Option Investor
Newsletter

Daily Newsletter, Thursday, 2/18/2016

Table of Contents

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

Market Wrap

Short Covering Ends

by Thomas Hughes

Click here to email Thomas Hughes
The three day short covering rally ended today.

Introduction

The three day short covering rally ended today, what comes next is the question on everyone's mind. The rally and bounce from deep support levels is promising in terms of future rallies but not a guarantee of a reversal or continuation by any means. Until the market decides it really is time to start getting bullish on stocks this move looks a lot like a range bound market hitting the top of the range.

Asian markets may be giving a bullish sign. Indices in the region gained more than 2.25% in Thursday trading driven by what Chris Weston at IG thinks could be the start of a "fear of missing out" rally. European indices followed the lead set by Asian traders, gaining more than 2% intraday only to see those gains cut by the close on weakness in our markets.

Market Statistics

US indices were indicated to open positive all morning, if barely. The SPX was indicated to open with a gain near 0.25%. Better than expected, or at least not as bad as expected, data released at 8:30AM helped strengthen the trade to 0.35% and that is how the markets opened. After the opening bell the mood changed quickly. Within minutes the indices fell to break even levels and below, led by the transports. Intraday low was hit just before lunch, the rest of the day saw the indices hover between Wednesday's closing prices and the early low.

Economic Calendar

The Economy

Initial claims for unemployment was reported as 262,000 this week, down -7,000 from last week's not revised figure and better than the +5,000 increase predicted. The four week moving average also declined, losing -8,000 to hit 273,000. On a not adjusted basis first time claims fell -11.1% versus an expected decline of -8.7% and are now -7% lower than last year at this time. The states seeing the largest increase in claims are Texas and Rhode Island with gains of +1,674 and + 783 respectively. The states with largest decreases in claims are Illinois and Tennessee with declines of -5,503 and -3,067 respectively.

This week's data helps cement the idea that seasonal increases in joblessness are behind us. This week's initial claims are now less than 15,000 above the 43 year low set last summer and consistent with ongoing health in the labor market. Based on these numbers we should see declines in continuing claims and total claims over the next few weeks.


Continuing claims rose by 30,000 to hit 2.273 million from last weeks upwardly revised figures. Last week's data was revised by +4,000. The four week moving average of continuing claims rose 13,500 to 2.262 million, the highest level for the moving average in over 6 months. In the near term view this is a negative, we don't want to see joblessness on the rise, but considering the post holiday surge in initial claims and the recent down turn in those claims this is very likely the peak in continuation claims. And, despite the near term increases, continuing claims remain at low level relative to the recovery and indicative of labor market health.

The total number of Americans receiving unemployment benefits fell -19,218 to 2.720. Total claims has been holding relatively flat near this level for the last four weeks, since hitting the post holiday peak in mid-January. Based on initial claims data and the historical total claims data we should see a down turn in total claims in the next 4 weeks or so. Total claims lags initial claims by 2 weeks so we may see some downward bias as soon as the first week of March. On a year over year basis total claims are down -4.7% and remain consistent with labor market health.


The Philadelphia Federal Reserve Manufacturing Business Outlook Survey was also released at 8:30AM. The headline number was -2.8, better than the -2.9 expected by economists and also better than the -3.5 reported last month. The 6 month forward outlook remains positive but fell to 17.3, a 3.5 year low. Within the report new orders fell -4 to -5.3, shipments remain positive but fell -7, inventories and back log orders declined and the employment index fell -3 to -5.0. What I found interesting about the employment segment was that only 20% of respondents predicted a decline in employment while 63% saw no change and 15% predicted they would be hiring in the near future.


The Index of Leading Indicators was released at 10AM. The headline number was a decline of -0.2% from January, exactly as expected, with a downward revision of -0.1% to December and a +0.1% upward revision for November. The index now stands at 123.2, 23.2% better than 2010 levels. The Coincident Index rose 0.3% and the Lagging Index rose 0.1%. According to Conference Board economists this month's reading does not indicate recession and remains consistent with moderate economic expansion expected for the first half of the year.

The Oil Index

Oil prices were a bit choppy today but not quite as choppy as they have been recently. In the early part of the day what appears to be a growing consensus from OPEC and non-OPEC producers to curb production levels helped to drive prices up by over 3%. Later in the day EIA data showing a larger than expected build in US stockpiles helped to moderate the day's gains to about +0.8%.

While talk of the proposed production freeze is supporting prices the fundamentals remain unchanged. A curb to production would leave supply at current high levels and do little to alleviate oversupply. So long as supply and production outweigh demand expectations oil prices are going to remain low so it looks like what we have brewing is a buy-the-rumor and sell-the-news type of scenario.

The Oil Index made a small gain at the open, just below the 1,000 resistance level, and sold off from there. The index end up losing about -1.75% on the day, created a dark cloud cover and confirmed resistance. The indicators are bullish and rising, but remain consistent with a range bound asset at this time. This range may persist in the near to short term while the market decides on whether oil prices have bottomed or not, and if talk of production curbs are enough to drive prices higher. A break above 1,000 could go to 1,100, support targets are at 950 and 900. No matter what happens I expect to see more volatility out of the oil patch.


The Gold Index

Gold prices rose more than 2% today, gaining more than $25, as risk averse investors fueled the flight to safety trade. Goldman Sachs may be right about shorting gold, but from my perspective the target entry for such a short would be near $1,250. If Goldman is wrong they've added fuel for another round of short covering. Regardless, the technicals support a retest of the recent high at least. Low inflation data and a more dovish than not Fed could help fuel this trade as well, the risk being that ECB QE could devalue the euro and reinvigorate dollar bulls.

The gold miners rose along with the prices of gold. The Gold Miners ETF GDX gained more than 4.5% to break back above $18 and approach the 7 month high set last week. The index is moving up to retest the highs, as indicated by convergences in the indicators, with a target near $18.68. Strength in the indicators, particularly a near 3 year extreme peak in MACD momentum, suggest that the gold miners have reversed, or at least bottomed, from the 5 year down trend. The sector may correct and/or trend sideways from here. It will of course come down to gold prices which appear to have set a new, higher, support level at or near $1200.


In The News, Story Stocks and Earnings

The Dollar Index held steady in today's session, below the shot term moving average and resistance at the $97.50 level. The indicators are bullish and pointing higher but not strongly. Diminished expectation for a March rate hike has the dollar under pressure and could keep it below resistance and range bound until the next round of central bank meeting, about 3 weeks away. Fed hawk James Bullard said just yesterday that it would be unwise for the Fed to continue raising rates at this time.


WalMart released earnings this morning and did not please the market. The company beat on the bottom line but revenue fell short due to weakness in the US the impact of currency conversion. The company also gave weaker than expected guidance, due in part to currency conversion and to the string of store closings announced last month. Today the stock lost more than -5% in the early part of the session but seemed to attract buyers. By end of day the loss was halved leaving a white bodied candle with long lower shadow.


La-Z-Boy reported after the bell on Wednesday and sparked a massive increase in share prices today. The company reported a 7.3% rise in sales, a 26.5% increase in quarterly EPS, a 29.9% increase in operating income and the highest margins in 12 years and all with positive forward outlook. Today the stock gained 20% on 4 times average daily volume.


Boston Beer Company, maker of Sam Adams, reported after the bell. The company beat expectations on the top and bottom line although both were down from the same period last year. The decline from last year's results was due to a 3% decline in shipments coupled with increased advertising and marketing costs that were only partially offset by price increases. Advertising and promotional expenses were up about 9% from last year at this time. Also impacting revenues was a decline in market share attributed to the wave of craft brewers sweeping the nation. (I live in Asheville, NC, we have about 30 microbrewers in town and more pop up every day, the funny thing is that PBR remains the top selling brand). The stock traded down -2.5% during the day, resting on the 30 day moving average, with little to no action in the after hours market.


The Indices

The indices fell in today's session, but other than that the day looked pretty good. The day's declines were relatively small and for the most part left the indices near the highs of the rally which began last week. The one exception is today's loss leader, the tech heavy NASDAQ Composite, which fell a little more than -1.0%. Today's candle is a little ominous, dark cloud cover, so we may see a pull back to test support. The indicators remain bullish in the near term, and consistent with a bottom in the short term, so any such pullback could result in new entry points for bullish positions. Resistance is just above today's open, near 4,600 and the short term moving average, with first target for support near 4,375.


The Dow Jones Transportation Average was the next biggest decliner among the major indices, losing about -0.57% in today's session. The index is taking a breather from the intense rally of the preceeding 3 days but is supported by strong indications of higher prices. MACD momentum is on the rise and at an extreme peak, stochastic is about to cross the upper signal line, both indicative of higher prices or at least a retest of current highs if a test of support occurs. The index is below resistance targets so has a little room left to run in the nearer term. Resistance target is 7,500 with first support target just above 7,000 near the short term moving average, which happens to be moving higher for the first time in nearly 3 months.


The S&P 500 made the third largest decline, nearly -0.5%, and looks like it could go higher. Today's action was more of a consolidation move than a reversal signal, with the decline halted at the short term 30 day moving average. The indicators are pointing higher and stochastic is firing a strong signal with this second bounce from support so a test of resistance looks likely. Resistance target is near 1,950, a break above this level would confirm a reversal from the recent low. If the index pulls back to test support first target to the downside is 1,900.


The Dow Jones Industrial Average made the smallest decline in today's session, only -0.25%. Today's candle is black and may indicate a peak but the close above the short term moving average suggests the market is still moving higher. The indicators are also both still pointing higher, suggesting a move up to the 16,600 resistance target is likely. A break above this level would confirm the reversal and could spark another rally.


The short covering rally is over. Now it's time for the market to decide what is going to happen next. Based on the indicators it looks like there will be at least a test of resistance, if not another move higher. Over the next week earnings and data are going to play a big role in what happens, especially the data due to its impact on FOMC speculation. Tomorrow's data, CPI, could go a long way towards swaying the speculation.

I remain a bull, it looks like the market is bottoming, but I have one concern yet to be alleviated and that is earnings. Earnings expectations for every quarter in 2016 continue to decline, full year expectations are now in the range of only +3.5% (down from +15% last summer), and could easily derail any hopes of a sustained rally.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Water Can Be Profitable

by Jim Brown

Click here to email Jim Brown

Editors Note:

I tried to launch this position on February 1st but the late January market rebound failed and began moving lower on the 2nd. This play was never triggered and eventually cancelled. After fading with the market this company is back at the January highs and I am recommending it again. Hopefully we will have better luck this time.

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

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


NEW DIRECTIONAL CALL PLAYS


AOS - AO Smith - Company Description

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

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

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

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

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

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

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

Earnings are April 29th.

The stock bottomed on the January 19th market crash and had been moving steadily higher. The market took it lower again to retest that bottom on February 9th. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade at $70.45.

With an AOS trade at $70.45

Buy April $75 call, currently $2.05. Stop loss $66.45.


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Pause to Refresh

by Jim Brown

Click here to email Jim Brown

Editors Note:

Markets do not go straight up or down and a pause to refresh after three days of big gains is only normal.

The S&P gained more than 1% per day for three consecutive days and that has not happened since October 2011. This was a big rebound with a +120 point gain in the S&P. We gave back -9 points today and I view that as very acceptable. It could have been a lot worse.



Current Portfolio




Current Position Changes


DNKN - Dunkin Brands

The long call play was entered at the open.


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 held its substantial gains from the last week with no material intraday dip. This is encouraging because it suggests the return of a positive market could see further gains. 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.


DNKN - Dunkin Brands - Company Description

Comments:

We received a gift from the market this morning when DNKN dipped below $43 at the open to give us a decent entry point on the option at $2.05. The dip was immediately bought and DNKN returned to the highs of the day.

Original Trade Description: February 17th.

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.

Position 2/18/16

Long June $45 call @ $2.05, see portfolio graphic for stop loss.



FL - Foot Locker - Company Description

Comments:

Foot Locker also declined sharply with the market at the open but recovered to close $1 off its lows. Target $69.25 to exit.

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:

Good relative strength with a rebound off the intraday lows. Given its recent gains the profit taking wwas minimal. 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 was the big loser for the day. The nearly $2 drop at the open was bought but shares did not recover all the losses. The intraday rebound faded at the close. After a $4 rebound the prior 4 days we should expect some profit taking.

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 paused their gains because of the weak Nasdaq but declined only $1. I raised the stop loss to $97.85.

Target $105.50 for an exit.

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:

Sharp drop at the open but recovered to close positive for the day. Excellent relative strength. 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:

BABY shares are still lackluster and we are waiting for that big seller to appear that can force it to a lower level.

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 exploded higher on no news ahead of earnings next week. Volume was only slightly higher than normal but it was heavily skewed to the buy side. This could be continued short covering.

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:

The VXX actually declined even though the market was down. There was a slight uptick at the close as the intraday market rebound rolled over.

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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