Option Investor
Newsletter

Daily Newsletter, Saturday, 10/10/2015

Table of Contents

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

Market Wrap

Best Week in 2015

by Jim Brown

Click here to email Jim Brown

A rally broke out while everyone was looking for a new low and the Dow gained +612 points for the week. However, the real news is the +1,144 point gain in eight days from the September 29th low at 15,942.

Market Statistics

Friday was really quiet with the markets opening slightly higher and then fighting off some midday weakness to end the day with minor gains. I see that as bullish since nobody was taking profits from the big rebound ahead of the weekend. With the bond market closed on Monday there was the potential for a stock hiccup next week.

Friday was also light on economics with nothing to really move the market. Import prices for September declined -0.1% after a -1.6% decline in August. Export prices declined -0.7% after a -1.4% decline the prior month. The numbers would have been worse but petroleum prices rose +1.1% after a -11.8% drop in August.

Wholesale inventories rose +0.1% for August after a -0.3% in July. The internal components were unremarkable and the report was ignored.

The calendar heats up next week with the bond market closed on Monday for Columbus Day. The equity markets will be open but trading volume will be light.

Wednesday has the Fed Beige Book with the update on economic conditions in each of the 12 Fed regions. Normally this is just informational and neutral for the market. However, with payrolls declining and regional manufacturing reports weakening, we could see the conditions in the Fed regions also worsening.

Thursday has the Philly Fed Manufacturing Survey. This is a proxy for the next ISM Manufacturing report and the most important regional report of the month. Expectations are for a slight improvement to zero after falling into contraction in September.

The Producer Price Index (PPI) and Consumer Price Index (CPI) will be inspected for evidence of inflation. The Fed did not hike rates in September because many of the Fed heads were concerned about the falling inflation. These reports will tell us if inflation is still declining. Since oil prices have rebounded in the last two weeks the next pair of reports in November should show an increase in inflation but for this week the reports for September are probably still going to show a decline.

The U.S. debt ceiling was hit several weeks ago. The Treasury is implementing "special operations" to continue paying the bills until the ceiling is raised. Treasury Secretary Jack Lew said the government will run out of money on or about November 5th. On November 18th, more than $14.2 billion in social security payments are due. Congress will need to resolve its problems and raise the debt ceiling by mid November to avoid a crisis. Some analysts believe this can be extended until early December but the date to worry about is November 18th.


Global Payments (GPN) announced a 2:1 split along with earnings and the stock rocketed higher. GPN has gained +$18 since the Tuesday evening announcement. The spike was on earnings and not the split but that news helped juice the earnings short covering. Full Stock Split Calendar


Tesla (TSLA) shares shorted out on Friday with another $6 decline after Barclays cut them to sell. The analyst lowered his price target from $190 to $180 but it was the sell rating that powered the decline. Shares closed at $220. Several brokers have lowered estimates on the company since the Model X debut last week. The general consensus is that the Model X is too expensive and deliveries will be too slow to reach production targets. They claim the car is too well made and the extra attention to detail is causing production delays. Earlier in the week Robert Baird downgraded Tesla from outperform to neutral on the Model X price.

Elon Musk took some shots at Apple last week. The company had been hiring away Tesla engineers to work on the new Apple car project. Musk called Apple the "Tesla graveyard." "They hire the engineers we fire. If they can't make it at Tesla they go to work for Apple." He warned that making cars was a lot more difficult than making phones. A couple weeks ago, he poked fun at Toyota and their fuel cell technology calling it "fool cell technology." Bloomberg reported earlier this year that Tesla had hired more engineers from Apple than anywhere else.

Tesla shares could be headed back to $180 ahead of earnings on Nov 4th. With delivery estimates in doubt the company could lower the forecast again with earnings.


Gap (GPS) shares fell -5% after the company reported ugly same store sales comps. Overall, global sales were flat after a 3% decline in the year ago quarter. However, Banana Republic sales fell -10% compared to a 2% rise a year ago. Old Navy sales rose +4% after a 1% gain in the comparison quarter. This compares to comps from competitor Limited Brands (LB) which rose +9%.


If you have been trying to trade Netflix, I hope you were quick on the trigger. On Monday shares rose +$5, down -$4 on Tuesday, up +6 on Thursday and down again on Friday. Earnings are next Wednesday and the last several cycles have not been kind to investors.

Over the last four years, the reactions to the Q3 earnings report have been disastrous.

Q3-2014 -19%
Q3-2013 -9%
Q3-2012 -11%
Q3-2011 -34%

However, every earnings report in 2015 has been followed by a huge spike.

Q4- Jan +18%
Q1- Apr +21%
Q2- Jul +18%

This year Netflix has already seen a -28% drop from the $129 high in August to the $93 low in September. That could mean the downside risk has been eliminated but I would not count on it. If you are holding a profitable position on Netflix, it may be wise to close it on Tuesday. The options market is expecting a 15% move in Netflix shares after earnings. Based on Friday's close that means a potential drop to $100 or a spike to $130. Choose the right direction and you have a big winner. Choose wrong and you have zero.


Twitter (TWTR) was still on an upward trajectory at the close but that may not last. Twitter announced a new video advertisement feature. Publishers are no longer restricted to uploads from mobile devices using the mobile app. Advertising videos can now be uploaded fro desktops and that suggests the quality of the advertising videos will quickly improve. Twitter will also put pre-roll ads in front of the videos and collect 30% of ad sales.

Twitter's new Moments product is being met with rave reviews and that helped push shares higher after Jack Dorsey was officially named the permanent CEO.

After the close Re/Code said Twitter was planning company-wide layoffs next week. The company employs 4,100 people in 35 offices around the world. There was no news of how many people would be impacted. Shares declined about $1 in afterhours trading.


Apple (AAPL) announced it is increasing the reach of Apple Pay and Starbucks (SBUX), KFC and Chili's Grill will accept the payment service. Apple Pay only accounts for 1% of all retail transactions in the U.S. because of the slow rollout of the payment service. Starbucks own mobile payment app accounts for 20% of all transactions in the coffee shop. The company said it still plans on making all popular payment methods available to customers. Their U.K. stores have been accepting Apple Pay for several months.

Chili's is owned by Brinkers (EAT) and the company said it plans to offer Apple Pay at 930 of the stores nationwide by Spring. Yum! Brands (YUM), owner of KFC, plans to offer Apple Pay at all its stores by spring.

Apple pulled ad-blocking apps from its webstore saying the apps could resell user data with browsing history. Conspiracy theorists claim Apple is doing this because advertising is a big source of revenue that they do not want to see diminished.

Starbucks shares rallied to a new high on the news. Apple shares gained +2.62 on the news but stalled right at prior resistance at $112.



International Paper (IP) said it had agreed to sell its 55% ownership in a joint venture partnership for coated board in China. The sale will remove $400 million in debt from IP's balance sheet and they will receive $23 million from their partner. IP said rather than create a new business to sell in China they were going to sell their globally competitive products made in U.S. and Russia. Shares rallied +5% on the news.


Helen of Troy (HELE) shares spiked +7% after the company reported earnings of $1.12 compared to estimates for $1.03. Revenue of $369.1 million easily beat estimates for $338.6 million. HELE manufactures housewares and beauty products.


Supermicro Computer (SMCI) shares fell -15% after the company warned that revenues would be in the range of $529-$530 million compared to prior guidance of $520-$580 million. Earnings are now expected to be 44-45 cents compared to prior guidance of 49-59 cents. The blamed stronger seasonal effects along with weakness from Europe and Asia. I am sad to see them experiencing weaker sales. They make the best servers in the market in my opinion. We have used them at Option Investor for the last 15 years. Every computer we have is a Supermicro. When the best company is seeing product weakness we can bet Hewlett Packard and others are going to be weak as well.

In related news, research firm Gartner Inc, said PC shipments fell -7.7% in Q3 to 73.7 million units. Research firm International Data Corp, said shipments fell -10.8% to 71 million units. Gartner said the launch of Windows 10 had minimal impact on PC sales as most users opted to upgrade existing PCs.


There were some random analyst moves on other stocks on Friday. Mizuho initiated coverage on Valeant Pharma (VRX) with a neutral rating. Allergan (AGN) and Jazz Pharma (JAZZ) were initiated with a buy rating.

Needham cut the price target on Yahoo (YHOO) from $550 to $40 but kept its buy rating.

Morgan Stanley (MS) initiated coverage on Ciena (CIEN) with an equal-weight rating and price target of $25. Shares closed at $22.75.

After the bell additional news broke about a potential acquisition of EMC by Dell. The new deal could value EMC at close to $55 billion. Dell is planning on paying cash for most of the acquisition but would then issue a tracking stock for the 20% of VMWare that EMC does not own. Reportedly, Dell is offering EMC up to $33 per share but some news reports are as low as $27.50. Dell is only a $23 billion company. This will require a lot of debt to complete and Dell already has $12 billion in debt on its books. Shares rallied to $29 in afterhours trading. VMWare (VMW) shares were unchanged.


Earnings kick off in volume next week with 30 S&P companies reporting. The highlights will be Intel, Netflix and the flurry of major banks. Netflix will be the most watched because of the potential for a major post earnings move.

S&P Capital IQ is now expecting a -5.1% decline in earnings for Q3 and the first decline since Q3-2009. Excluding energy, earnings growth would be +2.8%. That is down from the +3.4% estimate a week ago. The revenue outlook has improved to a -1.1% decline, up from a -2.3% decline last week. This would be the third consecutive quarter with a revenue decline.


The energy sector provided a large part of the market lift last week. The Oil Service Index ($OSX) rallied +12.4% and the Oil Index ($XOI) gained +9%. Crude oil rallied +8.5%.


WTI crude rallied to trade over $50 intraday on Friday after Russia launched 26 cruise missiles from the Caspian Sea to hit rebel targets in Syria. Four of them reportedly malfunctioned and crashed in Iran. Tensions between Russia and Turkey, the USA and NATO continue to rise. It is only a matter of time before there is an incident regarding Russia.

Crude prices rose despite an inventory build of 3.1 million barrels on Wednesday. Refinery utilization declined more than 2% to 87.5% and suggests inventories will continue to build in the weeks ahead. Production rose +76,000 bpd but it was ignored.

On Friday the Baker Hughes rig count declined another -14 rigs to 795 and a decade low. Oil rigs declined -9 to 605, down -1,004 from the peak. Gas rigs declined -6 to 189 and a new 18-year low.



Markets

Market sentiment changed dramatically last week. The S&P powered through the resistance band from 1990-2005. However, it came to a dead stop at the September high at 2,020 on Friday. The actual high on Friday was 2,020.13 so the rejection was immediate.

If the S&P can manage to punch through that 2,020 level next week the next material resistance is 2,100. That would be a significant move of +3% after the index already gained +3.3% last week.


There is considerable congestion from 2040-2125 so it is hard to single out one particular area as material resistance other than 2,100. The risk is that the S&P rallies to near the prior highs and then weak earnings and economics causes funds to begin taking profits.

The fiscal year end for most mutual funds is October 31st. They need to complete their restructuring before then in order to plan for the distributions and tax statements before the calendar year end. Since the August flash crash probably caused a lot of unplanned selling there is not likely to be a lot of tax loss selling heading into month end. It is more likely that funds will be putting money back to work in window dressing their portfolios for the fiscal year end.

With the S&P posting the best weekly gain of 2015 there is the potential for some profit taking early in the week. Energy stocks are over extended and due for a rest. The bank earnings are not expected to be good and that could also be a cloud on the markets.


The Dow sprinted past resistance at 16,750 and 16,933 to close at a seven-week high. That is a 1,144-point gain from the low on September 29th. If the Dow can move over 17,130, there is a solid range of congestion beginning at 17,500 through 18,165. It would take a lot of cooperation and positive earnings from the 30 Dow stocks to keep that move going. Since most of the Dow stocks are international companies they will all face significant currency headwinds and most will probably miss on the revenue component.

Multiple Dow components report earnings next week with Intel, JP Morgan, GE, Wells Fargo, Johnson & Johnson and Goldman Sachs on the calendar. Each will have an opportunity to move the index and the direction may not be up.



The Nasdaq stopped right on resistance at 4,835 on Friday after a +2.6% gain for the week. The Nasdaq Composite and the Nasdaq 100 ($NDX -2.4%) posted the smallest gains of the major indexes. The biotech sector continues to drag the Nasdaq lower and semiconductor stocks added to the weakness on Friday.

Earnings from Intel and Netflix could weigh on the Nasdaq early in the week. The big flurry of Nasdaq reporters occurs the following week.

Support has formed in the 4715-4740 range and immediate resistance is 4,835 and then 4,900.



The Russell 2000 small cap index posted the second largest gain for the week at +4.6% to come to a stop right on resistance at 1,165. If that level can be broken, the resistance at 1194-1200 could be a challenge. That is a psychological level and the beginning of significant congestive resistance all the way to 1,275. I would love to see the small caps take the lead because it would mean the fear was leaving the market.


The index with the biggest gain for the week was the most unlikely. The Dow Transports gained +4.82% despite the sharp +8.5% rise in oil prices. The airlines were responsible for the gains with UAL up +6.6% on Friday, DAL +2.7%, JBLU +3.3% and American +6.7%. They all reported positive guidance for September revenue miles. Load factors were up, margins were up and revenue passenger miles rose +7.2% at American. The airline bought back 6% of its stock in Q3.

The Transports came very close to breaking over short-term resistance at 8,260 and did break the downtrend from March.


I am encouraged that the normal October trend with market lows in the first ten days of the month did not appear. This may be the beginning of a normal Q4 rally but quite a few professional traders are recommending we short the rally.

This is normal. When a rebound occurs from extremely bearish conditions it takes a few days for the traders to change their mindset. They are still focused on the decline and where they thought the market was headed rather than the rebound. As we move over the various resistance levels those traders will become converts.

There is always the possibility they are right but at this point I continue to believe we should trade what we see rather than what we expected to see. Continuing to hold a bias contrary to market direction can be financially destructive.

We are well over that solid resistance at 1,950 and again at 2,000 and those were critical levels. Buy the dips until proven wrong.


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Random Thoughts


There was a huge change in sentiment for the week ended on Wednesday. Bearish sentiment declined -11.7 and bullish sentiment rose +9.4. This is what we should have expected from the rebound in the markets.



Lawrence Summers, Treasury Secretary from 1999-2001 and economic adviser to President Obama in 2009-2010, is warning of a global recession. Inflation is well under the target of 2% in all the developed countries and interest rates are near zero in those same countries with no chance of a material increase in the foreseeable future. The global economy is barely getting by despite the low interest and most areas are declining. The Fed funds futures are only projecting a 1% rate as of the end of 2017 and that could be optimistic. If a global recession does take hold, the central banks have no tools to combat the problem. They cannot lower rates any farther with short-term rates in many countries now negative. QE has not been effective as proven in Japan. Full Story

The bond market has lost confidence in global central banks. Despite hundreds of interest rate cuts, rates at zero or below and trillions of dollars in QE, the bond market outlook for inflation is approaching the lows seen during the financial crisis. Central bank efforts in the major economies are failing. The bond market is losing faith in central banks and that means a "risk off" mentality in the equity markets. Despite all their efforts, inflation is continuing to decline. That shows they have lost control. Central Banks Lose Credibility

Bank of America warned that QE has gone too far and the removal of QE, if it ever happens, is going to be a very rough ride. Buckle Up


China's economy has turned significantly negative over just the last two months. Alcoa warned that automotive production, commercial building construction in China and sales of heavy trucks and trailers would fall much more than previously expected. In July, Alcoa did not even breakout the outlook for China because there was no reason.

Yum Brands reported dismal earnings that disappointed significantly because of "unexpected headwinds" in China. As recently as August 18th, the CEO said "same-store sales in China had turned significantly positive."

NuSkin slashed its Q3 revenue forecast because of a sudden decline in sales in China in Aug/Sep. In July, the company said it was "particularly" pleased with progress in China, where it generated "healthy sequential growth in both sales leaders and revenue." Something changed dramatically.

The IMF downgraded its China forecast to 6.2% growth in 2016 and several brokers are suggesting it could be less than 6%. China a Red Flag for Global Economy


The IMF cut its global growth estimates for 2015 once again and warned that downside risks to the economy appear "more pronounced." Global growth is now expected to be +3.1% and decline of -0.2% from the July forecast. They cited lower growth prospects for emerging economies, including China, and a decline in commodity prices as the reason for the revision. With lower commodity prices reducing capital flows to emerging markets and devaluations of their currencies the risks to the outlook are rising. IMF Cuts Global Growth Outlook Again


Liz Ann Sonders, chief investment strategist at Charles Schwab, turned neutral on stocks. Schwab manages $2.46 trillion for clients. She is worried that we are in an earnings recession and could be approaching an outright economic recession. Q3 earnings are expected to show a -5.1% decline. Q4 earnings, which at one point were expected to show +12% growth, are now expected to decline by -1%. Full year earnings growth is now expected to be negative. Sonders Neutral on Stocks, Fears Recession


The OPEC price war is heating up. Saudi Arabia cut the price on light-crude deliveries to Asia by -$1.70 per barrel. Previously they had been charging a premium of 10 cents a barrel on the rival Dubai benchmark crude and that cut takes them to a $1.60 discount to Dubai. Saudi also cut its price for heavy oil to the Far East by -$2 a barrel and -30 cents to the USA. The move came after Iran, Iraq and other Middle East countries cut prices to be lower than Saudi Arabia in an effort to gain market share. As these countries battle to be the lowest cost seller in the market it will continue to pressure WTI prices in the USA. The rebound last week was strictly short covering on Russia's entry into Syria and the decline in active rigs.


Deutsche Bank warned again that mortgage standards were tightening from what were already considered tight levels. "We believe this has been and will remain a drag on economic growth in the US and contribute to lower for longer interest rates." Average FICO scores required to get a conventional loan have risen from 720 to 750 in the first half of 2015. DB describes those as "very high, at the end of prime and nearing super prime." The FHA said the average FICO score in Q2 was 689 and FHA loans are at the lower end of the mortgage scale. Mortgage Requirements Rising


Jeff Hirsch of the Trader's Almanac, pointed out that the period from Halloween to Christmas has posted gains in 25 of the last 33 years. The average gain since 1982 has been 4.2%. The Almanac Trader said their best six months seasonal buy signal was triggered on October 5th. There have only been two losses in the last 12 years. Buy Signal Triggered

Over the last 21 years, the Dow has averaged a gain of +12.3% over the same period. If the trend holds true the Dow could be trading over 18,000 in the near future according to Hirsch. Dow Averaged 12.3% since 1994


Bespoke broke down the S&P-500 into ten groups of 50 stocks. They grouped them by the amount they lost from the May 21st high to the September 29 low. The stocks with the biggest losses rebounded an average of 15.4% over the last week. The stocks that lost the least in the market decline rebounded only +3.7%. EVERY group performed exactly as expected with each group of 50 that declined more than the prior 50, rebounding more than the stocks in the prior group. The worst performing stocks in the decline were the best performing stocks in the rebound.

Short covering was a big part of that rebound. Fund managers also bought the losers thinking the worst was over and the risk was negligible. They called it an "epic buy the losers rally."

Bespoke Investment Group Chart Source


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The third-rate mind is only happy when it is thinking with the majority. The second-rate mind is only happy when it is thinking with the minority. The first-rate mind is only happy when it is thinking. "

A. A. Milne

 

subscribe now

 


Index Wrap

Bear Killer Month

by Jim Brown

Click here to email Jim Brown

Normally a 4% gain in a month is a good month. Last week the Dow gained +3.7% and the Russell 2000 +4.6%. That would be a good month except that we are just getting started in October.

The month of October is known as the "bear killer" because the rebound from the early month lows typically begins the Q4 rally. The Dow has averaged +12.3% gains between Halloween and Christmas since 1994.

So where are we going this quarter? The indexes have rebounded strongly from the lows with the Dow adding +1,144 points since September 29th. That is a +7.2% rebound from the lows. Normally that would be a caution signal that the index was over extended and in need of a rest.

With the Q3 earnings cycle likely to weigh heavily on the Dow any further gains will be hard fought. Nearly all of the 30 Dow components are expected to miss on revenue expectations. That could also lead to misses on earnings except that the Dow 30 stocks are pretty good at financial engineering and they will do everything possible to avoid an earnings miss. That includes buying back additional shares and moving charges and expenses around to increase earnings. Whether it will work this time is of course unknown.

The Dow is in relatively unsupported territory. The index crashed so fast in August that support levels were not created. The support from December/January at 17,069 was not even a blip on the chart in the August decline. Friday's close at 17,084 is slightly over that level but not enough to be important. There is no support/resistance in the vicinity of Friday's close.

If I were betting on Monday, I would expect some profit taking. I think the rally has legs at least until the Dow components begin releasing earnings then it could get a little dicey. Because fund managers need to buy performance between now and their fiscal year end on Halloween, I expect any dips to be bought. Once we are into November it may be a different story.


The S&P blew through resistance from 1990-2005 but came to a dead stop at the September high at 2,020. That will be the level to watch next week followed by 2,040. However, if we do get through 2,020 I do not think we will stop at 2,040. There was no pause at that level on the drop and I think traders are going to be more focused on 2,100 as the next target.

If we do pause for profit taking, there is decent support at 1,985 and 1,975. The 2,000 level may be psychological but it was ignored on the way down and had little influence on the way up.

Once the index moves over 2,040 it will enter a strong band of congestive resistance that lasts all the way to the historic high at 2,132. That band contained the S&P for six months and we are not likely to just blow right through it.


The Nasdaq 100 ($NDX) is struggling. The big caps led by Apple and the biotechs Amgen and Biogen are having a tough time moving higher. Apple's earnings are not until Tuesday the 27th or more than two weeks away. Until that event, Apple is not likely to mount any material rally. Investors are scared that the iPhone 6s is not selling as much as they expected. Weakness in Apple and continued weakness in the biotech sector is going to be a drag for the Nasdaq 100.

However, Friday's close was above downtrend resistance but just slightly. Any material pullback on Monday could put it back below the trend line and potentially back below resistance at 4,345.


The Russell 3000, the largest 3,000 stocks in the market, rebounded +7.6% from the September 29th lows. However, it has not broken through decent resistance at 1,207. This is a broad market index that had a textbook retest of the September lows. A move through 1,207 should signal a further rally but the R3K has significant congestive resistance from 1,220 to 1,275.

While I believe the market will continue higher after some profit taking, I think it will be tough sledding over the 1,220 mark given the weak earnings expectations.

Whenever a company misses on earnings the entire sector declines. With earnings reports accelerating the week of the 19th there may be a lot of sectors struggling to hang on to their gains.


The biotech sector attempted to rebound last week but the effort was half hearted. Resistance at 3,450 was rock solid. The conflicting analyst recommendations and warnings that the decline may not be over combined to prevent any material rebound. The index still posted a -2.6% decline for the week and that kept the Nasdaq from rebounding more than 2.6% compared to 4% on average for the rest of the indexes.

Based on this chart the biotechs may have farther to fall.


The Oil Service Index ($OSX) rallied +12.4% for the week. However, it came to a stop at resistance at 185 and I would probably be looking to short this rebound.

The major factor in pushing energy stocks and WTI higher was the entrance of Russia into Syria. That caused some heated conversations and plenty of headlines. Russia and Iran are allies. Iran is a Shia nation. Saudi Arabia is a Sunni nation and Iran's archenemy. With Russia's military active in Syria and the Iraq president inviting Russia into Iraq there was a great potential for a conflict with the US and/or NATO and eventually Saudi Arabia.

However, it appears the U.S. has pulled its planes out of Syria and the fleet is pulling out of the Mediterranean and heading home. The chances for a Russian confrontation have declined significantly.

With inventories rising and the geopolitical headlines likely to fade the price of oil should decline. That will take the bloom off the Oil Service Index and probably depress the market. However, predicting the price of oil is harder than predicting the weather so anything is possible.


The outlook for next week suggests some profit taking early in the week and then some concern over earnings from Intel, Netflix and the banks. I think dips should be bought but I would be cautious about buying a breakout unless we move over 2,020 on the S&P in decent volume.

The bond market is closed on Monday for Columbus Day so equity volume should be very light.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

subscribe now

 


New Option Plays

A Long Time Ago

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

The Walt Disney Company - DIS - close: 105.56 change: +0.95

Stop Loss: 99.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 9.9 million
Entry on October -- at $---.--
Listed on October 10, 2015
Time Frame: Exit PRIOR to earnings in early November
New Positions: Yes, see below

Company Description

Trade Description:
The Force is strong with this one. DIS is poised to reap a galaxy of profits as the company re-launches the Star Wars franchise.

DIS has been a big cap superstar with strong, steady gains off its 2011 lows. That changed in August this year. Shares of DIS plunged into a very sharp and painful correction. The catalyst for the drop was the company's earnings report. 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 accelerated in August thanks to the global market meltdown. Since then shares have recovered.

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 were 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.

(sidenote - The advertising environment for television should also improve in 2016 thanks to the U.S. presidential election.)

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 list)

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

Content is still king and DIS rules. They're going to make a hoard of money off their Star Wars movies but that's just the tip of the iceberg. There will be tons of money made on merchandising from toys, clothing, video games, and just about everything else under the sun they can slap a Star Wars logo on.

The stock's correction from $121 to $90 was abrupt. DIS quickly fell from correction territory to bear-market territory in just a few days. Fortunately DIS produced a pretty good rebound. Yet the oversold bounce stalled under resistance near $105 and its 200-dma.

The breakdown under round-number support at $100 in late September looked ugly but there was no follow through lower. Since the late September low shares have rallied and Friday, October 9th, saw DIS close above resistance at its 50-dma and above resistance at $105.00. Now it just needs to clear technical resistance at the 200-dma currently at $106.21. We are suggesting a trigger to buy calls at $106.50.

We will plan on exiting prior to DIS' earnings report in early November. More aggressive investors might want to hold over the report (if that's you I suggest considering the January 2016 calls).

Trigger @ $106.50

- Suggested Positions -

Buy the NOV $110 CALL (DIS151120C110) current ask $1.53
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 Surge Right To Resistance

by James Brown

Click here to email James Brown

Editor's Note:

Stock markets around the world ended Friday with gains. It was the best one-week performance in years. Yet the S&P 500 and the NASDAQ indices both stopped right at resistance on Friday.

Tonight we have updated stop losses on COST, HD, and COO.


Current Portfolio:


CALL Play Updates

Alkermes Plc - ALKS - close: 60.82 change: +0.92

Stop Loss: 54.25
Target(s): To Be Determined
Current Option Gain/Loss: -35.7%
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:
10/10/15: The IBB biotech ETF is still trying to find a direction. ALKS is showing a little bit of relative strength and managed to outperform its peers with a +1.5% gain on Friday. The stock looks like it's poised to breakout of its trading range from the last two weeks.

I am suggesting investors wait for ALKS to trade above $61.25 before considering new bullish positions.

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

10/06/15 a very volatile day with ALKS down -11% from its intraday highs. Shares close down -2%.
10/05/15 triggered on gap open at $61.17, suggested entry was $60.75
Option Format: symbol-year-month-day-call-strike

chart:


Costco Wholesale Corp. - COST - close: 153.97 change: +2.31

Stop Loss: 147.45
Target(s): To Be Determined
Current Option Gain/Loss: +182.5%
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:
10/10/15: The rally in COST continued on Friday with another +1.5% gain. The stock closed at new six-month highs. Shares are poised to challenge resistance near the early 2015 peak.

After such a sharp rally in October I would not be surprised to see COST pause or pullback after tagging the prior peak in the $156-157 area.

Tonight we are raising the stop loss up to $147.45.

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

10/10/15 new stop @ 147.45
10/08/15 COST rises on better than expected September same-store sales
10/07/15 COST could see a short-term dip here.
10/05/15 triggered @ $146.25
Option Format: symbol-year-month-day-call-strike

chart:


Salesforce.com, Inc. - CRM - close: 75.25 change: +0.16

Stop Loss: 72.95
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.6 million
Entry on October -- at $---.--
Listed on October 07, 2015
Time Frame: Exit PRIOR to earnings in November
New Positions: Yes, see below

Comments:
10/10/15: CRM is still drifting higher and appears to be coiling for a bullish breakout past resistance at the $76.00 level. Our suggested entry point to buy calls is $76.25.

Trade Description: October 7, 2015:
Cloud computing and software giant CRM has been churning sideways for almost seven months. In spite of this lack of upward movement CRM is still outperforming the broader market. The NASDAQ composite is up +1.2% year to date. CRM is up +26%. The good news is that CRM looks poised to breakout past major resistance and begin its next leg higher.

CRM is part of the technology sector. According to the company, "Salesforce is the world's #1 CRM company. Our industry-leading Customer Success Platform has become the world's leading enterprise cloud ecosystem. Industries and companies of all sizes can connect to their customers in a whole new way using the latest innovations in cloud, social, mobile and data science technologies with the Customer Success Platform."

CRM's revenues have been consistently growing in the mid +20% range the last few quarters. Their Q4 revenues were up +26%. Q1 revenues were +23%. The company's most recent quarter was announced August 20th. Analysts were expecting Q2 results of $0.17 a share on revenues of $1.6 billion. CRM beat both estimates with a profit of $0.19 as revenues grew +23.5% to $1.63 billion. Management raised their Q3 and full year 2016 revenue guidance.

Technically the stock is in a long-term up trend and the point & figure chart is forecasting an $85.00 target. The $75.00-76.00 area is major resistance with CRM failing in this region multiple times. The recent rally has boosted CRM back to this level and the stock looks poised to breakout soon.

(Sidenote - CRM did hit an intraday high of $78.46 on April 29th thanks to M&A rumors. The company is still considered a potential acquisition target by larger rivals.)

We like CRM's relative strength and consistently strong earnings and revenue growth. A breakout here could spark a run that lasts until the company's earnings report in November. Tonight we are suggesting a trigger to buy calls if CRM trades at $76.25 (or higher).

Trigger @ $76.25

- Suggested Positions -

Buy the DEC $80 CALL (CRM151218C80)

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

chart:


The Home Depot, Inc. - HD - close: 121.33 change: +0.27

Stop Loss: 117.45
Target(s): To Be Determined
Current Option Gain/Loss: +1.4%
Average Daily Volume = 5.3 million
Entry on October 08 at $120.25
Listed on October 05, 2015
Time Frame: Exit PRIOR to earnings on November 17th
New Positions: see below

Comments:
10/10/15: Traders bought the dip Friday and HD managed another gain by the end of the day. Broken resistance at $120.00 should be new support. We are raising our stop loss up to $117.45.

Trade Description: October 5, 2015:
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.

- Suggested Positions -

Long NOV $125 CALL (HD151120C125) entry $1.43

10/10/15 new stop @ 117.45
10/08/15 triggered @ $120.25
Option Format: symbol-year-month-day-call-strike

chart:


Ingredion Inc. - INGR - close: 90.61 change: +0.37

Stop Loss: 87.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 458 thousand
Entry on October -- at $---.--
Listed on October 08, 2015
Time Frame: Exit PRIOR to earnings on October 29th
New Positions: Yes, see below

Comments:
10/10/15: INGR continued to rally on Friday and set a new six-week closing high. The stock got extremely close to our entry trigger. Currently our plan is to buy calls when INGR trades at $91.05. The intraday high on Friday was $91.04. If there is any follow through higher on Monday we should be triggered.

Trade Description: October 8, 2015:
The rally continues for INGR. The stock is up +400% from the 2008-2009 bear-market lows. Shares are only up +6.3% in 2015 but that's better than the S&P 500's -2.2% decline this year.

INGR is in the consumer goods sector. According to the company, "Ingredion Incorporated (INGR) is a leading global ingredients solutions provider specializing in nature-based sweeteners, starches and nutrition ingredients and biomaterial solutions. With customers in more than 100 countries, Ingredion serves approximately 60 diverse sectors in food, beverage, brewing, pharmaceuticals and other industries."

Looking at the last couple of quarters INGR has beaten Wall Street's bottom line earnings estimates both times. Revenues have slipped -2.0% in Q1 and -2.3% in Q2 but that is a reflection of bearish foreign currency exchange rates. Their Q2 earnings were up +13.3% from a year ago.

Technically shares are in a long-term up trend. They're also seeing strength on a short-term basis with traders buying the dips. The $90.00-91.00 area has been short-term resistance. Tonight we are suggesting a trigger to buy calls at $91.05. Plan on exiting prior to INGR's earnings report on October 29th.

Trigger @ $91.05

- Suggested Positions -

Buy the NOV $95 CALL (INGR151120C95)

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

chart:


NIKE, Inc. - NKE - close: 124.94 change: +0.03

Stop Loss: 119.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.8 million
Entry on October -- at $---.--
Listed on October 08, 2015
Time Frame: Exit PRIOR to earnings in December
New Positions: Yes, see below

Comments:
10/10/15: After a strong day on Thursday shares of NKE took Friday off. The stock just drifted sideways in a narrow range. I do not see any changes from the Thursday night new play description. Our suggested entry point is $126.15.

Trade Description: October 8, 2015:
Nike is named after the Greek goddess of victory. The stock has definitely been winning this year. NKE's stock is up +30% in 2015 and looks poised to keep running.

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

NKE has reported strong earnings all year long. You could probably sum up NKE's year with growth in every geography and every key category and improving gross margins. Their Q3 2015 earnings in March beat estimates with earnings up +16% from a year ago and revenues up +7% in spite of negative currency headwinds (would have been +13%).

NKE's Q4 2015 earnings were 15 cents better than expected at $0.98 a share. Revenues were up +4.8% (+13% on a currency neutral basis). Future orders were above expectations. Their 2016 Q1 results just came out a few weeks ago on September 24th. Earnings of $1.34 a share beat estimates by 15 cents. Revenues were up +5.4% to $8.41 billion, above expectations. Their future orders were up +9% compared to estimates for low single digits. On a constant currency basis their future orders are up +17%. Their China business was a bright spot with very strong growth.

Shares of NKE vaulted higher on their Q1 results and closed at all-time highs near $125 a share. The stock has spent the last two weeks consolidating gains in a sideways range. We want to hop on board the NKE bandwagon if shares rally to new highs. NKE's intraday high is currently $126.49. Tonight we are suggesting a trigger just below this level at $126.15. The plan is for this to be a multi-week trade and we'll exit prior to earnings in December.

Trigger @ $126.15

- Suggested Positions -

Buy the 2016 JAN $130 CALL (NKE160115C130)

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

chart:




PUT Play Updates

The Cooper Companies Inc. - COO - close: 137.62 change: -4.37

Stop Loss: 143.60
Target(s): To Be Determined
Current Option Gain/Loss: +31.7
Average Daily Volume = 469 thousand
Entry on October 08 at $141.75
Listed on October 06, 2015
Time Frame: Exit PRIOR to November options expiration
New Positions: see below

Comments:
10/10/15: The relative weakness in COO accelerated on Friday with shares plunging another -3.0%. I would not chase it at this time. Tonight we are adjusting the stop loss down to $143.60.

Trade Description: October 6, 2015:
Healthcare stocks have been strong market performers for years. The group seems to be struggling with healthcare down -11% in the third quarter. Shares of COO are also underperforming the broader market. COO is down -10.7% year to date but it's down -23.4% from its 2015 highs. That means shares are in a bear market.

If you're not familiar with the company, here's a brief description: "The Cooper Companies, Inc. is a global medical device company publicly traded on the NYSE Euronext (COO). Cooper is dedicated to being A Quality of Life Company(TM) with a focus on delivering shareholder value. Cooper operates through two business units, CooperVision and CooperSurgical. CooperVision brings a refreshing perspective on vision care with a commitment to developing a wide range of high-quality products for contact lens wearers and providing focused practitioner support. CooperSurgical focuses on supplying women's health clinicians with market leading products and treatment options to improve the delivery of healthcare to women. Headquartered in Pleasanton, CA, Cooper has close to 10,000 employees with products sold in over 100 countries."

Earnings results have been mixed but there has been one constant over the last three quarters. COO has missed Wall Street's revenue estimate the last three quarters in a row. Plus, COO management has lowered their revenue guidance three quarters in a row.

The company's most recent earnings report was its Q3 results, announced on September 3rd. Earnings were $1.97 per share. That beat estimates by two cents but represents a -2% drop from a year ago. Revenues were down -6.8% to $461.7 million.

Shares of COO plunged on its revenue miss and lowered revenue guidance. The oversold bounce in September has failed. Now shares are poised to breakdown down to new 2015 lows and could begin its next major leg lower. The stock found support near $142.00 last month. Tonight we are suggesting a trigger to buy puts at $141.75. Plan on exiting prior to November options expiration. Investors may want to limit their position size to reduce risk because COO's option spreads are a little bit wide.

- Suggested Positions -

Long NOV $140 PUT (COO151120P140) entry $4.10

10/10/15 new stop @ 143.60
10/08/15 triggered @ $141.75
Option Format: symbol-year-month-day-call-strike

chart: