Option Investor
Newsletter

Daily Newsletter, Tuesday, 2/9/2016

Table of Contents

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

Market Wrap

Seasick Yet?

by Jim Brown

Click here to email Jim Brown

The Dow changed directions seven times and traveled 1,149 points but ended the day only 12 points from where it started. Traders appeared unwilling to make any large bets ahead of Yellen's testimony on Wednesday.

Market Statistics

I am definitely not complaining about a relatively flat close on the major indexes. The Dow was down -145 at the lows and up +106 at the highs. The Nasdaq changed direction six times and traveled 434 points before ending the day with only a 14 point loss. Dip buyers were alive and well but sellers hammered every spike. In the end, there were more sellers than buyers but only slightly.

Global markets and especially European banks weighed on the markets early and crude oil impacted the trading in the afternoon. European markets declined about 1.5% on average today but they were all down over 3% on Monday.

Europe Today

Europe on Monday

The European banks are crashing on negative interest rates and high exposure to energy and commodity loans. With major companies like the UK miner Glencore with $30 billion in debt that is syndicated among all the major banks, the low commodity prices are creating bankruptcy worries. One of the big problems is that we really do not know what is on the balance sheets and loan portfolios of the European banks. The regulators in the U.S. have forced U.S. banks to bare all their secrets but Europe has not, at least to the same level of scrutiny. Banks in Europe have been trading as though there may be a Lehman event in the near future.

Deutsche Bank (DB) was the focus today after the CEO sent a letter to employees assuring them the bank was solvent. For him to do that was like yelling fire in a crowded theater. That acknowledged there was some doubt about its stability. Lehman's CEO said there was no danger until the bank collapsed. Shares crashed about 5% at the open and were trending lower during the day. At 2:PM another headline appeared saying they were considering buying back several billion euros of debt. They currently owe about 60 billion euros of debt. The bank said they would focus on senior debt of which it has about 50 billion euros or $56.44 billion. The story came from the Financial Times and DB would not comment on the headline. However, shares spiked about 6% on the news to lift DB back into positive territory but the rally was short lived. Without further qualification from DB we should expect shares to continue to drift lower. They have a 350 million euro debt payment due in April. They also have numerous legal problems left over from the financial crisis and will have to take additional charges to reserves in the future.

US banks declined as well because the exposure to European banks is unknown. There is a lot of derivative risk between U.S. and European banks.



Economic news was lackuster. The NFIB Small Business Survey saw the headline number decline from 95.2 to 93.9. The majority of the internal components declined. The plans to increase employment fell from 15 to 11. Those expecting the economy to improve declined from -15 to -21. Earnings trends and credit conditions worsened. This report was ignored.

The Job Openings and Labor Turnover Survey (JOLTS) for December showed job openings increased from 5.346 million to 5.607 million. Hires rose from 5.256 million to 5.361 million. This report was a lagging report for December and was ignored.

Wholesale Trade for December declined -0.1% after a -0.3% decline in November. This was the third consecutive month of declines. Estimates were for a -0.2% decline.

None of the reports for today were market movers. The real mover will be the Yellen testimony to the House at 10:AM tomorrow. With Europe and Asia crashing, negative interest rates, weak earnings and economics in the U.S. and falling oil prices will keep the fed from hiking rates in the near future. However, she may try to keep the pressure on by implying a March rate hike is still on the table. The Fed made a mistake in December and now they have to keep up the appearances. This could rile the market even more, depending on how she presents her views. She is normally dovish and she will be challenged in how she remains dovish but keeps rate hikes on the table. This will be a tightrope act for sure.


The morning earnings failed to move the market because it was already reacting to the European news. On top of Europe, there was news from Japan that interest rates had gone negative for the first time. The Nikkei declined -919 points or -5.4% for the day and approaching a 14-month low. This is another reason Yellen cannot raise rates.


In a flight to quality, bonds continued to rise with the yield on the ten-year treasury falling to 1.699% intraday and closing at 1.729%. These are 52-week lows and very close to three-year lows. Bonds are on fire as equities crash and burn. Recession worries are increasing daily.


The afterhours earnings were mostly positive. Akamai (AKAM) reported earnings of 72 cents compared to estimates for 62 cents. Revenue of $579 million also beat estimates for $569 million. The company also announced a $1 billion stock buyback program. The most important metric was the 16.4% growth in the cloud security business, which accounted for $286 million of the revenue. This should calm some of the fears generated by Tableau Software last week. The CEO, Tom Leighton, told analysts on the call he planned to buy $10 million of Akamai shares over the next six months. Shares were up +16% in afterhours to $46 after closing at a two-year low of $39.55.


Panera Bread (PNRA) reported earnings of $1.88 compared to estimates for $1.78. However, revenue of $692 million missed estimates for $695 million. Earnings declined -11% because of costs increased +8%. Same store sales were up +3.6% in Q4 and +6.4% in the first 41 days of Q1-2016. The company said they had completed the conversion of 410 stores to Panera 2.0, which involves kiosks, mobile an online ordering capability. Shares rose $5 to $190 in afterhours.


SolarCity (SCTY) reported a loss of -$2.37 that was better than analyst estimates for a loss of -$2.59. Revenue of $115.5 million, up +61% and beat estimates for $106 million. However, guidance for Q1 was light. They forecast production of 180 megawatts in the quarter compared to analyst expectations for 200 megawatts. During Q4, they installed 272 megawatts, up 54%. That also missed guidance for 280-300 MW. They guided for a Q1 loss of $2.55 to $2.65 and analysts were expecting -$2.36. Apparently, business is booming but they are losing money until they can sell these monster projects into the dividend company. Shares fell -30% to $18 in afterhours.


Disney (DIS) reported a record quarter with net income over $1 billion thanks to Star Wars and the theme parks. The company reported $1.53 compared to estimates for $1.45. Revenue of $15.24 billion beat estimates for $14.75 billion. This was their tenth consecutive quarter of double digit EPS. Revenue from the parks and resorts division rose +20%.

However, the profits from its cable empire fell -6%, due to an increase in the cost of sports-broadcast rights. Disney's sports bill is estimated to be 29% of the $130 billion media companies are contracted to pay for the rights to events like Monday Night Football and the NBA Playoffs. For instance, Time Warner agreed to pay $8 billion to broadcast the Los Angeles Dodgers baseball games. If subscription customers to sites like ESPN continue to decline at its current 1% per year analysts believe the profit growth for Disney could be cut in half within 4 years. In a post earnings interview CEO Bob Iger said Disney saw an uptick in cable subscribers after Q4 ended and he attributed it to increased sales by Dish Networks Sling TV bundle of online channels, which includes ESPN. Iger said "This notion that either the expanded basic bundle is experiencing its demise or that ESPN is cratering in any way from a subscriber perspective, is just ridiculous." He said they are exploring opportunities to sell ESPN into even more bundles that are cheaper than most pay TV packages today. Disney shares declined -$3 to $89.40 in afterhours.


Coca-Cola (KO) reported earnings of 38 cents that beat estimates by a penny. Revenue rose +3%.

Viacom (VIAB) reported earnings of $1.18 that met estimates but revenue missed estimates because film unit revenue was down -15%.

CVS Health (CVS) reported earnings of $1.53 that met estimates with revenue that beat estimates. Same store sales rose +5%.

Sears Holdings (SHLD) warned that Q4 earnings would be below estimates due to a "challenging" holiday season. The company is going to accelerate the closing of unprofitable stores.

Wendy's (WEN) reported preliminary earnings of 12 cents that beat estimates by a penny. Same store sales rose +4.8%.

Wyndham Worldwide (WYN) reported earnings of 98 cents that beat by a penny. They also announced a $1 billion buyback program and increased the dividend from 42 to 50 cents.

There were seven companies that raised guidance on Tuesday. There were 39 companies that guided in line with prior forecasts. There were 21 companies giving negative guidance.

Anadarko Petroleum (APC) fell -7% after the company announced it was cutting its dividend from 27 cents to 5 cents. They said the cut would give them an extra $450 million in cash to utilize during this stressful period. They warned last week they were considering a cut so this was no surprise but the stock still declined.


Oil prices fell to $27.74 intraday after the IEA said demand growth would "ease back considerably" in 2016. Demand growth peaked at +1.6 mbpd in 2015 and they expect that to decline to +1.2 mbpd in 2016. The IEA said stockpiles were "brimming" with oil and storage capacity was being pushed to its limits. The agency said economic slowdowns in Europe, Asia, Brazil and Russia were slowing demand growth.

Global production declined -200,000 bpd in January to 96.5 mbpd. Higher OPEC production offset some declines by non-OPEC producers. The IEA still believes non-OPEC supplies will decline -600,000 bpd in 2016. However, total OPEC production rose +280,000 bpd in January to a record of 32.63 mbpd. That is up +1.7 mbpd from January 2015. The IEA said Iran had restarted some production and Saudi Arabia had increased production to near record levels.

The IEA said the idea that OPEC and Russia would agree to cut production was pure "speculation" and OPEC was not likely to cut alone or in concert with other producers.

Due to current conditions the IEA said, "It is very hard to see how oil prices can rise significantly in the short term. The short term risk to the downside has increased."

Separately the EIA said U.S. production could decline -740,000 bpd in 2016 and slightly more than their prior forecast for -700,000 bpd. The rapid decline in active rigs and the sharp cuts in capex budgets were the reason.

After the bell today, the API reported a rise of 2.4 million barrels in crude inventories for the week ended on Friday. That was slightly less than expectations for a 3.6 million barrel gain. Gasoline inventories rose +3.1 million barrels. The EIA report on Wednesday is considered the most accurate and will move prices tomorrow.

Falling oil prices will weigh on the equity markets and without an OPEC production cut, we could see sub $25 pricing in the next 6 weeks.


Markets

There was little change from my weekend commentary. While the indexes did not make a big move today, they are holding in negative territory. The charts remain bearish and traders appear to be looking for the next big headline to take them lower. Yellen could provide a boost on Wednesday and Thursday or make matters worse.

There is no way to make the S&P chart bullish. We could rebound from here but there is significant overhead resistance and the outlook is for a retest of the August low at 1,812 or even the February 2014 low at 1,737.



The Dow is also struggling and resistance at 16,500 seems firm. The January low at 15,450 could be tested at any time and the August low at 15,350 appears to be a more likely target. Banks and energy should continue to weigh on the Dow and Disney will be a drag at the open on Wednesday.

There is no one reason why the Dow should decline. The chart is bearish and that is normally enough to convince investors to go to cash and sellers to continue to add to the decline.



The Nasdaq appears to be headed for a retest of the 4,130 low from October 2014. It has already at a 15-month low and there is no support before that 4,130 level. Miracles do happen but it would be hard to speculate on what could lift the markets this week other than Yellen. We failed to get a short squeeze today when the Dow was up over 100 points so shorts appear to be expecting lower lows. They failed to rush the exits and sellers ganged up on the close.



The Russell 2000 came within 3 points of retesting the June 2013 support low at 954 on both Monday and Tuesday. While this is a psychological win so far, a break below that level could be very bearish for sentiment. The next support level is 900. Small caps have been weak thanks to oil, banks and biotechs. A slight improvement in the biotech sector today probably kept the Russell from breaking down any further. Watch the Russell for your sentiment indicator.


I am sorry I do not have anything positive to tell you about the market. Sometimes we simply have to call a bear a bear and deal with it. We can try to "hope" it up as it passes through each support level but until sentiment changes the path of least resistance is down. We have to play the cards we are dealt until the next shuffle appears.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Pick Your Battles

by Jim Brown

Click here to email Jim Brown

Editors Note:

Oversold markets may become more oversold if Yellen develops foot in mouth disease in her testimony on Wednesday.

The Dow traveled 1,149 points today but closed only 12 points from where it started. The expected short squeeze did not develop even when the Dow was up +106 points at the highs. With Yellen the important headline for Wednesday and the market likely to react strongly to whatever she says we are likely to see some strong volatility.

The Asian markets that are open, China is closed for the week, are down hard again tonight and the S&P futures are down -9 points. I think we should pick our battles carefully and Wednesday is a battle where we should not participate. The market should go directional again after tomorrow. Whether up or down depends on Yellen.

No new plays today!


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Heavy Chop

by Jim Brown

Click here to email Jim Brown

Editors Note:

It was touch and go all day with the market dropping sharply at the open, rebounding and then repeating the process several times. The Dow traveled 1,149 points but ended only 12 from where it started.

It was hardly a monster short squeeze day. Traders cautiously bought the dips but sellers continued to sell the highs. The biotech sector recovered slightly and those stocks did see some decent short covering at the open.

We were stopped out on the JUNO put on the short covering but we exited with a $1.15 gain.

The good news was a failure by the Nasdaq to drop another 100 points. The extreme oversold conditions may have been eased somewhat but the sellers outnumbered the buyers once again.

Typically, the market is positive ahead of a Yellen speech and that probably was responsible for the intraday buying. The sellers just overpowered the dip buyers.

The S&P chart remains negative with 1,812 the next target.



Current Portfolio




Current Position Changes


IYT - Transport ETF

The IYT call recommendation was opened at $125.85.


FL - Foot Locker

The Foot Locker call remains unopened.


QQQ - Nasdaq 100 ETF

The QQQ call remains unopened.


JUNO - Juno Therapeutics

The JUNO Put position was stopped out.


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.



BULLISH Play Updates


FL - Foot Locker - Company Description

Comments:

Shares traded basically flat for the day. The intraday dip to $62.73 was instantly bought.

If the market is getting prepared for a bounce the high interest momentum stocks like Nike, UA and others should be the biggest rebounders when (IF) a short squeeze begins.

Original Trade Description: February 3rd.

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 $64.75:

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


IYT - Dow Transports ETF - Company Description

Comments:

The IYT call was opened when the ETF traded at $125.85. The ETF closed near its highs.

Original Trade Description: February 8th

The Dow Transports typically lead the Dow industrials. The transports have been weak because of the slowdown in the manufacturing sector, competition in the airline sector and slowing rail traffic due to the weak shipments of coal and oil field equipment.

For some reason the transports quit declining about three weeks ago about the time oil prices appeared to have bottomed. Now with analysts extending their estimates for low oil prices into 2017 the transports are starting to rise again. Summer is a very busy time for airlines and with low oil prices, their profits should be much stronger even with the added competition.

The transports are very oversold. In Monday's market drop the IYT shares barely moved and ended the day down -38 cents. If we are looking at a potential rebound in the market the transports could lead because of their severely oversold position. The individual stocks have been crushed since early December. The Dow Transports declined -31% off their highs to the January lows.

This is a play on a rebound in the transportation sector. While I admit the fundamentals are still weak the IYT has refused to dip below support for three weeks and set a new high for 2016 last Thursday. This relative strength in a very negative market suggests investors are making their bets there is a rally in the future.

Buy March $130 call, currently $2.15, initial stop loss $118.75


PG - Procter & Gamble - Company Description

Comments:

PG rallied to a new 10-month high and continues to show excellent relative strength. This is because PG is relatively recession proof.

Original Trade Description: February 5th

Procter & Gamble was started in 1837 and has grown to be an international company with hundreds of brands that are household names. This includes products like medicines, diapers, toothpaste, mouthwash, soap of all types, toilet paper, razors and hundreds more. There is not a person in America that does not have at least one P&G product in their home today and most probably have dozens.

They reported Q4 earnings in January of $1.12 that rose +37% on a currency neutral basis. Revenue was $16.9 billion. Revenue declined -9% due to an 8% impact from the strong dollar and a 3% impact from reorganizing in Venezuela as a result of their economic collapse.

P&G saw operating cash flow of $4.5 billion, up +117%. They repurchased $2 billion in stock and paid $1.9 billion in dividends in the quarter.

The guided for flat to low single digit growth in 2016 after an expected 7% drag due to currencies and a continued 3% drag from Venezuela. Absent Venezuela and currencies they could see high single digit revenue growth despite the weakness in the global economy.

In 2016, they expect to pay additional dividends of $7 billion and repurchase another $8 billion in shares.

Everybody knows P&G. This is a no brainer play. P&G has relative strength to the market and no material impact to its operations from the economy. P&G is recession proof because their brands are used every day by everyone.

This is a technical setup with PG shares about to break over resistance at $81. Earnings are a long way off on April 26th. If the market continues lower, we have the protection of relative strength. If it moves higher we should see PG shares retest resistance at $85 or even higher. The December 2014 high was $94.

Position 2/8/16 with a PG trade at $81.50

Long April $82.50 call @ $1.93, see portfolio graphic for stop loss.


KR - Kroger - Company Description

Comments:

Kroger recovered from the big decline on Monday and the morning drop today. This was excellent relative strength on the rebound suggesting investors were looking for recession proof bargains.

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.


QQQ - Nasdaq 100 ETF - Company Description

Comments:

The QQQ call position remains unopened. The ETF did not reach our entry trigger at $98.45. The high of the day was $97.78. We dodged a bullet by not being triggered with the afternoon decline.

Original Trade Description: February 8th.

This is purely a rebound play and not based on fundamentals. The major large cap stocks in the Nasdaq 100 have been crushed and the $NDX had declined -411 points at today's lows, down from 4,300 the prior Monday. This is a -9.5% drop and represents a severely oversold market.

I warned in my weekend Option Investor commentary that we we could expect some follow through on Monday as portfolio managers who missed the Friday reaction drop hit the sell button today. I also mentioned the potential for those managers that did raise cash on Friday to come back to today with a calmer mind and start bargain hunting.

The afternoon rebound suggests those bargain hunters appeared and once the smoke clears we could see a major short squeeze.

Buy March $100 call, currently $2.02, stop loss $94.25, just under today's lows.


THO - Thor Industries - Company Description

Comments:

Still holding at support at $48 followed. 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.



BEARISH Play Updates (Alpha by Symbol)


AMBA - Ambarella - Company Description

Comments:

Continued weakness in Ambarella shares but the weakness was limited. Shares tried to rally at the open but were quickly sold. I lowered the stop loss to $36.85.

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 2/5/16

Long March $32.50 put @ $1.78, initial stop loss $41.55




BABA - Alibaba - Company Description

Comments:

BABA dipped sharply at the open but recovered in the afternoon to positive territory. I considered lowering the stop loss again but the downtrend resistance is about $64. 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, see portfolio graphic for stop loss.


BABY - Natus Medical - Company Description

Comments:

BABY declined to a new low at the open but then bounced on short covering as the biotech sector began to recover in the afternoon. I do not see a change in trend with just one day of short covering.

Original Trade Description: February 4th.

Shares of BABY spiked higher on the 27th when they posted a 27% increase in earnings but revenue only rose +6.4% and failed to meet their projections. They guided for $100 million and came close at $99.951 million so rounded up they did hit their target. However, investors sold the stock almost immediately and the stock has continued slowly lower.

There is nothing wrong with the company. They are transitioning away from selling devices and systems as their primary revenue and more to supplies and services as a continuing revenue source. Once you sell a hospital a bunch of devices it will be years before they buy again. By moving into the supplies area they will develop a constant revenue stream as those supplies are consumed.

One of their products is called NicView that allows families and friends to view the babies over the Internet while they are in the neonatal intensive care units. More than 80 hospitals now have that installed.

They guided for Q1 to revenue of $86.5-$97.5 million, down slightly from Q4 and earnings of 34-35 cents. Full year revenue guidance was $445-$455 million and also down from the Q4 run rate. Earnings are good but that slowing revenue is a challenge.

Earnings are April 27th.

I like Natus as a company. I wish their stock was rising so I could play it on the upside. However, shares are struggling to hold over $34. If this level breaks the next support is in the $25 to $28 level.

With the biotech sector very weak and expected to get weaker I am afraid it is going to rub off on Natus and we will see that breakdown.

Position 2/5/16 with a BABY trade at $33.50

Long April $30 put @ $1.15. No stop loss because of the cheap option.


HPQ - Hewlett Packard - Company Description

Comments:

HP dipped at little further below support and may finally be picking a direction. We have plenty of time.

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 - Full Company Description

Comments:

JUNO spiked at the open above resistance at $28 to stop us out at $28.25. Shares weakened almost immediately. The rebound in the biotech sector probably triggered some short covering. There was no news. We exited with a $1.15 gain.

Original Trade Description: January 22nd

Juno is a biopharmaceutical company that develops cell based cancer immunotherapies. 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, closed 2/9/16:

Closed: Long March $27.50 put, entry $1.75, exit $2.90, +1.15 gain



VXX - iPath S&P 500 VIX Futures ETN - ETF Description

Comments:

Finally a positive day to remove some of the volatility from the market. We need multiple positive days to really knock the VXX lower. 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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