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Daily Newsletter, Saturday, 2/20/2016

Table of Contents

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

Market Wrap

Best Week since November

by Jim Brown

Click here to email Jim Brown

The short squeeze rebound from the prior week's 1,810 low on the S&P powered the Nasdaq to a 4% gain and the best S&P weekly gain since November.

Market Statistics

Friday Statistics

The rebound started off as a major short squeeze after the S&P put in what appeared to be a double bottom at 1,810. The squeeze powered the Dow back to resistance at 16,500 but the S&P fell 20 points short of reaching major resistance at 1,950. Volume on the rebound was decent at an average of just under 9 billion shares per day for the first three days. Volume declined to 7.6 billion shares on average for Thr/Fri suggesting there was no conviction in the weak market.

The biggest plus came from the lack of selling the rally. Since early January, every rally has been sold and so far, the sellers have been absent. There was minimal profit taking over the last two days and each dip was bought. The Dow fell -135 points at the open on Friday but the dip was instantly bought to end with only a -21 point loss thanks to a big drop in Boeing shares.

Positive economics helped lift spirits and slightly hawkish comments from Loretta Mester, president of the Cleveland Federal Reserve, failed to deter the markets on Friday. Mester said the economic fundamentals remain strong and she expects the Fed to continue on its "gradual" pace of rate increases. "Oil prices cannot decline forever, nor can the dollar appreciate forever. At some point both will regain some stability and the impact on inflation will dissipate." She expects the Fed members to have a "lively" discussion about rates at the March meeting but she expects the Fed to continue hiking.

Her comments were offset to some extent by a better than expected reading on the January Consumer Price Index. The headline number came in at zero compared to estimates for a -0.1% decline and a -0.1% decline in December. The headline number was impacted by a -2.8% decline in energy. The core rate, which excludes food and energy, rose +0.3% to 2.2% over January 2015.

However, much of the gain came from an increase in "owner's equivalent rents" with a +0.2% gain. That component is now up +3.7% over the last year. That is one of those components that rarely goes down because rent and housing prices rarely go down. It also has little to do with actual consumer prices.

Apparel prices rose +0.6% and the first gain since August. Footwear prices rose +1%, thank you Nike, and the largest gain since 2006. Jewelry prices rose +3.2% because the price of gold is up +$130 since the beginning of January. On the downside fuel prices declined -4.8% and heating oil fell -6.5%. Energy commodities fell -4.8%. Egg prices fell -1.8% as the impact of the bird flu problem in 2015 faded.

This report could pressure the Fed on further rate hikes because the core inflation at 2.2% year over year is over their 2.0% threshold. However, the headline inflation is up only 1.3% in the same period. This was a good news, bad news report that will send mixed messages to the Fed.

Next week has a lot of reports with the Richmond Fed Manufacturing Survey on Tuesday and GDP on Friday the most watched. The Richmond Fed survey spent three months in contraction from Sept-Nov before recovering slightly while the majority of the other regional reports are still in contraction. If Richmond falls back into contraction for February, it will propagate the recession fears. The Kansas Manufacturing Survey on Thursday has been in contraction since February 2015 and posted a -9 for the last two months and the lowest level since May.

The GDP on Friday is expected to be revised only slightly higher to +0.8% growth, up from +0.7% in the first release.

In a surprising reversal of trend, the Atlanta GDPNow forecast for Q1 GDP rocketed from 1.2% at the end of January to 2.6% growth as of February 17th. That is significantly higher than the consensus estimates at 2.1%. This is the first time in a long time that the GDPNow has been above the consensus.



Stock news was pretty sparse on Friday with the earnings cycle almost over and not much happening in the headlines other than Apple and politics. Apple (AAPL) had a bad couple of days after the FBI served them with a court order demanding that they hack into the iPhone belonging to the San Bernardino shooter Syed Farook. Actually, the phone did not belong to him but to the county. He was a county employee. The city was in agreement with the FBI in the pursuit of the information stored on the phone.

The iPhone has a safeguard system that erases the phone if the wrong password is entered too many times within a certain period. The FBI is demanding that Apple create a workaround that will allow the FBI to access the data without being forced to login using the correct password. Apple refused. CEO Tim Cook published an open letter saying it would violate privacy laws to unlock the phone even though the terrorist is dead and the phones owner requested it. The debate swirled for two days and Apple stock declined. On Friday, the Justice Department filed a motion to compel Apple to unlock the phone. The White House also weighed in saying unlocking the phone was a top priority and called for Apple to do the right thing and cooperate with the FBI.

Some lawmakers were discussing passing a bill that would have certain penalties for a company that failed to comply with a lawful order to unlock a secured device. Those penalties could be as simple as a daily fine or as drastic as a prohibition on further sales or criminal charges against the corporate officers for refusing a lawful order.

The Federal judge issuing the original order gave Apple a fixed length of time to unlock the phone. Apple's official response is due next Friday and a hearing is set for March 22nd. This will not go away.


Deere & Co (DE) reported earnings of 80 cents that beat estimates by 9 cents. However, revenue of $5.53 billion missed estimates. Agricultural revenue declined -12% and construction equipment revenue declined -23%. The company forecast another 10% decline in revenue in 2016, which was more than the prior forecast of -7%. Sales in the current quarter are expected to decline -8%. Shares of Deere fell -4% on the news.


Apparel maker VF Corp (VFC) reported earnings of 95 cents that missed estimates by 6 cents. Revenue declined -5% to $3.41 billion and missed estimates for $3.64 billion. The company said the collapse of the energy sector, warm weather and the strong dollar impacted sales. VF markets North Face, Timberland, Vans, Kipling, Napapijri, Jansport, Reef, Smartwool, Eastpak, Lucy, Eagle Creek, Wrangler and Lee brands. The warm weather caused lower sales in the North Face and Timberland outerwear clothing. The company forecast sales growth for 2016 in the mid single digit range and analysts were expecting 8%. Q1 sales and earnings are expected to be flat and also short of estimates. Shares fell -4.4%.


Nordstrom (JWN) reported earnings of $1.17 that missed estimates by 5 cents. Revenue also missed estimates. Same store sales declined -3%. Inventory levels rose +12%. Heavy promotions drew buyers but at lower prices and smaller margins. Analysts claim this problem exists for all retailers. Shoppers are buying less apparel and more items like Fitbits, iPhones and video games. Shares fell -7% on the news.


Applied Materials (AMAT) reported earnings of 26 cents that beat by a penny. Revenues of $2.26 billion declined -4.3% but still beat estimates for $2.4 billion. The company guided for sales to increase 5-10% in the current quarter with earnings of 30-34 cents. They paid dividends of $115 million and repurchased 35 million shares for $625 million. Shares rallied +7% on the upgraded forecast.


Truecar (TRUE) reported a loss of 6 cents that missed estimates for a loss of 4 cents. Revenue of $63.3 million also missed estimates for $65.43 million. On the plus side a record 750,108 cars were sold through the system in 2015. However, the company guided to revenue in Q1 of $60-$62 million and full year of $270-$275 million. Analysts were expecting $69 million and $309.8 million. Shares crashed -13% on the news.


Best Buy (BBY) shares fell -3% after Goldman Sachs downgraded them from buy to neutral saying weakness in mobile phone/computing sales would offset sales gains in TVs. Goldman took Best Buy off its "Americas Buy" list.


Valeant Pharmaceuticals (VRX) shares fell -10% after Wells Fargo initiated coverage with a sell rating citing "unanswered questions" about accounting methods and strategic direction. The analyst said, "The Valeant board and management have made decisions that may have put Valeant at significant business and reputational risk. While it is often noted that Valeant's management team has created a huge amount of value, our perspective is different: Valeant has lost approximately $60 billion of market value from its peak, yet its current market value is approximately $30 billion."

The analyst said Valeant had been using "lax" accounting and had deferred about $1.8 billion in tax obligations into future periods. He also warned about the use of "cash per share" earnings that seem somewhat arbitrary. He warned they also have about $30 billion in debt with $1.6 billion in interest expenses due in 2016. Valeant is due to report Q4 earnings but has not yet announced a date and that is another red flag. Wells put a target price on the stock of $67 and shares closed at $85. I looked at the put options but the premiums were extreme.


Starbucks (SBUX) coverage was initiated at Nomura with a buy rating and price target of $70. The analyst said the digital initiatives will maintain "robust" same store sales in the Americas. Nomura is very optimistic about the Mobile Order & Pay system. The bank said Starbucks has the highest customer frequency of all large North American retailers thanks to a low average check and expanding menus. Shares have had a rough time since the peak in October. Volatility has risen and even strong earnings have not helped the shares. I personally believe this problem is about over and we will see new highs in 2016.


Yahoo (YHOO) announced on Friday they were exploring "strategic alternatives" and had hired additional bankers to explore options. You would have to live in a cave without TV, Internet and newspapers to not know that Yahoo has been trying to sell all or part of itself for the last year. On February 2nd, CEO Marissa Meyer told the world in the earnings call and in several interviews that they were exploring sale options. By announcing they were adding to the stable of advisors to include JP Morgan, Goldman Sachs and Swaine & Moore it must mean that prior efforts to attract buyers had been unsuccessful. Since Verizon and private equity firm TPG had already expressed interest there must be some challenge that is causing buyer apprehension. With JPM and GS in the picture, I would expect an eventual offer but the price is going to be a problem.

Yahoo owns a $40 billion stake in Alibaba and the IRS will not let them spin it off in a tax-free transaction. That means the Yahoo parent company must be spun out if the assets are going to be separated. Yahoo is preparing to announce its slate of directors for the next shareholder meeting but activist shareholder Starboard Value LP has been considering waging a proxy fight in order to take control of the board. Starboard is frustrated with the pace of the reorganization process. This potential proxy war is probably the only reason Yahoo announced the formation of an independent investment committee to review strategic options. They have to show some progress or Starboard could incite enough shareholders to be successful in the proxy war.

Yahoo is the third most active website with more than 200 million unique visitors each month. Yahoo has value but any buyer will likely shed the dozens of unprofitable entities and efforts that Marissa and her predecessors added in hopes of attracting more users. Verizon wants to combine it with AOL and capture the traffic from those 200 million monthly users.

Yahoo has a market cap today of $28 billion and the Alibaba stake is worth $40 billion. The difference is the implied tax hit from selling the Alibaba portion. If the Yahoo business was split off from the Alibaba asset that would increase value for both parties because the remaining Alibaba portion would essentially become a tracking stock to Alibaba and the potential tax liability would go away.

While I can see on paper that an acquisition of Yahoo corporate separate from the Alibaba asset would increase value, there is the risk that any purchase price for yahoo alone could be very small. I would not be a buyer of Yahoo at this time. There is too much execution risk. It is not inconceivable that Yahoo shares return to $20 depending on who offers to buy them, under what structure and in what time frame.


It has been a rocky three weeks in the oil market. The nearly daily headlines about possible joint production cuts, production limits, surplus production, declining storage, etc, have seen prices vacillate from $35 to $26 and everywhere in between. Analysts are either saying "load up on energy stocks now" or "avoid energy" because the worst is yet to come. They are all right only the time frame is different.

Investors thought there was a deal to limit production last week but that was sabotaged by Saudi Arabia on Thursday. The foreign minister said, "If other producers want to limit or agree to a freeze in terms of additional production that may have an impact on the market but Saudi Arabia is not prepared to cut production" Also, "The oil issue will be determined by supply and demand and by market forces. The kingdom of Saudi Arabia will protect its market share and we have said so." Basically he was saying we will pump what we want, when we want in order to secure and/or increase our market share because that is what they have been saying for several months. Prices began to crash on his comments and closed at $29.86 on Friday.

March crude futures expire on Monday so we could see some additional volatility ahead of that expiration. The February expiration on January 20th saw prices fall to $26.19 and was credited with a lot of the decline in the equity markets at that time. I do not expect the same result on Monday. The April futures closed at $32 on Friday and that discrepancy will provide an artificial boost when they become the front month on Tuesday. That may only be temporary depending on the headlines from the Middle East.


The American Petroleum Institute (API) announced on Friday the U.S. had the most oil deliveries in 8 years in January at 19.4 mbpd and the most gasoline deliveries in 9 years at 8.8 mbpd. Crude inventories reached the highest level in 86 years at 502.7 million barrels. Refiners produced record amounts of gasoline in January leading to the current national average of $1.72 per gallon compared to $2.30 per gallon in February 2015. That amounts to a $224 million dollar a day savings for U.S. drivers. Last week we consumed 9.203 million bpd of gasoline.

The recent drop in oil prices to $26 finally knocked out a significant amount of U.S. production. In the last three weeks alone, we lost -115 active rigs. Production declined from a two month high of 9.235 mbpd to 9.135 mbpd, a decline of -100,000 bpd. With active rigs dropping that fast we can expect to see additional production declines in the weeks ahead. Producers are finally throwing in the towel and going into extreme cash conservation mode. This suggests we will see significantly higher oil prices by the end of 2016, possibly in the mid $40s.


While the worst may not be over for the energy sector, we should be nearing a bottom if it is not already behind us. Unfortunately, as many as 50 additional producers could file bankruptcy in 2016. Forty-two companies filed in 2015. Deloitte said last week that 175 global producers were at risk with 50 at extreme risk. However, companies like Exxon, Chevron, Pioneer Natural Resources and EOG Resources are not in that category. They should be bought today with the understanding there may be additional volatility before the final rebound begins.

Markets

I was glad to see the market rebound last week and I hope it continues. The lack of any material selling on Thr/Fri and the dip buying at Friday's open suggested we might have turned the corner. However, the charts are still telling a different story.

The correlation chart between the High Yield ETF and the S&P is still high and bearish. High yield bonds are still in decline and that should continue to weigh on the markets. We know that 15% of high yield debt is owed by the energy sector but that still leaves 85% that is not energy related. Historically the S&P follows the HYG as you can see in the chart below. The correlation today is 78% and rising.


The majority of the rebound was a short squeeze. The McClellan Oscillator (MO) was created in 1969 and measures the acceleration of the market by analyzing the advance/decline statistics. Basically, it calculates over bought and oversold levels. High numbers on the MO represent overbought and low numbers represent oversold. Note that we reached a high of +60 last week and the highest level since October. Also, note that the oversold reading from the prior Thursday only dipped to just below -40 and nowhere near the -90 readings from January.

In plain English, despite the dip to 1,810 on the S&P we were not as oversold as the January drop but we are now more overbought. Also, bear in mind that this measures market acceleration and tends to over compensate for high volume.

It does suggest we are overbought and due for some selling.


Despite the gains from last week, which was the best week for the S&P since November, the percentage of S&P stocks over their 50-day average rose to only 44%. The bulls would see that as a lot of bargains in the market today. The bears would see it as confirmation the rebound was lacking in duration and strength.


The percentage of stocks over their longer-term 200-day average rose to only 31% and still below their September rebound point. This means more stocks are still weak than improving.


Lastly, the Chinese markets came back strong after being closed for a week for the Lunar New Year. However, volume was still weak because a lot of investors were still on vacation. Volume should return to normal this week. The Shanghai Composite rebounded exactly to resistance and stalled. If those traders come back to work and decide to sell that February bounce this is exactly where it should happen. The decline in 2016 may not be over as investors continue to raise cash to take out of China to avoid future devaluation concerns of as much as 20%.


The S&P rallied more than 1% per day for three consecutive days and that has not happened since October 2011. It was a great short squeeze. However, the rally failed at the initial resistance at 1,927 and never made a convincing run for the stronger resistance at 1,950. If the rally were to continue next week that 1,950 level is going to be critical. A failure there would attract an avalanche of sellers while a breakthrough would cause another monster short squeeze. The three levels to watch are 1,950, 1,927 and 1,810 for obvious reasons.


The Dow rebounded exactly to strong resistance at 16,500 where it came to a dead stop. Friday's close was -108 points below that level. The financial stocks were alternately fuel for the rally and anchors for the decline. Boeing added about 80 points in the rally and subtracted about 19 points on Friday. Goldman Sachs added about 90 points in the rally and subtracted about 37 over the last two days.

With the Dow earnings cycle over, we are dependent on headlines and fundamentals to power the index next week. Resistance at 16,500 is going to be tough but a break through should trigger strong short covering. Initial support is back down around the 16,000 level followed by the prior week low at 15,500. A third test of that level would probably fail.



The Nasdaq Composite put in a firmer bottom over four days at 4,215 and that has given it greater relative strength. Traders took profits on Thursday but bought the opening dip on Friday at 4,455 to power the index 17 points higher to the 4,504 close. The FANG stocks with the exception of Netflix all posted gains on Friday.

The biotech stocks powered the gains from the prior week but something strange happened over the last three days. The Biotech Index ($BTK) went into hibernation on Wednesday and Thursday and half the day on Friday. Volume was very low and the intraday range was extremely narrow. This had to be an error somewhere but I could not find it referenced on the web. The biotech ETFs, XBI, IBB all had regular trading patterns.



Like the S&P the Nasdaq made a lower high but the move may not be over. The index made a dead stop at resistance at 4,540 on Wednesday. That becomes the line to watch next week followed by 4,620.




The Russell 2000 small cap index gained 4% last week and rebounded to 1,010 and back over the psychological resistance at 1,000. The light resistance at 1,007 was also broken. The next target is 1,035 followed by 1,050.

The rebound in the Russell was powered by substantial short covering in the small financials and energy stocks. The index gapped open on the 16th and 17th as shorts raced to cover.

The +5 point gain on Friday when the Dow and S&P were negative is a very positive sign. If this outperformance continues, it could provide some positive bullish sentiment. The 1,035 resistance equates to the 1,950 resistance on the S&P. Let's hope both indexes break through those levels this week.

Support would be the dip bottom from Friday at the 1,000 level.


I am confused about what to expect for next week. The charts are still negative until the Dow breaks over 16,500 and the S&P breaks 1,950 but sentiment seems to be changing. Negative economics and hawkish statements from Fed speakers did not deter the markets last week. Dips were bought and there was no material selling on Thr/Fri after a very strong gain.

However, the market has gone from oversold to overbought in a very short period of time. We could easily chop around at these levels for several days or even give back some of the gains without changing the outlook. I mentioned last week that Bank of America said cash levels were giving an "unambiguous buy signal" and apparently, some investors took their advice.

While Bank of America and JP Morgan both lowered their 2016 price targets from 2,200 to 2,000 that still represents a decent gain from the 1,810 lows but it does not represent a decent gain from our current level, which would be only 4%. Whether the increasing bearishness by the major brokers will weigh on the market long term is unknown. They were all exceedingly bullish last year and they were all wrong. They could be just as wrong this year only in the opposite direction.

We simply need to trade what the market gives us. That is very hard to do when the S&P moves in a 100-point range every week. If the S&P breaks through 1,950 that will be the all clear signal for the bulls and produce some major short covering. That should be our line in the sand. Until then I would recommend smaller and fewer positions. There is always another day to trade as long as you have money to invest.


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Random Thoughts


Your pockets may get a lot fuller if some lawmakers have their way. Former Treasury Secretary Larry Summers wrote in the Washington Post last week that the U.S. should consider eliminating the $100 bill. He would like a global agreement to stop issuing notes worth more than $50.

Summers based his article on other studies and analysis suggesting it would make it harder for the bad guys if cash took up a lot more space. This would make it harder for tax evaders that pay cash for everything, criminals, terrorists and those engaged in bribery. In Europe, they are considering dropping the 500-euro note for those reasons. A million euros in 500 euro notes weighs 2.2 pounds. A million dollars in $20 bills weighs 50 pounds. A million in U.S. one ounce gold eagle coins weighs 52 pounds.

In the U.S. the $100 bill is very popular. There are 10.8 billion in circulation compared to 11.4 billion $1 bills. Kill the $100 Bill?

The two largest counterfeiters of U.S. $100 bills are North Korea and Iran.

While I understand the reasoning behind the move, I view it as one more step in the removal of liberty for the U.S. citizen. Rather than actually catch the bad guys the good guys are punished. We are not deemed trustworthy enough to buy a big soda in New York because we might make ourselves fat. More than 200 million gun owners are penalized because a few bad guys might actually try to buy a gun legally. We cannot carry a wad of cash through the TSA security because we may have acquired it illegally. I am tired of lawmakers trying to turn the U.S. into a nanny state.

In June 2014, the IRS seized $153,907 from Ken Quran's business account because he made large cash deposits under $10,000. Quran runs a convenience store in a poor part of town where customers primarily pay in cash. There is a law that makes it a crime to make large cash withdrawals and deposits under $10,000. Transactions over $10,000 are reported to the IRS. However, if a bank computer recognizes a pattern of transactions under $10,000 they are required to report it to the IRS. The government seized the funds even though there was no evidence of wrongdoing and he had been making cash deposits for years. Now after nearly two years the IRS has decided to give it back. He was deprived the use of the money for inventory and expenses for two years. He would have gone bankrupt except that a bank loaned him $50,000 on a temporary basis. Somebody needs to reign in the watchdogs. They are out of control. Business Cash Seized


Twitter recently announced it had suspended more than 125,000 accounts linked to ISIS over the last 9 months. They hired extra workers to accomplish the task as those accounts multiplied.

Research determined there are only about 1,000 easily discoverable English speaking terrorist accounts at any given time. Each of the more visible accounts had an average following of about 400 people. Researchers monitored a list of ISIS supporter accounts for a period of four months. They found that each time Twitter deactivated an account it would pop up again under another name relatively quickly. However, the number of followers declined each time it was deactivated. They found that suspensions had a significant impact on shrinking the size of their networks even when they sometimes reappeared several times in one day. "Returning accounts rarely ever reached their previous heights, even when the pressure of suspension was removed." Twitter & ISIS


Investor sentiment for the week ended on Wednesday saw bullish sentiment rise +8.3% and bearish sentiment decline -10.9%. Since Wednesday was the end of the three-day rally, I am surprised the sentiment shift was not more pronounced.



Magellan's Global Equity Fund has beaten 99% of its peers over the last five years. The fund manager, Hamish Douglass, has boosted his cash position to 16% and the highest level since 2009. He has no immediate plans to buy stock. He believes stocks are overvalued and once the Fed continues raising rates the best-loved stocks are going to look even more overpriced. Once they correct he will be ready to buy. $9 Billion Fund in Cash


In the Iowa caucus, Clinton won 6 precincts by a coin toss. When the votes are tied they flipped a coin to determine the winner for that precinct. She won all six coin tosses. In the early reporting from Nevada she won precinct 307 by a cut of the cards. Yes, the votes were tied so they drew for high card and she won again.


Carl Icahn's, Icahn Enterprises (IEP) shares fell -11% on Friday after S&P put the company on credit watch with negative implications. The company is currently rated BBB and a downgrade would knock it into junk status. S&P said the declining value of the company's investments would likely push the firm into a 45% loan to value ratio. That is the threshold for a rating change. S&P said the company could initiate an equity raise to support the capitalization but that was not factored into the potential downgrade. Icahn owns 117 million shares or 91% of the company. Shares have declined nearly 50% over the last 12 months. Carl has made some really bad investment decisions over the last two years and they are coming back to haunt him. Icahn Going to Junk



Beware the end of February. Historically the stock market rebounds from early month lows to peak around the 11th trading day of the month, which would have been last Monday. Starting several days later the indexes fade going into month end. This is according to Jeff Hirsch from the Stock Trader's Almanac. February Mid Month Bounce Fades



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people."

Warren Buffett



Index Wrap

Bullish Follow Through for a Bullish Opex

by Keene Little

Click here to email Keene Little
We had a nice setup for a reversal of the decline into the February 11th low to give us a rally into opex week and the bulls took advantage of the setup. Now we wait to see if the bulls can keep the buying going into the end of the month.

Week's Indexes


Review of Major Stock Indexes

The stock market was deeply oversold when it dropped into the January lows and it was still oversold when the bounce correction into the February 1st highs was followed by a retest of the lows on February 11th. The weaker momentum heading into the February lows, with a price pattern that suggested the leg down from December 2nd was completing, gave us a very good setup to get long into opex week and the bulls did not disappoint. The rally into Wednesday's high was strong and it quickly retraced the February decline. Now we have short-term overbought conditions and daily charts suggesting another reversal back down could happen unless the bulls can keep up the pressure in the coming days.

There's a bullish pattern that suggests we could be looking at a multi-week rally but it might be a choppy/whippy one. We've certainly had whippy price action in the past month with the DOW swinging 1000 points multiple times since mid-January's brief consolidation. There's a big battle going on between strong support levels and resistance levels and neither side has been able to break through in the past month. This past week's stall following Wednesday's high is at resistance again and that leaves both sides guessing which direction will follow from here.

Part of the confusion for the market is mixed signals from the economy and the Fed. Some economic reports show slow growth, which obviously is better than no or negative growth, but other reports confirm the economy and corporate earnings are slowing. This past week's data was a little better than expected (maybe not so much for housing), including inflation data, and that has many trying to guess what that will mean for the Fed.

Janet Yellen is now openly talking out one side of her mouth about the possibility of negative yields while at the same time talking out the other side of her mouth about the Fed wanting to raise rates further this year. I've heard of doublespeak (Greenspan perfected it) but Yellen's doublespeak has the market very confused. The market hates uncertainty and the large whippy moves we've seen in the past month are reflective of that uncertainty.

When we've had many bullish opex weeks in the past they tended to be followed by weakness the following Monday/Tuesday. That pattern needs to be respected but there was also evidence on Friday that the Thursday-Friday consolidation could be followed by another rally leg. The best way to approach the market right now is carefully and with short-term trading since we could be in just a correction to the December-February decline and corrections tend to be choppy. There are some key levels to watch, which identify support and resistance and more importantly they identify levels where one side or the other looks to be taking the lead. In between the key levels could be a choppy mess.


A Look At the Charts


Dow Industrials, INDU, Weekly chart

There is a parallel up-channel that encompasses the Dow's rally off the March 2009 low and the bottom of the channel was punctured briefly with the sharp decline in August 2015 but it never closed below the channel. It took January's decline to close below the up-channel and the bounce into the February 1st high was a back-test of the broken channel. This past week's rally almost made it back up to the bottom of the channel again, currently near 16540, and it would obviously be more bullish above that level, especially on a closing basis. Between support near 15300 and resistance near 16550 we could see price continue to whip up and down.


Dow Industrials, INDU, Daily chart

There are a number of possibilities for price action from here and I show multiple levels of support and resistance on the Dow's daily chart below, as well as a few ideas for how the price pattern could play out over the next several weeks. But in reality we are in a correction to the decline from December and corrections are not good times to look for trend-following trades. Hit and run and base hits are the way to go. If the buying continues in the coming week and the Dow makes it back inside its broken up-channel, watch to see how price reacts to possible resistance at its 50-dma, declining but currently near 16673, and the 50% retracement of the December-February decline, at 16702.

Key Levels for INDU:
-- bullish above 16,700
-- bearish below 15,300


S&P 500, SPX, Daily chart

One common pattern with the indexes is a 5-wave move down from December 2nd, which is what sets us up for a larger bounce correction and possibly something more bullish. It could be a larger correction in time rather than price (with a choppy sideways consolidation between the recent highs and lows) or it could be a high 3-wave bounce, which is what is depicted on the chart below (bold red). This is just an idea to watch for but it will obviously have to be updated as price dictates. For now keep an eye on resistance at a downtrend line from July 2015, which was used as support in November and December but was resistance in February and again on Wednesday and is currently near 1930. MACD is back up to the zero line and if it rolls over again from here it could signal another selloff. But a rally above 1930 should lead to a move up to its 50-dma, near 1954, and the 50% retracement of its December-February decline, at 1957.

Key Levels for SPX:
-- bullish above 1957
-- bearish below 1820


S&P 100, OEX, Daily chart

OEX has been cycling around its uptrend line from October 2011 - August 2015, which was tested again on Friday (and used as support). But it's struggling with a trend line along the lows from the November-December lows, which stopped the rally on February 1st and again last Thursday. Currently near 863 that's a line the bulls need to power through. Near 872 is where it would achieve two equal legs for the bounce off the January 20th low and that could lead to another leg down but as with the other indexes, there are a number of different bounce patterns that could develop into March. The bulls need to get the OEX above 872 to also get above its broken 50-dma, coming down to 872.

Key Levels for OEX:
-- bullish above 872
-- bearish below 810


Nasdaq-100, NDX, Daily chart

I've drawn a H&S top on the NDX chart below (left shoulder in September 2015, head in November-December, right shoulder in January-February) and the neckline is an uptrend line from August 2015 - January 2016, currently near 3900. A break below that line could be significant so be careful with long positions below that line. But as I'll show you on the QQQ chart further below, volume is not supporting this H&S interpretation, at least not yet. The NDX is currently fighting to get back above its uptrend lines from March 2009 - August 2015 and June 2010 - November 2012, near 4181 and 4212, resp., so a rally above those trend lines would be more bullish. A 38% retracement of its December-February decline is at 4222, making the 4181-4222 area tough resistance for now. As is a common theme among the indexes, MACD has made it back up to the zero line and the bulls do not want to see it roll back over from here.

Key Levels for NDX:
-- bullish above 4325
-- bearish below 3900


Nasdaq Composite, COMPQ, Daily chart

As mentioned earlier, following the 5-wave move down from December 2nd we had a good setup for a large bounce correction, which could end up being a high retracement. The Nasdaq's chart below shows the idea for a 62% retracement of the decline, so a bounce up to 4807, maybe a little higher for a back-test of its declining 200-dma. A 50% retracement, at 4693, would result in a back-test of its 50-dma. Those provide some upside targets to watch if the buying continues. If it pulls back a little first, watch for support at its uptrend lines from October 2014 - August 2015, near 4400, and from October 2011 - November 2012, near 4300.

Key Levels for COMPQ:
-- bullish above 4700
-- bearish below 4099


Russell-2000, RUT, Daily chart

It's the same picture for the RUT. MACD is nearing the zero line so the bulls need to prevent it from rolling over from here. Encouraging for the bulls is the climb back above the 20-dma on Wednesday and then using it for support on a back-test on Friday. The next level of resistance is 1040, which is price-level S/R (October 2014 low) and its broken uptrend line from March 2009 - October 2011. It would obviously be more bullish above that level but the first thing I'd look for is a pullback from there, if reached, before potentially heading higher.

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


SPDR S&P 500 Trust, SPY, Daily chart

Bringing volume into the mix, the SPY chart below shows price is now inside a trading range, at 187-194.50, where there is higher Volume at Price (VAP) and that's another reason why we could find both sides battling it out for control. A rally above 194.50 would be into a lower VAP area and therefore potentially less resistance. Trading volume has been tailing off for the rally from February 11th, which is not supportive for the bulls and you can see MFI continues to struggle at the midline. Both of these suggest bulls need to be cautious and while there's at least a little more upside potential to the top of the Bollinger Band, currently at 195.47, there's likely going to be a pullback soon. If that pullback results in MFI breaking its uptrend line it would be a warning sign that a deeper pullback can be expected, in which case look for the 20-dma, currently at 189.32, for possible support, otherwise back down to price-level S/R at 187.


Powershares QQQ Trust, QQQ, Daily chart

I had mentioned the possibility for a H&S top on the NDX chart and you can of course see the same possibility for QQQ below (left shoulder in September, head in November-December, right shoulder in January or developing now). But the one thing that doesn't support this pattern is volume, which should be lower for the right shoulder but in this case it's higher. If the right shoulder develops further and does so with lighter volume, which it's currently doing, then we'd have a more legitimate topping pattern. But at the moment the volume pattern is not supporting the H&S pattern and therefore a break below the February 11th low, if it happened from here, would not provide a reliable downside objective. As for further upside potential, as long as it holds above its 20-dma (tested and held on Friday), currently at 100.69, it could rally up to the top of its BB, near 106.


Summary

The setup following the February 11th lows was for a larger bounce correction, potentially something more bullish, which should play out in the next few weeks. A typical bounce correction, if that's all we're going to get, should typically take about 62% of the time for the previous decline, which projects out to March 24th. "Typical" is of course a dangerous word in a market that has not been acting typically but it at least provides a time of reference. We could see a choppy, potentially whippy, bounce make it higher into March and that's reason enough to warrant caution by those who are anxious to short the rally.

There is the possibility that the December-February decline completed a large 3-wave pullback from last year's highs, in which case we've just started the next major rally leg. Considering some of the fundamental issues we're facing with a slowing global economy (unlikely the U.S. would avoid being dragged down by it) I struggle to believe we could see the stock market head for new highs this year but from a price pattern perspective the possibility needs to be respected. That's reason enough not to be a "sell-and-holder" for the same reason I believe now is not the time to be a "buy-and-holder."

Until proven otherwise I believe we've entered a bear market and timing the market's swings will prove much more profitable than simply riding it out in whatever positions you're currently in. At the moment, and for the next few weeks, I think the path of least resistance is to the upside to give us a larger bounce correction but we could see some whippy moves in both directions and/or a deep pullback before heading higher again. Be careful out there.

Trade safe, have a good week and good luck with your trading. I'll be back with you next weekend.

Keene H. Little, CMT

Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville


New Option Plays

Guilty by Association

by Jim Brown

Click here to email Jim Brown

Editors Note:

Sometimes a stock is hammered after a company in the same sector reports earnings that disappoint. That is guilt by association.

Back on February 5th Tableau Software (DATA) posted disappointing earnings and warned that enterprise spending was slowing. DATA shares dropped from $82 to $36 and all the other cloud software stocks suffered significant declines. However, the other companies did not report the same weakness in their earnings. This was guilt by association and has provided a good entry point for Netsuite.


NEW DIRECTIONAL CALL PLAYS


N - NetSuite -
Company Description

NetSuite provides cloud based financials/enterprise resource planning (ERP) and omnichannel commerce suites in the U.S. and internationally. They also offer customer relationship management (CRM) and professional services automation (PSA). NetSuite OneWorld manages various companies or legal entities across multiple countries with different currencies, taxation rules and reporting requirements.

NetSuite reported adjusted earnings on January 28th of 5 cents compared to expectations for 4 cents. Revenue of $206.2 million rose +33% and beat estimates for $205 million. They reported several new accounts including Snapchat, American Express Global Business Travel and Lucky Brand to name a few. They added 616 new customers in the quarter and replaced SAP in 17 accounts. Recurring revenues rose +30% and now make up 80% of revenue. Nonrecurring revenue of $41.7 million rose +34%. They ended the quarter with $379 million in cash.

Revenue for 2016 is expected to rise 28-31% with earnings growing 80% to 100% to a range of 40-45 cents.

NetSuite was upgraded by Canaccord Genuity from hold to buy after earnings.

Not many companies are growing annual revenue by 30% and earnings by 100%. This is NOT Tableau software but it was punished for Tableau's weakness.

Earnings are April 21st.

With a trade at $56.50

Buy April $60 call, currently $2.05, stop loss $51.50



SBUX - Starbucks - Company Description

You know what Starbucks does. They are the premier coffee retailer in the U.S. and Europe. Shares were crushed in early February after sales growth slowed in Europe. CEO Howard Schultz said they were headed for a record Q4 until the Paris attacks and everything just stopped. Consumers avoided the streets and especially retail establishments. Schultz said conditions were returning to normal and 2016 would be a good year.

U.S. same store sales rose +9% and +6% internationally excluding Europe. Earnings are expected to grow 15% annually for the next five years. They are opening 500 stores a year in China over that same period. The currently operate 21,000 stores in 66 countries. Schultz expects annual revenues to double from $16 billion last year to $30 billion by 2019.

To do this they are constantly adding more menu items including baker goods, sandwiches, desserts and even beer and wine to create an "evening experience" to expand their profitable hours. The average Starbucks customer visits a store 16 times a month with many making daily visits.

The post earnings crash in early February was more market related than earnings related. With double digit earnings and revenue growth and a proven business model there is nothing not to like about Starbucks.

Shares have rebounded from the $53 low on February 8th to $57.66 on Friday. Nomura initiated coverage on Friday with a buy rating and $70 price target. I am recommending the June $60 call and we will exit before earnings. I am using the June options so there will still be an earnings expectation premium when we exit before the event.

Earnings April 21st.

Buy June $60 call, currently $2.37, initial stop loss $53.50


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Selling the Rallies

by Jim Brown

Click here to email Jim Brown

Editors Note:

We did not see any material attempt to sell the rally last week. Two days of market chop on low volume is vastly different than the high volume declines in early February. Maybe the trend is changing.

The Dow rallied exactly to strong resistance but the Nasdaq and S&P only made lower highs. Since they are both holding at those highs it is too early to claim the weakness as signs of another failure. The charts are still negative but every long-term rally begins with a short squeeze.

I would continue to be cautious until the S&P moves over resistance at 1,950. Use smaller position sizes and limit the number of active positions.



Current Portfolio




Current Position Changes


AOS - AO Smith

The long call play remains unopened.


FL - Foot Locker

Earnings date changed from 3/3 to 2/25. See play description.


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


AOS - AO Smith - Company Description

Comments:

This play remains unopened until AOS trades at $70.45. Shares declined only 12 cents on Friday and that shows good relative strength. We just need to see it break through resistance at $70 before we enter the position.

Original Trade Description: February 18th.

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.


CSCO - Cisco Systems - Company Description

Comments:

Cisco closed at the high of the day after an early morning market related dip. No change in the position. 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:

The morning dip in the market knocked $1.50 off DNKN but the afternoon rebound saw a 75 cent rebound. We are still fighting the resistance at $44.

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:

Good rebound off the opening lows to turn a -$1.35 loss into a 50 cent gain.

The earnings date changed from March 3rd to Feb 26th, which is next Friday. Normally we would exit before earnings to avoid unpleasant surprises. However, Nike beat earnings and guided higher and Foot Locker normally follows Nike in earnings results. We have a week to make an exit decision. I will make that recommendation on Wednesday.

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:

Continued good relative strength with no profit taking. 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 lost ground again but it was only 24 cents. However, I added a stop loss at $36.85 just in case it continues to lose ground.

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 posted a minor gain but the real key was a lack of a loss. The Qs are up strongly over the last week and they failed to give any back on Friday.

Target $105.50 for an exit. Cautious traders may want to target $104.50.

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:

Thor was the winner on Friday with a close at the high for february. 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:

The big block trade finally showed up but it was not a seller. At exactly noon a sudden surge in buy orders for more than 60,000 shares hit the tape over 5 minutes and BABY shares exploded higher as shorts raced to cover. The short squeeze lasted until 2:45 when sellers began to appear again and in volume. To prove that point a block of 21,000 shares traded at the close and the price barely moved.

Volume for the day was 832,000 and more than twice normal. The vast majority, literally 99.9% of the trades for the day were 100 share lots or smaller. With volume that thin those big lots managed to move the price in the early afternoon. I suspect the high frequency trading software picked up on the sudden directional movement and fueled some of the short squeeze.

There was no news. I have no stop loss on this position because the option only cost $1.15. The rebound to $35.50 was exactly to resistance. If this move continues next week we will probably lose our money but we have two months for the decline to resume, so no rush.

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 gains finally turned into profit taking on Friday but the stock did close well off the lows.

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 continued to decline even though the Dow was negative. The positive Nasdaq helped to improve sentiment.

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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