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 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
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
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.
Long March $60 calls @ $2.90, see portfolio graphic for stop loss.
STZ - Constellation Brands - Company Description
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.
Long April $150 Call @ $4.70, see portfolio graphic for stop loss.
Original Put Recommendations (Alpha by Symbol)
AMBA - Ambarella - Company Description
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
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
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.
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
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.
Long March $27.50 put @ $1.75, see portfolio graphic for stop loss.
VXX - iPath S&P 500 VIX Futures ETN
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.
Long March $23 Put @ $2.41, no stop loss
XLE - Energy Select SPDR ETF
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
Long March $50 Put @ $2.62, see portfolio graphic for stop loss.
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