Option Investor
Newsletter

Daily Newsletter, Saturday, 10/31/2015

Table of Contents

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

Market Wrap

Market Weakness on Schedule

by Jim Brown

Click here to email Jim Brown

The market week played out exactly as expected with a consolidation dip early, a final boost from window dressing on Wednesday and then weakness late in the week as that dressing faded and traders positioned themselves for next week.

Market Statistics

I wrote several times over the last week that I expected Thursday/Friday to be weak as window dressing faded and cautioned that next week could also be soft as some of that window dressing is removed. I am encouraged that the profit taking over the last two days was not any worse. Now we just have to get through next week without a big decline.

Typically, the first couple days of a month are positive from end of month retirement contributions being put to work. In November, those incoming contributions will be offset somewhat by managers taking some cash out of the market to rebuild their redemption reserves. As long as the selling is light, they may decide to leave some of their window dressing buys in place. November is supposed to be the starting point for the best three months and best six months of the year cycles.

On the flip side, the S&P was up +8.3% in October, Dow +8.5% and Nasdaq +9.4%. October was the best month in four years and with November the beginning of a new fiscal year for mutual funds they may want to take some profits.

Friday was a lackluster day in the market with the only news coming from Thursday earnings reports, a couple of weak economic reports and a continued crash in Valeant (VRX) shares.

Consumer sentiment for October came in at 90.0 in the final revision. That is up from 87.2 in September but well below the 92.1 in the first version. That is the second lowest reading since November of 2014 at 88.8. The present conditions component rose slightly from 101.2 to 102.3 but was the laggard. The expectations component rose from 78.2 to 82.1 thanks in part to the stock market gains.


Personal income for September rose only +0.1% and less than the +0.4% in each for the last four months. Analysts were expecting +0.2%. Wages and salaries declined from +0.5% to zero gain.

Personal spending for September rose only +0.2% after a +0.4% gain in August. Spending on goods was flat. Spending on durable goods rose +0.6% but non-durable goods declined -0.3% and spending on household furnishings declined -0.3%. Food and beverage spending declined -0.6% while spending on clothing rose +0.8%. Thank the back to school shopping cycle for that gain.

Of the most interest to the Fed was the -0.1% decline in the Personal Consumption Expenditure (PCE) Deflator. This is the Fed's preferred inflation indicator. The PCE Deflator has now been flat at zero for the last three months after a +0.1% gain in July. That is down from an average gain of +0.2% in the months preceding July. Falling energy prices are the culprit. Prices for gasoline and other energy goods declined -8.2% in September.

The PCE is now up only +0.2% for the trailing 12 months or almost zero inflation and declining. The Core PCE, excluding food and energy, is up +1.3% and dead flat for the last 8 months and is only expected to rise to 2% at the end of 2016. The headline PCE will give the Fed a headache over raising rates but the Core PCE will be their crutch.

Next week is payroll week with the ADP Employment on Wednesday and Nonfarm Payrolls on Friday. The ADP report is expected to show a decline in new jobs but the Nonfarm forecast is for a gain of +180,000 jobs. That is more than the +142,000 jobs in September. Because the weekly jobless claims are at multi-decade lows the majority of analysts are expecting a return to the 200,000+ level in the coming months. They view the declines in the last two months as an anomaly and problem with the data.

The ISM Manufacturing Index on Monday is expected to fall into contraction territory at 49.6 after peaking at 58.1 in August 2014. This should also be a headwind for the Fed but they are in "hear no evil, see no evil" mode and will probably ignore it.


Lastly, Janet Yellen will testify in the House on Wednesday. That is normally good for producing market volatility.


The first reading on Q3 GDP came in at +1.5% growth, down from +3.92% in Q2 and up from +0.64% in Q1. Inventories lifted GDP in Q2 and crushed it in Q3. The big positive swing in Q2 was blamed on the West Coast port strike and the sudden influx of goods when that strike was over. That made the Q2 number artificially high and Q3 is now artificially low as those inventories decline.

However, the Atlanta Fed GDPNow for Q3 went out at +1.1% growth so the outlook is for a decline in the official Q3 numbers when they are revised over the next two months. The current average for the first three quarters is 2% and the current outlook for Q4 is +2.5% so it has not been a banner year for growth. It is amazing to think the Fed is ready to raise rates in December with manufacturing in contraction and economic growth hovering at +2%.


Q3 GDPNow Forecast

Abbvie (ABBV) reported earnings on Friday of $1.13 that beat estimates by a nickel. Revenue of $5.95 billion also beat estimates. The company guided to full year earnings of $4.26-$4.28 and above analyst estimates of $4.24. Even better, Abbvie guided to a better than 10% annual growth rate to revenue of $37 billion by 2020. Analysts were only projecting $30 billion in 2020. The guidance projected full year earnings of $8.80 in 2020 or more than twice the forecast for 2015. Shares of Abbvie rallied +10% on the report.


The CBOE (CBOE) reported earnings of 76 cents compared to estimates for 73 cents. Transaction fees spiked +39% and trading volumes jumped +6% to 5.25 million contracts per day. However, the CBOE warned that costs were rising and analysts pointed out that trading volumes were declining as Q4 progressed. The average revenue per contract rose from 32.9 cents to 43.1 cents because of a price hike in Q3. Operating expenses rose +16% in the quarter. Shares declined -3% on the news.


CVS Health (CVS) reported earnings of $1.28 that missed estimates by a penny. That is the first time CVS has missed estimates in 7 quarters. Revenue of $38.6 billion beat estimates for $37.9 billion. The company guided for 2016 earnings to $5.68-$5.88 per share and analysts were expecting $6.02. Same store sales rose +1.7% with pharmacy same store sales up +4.6%. The chain said earnings were hurt by the introduction of numerous generic drugs with lower profit margins. Shares declined -$5 on the news.


Chevron (CVX) beat drastically reduced estimates of 79 cents with earnings of $1.09 on $34.32 billion in revenue. Chevron does not report onetime adjustments so there is no way to really compare apples and apples. The reported earnings represented a net income of $2.0 billion, a -64% decline from the year ago quarter. Chevron said it was cutting 7,000 jobs (11%) and cutting costs by another 25%. Additional cuts would be made in 2017 and 2018 if crude prices did not recover. Refinery earnings rose +54% in the U.S. to $1.2 billion. International refinery operations saw a +66% jump in profits to $962 million. Shares rallied $1 on the news.


Exxon (XOM) reported earnings of $1.01 compared to estimates for 89 cents. That represents net income of $4.24 billion. Refining profits nearly doubled to $2 billion. Production increased +2.3% to 3.9 million barrels of oil equivalent per day and they still expect to finish 2015 at 4.1 mboe. Exxon is planning on spending $34 billion on exploration and production in 2015 and less than that in 2016 and 2017. Shares were up fractionally on the news.


Companies that reported earnings on Thursday evening and seeing their shares move on Friday included Linkedin (LNKD). Shares rose +11% on a strong earnings beat.


SolarCity (SCTY) shares fell -22% after they reported terrible earnings and warned that they were going to focus on cutting costs and improving cash flow rather than generating higher growth. Multiple brokers slashed price targets and this decline will likely be the start of a further drop in price.


Shares of Baidu (BIDU) rallied +11% after reporting earnings of $1.43 compared to estimates for $1.28. Revenue rose +36%. The company announced a $2 billion share buyback, the second in 3 months.


Expedia (EXPE) reported earnings of $2.07 compared to estimates for $2.02. The value of bookings rose +21% to $15.4 billion. The company said it would see a meaningful increase in revenue from its acquisition of Orbitz. Expedia raised full year guidance.


Cybersecurity firm Imperva Inc (IMPV) reported earnings of 19 cents compared to estimates for a loss of 5 cents. Revenue of $63.3 million also beat estimates for $56.5 million. They raised full year revenue guidance from $215-$217 million to $228-$229 million. They raised earnings estimates to breakeven or 7 cents loss from a loss of 44-46 cents.


More than 340 S&P companies have reported earnings for Q3. Of those 76% have beaten on earnings and 47% have beat revenue estimates. The blended earnings growth for Q3 as of Friday was -2.2%. On September 30th, the blended estimate was for a -5.2% decline according to Factset. Just last Friday the estimate was for a -3.9% decline so the outlook is improving.

The average earnings beat is 5.9% above estimates. The average revenue miss is -2.9%. The earnings for Q4 are currently expected to decline -2.4%. The energy sector has provided the biggest earnings beats with an average of +22%. Even with the energy beats, they are still a drag on earnings. If you exclude energy, earnings for Q3 would be up roughly +6.3%. That is still the fourth consecutive quarterly decline but much better than a -2.2% drop.

If earnings do decline for Q3, it will be the first decline since Q3-2009. However, it will be the third consecutive quarterly decline for revenue.

Next week 105 S&P companies and 2 Dow components (V, DIS) will report.

The highlights for the week will be Tesla on Tuesday, Facebook on Wednesday and Disney on Thursday. The volume of earnings will begin to decline the following week.


After hitting a historic high of $105 on Thursday, Facebook was downgraded on Friday and shares gave back -$3 on the news. Jyske Bank cut Facebook from buy to sell ahead of its earnings report on Wednesday. Jyske is a private bank and they should not have that much impact on Facebook shares but coming 3 days in front of an earnings report probably triggered some additional cautious selling. JMP Securities and Wedbush both reiterated a buy rating after the Jyske Bank call. There are 46 buy ratings, 3 holds and 2 sells. The other sell is Societe Generale.

Facebook shares average about a $3 move after earnings. Options are currently pricing in a 5.4% move.

Analysts expect Facebook to report earnings of 52 cents on revenue of $4.37 billion. Monthly active users should be around 1.38 billion with daily users at 1.1 billion.


Bill Ackman of Pershing Square Capital Management is in a lot of trouble. His second largest position in Valeant Pharmaceuticals (VRX) has fallen from $264 per share to $94 with much of that decline over the last few weeks. Ackman owns 21.4 million shares of Valeant and the position is down about $1.8 billion and severely crimping the $16 billion Pershing portfolio.

He spent four hours on a conference call on Friday trying to explain why Valeant would recover and rally to $448 per share over the next several years. Short seller Citron dumped their typical report on Valeant a couple weeks ago claiming they were Enron part II and saying their accounting was fraudulent. They do this to a different company about once a year.

In this case, they may have gotten it right. Valeant had an illicit relationship with mail order pharmacy Philidor Rx Services. There are some questions on how drugs shipped to Philidor were paid for and whether it was a circular scheme to inflate Valeant profits. I do not know enough about it to pass judgment but CVS and Express Scripts have both dropped Philidor from their network after researching the Citron claims. There is a good chance Philidor will go out of business.

Ackman claims Valeant made some bad decisions and shares will probably lose more ground before a recovery appears. He expects them to pay a fine for their misdealing and then continue business as usual. What would you expect Ackman to say with another $1 billion at risk and already losing -$1.8 billion? He has to talk the stock back up or he is going to take a monster hit that could end his firm after investors flee to avoid the next mistake. Ackman bet $1 billion that Herbalife would go out of business and shares are back above his entry price. That did not turn out well either.


Microsemi (MSCC) raised its offer for PMC-Sierra (PMCS) to $11.88 per share. That is $9.04 in cash and 0.0771 shares of MSCC. That compares to an all cash bid of $11.60 by Skyworks Solutions (SWKS). Initially Skyworks agreed to buy PMCS for $9.50 per share but MSCC swooped in with a higher offer. Now there is a bidding war in progress with analysts saying a likely offer of $12-$13 is expected. MSCC could use its stock to offer up to $15 per share but analysts do not expect the bidding to go that high. Skyworks will probably end up the victor because they have no debt and could fund the entire acquisition in cash. PMCS shares closed at $11.92 and above the MSCC offer so investors are expecting a higher bid. Shares were $6.35 when the bidding started.


Hewlett Packard (HPQ) splits into two companies this weekend. They will become HP Inc (HPQ) and HP Enterprise (HPE). The new HP Enterprise will sell servers, software, storage, networking, cloud and associated services. HP Inc will sell printers and PCs. Each company will be a Fortune 50 company with about $57 billion in revenue each.


Crude inventories rose +3.4 million barrels for the week but crude prices rallied sharply. Traders were heavily short and a flurry of news headlines caught them off guard. A Reuter's survey found that Iraq and Saudi Arabia pumped less oil in October than expected. Active oil rigs declined -16 suggesting production is eventually going to decline. China said they were boosting their oil import plans for 2016 in order to fill their strategic storage. Lastly, the U.S. said it was sending Special Forces troops to Syria to assist forces on the ground fighting ISIS.

The potential for a U.S.-Russian conflict or possible accidental bombing of U.S. forces caused crude prices to rise. There are pipelines from Saudi Arabia and Iraq crisscrossing Syria and the more the conflict heats up the better chance some of those pipelines are bombed accidentally.

After falling to $42.58 on Tuesday, crude spiked +6% on Wednesday on the various headlines and ended the week at $46.60. In theory, crude inventories will continue to build and prices should fall but the Syrian conflict is the wild card. Anything is possible. There are currently four active wars in the region and ISIS/Al-Qaeda could attack oil facilities at any time.

In September Saudi Arabia thwarted a terrorist attack at Abqaiq, the world's largest oil processing facility that can process up to 7.0 million barrels per day. There are 46 pipelines connected to Abqaiq including a major pipeline to Ras-Tanura, the largest export terminal in the Persian Gulf. With Saudi Arabia bombing Yemen and also part of the coalition fighting ISIS in Syria we could see ISIS strike back against these facilities at any time. Therefore, oil prices may not follow the normal pattern of declines in Q4 as inventories build.


Active rigs declined by 12 to 775 for the week ended on Friday but that was the ninth consecutive week of declines for oil rigs. Oil rigs declined -16 to 578 and a decade low but gas rigs rose +4 to 194. Offshore rigs declined -2 to 33.


Markets

The major indexes completed four weeks of gains with the exception of the NYSE Composite and the Dow Transports. After gaining more than 8% in October, it should be time for some profit taking. Fund managers should be ecstatic that October pulled them back to zero to close the year unless they were heavy in tech stocks. The S&P is now up a whopping 0.99% for the year, the Nasdaq Composite +6.7% and the Nasdaq 100 big caps +9.7%. The Dow is still negative by about -0.9%.

This has been a tough year for most funds and especially tough for hedge funds. Almost every day we get a report about some hedge fund down double-digit percentages for the year. Investors are fleeing those funds and going back to self-management of their accounts. Index funds and index ETFs are seeing huge inflows of cash.

Now that November begins on Monday and the best six months of the year we should see continued inflows because a lot of investors believe in that strategy. That may not protect us next week because the profit piper must be paid. The gains from October's window dressing will need to be harvested. This could take a couple days or longer depending on how much month end retirement cash is going to be put to work or alternately used by fund managers to replenish the cash coffers.

We have a new wild card in play. The Fed came very close to saying "we are going to hike rates in December" with the change in their post meeting statement. After an initial dip, the market rallied on Wednesday but that was the last day for window dressing so we do not really know if it was Fed or funds pushing stocks higher. In theory, the market is ready for a rate hike and the Fed statement was seen as a warning for December. However, the payroll reports will have to cooperate. The reports for both October and November will need to be over 200,000 for the Fed to have a green light. Inflation will have to flat line or improve. If the PCE numbers continue to decline it could keep the Fed on hold even though they want to hike.

The October rebound should have energized investors ahead of the November kickoff for the best six months cycle. The next three months are the best three-months in the year so investors should be excited. That means any profit taking that produces a dip will probably be bought. Earnings are coming in better than expected and overseas markets are exploding higher. Multiple companies have said they see improvement in the European economy. That is good news for the U.S. outlook.

The S&P is so overextended that it generated a technical short-term sell signal on Wednesday. There are three components to this signal. The extension and the width of the gap on the MACD, the nearness of the 70 level on the RSI and the 72-point spread between the Wednesday close at 2,090 and the 20-day average at 2,018. Note that the 20-day typically runs in the middle of the price range and not 72 points below. The MACD is at the point where it would typically roll over and the RSI is at the high for the year. Previous tops have been at 60.

All these indicators really mean is that the S&P has come too far too fast and we need some profit taking to reduce the pressure.


However, the S&P Bullish Percent Index has spiked to the highest level since May at 69.4%. That means 69% of the S&P-500 stocks are showing a buy signal on a Point & Figure chart. This is very bullish and indicates that the breadth of the rally is expanding.


The percentage of stocks trading over their 50-day average is over 78% and that is a high for 2015. While that sounds really bullish this is the result of the averages being pushed lower in September and the rebound has lifted stocks back over those lowered averages. This is bullish because it shows breadth but needs to be taken in context.


The Advance/Decline Line Index on the S&P is at the highest level since May but notice the MACD at the bottom. The indicator is rolling over and suggests some weakness ahead which I believe will be short-term.


The S&P opened at resistance at 2,090 on Friday and failed to extend its gains. The late day decline knocked off -10 points to close just under 2,080. The index has support at 2,075, 2,065 and 2,020 but I doubt we will dip that far. There is always the possibility we will not dip at all but I view that as less likely.


The Dow managed to cling to a 16-point gain for the week but it was very close. The Dow hit 17,799 at 1:45 and it was all downhill from there culminating in a -78 point drop in the last 10 minutes. There was no headline and it was purely based on market on close orders. A decline like this on the last day of the quarter is normally positioning for some early month selling.


Only a handful of the Dow components lost more than $1 but the declines were three times the advancers. Goldman Sachs and UnitedHealth were the biggest losers with each giving back -$2 in the last hour. It appeared the selling was concentrated in those two issues with the other charts showing limited end of day declines.


The Dow has decent support at 17,550 and 17,350 followed by 17,150. Resistance is 17,775-17,800. The 200-day average is 17,577 but the Dow is not very reactive to moving averages. Two Dow components report this week. Those are Visa on Monday and Disney on Thursday.


The Nasdaq Composite held its gains really well and is stubbornly refusing to retest psychological support at the 5,000 level. Most of the big cap tech stocks have already reported so the potential for a big earnings disappointment is fading. Facebook is the only material big cap tech reporting next week and I would be surprised to see a big decline.

Support is about 5,010 and resistance is rock solid at 5,085.



The Nasdaq 100 closed within ONE point of a new high on Wednesday. The prior high of 4,679.68 was nearly reached with the 4,678.58 close at the high of the day. This is a clear example that the big cap tech stocks have been leading the market higher. That prior high has turned into serious resistance with the index coming to a dead stop just below that level for the last two days.


The Russell 2000 small caps just cannot hold a gain over resistance at 1,165. Wednesday's spike to close at 1,178 looked like a breakout but it was immediately sold the next day to close back at 1,161 on Friday.

In theory, November is when the small caps begin to shine as the January Effect begins to be felt. Historically fund managers would buy small caps in January but as that trend became known traders would buy the small caps earlier and earlier in order to front run the funds. Now the effect tends to appear in the middle to end of November and run through Christmas. Let's hope the buying interest is about to begin.


I think I was clear in stating my bias above. I expect some short-term profit taking soon and then the market should rally into Thanksgiving week. The major earnings are over but there are still about 700 companies reporting this week and there will be some hits and misses. With 105 S&P companies reporting there will still be some sector hiccups if there are some earnings disasters. However, overall the earnings are coming in better than expected. The bar was really low but a beat is still a beat. I would be a dip buyer next week.

Important Limited Time Offer - ONE WEEK ONLY

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 18 years this Thanksgiving. If you already know you want to renew your subscription at the cheapest price of the year then click the link below. I am offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. Once the special actually begins on Black Friday the price will revert to the normal price.

CLICK HERE FOR ADDITIONAL $50 OFF EOY SPECIAL


Random Thoughts


How good was October?

The three major indexes had their best month since October 2011.

Since 1992, there have only been four months with bigger point gains for the Dow.

Since 1987 the S&P gained more than 8% in a month only 12 times.

The German Dax gained +12.3%.

The Japanese Nikkei gained +9.75%.

The Chinese Shanghai Composite gained +10.8%. That was the first monthly gain in five months.


First time jobless claims were 260,000 last week. That is the third consecutive week at 260K or lower. The last time that happened was in November 1973. Jobless claims are low not because there is suddenly a surge in employment but because more people are dropping out of the labor force. This is a bad trend hiding under a seemingly positive data point. Jobless Claims Low

Chart from Bespoke


Stupidity is rampant in Washington. The new budget deal passed last week authorizes the sale of 58 million barrels of oil from the Strategic petroleum Reserve (SPR) in order to raise $5 billion in revenue to go into the general fund. Really? Oil is at post crisis lows at $45 and when the last barrels went into the SPR from 2000-2005 the price of oil was rising to the $75 range. Buying high and selling low never makes sense in the stock market so why does it make sense in the SPR? Fortunately, the sales do not start until 2018 so there is time for calmer heads to prevail. The sale was rationalized as a test to see if oil from the SPR could be sold on the open market in a time of stress. We never had trouble extracting oil from the SPR in the past so why should we have trouble in the future? The SPR contains 694 million barrels.


Sam Stoval at S&P Capital IQ authored a piece on "Stealing from Santa." In this article he pointed out that the S&P gained more than 8x normal in October. Since 1945 a gain of more than 7% in October resulted in a drop in the November/December gains to an average of +1.9% versus an average gain of +3% for all 70 years. After a strong October, the frequency of additional gains fell to 60% rather than the normal 77%. He also found that the sectors that led in October lagged the rest of the year. Stealing from Santa


The Titan supercomputer in Knoxville Tennessee can process 20,000 trillion instructions per second. This is the equivalent of 10 million times faster than your PC. Titan Supercomputer


Russia is planning on restarting civilian defense training on how to protect themselves in case of nuclear war. The deputy prime minister in charge of defense said after a meeting with Putin that the U.S. was upsetting the nuclear balance by developing new weapons systems. Russia has no choice but to react to the aggressive capabilities of the United States. Russia Increasing Nuclear War Defenses

Russian Bombers Buzz Navy Ships


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Amateurs built the Ark, professionals built the Titanic. "

Richard J Needham, 1979

 

Important Limited Time Offer - ONE WEEK ONLY

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 18 years this Thanksgiving. If you already know you want to renew your subscription at the cheapest price of the year then click the link below. I am offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. Once the special actually begins on Black Friday the price will revert to the normal price.

CLICK HERE FOR ADDITIONAL $50 OFF EOY SPECIAL

 


Index Wrap

Minor Further Gains But Indices Overbought At Resistances

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The recent overbought RSI extremes seen in the Indices, the halt at the Dow 30's (INDU) down trendline resistance and a potential double top in the Nasdaq 100 (NDX) suggest technical reasons for a pause/correction.

I don't currently envision a major top forming and odds favor at least a retest ahead of prior highs ahead in the S&P 500 (SPX) in the 2130 area and the Nasdaq Composite (COMP) around 5230.

The aforementioned outlook assuming it goes that way in the near to intermediate-term would suggest that the big cap tech-heavy NDX would move still higher but 4800 looms as longer-term chart resistance. Over time NDX 5000 could be seen but that seems more likely as a late Q1-early Q2 potential objective.

Recently, we've (finally) seen traders get more bullish, given a pick up in equities' call volume relative to puts. It wouldn't be unusual for bullish trader sentiment to increase just when the Market has already had substantial gains from a bottom and now looks vulnerable for a correction or a minor pullback. Corrections could also include a period of sideways action that 'throws off' an overbought condition. It's frequently the nature of bullish sentiment to take time to build (consensus formation) and more time to subside. The Russell 2000 (RUT) is the 'odd man out' here in that RUT hasn't yet managed to rebound even HALF of its prior decline. The Russell's recent rally fell a bit short (8 points so far) of a 50% upside retracement. If this lagging in the Russell is a warning relative to the other indices making much further upside progress, RUT has sounded it.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

The S&P 500 (SPX) has had strong upside momentum since the double bottom low, which is a 'strong' bullish chart formation. Ahead it remains to be seen if SPX can pierce its prior top and prolonged line of resistance that formed in the 2130-2132 area. The current 'overbought' extreme registered in the 13-day Relative Strength Index/RSI suggests possible backing and filling and a corrective pullback before SPX could retest, or substantially exceed, its prior top.

A sustained advance above 2100 is needed to regain long-term upside momentum. Resistance is highlighted at 2100, then in the 2132 area. Long-term resistance extends to 2200-2230. Near support is seen at 2050, then at the milestone 2000 level. I'd be watching for any sustained bearish downside penetration of SPX's 21-day moving average; this key trading average intersects currently at 2030.

SPX, as is the case with the other major indices (except RUT) is showing an overbought extreme in terms of the 13-day RSI. Bullish 'sentiment' shot up recently after lackluster 'neutral' readings in my CPRATIO indicator over much of the strong recovery rally. Traders were quite slow on the uptake as they seemed not to 'believe' actual price action over perceived economic and earnings uncertainties.

No trade suggestions. Buying SPX calls after the second bottom formed is behind us with its outstanding risk to reward potential. I would suggest buying a good-sized pullback only, such as back to near 2000. An actual print AT 2000 seems unlikely or unrealistic given proof of the bull market trend resumption.

The S&P 100 (OEX) INDEX DAILY CHART

The big cap S&P 100 (OEX) has had strong upside momentum since its late-September low which formed a secondary higher bullish low on rising 'relative strength' per the RSI indicator. Next up technically is a key test in the ability for OEX to pierce its key 940-948 resistance zone.

Near-term it may be unlikely for any move to a new Closing high given the overbought condition as seen with the Relative Strength Index. We could see a drop next in the RSI back to a more 'neutral' mid-range reading. Traders have gotten (finally) more bullish as seen above with my CPRATIO indictor with the SPX chart. Buying was scarce at the bottom, now there's more buying interest but 'timing' may be off. Some backing and filling or a sideways move may be up next.

Near support is highlighted at 920, extending to the milestone 900 level. I'm bullish on the big cap S&P 100 on pullbacks such as back to near 900. Over time OEX 'projects' to the 1000 area which would reflect a move to the upper resistance end of its bullish long-term uptrend channel.

THE DOW 30 INDUSTRIAL AVERAGE (INDU); DAILY CHART:

The Dow 30 (INDU) hit and has initially at least failed to pierce resistance implied by INDU's down trendline currently intersecting at 17760. Next resistance above the trendline then comes in at the 18137 prior intraday high.

The Dow is currently above the important 200-day moving average which is a well-watched indicator from an 'investment' trend point of view. Near support is highlighted at 17500, with next support in the 17200 area.

I'm anticipating a dip ahead, which would relieve the overbought RSI extreme. INDU is important technically relative to the other major indices in terms of having a well-defined down trendline. A sustained Close above this trendline could set up a potential retest of INDU's two prior highs; i.e., first at 18137, then at 18360.

Weekly chart patterns with bullish recovery or continued strong bullish action is seen with BA, DD, GE, HD, MCD, MMM, MSFT, NKE, TRV and V. MORE than these 10 would be encouraging in suggesting the potential or likelihood for a bullish upside breakout in the INDU Average.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart has made of course a strong recovery move after formation of a double bottom in the 4500 area. We have to note that the first low in both the Composite (and the Nasdaq 100) on the panic sell off of late-August had printed lows in COMP well under 4500 but negligible actual trading occurred at those lows; reflecting computerized selling overshooting where much Nasdaq trade actually occurred.

The Composite may be stalled around 5100 resistance given the possible double top that may have formed in the big cap NDX. COMP would retest ITS prior high at 5232. I've noted resistance at 5200 but that extends to the prior intraday peak at 5232. This area (5200-5232) is at my upper 6% trading 'band', reflecting where COMP is 6 percent above its 21-day moving average. 'As below, so above' so to speak; COMP, at least within 2-3 trading sessions, rebounded from 6% BELOW the 'centered' 21-day moving average.

Key near support is at the milestone 5000 level, with next support coming around 4925-4900. COMP has hit an 'overbought' high extreme in terms of the RSI indicator.

Bullish sentiment also spiked higher but hasn't yet reached what I consider to be another type of overbought 'extreme' and what I define as excessive bullishness; i.e., possible unrealistic expectations of prices continuing substantially higher.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) has stalled just below its prior intraday highs in the 4686-4694 area. While near to intermediate-term momentum is up, long-term upside momentum is uncertain until and unless there's a decisive upside penetration of the previous top. Moreover, NDX has hit an 'overbought' extreme in terms of its Relative Strength Index or RSI, so a pause or pullback is quite possible.

Near support is seen at 4600 and the top end of its sizable upside price gap. The low end of that gap, at 4500, is considered to be an underlying chart support in technical analysis terms.

I've noted key near resistance already at the prior highs just under 4700. Next resistance is projected at 4800. The long-term weekly chart (not shown) has resistance implied by its upper channel line intersecting in the 4800-4815 area. Looking out over the next few months such as out into April, a milestone resistance is projected at 5000.

The NASDAQ 100 Tracking Stock (QQQ); DAILY CHART:

The Nasdaq 100 ETF (QQQ) like the underlying NDX of course could be forming a double top at 114. This level is certainly key to saying that the Q's have resumed its prior long-term uptrend. Stay tuned on that! As is seen with NDX above the big cap Nas 100 is at an overbought 'extreme' in terms of the 13-day Relative Strength Index. It would unusual for the Index to tack on another substantial up leg given this reading. I've noted next resistance in QQQ at 116.

Key near support begins around 112, then extending lower down to 110 and the top (support) end of QQQ's sizable upside gap.

Daily trading volume is noticeably lackluster on this last spurt higher. On Balance Volume (OBV) just turned lower and may be the start of further corrective action. It would not be surprising to see QQQ pull back toward the 110 area. 108-110 looks like a support zone and potential next buying opportunity. Long-term resistance looks like 118 currently, extending over time (e.g., into December, to 120).

The RUSSELL 2000 (RUT); DAILY CHART:

As I noted in my initial Bottom Line commentary the Russell 2000 (RUT) is substantially lagging the other major indices in that it has yet to retrace even HALF of its late-June to early-October decline.

The RUT recovery to date is contrasted with the S&P and Nasdaq having retraced most of their prior declines; e.g., SPX at its recent recovery high has regained 85% of its prior downswing and NDX has recovered 100% of its. The question relative to the overall Market is whether the lagging RUT is a harbinger of limited further upside in the other indices. RUT's lagging performance is noticeable. INDU for example has reversed from its down trendline so other signs of a pause/pullback are out there.

Sticking with just what's showing with the Russell, its chart remains bearish in its pattern. RUT would have to regain the 1213-1220 area to suggest it had regained upside momentum.

Near support is highlighted at 1140, which is the pivotal support. Below 1140, RUT is showing continued weakness. 1120 is next lower support.

Near resistance is seen at 1187, representing the 50 percent retracement level. In a 'normal' recovery rally a stock or index will typically only rebound about half of its prior decline before selling pressures tend to mount again. Next key higher resistance is suggested at 1213-1220.


GOOD TRADING SUCCESS!




New Option Plays

Demand Remains Weak

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Canadian Pacific Railway - CP - close: 140.50 change: -3.33

Stop Loss: 146.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.0 million
Entry on November -- at $---.--
Listed on October 31, 2015
Time Frame: Exit PRIOR to earnings in January
New Positions: Yes, see below

Company Description

Trade Description:
Transportation stocks have been significant underperformers this year in spite of lower fuel costs. The Dow Jones Transportation Average peaked in late 2014-early 2015 and has fallen -11% year to date. Railroad stocks have fared even worse. The DJUSRR railroad index is down -26% for the year. Shares of CP are down -27% this year and look poised to extend their losses.

CP is in the services sector. According to the company, "Canadian Pacific is a transcontinental railway in Canada and the United States with direct links to eight major ports, including Vancouver and Montreal, providing North American customers a competitive rail service with access to key markets in every corner of the globe. CP is growing with its customers, offering a suite of freight transportation services, logistics solutions and supply chain expertise."

One of the challenges for the railroad companies has been falling coal demand. The White House has been pressure the coal industry. Meanwhile falling natural gas prices have made it a more attractive alternative to coal. One estimate suggest coal demand in the U.S. could fall by 100 million st this year and 2016 will be even lower. A lot of that coal gets moved by train but falling demand means less carloads to transport.

Another challenge for the railroad industry has been falling capex spending from the energy companies across North America. Depressed oil prices make it less profitable to invest in new wells and that means less demand to move that equipment and fracking supplies by rail. Wall Street analysts have been reducing their earnings estimates on the railroad companies and cutting their price targets.

A U.S. economy stuck near 2% growth doesn't help either. GDP growth fell from +3.9% in Q2 to +1.5% in Q3. Last week the latest durable goods orders (from September) were another disappointment and suggest the economy is slowing.

The stock market's plunge in August pushed shares of CP from $160 to $130. The stock almost made it back to $160 by early October but the rebound has reversed. Disappointing earnings news in the transportation industry this past week sparked another sell-off. Now the trading in CP over the last two months looks like a bear-flag consolidation pattern (see chart). The point & figure chart has turned bearish and is currently forecasting a $128 target but it could get worse. Tonight we are suggesting a trigger to buy puts at $139.75.

Trigger @ $139.75

- Suggested Positions -

Buy the 2016 JAN $130 PUT (CP160115P130) current ask $0.00
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

Markets Inch Lower On Friday

by James Brown

Click here to email James Brown

Editor's Note:

October 2015 was a great month for the bulls. Investors were in a buy-the-dip mood nearly all month and the major U.S. indices surged. It was the best monthly performance in years.

COST and LRCX both hit our entry triggers on Friday.

We want to exit both the DIS and STZ trades on Monday morning at the opening bell.


Current Portfolio:


CALL Play Updates

Costco Wholesale - COST - close: 158.12 change: -0.16

Stop Loss: 152.90
Target(s): To Be Determined
Current Option Gain/Loss: -16.9%
Average Daily Volume = 1.9 million
Entry on October 30 at $158.85
Listed on October 29, 2015
Time Frame: Exit PRIOR to earnings in mid December
New Positions: see below

Comments:
10/31/15: Our new bullish trade on COST is now open. Shares rallied to a new high on Friday and tagged our suggested entry point at $158.85. COST pared its gains by the closing bell but closed virtually unchanged on the session. I'd wait for a new rally above $158.80 before initiating new positions.

Trade Description: October 29, 2015:
We are bringing COST back to the Option Investor newsletter. Shares have been doing well since they bottomed in August this year. We were in COST last week and were unexpectedly stopped out on this Monday's gap down.

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.

Wall Street is generally bullish on COST. Out of the twenty analysts that cover the stock 12 of them have a "strong buy" rating. COST has seen its price target upgraded twice this month. The most recent upgrade was this week with a $180 target. The point & figure chart is very bullish and forecasting a long-term target of $239.00.

The last few days have seen COST consolidating gains with a sideways move in the $155.00-158.50 area. The intraday high was set last week at $158.80. Tonight we are suggesting a trigger to buy calls at $158.85. We will plan on exiting prior to COST's earnings report in December.

- Suggested Positions -

Long DEC $165 CALL (COST151218C165) entry $1.36

10/30/15 triggered @ $158.85
Option Format: symbol-year-month-day-call-strike

chart:


Salesforce.com, Inc. - CRM - close: 77.71 change: -0.43

Stop Loss: 75.75
Target(s): To Be Determined
Current Option Gain/Loss: +16.4%
Average Daily Volume = 3.6 million
Entry on October 12 at $76.25
Listed on October 07, 2015
Time Frame: Exit PRIOR to earnings on November 18th
New Positions: see below

Comments:
10/31/15: CRM has spent the last couple of days essentially drifting sideways. Shares lost less than 50 cents on Friday. If this dip continues we can look for support at the rising 20-dma near $76.85. Tonight we are raising the stop loss up to $75.75.

I am not suggesting new positions at current levels.

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.

(Side note - 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).

- Suggested Positions -

Long DEC $80 CALL (CRM151218C80) entry $3.05

10/31/15 new stop @ 75.75
10/17/15 new stop @ 74.75
10/12/15 triggered @ $76.25
Option Format: symbol-year-month-day-call-strike

chart:


The Walt Disney Company - DIS - close: 113.74 change: -1.30

Stop Loss: 111.85
Target(s): To Be Determined
Current Option Gain/Loss: +216.3%
Average Daily Volume = 9.9 million
Entry on October 12 at $106.50
Listed on October 10, 2015
Time Frame: Exit PRIOR to earnings on November 5th
New Positions: see below

Comments:
10/31/15: DIS ended the week on a down note with a -1.1% drop on Friday. Shares still managed to extend their gains to five up weeks in a row.

Tonight we are suggesting an immediate exit on Monday morning to lock in potential gains. DIS has earnings coming up on Thursday, November 5th. More aggressive traders could hold on a couple of more days and then exit prior to earnings but we are exiting now.

- Suggested Positions -

Long NOV $110 CALL (DIS151120C110) entry $1.66

10/31/15 prepare to exit on Monday morning
10/29/15 new stop @ 111.85
10/24/15 Less than two weeks to go on this trade
10/22/15 new stop @ 109.25
Investors may want to take some money off the table with our option up +200%
10/17/15 new stop @ 104.40
10/15/15 new stop @ 101.85
10/12/15 triggered @ $106.50
Option Format: symbol-year-month-day-call-strike

chart:


The Home Depot, Inc. - HD - close: 123.64 change: +0.01

Stop Loss: 121.75
Target(s): To Be Determined
Current Option Gain/Loss: +20.3%
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:
10/31/15: HD's rally on Friday peaked midday. The stock faded back toward unchanged by the closing bell. For the week HD posted a loss, snapping a five-week trend of gains. The bigger picture is still bullish but I am not suggesting new positions at this time.

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

10/22/15 new stop @ 121.75
10/10/15 new stop @ 117.45
10/08/15 triggered @ $120.25
Option Format: symbol-year-month-day-call-strike

chart:


iShares Russell 2000 ETF - IWM - close: 115.34 change: -0.53

Stop Loss: 113.35
Target(s): To Be Determined
Current Option Gain/Loss: -27.0%
Average Daily Volume = 36 million
Entry on October 28 at $116.55
Listed on October 24, 2015
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
10/31/15: The IWM delivered a disappointing end to the week. This ETF has failed to see any follow through on Wednesday's bullish breakout. At this time I would hesitate to launch new positions. Look for the IWM to rally back above $116.35 before buying calls again.

Trade Description: October 24, 2015:
If you haven't noticed the market is in rally mode. Worries over the Fed raising rates in 2015 are fading while the rest of the world is trying to add stimulus to their economies. Concerns over a terrible Q3 earnings season are also fading. Yes, earnings results have been bad but the bar was set low enough that companies are beating estimates. Now the U.S. market is surging.

One area of the market has lagged behind and that is the small cap stocks. The NASDAQ composite ended the week with a +6.3% gain for 2015. The S&P 500 edged back into positive territory with a +0.8% gain for the year. Yet the small cap Russell 2000 index is still down -3.2%. It's time for the small caps to play catch up with the rest of the market.

A couple of issues have driven this divergence. Right now big caps are outperforming because mutual fund and hedge fund managers are probably window dressing their portfolios for the end of their fiscal year (October 31st). Another factor has been weakness in the biotech stocks. Biotechs reversed sharply in the last three months and they have struggled to keep up with the market's rebound. Currently there are a lot of small biotech companies in the small cap index. Biotechs now account for about 7% of the Russell 2000 index. This group has definitely lagged the rest of the market over the last three weeks.

The good news is that the IWM small cap ETF, which tracks the Russell 2000 index, looks poised to breakout higher. It has been coiling below resistance in the $116 area the last several days. When it finally breaks higher it can move pretty quick.

Tonight we are suggesting a trigger to buy calls at $116.55. If triggered we will start with a stop loss at $113.35. This is a multi-week trade.

- Suggested Positions -

Long 2016 JAN $120 CALL (IWM160115C120) entry $1.89

10/28/15 triggered @ $116.55
Option Format: symbol-year-month-day-call-strike

chart:


Lear Corp. - LEA - close: 125.06 change: +1.42

Stop Loss: 117.80
Target(s): To Be Determined
Current Option Gain/Loss: +10.8%
Average Daily Volume = 951 thousand
Entry on October 28 at $123.65
Listed on October 27, 2015
Time Frame: Exit PRIOR to December option expiration
New Positions: see below

Comments:
10/31/15: Auto part makers bounced on Friday. Shares of LEA added +1.1% and outperformed the broader market indices. If you like to buy breakouts then a rally past $126.20 could be an entry point. If LEA dips, the $123.00 level should be short-term support and a potential entry point (although I'd prefer to see LEA bounce at $123 before initiating new positions).

Trade Description: October 27, 2015:
Shares of LEA experienced a correction this summer but the stock has come charging back. Year to day LEA is up +25% against the S&P 500, which is virtually flat with a +0.3% gain. The relative strength has been very evident in the last couple of months. The S&P 500 is up +10.6% from its August-correction lows. LEA is up +36% off its August intraday lows.

LEA is in the consumer goods sector. They are part of the auto parts industry. According to the company, "The Lear Corporation is a Fortune 500 company with world-class products designed, engineered and manufactured by a diverse team of talented employees. As a leading supplier of automotive seating and electrical, Lear serves its customers with global capabilities while maintaining individual commitment. With headquarters in Southfield, Michigan, Lear maintains 235 locations in 35 countries around the globe and employs approximately 135,000 employees. Lear is traded under the symbol [LEA] on the New York Stock Exchange."

The strong dollar has created negative currency headwinds for LEA but the company continues to beat on the bottom line. Their Q2 results, announced on July 24th, were better than expected with earnings of $2.82 per share. That was 34 cents above estimates. Management raised their full-year 2015 guidance.

The trend of better than expected earnings continued in the third quarter. LEA just announced their Q3 results a few days ago on October 23rd. Analysts were expecting a profit of $2.37 a share on revenues of $4.41 billion. LEA delivered a profit of $2.56 a share. That is a +33% jump from a year ago. Revenues were only up +2.3% to $4.33 billion. That missed expectations. However, if you discount negative currency headwinds, sales were up +11%. LEA management raised their 2015 outlook again.

These results were good enough to generate some bullish analyst comments on LEA and a new price target at $138.00. Coincidentally the point & figure chart is bullish and forecasting at $138 target. The current rally in LEA has produced a bullish breakout past major resistance in the $118.00 region, which should now become new support. More aggressive traders may want to buy calls now. We are suggesting a trigger to buy calls at $123.65, which would be a new all-time high. .

- Suggested Positions -

Long DEC $125 CALL (LEA151218C125) entry $3.70

10/28/15 triggered @ $123.65
Option Format: symbol-year-month-day-call-strike

chart:


Lam Research Corp. - LRCX - close: 76.59 change: +0.75

Stop Loss: 72.25
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
Average Daily Volume = 2.5 million
Entry on October 30 at $76.25
Listed on October 28, 2015
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
10/31/15: Our new trade on LRCX is now open. Semiconductor stocks showed some relative strength on Friday. LRCX rallied past technical resistance at its 200-dma. Shares hit our entry trigger at $76.25. I would still consider new positions at current levels ($76.00-77.00 range).

Trade Description: October 28, 2015:
Wall Street loves mergers and this month LRCX has jumped into the 2015 buying spree. Semiconductor stocks had a rough summer with the SOX semiconductor index plunging from early June through late August. Fortunately the group appears to have bottomed. LRCX's recent earnings news and acquisition announcement has accelerated the stock's rebound.

LRCX is part of the technology sector. According to the company, "Lam Research Corp. (LRCX) is a trusted global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. Lam's broad portfolio of market-leading deposition, etch, and clean solutions helps customers achieve success on the wafer by enabling device features that are 1,000 times smaller than a grain of sand, resulting in smaller, faster, more powerful, and more power-efficient chips. Through collaboration, continuous innovation, and delivering on commitments, Lam is transforming atomic-scale engineering and enabling its customers to shape the future of technology. Based in Fremont, Calif., Lam Research is a Nasdaq-100 Index and S&P 500 company whose common stock trades on the Nasdaq Global Select MarketSM under the symbol LRCX."

LRCX's most recent earnings report was October 21st. Analysts were expecting a profit of $1.72 per share on revenues of $1.6 billion. LRCX delivered earnings of $1.82 a share. Revenues were up +38.8% from a year ago to $1.6 billion. Management then raised their Q2 earnings guidance to $1.32-1.52 a share, which is significant above analysts' estimates.

The news didn't stop there. LRCX also announced they were buying KLA-Tencor (KLAC) for $10.6 billion. This new combined company will have $8.7 billion in revenues.

Here are a few highlights from the LRCX-KLAC merger deal:

Creates Premier Semiconductor Capital Equipment Company: Strengthened platform for continued outperformance, combining Lam's best-in-class capabilities in deposition, etch, and clean with KLA-Tencor's leadership in inspection and metrology

Accelerates Innovation: Increased opportunity and capability to address customers' escalating technical and economic challenges Broadens Market Relevance: Comprehensive and complementary presence across market segments provides diversity, scale and value creating innovation opportunities

Significant Cost and Revenue Synergies: Approximately $250 million in expected annual on-going pre-tax cost synergies within 18-24 months of closing the transaction, and $600 million in annual revenue synergies by 2020 Accretive Transaction: Increased non-GAAP EPS and free cash flow per share during the first 12 months post-closing

Strong Cash Flow: Complementary memory and logic customer base, operational strength, and meaningful installed base revenues strengthen cash generation capability Anstice concluded, "We have tremendous respect for the company KLA-Tencor employees have built over nearly 40 years - their culture, technology, and operating practices. I have no doubt that our combined values, focus on the customer, and complementary technologies will create a trusted leader in our industry, capable of creating significant opportunity for profitable growth and in turn delivering tremendous value to all of our stakeholders. This is the right time for the right combination in our industry." You can read more details about the merger here.

The combination of the earnings beat, raised guidance, and the merger news launched LRCX stock higher. Traders have been consistently buying the dips since then. Now shares of LRCX are poised to break through technical resistance at its 200-dma soon. Shares have been upgraded with a new price target of $85.00. Meanwhile the point & figure chart is bullish and forecasting at long-term target of $107.00.

LRCX looks like it could run towards the 2015 highs in the $84-85 region. Today's intraday high was $76.19. We are suggesting a trigger to buy calls at $76.25.

- Suggested Positions -

Long JAN $80 CALL (LRCX160115C80) entry $3.30

10/30/15 triggered @ $76.25
Option Format: symbol-year-month-day-call-strike

chart:


Pepsico, Inc. - PEP - close: 102.19 change: -0.61

Stop Loss: 99.40
Target(s): To Be Determined
Current Option Gain/Loss: +28.1%
Average Daily Volume = 5.0 million
Entry on October 22 at $101.00
Listed on October 19, 2015
Time Frame: Exit prior to expiration in January
New Positions: see below

Comments:
10/31/15: Going into last week PEP was up six weeks in a row. Last week the rally stalled. Shares consolidated sideways in the $101.50-103.50 zone.

The $100-101 area was major resistance so should be major support. If you're looking for an entry point I'd consider buying a bounce near $101.00 or waiting for a breakout past $103.50.

Tonight we are adjusting the stop loss higher to $99.40.

Trade Description: October 19, 2015:
Soda sales remain the biggest chunk of non-alcoholic drinks. Unfortunately for big soda makers like PEP and KO trends are changing. Consumers are become more health conscious. Sugary soda drink sales have fallen ten years in a row. The good news is that more and more consumers are reaching for bottled water and other drinks perceived to be healthier than traditional colas. Bottled water sales are on pace to surpass soda as the beverage of choice for U.S. consumers soon. (FYI: PEP's bottled water brand is Aquafina)

PEP is a consumer goods giant with a global presence. According to the company, "PepsiCo products are enjoyed by consumers one billion times a day in more than 200 countries and territories around the world. PepsiCo generated more than $66 billion in net revenue in 2014, driven by a complementary food and beverage portfolio that includes Frito-Lay, Gatorade, Pepsi-Cola, Quaker and Tropicana. PepsiCo's product portfolio includes a wide range of enjoyable foods and beverages, including 22 brands that generate more than $1 billion each in estimated annual retail sales."

The stock has been stuck consolidating sideways in the $90-100 trading range for almost a year. It looks like that consolidation may be nearing its end.

Earnings have been better than expected. I looked at the last three quarters. PEP has managed to beat Wall Street's estimates on both the top and the bottom line. Revenues have declined year over year but that is due to negative foreign currency exchange rates that is shaving off about -10% from earnings and revenues. The company says their gross margins and operating margins continue to improve.

PEP's Q3 results showed a +7.4% jump in organic revenues. On a constant currency basis their operating profit was up +12%. Earnings were up +14% from a year ago and their core gross margins surged 120 basis points. They have raised their full year 2015 core constant currency EPS guidance twice this year. Thus far PEP has saved $1 billion in productivity savings and returned $9 billion to shareholders in 2015.

The U.S. market is up the last three weeks in a row but it's relatively flat for the year. Investors are confused with all the different global cross currents, exchange fluctuations, central bank moves, and more. Fund managers are probably tempted to park cash in a huge, liquid big cap like PEP and get paid 2.8% a year with dividends. Why not? PEP is still growing with solid single-digit growth.

Technically PEP looks poised to breakout past major resistance in the $100 area. The point & figure chart is already bullish and forecasting at $120.00 target. Tonight we are listing a trigger to buy calls at $101.00.

- Suggested Positions -

Long 2016 JAN $100 CALL (PEP160115C100) entry $2.81

10/31/15 new stop @ 99.40
10/22/15 triggered @ $101.00
Option Format: symbol-year-month-day-call-strike

chart:


Signet Jewelers Limited - SIG - close: 150.94 change: +0.37

Stop Loss: 144.15
Target(s): To Be Determined
Current Option Gain/Loss: -4.7%
Average Daily Volume = 889 thousand
Entry on October 29 at $150.75
Listed on October 26, 2015
Time Frame: Exit PRIOR to earnings on November 24th
New Positions: see below

Comments:
10/31/15: SIG spiked lower at the open on Friday but traders bought the dip near $149.00. The stock managed to hit another new all-time high before paring its gains for the session.

More conservative traders may want to start inching up their stop loss.

Trade Description: October 26, 2015:
The holiday shopping season is almost here. A lot of retailers launch their holiday sales push in the first week of November. Soon investors are going to be looking for a Santa Claus rally. SIG looks like a tempting candidate since it has a history of outperforming the S&P 500 during the fourth quarter.

SIG is in the services sector. According to the company, "Signet Jewelers Limited is the world's largest retailer of diamond jewelry. Signet operates approximately 3,600 stores primarily under the name brands of Kay Jewelers, Zales, Jared The Galleria Of Jewelry, H.Samuel, Ernest Jones, Peoples and Piercing Pagoda. Further information on Signet is available at www.signetjewelers.com. See also www.kay.com, www.zales.com, www.jared.com, www.hsamuel.co.uk, www.ernestjones.co.uk, www.peoplesjewellers.com and www.pagoda.com."

Kay, Zales, and Jared are the first, third, and fourth biggest brand names in the jewelry business. In spite of having such a dominant position SIG only has about 8% of the $74 billion U.S. jewelry market. That leaves plenty of room to grow.

The company is integrating its recent acquisition of Zales. The results have boosted sales. Their 2016 Q1 and Q2 results (announced in May and August) came in better than expected. Same-store sales have been healthy at more than +4%. They are also seeing strong growth in their online sales.

Wall Street seems positive on SIG. A Nomura analyst recently labeled SIG as one of their best multi-year growth stories in retail. The stock has been showing relative strength too. SIG is up +12% in 2015 versus an S&P 500 that is virtually flat for the year.

Technically shares have a bullish trend of higher lows and higher highs. The point & figure chart is bullish with a quadruple top breakout buy signal and a $187 price target. On a short-term basis SIG has resistance in the $150.00 area. The recent high was $150.65. Tonight we are suggesting a trigger to buy calls at $150.75.

- Suggested Positions -

Long DEC $155 CALL (SIG151218C155) entry $4.30

10/29/15 triggered @ $150.75, upgraded by Goldman Sachs
Option Format: symbol-year-month-day-call-strike

chart:


Constellation Brands Inc. - STZ - close: 134.80 change: -0.31

Stop Loss: 133.20
Target(s): To Be Determined
Current Option Gain/Loss: -48.0%
Average Daily Volume = 1.29 million
Entry on October 23 at $138.38
Listed on October 22, 2015
Time Frame: Exit PRIOR to earnings in early January
New Positions: see below

Comments:
10/31/15: STZ has been a zombie this week. The stock has underperformed and just notched its sixth daily decline in a row. We are throwing in the towel. Plan on exiting this trade on Monday morning to cut our losses.

Of course now that we are exiting the stock will likely explode higher.

- Suggested Positions -

Long 2016 JAN $145 CALL (STZ160115C145) entry $2.50

10/31/15 prepare to exit on Monday morning
10/23/15 triggered on gap open at $138.38, entry trigger was $138.25
Option Format: symbol-year-month-day-call-strike

chart:




PUT Play Updates

Cracker Barrel Old Country - CBRL - close: 137.46 change: -1.59

Stop Loss: 142.75
Target(s): To Be Determined
Current Option Gain/Loss: -26.6%
Average Daily Volume = 395 thousand
Entry on October 22 at $136.90
Listed on October 21, 2015
Time Frame: Exit PRIOR to earnings on Nov. 24th
New Positions: see below

Comments:
10/31/15: Restaurant stocks ended the week on a down note. CBRL tried to rally but reversed at $141.89. Shares fell to a -1.1% decline on the session. The October low is $136.53. Trades may want to use a decline under $136.50 as a new entry point.

Tonight we are adjusting the stop loss down to $142.75.

Trade Description: October 21, 2015:
Some of the restaurant stocks are struggling. Disappointing consumer spending, slower foot traffic, and tougher comparisons are weighing on the group.

CBRL is in the services sector. According to the company, "Cracker Barrel Old Country Store restaurants provide a friendly home-away-from-home in its old country stores and restaurants. Guests are cared for like family while relaxing and enjoying real home-style food and shopping that's surprisingly unique, genuinely fun and reminiscent of America's country heritage...all at a fair price. Cracker Barrel Old Country Store, Inc. (Nasdaq:CBRL) was established in 1969 in Lebanon, Tenn. and operates 637 company-owned locations in 42 states."

Earnings have taken a turn for the worse with CBRL. Back in June this year CBRL delivered a very upbeat earnings report. Profit was $1.49 per share, which was 12 cents above estimates. Revenues were up +6.3% to $683.7 million, beating expectations. Comparable store sales were relatively healthy and management raised their guidance.

Fast-forward to September 16th and CBRL reported their fiscal Q4 results of $1.97 a share. That did beat estimates but revenue growth slowed down to +3.8% to $719 million, which missed estimates. Comparable store sales slowed down to +0.6%. Management lowered their fiscal 2016 Q1 guidance.

Technically CBRL has developed a bearish trend of lower highs and now lower lows. This past week has seen the oversold bounce fail at resistance near its 200-dma. The point & figure chart is bearish and forecasting at $124.00 target.

I'm a little bit worried about the elevated short interest. The most recent data listed short interest at 22% of the small 19.0 million share float. That could make CBRL more volatile than normal but the shorts are probably right on this one, at least for a little while.

Tonight we are suggesting a trigger to launch bearish positions at $136.90. We are not setting an exit target tonight but the $130.00 and $120.00 levels are potential support (and thus possible bearish targets).

- Suggested Positions -

Long DEC $130 PUT (CBRL151218P130) entry $3.20

10/31/15 new stop @ 142.75
10/22/15 triggered @ $136.90
Option Format: symbol-year-month-day-call-strike

chart:


Darden Restaurants - DRI - close: 61.89 change: -0.54

Stop Loss: 63.65
Target(s): To Be Determined
Current Option Gain/Loss: + 7.0%
Average Daily Volume = 1.7 million
Entry on October 21 at $63.40
Listed on October 20, 2015
Time Frame: Exit PRIOR to earnings in December
New Positions: see below

Comments:
10/31/15: DRI is another restaurant stock that is underperforming the broader market. Shares broke down under short-term support to end the week at new five-month lows.

Tonight we are adjusting the stop loss down to $63.65.

Friday's decline looks like a new entry point for bearish positions.

Trade Description: October 20, 2015:
Consumer spending has been disappointing and some of the restaurant names are suffering for it. DRI has actually raised guidance two quarters in a row but investors are ignoring this news and seem to be focusing on the larger macro trends for the industry.

DRI is in the services sector. According to the company, "Darden Restaurants, Inc., (DRI) owns and operates more than 1,500 restaurants that generate $6.8 billion in annual sales. Headquartered in Orlando, Florida, and employing 150,000 people, Darden is recognized for a culture that rewards caring for and responding to people. Our restaurant brands - Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's and Yard House - reflect the rich diversity of those who dine with us. Our brands are built on deep insights into what our guests want."

DRI reported their Q4 report on June 23rd. They beat Wall Street's EPS estimate and raised their 2016 guidance. Shares popped on the news and the stock continued to rally into late summer. Unfortunately shares produced a bearish double-top pattern in the July-August time frame. DRI began to correct lower.

The company reported its 2016 Q1 results on September 22nd. Earnings of $0.68 per share beat estimates by 10 cents. Revenues were up +5.7% to $1.69 billion, which was above estimates. Same-store sales were up +3.4% for the quarter. Management raised their 2016 earnings guidance again. This looked like a pretty good report. Yet three days later investors sold the rally.

Nationwide the pace of consumer spending has been lower than expected. A few days ago an industry research firm said U.S. restaurant sales were up +1.5% in Q3 but that was slower than Q2's +1.8% growth. A higher tab helped offset slower traffic numbers. The outlook for traffic is worrisome. This firm expects restaurant traffic numbers to be stagnant. This is inline with another research note that expects foot traffic at retailers to fall -8% this holiday season.

The market used to think that consumers would take the money they saved from lower gasoline prices and spend it elsewhere. That doesn't seem to be happening. Now the restaurant industry is facing tough comparisons to last year's relatively healthy Q4 numbers.

Technically DRI is now in a bearish trend of lower highs and lower lows. Shares have broken down below their 200-dma. The oversold bounce just failed at resistance near $66.00. The point & figure chart is bearish and forecasting at $55.00 target. Tonight we are suggesting a trigger to buy puts if DRI trades down to $63.40. This is a multi-week trade. We will plan on exiting prior to earnings in December.

- Suggested Positions -

Long 2016 JAN $60 PUT (DRI160115P60) entry $2.15

10/31/15 new stop @ 63.65
10/21/15 triggered @ $63.40
Option Format: symbol-year-month-day-call-strike

chart:


Nordstrom Inc. - JWN - close: 65.21 change: +0.51

Stop Loss: 66.25
Target(s): To Be Determined
Current Option Gain/Loss: +66.4%
Average Daily Volume = 1.4 million
Entry on October 15 at $66.40
Listed on October 14, 2015
Time Frame: Exit PRIOR to earnings on November 12
New Positions: see below

Comments:
10/31/15: JWN managed a bounce on Friday. Shares gained +0.7%, which outperformed the major indices. Shares remain inside the $64.00-66.0 trading range from the last five days.

No new positions at this time.

Trade Description: October 14, 2015:
Normally Q4 is the time investors think about buying retail-related stocks in anticipation of a strong holiday shopping season. This year the retailers' Q4 is off to a weak start.

JWN is in the services sector. According to the company, "Nordstrom, Inc. is a leading fashion specialty retailer based in the U.S. Founded in 1901 as a shoe store in Seattle, today Nordstrom operates 316 stores in 39 states, including 120 full-line stores in the United States, Canada and Puerto Rico; 188 Nordstrom Rack stores; two Jeffrey boutiques; and one clearance store. Additionally, customers are served online through Nordstrom.com, Nordstromrack.com and HauteLook. The company also owns Trunk Club, a personalized clothing service serving customers online at TrunkClub.com and its five clubhouses. Nordstrom, Inc.'s common stock is publicly traded on the NYSE under the symbol JWN."

JWN's earnings results have struggled this past year. Last November they beat estimates by a penny but guided lower. When JWN reported earnings in February 2015 they missed expectations and guided lower the second quarter in a row. In May this year they missed estimates again. Their most recent earnings report was August 13th. JWN beat Wall Street estimates by three cents with a profit of $0.93 a share. Revenues were up +9% to $3.6 billion, slightly above estimates. Management actually raised their 2016 guidance. The stock popped higher on the earnings beat and bullish guidance. Unfortunately the rally did not last.

Shares of JWN reversed and formed a bearish double top. Since then investors have continued to sell the rallies. The big drop on October 7th was an adjustment for JWN's special cash dividend of $4.85. There has been virtually no bounce.

Today JWN underperformed as the market reacted to Wal-Mart's earnings warning. Suddenly investors are concerned that consumer spending this holiday season may be weaker than expected. That doesn't bode well for JWN. The trend is already down and the point & figure chart is forecasting at $58.00 target.

Shares readers could argue there is potential support near the $65.00 level but we think JWN is headed a lot lower and could drop toward round-number support at $60.00. Tonight we are suggesting a trigger to buy puts at $66.40. Prepare to exit prior to JWN's earnings report in November.

- Suggested Positions -

Long NOV $65.15* PUT (JWN151120P65.15) entry $1.13

10/29/15 new stop @ 66.25
10/15/15 triggered @ $66.40
*NOTE: The odd option strike is due to JWN's special cash dividend of $4.85 per share. The ex-distribution date was Wednesday, October 7, 2015. The option market adjusted all the prior option strikes down -4.85.

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

chart: