Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/24/2016

Table of Contents

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

Market Wrap

Reversals of Reversals In A Whippy Market

by Keene Little

Click here to email Keene Little
Both sides in the stock market are clearly battling it out for control and the result has been a large number of reversals and whippy price action. This is turning into a year of multiple >1% moves and that's very different from the past and the result has been a lot of frustration for traders.

Today's Market Stats

It used to be foreign exchange funds, depositories and foreign-related ETFs that experienced a lot of gaps from day to day but now it's common to see the morning move in the stock market start with a gap. Whether it's global trading and overseas markets' influence on overnight futures or all the algorithmic trading (HFTs), the net result has been big gap moves and many of those have been followed by a sideways market. Oftentimes if you weren't positioned for the gap there's been not much to trade. This morning started off with a big gap down and it was looking like we might go sideways again but then the buyers stepped in and drove the indexes back into the green. Will the rally hold into tomorrow morning? I'll be able to answer that question tomorrow morning.

Many of the algo trades are based on correlations, such as the between the S&P 500 and the US$/Yen currency pair. Lately we've seen a tight correlation between the S&P and oil and these correlations can create large moves in the market that are not necessarily related to anything that directly affects the stock market. But the program trading, which now accounts for about 80% of the market's trading volume, has a huge impact and these correlations must be considered (once they're identified), especially as the central bank policies start to have less of an impact on the market. I'll discuss these issues a little more with my discussion of currencies later.

So if you're feeling whipped by this market there's a reason for it -- you are. I have not personally verified this data but I read a market research report today from Phoenix Capital that talked about this year's price volatility. Apparently there were only 53 days between 1900 and 2000 that moved 1% or more. That's 53 days in 100 years. It's obviously been a bit more volatile than that since the bear market started in 2000 and now in 2016 the report said we had 22 such days through Monday. Add in yesterday's and today's moves and that makes 24 days out of 36 trading days this year that have seen moves of 1% or more. Just today we had a greater than 1% decline and then greater than 1% rally off the morning low. That means 67% of the days this year have seen a move equal to or greater than 1% and many times they've been reversal of prior moves or like today, reversals of intraday moves.

This is an amazing amount of price volatility while the VIX has stayed somewhat subdued (elevated in the 20s but not scary high) and to a large extent it shows how much this market is being moved by program trading. This likely means these large market moves are going to be more normal price behavior. The good news for active traders, if you can catch the reversals, is that this provides a very good trading environment to catch daily and intraday swings that are large enough to cover slippage in options plays. The bad news for traders, especially if you're not an active day trader, is that it's riskier holding positions overnight. A big gap move against you makes it much more difficult to exit a wrong-direction trade without taking a big haircut.

Part of the market's worry is earnings and whether or not the current P/E levels are warranted (no matter which way they're measured). Many traders are pleased that so many companies have met or exceeded analyst expectations, forgetting about the fact that earnings in general are in decline. Beating expectations is meaningless for bulls if earnings are in decline, which they are. Revenue growth has slowed, if not reversed, and that makes lofty P/Es difficult to justify. According to FactSet Earnings Insight, about 70% of the companies have beaten expectations, which keeps the bulls excited about buying the dip, but it's revenue earnings that can't be manipulated (as much) like earnings per share, especially with all the buy-back programs in existence (a pure waste of money for a company, except to reward management and shareholders).

In contrast to the 70% beat on expectations, about 76% of companies that have reported earnings have missed on revenue expectations. Of 85 companies that provided 1st quarter guidance only 17 said they foresee positive growth, leaving 68 saying they expected negative growth. The combined earnings growth for Q4 shows a 3.7% decline and if this figure holds true for the remainder of the reporting companies it will give us the 3rd consecutive quarter of decline in year-over-year earnings. This will be the first time this has happened since 2009. This is not something companies can massage away through their accounting gimmicks and it should be of great concern by the market. But hope is a wonderful thing, as long as it's not used as an investment strategy.

There's clearly a battle going on in the stock market as both sides argue their points and the price volatility is reflective of that. Let's see if there's any clarity from the charts


Review of the charts


S&P 500, SPX, and Value Line Geometric index, VALUG, Weekly chart

The weekly chart below shows the parallel up-channel for the 2009-2015 bull market rally, the bottom of which held as support last August-September but broke in January. The best SPX has been able to do so far is back-test the bottom of the channel and anytime I see this it's always a good setup to trade resistance. It might recover back into the up-channel but this kind of bearish setup works more often than not and since this is a game of probabilities, the higher-probability setup here is for the back-test to fail and SPX to continue lower. I've shown before the comparison with the Value Line Geometric index (VALUG in green) and how it's testing its May 2011 high. For SPX to do the same it will need to drop to 1370 (a 28% decline from the current level). There is no guarantee it will get down there but that's the current risk.


S&P 500, SPX, Daily chart

SPX broke its 20-dma at the morning low but the recovery and close above it, especially with a bullish hammer candlestick, looks like it could lead to another leg up for its rally off the February low. If that happens we could see a rally up to its 200-dma, currently at 2028 and coming down slowly. With the big whippy moves we've been seeing in the market it's very difficult to determine whether one day's move will see any follow through and it's no different here. Today's rally could be reversed and lead to at least a larger pullback before heading back up. Take nothing for granted in this market!

Key Levels for SPX:
- bullish above 1957
- bearish below 1810


S&P 500, SPX, 60-min chart

As of the end of today's trading it clearly looked bullish following the strong rally off this morning's low. But it also looked very bearish this morning so that left me thinking tomorrow's first move is a coin toss. On the 60-min chart below I show an expectation for another pullback before setting up a stronger rally to give us a 3-wave move up from February 11th. But in reality this is a read and react market right now, especially since we're in a corrective pattern. They're difficult to trade because there's often little follow through and that's been especially true in this market.


Dow Industrials, INDU, Daily chart

The Dow has the same pattern as SPX and you can see the strong bounce off its intraday test of the recovered 20-dma near 16231. If it can rally above its 50-dma, near 16590 on Thursday, which stopped the rally on Monday, it would be more bullish. In that case we could see a rally up to its 200-dma in the first week of March, currently at 17231. But there is a wave count that calls for another leg down for at least a test of the January-February lows and therefore today's strong recovery could be reversed just as quickly as this morning's decline was reversed.

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


Nasdaq-100, NDX, Daily chart

NDX also recovered from an intraday break back below its 20-dma but almost left a bullish engulfing candlestick (if it had been able to close above yesterday's high). But it's still struggling with its two broken uptrend lines from March 2009 - August 2015 and June 2010 - November 2012, now near 4186 and 4222, resp., closing in the middle at 4200. Above Monday's high at 4235 would obviously be more bullish but then it would soon have to contend with its 50-dma, coming down but currently near 4296.

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


Russell-2000, RUT, Daily chart

One thought about what might play out in the weeks ahead is shown on the RUT's chart below. It's just an idea but for a 4th wave sideways correction in the decline from its June high it would fit well. The reason I mention the sideways triangle is that it would be filled with whippy price action with lots of reversals. It could still head a little higher first, such as back up to its broken uptrend line from March 2009 - October 2011, now near 1043, and maybe even its 50-dma near 1050, but in a corrective pattern it's best to stay cautious rather than aggressive in either direction.

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


10-year Yield, TNX, Weekly chart

The Treasury market is not supporting the current bounce attempt by the stock market. Typically yields follow fairly closely with the stock market, which reflects the money rotating back and forth between stocks and bonds. As the stock market rallies, money comes out of bonds and that raises yields and vice versa. The bounce in the stock market off the February 11th low led to SPX making a new high on Monday above its February 1st high and today was a successful pullback to its recovered 20-dma, which held as support. By contrast, TNX made a much lower low in February vs. its January 20th low and it has not been able to even make it back up to its broken 20-dman, near 1.81%, which has acted as resistance twice since February 11th. In addition to that MA its' been struggling with its broken uptrend line from June 2012 - February 2015, near 1.76% (today's close was 1.745(%). As long as there is an underlying bid in bonds (holding yields down), there should be caution about stocks on the long side, especially if bonds are going to consolidate for several weeks (notice the similarity between the idea for a sideways triangle in the 4th wave position as mentioned for the RUT above).


KBW Bank index, BKX, Weekly chart

Another expectation for a larger correction/consolidation pattern is shown on the BKX weekly chart below. It could consolidate on top of its uptrend line from March 2009 - October 2011, currently near 58, for another month or two before heading lower (assuming we're in a bear market and not still in a bull market). The banks have been weaker than the broader market, which is reflecting concerns about the debt bomb that's out there. The collapse of the energy sector has spilled over into most other sectors and the explosion of debt in the past several years, thanks to the Fed's easy-money policies, is coming due. The financial system is at significant risk, especially considering all the 3rd party derivatives exposure, and it won't be just the banks that take it on the chin. Keep a close eye on the banks (follow the money).


Transportation Index, TRAN, Daily chart

The choppy climb up from its January 20th low has looked both bullish and bearish. There was a strong bullish divergence with its higher low on February 11th compared to the Dow. But the choppy climb has it looking more like a bear flag pattern than something more bullish. The rally into Monday's high, at 7463, was an intraday break above price-level resistance near 7453 (its August 2015 low) but it closed below 7453, as well as its 50% retracement of the leg down from November 20th. MACD and RSI are both rolling over from overbought, but without bearish divergence, so it could go either way from here but it's looking risky for longs. The Trannies have been a very good canary for the broader market.


Currencies

The US$ has been in a sideways trading range since March 2015 and one reason is likely because the relative strength of the U.S. economy draws money into this country. The Fed also helped strengthen the dollar with its talk for the past year about raising rates. But opposing those factors that strengthen the dollar are worries that the Fed will have to some things to devalue the dollar in order to make international companies' products more competitive (in the race for the bottom in devaluing currencies around the world). But are the central banks really in control of any of this? Many more analysts are now beginning to question that thesis.

Germany's central bank chief, Jens Weidmann, is now openly questioning the ECB's decision to go nuclear with their own NIRP. Weidmann is a member of the ECB's governing council and he said QE was "no longer necessary." Most members of the ECB appear to be behind doing more of "whatever it takes" but fractures in unified support are beginning to show up and a disagreement with powerhouse Germany is not to be taken lightly. France is lining up behind Germany to pull support for Mario Draghi so it's not just the countries' open borders that are beginning to crumble in the EU.


Nikkei 225 index, $NIKK, Weekly chart

Bank of Japan's Kuroda has been the central bank head since 2013 and he has been aggressively pushing QE, NIRP, ZIRP and anything else he can do to pump up the Nikkei (including outright purchases of stocks) and depressing the value of the Yen as a way of pumping up inflation and the stock market. It worked for a while as can be seen on the chart below. But since the middle of last year the NIKK has tumble hard while the Yen has been on the rise. The last few weeks have shown the currency and stock markets are losing faith in Kuroda's ability to do anything. After he announced NIRP last month the stock market rallied one day. That's it, one day.

The stock market continued its decline and the Yen continued to rise, in effect calling Kuroda's bluff as he promises to do "whatever" it takes (the statement by all central bankers now, who very likely feel trapped but don't know what else to try). As John Mauldin stated, "Japan is a bug in search of a windshield." And keep in mind that a rising Yen will cause a rush to exit stocks as algorithms hit the sell button (there's been a strong inverse correlation between the Yen and SPX and many trading algorithms trade based on this relationship, just as they are trading the oil correlation at the moment).


U.S. Dollar contract, DX, Weekly chart

Moving on to our Fed, they are in the process of preparing us for a few things:

1. Negative interest rates
2. A ban on cash (talk of removing the $100 bill, and 500 Euro bill from circulation)
3. More QE

The first two are tightly linked -- going to negative interest rates will only encourage people to withdraw their money and park it outside the banking system, even under their mattress. That would have a significant negative impact on banks' earnings as well as their capital base. One way to stop withdrawals is to go all digital and get rid of cash and that way the government/banks have a lock on your money and can institute tighter monetary controls at any time (ready for bail-ins?). France already bans any transactions over 1000 Euros with cash. Spain is looking into doing the same with 2500 as the limit and Germany is considering 5000. Basically NIRP can't work without a cash ban in place and we're being prepared for this by the likes of Larry Summers, et.al., as they use the excuse of criminal activity being supported by access to big bills (see Summer's article at Going After Big Money).


Gold continuous contract, GC, Weekly chart

With all of this information floating around about cash bans, NIRP, failing currencies and the potential for stoking inflation, it's no wonder gold has been rallying strong. I might not be convinced gold's breakout is real but I certainly can't argue with its recent strength. Gold is one of the best insurance programs to protect against a global currency crisis and failed central bank policies. Gold has broken out of a descending wedge that it's been in since 2013 and that has just about everyone I read turning super bullish on the shiny metal. At the moment I think it's a knee-jerk reaction, which will be followed by another leg down but I have to admit I'm not feeling comfortable with my bearish view on gold. I see the potential for another leg up to test its January 2015 high near 1308 but at the moment it's struggling to get above the top of a parallel down-channel for the decline since 2013. If gold can get above its February 11th high near 1264 there's one other resistance level to watch, near 1285, which is the 38% retracement of its 2001-2011 rally.


Oil continuous contract, CL, Daily chart

Along with the stock market, oil has been trading in a sideways range since its January 20th low and it could continue to do that for several more weeks before heading lower, even if it's to be just a minor new low or a test of the January-February lows. If it drops down to the bottom of a descending wedge pattern for the leg down from June 2015, we could see oil get closer to $20 before making a longer-term bottom. But if it rallies a little further then keep an eye on a downtrend line from June-October 2015, near 36.75, where a 3-wave bounce pattern off the January 20th low could finish and be followed by another leg down.


Economic reports

Other than New Home sales this morning there wasn't much in the way of economic reports to influence the market. Thursday morning will be a little busier with unemployment claims data, Durable Goods and house pricing data. Friday will be more related to what the Fed says they're watching -- GDP, personal income/spending and core PCE prices


Conclusion

The large number of large price swings is making it very difficult to figure out which way this market wants to go. Since the January lows we've seen some very strong moves and today's strong reversal off the morning gap down has it looking like it wants to break out to the upside. At the moment we remain inside a wide trading range between the January-February lows and the February 1st highs. Finger to the wind, it looks like we'll see the indexes make it higher but that could happen after another leg down to give us a larger pullback from Monday's highs.

Keep in mind that if we get a continuation of the rally that it will turn many, if not most, traders very bullish, especially with talk about the double bottom in January-February. But the larger risk is to the downside, especially with the confusion about what the central banks will or will not do and whether any of it really matters anyway. What should really matter is the fact that corporate earnings are in decline and that makes it more difficult to justify a renewed rally. A higher bounce maybe but not to new highs. There's not enough evidence to support new market highs from here, either from the economy or the charts.

One chart that I found from Arch Crawford, shown below, is very informative because it's hard to massage the numbers. It shows the decline in earnings by people and the tax revenue derived from it. They're both in decline and the 4-week average has dropped hard in the past month. An economy dependent on the mighty consumer is not looking so good and we're seeing the effects in the retail sector and the likes of Walmart. It's just another piece of the puzzle to help answer the question as to whether or not we're entering a recession and if so, it's not a time to be invested in the stock market. Trade it instead and keep the bulk of your money in cash equivalents (not money markets but instead in Treasuries). If you're not comfortable trading the short side (shorting stocks, buying puts, buying inverse ETFs), now is a great time to start learning and just start off small.

Good luck with your trading and keep it short-term oriented. I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Back Up the Truck

by Jim Brown

Click here to email Jim Brown

Editors Note:

The +319 point Dow rebound today suggests the risk of a retest of the lows is not going to happen. Time to add some more long plays.

I believe we are going to retest resistance and potentially move through those levels. The massive rebound from the morning lows is the kind of event that reenergizes investors. Confidence is rebuilt and should our current resistance levels be broken we could see a lot of price chasing into the April earnings cycle.

I know this is a dramatic turnaround from the outlook over the weekend but we have to react to what the market gives us and try to take advantage of these swings. However, there is a word of caution. We saw earlier this year where the Dow moved 200 points per day in opposite directions for seven days. Just because we erased a major decline today and rebounded back to resistance does not mean we are home free. One day does not make a trend. However, when coupled with the positive signals from last week and today it appears sentiment may be changing.

I am going to recommend multiple longs today rather than space them out over the next three days. Each stock is at a critical level and if we wait we could miss the entries. Just because I am adding three plays does not mean you have to use all three. Just add the plays you are comfortable with and are willing to take the risk of another decline.

I am also going to shorten the play descriptions in order to get them all into the newsletter today. They are pretty simple longs and everyone knows the companies.


NEW DIRECTIONAL CALL PLAYS


JNJ - Johnson & Johnson -
Company Description

I have JNJ as a longer-term play in another newsletter so I am going to use part of that play description here to save time.

JNJ is broadly diversified with more than 250 subsidiaries. If you need a Band-Aid, mouthwash, cold capsule, cancer drug or artificial joint, they make it. They spent about $10 billion on research in 2015. Seven of the 15 new drugs they brought to market since 2009 have annual sales in excess of $1 billion.

They have increased their dividend for 53 consecutive years. The yield today is about 3%. They have a rare AAA credit rating and produce more than $11 billion in free cash flow annually. At the end of 2015 they had $38.5 billion in cash.

JNJ is recession resistant because their products are not bought on a whim. If you need a Band-Aid you buy it. If you have arthritis, you buy Motrin. If you have acid indigestion you take Pepcid. If you are sick you get a prescription for their drugs. This makes them relatively safe in times of economic weakness. With worries over a potential recession in the near future this has powered their shares to a 52-week high.

I do not need to explain JNJ to everyone because we have grown up with their brands. The company was founded in 1886 and is older than anyone reading this newsletter.

The close on Wednesday at $104.94 is right at resistance and a breakthrough here should retest the historic highs at $109 where a breakout to a new high is entirely possible. They have based at the $100 level for the last two years with the exception of the flash crash last August.

Earnings are April 12th.

Buy May $110 call, currently $1.36, no initial stop loss.


QCOM - Qualcomm Company Description

Qualcomm holds the major patents on the 3G/4G wireless technology and their chips are showing up in more and more phones every month. Several days ago they signed a new licensing agreement with Lenovo for 3G and 4G technology for use in China. The devices will be marketed under the Motorola and Lenovo brands. Under the agreement Qualcomm will receive royalties on 3G (WCDMA and CDMA2000) and 4G (LTE-TDD, TD-SCDMA and GSM) devices. Lenovo will design, produce and market lower priced phones for the Chinese market.

A couple days later NXP Semiconductors (NXPI) and Qualcomm announced the integration of an industry-leading near field communication (NFC) and embedded secure element (ESE) solutions for Qualcomm's Snapdragon 800, 600, 400 and 200 processor platforms. This provides Qualcomm an end-to-end solution for mobile transactions and payment processing.

A day later Qualcomm announced the Snapdragon 820 processor with integrated Snapdragon X12 LTE modem for 33% faster 4G+ LTE download speeds and 200% faster LTE upload speeds, would power the new Samsung Galaxy S7 and S7 Edge phones. When coupled with the Samsung TruSignal multi-antenna boost technology, these will be the fastest phones currently in production.

A day later Qualcomm announced its collaboration with Ericsson (ERIC) on the new 5G technology, which is expected to be in production in 2018. The companies are doing the development work necessary on the 3GPP platform to insure rapid adoption of the new ultra high speed wireless technology. This puts Qualcomm at the forefront once again.

According to ABI Research, Qualcomm held a 65% market share of the 4G LTE baseband chipsets in 2015. The 4G LTE market is expected to grow at a 78.6% CAGR through 2019 when the 5G phones will begin to be plentiful. ABI said the Snapdragon 820 chip would probably increase Qualcomm's market share in 2016. Because of their dominance ABI believes Qualcomm will be able to increase the average selling price as the demand for the high end phones increases.

All the buzz about the new partnerships and deals has lifted QCOM shares out of a two-year decline. Shares fell while Qualcomm was fighting various companies about royalty payments in China. The new agreements with Chinese companies clearly show those problems are behind Qualcomm. All the analyst ratings changes in 2016 have been upgrades. Bernstein upgraded them to a buy last week.

I believe the long term downtrend is being reversed and although Qualcomm is up $10 over the last two weeks the positive rebound can continue. Normally I would not touch a company with a 25% rally in progress but the news is so strong I believe it is worth a chance. The most recent analyst price target is $70.

Earnings April 27th.

Buy April $52 call, currently $1.60, no initial stop loss.


ATVI - Activision Blizaard Company Description

Activision announced on Wednesday they had completed their acquisition of King Digital (KING) for $5.9 billion. This is a major milestone for Activision and they now have more than 500 million gamers making them the largest game network in the world.

They produce Candy Crush, World of Warcraft, Call of Duty and more than 1,000 other titles that can be played on mobile devices, consoles and PCs. The games are played in 196 countries. Activision was named one of Fortune's 100 Best Companies to Work For in 2015.

King Digital had 318 million monthly actuve users as of December 31st and offers games in more than 200 countries.

The combination of these two companies creates a powerhouse that will cross market to the combined subscriber base and new subscriptions and sales of new games to the combined user base will explode in 2016. Earnings are going to rocket higher. Activision is projecting 2016 revenue of $6.25 billion, earnings of $2 billion and earnings per share of $1.75. This compares to 2015 revenue at $4.62 billion and $1.19 in earnings.

The earnings on February 11th missed estimates for a variety of reasons and shares fell to a six-month low at $26.50. The rebound was immediate on the impending announcement of the completion of the King Digital acquisition. Shares closed today at $31.72.

With the higher earnings estimates and the King acquisition behind them I am expecting the shares to continue to rise. The high was $40 in December.

Earnings are May 12th.

With an ATVI trade at $32.15

Buy May $34 call, currently $1.46, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Market Flushing Dip

by Jim Brown

Click here to email Jim Brown

Editors Note:

The -266 Dow decline at the open with the S&P falling to 1,891 was a market flushing dipon the back of Tuesday's -189 point decline.

The -455 point two-day dip cleared the majority of trailing stop losses held by traders who bought the February dip. This is normally considered the weak holders and that gave portfolio managers an excellent opportunity to establish new positions.

The Dow rebounded from the -266 point drop to gain +53 at the close. The S&P rebounded from 1,891 to close at 1,929 with an 8-point gain.

We were stopped out of two of what were once highly profitable positions. The severity of the two day decline and the fact that the stops were hit when the market gapped down to the lows this morning, deflated the option premiums and we barely escaped with a gain.

I have resolved to be more proactive in taking profits when we have seen several days of gains and on managing stop losses where appropriate to take us out earlier. The alternative is no stops and I believe that stance should be used sparingly.



Current Portfolio




Current Position Changes


FB - Facebook

The long call play was triggered with a trade at $106.45 this afternoon.


QQQ - Nasdaq 100 ETF

The long call play was stopped out on the morning dip.


IYT - Dow Transport ETF

The long call play was stopped out on the morning dip.


BABY - Natus Medical

Close this long put position at the open on Thursday.


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:

Shares dipped to $67.55 at the open but rebounded strongly to finish the day with a gain. I raised the stop loss to $67.25 and just under today's low.

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.


DNKN - Dunkin Brands - Company Description

Comments:

We finally got the breakout and short covering we were expecting with DNKN surging to $46 in what started out as a bad market.

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.



FB - Facebook - Company Description

Comments:

Facebook recovered from a sharp dip to $102.74 at the open to trade up to nearly $107 and trigger the entry into the position at $106.45. This relative strength is why I chose FB as a position.

Original Trade Description: February 23rd.

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.

Position 2/24/16 with a FB trade at $106.45

Long April $110 call @ $3.30, initial stop loss $98.65


IYT - Dow Transports ETF - ETF Description

Comments:

The IYT dipped to $128.07 at the open when the Dow was down -266. We were stopped out of the position at $129.85 for a minor gain of 30 cents.

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

Closed 2/24/16: Long March $130 call @ $2.55, exit $2.85, +.30 gain.


KORS - Michael Kors - Company Description

Comments:

Kors surged to another 8-month high despite the crummy market open. Excellent relative strength.

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 still holding its recent gains while we wait for the next move higher. Unfortunately earnings are next Wednesday and we need to exit before the event. I am hoping for a move over resistance to at least $39.50 before we have to exit.

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. See portfolio graphic for stop loss.


N - NetSuite - Company Description

Comments:

Dip to initial support at the open but rebounded +1.60 in late afternoon to end with only a 67-cent decline. There was no news.

After two days of declines I raised the stop loss to $53.25.

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 morning dip knocked the QQQ back to $99.77 and stopped us out at $100.45 before rebounding to $102.55 and closing the day positive. We escaped with a minor gain of 15 cents and a significant amount of frustration.

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

Closed 2/24/16: Long March $100 call @ $2.61, exit $2.76, +.15 gain.


SBUX - Starbucks - Company Description

Comments:

Starbucks dipped to support at $56.25 at the open and rebounded to close over $58 and a minor loss for the day. Good recovery from a bad open. 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 recovered from the opening dip and nearly closed at a new two-month high.

Earnings March 7th. 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 barely dipped at the open and recovered to close right at resistance at $36.50. I am recommending we close this position before resistance fails.

Close the position at the open on Thursday.

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 rebounded from the opening dip to close at a five week high ahead of the earnings after the bell. The company reported earnings of 36 cents that matched estimates. Revenue declined -12% to $12.2 billion compared to estimates for $12.1 billion.

However, the company projected earnings of 35-40 cents in the current quarter and analysts were expecting 55 cents. The guided for the full year for earnings of $1.59-$1.69 and analysts were expecting $2.15.

Shares rallied slightly after the earnings and ahead of the conference call.

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 spiked at the open to 26.65 and it was all downhill from there with the close right at 25 and moved down to 24.79 in afterhours. The market rebound today should put to rest the worry about a retest of the lows and we could move higher from here. That will pressure the VIX and the VXX.

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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