Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/3/2016

Table of Contents

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

Market Wrap

Bounce Corrections

by Keene Little

Click here to email Keene Little
The bounce off the January 20th lows fit as a correction to the decline from December. The bounce off this morning's low fits as a correction to the decline from Monday. Both point to a stronger move down but the bears will need to prove it with an early move on Thursday.

Today's Market Stats

The stock market has been its best to fight off the bears but the price pattern suggests it could be a losing battle. A 3-wave bounce off the January 20th lows into Monday's highs fits as an a-b-c correction to the decline from December 20th. The decline from Monday's high into this morning's low has been followed by an a-b-c bounce off into this afternoon's high and that's a bearish setup for an immediate decline on Thursday. But the bears can't waste any time taking advantage of this setup otherwise something more bullish, even if only short term, could follow.

What the stock market is fighting is more evidence of a slowing economy, and not just in the U.S. The global economy is slowing in unison (some faster than others) and this is the first time for this to occur since the 1930s. This of course fits the general thesis that says we've been in a secular bear market since 2000 (since 1998 by measures other than price) and that the next cyclical bear within the secular bear could be a very painful move for those who hold long positions.

Further evidence of a global slowdown in the economy is what we see happening in the currency markets. Everyone is in a race to devalue their currencies in hopes of making their products cheaper for other countries to import. But with everyone doing it the only thing that's been accomplished is a race to the bottom and a global devaluing of fiat currencies, which has created a deflationary cycle. That of course is what the central banks are trying to fight with their QE and ZIRP/NIRP policies but each is negating the efforts of the other. In the past, as in the 1930s, this currency war tends to lead to very bad things between countries.

The Chairman of the OECD's Review Committee, William White, wrote "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end. The global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20% of GDP higher today. We are holding a tiger by the tail." We all know what happens when the tiger gets tired of us yanking on his tail.

The economic slowdown obviously affects businesses and we're seeing that show up in the slowdown in earnings, which is making it more difficult to service the massive debts that they've taken on. Some of the debt has been for the development of new energy sources, such as the fracking. Think that debt might be in trouble. Much of the debt has been from companies borrowing heavily to buy back stock in an effort to boost earnings per share and hide the fact that actual earnings have been slowing. Again, a slowdown is now making it more difficult for those companies to service their debt and the slowdown is going to cause a double whammy to earnings.

The Fed keeps pinning their hopes on the employment picture but that picture is a lot dimmer than their simple observations of how people are employed (it's part of their flawed economic models). The chart below is hard to read because I had to squish it to fit but basically it's showing the inflation-adjusted price of SPX (on top) vs. the ratio of nonfarm employment to part time employment. Each time the ratio has been in decline (meaning part time employment is becoming larger than nonfarm (full) employment) we've been in a secular bear market. The dates of the first secular bear (pink band) is 1966-1982 and the second secular bear (pink band on the right) is from 1999. You can clearly see how the employment ratio has declined from its 1999 peak and since the 2009 low it hasn't even recovered to the 2002 low. In other words, the employment picture remains weak but the Fed feels it was strong enough to warrant a rate increase in December.

Inflation-adjusted S&P 500 index vs. Nonfarm employment/Part time employment, chart courtesy Martin Pring

The chart above shows why it can't be used as a timing tool but it does support why we've been in a secular bear, regardless of the new (non-inflation adjusted) price highs for the stock market in both 2007 and 2015. And if we're still in the secular bear, as I've contended for many years, the new price highs into 2015 merely made the stock market more vulnerable to a market crash. Have we started that crash? It's too early to tell but yes, I do believe we've started the next (and should be final) leg of the secular bear. But for those who think it's a good idea to just sit tight and let the market recover after the decline, I think the recovery will be far slower than the one off the 2009 low. It could take a generation before prices recover back to the December highs.

Starting the review of tonight's charts, the SPX weekly chart below shows a wave count I think is the most probable at the moment. The relatively small bounce off the January 20th low, which was a test of the October 2014 low, is a small 4th wave correction is what should become a larger 5-wave move down from May. This bearish wave count suggests SPX will stair-step lower into the fall before setting a much larger bounce correction. The next move, if the decline continues as depicted, should drop SPX to support at its uptrend line from March 2009 - October 2011, which will be near 1760 next week. This would set us up for a bounce into February's opex week.

S&P 500, SPX, Weekly chart

The daily chart shows the 3-wave bounce off the January low and up to the bottom of a previous parallel down-channel, which is a very common resistance level. Monday's high tagged the line to the penny and then turned back down, which suggests the decline will continue from here. A rally above Monday's high, near 1945, would have me looking for a move up to 1992 (price-level resistance and the 50-dma).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1945
- bearish below 1867

In addition to the bottom of its previously broken down-channel, SPX achieved a 50% retracement, at 1946.93, of the decline from December 29th. It's hard to see on the 60-min chart but the bounce off this morning's low is another 3-wave pattern that retraced 62% of the decline from Monday into this morning's low. This makes it a good setup for a reversal back down into a stronger selloff (for the 3rd wave of the move down from Monday). But this is also why the bears need to take advantage of the setup immediately Thursday morning otherwise the pattern could turn at least short-term bullish.

S&P 500, SPX, 60-min chart

The Dow was the stronger index today, closing up +183 (+1.1%), while the techs were weaker (NDX closed down -21 (-0.5%). As you can see in the table below, there were some star performers today, starting with XOM's +4.9% rally. There were seven stocks that did better than +2% while only one stock (MCD) declined more than 2%.

Dow Industrials component stocks

The Dow bounced off price-level S/R this morning, at 16K, and left a bullish candle at support. This certainly has the potential for follow through to the upside and the bottom of its previously broken down-channel is up near 16800. A nearly 600-point rally would obviously be painful if you're short and it's another reason why the bears need to step back in quickly on Thursday if the bearish pattern is correct, which calls for the Dow to drop down to at least retest its January 20th low at 15450 and likely down to price-level support at 15340-15370 (its February 2014 and August 2015 lows).

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,510
- bearish below 15,863

On the NDX daily chart below you can see how it has been struggling to hold onto its uptrend lines from June 2010 - November 2012 and March 2009 - August 2015, which are converging and currently near 4180 (where it closed today) and 4140, resp. This morning's low dropped slightly below the January 27th low, which strongly suggests the 3-wave bounce off the January 20th low has completed and we're looking for another leg down. The decline from Monday afternoon's high to this morning's low looked like a 1st wave down and the bounce into this afternoon's high looks like a completed correction to the decline from Monday, which suggests an immediate drop lower on Thursday. It's up to the bears to make it happen otherwise the bulls could take advantage of trendline support and launch another rally leg.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4302
- bearish below 4112

I've drawn an up-channel for the RUT's bounce off the January 20th low and it's certainly possible the bounce pattern is only half way through. Monday's high hit the 1036-1040 target zone I was looking for and the turn back down fits the larger bearish pattern that calls for a continuation lower to at least the trend line along the lows from February-October 2014, currently near 965. The 5th wave of the move down from December 2nd, which is the leg that started down from Monday's high, would equal the 1st wave at 941.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1040
- bearish below 996

The 10-year yield has continued lower and the projection at 1.729%, shown on the weekly chart below, is where the decline from June 2015 would achieve two equal legs down. This projection, or its uptrend line from July 2012 - January 2015, near 1.76%, are potential support levels if there will be one more leg up inside a sideways triangle pattern before dropping lower (to head for 1%). If it breaks below 1.72% I'd say it will head lower sooner rather than later. The bearish pattern would be negated with a rally (selling in bonds) above the November 2015 high near 2.38%.

10-year Yield, TNX, Weekly chart

The banks have been relatively weak as the talk increases the chances for the Fed to not raise rates any further this year. Moving closer to a NIRP policy would decrease banks' earnings and the concern by many is that the Fed, along with the other central banks, has run out of options in their need to do Something. But BKX could be ready for at least a consolidation before continuing lower. Today's low at 59.05 stopped a little short of price-level support at 58.83, which is its April 2010 low (pretty amazing that a 2-year rally has been retraced in six months and the meat of the expected decline hasn't hit yet). Assuming we'll see price bounce/consolidate for a few weeks we'd then have a setup for another drop lower to complete a 5-wave move down from its July 2015 high, which would target the 52.50 area. From there I would then expect a bigger bounce correction for a few months before heading more strongly lower.

KBW Bank index, BKX, Weekly chart

On January 13th the TRAN lost support at its uptrend line from March 2009 - October 2011, near 6950 at the time. Following its January 20th low it made a choppy bounce back up to the broken uptrend line, near 6985, with Monday's high at 7000, and then sold off. That was a nice back-test followed by a bearish kiss goodbye and that sell signal can only be negated with a rally above Monday's high. Until then, it's looking like a good setup for the 5th wave down in the decline from November 2015 and the 5th wave would equal the 1st wave at 6003, shown on its daily chart below.

Transportation Index, TRAN, Daily chart

The U.S. dollar snapped to the downside today, starting from the overnight session. Today's low was a test of its 200-dma, at 96.90, as well as its 50-week MA 97.10, as can be seen on its weekly chart below. Two equal legs down from its December 3rd high points to 96.56, not much below today's low at 96.88. That's also where it would test an uptrend line from August-October 2015 so I would expect a bounce if that level is reached. The dollar could then rally up to at least a minor new high before pulling back again but I'll stick with the larger pattern that calls for a continuation of the sideways consolidation into the summer before heading higher.

U.S. Dollar contract, DX, Weekly chart

Looking at just about any commodity you choose there's no question they've been beaten to a pulp over the last couple of years. The dollar's strength has had a negative impact on many commodities but it's primarily due to either excess supply or weakening demand and for many it's both (think oil). Whenever a sector gets pushed down into the mud and just when you think the poor bastard is going to suffocate in it there is often a very good buying opportunity. As Warren Buffet often said, when there's blood in the streets you want to be a buyer. Of course many have been thinking this for a while and they've joined the commodities in the mud as they too get pushed lower. Obviously the saying "don't try catching falling knives" is apropos here.

But we might in fact be looking at a good opportunity to be thinking long some of the commodities and while I don't study individual ones, other than gold, silver and oil, there are some that are worth watching closely. Some worthy stocks are listed below as the BARF stocks (listed below the table below), which is also apropos considering how many investors have puked their positions. I have not evaluated the listed stocks below but the fundamental comparison between the FANG and BARF groups is certainly compelling as far as why you want to sell FANG and buy BARF. I didn't make up those terms and this particular table came from extract.com

FANG vs. BARF, 2015

FANG stocks:(Facebook, Amazon, Netflix, and Alphabet - GOOG;
BARF stocks: BHP Billiton - BHP, Anglo American - LSE:AAL, Rio Tinto - (LSE:RIO), and Freeport-McMoran - FCX

As I mentioned above, I have not looked at the individual stocks but the chart of the commodities index shows the drop down to support at the February 1999 low at 74.24. It can of course continue lower but I like the setup for at least a larger bounce correction before heading lower (maybe). There's been a large separation between stock prices and commodity prices since commodities peaked in April 2011 and I've been saying for a long time that the huge gap will get closed someday. It's been my expectation that it will mean the stock market will join commodities by dropping. But commodities could rally while the stock market declines. This happened in 2000 when commodities were coming up from lows in early 1999 while stocks peaked in 2000 and didn't bottom until 2002. So the two have traded separately in the past and could do so again.

Bloomberg Commodity index, DJUBS, Weekly chart

Countering an expectation for at least a larger bounce in the commodities index, my view of gold and oil is that we have not seen their lows yet. Gold has made it up to price-level S/R at 1142 and its 50-week MA at the same level. The bearish pattern calls for another leg down and a downside target will be near 1000 if it starts back down from here. But it would obviously be more bullish if it can continue to rally through resistance and especially if it used 1142 as support on a pullback.

Gold continuous contract, GC, Weekly chart

Like gold, oil has been building a bullish divergence since its January 2015 low and it could be ready to at least bounce higher in a multi-month move. But the pattern for the decline from June 2015 would look best with one more new low, perhaps down to about 23, before starting a larger bounce.

Oil continuous contract, CL, Weekly chart

Today's ADP Employment report showed a stronger than expected employment gain, which suggests we might have an upside surprise from Friday's NFP report. But as mentioned at the beginning of tonight's report, the employment report is not that accurate as a predictor of the stock market, especially since it tends to peak with the stock market. Economic indicators, such as today's ISM Services report and tomorrow's Factory Orders, continue to point to a slowing economy, which is far more important for stock prices going forward. Only the Fed gets hung up on employment numbers and they've pretty much run out of options to help the market, I mean economy.

Economic reports

Conclusion

The stock market bounce off the January 20th lows appears to be over, or at least that's what the bearish price pattern suggests. That interpretation of the pattern says the leg down from Monday is the start of the next decline that should take the indexes below the January 20th lows. That means today's bounce off this morning's low should lead to a continuation lower, which means if the bulls can thwart that expectation it will mean the bounce off the January 20th lows could extend higher before turning back down.

I have not seen enough in the bounce pattern to suggest anything more bullish than just a bounce correction to the December-January decline, which has me looking at bounces as shorting opportunities. The immediate setup for the bears calls for a decline pretty much out of the gate Thursday morning. If the indexes do rally above Monday's highs I would be careful about chasing it higher since the choppy move up will mean it could fail at any time. Day trade the long side whereas a short trade should take us into next week and then maybe set up a bounce/rally into opex week.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Ready for March Madness?

by Jim Brown

Click here to email Jim Brown

Editors Note:

After the last few days of volatility I am sure everyone will just be glad to get out of February but we should use this month to prepare for March Madness.

Non sports enthusiasts probably do not realize that March Madness is the term used for the NCAA Basketball Tournament produced by CBS Sports and the Turner Network. This is one of the biggest sporting events on TV and all basketball fans will not miss a minute. February and March are two of the biggest months for sales of sporting apparel like shoes.


NEW DIRECTIONAL CALL PLAYS

FL - Foot Locker

Foot Locker is a specialty athletic retailer with more than 3,400 stores in 23 countries and it a leading provider of athletic shoes. February is kickoff month for Foot Locker and they run a series of new ads on TV ahead of the March Madness.

This year the ads will feature comedian Kevin Hart in both Foot Locker and Kids Foot Locker promotions. In Q3 same store sales rose +8% and retailers for sports apparel reported a good holiday season. Foot Locker reports earnings on March 4th.

Nike and UnderArmour already reported strong earnings. UnderArmour reported a record quarter claiming accelerating sales of athletic footwear were growing market share and profitability. Nike reported earnings that increased 21.6% at 90 cents that were 5.1% above consensus. That was the 14th consecutive quarter that Nike has beaten estimates.

The country is currently undergoing a "social fitness" phenomenon with sales of sports watches and fitness training products exploding. Millennials, those born between 1980-2000, have changed the landscape of retail. They now represent 25% of the population. Millennials are far more health conscious than boomers and tend to try lots of different activities unlike boomers that stuck to 1 or 2 sports. Boomers played golf or tennis. Millennials are cyclists, runners, basketball players and any number of other active sports. They are not golfers. Each of these sports requires different shoes. This is where Foot Locker shines in providing a wide range of affordable shoes and athletic apparel.

Foot Locker should have a good quarter when they release earnings next month. With the Foot Locker commercials in February plus the Super Bowl and the build up to March Madness, investors will think of Foot Locker and shares should rise.

With a FL trade at $68.75:

Buy March $70 call, currently $2.65, initial stop loss $66.45


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays




In Play Updates and Reviews

Whipsaw

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow fell -198 at the open and rebounded as high as +229 at 3:PM before closing with a +183 point gain. Thank oil prices and the dollar for the gains.

Crude prices rallied on more Russian headline spam. Russian Foreign Minister Sergei Lavrov said Russia was open to a meeting with OPEC to discuss production cuts. However, the full quote contained the qualification "if OPEC is in agreement and ready to cut production." The initial headline reversed a drop in oil prices despite OPEC delegates saying it was unlikely the group would meet with Russia anytime soon. Analysts reviewing the comments and the possibility of a meeting are also doubtful a meeting will ever take place.

You have to keep in mind that Russia is the enemy of Saudi Arabia. Saudi wants to cause Russia pain at the pump because it limits the amount of money they have to support aggression in the Middle East. With Russia saying they would agree to meet that means the Saudi plan to force oil prices lower is working and Russia is imploding.

Some OPEC countries may meet but unless Saudi Arabia attends, nothing will happen. Saudi drives the OPEC bus and without a driver it will go nowhere.

Oil prices rallied on another case of headline spam but without some real details in the coming days we should expect to see oil prices decline again. This was a monster short squeeze of 9% in one day.

The Dollar also collapsed -1.66% and the biggest decline in more than three-months. A cheaper dollar means it takes more dollars to buy a barrel of oil, ounce of gold or ton of copper. All rallied sharply today on the dollar drop.



Current Portfolio




Current Position Changes


AMBA - Ambarella

The Ambarella put was triggered today at $35.75.


AOS - AO SMith

The AO Smith call 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)



AOS - AO Smith - Company Description

Comments:

Minor gain in a volatile market. The position is still unopened.

Original Trade Description: February 1st

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.


KR - Kroger - Company Description

Comments:

Kroger continued to inch higher. 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:

Another great day for LULU. I am recommending we target $66.25 for an exit. That is just below resistance at $67.

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.

Update 2/3/16: Target $66.25 for an exit.




STZ - Constellation Brands - Company Description

Comments:

Down -$2 but still a long way from the support at the 50-day average.

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:

Thor dipped to support at $50 intraday and rebounded at the close. No change in position.

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 was opened when the stock declined to $35.75 intraday.

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.

Position 2/3/16 with AMBA trade at $35.75

Long March $32.50 put @ $2.17, initial stop loss $40.55




BABA - Alibaba - Company Description

Comments:

Another big drop at the open but shares recovered somewhat in the afternoon. Target $58.25 for an exit.

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.

Position 2/2/16 with a BABA trade at $64.85:

Long March $65 put @ $3.90, initial stop loss $71.65.


HPQ - Hewlett Packard - Company Description

Comments:

Dipped under support at the open but recovered in the afternoon. 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 gain for Juno thanks to the rebound in the Biotech Index ($BTK). It is not convincing and I suspect the sector will go lower.

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:

The VXX closed well off its highs and back down at $25 support. 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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