Option Investor
Newsletter

Daily Newsletter, Monday, 2/1/2016

Table of Contents

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

Market Wrap

Is It Rally Time?

by Thomas Hughes

Click here to email Thomas Hughes
The market held near Friday's high, waiting on another week of earnings and NFP data due Friday.

Introduction

The market tried hard to extend Friday's rally despite falling oil prices and weak data from China. Better than expected earnings and growing hope the Fed won't raise rates again soon are supporting the market.

Global indices had a much harder time in today's session than ours did. Weak manufacturing data from China sent most Asian indices into the red, led by the Shanghai's decline of -1.75%. The Nikkei bucked the trend, rising nearly 2% in the wake of last week's surprise BOJ action. European markets fell a little more than -1% intraday, driven by weak China data and plunging oil prices, but were able to regain a little more than half of that before the close of trading.

Market Statistics

Futures trading indicated a negative open for the US indices all morning. Pre 8:30AM the SPX was indicated to open with a loss near -6 points, then hit a low near -1% on oil prices, then moderated that to about -.4% after the release of economic data and held that going into the opening bell. After the bell the indices started with small losses, then extended them until hitting early bottom just after 10AM. From that point on the indices drifted sideways to up, slowly regaining the early losses, until reaching opening price levels just before 2:30PM. By 3:30 they had all at least touched higher prices, leaving them at or above break even at the close.

Economic Calendar

The Economy

There was quite a bit of economic data for a Monday. Personal income and spending were the only bits to be released before the opening bell. Personal income rose by 0.3%, a little better than the 0.2% expected by analysts. Disposable personal income also rose by 0.3%, both a sign of slowly rising upward pressure in wages. The core PCE fell by -0.1% but revisions to November data wash that out. Both Income and core PCE were revised higher, income to 0.3%, PCE to 0.5%. The less than expected news was an unchanged reading for spending, 0.0%.

ISM Manufacturing and Construction Spending were both released at 10AM, and both were below expectations. ISM came in at 48.2 for January, below the expansionary 50 level but up 0.2 from December. This makes the 3rd month of contraction within the manufacturing sector but there are some bright spots within the report; both New Orders and Production are up from last month. New orders is up by 2.7 and expansionary at 51.7, Production is up 0.3 to 50.2 and mildly positive. The worst reading was for employment, -2.3 to 45.9.

Construction Spending rose a meager 0.1% in December, far below the 0.5% expected by the analysts. On the upside, the previous moth was revised higher by 0.2% to 0.6% and year over year growth stands at 8.2%. Based on housing and labor data I think we can expect at least similar growth this year.

Moody's Survey of Business Confidence rose 0.3 to 30.6. This is up from last week's low but only just. Sentiment has fallen noticeably since the summer and Mr. Zandi has little positive in his report. Global market turmoil is having an impact, views on current conditions have been hit the worst while forward looking sentiment is stronger. Based on my chart there is no sign sentiment is bottoming at this time.


According to FactSet 40% of the S&P 500 has reported earnings so far, another 20% is due to report this week. Of those who have reported 72% have beaten earnings projections while only 50% have beaten revenue projections. The number beating on earnings is above average, the number beating on revenue is below average. To date, the blended rate of S&P 500 earnings growth is now -5.8%, up slightly from last week. If this is the bottom in expectations we can expect to see the final rate of growth for the 4th quarter of 2015 run in the range of -1% to -2%. Energy of course is leading the decline.


Expectations of growth for all of 2016 are coming down, led by the energy sector, but only the first quarter is projected to be negative at this time. First quarter growth is now forecast at -3.8%, down more than -2% from last week, and could fall further as we get reports from the different segments of the energy sector. Looking past that growth is still expected to return by the 2nd quarter, +0.8%, but that looks like it might fall below 0% as well. Beyond that expectations are more robust, 6.3% in the 3rd quarter and 13.6% in the 4th. Full year 2016 estimate fell -0.9% to 5.0%. Looking forward I see another quarter of poor earnings unfolding; longer term outlook remains positive, if under pressure.


This is a big week for earnings. The turn of the month means a new round of macroeconomic data. Tomorrow is light, only auto/truck sales but the rest of the week is full. Wednesday is ADP Employment and ISM Services, Thursday is Challenger Job Cuts, jobless claims, productivity, labor costs and factory orders. Friday will be the big day with NFP, Unemployment and hourly earnings.

The Oil Index

No big news in the oil sector today except that the Saudi deal to curb price declines was smoke and mirrors, as expected. The prices of WTI and Brent fell by more than -6% on an unwinding of speculative positions and could lead both back below $30. WTI settled just above $31.50, down more than $2 from Friday's close. Still no change to supply/demand that I can see. Iran is in business, the Saudi's and OPEC are still at record levels, Russia is doing what it can and we're still pumping too.

The Oil Index fell as I would expect on a day when oil loses -6% but not as much as I might have thought, only about -1.5%. Today's action helps confirm resistance at the short term moving average, near the 1,000 level, and may precede a move lower. The indicators are currently pointing higher but are weak compared to the longer term and overbought in the longer term. Resistance may be tested again but without strong catalyst will likely hold. First target for support is near 950 and the 78.6% Retracement level and then below that at 900.


The Gold Index

Gold prices are being supported by a number of factors that may continue to add lift into the near term. Lack of indication from the Fed on when interest rates would be raised is one. The economic situation is another, weak global growth and weak US growth have added speculation the Fed won't raise rates again very soon. This morning that sentiment was echoed by the Fed's Fischer who said concerns were growing, he didn't know what the Fed would do next, and that maybe the market was getting it right.

Another factor supporting gold prices is a flight-to-safety trade driven by global market turmoil and slowing in China. Yet nother is the oncoming Chinese Lunar New Year and seasonally strong physical demand in China and other Asian nations. Today's action left gold above $1130 for the first time in over three months. This move appears to be gaining some traction and could take prices to $1150 or higher.

The gold miners are riding high on rising gold prices. The miners ETF GDX gained more than 3% in today's session and is now at a potential resistance target. First target is just above $14.50 but likely to fail, next target is closer to $15. The indicators are pointing higher but very weak so any move is likely to remain within the longer term 7 month trading range with upper target near $16.50.


In The News, Story Stocks and Earnings

The Dollar Index fell on today's economic data. There were some positives within the reports but on a whole were not as good as expected and adding to concern we are entering a possible slowdown of economic growth. The index fell nearly -0.65% and is now sitting on support at the short term moving average, well within the three month range. I think at this point the next steps for the FOMC, the ECB and the BOJ are to unclear for the market and may leave the index range bound in the near to short term. The indicators are perfectly consistent with a range bound asset; MACD is weak, barely moving above or below the zero line and stochastic is trending nearly flat in the middle of its range. My range targets are $98.25 to $100.25.


There were quite a few health companies reporting today, all beating expectations. Cardinal Health, a company providing services to the health care industry, reported a 24% increase in revenue, beating on the top and bottom line. Aetna, health insurer, beat on the top and bottom lines as well. Profits were up 38% driven by an increase in fees and led the company to reaffirm guidance. The health care sector as a whole has been beating expectations for the past several quarters, more than doubling earnings growth projections in the last two at least. This quarter the sector is already on track to do the same; expectations were for growth to rise 4.9% and the blended rate is already up to 7.2%. The XLH Health Care SPDR rose just a little more than 0.15% in today's session but looks like it could be bottoming at the $65 level.


Toy maker Mattel reported after the closing bell. The company reported a beat on the top and bottom lines driven by a 7% increase in global sales. Shares had been down as much as -3% during the day but pared that loss after the news was released. By 4:15 share price had turned positive on the day, breaking above resistance at the $27 level.


Google, excuse me, Alphabet reported after the bell as well. The company that makes the internet what it is today reported a beat on the top and bottom lines and pleased investors with the break-down of business segments. The Google segment performed better than expected and helped to drive the stock higher in after hours trading. Alphabet is now valued with a market cap greater than Apple, up more than 7% in after hours trading.


The Indices

Today's action wasn't overly bullish but it is nonetheless a good sign for the bulls following Friday's rally, at least in the near term. After making a test for support the indices were able to move into the green and extend the Friday rally but not all were able to hold those gains into the close. The move was led by the Dow Jones Transportation Average with a gain of +0.90%. Today's candle is relatively small for the transports but carries the index up to resistance, closed at the high of the day and is accompanied by rising, strong momentum. Resistance target it the 7,000 level with a chance it will be broken, a move higher would find next resistance just above at the short term moving average.


The next biggest gain in today's session was made by the NASDAQ Composite. The tech heavy index advanced 0.14% and looks set to move higher. The indicators confirm the move and have room to run. First upside target is the underside of the short term moving average, near 4,700, with a chance that will be broken as well. A move above the short term moving average could go as high as 4,800.


The S&P 500 closed with a loss of only -0.04% after hitting lows greater close to -1%. Today's action created a doji candle just below resistance that may be nothing more than a spinning top. The indicators are rising, confirming the move higher, with first resistance target just above today's close at the short term moving average. A break above the moving average could take the index up to 1,975, a failure could result in a retest of support levels near 1,900.


The Dow Jones Industrial Average closed with a loss of -0.10% after hitting lows as much as -1% below Friday's close. Today's action created a doji candle that confirms resistance at the 16,500 level but does not yet indicate reversal. The indicators remain positive and gaining strength so a test of resistance at least is on the way. A break above this level could go as high as 17,000 and the bottom of the previous up trend line.


The market is moving higher after bouncing from support but whether or not we have begun to reverse is yet to be seen. Having a bounce is nice and could lead to a full reversal but for now it's just that, a bounce, and not enough evidence to get bullish on just yet.

This week is going to be another hurdle for the indices, what with over 20% of the S&P 500 and 10% of the Dow Jones Industrials reporting earnings alongside a round of monthly macroeconomic data, so whatever happens in terms of price will likely have a lasting impact.

I remain a bull in the longer term, earnings growth outlook is positive, but I have growing concern for the short term. In the longer term a return to growth is going to drive a market rally, the question is when? Expectations have been positive for 2016 earnings growth for the last year, but those expectations seem to be slipping away. 1st quarter earnings are likely going to be negative, the 4th quarter in a row of negative earnings growth, and could provide catalyst for the market to test support if they keep falling. If 2nd quarter expectations fall below 0% the market could remain range bound or in bear market conditions until later in the year.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Got Water?

by Jim Brown

Click here to email Jim Brown

Editors Note:

Charles Jeremiah Smith started a small business in 1874 in Milwaukee Wisconsin making hardware specialties. That small one person business has grown to more than 10,000 employees and is a global manufacturer.

His son Arthur Oliver Smith joined the business and developed a lightweight steel car frame. The company took off and sold those frames to Cadillac, Oldsmobile and Ford. The inventions that followed included a new way to weld steel that allowed the invention of a new pressure vessel. That started out in the energy sector but eventually found its way into water heaters and boilers. They pioneered the glass lined water heater that became the standard in the industry in 1936 and it remains the standard today.


NEW DIRECTIONAL CALL PLAYS


AOS - AO Smith - Company Description

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 29th market crash and have been moving steadily higher. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade over today's intraday high.

With an AOS trade at $70.45

Buy April $75 call, currently $3.30. Stop loss $64.85.



NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays


In Play Updates and Reviews

Techs Are Back

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq recovered from the morning dip to close positive while the Dow and S&P came close. GOOGL, PCLN, TSLA, AVGO and FB led the winners list.

Analysts were calling the rebound off the morning lows "short squeeze hangover." Personally If I was short at the close on Friday I would have welcomed the decline at the open. I believe the rebound was due to fund managers putting some of that Friday buyout cash to work in an oversold market.

Google (GOOGL) beat on earnings and rallied +$43 in afterhours.

The afternoon rebound lifted the S&P to 1,947 and very close to that 1,950 resistance level I warned about. The sellers appeared immediately and knocked it back to close at 1,938.

Crude oil declined -6% after multiple people in the Middle East repeated the warning that a deal between Russia and OPEC had no chance of coming to pass. Oil crashed back to $31 and weighed on the market. However that $54 billion pile of buyout cash overcame that oil weakness to bring the markets back to neutral.



Current Portfolio




Current Position Changes


No changes to existing positions.


BABA - Alibaba

The Alibaba put remains unopened.


AMBA - Ambarella

The Ambarella put remains unopened.


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)


KR - Kroger - Company Description

Comments:

Kroger continued its winning trend with another 3.3% gain today. No change in the position.

Original Trade Description: January 28th

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.

Position 1/29/16:

Long April $40 call, entry $1.05. No stop loss because of the cheap option.


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 shares declined -2% after an analyst put out a discouraging note on high dollar retailers. While LULU was not mentioned the stock declined with the sector. A $1 drop is not a big deal and prior resistance at $60 acted as support.

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:

Another new high for STZ as it broke above uptrend resistance. Let's hope this trend continues.

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.




THO - Thor Industries - Company Description

Comments:

The Thor position was entered when the stock traded at $52.75. Nice steady gain without any volatility.

Original Trade Description: January 29th, 2016:

Thor designs and manufacturers recreational vehicles for the U.S. and Canada. Some of its brands include Airstream International, Flying Cloud, Land Yacht, Eddie Bauer, Interstate and AutoBahn class B motorhomes. They have dozens of other brands in the conventional travel trailers and fifth wheels.

You would think that motorhomes would be a tough sell in the current economy. We know that Harley Davidson (HOG), Polaris (PII) and Arctic Cat (ACAT) have been having some challenges. That is not the case for Thor. Towable RV sales in the U.S. hit a record high in 2015.

In the last quarter, Thor reported earnings of 97 cents, up from 73 cents. Revenue rose +11.7% to $1.03 billion. Profit margins rose from 12.8% to 14.8%. They have $180 million in cash and no debt. They pay nearly a 3% dividend.

At the end of October Thor's backlog in orders for towable RV units was $710 million. The order backlog for motorized RVs was $341 million. With total backlogs of more than $1 billion and headed into the RV selling season, Thor is positioned to capitalize on price increases, margin expansion and even more sales.

Earnings are March 3rd.

Shares collapsed with the market in early January and bottomed the prior week at $48. Despite market volatility last week, they have been moving steadily higher. I am recommending the March options and we will exit before earnings.

Position 2/1/16 after a THO trade at $52.75

Long March $55 call @ $1.15, no stop loss because of the cheap option.



Original Put Recommendations (Alpha by Symbol)


AMBA - Ambarella - Company Description

Comments:

The Ambarella trade remains unopened with an entry trigger at $35.75. Shares declined -1.48 but have not yet hit our entry point. Resistance is still $40 so this week will be the long-term key. A move over $40 suggests the selling is over.

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




BABA - Alibaba - Company Description

Comments:

Original Trade Description: January 29th.

This Chinese retailer reported earnings of 73 cents that beat estimates for 70 cents. Revenue of $5.33 billion also beat estimates for $5.08 billion. However, gross merchandise volume rose only 23% to $149 billion and the slowest growth in more than three years. Alibaba has 80% market share in China and they are starting to see the impact of the economic slowdown.

Shares declined after the earnings on Thursday and then declined again on Friday. If it were not for a burst of short covering at the close, they would have ended in the red in a very strong market. They gained only 11 cents on the short covering.

Shares have been declining since mid December when the Chinese economics and equity markets began to weaken further. Investor sentiment is fading as continued questions over accounting issues cloud their results.

It is not that investors are terribly disappointed in Alibaba. They are worried more about China's economic direction with multiple CEOs including Howard Schultz at Starbucks saying China sales are slowing. Add in the constant accounting rumors and investors are leaving the stock.

Shares bumped up against a solid top in Nov/Dec and then faded in January. The stock is about to experience a death cross of the 50-day below the 200-day average. I am looking for a retest of support at $57 from September.

The low last week was $65.34. I am recommending a put position with a trade at $64.85.

With a BABA trade at $64.85:

Buy March $65 put, currently $3.15, initial stop loss $71.65.


HPQ - Hewlett Packard - Company Description

Comments:

No specific news. 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:

Minor 35-cent decline at the close but a new intraday post IPO low at $26.32.

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 - ETF Description

Comments:

Another minor decline on the afternoon market rebound and approaching our strike price at $23. 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






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