Option Investor
Newsletter

Daily Newsletter, Thursday, 11/19/2015

Table of Contents

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

Market Wrap

Calm Quiet Trading

by Thomas Hughes

Click here to email Thomas Hughes
Today was the calmest day of trading in quite some time as traders await options expiration.

Introduction

Today was the calmest day of trading we have seen in quite some time. Today's range for the S&P 500 was less than 8 points, the smallest range since February 23, and not too surprising given yesterday's Fed driven rally. The Fed seems to be saying we should be ready for a rate hike in December, today's data supports this view.

Global markets were cheered by the FOMC minutes and the rally in US equities. Asian indices closed with gains greater than 1%, European indices did not fare so well but were able to close in the green, and at new 3 month highs. Both regions were also buoyed by central bank activity other than from the FOMC. The PBC lowered its overnight lending facility, adding stimulus to the Chinese economy, the ECB minutes revealed the members discussed adding QE at their last meeting.

Market Statistics

Futures trading indicated a positive open for most of the morning. Futures fell off a little going into the release of 8:30AM data but firmed a little following it. The indices opened flat to positive and the stayed there all day. There was a little back and forth action between the bulls but it was so mild as to be nearly unnoticeable. This held through until the end of the day leaving the indices just off yesterday's closing levels. One index bucked the trend; the transports put in a stealth rally that added 1% to yesterday's closing price.

Economic Calendar

The Economy

Initial claims for unemployment fell in line with expectations to 271,000. This is a decline of -5,000 from last week's not revised figures. The four week moving average gained 3,000 and hit 270,750, the highest level in nearly two months. On a not adjusted basis claims fell by -9.5%, ahead of the -7.6% projected by the seasonal factors. New Jersey and Pennsylvania had the largest increases in claims, 2,963 and 2,840, while Louisiana and Michigan had the largest declines in claims, -632 and -520. Despite the rise in the 4 week moving average initial claims figures are still trending near the 43 year lows and consistent with labor market health.


Continuing claims fell, shedding -2,000 from last weeks upward revision. Last week was revised higher 3,000, wiping out this weeks decline. Even so continuing claims are holding steady near the 43 year low and consistent with labor market health. The four week moving average moved slightly higher, 750, but is also holding steady near the long term low.

The total number of claims for unemployment rose this week, the fourth week of gains since reaching the long term low last month. Total claims gained 24,215 to hit 1.951 million. Even with the rise in total claims this week's figure is still below the previous long term low set earlier in the year and consistent with labor market health.


The Philly Fed Manufacturing Business Outlook Survey was better than expected, indicating a rebound in activity. The headline index reading came in at 1.9 versus an expected -1.0. This is up from last month's -4.5 and ends a two month streak of contraction in the region. Within the data new orders and shipments both remain negative but increased to near 0. The employment index also improved and also moved back into positive territory, coming in at 2.6. The gains reflects an increase in employment offset by a decline in average hours worked. Perhaps the most notable portion of the report is the future outlook index which gained 6.7 points to hit 43.4, reflecting increased levels of optimism for the next 6 months.


The Index Of Leading Indicators was released at 10AM and was as expected, +0.6%. This end two months of negative readings, -0.1% in both August and September, and indicates growth is expanding into the fourth quarter. The Coincident and Lagging Indices also made gains, rising 0.2% each.

Today's data points support ongoing economic recovery, tightening labor markets and an FOMC rate hike. There will be no data releases tomorrow but there are quite a few next week. Due to the holiday most are scheduled to come out on Tuesday and Wednesday. Big on the list are revisions to 3rd quarter GDP, existing and new home sales, jobless claims, income and spending and durable goods.

The Oil Index

Oil prices did not get a boost from global tensions and are now hovering at three month lows. Today WTI fell, losing about a half percent at settlement time but falling more than 1% on an intraday basis. Price remains just above $40 and looks like it could break through to new lows. Supply and production remain very high while demand expectation is still very weak.

The Oil Index lost about -1% in today's session. The fall was halted at the short term moving average which has provided support for two days now. The indicators remain weak however and pointing lower so a retest of more substantial support is likely, especially if oil prices remain near $40 or move lower. First target for support is 1,150 with a chance for move down to 1,050 if oil breaks below $40. Resistance is near 1,250 should the index move higher.


The Gold Index

Gold prices rebound today after hitting a multi year low yesterday. This move, near 1.5% intra-day, met resistance at previous support, just above $1,080, and does not appear to have ended golds down trend. The Fed has more than hinted a rate hike would come in December, which, along with dovish ECB intentions and steady US economic data, is driving the dollar higher. The dollar index retreated from resistance today, most likely the cause for golds rise, but is looking strong in the short to long term. A combination of an ECB add-on to QE with an FOMC rate hike could cause the dollar index to break above resistance and pressure gold to new lows. It is now less than one month until the December FOMC meeting.

The Gold Miners ETF GDX gained nearly 3.5% in today's session after retesting the all-time low yesterday. This move is likely driven by short covering as well as options expiration/assignments and bottom seekers more than anything else. This bounce could continue higher with the short term moving average,$14.40, as near term target but I don't trust it. The move to retest the lows was strong in terms of momentum and indicates support is likely to be tested again, if not broken. Support is the all time low, just below $13.00.


In The News, Story Stocks and Earnings

UnitedHealth made the news early this morning when it issued a profit warning due to Obamacare. The company revised 2015 full year earnings down by nearly a quarter because its health exchange based products are not performing. The company says that not enough people are signing up to make the exchanges profitable, claims are higher than expected and they even suggested that some users are taking advantage of the system. The release goes on to suggest that UnitedHealth would not participate in the exchange system after 2016. Needless to say the news sparked more talk of the possible demise of Obamacare. Shares of the stock fell more than -6% at the open, struggled to regain the loss but were held near the low of the day.


Best Buy reported earnings before the opening bell and sent the stock seeking support. The company reported earnings that were ahead of expectations on weaker than expected revenue and lowered full year guidance. The stock lost more than -7.5% in the pre-opening session to open near the one year low. Support was there and drove prices back up but not enough to recover all the losses.


The JM Smucker Company reported before the bell as well but delivered much different results. The company beat on the top and bottom lines and was able to adjust guidance to the top end of the previously stated range. The improvement is due to strength in the Big Heart pet brand and coffee. Shares of the stock surged by 3% in the pre-opening session and then more than doubled that gain after the opening bell. Smuckers is now trading at a new all time high.


Jack Dorsey's Square IPO'd today. The stock opened at $11.20 after pricing at $9, then popped on the open gaining more than 50% on an intraday basis and closing with a gain of 45%.

Nike made headlines in after hours trading with the announcement of a new $12 billion buy back plan, a 14% increase to the dividend and a 2 for 1 stock split. The news was well received, sending shares up more than 4%.


The Indices

Today's action was light to say the least. Volumes were low as was volatility; most indices traded within very tight ranges except for one, the Dow Jones Transportation Index. This index gained 1% in a move that takes it to the top of the three month range. The indicators are still weak but swinging into a bullish signal so it looks like resistance will be tested here if not broken. A break above the top of the range, 8,275, could take it up to next resistance near 8,500. Support is near 8,000 should a pull back occur.


The other indices all closed with a loss, if negligible, led by the S&P 500. The broad market created its smallest candle in 10 months and is hanging near the top of yesterday's candle. The index is bouncing higher and looks like it could continue but the indicators remain mixed. The indicators are mixed, but also showing what could be the early signs of a bullish trend following entry. Stochastic has already fired a weak signal, yet to be confirmed by MACD, while MACD is approaching the zero line, a set up that can easily lead to a stronger signal should the index continue to consolidate at or near current levels. Upside target is near 2,120 in the near term with support targets near 2,075, 2,050 and 2,000.


The NASDAQ Composite made the next largest decline, -0.03%. The tech heavy index created a similarly small candle although it has traded in a tighter range than today's within the last 30 days. The index appears to be bouncing higher with upside target near 5,110 but the move has yet to gain strength. The indicators are mixed as with the SPX but also setting up for a potential bullish trend following entry.


The Dow Jones Industrial Average made the smallest move of all, only -0.2%. The blue chips are also bouncing from support levels, in line with underlying long term trends, and look like they will continue with upside target near 18,000. The indicators are mixed as with the others and likewise beginning to rollover into what could become a strong trend following entry signal. It may take a few weeks for this signal to develop so I expect to see some side-winding in this as well as the other indices until then.


The market took a breather today. The negative implications of that is there was no follow through on yesterday's rally. The positive is that the market held its ground and did not reverse yesterday's gains.

It looks like the rally will continue but there are still some hurdles for the market to overcome. One is geopolitical tensions, another is slow global growth, another is weak expectations for 4th quarter earnings, not to mention the fact we are entering the doldrums of the earnings cycle.

The combination of waiting for the FOMC meeting along with a lack of earnings news could keep the market from breaking out to a new high. At best the indices will remain range bound at current levels, at worst they will correct to long term support levels. In between now and the meeting will be an entire month of economic data to sway sentiment, induce volatility and drive market direction.

I remain bullish and a buyer of dips.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Bullish Breakout Approaching

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

The Boeing Company - BA - close: 149.24 change: +0.96

Stop Loss: 144.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.8 million
Entry on November -- at $---.--
Listed on November 19, 2015
Time Frame: Exit PRIOR to January option expiration
New Positions: Yes, see below

Company Description

Trade Description:
Growing demand for airplanes and rising demand for defense spending to crush ISIS generates a couple of strong tailwinds for BA. The company is involved in both defense and a major player in the commercial airline industry.

BA is in the industrial goods sector. According to the company, "Boeing is the world's largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security systems. A top U.S. exporter, the company supports airlines and U.S. and allied government customers in 150 countries. Boeing products and tailored services include commercial and military aircraft, satellites, weapons, electronic and defense systems, launch systems, advanced information and communication systems, and performance-based logistics and training."

BA's most recent earnings report was October 21st. Wall Street was expecting a profit of $2.20 a share on revenues of $24.78 billion. BA beat estimates on both fronts. Earnings were $2.52 a share. Revenues were up +8.7% to $25.85 billion. The company raised their guidance on both EPS and revenues. Their backlog is almost 5,700 planes valued at more than $425 billion.

The company sees strong demand for the airplane market. On November 4th BA issued a press release stating, "Boeing forecasts airlines in the Middle East will require 3,180 new airplanes over the next 20 years, valued at an estimated $730 billion. 70 percent of the demand is expected to be driven by rapid fleet expansion in the region." Then on November 16th, "Boeing projects the Latin American commercial aviation market will grow at one of the highest rates in the world over the next 20 years. As a result, Boeing forecasts the region's airlines will need 3,050 new airplanes valued at $350 billion."

A couple of days ago two analysts with Canaccord Genuity issued a note suggesting rising interest rates are bullish for BA. Here's what they had to say, "While it is difficult for us to determine exactly when the U.S. will raise its target federal funds rate, we wanted to review again the impact of rising rates has historically had on Boeing and the commercial aerospace cycle. Historically, rising rates have corresponded with strengthening commercial orders and outperformance by both Boeing stock and the broader Aerospace & Defense sector. For example, over the past three significant tightening cycles, commercial transport orders increased by an average of 7% and 140% in the 12 and 24 month time periods after rates started to increase. Similarly, the total commercial backlog also increased over these same periods by an average of 3% and 43%... Not surprising as well, over the past two tightening cycles, BA stock has outperformed the broader market by an average of 19%-20% annually while rates are rising. We agree that with the more diverse backlog today, the health of U.S. airlines is less impactful for the cycle. However, we believe in the aggregate, rising rates in the U.S. are generally a bullish signal for both Boeing and the A&D sector. Note that since 1991, BA stock has outperformed the S&P in 15 of the 24 years, and is on pace to do so again in 2015." (source)

News in late October that BA and project partner Lockheed Martin (LMT) had lost their bid on the Pentagon's long-range strike bomber project to rival Northrop Grumman (NOC) did not seem to have much impact on BA's share price.

On the subject of defense, the terrible attacks in Paris last week have generated new support for additional defense spending to focus on ISIS/ISIL. BA could see additional defense spending contracts from multiple governments as governments bulk up for more action.

Meanwhile shares of BA have been building on a bullish trend of higher lows since the market's correction in August. The bounce off its trend line of support has lifted BA toward major resistance at $150.00. The point & figure chart is bullish and forecasting at $165.00 target. We want to see a breakout past resistance at $150. Tonight we are suggesting a trigger to buy calls at $150.25.

Trigger @ $150.25

- Suggested Positions -

Buy the JAN $155 CALL (BA160115C155) current ask $2.00
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

Bulls Hit The Pause Button

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market spent Thursday's session oscillating on either side of unchanged. The good news is that stocks are holding on to big gains this week. We are not seeing a lot of profit taking yet although healthcare stocks underperformed today.


Current Portfolio:


CALL Play Updates

Alkermes Plc - ALKS - close: 73.07 change: -1.22

Stop Loss: 69.75
Target(s): To Be Determined
Current Option Gain/Loss: -51.0%
Average Daily Volume = 699 thousand
Entry on November 17 at $75.25
Listed on November 10, 2015
Time Frame: Exit PRIOR to December option expiration
New Positions: see below

Comments:
11/19/15: It was a quiet day for the U.S. market. Unfortunately shares of ALKS underperformed. The early morning rally failed at round-number resistance near the $75.00 mark. ALKS spent the rest of the day fading lower and closed with a -1.6% decline.

I would wait for a new rally above $75 before considering new positions.

Trade Description: November 10, 2015:
The healthcare and biotech names have started to show life again. Biotechs have definitely shown some relative strength in late October and now this week.

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."

Recent earnings results have generally been better than expected. On July 30th ALKS reported its Q2 results with both earnings and revenues coming in above expectations. Management raised their fiscal 2015 guidance.

ALKS beat analysts' estimates again when they reported their Q3 results on October 29th. The company lost ($0.18) a share but that was better than the estimates for ($0.21). Revenues were down -4.6% to $152.7 million but that was better than expected.

In ALKS' Q3 press release they provided a breakdown of revenues:

Manufacturing and royalty revenues from RISPERDAL CONSTA and INVEGA SUSTENNA/XEPLION were $67.6 million, compared to $68.5 million for the same period in the prior year.

Net sales of VIVITROL were $37.9 million, compared to $25.8 million for the same period in the prior year, representing an increase of approximately 47%.

Manufacturing and royalty revenues from AMPYRA/FAMPYRA 1 were $22.1 million, compared to $16.5 million for the same period in the prior year.

Royalty revenue from BYDUREON was $13.0 million, compared to $10.3 million for the same period in the prior year.

A few weeks ago ALKS announced that the FDA had approved their ARISTADA treatment for schizophrenia. ALKS explained that schizophrenia is a chronic, severe and disabling brain disorder that affects millions of patients in the U.S.

In ALKS' Q3 press release the company also announced they were working toward key milestones for their ALKS 3831 treatment for schizophrenia, their ALKS 8700 treatment for multiple sclerosis, and their ALKS 5461 treatment for major depressive disorder. They expect more data on all three within the next six months.

Technically the stock has soared from the bottom of its major trading range near $55 toward the top of its trading range near $75.00. The current rally has produced a buy signal on the point & figure chart, which is also forecasting a long-term target of $108.00.

The key level to watch is resistance at $75.00. ALKS has been consolidating sideways in the $70-74 zone the last several days but shares are on the verge of a breakout. It would be tempting to buy calls on a rally above today's high ($74.11) but we are suggesting a trigger to buy calls at $75.25, which would be a new multi-year high and above resistance from early 2015.

- Suggested Positions -

Long DEC $80 CALL (ALKS151218C80) entry $2.45

11/17/15 triggered @ $75.25
Option Format: symbol-year-month-day-call-strike


The Walt Disney Company - DIS - close: 118.71 change: +0.57

Stop Loss: 113.75
Target(s): To Be Determined
Current Option Gain/Loss: +7.9%
Average Daily Volume = 10.6 million
Entry on November 18 at $117.75
Listed on November 12, 2015
Time Frame: Exit PRIOR to 2016 January option expiration
New Positions: see below

Comments:
11/19/15: DIS garnered bullish analyst comments this morning and shares continued to climb. The stock outperformed the major indices with a +0.48% gain today. DIS is quickly approaching potential round-number resistance (and its July highs) near $120.00.

The hype for DIS' upcoming Star Wars film is really picking up with only 28 days to go.

Trade Description: November 12, 2015:
Star Wars fans are counting down the days until episode seven, The Force Awakens, hits theaters. 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 during that time frame. 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.

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. The company has a strong line up of movies in the pipeline and they all feed their massive merchandising machine.

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 in August 2015 was abrupt. DIS quickly fell from correction territory to bear-market territory in just a few days. Fortunately DIS produced a pretty good rebound.

Several days ago DIS reported their Q4 earnings on November 5th. Analysts were expecting a profit of $1.14 a share on revenues of $13.52 billion. DIS delivered $1.20 a share. Revenues were up +9% to $13.51 billion. The market is still worried about DIS' ESPN unit but these concerns were overshadowed by excitement over the new Star Wars franchise, which kicks off on December 18. That's just 34 days away. Shares of DIS could see a pre-movie rally as the hype builds up for the movie launch.

Technically shares of DIS are arguably overbought with a surge from $98 to $118 since its late September lows. One reality of the market is that overbought stocks can always get more overbought. The stock did see some volatility on November 4th in reaction to earnings from rival Time Warner. Today shares of DIS displayed some strength. The S&P 500 fell -1.39% yet DIS only dropped -0.26%. Another reason DIS could outperform between now and year end is mutual fund and hedge fund managers trying to boost their performance. It's been a tough year for money managers. Odds are they will be chasing performance in the market. A high-profile, big cap winner like DIS is a prime target for them.

The high this week was $117.58. Tonight we are suggesting a trigger to buy calls at $117.75.

- Suggested Positions -

Long 2016 JAN $120 CALL (DIS160115C120) entry $2.92

11/18/15 triggered @ $117.75
Option Format: symbol-year-month-day-call-strike


Global Payments Inc. - GPN - close: 71.27 change: +0.37

Stop Loss: 66.75
Target(s): To Be Determined
Current Option Gain/Loss: +2.2%
Average Daily Volume = 718 thousand
Entry on November 17 at $70.25
Listed on November 11, 2015
Time Frame: Exit PRIOR to December options expiration
New Positions: see below

Comments:
11/19/15: The rally in GPN continues thanks to a spike higher this morning. Shares spent the rest of the day consolidating sideways.

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

Trade Description: November 11, 2015:
Consistently strong earnings growth can do wonders for your stock price. Just ask GPN. Shares are up +72% year to date. That compares to a +0.8% gain in the S&P 500 and a +7% rally in the NASDAQ this year. The rally in GPN started a couple of years ago and shares are up +218% from its $22 lows in 2013.

GPN is in the services sector. According to the company, "Global Payments Inc. (GPN) is a leading worldwide provider of payment technology services that delivers innovative solutions driven by customer needs globally. Our partnerships, technologies and employee expertise enable us to provide a broad range of products and services that allow our customers to accept all payment types across a variety of distribution channels in many markets around the world. Headquartered in Atlanta, Georgia with approximately 4,500 employees worldwide, Global Payments is a Fortune 1000 Company with merchants and partners in 29 countries throughout North America, Europe, the Asia-Pacific region and Brazil."

This company has beaten Wall Street's earnings estimates every quarter this year. Not only that but GPN has raised guidance the last four quarters in a row. GPN has delivered two years of consistent earnings growth and investors have noticed.

Last year (fiscal 2015) the company earned $4.12 a share. That was a +22% improvement from the prior year. This year analysts are expecting GPN's earnings to grow +39%.

GPN's most recent earnings report was October 7th. Earnings surged +37.5% from the prior year. GPN beat on both the top and bottom line. They raised their fiscal 2016 guidance above Wall Street estimates. Plus they announced a 2-for-1 stock split, which took place on November 2nd.

Jeff Sloan, CEO, commented on their quarter, "We are delighted with our outstanding first quarter results, which represent an excellent start to the 2016 fiscal year and a continuation of exceeding our expectations across our markets. This performance builds on the momentum we have generated as we continue to invest in our strategy to expand distribution and create competitive differentiation through technology by delivering innovative solutions globally."

You can see the surge in GPN's stock following its October 7th earnings report. Investors have been buying the dips. Today GPN is challenging round-number resistance at the $70.00 level. Tonight we are suggesting a trigger to buy calls at $70.25.

- Suggested Positions -

Long DEC $70 CALL (GPN151218C70) entry $2.25

11/17/15 triggered @ $70.25
Option Format: symbol-year-month-day-call-strike


Huntington Ingalls Industries - HII - close: 134.08 change: +2.65

Stop Loss: 125.95
Target(s): To Be Determined
Current Option Gain/Loss: +12.3%
Average Daily Volume = 318 thousand
Entry on November 17 at $132.05
Listed on November 16, 2015
Time Frame: Exit PRIOR to December option expiration
New Positions: see below

Comments:
11/19/15: HII displayed relative strength today. Traders bought the dip around lunchtime at $130.60 and HII rebounded to a +2.0% gain on the session.

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

Trade Description: November 16, 2015:
Defense stocks were in the spot light today. The tragic terrorist attack in Paris on Friday has changed the worldview for many governments. Most major world powers have vowed to intensify their efforts to destroy ISIS. That should mean additional defense spending.

HII is in the industrial goods sector but it's part of the defense industry. According to the company, "Huntington Ingalls Industries is America's largest military shipbuilding company and a provider of engineering, manufacturing and management services to the nuclear energy, oil and gas markets. For more than a century, HII's Newport News and Ingalls shipbuilding divisions in Virginia and Mississippi have built more ships in more ship classes than any other U.S. naval shipbuilder. Headquartered in Newport News, Virginia, HII employs approximately 37,000 people operating both domestically and internationally."

The earnings picture has been mixed for HII. The market was relatively forgiving with the company's most recent earnings report. HII announced its Q3 results on November 5th. Earnings were up +18.5% from a year ago to $1.98 a share. That actually missed Wall Street estimates by three cents. Revenues were up +4.8% to $1.8 billion, which was above expectations. HII said their total operating margin improved from 10.0% to 11.1%. Management also said their backlog grew about $800 million to $23.3 billion.

The stock reacted sharply with a surge to new multi-month highs. Since this earnings report HII has been digesting its gains in a sideways consolidation pattern. Friday's market decline pushed HII to short-term technical support at the 10-dma. Today shares bounced +3.1% to set a new six-month closing high. We think this rally continues. The point & figure chart is bullish and forecasting a long-term target of $179.00.

Tonight we are suggesting a trigger to buy calls at $131.75.

FYI: HII will begin trading ex-dividend on November 24, 2015. The quarterly cash dividend is $0.50.

- Suggested Positions -

Long DEC $135 CALL (HII151218C135) entry $2.83

11/17/15 triggered on gap higher at $132.05, trigger was $131.75
Option Format: symbol-year-month-day-call-strike


Lennox Intl. Inc. - LII - close: 136.50 change: -0.24

Stop Loss: 132.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 425 thousand
Entry on November -- at $---.--
Listed on November 18, 2015
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Comments:
11/19/15: LII did not see any follow through on yesterday's rally. The stock struggled this morning after being downgraded from a "buy" to a "neutral". LII managed to recover and tag a new relative high ($137.18) before fading back toward unchanged on the session.

Our suggested entry point to buy calls is $137.25.

Trade Description: November 18, 2015:
Not many publicly-traded companies can say they have been around for over 100 years. LII started back in 1895. The last four years have been solid for bullish investors in the stock. There was a big pullback in mid 2014 but the stock recovered. Since then LII has been setting a string of new all-time highs.

LII is in the industrial goods sector. According to the company, "Lennox International is a leading provider of climate control solutions for heating, air conditioning and refrigeration markets around the world. We have built our business on a heritage of integrity and innovation dating back to 1895. Our employees are dedicated to providing trusted brands, innovative products, unsurpassed quality, and responsive service." The company operates three key businesses with a residential heating and cooling division, a commercial heating and cooling division, and a refrigeration business.

The earnings picture has been relatively solid as well. LII has beaten Wall Street's earnings and revenues estimates in three of the last four quarterly reports. Their most recent earnings report was October 19th. LII's earnings rose +26% from a year ago to $1.82 per share. That was three cents above estimates. Revenues were up +6.3% to $955 million versus the $940 million estimate. On a constant currency basis revenues were up +11%. Management raised their 2015 revenue forecast.

Todd Bluedorn, LII Chairman and CEO, commented on his company's quarter, "Lennox International realized strong revenue growth at constant currency and significant margin expansion across all three of our businesses in the third quarter. For the company overall, total segment profit set a third-quarter record, and profit margin expanded 140 basis points from the prior-year quarter to a record level of 13.7%. Our Residential business set third-quarter records for revenue, margin and profit as strong business momentum continued. Residential revenue was up 13% at constant currency, and margin expanded 240 basis points to 17.4%. In Commercial, segment profit and margin set new highs on 8% revenue growth at constant currency. North America and Europe both saw high single-digit revenue growth at constant currency. Commercial segment margin expanded 70 basis points to 18.2%. In Refrigeration, revenue was up 8% at constant currency, with double-digit growth in North America and Europe. Refrigeration margin expanded 220 basis points from the prior-year quarter to 10.7%."

It's hard to go wrong with record results and rising margins. The stock surged on this earnings report. Momentum finally stalled near $136-137 in early November. LII has spent the last couple of weeks consolidating gains in a sideways trading pattern. Shares were relatively resistant to the market's mid-November swoon. Now with the market in rally mode LII is on the verge of another breakout higher. Today's high was $136.94. Tonight we are suggesting a trigger to buy calls at $137.25.

Trigger @ $137.25

- Suggested Positions -

Buy the MAR $140 CALL (LII160318C140)

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


Lam Research Corp. - LRCX - close: 77.92 change: -0.51

Stop Loss: 73.85
Target(s): To Be Determined
Current Option Gain/Loss: -16.7%
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:
11/19/15: Intel (INTC), the largest semiconductor company, displayed relative strength with a +3.4% gain. This kept the SOX semiconductor index in positive territory. LRCX was not so fortunate. This stock spent most of the day churning sideways. An afternoon swoon left shares with a -0.65% decline on the session. The lack of follow through on LRCX's breakout attempts past $78.00 is worrisome.

No new positions.

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

11/12/15 LRCX closes below short-term support at $76.00
11/03/15 new stop @ 73.85
10/30/15 triggered @ $76.25
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Cummins Inc. - CMI - close: 98.57 change: +0.22

Stop Loss: 101.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.0 million
Entry on November -- at $---.--
Listed on November 17, 2015
Time Frame: Exit PRIOR to January option expiration
New Positions: Yes, see below

Comments:
11/19/15: CMI continues to drift sideways. Shares eked out a 22-cent gain. There is no change from my prior comments. Our suggested entry point to buy puts is at $97.30.

Trade Description: November 17, 2015:
Shares of CMI are in a bear market. The current down trend shows no signs of slowing. The stock is down -32% year to date.

CMI is in the industrial goods sector. According to the company, "Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins currently employs approximately 54,600 people worldwide and serves customers in approximately 190 countries and territories through a network of approximately 600 company-owned and independent distributor locations and approximately 7,200 dealer locations. Cummins earned $1.65 billion on sales of $19.2 billion in 2014."

CMI reported its Q2 results on July 28th. The company beat estimates on both the top and bottom line. Yet the post-earnings rally quickly faded. Shares were already in a down trend and investors used the rally to sell. Unfortunately, the earnings picture has taken a dramatic turn for the worse.

Business conditions deteriorated in the third quarter. Wall Street was expecting CMI to report earnings of $2.59 a share on revenues of $4.92 billion. The company delivered earnings of $2.14 a share. Revenues fell -5.5% to $4.62 billion. Management lowered their 2015 guidance and said they would start laying off up to 2,000 people.

The stock crashed to new multi-year lows the next day (see chart). A bearish note from Morgan Stanley didn't help either. A team of analysts at Morgan Stanley cut their rating on CMI to a "sell" and slashed their price target down to $79. Here is an excerpt from the Morgan Stanley note:

We believe CMI is facing three major headwinds that will drive share price underperformance: 1) The secular growth story within the Components business is dissipating - as developed markets shift regulatory focus from emissions to fuel economy, we expect CMI's Emissions Solutions revenue growth to converge with production; this represents a $0.35 EPS headwind. 2) The NAFTA Engine business is likely to suffer from market share erosion - as per our analysis on pages 4-6, we calculate $0.40-0.60 EPS risk associated with incremental Ford, Freightliner, and PACCAR vertical integration. 3) Consensus forecasts do not yet reflect the full impact of a NAFTA truck industry downturn - based on ACT's outlook, we see $0.40-0.65 EPS risk associated with cyclical decline in the NA truck market. While the negative reaction to today's 3Q miss and 2015e guide-down implies increasing awareness of cyclical risk, our bearish call focuses more on the impediments to secular growth and market share. (source)
A couple of weeks later, on November 10th, CMI held their analyst day. The Board of Directors approved another $1 billion stock buyback program to replace the previous $1 billion buyback they announced in July 2014. This news didn't help the stock. That is probably because CMI warned that they expect 2016 revenues to be -5% below 2015 (or worse).

I will point out that some investors see CMI as a dividend trade. The stock's decline has boosted the dividend yield on CMI's stock to nearly 4%. We should keep in mind that if the Fed starts raising rates it will put pressure on high-dividend names. Speaking of dividends, shares of CMI should begin trading ex-dividend on November 18th or 20th (I saw two different dates). The quarterly dividend is 97.5 cents a share.

The last few days have seen CMI breakdown below round-number, psychological resistance at the $100.00 level. The oversold bounce has failed to lift CMI back above this key level. We think CMI accelerates lower from here. Last Friday's low was $97.41. Tonight we are suggesting a trigger to buy puts at $97.30.

Trigger @ $97.30

- Suggested Positions -

Buy the 2016 JAN $95 PUT (CMI160115P95)

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