Option Investor
Newsletter

Daily Newsletter, Monday, 2/22/2016

Table of Contents

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

Market Wrap

Monday Morning Follow Through

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Monday traders provided some follow through to last week's rally, the caveat is that much of the gains were driven by oil prices. A variety of factors, including the evolving potential for a deal to support oil prices, helped to drive WTI up by nearly 7% today and the market followed it higher.

The rally started early. Asian indices climbed about 1%, led by the Shanghai index 2.37% gain. Aiding the rally in China, and perhaps the rest of the world, is the weekend announcement that the head of China's securities regulation department was removed and replaced. Xiao Gang, former head of regulation, was singled out for blame concerning the series of missteps taken by the regulator over the past year. European indices made gains near 2%, driven by oil prices, the rally in Asia and relief over the deal keeping the UK in the EU>

Market Statistics

Our indices were indicated higher from the earliest part of the pre-opening session; futures indicated an open nearly 1% higher all morning. At the open the indices quickly moved up by the 1% indicated and were pushing 1.25% within the first 15 minutes of trading. The early surge higher reached its peak at 10AM, about +1.5% for the SPX, and the drifted sideways until early afternoon. Around 1:30PM news that United Technologies and Honeywell may be in talks for merger sent the indices back to test their early highs and then move a hair higher. Late afternoon trading saw the indices trend sideways into the end of the day leaving the indices at or near their highest levels.

Economic Calendar

The Economy

There was no economic data released today but there are some important releases on the schedule for this week, next week is the first of March so we will be getting the monthly round of macro data including ADP, NFP and Unemployment. This week look out for the Case-Shiller 20 City Index and consumer confidence on Tuesday; New home sales on Wednesday; jobless claims, durable goods and the housing price index on Thursday and then personal income and spending, Michigan Sentiment and the 2nd estimate for GDP on Friday. GDP is expected to fall to 0.5% with this read.

Moody's Survey Of Business Confidence ticked higher this week, gaining 0.4% to hit 28. This is up from last week's reading of 27.6 which was a new near term low. The index has been in steady decline since hitting a historic high last summer and shows no sign of bottoming. Mr. Zandi says that the decline in sentiment is clearly linked to global financial market turmoil.


According to FactSet 87% of S&P 500 companies have reported so far this season. Of those 68% have beaten on the bottom line while only 48% have beaten on the top line. Since the start of the reporting season 7 sectors have performed better than expected, led by telecom which has posted a +79% increase in earnings over the previous quarter. Energy of course is the laggard, earnings growth is -73.7%. Ex energy things look a little better, earnings growth is in the range of +7.9%. There are 48 S&P 500 companies and 1 Dow component due to report earnings this week


Looking forward the earnings growth picture continues to deteriorate. First quarter earnings growth projections have now fallen to -6.5%, as have had second quarter growth projections, now -1.1%. Beyond that growth is expected to return but projections continue to decline. Third quarter growth is projected to be 5.1%, fourth quarter projections are 10.0%. Full year 2016 earnings growth projections are now only 3.4%.



I've been looking for the dip in earnings growth to come to an end for the past two quarters, so far it has not materialized. Based on the projections, and aided by the potential bottom in oil prices, it looks like the 2nd quarter could be the turning point. However, until the estimates begin to rise negative expectations could weigh on the market and send the indices back to retest support.

The Oil Index

Oil prices made their largest move yet. WTI gained more than 7.5% on an intraday basis to briefly touch $32. There is still no real sign of a change in fundamentals but there is growing reason to suspect that sign may be at hand. Not only is the chatter surrounding the OPEC/Russia deal to curb output growing, last week's drop in US rig count and today's prediction by the IEA suggests that US production will soon start slowing as well. The IEA says that US shale production will decline by 600K bpd in 2016, followed by another 200K decline in 2017. The caveat is that until some concrete sign of falling production and/or supply hits the market prices are being supported by rumor and subject to quick reversal. Near term resistance is about $32, next is about $35, break above these levels could help draw in more bulls.

The Oil Index gained about 2.75% in today's session. The move appears bullish but was halted at resistance, just above 1,000. This level has been resistance twice before and is now the top of a two month trading range. The indicators are pointing higher but still look weak to me and suggest that the trading range will hold unless another catalyst emerges to drive oil prices higher. A break above 1,000 could go to 1,100 in the near term, support is currently around 950.


The Gold Index

Gold prices fell today, losing about -1.75%, but remain above $1200. Today's move was driven by strength in the dollar, likely due to last week's CPI data. CPI was slightly hotter than expected, not much, but enough to keep an FOMC rate hike on the table. This week GDP and personal income/spending data may help drive this trade; stronger data would support rate hikes and the dollar, weaker data would support no rate hike and gold. Upside resistance for the metal is between $1230 and $1250, support is just above $1200. In any event, gold prices are well off of their lows and helping to support the gold miners, at least in the near term.

The Gold Miners ETF GDX opened the day with a substantial loss, greater than -3%, only to have buyers step in and drive the sector higher. By end of day the ETF had gained more than 1.25% to close near the high of the day. Over the past week or so the sector has been consolidating, at this time it looks like a potential pennant or flat topped triangle but as yet is not confirmed. Gold prices will no doubt play a part in how this pans out, pun intended, as will Goldman Sachs call to short gold.

Regardless of the data this week, next week and the week after will be very important in terms of FOMC speculation, the dollar and the path gold prices take from here. I am not really expecting a hike at the next meeting, about 3 weeks away, or any overtly hawkish statements, a move that would likely help devalue the dollar and support gold. On a technical basis momentum, specifically an extreme peak in the MACD, suggests that the rally in gold is not over.


In The News, Story Stocks and Earnings

The Dollar Index got a little boost today, about 1%, but was halted at resistance. Resistance was met at the 38.8% retracement level which was able to push the DXY back below the 30 day EMA. The indicators are pointing higher so resistance may be tested again but in light of the December to present down trend in the index such a move looks more like a shorting opportunity than not. Resistance is at $97.50, first target for support is near $96.50 and the 50% retracement line.


The news that Honeywell may be in the market to buy United Technologies helped to lift the market during the afternoon portion of today's session. The news also helped to lift shares of UTX, and initially Honeywell too, but by the end of the day Honeywell was down nearly -2%. The deal is expected to be almost a merger of equals but puts a premium on shares of UTX. At this time there is no deal on the table and there is expected to be pushback from regulators and companies doing business with both UTX and HON.


Dean Foods reported better than expected earnings and upbeat first quarter guidance before the opening bell. The nations leading dairy foods company beat adjusted earnings by $0.02 and provided guidance in a range above consensus estimates, driven on a decline in milk prices. Despite the good news investors dumped the stock, driving share prices down by more than -8.5%. The only reason I can see for the sell off is lack of confidence in the guidance. According to forecasts by AGWeb currently low milk prices are expected to lead to lower global production and increased demand among consumers, leading to a shortage of dairy and an increase in prices later on in the year.


Lumber Liquidators suffered from a revised statement by the CDC. The new release says that the cancer risk associated with formaldehyde treated wooden flooring was greater than first assessed. The reason being an error in calculations. The news sent shares down by nearly -20% to trade just above the long term low set in the wake of the initial report released last year.


The Indices

Today was a good day for us bulls. The Monday morning buyers were out in force, drove the market higher right from the start, held those levels all day, pushed to a new high and closed near the high of the day. Gains were fairly even across the board but one index stood out as the definite leader, the Dow Jones Transportation Average. The transports gained 1.86% in today's session to come just shy of upside resistance target of 7,500. The indicators are on the rise and gaining strength so it looks like this level could be tested at least. Stochastic and MACD are both showing some strength although stochastic is still suggestive of a trading range, it is at the upper signal line and may cross over but has not yet. MACD on the other hand is ticked higher in with today's action and remains at a multiyear extreme and suggestive of ongoing up trend. A break above 7,500 would help confirm reversal and could take the index up to 7,750 8,000.


Th next biggest gainer was the NASDAQ Composite. The tech heavy index gained 1.47%, breaking above the 4,550 resistance line and the short term moving average. The indicators are on the rise and pointing to higher prices although stochastic is not yet showing a lot of strength. MACD is at an extreme peak and on the rise suggesting ongoing up trend and/or a retest of the current high should a pull back to support should occur. Next upside target is near 4,650 with first target for support near 4,500.


Third up in today's run down is the S&P 500. The broad market made a gain of 1.45%, closed near the high of the day and just short of a key resistance level at 1,950. A break above 1,950 would help to confirm the reversal and may be on the way. The indicators are bullish, pointing higher, suggestive of a test of resistance or break out but not yet showing a lot of strength. Momentum has not reached an extreme but it is still on the rise, stochastic is pointing higher but overbought in the nearer term and consistent with a trading range in the longer.


The Dow Jones Industrial Average brings up the rear in terms of daily gains but is the most bullish of all in terms of price action. Today the blue chips broke above the top of the two month trading range with rising indicators and appears to be heading higher. The indicators are bullish but like on the SPX chart still weak when compared to the transports and techs; MACD is on the rise but not yet at an extreme level, stochastic is pointing higher but from the middle of the range. The good thing about this is that the indicators show there is room for the index to run with next upside target near 17,000 and the underside of the long term trend line.


It looks like rally on, at least into the near term. Today's action was very promising and could continue to drift higher into the end of the week. The risks are economic data, FOMC speculation, rumors from the oil patch and earnings. This week is going to be fairly light on earnings, not devoid but light, as are economic releases.

The headline sector for earnings this week will be the retailers. Names on the list include Target, TJMaxx, Best Buy, Kohl's and others. Also of note are food and berage companies such as Anheuser-Busch and Domino's Pizza. FOMC speculation may simmer some tomorrow with the release of consumer confidence numbers but the real movers in terms of data aren't due out until Friday. As for OPEC and oil, rumors are solidifying a production cap could be agreed upon but even so, fundamentals are still bearish so I expect to see more volatility in the $28 to $32 range.

I have to say it looks like the market has hit bottom and is in processing of reversing. I am however still concerned about earning outlook for the coming two reporting seasons. If projections continue to decline we could easily see the indices return to retest support levels. Once we get past what we can say for sure is the bottom of the earnings recession and actually begin to look forward to real earnings improvement I will be much more bullish. Until then I'm bullish but still ever so cautious.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Heading for Higher Ground

by Jim Brown

Click here to email Jim Brown

Editors Note:

Michael Kors shares were left for dead after falling from $100 to $35 but the fashion retailer was not giving up. They analyzed and adapted and are back in the saddle again.


NEW DIRECTIONAL CALL PLAYS


KORS - Michael Kors -
Company Description

Michael Kors designs, markets and distributes branded women's apparel and accessories and men's apparel. They operate more than 350 stores in the USA and 200 stores internationally. They also license their brands.

Kors shares crashed from $100 in early 2014 to $35 at the end of January on declining sales in the expensive categories that impacted all the major retailers. Inventory levels rose and margins dropped. Kors went from being the premier brand to just another high priced name.

Fast forward to Q4 earnings and everything changed. The company reported a solid holiday quarter when everyone else was just getting by. Kors reported a 6.3% increase in revenue to $1.6 billion that beat estimates for $1.4 billion. Earnings rose to $1.59 and also beat estimates for $1.46. Same store sales rose +2%. Sales overseas boomed +14% with Japan leading with a 68% rise. U.S. same store sales declined -0.9% but that was significantly better than the -8.5% drop in the prior quarter.

Kors heard what customers wanted and shifted to fill that demand. Kors introduced a new line of smaller leather handbags that cost less and customers snapped them up in volume. The company said they were selling so good they were going to raise prices and increase margin. The trend is away from the larger bags that made Kors famous but they adapted and sales are rising again.

Kors also suffered from the strong dollar and weak currencies overseas but overcame the headwinds to easily beat on earnings.

Shares spiked $12 on the news from $40 to $52. After trading sideways for the last three weeks the shares have broken out to a new 52-week high at $55 and appear to be headed for $60 or higher. Investors remember Kors as the leading fashion merchandiser and they believe the company is back on top again.

I want to take that ride to $60 and then see what happens when we reach that level.

Earnings are May 26th.

With a KORS trade at $55.25

Buy May $57.50 call, currently $2.45, initial stop loss $49.85


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Oil, Europe, China

by Jim Brown

Click here to email Jim Brown

Editors Note:

The 2.3% rally in the Shanghai Composite and +2% rally in European shares plus the spike in oil prices pushed the Dow over strong resistance.

The Dow catapulted over resistance at 16,500 at the open and continued to post gains until it hit the next resistance level at 16,665. The high for the day was 16,664. This energized the broader market and the S&P rallied to 1,945.

The S&P will be the next challenge with 1,950 very strong resistance. If we can tack on one more day of big gains that would breakout the S&P and the Nasdaq, which has resistance at 4,600.



Current Portfolio




Current Position Changes


AOS - AO Smith

The long call play remains unopened.


N - Netsuite

Play triggered at the open this morning.


SBUX - Starbucks

Play entered at the open this morning.


FL - Foot Locker

Close at the open on Tuesday.


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 rallied +$1.10 to close at $69.96. 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 spiked at the open to $26.91 to barely miss our exit target. The stock faded from the highs to gain only 8 cents. I raised the stop loss just in case it rolls over. 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:

Decent gain but a little fade at the close. We are still fighting the resistance at $44. When it breaks out we could see some decent short covering.

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:

Spike at the open but faded into a loss at the close. Being down on a strong market day is a signal we need to close now rather than wait for Thursday before earnings.

CLOSE the FL play at the open on Tuesday

The earnings date changed from March 3rd to Feb 26th.

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:

Excellent strength with no profit taking.

I raised the stop loss. We are becoming very overbought here. 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 posted a minor gain but still below resistance at $38.75.

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.


N - NetSuite - Company Description

Comments:

Netsuite gapped open to $56.90 to trigger the play at the high of the day. It held the majority of its gains and the uptrend is in place.

Original Trade Description: February 19th.

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.

Position 2/22/16 with a trade at $56.50

Long April $60 call @ $2.40, see portfolio graphic for stop loss


QQQ - Nasdaq 100 ETF - ETF Description

Comments:

Strong gain in the Qs and the stock is approaching the first resistance at $104.50. I changed the exit target to $104.50 from $105.50 because we have had too many positive gains in a row. It is time for some profit taking.

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.


SBUX - Starbucks - Company Description

Comments:

Starbucks gapped up $1.25 to trigger the play at the high of the day. First resistance is $59.50.

Original Trade Description: February 19th
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.

Position 2/22/16 @ $58.63:

Long June $60 call @ $1.46, see portfolio graphic for stop loss.


THO - Thor Industries - Company Description

Comments:

Thor posted a nice gain to break over resistance at $53. The next resistance level is $57-$58 and I added an exit target at $56.85.

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 Friday short squeeze is over. BABY gapped open to the high of the day at $36.40 but immediately began to decline to close at the low of the day at $35.63. Volume returned to normal after the 2x spike on Friday. BABY stalled right at resistance at $36.25 and this would be the perfect spot for as new decline to begin.

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 continues to add to its gains ahead of earnings on Wednesday. Either shorts are existing because they expect good news or funds are buying for the same reason. Volume has only been about 50% of normal for the last week.

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 is now approaching two month lows as the rally accelerates higher.

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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