Option Investor
Newsletter

Daily Newsletter, Monday, 10/5/2015

Table of Contents

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

Market Wrap

Looking Forward To Earnings

by Thomas Hughes

Click here to email Thomas Hughes
The market opened strong and finished strong in a week largely focused on earnings.

Introduction

The market opened strong and finished strong despite the surprisingly weak NFP we saw last week. The poor number could be sign the economy is faltering, not ordinarily good for the bulls, but was taken as a sign the FOMC doesn't need to raise rates just yet. The dovish tone set by the NFP, along with a noted absence of other fear inducing headlines, allowed the bulls to march higher and take out near term resistance targets.

Market Statistics

The bad-news-is-good-news effect was not limited to US markets. Asian and European indices were also riding high. Asian indices gained about 1.5%, European indices gained 2.7%-3%.

Futures trading indicated a higher open for the US indices right from the start. The SPX was looking at a 0.75% jump at the start and that held fairly steady throughout the early morning. There was a little new and data in the early hours but nothing to really move the market. On the economic front ISM was weaker than expected but expansionary, on the business front Nelson Peltz took a $2.5 billion stake in GE and on FOMC front Boston Federal Reserve President Rosengren made some comments. He says a 2015 rate is still on the table but if thing change from here he would want to wait until 2016. Changes he is looking for are a rise in unemployment from 5.1% or if GDP slows to less than 2%.

The equity market moved higher right at the start of trading. The SPX gained the indicated 0.75% and more on steady trading. The indices hit a high in the first few minutes and then held those high, and slowly drifted higher, throughout the rest of the morning. The bulls held their ground through the lunch hour and by 1PM were approaching another new intra-day high. Bullish sentiment dominated during the afternoon as well. The indices continued to drift higher and were setting new intra-day highs on a regular basis. Strength held up until the end of the day leaving the indices at or near their highs when the closing bell sounded.

Economic Calendar

The Economy

Only one economic report today, ISM Services Index, and it was not as good as expected. It came in at 56.9%, firmly expansionary and the 68th month of expansion in the non-manufacturing sector, but below the 59% reported last month and the 57.5% expected by the analysts. Within the report 2 of the three major components declines, Business Activity and New Orders, while Employment rose. All three components are above the 50 level.

Later in the week look out for Trade Balance and Consumer Credit coming out tomorrow, the minutes to the last FOMC meeting on Wednesday and Wholesale Inventories on Friday. And of course, the weekly jobless claims on Thursday. Also up this week is earnings from Alcoa which may become the focal point of the week. It is the only major report due out this week, the big banks start reporting next week.

Moody's Survey Of Business Confidence declined for the fifth week. The diffusion index dropped 0.2% to 39.7 and is at the lowest levels since mid March. According to Mark Zandi, Moody's chief economist, global business sentiment has downshifted in recent weeks due to market turbulence. Despite the downturn he says there is no sign businesses are getting "decidedly more cautious". US business sentiment continues to lead with reports of steady hiring and strong sales.


The Moody's report, and in particular Mark Zandi's comments about hiring, remind me of some thoughts I have had in regards to labor trends and jobs creation. Jobs creation is good and we need it, that is without a doubt. However, in light of all the supposed businesses who can't fill jobs they already have is it more important that hiring be strong or job creation? Does it matter if NFP is not above 200K every month if unemployment is declining because people are getting hired into existing jobs rather than new jobs? According to Factset the blended rate for 3rd quarter S&P 500 EPS growth is now -5.1%. This is down -0.6% from last week and is now the lowest level we have seen, the expected decline was closer to -1% at the start of the quarter. The drop this week is due to downward revisions in energy, no surprise, and in materials. The energy sector is now expected to produce earnings growth declines of -64.5%, down from 58.9% at the start of the quarter. The materials sector is now expected to show declines of -13.7%, down from -15% on June 30th.

Ex-energy 3rd quarter earnings growth should be in the range of 1.9%. Factor in the 4% upside as predicted by the four year average difference in the earnings growth rate between the start and end of the quarter and growth in the 3rd quarter should be closer to -1.5%, or 6% ex-energy. So far there have been 19 reports this season, 17 beat on EPS projection and 13 beat on revenue projections. Full year 2015 and 2016 estimates have also fallen, 2015 is now at 0.5%, 2016 at 9.9%.

The Oil Index

Oil prices got a big boost today on talks that Russia was willing to meet with OPEC and non-OPEC countries about stabilizing prices. This comes on top of a big drop in US rig counts last week and fueled speculation of a bottom in oil prices. Despite the talk, and the drop in rigs, supply and production remains high with little sign of demand build up. At best we are on the brink of production coming more into line with demand. WTI gained more than 3% on an intra-day basis to trade above $46.50.

The Oil Index made another nice move higher in today's session, a little more than 3%, and extended its bounce from support levels. The index is now trading above the short term moving average with bullish indicators confirming the move. MACD is pointing up and gaining strength while stochastic makes a strong bullish crossover, both %K and %D are pointing higher, so it looks like this move will continue upward until it hits resistance. Resistance may be found near 1,150, or 1,175 if first target is broken.


The Gold Index

Gold prices held steady near $1135 in today's session. The metal got a big boost on Friday from the weak jobs data but was not able to follow through on the move today. Poor NFP has renewed outlook for a later rather than sooner rate hike and weakened the dollar/strengthened gold, in the near term. Outlook for rate hike remains so upside based on the dovish numbers is limited. Unless the FOMC gets off the rate hike path, which would be wickedly bullish for gold I think, there is going to be a rate hike sometime soon and this expectation could send gold testing its lows if not moving lower. Until then it still looks like gold is consolidating around the $1130 level with support near $1100 and resistance near $1150.

The Gold Miners ETF GDX gained more than 4.25% in a move disconnected from the underlying commodity. This move is taking the miners to a new 6 week high while gold prices remain well within the 6 week range. The indicators have rolled into a bullish signal, MACD is bullish and rising while stochastic is making a bullish crossover, so it looks like this move will continue into the near term. Upside targets are near $15.72 and the previously broken all time low. Resistance could be strong at this level, a break above here would be significantly bullish and highly dependent on gold prices. If prices move to this level and/or surpass it without a similar move higher in gold prices I will be skeptical to say the least.


In The News, Story Stocks and Earnings

GE was the biggest headline in business news this morning. The global conglomerate caught the eye of Nelson Peltz, who decided to take a $2.5 billion stake in the company through his firm Trian. He is expected to push for deeper cost cuts and quicker action from execs in order to boost shareholder value. The announcement was met with approval and sent the stock shooting higher. Shares of GE climbed more than 3% in pre-market trading, gapped open and closed with a gain of nearly 5.5%.


Yum! Brands reports earnings tomorrow, before the bell. The operator of Taco Bell, KFC and Pizza Hut is expected to report $1.08 per share, up from the $0.69 last quarter. The company has been struggling in China and emerging markets so estimates may be high. Today the stock gained 1.62% in a move that appears to confirm support along the short term moving average. The indicators are moving higher in confirmation of the move and point to higher prices, or at least expectations of a decent earnings report. Resistance is just above the current level, near $84, and could be important in tomorrow's action. A break above this level would be bullish, a failure could send it back to test support near $80 or $75.


Pepsico is also expected to report before the bell tomorrow. The international beverage and snack giant, also make Doritos etc, is expected to report $1.27, down from last years $1.36, largely due to emerging markets and currency conversion. Weakness in international business is expected to be offset by US sales, in particular with snacks. Shares of the stock gained about 1.75% in today's session but gains were capped by resistance. Today's action created a medium bodied white candle with rising, strong, bullish momentum but there is still resistance ahead. Resistance is near today's closing price, about $96.25 and top of a gap/open window, and could keep shares from rising further.


Dupont made the news in after hours trading. The company first came out and said that it was lowering guidance for the full year, due to foreign exchange. Second they announced the retirement of CEO which was taken as good news. The stock shot up more than 10% in after hours trading.


The Indices

The bulls came out of the gates strong today and were able to extend the bounce from support which began last week. The indices gained at least 1.5% in today's session and were able to close near the highs of the day. Today's session was led by the Dow Jones Industrial Average which advanced more than 3%. The blue chips created a large white candle with a significant lower shadow to form the largest candle in over a month, and the largest white candle in at least a year. This move confirms support at the 16,000 level, takes the index above the short term moving average and is accompanied by bullish indicators. Both MACD and Stochastic are bullish and moving higher although both are still weak. It looks like we got the test of support I mentioned last week and if so could lead this index back to recent all-time highs. For now upside target is near 17,250 which could be reached in anticipation of the fast approaching earnings season.


The next biggest gain was in the Dow Jones Transportation Average. The transports added close to 2.5% in today's session and created one of the longest candles in over a month. Today's action extends the bounce begun last week and carries the index above the short term moving average. The indicators are mixed but generally bullish as the index advances with upside target near 8,250. MACD is bullish, and rising, and leading stochastic higher; stochastic is rolling over into a stronger bullish signal after making a weak bullish crossover. Although indicated higher, in line with longer term economic and earnings outlook, the move remains weak with significant resistance ahead.


The S&P 500 made the third largest gain in today's session, about 1.75%. Today's move was capped by resistance at 1,990, coincident with the convergence of my resistance line and the bottom of my up trend line, always an interesting occurrence. The move was strong and accompanied by mildly bullish indicators so could break through. I say mildly because while MACD is rising, stochastic has not yet fully rolled over into its bullish signal. A break above the trend line, or at least the resistance level as time wears on, would be bullish and help to confirm further upside. Such a break could lead to a retest of the most recent all time highs. Support may be found along the short term moving average but looks more likely near 1,950 and 1,900.


The NASDAQ Composite was the laggard today and only gained about 1.55%. Regardless, the index made a strong move that carried it higher all day, closing near the high of the day. Today's candle crosses the short term moving average, after making a small gap to the upside, but was capped at resistance. The indicators are weak but rolling into a bullish signal so resistance could be tested at least, at break above this level would be bullish and could take the index up to 4,900 or 5,000. A failure to break above the current level could result in a retreat to support near 4,500.


The indices made a nice move higher and appear to be completing a double bottom type reversal following the August/September correction. Today's action carried them back out of correction territory and is supported by the indicators. The problem is, there is technical resistance ahead and still reason for caution in the market. Number one on the list is earnings; there is reason to believe the season will be better than expected but until then expectations are poor. Outlook beyond this reporting season is good and that I think will lead the market higher but I don't think we are there just yet.

After earnings there is a host of items to be wary of. US economic data has been a little weak the last month, the FOMC rate hike debate is still raging, China is still out there with a sluggish economy, the EU is still on shaky ground, global growth is in question and on and on. What was noticeably absent from today's trading, and from weekend news and news in general, were new headlines to be worried about and that allowed the bulls to move higher as much as anything that spurred them to rally.

The market is rising, and looks like it will continue to rise, but I am not yet ready to go full bull. I'm a cautious bull, to get more bullish I'd like to see the indices breach resistance levels first, I'd also like to see earnings come in better than expected, as expected. It would also be nice to see the pundits and analysts start talking more about Q4 earnings season but it may be a few weeks at least before that starts to happen. In the mean time I am watching resistance levels very closely.

Until then, remember the trend!

Thomas Hughes


New Option Plays

This Stock Could Surge To New Highs

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

The Home Depot, Inc. - HD - close: 119.20 change: +1.39

Stop Loss: 114.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 5.3 million
Entry on October -- at $---.--
Listed on October 05, 2015
Time Frame: Exit PRIOR to earnings on November 17th
New Positions: Yes, see below

Company Description

Trade Description:
Home Depot's stock has outperformed the broader market in spite of the fact shares have been stuck in a trading range for the last seven months. That could be about to change.

The big surge in the U.S. housing market this year has been a bullish tailwind for HD's business. The home remodeling and repair industry and consumer spending in this category is expected to hit levels not seen since before the "Great Recession" in 2008-2009. HD is poised to reap the benefits.

HD is in the services sector. According to the company, "The Home Depot is the world's largest home improvement specialty retailer, with 2,270 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico. In fiscal 2014, The Home Depot had sales of $83.2 billion and earnings of $6.3 billion. The Company employs more than 370,000 associates. The Home Depot's stock is traded on the New York Stock Exchange (HD) and is included in the Dow Jones industrial average and Standard & Poor's 500 index."

HD has been showing steady earnings and revenue growth. The company has beaten Wall Street estimates on both the top and bottom line the last three quarters in a row. Management has also raised their guidance the last three quarters in a row.

Their most recent report was August 18th. HD announced its Q2 earnings were up +14% from a year ago to $1.71 per share. Revenues were up +4.3% to $24.83 billion. Comparable store sales came in better than expected with a +4.2% improvement.

Wall Street analysts seem bullish with firms like Deutsche Bank and UBS recently raising their price targets on HD. Currently the point & figure chart is bearish but a rally past $120.00 would generate a brand new buy signal.

Earlier I mentioned that HD has been stuck in a long trading range or consolidation for most of 2015. With the exception of a few days, shares of HD have been churning sideways in the $110-120 range. Today HD looks poised to breakout from this channel. The $120.00 level is round-number resistance. Tonight we are suggesting a trigger to buy calls at $120.25. Plan on exiting prior to HD's earnings report in mid November.

Trigger @ $120.25

- Suggested Positions -

Buy the NOV $125 CALL (HD151120C125) current ask $1.26
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

Market Rally Continues With Widespread Gains

by James Brown

Click here to email James Brown

Editor's Note:

Traders are still reacting to Friday's intraday reversal higher. The market is also digesting the new idea that the Federal Reserve may not raise rates this year after all.

Our two new bullish trades, ALKS and COST, were triggered today.

The market's rally stopped out our bearish trades: AON, DECK, and WWAV. We have chosen to remove OUTR, it did not open.


Current Portfolio:


CALL Play Updates

Alkermes Plc - ALKS - close: 59.77 change: -0.71

Stop Loss: 54.25
Target(s): To Be Determined
Current Option Gain/Loss: -38.6%
Average Daily Volume = 1.0 million
Entry on October 05 at $61.17
Listed on October 03, 2015
Time Frame: Exit PRIOR to earnings in late October
New Positions: see below

Comments:
10/05/15: Our new trade on ALKS is open. The plan was to buy calls at $60.75 but our trade opened with ALKS gapping higher at $61.17 this morning. The rally made it to $62.50 before ALKS reversed back into negative territory. If you didn't buy calls today you may have missed your chance. Shares of ALKS are trading higher after hours (near $63.60) on news that the FDA has approved ARISTADA for treatment of schizophrenia. Odds are good ALKS will gap higher again tomorrow morning.

Trade Description: October 3, 2015:
The U.S. market delivered an impressive bounce the last few days. If this rebound continues the beaten-down biotech stocks could easily outperform. ALKS looks like a good candidate to capture the bounce.

ALKS is in the healthcare sector. According to the company, "Alkermes plc is a fully integrated, global biopharmaceutical company developing innovative medicines for the treatment of central nervous system (CNS) diseases. The company has a diversified commercial product portfolio and a substantial clinical pipeline of product candidates for chronic diseases that include schizophrenia, depression, addiction and multiple sclerosis. Headquartered in Dublin, Ireland, Alkermes plc has an R&D center in Waltham, Massachusetts; a research and manufacturing facility in Athlone, Ireland; and a manufacturing facility in Wilmington, Ohio."

The earnings picture for ALKS seems to be improving. Looking at the last few earnings reports ALKS has beaten Wall Street expectations on both the top and bottom line the last three quarters in a row. Their most recent report, on July 30th, was follow up with management raising their 2015 guidance above analysts estimates.

While the earnings picture is supportive for a bullish bias, today's trade is more of a technical one. The biotechs have been crushed lately (Thanks, Hillary Clinton!) and shares of ALKS plunged from resistance near $73.00 to support near $54.00. Now it's starting to rebound. This is not the first time ALKS has bounced from this area.

Tonight we are suggesting a trigger to buy calls at $60.75. Our target is $71.50. Plan on exiting prior to ALKS' earnings report in late October. Please note that I consider this a more aggressive trade because the option spreads on ALKS' November options are a little bit wide (and because ALKS is a biotech stock and biotech stocks tend to be more volatile anyway but regular readers already know that).

- Suggested Positions -

Long NOV $65 CALL (ALKS151120C65) entry $3.50

10/05/15 triggered on gap open at $61.17, suggested entry was $60.75
Option Format: symbol-year-month-day-call-strike


Costco Wholesale Corp. - COST - close: 148.07 change: +2.21

Stop Loss: 141.85
Target(s): To Be Determined
Current Option Gain/Loss: +32.5%
Average Daily Volume = 1.9 million
Entry on October 05 at $146.25
Listed on October 03, 2015
Time Frame: Exit PRIOR to November option expiration
New Positions: see below

Comments:
10/05/15: Our new trade on COST is off to a strong start. Shares hit our entry trigger at $146.25 this morning. The stock broke out to new multi-month highs and closed up +1.5%. I would still consider new positions now at current levels or you could look for a dip near $147.00 as an alternative entry point.

Trade Description: October 3, 2015:
Thus far 2015 has been a frustrating year for COST bulls. After years of steady stock price appreciation (2009-2014) the rally peaked in the first quarter of 2015. Shares spent months correcting lower but it looks like the worst may be behind it for COST.

If you're not familiar with COST they are in the services sector. The company runs a membership warehouse business that competes with the likes of Sam's Club (a division of Wal-Mart). According to the company, "Costco currently operates 686 warehouses, including 480 in the United States and Puerto Rico, 89 in Canada, 36 in Mexico, 27 in the United Kingdom, 23 in Japan, 12 in Korea, 11 in Taiwan, seven in Australia and one in Spain. The Company plans to open up to an additional 16 new warehouses (including one relocation to a larger and better-located facility) prior to the end of its fiscal year on August 30, 2015. Costco also operates electronic commerce web sites in the U.S., Canada, the United Kingdom and Mexico."

Revenue growth has been lackluster this year. COST has managed to beat Wall Street estimates on the bottom line but the revenue number has been soft. Their most recent quarterly report was announced on September 29th. Earnings were up +10% from a year ago to $1.73 a share. That beat estimates. Yet COST said their Q4 revenues were virtually flat (+0.7%) to $35.78 billion. That missed expectations. Comparable store sales were up +2% in the U.S. but down -10% in Canada.

A lot of COST's revenue troubles have come from lower oil, which has pushed gas prices lower. The big drop in gas prices cuts their revenue growth. Plus the stronger dollar hurts their foreign sales. The company continues to expand its presence in the U.S. and overseas. Management plans to launch 12 new warehouses this quarter. Overall COST plans to build 32 new stores in the next 12 months, including its first store in France.

The stock looks poised to breakout past its July, August, and September highs and make a run at its 2015 highs. We suspect COST is going to grab more investor attention as we approach the holiday shopping season. The stock tends to see a rally from September into Black Friday (the day after Thanksgiving).

Tonight we are suggesting a trigger to buy calls at $146.25. More conservative traders may want to wait for a rally past the September peak ($146.90) or even past short-term resistance $147.00. We want to jump in a little early as COST could surge wants it clears $147.00.

- Suggested Positions -

Long NOV $150 CALL (COST151120C150) entry $2.00

10/05/15 triggered @ $146.25
Option Format: symbol-year-month-day-call-strike




PUT Play Updates


Currently we do not have any active put trades.



CLOSED BEARISH PLAYS

Aon plc - AON - close: 91.52 change: +1.74

Stop Loss: 90.35
Target(s): To Be Determined
Current Option Gain/Loss: -47.0%
Average Daily Volume = 1.2 million
Entry on September 23 at $88.65
Listed on September 22, 2015
Time Frame: Exit PRIOR to earnings in late October
New Positions: see below

Comments:
10/05/15: AON shot higher this morning. The stock gapped open above round-number resistance at $90.00 and surged to a +1.9% gain. Our stop was hit at $90.35. (Note: today's move has confirmed Friday's bullish reversal pattern)

- Suggested Positions -

2016 JAN $85 PUT (AON160115P85) entry $3.30 exit $1.75 (-47.0%)

10/05/15 stopped out
10/03/15 new stop @ 90.35
09/28/15 new stop @ 90.85
09/23/15 triggered @ $88.65
Option Format: symbol-year-month-day-call-strike

chart:


Deckers Outdoor Corp. - DECK - close: 60.64 change: +1.63

Stop Loss: 60.25
Target(s): To Be Determined
Current Option Gain/Loss: -41.1%
Average Daily Volume = 775 thousand
Entry on September 24 at $58.28
Listed on September 23, 2015
Time Frame: Exit PRIOR to earnings
New Positions: see below

Comments:
10/05/15: Shares of DECK rallied through round-number resistance at $60.00 and hit our stop loss at $60.25. If this rebound continues the stock could run toward stronger resistance at the $65.00 level.

- Suggested Positions -

NOV $55 PUT (DECK151120P55) entry $2.85 exit $1.68 (-41.1%)

10/05/15 stopped out
09/28/15 new stop @ 60.25
09/24/15 Trade begins on gap down at $58.28, trigger was $58.65
Option Format: symbol-year-month-day-call-strike

chart:


Outerwall Inc. - OUTR - close: 59.67 change: +1.52

Stop Loss: 60.55
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 486 thousand
Entry on September -- at $---.--
Listed on September 30, 2015
Time Frame: Exit PRIOR to earnings in late October
New Positions: see below

Comments:
10/05/15: The bearish story for OUTR has not changed but that doesn't matter when the market is in rally mode. A rising tide lifts all boats. OUTR surged +2.6% to close just below round-number resistance at $60.00.

Our trade has not opened yet. Tonight we are removing OUTR as a candidate.

Trade did not open.

10/05/15 removed from the newsletter, suggested trigger was $56.35

chart:


The WhiteWave Foods Co. - WWAV - close: 42.94 change: +1.16

Stop Loss: 42.35
Target(s): To Be Determined
Current Option Gain/Loss: -55.6%
Average Daily Volume = 1.8 million
Entry on October 02 at $39.45
Listed on October 01, 2015
Time Frame: Exit PRIOR to earnings in early November
New Positions: see below

Comments:
10/05/15: WWAV turned out to be loser for us. It was almost a worse-case scenario. Shares spiked lower on Friday morning, hit our bearish entry trigger, and then reversed sharply higher. The reversal continued higher today and WWAV hit our stop loss at $42.35.

- Suggested Positions -

NOV $37.50 PUT (WWAV151120P37.5) entry $1.80 exit $0.80 (-55.6%)

10/05/15 stopped out @ 42.35
10/02/15 triggered @ $39.45
Option Format: symbol-year-month-day-call-strike

chart: