Option Investor
Newsletter

Daily Newsletter, Thursday, 1/28/2016

Table of Contents

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

Market Wrap

An Oil Bounce?

by Thomas Hughes

Click here to email Thomas Hughes
Fed? What Fed? The market jumped on rising oil prices and positive earnings.

Introduction

The market jumped today on rising oil prices but don't get your hopes up to soon, the catalyst may be nothing more than the same rhetoric we've been hearing the last 12 months. WTI got a 5% pop on news that there was going to be a meeting of oil ministers. Soon after that Russia made a statement that Saudi Arabia was calling for a 5% production cut and then not too long after that the Saudis denied the call saying there were, as always, willing to discuss such a cut should other nations meet them at the negotiating table.

This time a deal to cut support global oil prices could happen but nothing concrete happened today, except a rumor driven gain in oil prices. The conspiracy theorist in me wonders if Russia and Saudi Arabia didn't orchestrate this little rumor, $1 a barrel price difference is a lot of money for a country pumping 100's of thousands of barrels per day. The Russians and Saudis are both pumping at or near record levels, more than 10 million barrels per month each.

Market Statistics

Global markets were mixed. Most Asian indices closed lower, well before the oil news, led by the mainland Shang Hai. It fell -2.85%. In Europe the indices started the day with small losses, then moved into positive territory, and then sold off on weaker than expected earnings among EU businesses. The DAX led with a loss of -2.44%.

Futures trading on the US indices indicated a flat to positive opening for most of the early session. This strengthened a little after the 8:30AM data and a host of better than expected earnings reports but did not get really strong until nearly 9AM, just after the Russia/Saudi rumors began to swirl. At that point the futures jumped nearly a full percent and held those levels going into the opening bell.

The open was strong, the indices opened as expected, the SPX making gains near 0.80% in the first minute and rising as high as 1.05% before hitting the intraday high. The high was hit during the opening rush, about 5 minutes after the open, and held until late in the day. In between, the indices retreat to test support at yesterday's close before lunch, bounced during lunch, built a bottom in early afternoon and were approaching the early high by 2:30PM. The late day rally did not quite reach the high set earlier in the day but it did recover most of the early gains and left the indices near the highs of the day.

Economic Calendar

The Economy

There were two releases other than the jobless claims data this week, Durable Goods and Pending Homes Sales. Durable Goods Orders, released at 8:30AM, came in at a disappointing -5.1%, more than 4% lower than the expected -1%. Within the report ex-transportation durable goods orders fell only -1.2%. Shipments and unfilled orders both fell, inventories rose slightly by 0.5%.

Initial claims for unemployment fell -16,000 from an upward revision of +1,000 to hit 278,000. The four week moving average of initial claims also fell, losing -2250 to hit 283,000. On a not adjusted basis claims fell by -21.6%, well ahead of the expected drop of -17.1%. At face value the decline is good, in line with trends and consistent with ongoing labor market health but there is a red flag popping up; not adjusted claims are now higher than at this same time last year, the first time this has happened in several years. It may be nothing, just part of seasonal flux, but worth noting.


Continuing claims gained 49,000 from an upward revision of 11,000 to reach 2.268 million. The four week moving average of continuing claims also rose, gaining 15,750 to hit 2.246 million. This is a new 6 month high but not yet alarming, continuing claims remain low relative to trend and consistent with labor market health. If this metric continues to rise, and spill through into the total claims is noticeable, then we may have a problem.

Total claims fell by -122,445 from the peak set last week. This total number of Americans receiving unemployment benefits is now 2.729 million. The drop seen this week was predicted by historical data, if the data holds true then initial, continuing and total claims should begin to trend lower over the next 4 to 6 weeks and then into the summer months. On a year over year basis the total number of claims is down -7.9% and consistent with ongoing labor market recovery.


Pending Home Sales rose by a meager 0.1% in December and the November data was revised lower by a -0.1% so that gain is a wash. On a year over year basis signed contracts for new homes are up 4.2% in December, the 16th consecutive month of increase. Lawrence Yen, chief economist for the National Association of Realtors, says that difficulty in finding affordable homes is being offset by strengthening labor markets. Demand is expected to continue into 2016 but may see some dampening. Existing Home Sales are forecast to rise by 1.5% in 2016.

Tomorrow look out for Chicago PMI, Michigan Sentiment, the Employment Cost Index and the 1st estimate for 4th quarter GDP. Expectation is for growth to temper from 2% in the 3rd quarter to about 1% in the 4th.

The Oil Index

Oil prices spiked on rumor in today's session. WTI jumped by more than 7% at one time but tempered that gain going into the close. By end of day WTI and Brent were both up by more than 3.5% but well off the early highs. In my view this move is reactionary and without substance; the rumor is just that, a rumor. There is no change to fundamentals at this time so today's spike is most likely another shorting opportunity for oil bears. If a meeting of ministers does take place, and they do reach an agreement, prices may rise again but until there is a substantive change in the supply/demand picture I expect prices to remain low.

The oil sector got a boost from today's pop in oil prices that drove the Oil Index up by nearly 3%. Today's action created a gap to the upside that opened the session just below resistance, and then sold off from there. Resistance is at the short term moving average, just below the 1,000 level, and may prove strong. A failure to break above could result in a move back to support levels near 900. If oil prices fall back from today's peak the move to support could be swift.


The Gold Index

Gold prices have held steady over the past 24 hours, in the wake of the FOMC meeting and policy announcement. The Fed statement did not make any reference to when, if or how interest rates would be raised, weakening the dollar and leaving the market open for another 6 weeks of data driven speculation. Today, gold prices held flat near $1115, supported by a weaker dollar, but well below resistance targets and yesterday's high near $1125. Prices may remain at this level, within a range, until data or central bank activity provide a clearer outlook.


The Gold Miners ETF GDX fell from yesterday's peak but remains above the short term moving average. Today's candle is a small spinning top but one with bullish overtones. Today's action helps confirm near term support at the moving average and an upward trend within the 7 month trading range. The indicators are pointing higher, confirming the recent break above the moving average, and pointing toward the upper end of the range. First target is near $15 with additional targets near $16 and $17 should gold prices move higher as well.

In The News, Story Stocks and Earnings

The Dollar Index fell a little more than -0.30% in today's session. The FOMC's apparent dovishness has weakened the dollar and sent the index down to test support near $98.25. The downward move in dollar value could continue if global financial turmoil and/or weak US data persists. The indicators have confirmed the downside move with bearish crossovers but are otherwise consistent with a range bound index. At this time the most likely catalysts for the dollar are the ECB and BOJ which have both indicated a willingness to increase QE; the Fed is monitoring the situation.


Earnings. Today was one of the biggest days of the season, both in terms of sheer numbers and numbers of big name companies. Based on my calendar it looks like there were at least 175 major reports with names like Amazon, Microsoft, Pulte, Time Warner, JetBlue, Ford, Harley Davidson and many others. All in all the reports were good, there are isolated misses but in general earnings and revenues are coming in better than expected.

Names reporting before the bell:

Pulte Homes-Beat on the top and bottom line. Sales prices are up 6% over last year. Company CEO says they are benefiting from a favorable demand environment. Back logs are up 26% year over year.

Time Warner-Beat expectations although earnings fell -11% from last year.

Harley Davidson- Beat EPS and revenue expectations but edged down from last year. Revenue of $1.18 billion is down from last year's $1.20 billion but well ahead of the expected $1.02 billion projected by analysts. Shares of HOG jumped more than 5% at the open but sold off from there.


Ford-Beat on top and bottom line, reports first profits in Europe since 2011.

Caterpillar- Revenues miss, earnings beat (smaller than expected loss) and guidance is better than expected. Company CEO says the coming year is going to be tough.

UnderArmor- The star of the morning may have been UnderArmor. The company reported better than expected revenue, earnings and guidance driven on strong demand. The news helped to drive the stock up by more than 20% and left it near the high of the day.


After hours action included names like Microsoft, Amazon, Visa and Electronic Arts, all of which beat expectations, except for Amazon. Amazon reported revenues that more than doubled last years results for the same period but earnings were much weaker than expected. The street was calling for near $1.50 in earnings, reported adjusted earnings were $1. Shares of the stock had been trading up as much as 10% during the open session, but fell by an equal or greater amount after the earnings report hit the market.


Microsoft jumped by more than 3% in after hours trading, driven by better than expected earnings. The stock moved up above the short term moving average and looks like it is heading up to retest the recently set high.


The Indices

The indices tried to rally today but the signals are mixed. Most of them were able to make gains and hold them, if capped by resistance, but not all. The Dow Jones Transportation Average was the only of the four major indices to close with a loss, just over -0.80%. Today's action returns the index to support at the 6,700 level. The indicators are moving higher, confirming the bounce from support, but it looks like support will be tested again. If 6,700 fails, next target for support is 6,600.


Today's leader was the NASDAQ Composite, led by Amazon in the early hours so we'll see how if it retains leadership tomorrow. In any event, today's action carried the tech heavy index up by more than 1% at the open only to lose some of those gains during the day, the index closed with a gain of 0.86% and created a bearish candle with long lower shadow. The indicators are mixed; momentum remains bearish although it is close to shifting to the upside, stochastic is pointing higher with both %K and %D. This set up could be a preamble to a bullish break above the 4,500 resistance line, or a drop down to retest support along 4,400, depending on market whim and the price of oil Friday morning.


The Dow Jones Industrial Average made the 2nd biggest gain in today's session, about 0.79%. The blue chips created a medium bodied white candle with long lower shadow, indicative of support just below yesterday's closing price and the bottom of a 5 day consolidation. The indicators are rolling into a bullish signal, MACD is crossing the zero line today in confirmation, so it looks like this one could continue rising up to test resistance at the short term moving average. Upside target is near 16,500 with 15,600 target for support should the index pullback.


The S&P 500 made the smallest gain in today's session, only about 0.55%. The broad market created a white bodied candle with upper and lower shadow, indicative of indecision, between a two potential support and resistance lines; support is near 1,860 with resistance near 1,900. The indicator are pointing higher, consistent with a bounce from support, MACD confirming today with a bullish crossover. Upside target, should resistance be crossed, is near 1,950 in the near term.


The market certainly looks like it is trying to bounce, although the indications remain mixed. With the FOMC out of the way for at least a couple of weeks market direction is going to come down to earnings and oil prices. Earnings are coming in better than expected, if weak, while oil prices remain questionable. Oil may cause a retest of support but I think earnings, and forward outlook, will help support to hold. Whether or not a rally develops is yet to be seen. I remain bullish in the long term, cautious in the near.

Tomorrow look out for after shocks from today's post-closing earnings reports, another onslaught of new reports and the first estimates for 4th quarter GDP.

Tomorrow is also the last trading day of January, this could bring additional volatility as money managers liquidate losers and scoop up bargains.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Been Shopping Lately?

by Jim Brown

Click here to email Jim Brown

Editors Note:

One retailer has been rapidly expanding its line of certain products and is killing the overpriced competition.

With tech companies either exploding higher on earnings or blowing up for lack of earnings, I am turning my sights on the farthest thing from a tech superstar. Sometimes the sleeper stocks are the best bet in a market storm.


NEW DIRECTIONAL CALL PLAYS

KR - Kroger

Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.

While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.

They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.

Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.

While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.

At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.

Shares declined from $43 in early January to $36 on the Wednesday crash. This is long term support and shares are very oversold. Earnings are March 3rd and I expect the stock to rebound, assuming the market cooperates. With support at $36.50 and the stock at $37.81 I view this position as very limited risk unless the overall market crashes.

Shares have consolidates over the last year after a monster rally from $17.50 in early 2014.

Earnings March 3rd. We will exit before earnings.

Buy April $40 call, currently $1.00. No stop loss because of the cheap option.


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays



If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now


In Play Updates and Reviews

FANG is Back, Temporarily

by Jim Brown

Click here to email Jim Brown

Editors Note:

The FANG stocks, Facebook, Amazon, Netflix and Google all combined to lift the Nasdaq and the market.

What a difference a day makes. Facebook (FB) blasted off with a 15% gain of $15 to close at $109.11 and a new high by 10 cents. Amazon (AMZN) rallied +9% or $52 ahead of its earnings tonight. Netflix (NFLX) rallied 3.5% to $94 in an oversold bounce. Google (GOOGL) rallied 4.3% or $31 to close at $748. (Amazon was down -$95 in afterhours on weak earnings so the Nasdaq is going to have a tough open on Friday.)

The rebound lifted the Nasdaq 100 by 57 points but the ongoing biotech wreck held the Nasdaq Composite to only a 38 point gain. The Biotech Index ($BTK) fell -4.5% or -134 points. It is hard for the Nasdaq Composite and the Russell 2000 to gain any traction with biotechs down so strongly.

Another bogus story out of the Middle East regarding a proposed 5% production cut in oil pushed oil prices to nearly $35 before the denials began to pour in. A Russian oil official said Saudi Arabia had proposed a 5% cut across the board by every producing country. Prices soared. A little later OPEC spokesman said there was no offer on the part of OPEC and a Saudi Arabia spokesman said there was no offer. Later it was revealed that Venezuela had proposed a 5% cut but they have no voice in the proceedings. Venezuela cannot produce enough oil to meet their own production quota so a 5% cut in their quota would be meaningless.

What we are seeing is that oil ministers have figured out they can spike the price of oil by floating bogus headlines and now that they have figured it out we can expect to see this every week until investors understand what they are doing and ignore them. If you are exporting 2-3 million barrels of oil per day a $5 spike in the price per barrel is significant even if it only last 2-3 days. For Russia at 9 million barrels a day, that is a lot of money.

The bogus headlines and oil spike knocked us out of the XLE and DVN positions.



Current Portfolio




Current Position Changes


XLE - Energy SPDR ETF

The long call on the XLE was stopped by the spike in crude on the production cut headlines.


DVN - Devon Energy

This position was stopped by the spike in crude prices on the production cut headlines.


AMBA - Ambarella

The Ambarella put remains unopened.


IWM - Russell 2000 ETF

I am closing the long call on the IWM.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



Original Call Recommendations (Alpha by Symbol)


IWM - Russell 2000 ETF

ETF Description

Comments:

The IWM failed to rally and closed flat because of the plunge in the biotech stocks. It would have been worse but the short covering in the energy sector held the Russell to a fractional gain. I am closing this position because the biotechs are showing no indications of slowing their descent and once the oil spike fades the dro in energy stocks will also be a drag.

The IWM is still holding over support at $99. If you want to hold this position in hopes of a rebound I certainly understand. I changed my plan to exit or hold twice before I finally decided to limit our losses and recommend an exit.

Original Trade Description: January 20th

The IWM is the Russell 2000 ETF and the Russell was the only major index to close positive for the day other than the Biotech sector index. The Russell is in a bear market with a -24% drop from its highs. The Russell declined -47 points intraday and rebounded to gain +4.4 at the end of the day. The 960 level where it bounced was support from early 2013 and it was the 300-week average.

Typically, the small caps are the strongest index in December and January. That was not the case this year and there is a good possibility fund managers will bargain hunt there first when the buying begins.

Resistance from Tuesday's gap higher open is $101.20. I was going to recommend an entry trigger at $101.50 to get us past that level. The IWM closed at $99.18. However, by waiting to get past that resistance the option premiums could rise by more than $1. I would rather just buy the open and we will take what the market gives us.

Position 1/21/16, close 1/29/16:

CLOSE: Long March $102 call @ $2.76, currently $2.26, -.50 loss.




LULU - LuluLemon

LuluLemon designs, manufactures and sells athletic apparel and accessories for women, men and female youth. They operate through corporate owned stores and sell direct to the consumer online. They are best known for their yoga style clothing. Full Company Description

Comments:

LULU closed at a five month high at $59.60 but it is still struggling with that $60 resistance level. Good relative strength but moving up slowly.

Original Trade Description: January 22nd

LuluLemon surprised everyone when they raised their guidance for Q4 sales saying they had a great holiday season. The company preannounced strong sales when most other retailers were posting losses or mediocre gains. The company now expects Q4 revenues in the range of $690-$695 million compared to prior guidance for $670-$685 million. This represents nearly 19% year over year growth on a constant currency basis.

Earnings guidance was raised to a range of 78-80 cents, up from 75-78 cents. Analysts were expecting 77 cents. The company said it entered 2016 with a bang thanks to a better than expected holiday season and continued increases in store traffic.

Cowen raised the target price from $52 to $66. Wells Fargo ungraded them from neutral to outperform with a target of $65. Jefferies upgraded it from hold to buy and gave it a $70 price target. Credit Suisse maintained its outperform rating but raised the target to $60. Suntrust Robinson reiterated a buy with a $66 target. Morgan Stanley reiterated an overweight with a target of $68. Morgan called it their favorite "turnaround" stock for 2016. Barclays issued an overweight rating with a target of $85.

It is amazing what a little positive guidance can do for Street ratings.

Earnings are March 9th.

Position 1/26/16:

Long March $60 calls @ $2.90, see portfolio graphic for stop loss.




STZ - Constellation Brands - Company Description

Comments:

A great day for STZ with a nearly $6 gain. The minor weakness from yesterday was completely erased.

Original Trade Description: January 14, 2016:

STZ was one of last year's best performing stocks with +45% gains in 2015. Consistently raising earnings and revenue guidance can do that for a stock. The company is seeing so much demand for their beer products that STZ just announced they're building a huge new brewery in Mexico. Meanwhile their wine and spirits business is seeing stronger margins due to recent acquisitions. Overall STZ is moving into 2016 with the wind at its back.

STZ is in the consumer goods sector. According to the company, "Constellation Brands is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world's leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company's premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky... Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,700 talented employees."

STZ has been killing it on the earnings front. They have beaten earnings the last three quarters in a row. Management has raised their guidance the last three quarters in a row. Their most recent earnings report was last week on January 7th. Analysts were expecting a profit of $1.30 a share on revenues of $1.62 billion. STZ beat estimates with a profit of $1.42 a shares. Revenues were up +6.4% to $1.64 billion. Strong beer sales has helped fuel double-digit shipment increases. The company announced they were building another brewery and raised their guidance again.

This bullish outlook sparked a couple of new price target upgrades ($172, $174 and $185). The stock soared to new highs and broke through key resistance near the $145.00 level on its earnings news and guidance. Shares have seen some profit taking since its spike to new highs. Now STZ is near support at one of its long-term trend lines of higher lows. The simple 50-dma should offer technical support at $140.40. Meanwhile the $140.00 level could offer some round-number, psychological support. Both of these are converging near its trend line of higher highs.

STZ underperformed the market today, which may mean more profit taking ahead. We want to buy calls on STZ as it nears support in the $140.00-140.50 area. Tonight we are listing a buy-the-dip trigger at $140.50 with a stop loss $138.25, just under its early January low.

Position 1/19/16:
Long April $150 Call @ $4.70, see portfolio graphic for stop loss.




Original Put Recommendations (Alpha by Symbol)


AMBA - Ambarella - Company Description

Comments:

The Ambarella trade remains unopened with an entry trigger at $35.75. Shares rebounded slightly with the market.

Original Trade Description: January 27th

Ambarella develops full motion HD video chips for video capture, sharing and display worldwide. The system on a chip handles HD video, audio, image processing and system functions on one chip. Their largest customer is GoPro.

GoPro (GPRO) reported two weeks ago that holiday sales have been dismal and would report Q4 revenue of $435 million, down -31% from the year ago quarter. Analysts were expecting $512 million and that number had already been lowered by analysts fearing sales were declining.

GoPro said it was cutting 7% of its workers and would incur up to $10 million of restructuring expenses in 2016.

Ambarella shares tanked along with GoPro despite having numerous other customers that also buy their chips. Unfortunately, GoPro is their biggest customer by far. In the prior quarter, Ambarella missed estimates for "near-term headwinds" which translates to "GoPro cameras are not selling." This means the current quarter that they will report on March 3rd is not likely to be any better. There is probably an earnings warning lurking in the near future.

GoPro is being hampered by a flurry of new competitors at cheaper prices. This means competition is only going to get worse and GoPro has already cut its prices twice in the last 3 months. All of this means GoPro is losing market share and that means fewer Ambarella chips will be needed.

With Apple shares crashing and estimates for Q1 iPhone sales declining by about 20%, this is going to put a cloud over the entire personal electronics market.

Ambarella is not overpriced with a PE of 13. They are just too reliant on GoPro for the majority of their revenue. If Ambarella could accelerate some purchases by their other customers, the stock would recover quickly. Apparently that is not yet happening and shares are about to decline to an 18-month low under $35.

Earnings March 3rd.

With AMBA trade at $35.75

Buy March $32.50 put, currently $2.45, initial stop loss $40.55




DVN - Devon Energy

Comments:

Devon shares spiked at the open on yet another short squeeze in oil prices. There was more chatter about a possible OPEC deal with Russia. Later the talks and proposals were denied by OPEC officials and Saudi Arabian officials. We were stopped out on the spike at the open at $26.65.

Original Trade Description: January 21st

Devon Energy primarily engages in the exploration and production of oil and gas. The majority of their production is natural gas from more than 19,000 wells but they are making a concentrated effort to expand oil production. At year-end they had 689 million barrels of oil equivalent reserves. Company Description

In Q3 they produced 282,000 barrels of oil per day. That was a 31% increase over Q3-2014. That was the 5th quarter they exceeded guidance on oil production growth. That compares to their 680,000 Boepd of total gas and liquids production showing that oil was only about 41% of their total production. However, in Q3 oil accounted for 74% of total upstream revenue.

Devon is a well run company and highly regarded but the price of oil is killing them. They do have significant midstream assets including pipelines and processing facilities in the EnLink Midstream business. They own 70% of ENLC and 29% in ENLK. Those midstream companies generated $270 million in cash distributions in 2015.

The EnLink revenue is supporting Devon through this down cycle in the energy sector. Devon is also acquiring Access Pipeline in the first half of 2016 and that will add to their midstream assets.

If crude prices were to rally long term Devon would be a great company to own. However, in this period of falling oil prices from now until April the company is at the mercy of the declining sector.

On Thursday Devon shares rebounded with oil prices to resistance at $24.50 and then faded. When the switch to the March contract fades and crude prices begin to fall again I expect Devon to revisit the lows under $20 from Wednesday.

Earnings are February 16th so this will be a short-term play.

Position 1/25/16, closed 1/28/16:

Closed: Long March $23 put, entry $1.48, exit $1.20, -.28 loss



HPQ - Hewlett Packard

Juno is a biopharmaceutical company that develops cell based cancer immunotherapies. Full Company Description

Comments:

HPQ declared a dividend of 12.4 cents to be paid on April 6th to holders on March 9th. Shares still declined -14 cents. They could be positive on Friday after Microsoft posted good earnings.

This is a long-term play to hold over the Feb 24th earnings. Earnings news by other companies will be the driver over the next several weeks.

Original Trade Description: January 25th

Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.

Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.

In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.

HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.

Earnings are February 24th.

Position 1/26/16:

Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.



JUNO - Juno Therapeutics

Juno is a biopharmaceutical company that develops cell based cancer immunotherapies. Full Company Description

Comments:

Juno crashed to a new low on the selloff in biotechs. I lowered the stop loss on JUNO to $31.25.

Original Trade Description: January 22nd

Juno has been very active in buying up its competitors. On January 11th the company announced the acquisition of AbVitro for $125 million. That is their third acquisition in 12 months. However, Illumina (ILMN), ten times larger than Juno, is also on the same track and announced a similar acquisition on the same day.

Juno claims there is more than enough room in the space for both Juno, Illumina and Celgene (CELG) another competitor in the space. Apparently investors are not convinced. Shares of Juno have been in decline since early December and they hit a post IPO low last week. The rebound was lackluster and in a good market on Friday, they only gained 8 cents.

Update 1/26/16: The National Institute of Health (NIH) researchers published a study showing off-the-shelf T-cell therapy could induce remissions in patients with advanced blood cancers. This new "allogenic" T-cell therapy study represents a competitive threat to therapies from Juno, Kite and Novartis.

Earnings are March 17th.

Position 1/26/16:

Long March $27.50 put @ $1.75, see portfolio graphic for stop loss.



VXX - iPath S&P 500 VIX Futures ETN

Company Description

Comments:

The rally knocked the VXX back to support at 25. If we can get more than 1 positive day in a row it would help. Eventually the volatility will ease. It is only a matter of time.

Original Trade Description: January 16th

At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.

The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.

No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.

Stocks normally don't move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.

Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.

Position 1/19/16:
Long March $23 Put @ $2.41, no stop loss




XLE - Energy Select SPDR ETF

Company Description

Comments:

The bogus headlines on production cuts caused another short squeeze in WTI and energy equities. We were stopped out on the move past our stop at $56.75. I will look to reload this when energy prices begin to decline again.

Original Trade Description: January 19, 2016

The XLE is an ETF that represents the majority of the stocks in the energy sector. With the price of crude oil plunging and analysts predicting bankruptcy for 30-50% of the U.S. producers there is nothing to provide support for this ETF.

The few stocks that have dividends including Exxon, Chevron, Conoco and a few others, cannot support the sector. There are 45 stocks in the ETF with Exxon, Chevron and Schlumberger the largest weightings. That leaves about 40 stocks to drag the sector down as oil prices continue to fall.

This play does not need a lot of explanation. We are betting the energy sector will continue to decline as oil prices head for the low $20s.

This is the period of the year when oil inventories build. Demand is low and refineries will begin to shut down for spring maintenance in February and that will continue into March. Last year from the second week in January to the fourth week in April, U.S. inventories rose nearly 112 million barrels to record levels. They cannot repeat that this year because there is not enough available storage. This will drive prices even lower when producers run out of locations to store the oil.

We will plan on exiting this position the first week of March. I am not putting a stop loss on it initially because we could see some volatility whenever the shorts get squeezed. Once we are in the position for 3-4 days I will assign a stop loss

Position 1/20/16:

Long March $50 Put @ $2.62, see portfolio graphic for stop loss.






If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now