Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/17/2016

Table of Contents

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

Market Wrap

Bulls Plow Through the Bears

by Keene Little

Click here to email Keene Little
The bulls have taken no prisoners since the stock market bottomed last Thursday. It's been a straight-up rally, the strongest we've seen since the August 2015 low, and now the bulls are hoping to make it an even stronger one to finish opex week on a high note.

Today's Market Stats

The day started with another big gap up and that makes it three in a row for the 3-day rally off last Thursday's low. Will it turn into an exhaustion gap or is it a breakaway gap? Only time will tell but the rally now has the short-term charts deeply overbought and looking for some relief. It's been a strong short-covering rally but it could easily draw in real buying and this being opex week we could see the market hold up for at least another day or two. What kind of pullback pattern follows will then provide clues for what to expect next.

This morning's economic reports showed some improving data, which theoretically could help the Fed stay on track with their desire to raise rates this year. The PPI numbers came in stronger than expected, up +0.1% and +0.4% for PPI and Core PPI, resp., which were better than the -0.2% and 0.0% expectations. The Fed desperately wants to see inflation so they were probably heartened by this morning's numbers.

Housing numbers were in line if not a little disappointing, which depressed housing stocks (they finished flat for the day). Industrial production for January improved +0.9% which was better than expectations for +0.3% and a big improvement over December's -0.7%. Capacity utilization ticked up marginally as well so overall, the numbers go into the "rate increase" column as the Fed debates whether or not to continue raising rates this year.

The FOMC minutes that were released this afternoon highlighted the fact that the committee members agreed they would need to see more supporting data before raising rates further. That gave the market a little extra pop higher just after 2:00pm so the market was pleased that the Fed showed it's at least acting cautiously. Apparently the committee members were a little surprised by the negative reaction to the rate increase and they wish to tread carefully from here. The stock market was relieved by the better economic reports this morning and the Fed's willingness to back off on their rate-increase desires.

Regardless of what the Fed thinks about the market it's important what the market thinks is going on. The junk bond sector has been crushed in the past year and it's a sign of stress in the weaker sectors that have borrowed a lot of Fed-created cheap money. We know the energy sector is starting to default at a higher rate on their loans, which amount to much more than we had in the sub-prime slime days before the 2007 top. But now there are more sectors joining energy in struggling with their debt loads and that's being reflected in the stock market plunge.

Moody's uses their Liquidity Stress Index to measure how many firms are in trouble and the index jumped up to 7.9% in January from 6.8% in December. This is the highest level since December 2009 and the biggest one-month jump since March 2009. The stock market has barely begun a descent and already we're seeing major cracks in the debt-burdened industries. As credit markets tighten there are many companies finding it more difficult to service their debts (lower earnings) and roll it over into new debt. Moody's has already warned of a spike in defaults in the energy sector and now it's starting to spread to other sectors.

As reported my Hoisington in their Quarterly Review and Outlook for the 4th quarter, public and private debt currently stands at 375% of GDP, far above the historical average of about 190% (1870-2014). In their opinion, the extremely high level of debt suggests it's been used for unproductive and counterproductive purposes, such as stock buybacks, Debt is good if it generates a return such that the debt payments are covered by the investment of the money (in capital improvements for example). One specific bad use of debt was to generate higher stock prices without a commensurate rise in corporate profits, which is where we are now.

The end result of all this bad debt and an increasing number of companies unable to service their debt has been an increasing number of defaults on loans. This in turn had been reflected in the decline of the junk bond funds. The bond prices drop, boosting the yield, as a way to entice investors to take the risk. Clearly investors have been shying away from this risk and this risk-off attitude is finally being reflected in the stock market as well. Using HYG as a measure of junk bond performance we can see how relatively poorly it has done compared to the stock market, but the stock market could be at the beginning of "catching up" to the falling junk bond index.

SPX has rallied +6.7% from Thursday's low to today's high but HYG has rallied half that. The short covering in the stock market is not being matched by the buying/short covering in junk bonds and while that doesn't prevent the continuation of the stock market rally (look at how it continued to hold up after HYG started to nose dive in 2015) but as long as there's a lack of interest in junk bonds it will continue to warn us that risk-off trades should be preferred by investors.

The weekly chart of SPX vs. HYG, shown below, highlights the huge difference between the two. These two mimicked each other since the 2007 top (although HYG made a lower high in October 2007 while SPX made a new high, showing early weakness) and they only started to diverge after HYG peaked in May 2013. It tried to make a new high with the stock market in June 2014 but then started to sell off strongly from there. It's been a long-term bearish divergence since then but I think the stock market is going to play serious catch-up (catch-down?).

As I'll show with the daily chart further below, I'm expecting a higher bounce correction into March but there's something on the weekly chart below that has me feeling very cautious about upside expectations. There's a parallel up-channel for the rally from 2009, the bottom of which was tested in August/September 2015 and broken in January. The bounce up to the February 1st high was a back-test and kiss goodbye at the bottom of the broken up-channel. A second up-channel can be created by attaching another parallel line to the October 2011 low and that line was broken intraweek into the January 20th low. That line was broken again into last week's low and the bounce is now back-testing the line, near today's high at 1930. Is it a setup for another bearish kiss goodbye?

S&P 500, SPX, vs. High Yield Corporate bond fund, HYG, Weekly chart

As you can see on the daily chart below, SPX has run back up to its previously broken uptrend line from January 20 - February 3 and while I consider this to be a weak line of resistance it appeared to be respected this afternoon. Just another resistance level for the index to gap up over tomorrow morning (wink). I think the best fit for the decline from December 2nd is a completed 5-wave move down into last Thursday's low (this fits very well across the other indexes) to complete either the 1st wave down (techs) or the 3rd wave down from November (the RUT fits this interpretation particularly well for its decline from June 2015). To keep the indexes in synch, except for the RUT, I'm looking at the December high as the completion of the THE bull market rally (with truncated highs for the Dow and SPX. This sets us up for a strong bounce into March for a 2nd wave correction (bold red depiction). But the bulls need to keep this going since the weekly chart above is scary for the bulls.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1957
- bearish below 1195

One reason I like the idea of a stronger bounce correction into March is that it would help relieve the significant oversold conditions and it would turn the most traders bullish just before the 3rd wave down gets started. The 2nd wave is called the sucker wave for a reason, as is the name for the 3rd wave – the recognition wave. As I'll point out later for the RUT, it looks like it needs a 4th wave correction in the decline from June 2015 but it might get another 2nd wave to set it up for a 3rd of a 3rd down, to lead the market lower in a powerful 3rd wave decline into the summer. That's only speculation at this point but it's a theory I'll test along the way as the price pattern develops.

The previously broken uptrend line from January 20th is shown more clearly on the 60-min chart below and you can see how SPX tagged it to the penny today and then pulled back marginally. If it continues higher Thursday I'd look for a test of the February 1st high near 1947 and watch for possible resistance there. The 60-min chart is more overbought than it's been since last year's high and clearly due at least a pullback. The straight-up rally looks like a typical bear market rally and the risk for those chasing it higher is that we could see a deep pullback before heading higher (assuming we'll get a larger 3-wave bounce correction into March but that's certainly not a guarantee).

S&P 500, SPX, 60-min chart

On the Dow's chart I'm tracking the idea that we're only going to get a relatively short-lived bounce, which could be complete at any time now, and then one more drop down to test recent lows (to create a triple bottom). That would then be followed by a larger consolidation pattern into April before continuing lower. This idea suggests lots of choppy whipsaw moves in a multi-week consolidation. It wouldn't be a fun trading environment unless you're a good day trader and catch the tops and bottoms of the moves. I'm hoping for the sharper bounce pattern into March so we have some clearer trade setups.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 16,510
- bearish below 15,300

The tech indexes show the clearest reason why we should be looking for high bounce corrections. Looking at its bull market rally has having finished at its December 2nd high, the 5-wave move down gives us a larger-degree 1st wave. That calls for a sharp 2nd wave correction and the leg up from last Thursday is likely just wave-a of what should become a larger a-b-c bounce pattern. The big question at the moment is what kind of pullback we can expect for the b-wave before heading higher again.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 4225
- bearish below 3902

Like the techs, the RUT made a higher high in December than it did in November (unlike the blue chips with their truncated (lower) highs in December). The 5-wave move down into last Thursday's low also sets it up for a larger bounce but it could trade in more of big sideways choppy consolidation instead of a high bounce. How high a bounce we ultimately get will then provide clues for what to expect for the next leg down (either a 5th wave in the decline from June 2015 or a 3rd of a 3rd wave down following another 2nd wave bounce correction. For now we should simply expect some whippy price action so trade carefully.

Russell-2000, RUT, Daily chart

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

Banks were a little weaker than the broader averages today and that's always a bit of a warning sign for the bulls to heed. The morning high stopped a little shy of the bottom of its previously broken parallel down-channel from July 2015, currently near 62.60 (today's high was 62.40), and then sold off for the rest of the day, giving back the bulk of its morning rally. The pattern is not clear enough to offer a high-probability setup here but as depicted on its chart below, there is the potential for one more new low, or a test of last week's low at 55.99, to complete the leg down from November 2015. If this happens it would likely drag the other indexes back down as well, even if it will be for just a deep pullback in a larger bounce/consolidation pattern.

KBW Bank index, BKX, Daily chart

Along with the broader market the TRAN has had an even stronger rally in the past 3 days and has now retraced 50% of its decline from its November 20th high. Today's high at 7383 is close to its previous low on August 24th, near 7453, and that's likely to be strong resistance if and when reached. The longer-term pattern suggests we should see only a pullback and then another leg up for a larger bounce pattern but from here it's looking vulnerable to at least a pullback as the next move.

Transportation Index, TRAN, Daily chart

The US$ has bounced with the stock market in the past few days, after both dropped together from their February 1st highs, and the bounce could make it higher but at the moment it's testing its 200-dma at 96.90 (it broke above it this morning but then closed 2 cents below it) and is nearing its 50-week MA at 97.10. With the dollar and stock market trading in synch, if the stock market is looking at a bigger bounce in the coming weeks we could see the dollar do the same, especially if it's able to get above 97.10 and hold above. It's even possible the dollar will rally to one more new high following the 3-wave pullback from December, up to 103-104 (light-green dashed line), to finish its longer-term rally but at the moment I'm sticking with the higher-probability pattern that calls for a continuation of its sideways consolidation for several more months before continuing higher (bold green line).

U.S. Dollar contract, DX, Weekly chart

In the weekend wrap I showed the monthly chart of gold with its down-channel for the choppy decline since August 2013. The top of the channel is near 1262 and last Thursday's high was 1263.90. Thursday's big spike up (+66.50 to the day's high) was quickly retraced with the decline into yesterday's low and now we wait to see if the bulls can break through the top of the channel or if instead it was a blowoff ending to the a-b-c bounce correction off the July 2015 low. Bullish above 1264 but gold remains bearish below that level since it's still in an established down trend.

Gold continuous contract, GC, Weekly chart

Silver has the same down-channel from 2013 as gold, the top of which is near 16.10. And there is a downtrend line from April 2011 - October 2012, which was tagged with last Thursday's high at 15.99. A broken uptrend line from last August is also near 16.10. So there was more than one reason why last week's rally ran into trouble where it did and like gold, the decline into yesterday's low completely retraced last Thursday's exuberant rally. So what's next? Was the parabolic spike just another bear market rally that completed with a blowoff top or are we in the middle of a powerful wave up? Last Thursday's highs are now important for the bulls to get above.

One pattern that has been common in silver's decline from 2011 is the consolidation patterns -- they've each been a descending triangle, starting with the one that ran from September 2011 to October 2012 (the a-b-c-d-e triangle on the top left side of the weekly chart below) and then the next one from June 2013 to July 2014. The last one, I think, is the one at the bottom right side of the chart that just completed, running from December 2014 to February 2015. The first two triangles ran 53 weeks and 54 weeks and the latest was a little long in the tooth at 62 weeks. The e-wave of a triangle is often a head-fake move that gets traders caught in the end of a move instead of the beginning a reversal and that could be the case again. The bulls need to rally silver above 16.37 (the October 2015 high) to prove it's a real breakout, otherwise look out below.

Silver continuous contract, SI, Weekly chart

It's looking like oil's bounce could make it up to at least the 32.20-33.20 area before turning back down. At least the larger pattern calls for another turn back down for one more new low to complete the wave count to the downside. A downside target is currently near 23 in March and then we should have a good setup to get long oil. If oil gets above 35 there would then be upside potential to about 38-39 and above 40, with a break of its downtrend line from June 2015, it would be much more bullish. But at the moment I don't think we've seen a tradeable low for oil yet.

Oil continuous contract, CL, Daily chart

Thursday's economic reports include the Philly Fed index, which is expected to improve somewhat from January's -3.5 to -1.8 but Monday's Empire Manufacturing index was also expected to improve from January's -19.4 to -6.5 and instead came in at a marginal improvement to -16.6. We'll have to see if that data point falls in the "raise rates" or "hold rates" column of the Fed's spreadsheet. She loves me, she loves me not, she loves me ... not

Economic reports

Conclusion

The big question following the strong 3-day rally off last Thursday's low is whether or not it's sustainable. We don't know yet if this is the start of a stronger bull run into the spring or if instead it's just another bear market rally in what will be a continuation lower (the slope of hope is a decline punctuated by brief but strong hope-filled rallies and then a continuation lower).

One sign of a bear market rally is how strong it is. That sounds perverse but it's a fact that the strongest rallies occur in a bear market, albeit relatively short-lived thanks to short covering. In fact today Bespoke Investment Group tweeted the chart below, which highlights the fact that the strongest stocks in the Russell 3000 the past three days have been the ones most heavily shorted. Today's advance-decline line actually started back down after this morning's open while the advance-decline volume continued to climb. Money was pouring into fewer stocks (sending the a-d line lower) but still powering the select few (the most heavily shorted) higher. If it's hard to read the note on the chart it says "Stocks with the most short interest have significantly outperformed stocks with the lowest short interest over the last two days."

Stocks with highest short interest rally the strongest, chart courtesy Bespoke

As I mentioned earlier, the setup is good for a higher bounce correction into March but it could be whippy with a deep pullback before heading higher. The weekly chart of SPX highlighted a concern for the rally if the bulls can't keep it going here so a higher bounce is by no mean guaranteed. We are in a bear market and all rallies are suspect. It's only a question (in my mind) of how high the bounce will get before stronger selling kicks in.

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

Got a Sweet Tooth?

by Jim Brown

Click here to email Jim Brown
Editor's Note

Everybody in the U.S. has a sweet tooth and this company caters to that need. It also closed at a 5-month high today.

In a choppy market, we need to continue looking for relative strength. The three-day short squeeze may be about done but there will still be stocks that continue higher.

I chose DNKN because unlike other stocks rebounding from lows on short covering, Dunkin only declined -$4 over the last two weeks in an ugly market. They survived the normal post earnings depression and closed at a new 5-month high.


NEW BULLISH Plays


DNKN - Dunkin Brands - Company Description

Everybody knows Dunkin Donuts. Consumer consultancy, Brand Keys, named Dunkin Donuts coffee as the top brand for consumer loyalty for tenth consecutive year. I know, you would probably have said Starbucks if you were asked the question but Dunkin Donuts coffee is the most loved. Dunkin was also number one in packaged coffee loyalty for the fourth consecutive year. Starbucks sells more units because Dunkin Donuts did not sell their K-Cups in supermarkets for a long time. Up until recently, if you wanted to buy Dunkin K-Cups you have to go to a Dunkin store. Now they are available everywhere, even in Kohl's stores and Ace Hardware.

Dunkin is changing their business model. They are opening 62 "non-traditional" stores in 2016 in addition to their normal stores. Those non-traditional stores will be located in airports, transportation terminals, casinos and resorts, hospitals, stadiums, grocery stores, military bases, colleges and universities. They are also opening multibranded stores featuring both Dunkin Donuts and Baskin Robbins, their ice cream brand. That will allow for traffic from the morning donut and coffee to the after dinner ice cream treat. They are also adding other bakery goods to their donut menus including a full range of breakfast sandwhiches.

Dunkin currently has 11,700 stores under the Dunkin brand, with 750 of those now non-traditional. They also run more than 7,600 Baskin Robbins in 40 countries. They operate more than 220 stores in Europe.

Dunkin prides itself on the "blue collar" appeal compared to the sometimes snobby views of Starbucks with $10 coffees.

Their Q4 earnings were 52 cents that beat estimates by 2 cents. Revenue of $203.8 million increased 5% and also beat estimates. U.S. same store sales comps rose +1.4%.

Shares peaked just under $44 on February 5th, just before earnings. Post earnings depression and the weak market knocked them back to $40 but they have rebounded to close at $44 today and a five-month high.

No entry trigger because the June option is cheap and we have a long time before expiration. However, earnings are April 21st. We will decide on an exit strategy as we near that date.

Buy June $45 call, currently $2.25, stop loss $39.85




NEW BEARISH Plays


No New Bearish Plays





In Play Updates and Reviews

First Hour Rally

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the gains in the S&P came in the first hour with the high at 1,924 at 10:30 and the close at 1,926. This is still short covering. There was no follow through by investors.

I am definitely not complaining about the shorts being squeezed but eventually we are going to run out of shorts. The highs for the day were exactly the resistance high from February 4th. Relatively speaking this is weak resistance with much stronger resistance at 1940-1950.

The lack of additional follow through after 10:30 suggests investors are still skeptical of the rebound and are not chasing stocks higher. Only those forced to cover their shorts are participating.



Current Portfolio




Current Position Changes


No position changes


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


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


CSCO - Cisco Systems -
Company Description

Comments:

Cisco continued to surge higher again and is up +$4 since reporting great earnings. This rocket is going to run out of fuel soon. Target $27.25 for an exit.

Original Trade Description: February 11th.

Cisco reported after the bell yesterday and did more than please investors. The results, plus forward guidance, an increase to the dividend and an increase to the share buyback plan drove shares higher in today's session. The stock gained nearly 10%, broke above the previous resistance, moved up off the short-term moving average after gapping higher and all on 2.35X average daily volume.

Cisco Systems, Inc. supplies data networking products for the Internet. The Company's Internet Protocol-based networking solutions are installed at corporations, public institutions and telecommunication companies worldwide. The Company's solutions transport data, voice, and video within buildings, across campuses, and around the world.

Cisco reported earnings after the bell and did more than stun the market with its results. In the face of weak global growth and poor earnings results for the broader tech sector this company has been able to grow revenue, grow earnings and all on the back of increased demand.

Quarterly earnings rose to $3.1 billion or $0.62 per share, up 29.1% and 34% respectively from last year in the same period. Revenue rose 2% year over year due to a 2% increase in product revenue and a 3% increase in service revenue. All geographic segments saw growth, led by the Asia/Pacific region with an 11% increase. In terms of business segments product revenue was led by an 11% increase in security revenue, evidence of the ongoing need for business around the globe to bolster their online security. Margins are also on the rise driven by productivity improvement and a 7% decline in GAAP operating expenses.

The board of directors approved an increase to dividend, in line with the companies pledge to return 50% of free cash to investors. The new dividend is $0.26 per share, up $0.05 or 24% from the previous quarter.

The board also approved an increase to the current share repurchase program. The previously approved program totaled near $97 billion of which about $1.9 billion is left. The new addition is for another $15 billion, with no time limitation, making the total available for repurchase $16.9 billion.

The company also reaffirmed guidance for the 3rd quarter of fiscal 2016. Management is expecting earnings of $0.54 to $0.56, bracketing the consensus estimate, on revenue of $12.26 to $12.62 billion. Consensus revenue estimates are only $12.03 billion. High end estimates are closer to $13 billion, leaving plenty of room for Cisco to beat estimates yet again and if they continue to grow their customer base as they did this quarter it is sure to happen. Additionally, with the dollar falling to new lows and the strength shown in the Asia/Pacific region it is likely that current estimates are low.

There has already been one upgrade in the wake of the report and more are sure to come. Jeffries upped their rating to buy from hold. The consensus estimate if for share prices to rise to $31.61 with a high target of $37.00. Simply based on the consensus estimate there is a potential upside of 30%.

Our play, buy the April $25 call with a price trigger of $25 per share. As of today's action these options were going for $0.95 per share. Next earnings is in mid May so this position will be closed before then.

Position 2/12/16 with a CSCO trade at $25.00:

Long March $70 call @ $1.05, see portfolio graphic for stop loss.


FL - Foot Locker - Company Description

Comments:

Foot Locker struggled today with an early morning loss but recovered to close flat. Target $69.25 for an exit. I raised the stop loss again to $65.25.

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.

Position 2/10/16 with a FL trade at $64.75:

Long March $70 call @ $1.20, see portfolio graphic for stop loss.


IYT - Dow Transports ETF - ETF Description

Comments:

Another strong move by the IYT. I raised the stop loss to $127.85. Target $136.50 to exit.

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.

Position 2/9/16 with IYT trade at $125.85

Long March $130 call @ $2.55, see portfolio graphic for stop loss.


KR - Kroger - Company Description

Comments:

Kroger pushed through resistance from April/Aug at $38.75. Customers are raving about the new Kroger ClickList. Customers can shop online from a list of 40,000 items and their local store will pull the items, pack them and deliver to your car for $4.95. Not having to drag kids down the isles or spend an hour in the store is proving to be a winner. Click, pay, pickup at the curb.

News of a deal for Fresh Market could push it even higher.

Target $41.50 for an exit ahead of the resistance at $42.

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 - ETF Description

Comments:

The Qs continued their gains with a $2 sprint. Target $105.50 for an exit. Initial resistance is $104.50 but I think we could get through that but the resistance at $106 could be a challenge. I may be overly optimistic about the $104.50 but we can change the exit if trouble appears.

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.

Position 2/10/16 with QQQ trade at $98.45

Long March $100 call @ $2.61, see portfolio graphic for stop loss. .


THO - Thor Industries - Company Description

Comments:

Decent follow on gain but still facing initial resistance at $53. 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)


BABY - Natus Medical - Company Description

Comments:

Fractional gain and biotechs were still strong. This should be good news because it means the next time biotechs are weak we should see BABY decline further.

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:

HPQ closing in on earnings next Wednesday and that is when I expect the directional move to begin. 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.



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

Comments:

Two days of market gains knocked another point off the VXX. We need this rally to continue! It is not dropping quickly because so many traders are skeptical of this market rebound. 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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