Option Investor
Newsletter

Daily Newsletter, Monday, 1/11/2016

Table of Contents

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

Market Wrap

Market Drowns In Oil

by Thomas Hughes

Click here to email Thomas Hughes
plunging oil prices drag market to new lows.

Introduction

The market saw some big moves today as China, energy, earnings and data weigh on the minds of traders.

The mainland China Shanghai index fell more than -5% in late day trading after an earlier move by the PBOC to strengthen the yuan. Other indices in the region, while affected, did not suffer near the same losses. European indices were positive for most of the day. The China sell-off may have been responsible for a mid-day test of support but that led to gains of 1% for the DAX, and then another test of support later in the day that left the region flat to negative at the close of the session.

Market Statistics

Futures trading indicated a positive open for US indices all morning. The SPX was indicated to open with a gain of about 3 points in the early electronic session and that strengthened to +4 or 5 by the open; there were no economic releases before or after the bell, and little in the way of market moving earnings reports; Alcoa reported after the closing bell.

Early in the day the indices moved in a 1% range around break even that left them flat going into the lunch time hour. Just before noon things changed, oil prices fell to new lows and the market followed. The SPX fell more than -1% on an intraday basis and is quickly approaching the Sept/Oct 2015 support levels. Late in the day support levels were hit, the market bounced, the market rallied and the indices regained all of the days losses and more.

Economic Calendar

The Economy

There was no economic data released today but there are some big reports due out later this week. Tomorrow is the JOLTs release, important points will be number of job openings and the quits rate. Wednesday the Treasury budget is released in the morning, the Fed's Beige Book later that day. Thursday is weekly jobless claims with import/export prices and then Friday is the big day of the week. Retail Sales, PPI, Empire Manufacturing, Industrial Production, Business Inventory and Michigan Sentiment are all on the schedule.

Moody's Survey Of Business Confidence fell again. The index shows sentiment continues to fall from its high set last year but, according to Mr. Zandi, remains strong relative to historic levels and consistent with an expanding economy. He explains that much of the down turn is due to negative sentiment for present conditions, driven by sluggish global growth and market turmoil. Despite the down turn in sentiment the survey still indicates upbeat sales and good credit availability.


The Federal Reserve transferred $97.7 billion to the Treasury today. Much of the money was reported to be interest earnings from securities purchased through its now concluded open market purchase program.

There was a little bit of Fedspeak today, expect more over the next 2 weeks. Lockhart said in a statement that he did not expect to see enough data to warrant another rate hike at the January meeting. He also said that he was confident December was the right time to initiate the first hike.

According to FactSet the expected growth rate for S&P 500 earnings in the 4th quarter is -5.3%. This is down -0.4% from last week and a new low in the series. If the season goes according to trend we can expect this number to rise over the next few weeks by roughly +4%, leaving us with the third quarter of negative earnings growth. The reason for this week's decline is the financial sector which saw a number of downgrades ahead of some expected earnings reports.


On an ex-energy basis 4th quarter growth is projected to be +0.4%. Adding in the expected 4% increase this may go as high as 4.5% by the end of the reporting season. So far 21 companies have reported. 16 have beat on earnings, about average, while only 7 have beaten on revenue, below average. This week 19 more are expected to report.

Expectations for next quarter and next year continue to fall but remain positive. First quarter projections fell by 2 tenths to 0.5%, full year projections fell nearly a half percent to 5.5%. The declines are driven primarily by lower expectations in the energy sector, driven by low oil prices.


The Oil Index

Oil, WTI, fell close to -6% today as supply and production continue to swamp demand. Today's action has taken oil prices to a new low, dipping below $31 and closing below $32, with the $30 level a short drop away. There is still no sign of demand increase, or the production has equalized with demand, oil is likely to remain at or near these levels in the near to short term.

The energy sector got hit again today as plunging oil prices continue to drag on earnings expectations. The Oil Index fell about -2.5% in response, creating a long black candle and hitting my next support target at 950. The indicators are bearish and gaining strength so this level is likely to be tested again if not broken. If oil falls further it will likely be broken. The caveat is that the indicators are also diverging from the new lows so caution is due.


The Gold Index

Gold prices fell in today's session but only marginally. Spot prices lost about -0.05% but did close below $1,100. Prices are being supported by a flight to safety trade as well as Fed speculation, a move that does not yet appear to be very strong. Prices may hang at or near current levels until the FOMC meeting unless economic data is unusually strong or weak.

The gold miners were not supported by gold prices today. The miners ETF GDX fell more than -4.5% in a move that confirms resistance at the $15 level. The indicators are also rolling over, led by stochastic, consistent with the upper end of a trading range. It looks like the GDX will remain range bound between $13 and $15 for now.


In The News, Story Stocks and Earnings

Arch Coal, the nations 2nd largest coal miner, filed for Chapter 11 bankruptcy and is only the latest casualty in the ailing coal sector. The move is aimed at cutting billions in debt from the balance sheet. Reduced demand and lower prices have been hurting the sector for years and is likely to continue. Rival Consol Energy recently issued an earnings warning to to those very factors. That stock lost more than 10% on the news and is approaching 12 year lows.


There were several up and down grades in the financial sector. The most notable was an upgrade to Wells Fargo at Goldman Sachs citing the companies position in a difficult time. At the same time, Goldman downgraded JP Morgan after a period of outperformance. The sector responded by selling off, the Financial Sector SPDR falling nearly -0.75% in a move that set a new 3 month low. The ETF is now trading at potential support levels with bearish indicators and earnings season at hand. If the banks are able to at least meet expectations with positive outlook support at $22 could hold, if not, a break below could take it down to $21 or $20. JP Morgan reports on Thursday: US Bancorp, Wells Fargo and Citigroup report on Friday.


Alcoa reported after the bell, better than expected. The company reported $0.04 per share, double the expected $0.02, on a slight revenue miss and provided positive outlook for 2016. According to the report the company exceeded its own expectations and is forecasting a 6% increase in aluminum demand next year. The stock closed with a loss but gained more than 2.5% in after hours trading.


Rail carrier CSX is expected to report earnings tomorrow. The company and the sector have been hit hard by declining coal prices, just last month CEO Frank Lonegro lowered full year guidance by a full percent, to about 3% from a previously stated range near 4%. Today the stock fell more than -1% to hit a new 2.5 year low. The indicators are bearish and gaining momentum so this move could continue unless tomorrow's report provides positive outlook.


The Indices

The indices had a wild ride today, first up, then down, then up again to close at or near last week's closing levels. Two of the four major indices closed with a small gain, the Dow Jones Transportation Average closed with a loss. The transports lost about -0.45% in today's action and looks like it might go lower. The indicators are bearish in the near term, suggestive of weakness, but divergent from the new low in the short term, suggestive of support. The candle is also suggestive of support although it is unconfirmed. A drop below this level could take the index down to 6,500, if a bounce takes hold first upside target is 7,250.


The NASDAQ Composite also closed with a loss, -0.12%, and appears to be moving down to test support near the Sept/Oct lows. Today's action almost reached those levels and produced a long lower wick on today's candle, suggestive of support. The caveat is that bearish momentum is on the rise so this support is likely to be tested again, near 4,550.


The biggest gainer in today's action was the Dow Jones Industrial Average. The blue chips gained close to 0.3% in today's session and created a bullish candle. Today's signal could indicate the market has reached an extreme of near term bearishness and level of potential reversal. The indicators are mixed; momentum is bearish and gaining strength while signs of support persist in both the MACD and stochastic, consistent with a bull market sell-off. If a peak has indeed been reached and the market bounces back 16,600 is first target for resistance. If the index continues to move lower next target for support is 16,000.


Today's other gainer was the S&P 500. The broad market gained almost 0.1% and created a very interesting doji candle. This candle may signal a bottom to selling although that bottom is unconfirmed. The indicators are mixed; MACD is pointing to lower prices while stochastic is oversold and consitent with support. The index could continue down to retest support levels, near 1,900, with a move beyond that depending on earnings and data.


Today's action has brought the indices down to the Sept/Oct support levels, driven on geopolitical tensions, sluggish growth, financial market turmoil and an expected quarter of weak earnings. This move could continue but there are signs support is at hand, both on the charts and in the market, .

There are concerns and for sure reasons to be cautious but I just don't see a reason to expect a sustained downtrend. Earnings and GDP outlook for 2016 remain positive, with a labor market tail wind, so I do see a reason to expect a rally when near term fears subside. If Alcoa's earnings are a sign of what's to come I think we could see the start of another long term rally within the greater secular bull market begin to unfold. I remain bullish for 2016, waiting for earnings and data, watching for entries.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Still Seeing Relative Strength In 2016

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Sovran Self Storage Inc. - SSS - close: 109.50 change: +1.45

Stop Loss: 107.40
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 257 thousand
Entry on January -- at $---.--
Listed on January 09, 2016
Time Frame: Exit PRIOR to earnings in mid February
New Positions: Yes, see below

Company Description

Trade Description:
REIT stocks had a rocky year in 2015 as investors worried about the Federal Reserve raising rates. Well the Fed finally did raise rates in December and shares of SSS soared to new highs. This stock has been outperforming both its peers and the broader market. Last year the S&P 500 was flat (-0.7%) while the REIT ETF (symbol: IYR) lost -17.6%. Shares of SSS delivered a +22% gain last year and the bullish momentum continues in 2016.

SSS is part of the financial sector. According to the company, "Sovran Self Storage, Inc. is an equity REIT that is in the business of acquiring and managing self storage facilities. The Company operates over 500 self storage facilities in 25 states under the name Uncle Bob's Self Storage."

This is a relative strength play. SSS has rallied toward round-number resistance at $110.00. Shares spent the last several days consolidating sideways in the $105-110 zone. Now it looks poised to breakout. The point & figure chart is bullish and forecasting a long-term target at $130.00.

Readers might want to consider buying calls on a breakout past $110.00. However, the intraday high on December 30th was $110.60. We are suggesting a trigger to launch positions at $110.75.

FYI: SSS has an $0.85 dividend coming up soon. The ex-dividend date appears to be January 15th. The stock will likely gap down on Friday morning due to the dividend.

Trigger @ $110.75

- Suggested Positions -

Buy the FEB $110 CALL (SSS160219C110) current ask $2.60
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

Where Is The Bounce?

by James Brown

Click here to email James Brown

Editor's Note:

Stocks left investors disappointed again today. The S&P 500 closed flat on the session while the NASDAQ marked its eighth loss in a row. A plunge in biotech stocks and another multi-year low in crude oil weighed on the session.

DLTR and RRGB hit our stops today. DLR met our entry trigger.


Current Portfolio:


CALL Play Updates

Digital Realty Trust Inc. - DLR - close: 78.60 change: +1.56

Stop Loss: 74.80
Target(s): To Be Determined
Current Option Gain/Loss: +13.6%
Average Daily Volume = 1.5 million
Entry on January 11 at $77.75
Listed on January 09, 2016
Time Frame: Exit PRIOR to February option expiration
New Positions: see below

Comments:
01/11/16: Our new bullish trade on DLR is off to a good start. Shares outperformed the broader market and kept the rally alive with a breakout to new highs. Our trigger to buy calls was hit at $77.75.

Trade Description: January 9, 2016:
The last several days have been tough on investors. Stocks experienced a global market sell-off. This volatility and uncertainty could push investors into safer, high-dividend paying stocks. Currently the 10-year U.S. bond only yields 2.1%. That makes a stock like DLR, with a dividend yield above 4%, a lot more attractive. The company has a history of consistently raising its dividend over the last nine years in a row. The stock's relative strength doesn't hurt either.

DLR is in the financial sector. According to the company, "Digital Realty Trust, Inc. supports the data center and colocation strategies of more than 1,000 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia. Digital Realty's clients include domestic and international companies of all sizes, ranging from financial services, cloud and information technology services, to manufacturing, energy, gaming, life sciences and consumer products."

DLR has consistently beat Wall Street earnings expectations the last four quarters in a row. The last two quarters the company has also beat analysts' revenue estimates.

Earlier this week DLR provided their 2016 outlook and the company's forecast was slightly above expectations, which helped shares resist the market's sell-off.

Here is an excerpt from DLR's press release on their 2016 outlook:

Digital Realty expects 2016 core FFO (Funds from Operations) per share to be within a range of $5.45-$5.60, which represents a 7% increase at the midpoint from the midpoint of 2015 core FFO per share guidance. Foreign currency translation is expected to represent a headwind to core FFO per share of 1%-2% in 2016.

"We are seeing solid demand for Digital Realty's comprehensive set of data center solutions, which gives us confidence in our ability to achieve accelerating core FFO per share growth in 2016," commented Andrew P. Power, Digital Realty's Chief Financial Officer. "We also expect to generate double-digit AFFO per share growth (Adjusted Funds from Operations), driven by greater cash flow contribution from our core business, accretion from the Telx acquisition and the continued burn-off of straight-line rent. In short, the quality of earnings is improving, the growth in cash flow is accelerating, and we are optimistic about the prospects for our business in 2016 and beyond."

The recent relative strength in shares of DLR over the last few weeks has lifted shares above key resistance near the $75.00 level. It has also produced a buy signal on the point & figure chart, which is now forecasting a longer-term target of $102.00.

Friday saw DLR shares tag new all-time highs (@ 77.67). Tonight we are suggesting a trigger to buy calls at $77.75. Plan on exiting prior to February option expiration.

- Suggested Positions -

Long FEB $80 CALL (DLR160219C80) entry $1.10

01/11/16 triggered @ $77.75
Option Format: symbol-year-month-day-call-strike


Harris Corp. - HRS - close: 86.94 change: +1.10

Stop Loss: 84.90
Target(s): To Be Determined
Current Option Gain/Loss: -43.4%
Average Daily Volume = 927 thousand
Entry on January 05 at $88.15
Listed on January 04, 2016
Time Frame: Exit PRIOR to earnings in early February
New Positions: see below

Comments:
01/11/16: HRS briefly traded down to a new two-week low when it pierced short-term support near $85.50 this morning. Fortunately the stock rebounded and managed to outperform the market with a +1.28% gain by the close. A new rally past $87.85 or $88.00 could be used as another entry point to buy calls.

Trade Description: January 4, 2016:
Out of the thousands of publically traded companies out there only a few have been around for over 100 years. A couple of weeks ago HRS celebrated its 120th anniversary.

HRS issued a press release to mark the achievement. Here's an excerpt: "Founded in the back room of an Ohio jewelry store in December 1895, Harris grew from a tiny printing press company into a top 10 defense contractor with $8 billion in annualized sales, 22,000 employees, customers in 125 countries, and a diverse portfolio of technologies that connect, inform and protect the world. Harris is the longest-thriving major defense contractor and one of 398 publicly held companies still in existence for 120 years or longer - including GE, CVS, Coca-Cola, Pfizer, P&G, and J.P. Morgan."

Today HRS is in the technology sector. They are considered part of the communication equipment industry. According to the company, "Harris Corporation is a leading technology innovator, solving our customers' toughest mission-critical challenges by providing solutions that connect, inform and protect. Harris supports customers in more than 125 countries, has approximately $8 billion in annual revenue and 22,000 employees worldwide. The company is organized into four business segments: Communication Systems, Space and Intelligence Systems, Electronic Systems, and Critical Networks."

Last year HRS ended 2015 on a strong note. The month of December saw HRS win several government contracts worth more than $1 billion. Meanwhile analysts are bullish on the stock. Goldman Sachs has a buy rating on HRS. Cowen recently upped their price target to $102 and said it was one of their best trading ideas for 2016.

Technically the stock has been showing relative strength. Last year HRS outperformed the broader market with a +20% gain. The positive news about the company's new contract wins produced a bullish breakout past major resistance at $85.00 in mid December. Today investors bought the dip near short-term support at its 10-dma. HRS displayed relative strength today too with a +0.8% gain. If this bounce continues we want to hop on board. Tonight we are suggesting a trigger to buy calls at $88.15.

- Suggested Positions -

Long FEB $90 CALL (HRS160219C90) entry $2.65

01/05/16 triggered @ $88.15
Option Format: symbol-year-month-day-call-strike


PowerShares QQQ ETF - QQQ - close: 104.33 change: +0.32

Stop Loss: 103.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 35 million
Entry on January -- at $---.--
Listed on January 07, 2016
Time Frame: Exit PRIOR to February option expiration
New Positions: Yes, see below

Comments:
01/11/16: The QQQ dipped to $102.73 before bouncing. The ETF ended the session with a +0.3% gain, snapping a seven-day losing streak. There is no change from my weekend comments. We have two different entry points listed.

Trade Description: January 7, 2016:
The stock market moves on emotion. Most of the time it is a tug-of-war between fear and greed. Occasionally one emotion takes control of the market and stocks move too fast one direction. That is where we are at today.

Fears of a global slowdown thanks to disappointing economic data out of China have increased. China has devalued their currency again, which does not generate confidence. Yesterday we had the nuclear weapon testing headlines from North Korea, which generates fear. We have plunging oil prices, which is fueling worries about deflation.

Odds of a snap back rally are growing and we want to be ready to catch it. One way to play it is the NASDAQ-100 ETF or the QQQ. These are very liquid, big cap names that fund managers can move in and out of more easily.

Thus far 2016 has been ruled by fear. We are only four trading days into the year and the NASDAQ composite is already down -6.4% completely erasing its +5.7% gain from 2015. The QQQ is down -6.2% in the last four days and it's down -8.25% from its December 29th peak just six trading days ago. That's too far too fast.

Tonight we are suggesting a short-term bullish trade when stocks bounce. They will bounce (eventually). Today's intraday high on the QQQ was $107.29. We are suggesting a trigger to buy calls at $107.35. We'll use an initial stop loss at $103.85. More conservative traders may want to use a stop loss closer to today's intraday low instead ($104.81).

Trigger @ $106.50, use an initial stop loss at $103.45

- Suggested Positions -

Buy the FEB $110 CALL (QQQ160219C110)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Buy-the-Dip Trigger @ $100.50, use an initial stop loss at $97.45

- Suggested Positions -

Buy the FEB $105 CALL (QQQ160219C105)

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(s).

01/09/16 Entry Strategy Update - Use TWO different entry triggers
One is a buy-the-dip trigger at $100.50 with a stop at $97.45 and the Feb $105 calls
The other is a trigger at $106.50 with a stop at $103.45 and the Feb $110 calls
Option Format: symbol-year-month-day-call-strike




PUT Play Updates


Currently we do not have any active put trades.




CLOSED BULLISH PLAYS

Dollar Tree, Inc. - DLTR - close: 77.36 change: -0.43

Stop Loss: 76.90
Target(s): To Be Determined
Current Option Gain/Loss: -56.9%
Average Daily Volume = 3.6 million
Entry on January 07 at $80.85
Listed on January 06, 2016
Time Frame: Exit PRIOR to February option expiration
New Positions: see below

Comments:
01/11/16: Shares of rival discount store Dollar General (DG) were hammered at the open this morning. This probably pressured shares of DLTR lower. DLTR managed to pare its losses by the closing bell but it was too late. DLTR hit our stop loss at $76.90.

- Suggested Positions -

FEB $80 CALL (DLTR160219C80) entry $3.60 exit $1.55 (-56.9%)

01/11/16 stopped out @ 76.90
01/07/16 triggered @ $80.85
Option Format: symbol-year-month-day-call-strike

chart:


CLOSED BEARISH PLAYS

Red Robin Gourmet Burgers - RRGB - close: 59.46 change: +1.17

Stop Loss: 60.25
Target(s): To Be Determined
Current Option Gain/Loss: -30.0%
Average Daily Volume = 244 thousand
Entry on January 06 at $58.40
Listed on January 05, 2016
Time Frame: Exit PRIOR to earnings in mid February
New Positions: see below

Comments:
01/11/16: Friday's bounce in RRGB continued this morning. By lunchtime shares had pierced resistance at $60.00 and its simple 10-dma. Our new stop loss was hit at $60.25.

- Suggested Positions -

FEB $55 PUT (RRGB160219P55) entry $2.50 exit $1.75 (-30.0%)

01/11/16 stopped out
01/09/16 new stop @ 60.25
01/06/16 triggered @ $58.40
Option Format: symbol-year-month-day-call-strike

chart: