We are suggesting a trigger to buy calls if SKX trades at $145.15.

We will plan on exiting prior to the 3-for-1 split.

Trigger @ $145.15

- Suggested Positions -

Buy the OCT $150 CALL (SKX151016C150)

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


Stamps.com Inc. - STMP - close: 82.34 change: -0.83

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Option Gain/Loss: -31.4%
Average Daily Volume = 222 thousand
Entry on August 31 at $83.55
Listed on August 29, 2015
Time Frame: Exit PRIOR to October option expiration
New Positions: see below

Comments:
08/31/15: Our new bullish play on STMP is open. Shares hit $84.06 intraday. Our suggested entry point was $83.55. Readers may want to wait for a new rally past $83.25 before considering new positions.

Trade Description: August 29, 2015:
STMP is another stock showing significant relative strength this year. Shares were not immune to the market's recent sell-off. STMP fell about -14% but investors bought the dip near support. Even with the pullback STMP maintained its long-term up trend. The recent bounce has lifted STMP to a +73% gain year to date.

STMP is in the technology sector. They're considered part of the application software industry. According to the company, "Stamps.com is the leading provider of Internet-based mailing and shipping services to over 500,000 customers. Stamps.com's services enable customers to print U.S. Postal Service-approved postage with just a computer, printer and Internet connection, right from their homes or offices. The company has been the leader in transforming the world of mailing and shipping for small business owners, e-commerce sellers, high volume shippers, and enterprise organizations alike."

The company has been showing very strong earnings and revenue growth. They have beaten Wall Street's estimates on both the top and bottom line the last three quarters in a row. Q4 revenues were up +29%. Q1 revenues were up +32%. Q2 revenues, announced on August 6th, were up +41% from a year ago to $48.4 million. Q2 earnings were $0.97 per share, which beat estimates by 26 cents. STMP management has raised their guidance two quarters in a row.

Ken McBride, Stamps.com's chairman and CEO, commented on his company's recent quarter, "We are pleased with our continued strong revenue and earnings growth this quarter. We achieved record performance across multiple financial and customer metrics including total revenue, core mailing and shipping revenue, non-GAAP earnings per share, paid customers and average revenue per paid customer. In addition, we saw continued growth across all of our business segments and we experienced positive contributions from our ShipStation and ShipWorks subsidiaries. We remain excited about our future prospects which led us to increase our guidance for 2015."

STMP raised their 2015 earnings guidance from $2.55-2.90 per share to $3.10-3.50. Wall Street estimates were around $2.90.

The market's reaction to the better than expected earnings, revenues, and bullish guidance launched STMP to levels not seen since early 2000. STMP closed at $88.25 on August 19th, just before the market's correction. The pullback in STMP saw shares decline to support near $75-76 and its rising 50-dma. You can see on the weekly chart that STMP did not break its long-term up trend. The point & figure chart has already reversed back into positive territory and is forecasting at $132.00 target.

Tonight we are suggesting a trigger to launch bullish positions at $83.55.

- Suggested Positions -

Long OCT $85 CALL (STMP151016C85) entry $4.30

08/31/15 triggered @ $83.55
Option Format: symbol-year-month-day-call-strike


The TJX Companies - TJX - close: 70.32 change: -0.40

Stop Loss: None. No stop at this time
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.0 million
Entry on August -- at $---.--
Listed on August 26, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
08/31/15: TJX slipped toward short-term, round-number support at $70.00 on Monday. Currently we are still on the sidelines Our suggested entry point is $72.05.

Trade Description: August 26, 2015
Believe it or not but there are only 120 days until Christmas 2015. Most of us are just adjusting to school starting again but retailers are already planning for the 2015 holiday shopping season. Historically the time to buy retailers has been early fall (i.e. right now) and then sell on Black Friday (day after Thanksgiving). TJX could be a great way to play that seasonal trend.

TJX is in the services sector. According to the company, "The TJX Companies, Inc. is the leading off-price retailer of apparel and home fashions in the U.S. and worldwide. As of May 2, 2015, the end of the Company's first quarter, the Company operated a total of 3,441 stores in seven countries, the United States, Canada, the United Kingdom, Ireland, Germany, Poland, and Austria, and three e-commerce sites. These include 1,126 T.J. Maxx, 987 Marshalls, 498 HomeGoods and 6 Sierra Trading Post stores, as well as tjmaxx.com and sierratradingpost.com in the United States; 239 Winners, 97 HomeSense, and 39 Marshalls stores in Canada; and 416 T.K. Maxx and 33 HomeSense stores, as well as tkmaxx.com, in Europe."

Just a couple of days before the market collapsed TJX reported its Q2 2016 earnings results (on August 18th). Wall Street was looking for a profit of $0.76 per share on revenues of $7.25 billion. TJX beat both estimates with a profit of $0.80 per share and revenues of $7.36 billion. Earnings were up +7% from a year ago and revenues were up +6.5%. Gross margins improved. Comparable-store sales improved from +3% a year ago to +6%. TJX said their customer traffic improved for the fifth quarter in a row.

Most retailers have not been doing so hot this year so TJX management was naturally optimistic given their strong results. Carol Meyrowitz, Chairman and Chief Executive Officer of The TJX Companies, Inc., commented on her company's quarter,

"We are extremely pleased that our momentum continued in the second quarter. Our 6% consolidated comparable store sales growth and 7% adjusted EPS growth significantly exceeded our expectations. It was great to see that comp sales were entirely driven by customer traffic - our fifth consecutive quarter of sequential traffic improvement - and that we had strong sales across all of our divisions. Our flexible model and ability to offer an eclectic, exciting merchandise mix at outstanding values continues to resonate with consumers in all of our geographies. We were also very pleased with our solid merchandise margins. We are proud of our strong comp sales, traffic increases and merchandise margins, all of which are core to a successful retail business. We enter the back half of the year in an excellent position to keep our momentum going and have many exciting initiatives planned. I am convinced that our gift-giving selections will be better than ever this year, and that our fall and holiday marketing campaigns will keep attracting more shoppers to our stores. Above all, we will be offering consumers amazing values every day! The third quarter is off to a solid start and we are raising our full year comp sales and earnings per share guidance. Today, we are a nearly $30 billion retailer with a clear vision for growth, a differentiated apparel and home fashions business, and world-class organization. Looking ahead, we are confident that we will achieve, and hope to surpass, our plans as we continue to bring value around the world and grow TJX to a $40 billion-plus company!"
TJX management did lower their Q3 guidance but they raised their full year 2016 EPS forecast. They also raised their 2016 comparable store sales estimate from +2-3% to +3-4%. It was the second quarter in a row that management raised their guidance.

The stock market's recent sell-off produced a correction in shares of TJX, which fell from its August high of $76.78 down to an intraday low of $67.25 on Monday morning. That is a -12.4% correction. Shares just happened to bounce near technical support at the simple 200-dma and its late July lows near $67.00. In spite of the sharp retreat the point & figure chart is still bullish and still forecasting at long-term $98.00 target.

Tonight we are suggesting a trigger to buy calls at $72.05. This is a relatively longer-term trade and hope to hold this position for several weeks.

Trigger @ $72.05

- Suggested Positions -

Buy the 2016 Jan $75 CALL (TJX160115C75)

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




PUT Play Updates

Currently we do not have any active put trades.