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Newsletter

Daily Newsletter, Wednesday, 2/10/2016

Table of Contents

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

Market Wrap

Janet Yellen Disappoints

by Keene Little

Click here to email Keene Little
The stock market had a nice rally going this morning but once Janet Yellen began her Congressional testimony the market started to pull back. The techs held up while the others sunk back into the red.

Today's Market Stats

The stock market got a lift out of the gate this morning, thanks to an overnight rally in the futures, but after the first hour of trading the rally was given back and it happened after Janet Yellen started talking. The market appears to be losing faith in what the Fed can accomplish for the market, I mean economy. Also negatively affecting the stock market is what's happening in the political arena.

The stock market is not happy with the prospects of having either Bernie Sanders or Donald Trump as president (although Wall Street would prefer Trump over Sanders), both of whom are doing well in the polls. The frustration and anger of the electorate is showing up in the rejection of the status quo in the political system and they're voting for the two that have a different message (it's that hope and change thing all over again). The same level of frustration is showing up in the stock market, one of the best reflectors of social sentiment. When social mood turns sour it is always accompanied by a bear market in stocks. It really is as simple as that.

The problem for the market is that Yellen is not showing signs, yet, of helping the market recover from its January decline. In her prepared remarks to the House Financial Services panel, she said financial conditions "have become less supportive to growth." Like so many are now doing, she pointed the finger at China and effectively said "they did it!" She warned that "downside risks" tied to the health of the Chinese economy could weigh on our economy.

Yellen shared with the committee that the Fed had considered negative interest rates back in 2010 but decided it was not the right way to go. Besides, according to Yellen, there are some legal and regulatory issues that haven't been fully researched yet (after all, it's only been 5 years since then and these things take time, wink). As she told the committee, "We got only to the point of thinking it wasn't a perfect tool...we were concerned about the impact it would have on money markets, we were worried it wouldn't work in our institutional environment." My guess is that when they do implement NIRP, all those concerns will be swept under the rug as they continue to experiment on us. It will be a Hail Mary pass and according to Yellen she doesn't believe the Fed will have to resort to it unless the stock market drops by 50%, real estate loses 25% and the labor market significantly softens.

One of the problems with negative interest rates, which is essentially a tax on the banking system, is that banks start to underperform. We can see that already in the relative poor performance by banks this year compared to the S&P 500 index. It's not likely the banks will absorb the higher costs all by themselves out of the goodness of their hearts. I doubt Jamie Dimon will give up his $27M bonus (on top of his multi-million salary) to help his JPMorgan Chase company cover some of those costs. Instead, the banks will pass along those costs to its customers, which will include lower rates of returns on savings (can't get much lower) and charging more for services, such as for holding your money.

The problem with negative rates charged to banks is that it could actually do the opposite of what the Fed hopes to achieve. As some European countries are finding out, negative rates result in less lending by banks, thus negatively affecting the credit cycle. Money tends to leave the banking system of countries with negative rates and flows to countries providing better returns. Or Mom and Pop simply withdraw their money and put it in a safe deposit box or under their mattress. They put their money into U.S. Treasuries (one of the better places to park your money if you want to be in cash) and the result is the same -- money leaves the banking system. Banks with less money to lend then results in a contraction in credit, which then slows the economy further.

Emerging markets tend to offer higher yields to compensate for the higher risk and that's where much of the money from Europe has been flowing. The risk to the emerging markets is when the money flow reverses, which tanks their economies and stock markets. Their companies then start defaulting on loans and that starts to ripple through the global financial system -- a butterfly flapping its wings in Africa causes a hurricane to hit the U.S. (chaos theory).

So why are central banks resorting to NIRP policies? As explained in an article in the The Economist:

The best hope for success, however, lies in foreign-exchange markets. Negative rates might send investors in search of better returns abroad, leading to depreciation of the currency. That would raise the price of imports, helping to combat deflation and giving a growth-enhancing boost to exporters. Since the ECB introduced negative deposit rates the euro has fallen against the dollar by nearly 20%.

The Fed is deathly afraid of deflation, as are all Keynesian-trained economists (and practically all central bankers think the same way as they've been trained the same way). Fighting deflation is their first priority and that makes the NIRP decision easier to understand. The problem is when other countries match each other, effectively negating the effects. The only thing it accomplishes is a race to the bottom in currency devaluation. We have been and continue to be in a currency war and unfortunately they tend not to end well for anyone.

The rally in the stock market from 2009 has been built primarily on a booming credit cycle and nearly 100% of the corporate borrowing has been to buy back stock. This of course improves the earnings per share and drives stock prices higher. But it hasn't resulted in any productive use of the money and now many of those companies are finding it more difficult, with lower earnings, to service their debt. Lower earnings, higher debt and the inability to "massage" their earnings per share will result in lower stock valuations (prices). This is just one example of the QE efforts have simply distorted money flow and as with all distortions, the corrections tend to move faster and more violently than the distortion itself.

Yellen mentioned several times that she does not see evidence of slowing in the global economy or the U.S. economy. I'm not sure what numbers she's looking at but it sure seems obvious to me. One are that's been slowing is retail sales, starting with the disappointing holiday sales between Thanksgiving and Christmas. It appears many shoppers are tightening their belts and keeping their wallets closed. Paying down debt would be a good thing for most people but we also know that doing so will hurt our consumer-dependent economy. If it's not a necessary item we tend to buy less of them when things get tighter, such as electronic goodies, vacations, eating out, etc. What doesn't tend to slow down as much are those items we use most every day, such as toothpaste, toilet paper and other consumables, which are placed into the consumer staples category. Johnson & Johnson is a consumer staples company and it has done better than others this year.

It's often said when we're entering a recession, when it comes to which stocks to own, "if you can smoke it, drink it or eat it, buy it." But companies involved with discretionary items will suffer more in an economic downturn. The spending between consumer staples and consumer discretionary items will determine the profitability of those companies associated with each and therefore comparing these two groups is a way to provide a clue about how consumers are feeling about the economy and their financial position. These two groups are represented by the Consumer Discretionary ETF, XLY, and the Consumer Staples ETF, XLP.

I'll start tonight's chart review with a weekly chart of SPX and on the chart I also show the ratio of XLY to XLP, which I'll discuss further, below the chart. This chart is using the arithmetic price scale and the first thing to notice is the parallel up-channel for the rally off the March 2009 low. The January decline broke below the bottom of the up-channel, which is a very important signal that says the leg up from 2009 has now completed. The bounce off the January low into the February 1st high resulted in a back-test of the bottom of the broken up-channel and the selloff from the February 1st high leaves a bearish kiss goodbye.

S&P 500, SPX, Weekly chart

Back to the discussion above about the XLY/XLP ratio, which is shown in blue on the chart above, you can see this week's break of support at the lows since 2014 and I think that's a big deal. The consumer is moving more into hibernation mode and not willing to spend money on discretionary items. Just as we've seen the utility sector outperform other sectors in the market lately (people still need to buy electricity and water), now we're seeing people focus their spending more on staples than discretionary items. Being a consumer-driven economy, this is another sign of a coming slowdown in the economy, otherwise known as a recession. Stock markets don't do well in recessions.

The SPX daily chart below shows today's rally attempt above price-level S/R at 1867 (the August 2015 low) but the failure to hold above that level is at least short-term negative for the market (today's shooting star candlestick is bearish since it reflects the day's inability to hold onto the rally attempt). But it remains possible we'll get a larger rally up to the price projection shown at 1963.37, which is where the bounce off the January 20th low would achieve two equal legs up for an a-b-c correction to the January decline before heading lower. SPX would also likely test its broken 50-dma at the same time. A rally above the February 4th high near 1927 would confirm a break of its downtrend line from December 29th and that would be good confirmation that a rally to at least 1963 is likely. But a failure to rally above this morning's high near 1882 points to lower prices and those are at 20-point increments, starting with 1820 and down to 1760.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1927
- bearish below 1767

When I look at the short-term pattern for the decline from February 1st I see the possibility for a sharp decline this week and into next, which would mean a decline could quickly break below 1760.. From an EW perspective, the decline from February 1st could be a 1-2, 1-2 to the downside (because of the overlap between the current bounce and the February 3rd low), which suggests the selling is about to pick up speed if it can't rally above 1885-1892. Today it struggled at the top of a parallel down-channel for the decline from February 1st, as well as price-level S/R at 1867 (the August 2015 low), and the bearish wave count suggests the next leg down will be a strong one that will drop price below the bottom of the down-channel and likely below 1760 (the February 2014 low near 1738 would become a downside target). This bearish interpretation is not supported by the techs and the RUT, whose patterns suggest only one more minor new low, and therefore I show this only as a warning of what could happen. Be careful about trying to catch a bottom in the next selloff, if it starts down from here and drops quickly.

S&P 500, SPX, 60-min chart

The Dow held price-level support at 16K on a closing basis on Monday and Tuesday but it lost the battle today, closing at 15914. I see the possibility for only a minor new low below Monday's, at 15803, but if price-level support at 15666 doesn't hold then there's a good chance we'll see price-level support at 15340-15370 tested. Those are the lows in February 2014 and August 2015, resp., and following the completion of the leg down from February 1st I'll be looking for another multi-week choppy bounce correction. There is additional downside risk in a stronger breakdown but I'd want to see a strong decline below 15300 before thinking more bearishly.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,486
- bearish below 15,803

The Nasdaq has been fighting to hold onto support near 4300 and today's bounce has the potential to build something more bullish. But it needs to get above its broken uptrend line from October 2014 - August 2015, near 4395, about 25 points above today's high, and then break out of its down-channel for the decline from December, currently near 4425. The sellers drove the Naz back below the August 2015 low at 4292 on a closing basis today, after holding above that level all day. This has it looking more bearish and I think we're looking for another leg down, in which case the downside target would be the October 2014 low at 4099. A drop below that level would suggest a decline to the bottom of its down-channel could be next, which will be near 3890 next Monday.

Nasdaq Composite index, COMPQ, Daily chart

Key Levels for NDX:
- bullish above 4546
- bearish below 4099

Over the weekend I had mentioned the biotech index, BTK, and said it looked like it could be ready for a bounce. It's been hammered this year and actually since its high in July 2015. I had mentioned we might see it find support slightly lower than Friday's low and then we got the move down into Tuesday's low at 2575. This is good for two equal legs down from July 2015, at 2642, a test of its uptrend line from November 2008 - October 2011, near 2600, and a test of its 200-week MA at 2655. This is a dangerous sector to play but it looks like a good setup for at least a bounce. If you're a disciplined trader (be honest with yourself), this is an opportunity to try the long side (pick an ETF, such as BBH). Just don't let it go below Tuesday's low without you pulling the ejection handle. The next support level is not until 2260-2270.

Biotech index, BTK, Weekly chart

Like the other indexes, the RUT remains inside its down-channel for the decline from December and nearly tested the top of the channel with today's high at 983. A rally above today's high would be more bullish but short against that high looks like the right place to be at the moment. If we get another leg down watch to see how it does at the price projection shown on its chart at 941.15. This is where the 5th wave in the decline from December would equal the 1st wave down. At the moment the RUT is fighting to hold support at its trend line along the lows from February - October 2014, near 959 and it would show significant bullish divergence if it turns back up from here (a reason not to be short if it rallies above this morning's high). If the RUT drops below 940 we could be looking at a more significant decline and potentially down to the next price projection at 881.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1040
- bearish below 940

Treasuries have rallied strong while the stock market has sold off as a flight to relative safety continues. As mentioned at the beginning, in the discussion of NIRP and the flight of money, buying in Treasuries could be coming from Europe and Japan as well. This has resulted in Treasury yields dropping and the 10-year yield (TNX) has now dropped back down near its January 2015 low at 1.65%, with Tuesday's low at 1.70%. The small bounce pattern off yesterday's low looks like a correction and should be followed by another leg down, which means the January 2015 low will likely be tested, if not broken. This week's decline has TNX breaking its uptrend line from July 2012 - January 2015, near 1.76%, but there's still the potential for another bounce back up to the downtrend line from June 2007 - December 2013, which was last tested in November-December 2015. Another leg up inside a descending triangle would be a setup for a stronger decline but at the moment, if support at 1.65% doesn't hold then we'll likely see the decline continue to at least the July 2012 low at 1.39%. What it does from here will help clarify the next likely move for the stock market as well.

10-year Yield, TNX, Weekly chart

The banking index has outperformed the broader market but unfortunately that means it has outperformed on the downside. BKX has already broken well below its 2014-2015 lows and is now testing its April 2013 high at 58.83 (Tuesday's quick low was 58.42 and then it traded around 58.83 for most of the day). Today's low at 58.93 looks like it's going to be followed by lower lows and that should have BKX testing its uptrend line from March 2009 - October 2011, which this week crosses its 50% retracement of the 2007-2009 rally, at 57.25. That should set up a multi-week bounce correction into April before continuing lower. Below 57 would suggest the next support level near 52.50 would be next.

KBW Bank index, BKX, Weekly chart

More talk about negative interest rates further depressed the US$ this week but so far it's just continuing to trade inside a 94-100 trading range, which is not expected to change until later this year when I'm expecting another rally leg out of the consolidation. I'll change that opinion, which I've held since its high in March 2015, when price tells me to.

U.S. Dollar contract, DX, Weekly chart

Who lit a fire under gold bugs' butts? Last week gold broke above its downtrend line from October 2012 - January 2015 and then price-level S/R at 1142 and then blasted higher from there. I had mentioned it would be bullish above 1142 and that turns out to be no lie. The strength of the rally has it looking like a c-wave of an expanded flat correction, which is when the b-wave pullback (the October-November 2015 decline) drops below the previous low (July 2015). When that happens and it's followed by a strong spike up, as we see here, the c-wave generally achieves 162% of the a-wave, which is the 3-wave move up from July 2015 to the October 2015 high. That projection is shown on the weekly chart below at 1238.59, which closely aligns with previous price-level S/R at 1235. Once the leg up from December 3rd completes, assuming for now up near 1235-1238, it should get completely retraced as gold heads to a new low. That would obviously be extremely depressing for gold bugs and might finally dissuade them from trying to buy a low, which is what we need to see before a longer-term bottom will be in place. But a rally above 1240 would have me thinking a longer-term bottom might already be in place so we'll see what happens if and when it reaches that area.

Gold continuous contract, GC, Weekly chart

The pattern for oil's decline from June 2015 would look best with one more new low and that could be coming sooner rather than later. A downside projection for a new low is near 23 if it happens by the end of the month. Following a new low, if we get it, we should see a stronger bounce/rally in the coming months. The commodity index also supports this idea.

Oil continuous contract, CL, Weekly chart

There are no significant economic reports on Thursday but we'll export and import prices on Friday (to check how the inflation/deflation battle is going) and retail sales. Michigan Sentiment will be out after the open on Friday but none of the reports are likely to be market moving. If retail sales come in much different than expected (relatively flat for January) we could see a pre-market move so watch for that possibility.

Economic reports

Conclusion

The stock market looks like it has another leg down before we can look for a larger bounce (in time if not price). It could be just a minor new low or a significant drop and unfortunately it's not clear at this point which we should expect (assuming we'll get a new low). If we get a minor new low and a reversal with bullish divergence against the January 20th low I'd be more inclined to try the long side, especially if a minor new low is followed by a rally above today's high. But a sharp decline that breaks through the close-by support levels would have me sticking with the short side until we see some kind of ending pattern to the downside, with bullish divergence. We have a vulnerable market and that means downside surprises. Long trades should be considered counter-trend trades but the short side could be short-lived if we're nearing a tradeable bottom, which I think we are. That means small base hits for sides while we watch to see how the larger pattern is setting up.

Good luck and I'll be back with you for the weekend wrap (filling in for Jim).

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

To Bounce Or Not

by Thomas Hughes

Click here to email Thomas Hughes
The market wants to bounce but can't quite make up its mind to do so.

Editors Note:

The market is due for a bounce, looks like it is setting up for a bounce but can't quite make up its mind to do so. Today oil prices and testimony from Janet Yellen were to blame.

Oil prices went on yet another wild ride, up one minute and then down the next, carrying the broader market with it, while traders hang on every rumor coming out of the oil patch. The much talked about deal brewing between OPEC and non-OPEC producers continues to drift through the market with no real news to speak of.

Janet Yellen's testimony before Congress was much the same as it has been. She says we've made progress toward max employment and that the 2% inflation target is sure to be hit in the medium term. The economy remains strong and is expected to see further improvements in income growth and the consumer. The flipside is that low energy prices are holding inflation in check. The kicker; even with current uncertainty in the market the Fed's next move is more likely to be an increase in interest rates and not a cut.

I'd like to see some more commitment in the market to direction before initiating any more plays.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays


In Play Updates and Reviews

Waiting For A Rebound

by Thomas Hughes

Click here to email Thomas Hughes
The broad market made a 30 point gain from yesterday's close but weak oil prices took there toll leaving the market flat to negative for the day.

Editors Note:

The broad market made a 30 point gain from yesterday's close but weak oil prices took there toll leaving the market flat to negative for the day.

The market tried to bounce from support in today's action but was just not able to hold the gains. The day started well, futures were showing a positive open and that turned out to be the case. After the open the indices moved higher, adding more than 1% to yesterday's close, only to fall back to break even by the close.

The fact that the market was able to make gains at all in today's session is a positive, buyers are in the market and they seem willing to bid up the price. The negative is that oil prices remain weak and are continuing to weigh on sentiment and the broader market in general. Eventually energy prices will stabilize but it doesn't look like it will be anytime soon.

Because today's market action was basically flat there are no changes to the portfolio. Keep a close on eye on stops and be prepared for more volatility tomorrow and into the end of the week.



Current Portfolio




Current Position Changes


FL - Foot Locker

The Foot Locker call was opened today. Entry trigger was $64.75.

The QQQ call was opened today.


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 moved higher today, again on no news, but were capped by the short term moving average. Despite hitting short term resistance the entry trigger price was reached resulting in a buy.

Entry price for Mar $70 call is $1.05

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 transports continue to lead the broader market. Today the IYT moved above the short term moving average only to fall back below before the close. There are no changes at this time but I may raise the stop if it falls below $122.50

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:

Proctor & Gamble gave up some of the gains it made yesterday but closed above our entry price. Declining momentum may become an issue and will need to be watched. The stop was raised with yesterday's play updates so be sure to update your accounts.

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:

Prices moved higher today closing the gap opened on Monday but fell back to near break even before the close. The company is due to report in earnings in a couple of weeks; the entire sector is expected to show a 3-5% increase in sales ex-gasoline. Whole Foods reported after the bell foreshadowing what we can expect from Kroger; beating expectations and raising guidance. No changes today.

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 Q's moved higher today as well, closing a gap opened on Monday, only to fall back at the close. This is a purely technical play and continues to look like a good one. Current lows are bouncing from a long term resistance level with highly divergent indicators consistent with a rebound to the short term moving average.

Trigger price was reached resulting in a buy. Entry price for QQQ Mar $100 call is $2.05.

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:

Thor continues to test support. Support appears strong, probably due to strong earnings and sales in prior quarters. Earnings are due in about 3 weeks, if they miss or fail to inspire this play may get reversed. Until then the technicals and outlook remain positive, no changes to 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:

Small rebound in Ambarella today, no change to position.

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:

A small bounce in Alibabay today. Exit target stands, no change to stop.

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 tried to bounce today but met resistance at $35. The stock looks like it is setting up for the next big drop we've been anticipating.

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 continues to drift lower ahead of earnings.

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

Original Trade Description: January 25th

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

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

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

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

Earnings are February 24th.

Position 1/26/16:

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



JUNO - Juno Therapeutics - Full Company Description

Comments:

JUNO fell more than -1.7% today and is moving in our direction once again. No changes.

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:

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 VIX fell from what has become a lower peak, it looks like volatility may have decided to come down to reality, no changes to this position.

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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