Option Investor
Newsletter

Daily Newsletter, Tuesday, 2/23/2016

Table of Contents

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

Market Wrap

Turnaround Tuesday

by Jim Brown

Click here to email Jim Brown

The +221 gain on Monday was nearly erased by the -189 decline on Tuesday. The Dow closed at 16,431 and back under previously strong resistance at 16,500.

Market Statistics

The morning started negative after European markets posted an average decline of about -1.5% with Asia only slightly negative. The major driver for the U.S. markets was the drop in oil prices. The April futures contract became the front month and traded as high as $33.50 overnight after the March contract expired at $31.48 on Monday. That $2 difference was quickly erased after the Saudi Arabian oil minister Ali Naimi repeated more than once that there would be no production cuts. He said there will be no cuts because everybody would cheat. He also said a limit to production would have a minimal impact since limiting to the January level of 32.6 mbpd by OPEC would still leave a surplus of up to 2.0 mbpd on the market and Iran is not going to limit production. They plan to increase production by 700,000 bpd in 2016.


After the bell, the American Petroleum Institute (API) said U.S. crude inventories rose +7.1 million barrels and twice what analysts had expected. This further pressured WTI prices after the close and could weigh on the equity markets on Wednesday.


The Existing Home Sales for January came in stronger than expected but provided no lift to the market. Annualized sales came in at 5.47 million units and well above estimates for 4.35 million. That was also above the 5.45 million rate in December despite the monster snowstorms in January. Months of supply remained low at 4.0 months although up just slightly from the 3.9 months in December. The average for the prior six months was 5.0 months.

Bad news came in the form of the Richmond Fed Manufacturing Survey, which dropped back into contraction at -4 after a mediocre +2 in January. The Richmond area has now been in contraction 4 of the last 6 months. The order backlogs fell from +4 to -14 and new orders from +4 to -6.

The services sector also fell into contraction with a drop from +10 to -2 and the lowest level since 2013.



Consumer Confidence for February declined from 98.1 to 92.2 and the lowest level since July. The present conditions component declined from 116.6 to 112.1 and the expectations component declined from 85.3 to 78.9. Income expectations declined on both metrics. Prospective homebuyers declined from 7.4% to 5.3%, appliance buyers from 53.9% to 46.8% and auto buyers rose from 12.1% to 12.3%. The sharp decline in buying plans for homes and appliances suggests the retail sector is in for more pain.

The rapidly falling gasoline prices had no impact on confidence. I suspect the sharp decline in the equity markets took away the implied wealth effect making consumers more conservative in their plans. Also, with the presidential election cycle heating up there is a lot of complaining about the weak economy and that makes people focus on their lot in life instead of looking at the positive side.


The calendar for Wednesday has New Home Sales but that is not likely to be a market mover. The GDP on Friday along with Personal Spending will be the most likely reports to weigh on the market.

The earnings for Wednesday from LOW, GPS, BBY, ABBV and BIDU will have a lot more impact than the New Home Sales.


Home Depot (HD) tried to resurrect the Dow this morning by reporting earnings of $1.17 compared to estimates for $1.10. Revenue of $20.98 billion beat estimates for $20.39 billion. Same store sales were up +7.1%. Net earnings were $1.5 billion. Full year sales rose +6.4% to $88.5 billion with earnings rising to $5.46 from $4.71. The board authorized a 17% increase in the dividend to 69 cents. The company expects to earn $6.12 to $6.18 in 2016 on $88.08 to $88.84 billion. Analysts were expecting $6.16 and $93.12 billion so that is a huge revenue shortfall. Investors did not seem to care with shares rising $4 at the open. That faded in the negative market to +1.68 but still a gain. Analysts said those earnings projections target $140 in HD shares.

Over the last five years, Home Depot has bought back $30 billion in shares or 24% of the outstanding shares. Earnings have risen +167%.


Builder Toll Brothers (TOL) reported earnings of 40 cents that missed estimates by a penny. Revenue was $928.6 million that did beat estimates for $916.8 million. The company said orders rose +17.6% to 1,250 homes in their quarter ended January 31st. The CEO said the stock market seems to be pricing in a recession but we see no signs. Our business is strong. They narrowed their guidance for homes to be sold in 2016 from 5,600-6,600 to 5,700-6,400. Shares rallied $1 on the news. Shares are down sharply since December.


Macy's (M) reported earnings of $2.09 that beat estimates for $1.89. That was a -31.5% decline. Revenue fell to $8.87 billion but still beat estimates for $8.3 billion. Same store sales fell -4.3% but that was less than the -4.7% expected. They blamed the weak sales on warmer weather and the strong dollar. The company said there was a high degree of interest among parties they had approached about spinning off some of their real estate into some external vehicle including outright sale. Starboard Value estimates those assets to be worth about $21 billion. Shares rose +$1 on the news.


After the bell First Solar (FSLR) reported earnings of $1.60 compared to estimates for 80 cents. Revenue of $942.3 million beat estimates for $930.9 million. The company forecast full year 2016 earnings to be $4.00 to $4.50 per share with revenue in the $3.88 to $4.08 billion range compared to $3.58 billion in 2015. That was down slightly from their prior guidance for $3.9-$4.1 billion. Shipment guidance of 2.9 gigawatts to 3.0 gw was unchanged. Shares rose $2 in afterhours to $63.80.


Dreamworks Animation (DWA) rose 10% in after hours after reporting earnings of 55 cents that beat estimates for 15 cents. Revenue rose +34% to $319 million and beating estimates by 16%.


Avis Budget Group (CAR) reported earnings of 18 cents compared to estimates for 17 cents. Revenue of $1.9 billion missed estimates for $1.94 billion. They guided for 2016 full year earnings of $2.70-$3.30 compared to analyst estimates for $3.46. The company said that included a 17-cent impact for currency rates. They currently operate 11,000 locations. Shares were down -$4 in afterhours to $26.


Etsy Inc (ETSY) reported a loss of 4 cents compared to estimates for a loss of a penny. For the full year, they lost $54.1 million or 59 cents per share. Revenue of $87.9 million beat estimates for $86.6 million. They forecast revenue growth of 20% to 25% over the next three years. That forecast lifted shares $1 in afterhours to $8.47.


Western Digital (WDC) shares fell -7% after China's Unisplendor and Unis Union Information System dropped plans to acquire a $3.78 billion, 15% interest in the company. The deal was under review by CFIUS under the Defense Production Act and that gave either party a 15-day window to exit the deal. The CFIUS committee was worried that a new form of super fast flash memory under development by SanDisk (SNDK) may have been a prohibited product for transfer to China. WDC is buying SanDisk for $19 billion. CFIUS stands for Committee on Foreign Investment in the United States. They can block any transaction that may be contrary to national security.


Valeant Pharmaceutical (VRX) shares rose 4.4% after the company said it was going to restate earnings for 2014 and 2015 because of errors in the way it accounted for sales to former distributor Philidor. Earnings in 2014 are expected to decline by 10 cents and 2015 earnings are expected to rise 9 cents. The company said $58 million in sales to mail-order pharmacy Philidor were improperly recognized. The company said they should have been recognized when the patient received the drugs not when Philidor received them. Valeant had been criticized for accounting surrounding Philidor with analysts claiming that dumping drugs on Philidor was equivalent to stuffing the channel and it could be years before Philidor actually sold the drugs. Valeant cut ties with Philidor last year after it was learned that Philidor had created a network of phantom pharmacies to misdirect pharmacy benefit managers into buying Valeant drugs.

Shares rallied on the news but remain depressed because the CEO has been in the hospital for over a month and there is no date for his return.


JP Morgan (JPM) held an analyst day and was generally upbeat but the headlines that came out of the meeting were on energy. The bank said it would take another $600 million charge to reserves in Q1 for questionable energy loans bringing the total to $1.6 billion. If prices remain in the mid $20s for oil, they would have to double that to $3.1 billion. The bank has committed to $25 billion in investment grade loans on energy and $5 billion has been drawn. They have $19 billion in high yield energy commitments of which $9 billion has been drawn. CEO Jamie Dimon said he has been through these energy busts before and they are always tough but the bank always gets through them. Dimon was credited with creating the "Dimon Bottom" in the market on February 11th when he said he was personally buying $25 million of JPM shares. The stock immediately rebounded along with the market. Today he said he would buy more at this level if he could but there was a limit to his finances. Shares fell -$4 on the energy reserve news.


Markets

We were due for some serious profit taking. The only question was whether it was just profit taking or the return of the concentrated selling we have seen in 2016 and another retest of the lows.

It is far too early to make that call but there were quite a few stocks in the green today. My screen list of about 800 stocks was about one-third in the green. That is not concentrated selling and suggests today was just profit taking.

The recession proof stocks like PG and JNJ were not positive but their losses were minimal. The hard-core safety stocks like MO and RAI were positive as investors look for a high dividend and relative safety in times of economic stress. They have been up for a couple weeks so today was just the continuation of a trend rather than a sudden surge in buying. However, both closed at new highs.

The problem we are facing other than strong resistance is the lack of a catalyst to move stocks higher. We have downside catalysts like declines in oil and terrible earnings but nothing really major to push stocks higher. We are still a couple months away from the "sell in May" cycle but investors may be thinking this is a good time to exit in an election year that is normally rocky.

According to FactSet the S&P earnings for Q4 have declined -6.5% and that is down from expectations for a 15% gain back in January of 2015. For today there were 17 companies issuing positive guidance, 30 issuing in line guidance and 19 that issued lower guidance. Most of these were very small companies that do not move the market because we are late in the earnings cycle.

We get ourselves all excited about six days of gains when the long-term charts are still very negative. We are too focused on the short-term cycles rather than the long-term outlook. I believe everyone looking at the weekly chart below would develop a bearish bias that could last until the S&P is well over the resistance at 1,950 and 2,000.


However, if we look at a shorter term daily chart the main focus is on that strong resistance at the 1,950 level and not on the longer term view.

The 1,950 level is critical because the market cannot continue to heal until the index moves over that level. Right now, we are trapped in a 140-point range between 1810-1950 and nothing material is going to happen until we break out of that range. If we break to the downside then everyone will expect a bear market and a full 20% decline from the 2,130 high to roughly 1,704. If we break above that 1,950 level, we are still in danger of making a lower high only at a higher level around 1,990 or 2,020. Personally, I would rather face that problem than a target of 1,704.

The 24-point decline today is immaterial in a 140-point range. What will be material is whatever happens the rest of the week. We have traveled that range four times now and investors will be watching to see if initial support around 1,900 will hold and will we retest 1,950. If we do move under 1,900 I think we will fail at the 1,810 level on the third attempt.


The Dow broke through resistance at 16,500 on Monday but failed at 16,665. Today we broke back below the 16,500 and that level will return as weakened resistance on the next rebound. The new number to watch on the Dow is 16,665.

JPM, GS, CVX and AAPL were the biggest drags on the Dow. Apple is expected to lose the fight with the FBI and that could damage their potential sales overseas.

The continued decline in oil prices could weigh on Exxon and Chevron and cause them to drag the Dow lower. The same pressures will weigh on the banks because of their energy loans.



The Nasdaq Composite failed to return to the resistance at the 4,600 level and declined -67 points. The Biotech Index declined -2.3% and that hurt the Nasdaq and the Russell. Initial support on the Nasdaq is today's close at 4,500. A breakdown there could quickly retest the lows because it would damage sentiment for tech stocks.



The long-term chart for the Nasdaq looks worse than the S&P. The rebound off support at 4,330 was lackluster and that level has been penetrated multiple times. A continued move lower would target the clustered support around the 4,000 level.


The Russell 2000 has failed to return to the resistance at 1,040 but the -9 point drop today was only -0.9% and a smaller decline than the other indexes. Less selling in the small caps is always positive but one day does not make a trend. This chart is negative until we are over 1,040 and moving higher.


Despite the gloom I portrayed above there are some bright spots that suggest Tuesday was just profit taking and the flush in oil prices. The volume was very low at 7.0 billion shares. Declining stocks were 3:2 over advancers. Monday's volume was also very low at 7.1 billion shares and advancers were 3:1 over decliners.

The low volume means no conviction. With a third of the market posting gains today, the selling was not severe. This suggests the portfolio managers are in a wait and see period just like we are. Nobody has the conviction to buy or sell. On the negative side there was no dip buying at the close. The Nasdaq, S&P and Russell 200 closed at their lows for the day but on low volume.

I think Wednesday is a coin toss for direction. According to Bank of America, fund managers are sitting on a lot of cash and they want to buy a rally but they are afraid. There is no catalyst for direction. Until the market picks a direction and sticks with it for several days, we are all in a wait and see mode.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

 


New Option Plays

Second Chance

by Jim Brown

Click here to email Jim Brown

Editors Note:

I was going to recommend this play on Monday but an oversized gain kept me from adding it. Today's decline is a second chance. Facebook shot up more than $3 on Monday and kept me from adding the position. Today's -1.70 drop put it back into the realm of possibilities thanks to its upward momentum and relative strength.


NEW DIRECTIONAL CALL PLAYS


FB - Facebook -
Company Description

I do not really need to tell you what Facebook does. They are turning into the biggest online marketing portal on the planet and they still have not fully monetized WhatsApp, Instagram and several other web portals they own.

Facebook beat estimates for Q4 earnings at 79 cents compared to estimates for 69 cents. Revenue of $5.84 billion beat estimates for $5.37 billion. Earnings rose +46% and revenue +52%. Full year revenue rose +44% to $17.93 billion.

Monthly active users rose to 1.59 billion. Monthly active mobile users rose to 1.44 billion. Every day users watch more than 100 million hours of video. Zuckerberg hinted they were going to create s video space similar to YouTube to expand that video viewing. Average revenue per users rose to $3.73 compared to estimates for $3.43. WhatsApp ended the year with nearly 1 billion monthly active users.

Mobile ad impressions rose 29%. More than 2.5 million advertisers are actively promoting products on Facebook.

Post earnings Facebook shares rallied to $117 before the February market crash knocked them back down to $97. In another newsletter I was trying to launch a play at the 200-day moving average at $94.50 and never got filled. The rebound over the last week to $108 on Monday was solid. With the close at $105 today this may be our best chance for a new entry.

Earnings are April 20th. I am using the April options because they are cheaper than the May by a lot. They expire on the 15th so we will be out before they report.

Because of the market decline today I am going to use an entry trigger. If the market continues lower, I would rather not be holding calls at this level if we can potentially buy them lower.

With a FB trade at $106.45

Buy April $110 call, currently $3.10, stop loss $98.65


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Too Good Too Last

by Jim Brown

Click here to email Jim Brown

Editors Note:

We knew there was a bout of profit taking in our future after a week of gains. If it is only one day I doubt anyone will complain. If it turns into a week of declines and we head back to the lows from the prior week there will be a lot of worry over that low holding.

The S&P-500 never successfully retested the strong resistance at 1,950 with Monday's close at 1,945 the highest close for the month. With the strong -24 point decline today, that puts fear back into investors. However, there were a lot of stocks showing gains today despite the market decline. This looks like bargain hunting and I doubt we would see it if we were heading back to the lows.

Oil prices crashed again after the Saudi oil minister repeated the "we will not cut production" phrase in a speech in Houston and also saying a production limit would likely be unsuccessful because of widespread cheating.



Current Portfolio




Current Position Changes


AOS - AO Smith

The long call play was triggered at the open today.


KORS - Michael Kors

The long call play was triggered at the open this morning.


FL - Foot Locker

Long call play was closed at the open this morning.


CSCO - Cisco Systems

Long call play was stopped out.


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 was opened this morning when AOS traded at $70.45. The opening gap and crap gave us a bad fill on the option and then AOS declined -$2 with the market.

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.

Position 2/23/16 with an AOS trade at $70.45

Long April $75 call @ $1.88. See portfolio graphic for stop loss.


CSCO - Cisco Systems - Company Description

Comments:

Cisco dropped at the close to stop us out at $26.25 for a minimal 57-cent gain.

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:

Closed 2/23/16: Long March $70 call @ $1.05, exit $1.62, +.57 gain.


DNKN - Dunkin Brands - Company Description

Comments:

Nice breakout over resistance at $44. We did not get much short covering but I am sure the negative market was to blame.

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 helped us with a better than expected exit on the play. Thank you Home Depot for your help in the retail sector.

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:

Closed 2/23/16: Long March $70 call @ $1.20, exit $1.95, +.85 gain.


IYT - Dow Transports ETF - ETF Description

Comments:

The IYT only gave back half of the gains from Monday. I will take that trade off every day. 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.


KORS - Michael Kors - Company Description

Comments:

Kors spiked at the open to trigger the play at $55.25. The negative market pulled it back down but the loss was only a nickel. Excellent relative strength in a very bad market.

Original Trade Description: February 22nd

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.

Position 2/23/16 with a KORS trade at $55.25

Long May $57.50 call @ $2.48, see portfolio graphic for stop loss.


KR - Kroger - Company Description

Comments:

Kroger posted a decent gain in a bad market and edged back over 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 gave back -$1.31 in a bad market. There was no news.

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:

The profit taking appeared on schedule and Monday's gains were erased. The Nasdaq 100 gave back -69 points. I raised the stop loss to $100.45.

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 held its recent gains with only a -41 cent loss. 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 held its recent gains and only gave back a portion of Monday's gains. No complaints here.

Target $56.85 for an exit.

Original Trade Description: January 29th, 2016:

Thor designs and manufacturers recreational vehicles for the U.S. and Canada. Some of its brands include Airstream International, Flying Cloud, Land Yacht, Eddie Bauer, Interstate and AutoBahn class B motorhomes. They have dozens of other brands in the conventional travel trailers and fifth wheels.

You would think that motorhomes would be a tough sell in the current economy. We know that Harley Davidson (HOG), Polaris (PII) and Arctic Cat (ACAT) have been having some challenges. That is not the case for Thor. Towable RV sales in the U.S. hit a record high in 2015.

In the last quarter, Thor reported earnings of 97 cents, up from 73 cents. Revenue rose +11.7% to $1.03 billion. Profit margins rose from 12.8% to 14.8%. They have $180 million in cash and no debt. They pay nearly a 3% dividend.

At the end of October Thor's backlog in orders for towable RV units was $710 million. The order backlog for motorized RVs was $341 million. With total backlogs of more than $1 billion and headed into the RV selling season, Thor is positioned to capitalize on price increases, margin expansion and even more sales.

Earnings are March 3rd.

Shares collapsed with the market in early January and bottomed the prior week at $48. Despite market volatility last week, they have been moving steadily higher. I am recommending the March options and we will exit before earnings.

Position 2/1/16 after a THO trade at $52.75

Long March $55 call @ $1.15, no stop loss because of the cheap option.



BEARISH Play Updates (Alpha by Symbol)


BABY - Natus Medical - Company Description

Comments:

BABY spiked at the open, sold off then recovered slightly at the close. Typically when markets are really negative investors look for beaten up stocks as potential safe havens. Resistance at $36.50 is holding.

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 gave back its gains from Monday ahead of earnings on Wednesday.

This is a long-term play to hold over the Feb 24th earnings. We should see a directional move begin on Thursday.

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 retraced some of its losses in a bad market. The direction is still down unless the S&P heads back to its lows.

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






If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now