Option Investor
Newsletter

Daily Newsletter, Monday, 2/29/2016

Table of Contents

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

Market Wrap

Stocks Pull Back Ahead Of Data

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market pulled back from resistance in today's session, but basically held steady near last week's high, ahead of a big week of economic data. It is once again time for the monthly blast of macro-data including the Fed's Beige Book, auto/sales, unemployment rate and non-farm payrolls. Low expectation for another interest rate hike, rising oil prices and rising gold prices helped add support.

Market Statistics

Action in the international markets was mixed, Asian indices got slammed by negative sentiment following the G20 summit (no plans to boost global growth were unveiled) and that sentiment spilled over into the European markets. Asian indices were led lower by the mainland Chinese Shang Hai index (-2.87%) but losses may be reversed on news from the PBOC. The PBOC announced, after the close of the Chinese trading day, that they were lowering the capital reserve requirements for banks in hopes of further stimulating their slowing economy.

European indices began their day with losses in the range of -2.5 to -3% but regained most of those losses by end of day on the PBOC news, and another positive headline out of the oil patch.

Early action in the futures market indicated a flat to negative open for the US market during the earliest part of the morning. Trading turned positive by 8:45AM, by 2 to 3 points for the SPX, and held that level into the opening bell. Trading after the open was choppy for the first hour, testing support and resistance in a very narrow range around last weeks closing prices, until about 10:40 when oil prices started to climb. From 10:45 to 11:45 the market steadily rallied, adding about 10 points to the SPX from the morning low.

The next two hours saw the market sell-off in the same slow steady manner as it rose, leaving the indices at or near break-even levels for the day. By 2PM the bears were back in control, breaching break-even levels and sending the indices marching lower for the rest of the day. By 2:30 the morning lows were broken, by 3:00 the SPX was down by -10 points and by the close of trading nearly -16.

Economic Calendar

The Economy

There was not a whole lot of data out today although the calendar for the week is packed full. Today we got reads on pending home sales and Chicago PMI along with the weekly Moody's Survey, all out at 10AM. The Moody's Survey of Business Confidence gained a half point to hit 38.5. This is the second week of advance since hitting a multiyear but leaves the index very near to that low. In the near term declining business sentiment is driven on global financial market turmoil and uncertainty over China's economic outlook. Outlook for the future remains a bit more positive with signs, according to Mr. Zandi, that sentiment is stabilizing.


The Chicago PMI came in at 47.6 versus the expected 52 reversing gains made last month. Within the report 4 of the 5 gauges of activity were negative led by an -18 point drop in production. The only positive reading was for delivery marking a continued draw down in inventories. Inventories have been in contraction for 4 months, negative in the near term but a positive for the long term as those inventories will need to be rebuilt at some point. Employment has contracted for 5 months now and is at the lowest levels since 2009, for the manufacturing sector.

Pending home sales fell by -2.5% from December to January, December data was revised higher making this month's decline a wash. On a year over year basis January sales are up 1.4% making it the 17th month of year over year sales increases. NAR economist Lawrence Yun says that weather conditions had some effect on slowing sales but the real problem is higher prices driven by low inventory.

This week's economic calendar: On Tuesday auto sales, ISM index, and construction spending. Wednesday ADP employment is released in the early morning, followed by the Beige Book later in the day. Thursday is weekly jobless claims, Challenger report on planned layoffs, productivity, unit labor costs, factory orders and ISM services index. Friday wraps it up with average work week, hourly earnings, the unemployment rate and the NFP.

According to Factset 96% of the S&P 500 have reported earnings, 11 companies are scheduled to report this week. Of those who have already reported 69% have beat earnings expectations while only 48% have beaten revenue expectations. The blended rate of earnings growth is now -3.3%, much better than the low of -6% forecast at the end of January but a far cry from positive. This is now the 3rd month of negative growth and we will likely see at least 1 more if not 2.


The energy sector remains the biggest drag on earnings growth, the sector is posting a -72% earnings growth rate so far this season. Oil will continue to drag on growth for the next few quarters. First quarter projections have the energy sector posting a -92% growth rate as of this week's esimates and that does not improve substantially until late in the year. Earnings in the sector should start growing again in 2017 and are forecast to expand in the range of 143%.

Projections for the 1st quarter and full year 2016 continue to decline although on a quarter to quarter basis begin to improve starting with the 2nd quarter. Full year 2016 earnings growth is now forecast at 2.8%, positive but well off the highs set last summer near 15%. First quarter earnings projections have fallen to -7.4% and a new low.


Looking out to the 2nd, 3rd and 4th quarters of 2016 projections are in decline but turn positive in the third quarter and expand into the 4th. Second quarter growth is forecast at -1.6%, 3rd quarter forecast if 4.7% and 4th quarter is 9.4%.

The Oil Index

Oil prices jumped more than 3.5% to close near $34. Driving the move was a variety of factors that help support the idea that oil prices have bottomed. Last week rig counts were reported down for the tenth week in a row adding to the idea US production is on a declining path. Russia is having a meeting of its oil chiefs tomorrow in an effort to prepare for the upcoming meeting between it and OPEC. In addition to this a statement from the Saudi cabinet and January output data raises the chances an actual curb to output to could be on the way.

From the Saudi Cabinet . . . "The kingdom (of Saudi Arabia) seeks to achieve stability in the oil markets and will always remain in contact with all main producers in an attempt to limit volatility and it welcomes any cooperative action," . The Reuters poll shows that output held steady in Saudi Arabia from December to January although overall OPEC production fell. The two largest and offsetting factors are a decline in Iraq due to violence in the region and rising output from Iran.

A new shot was fired from the shale drillers that will have an impact on oil prices into the future. They say that they are ready to ramp up production as soon as oil hits $40 a barrel.

In the near term oil is rising and will likely test its recent high near $36, longer term supply and demand are still out of balance. Oil may have bottomed but I think it too soon to call a reversal, at best we may see some stabilization which is in itself a good thing. Stable oil prices will undoubtedly help stall declines in earnings and earnings projections. This week's data could help move oil but I think it is going to come down to demand. Supply and production are still very high, demand is only tepid and the OPEC/Russia curb won't change that situation.

The Oil Index fell in today's session, counter to the rise in oil prices. The index remains range bound between 950 and 1000 with little sign of impending break out. The indicators are bullish but with waning momentum and stochastic looking like it is about to rollover the range appears to be confirmed. A break to the upside is unlikely without some strong catalyst, a move lower more likely with a possible break below 950 to retest support near 900.


The Gold Index

Gold prices rose more than 1.59% or nearly $20 in today's session to trade near $1240. Gold continues to consolidate between $1200 and $1250 with a bias to the upside. Safety seekers, fund inflows, physical buying and low expectations for an FOMC rate hike are all providing support. It looks like gold is prepping for a big move, most likely centered on the FOMC meeting, that could take it $200 in either direction. Spot price is now $200 off of its lows, if gold breaks to the downside it could easily retest lows, if it breaks to the upside $1450 is a potential target. This weeks data could move gold prices, if too strong data will lead to FOMC rate hike speculation, rising dollar value and lower gold.

The gold miners continue to benefit from higher prices and lower oil prices. The Gold Miners ETF gained more than 3.5% and is trading near its 8 month high. The ETF has been trading around the $19 level for over 10 days on a wave of strong momentum. MACD is in decline at this time, from its extreme peak, but as yet has not led to a decline in prices. Stochastic remains strong above the upper signal line. Upside target is near $21 at this time with risk present in the economic data, the ECB meeting next week and the FOMC next week. First target for support should the sector pull back is $18 with next target near $17.


In The News, Story Stocks and Earnings

The Dollar index tried to add to Friday's GDP driven rally but couldn't hold today's gains. The index created a doji candle midway between the 38.8% and 23.6% retracement levels and may be more supported by ECB expectations than FOMC. The ECB is meeting next week and there is some hope they will increase QE, weaken the Euro and strengthen the dollar although hopes are not that strong. According to the CME's Fed watch futures are pricing in an 8% chance of rate hike at the next meeting, up from 6% last week, giving little reason to expect the dollar to strengthen much in the near term.Adding to this idea is the fact that the yen keeps gaining against the dollar on flight to safety trades, a move that sent the USD/JPY down by 1% today. If the ECB fails to meet expectations the DXY could sink back below $97.50.


Valeant Pharmaceuticals had another rough day today. First off, their CEO came back to work after months spent recuperating from pneumonia, that was good news. Other than that the company is suffering from a delayed earnings reporting and withdrawn guidance, in order to fix accounting errors, and an announced investigation by the SEC. No details into this new investigation are available yet. Shares of Valeant fell more than -16% in today's session.


Taser delivered a stunning report, beating on the top and bottom line with record revenues, up 19.7% over this same time last year. The performance was driven by improving sales and improving margins and is expected to continue into the coming year. The news was well received and helped send the stock up by more than 10%.


Lumber Liquidators reported a much bigger loss than expected. The company's sales have not recovered from the laminate flooring scandal and the latest news from the CDC are not going to help. Much of the loss is due to decreased margin in relation to the write-off of Chinese sourced laminate flooring. Shares tested support and set a new intraday low in today's trading but finished the day with a gain near 2%.


The Indices

The indices tried to hold at Friday's closing levels but were not able to. Today's action was bearish, but not too strong, and not overly concerning considering the amount of data due out this week. Today's action was also fairly broad, no one index made significantly more than another, led by a -0.81% decline in both the S&P 500 and the Dow Jones Transportation Average. The trasnsports created a small bodied black candle just below resistance at the 7,500 level. Momentum is declining but strong, and stochastic is strong and moving higher within the upper signal zone so it looks like resistance could be tested again. A break above this level would be a bullish sign and could lead to a move up to 8,000 in the near term. Support is near the moving average.


The S&P 500 made a slightly larger black candle but also moving down from resistance. Resistance is at the 1950 level and if broken, could precipitate a move up to 1980 or higher. The indicators are bullish although MACD appears to have peaked, consistent with resistance. Stochastic is showing some strength crossing the upper signal line with today's action and suggesting a retest of resistance.


The Dow Jones Industrial Average made the next biggest decline, about -0.74%. The blue chips created a medium bodied black candle with a bit of upper shadow, falling from resistance. Resistance is near 16,700 and may hold the index back in the near term although the short term moving average appears to be giving support. Support may be tested over the next couple of days but the indicators are bullish, stochastic is showing strength, so I would expect to see resistance tested again, if not broken.


The NASDAQ Composite made the smallest decline in today's session. The tech heavy index fell only -0.71% creating a small black candle with moderately sized upper shadow. The candle is indicative of resistance near 4,600 although its strength is yet to be seen. The indicators are bullish and indicate a rising index so I think we can count on resistance being tested again. Further, the index is supported by the short term moving average and the 4,550 support line so any pull back is likely to be muted provided no bad or badly perceived news hits the market. A break above resistance could take it up to 4,750, a break below support may find next support near 4,500.


The indices bounced from their lows and have moved higher. They are supported by rising oil prices, rising gold prices, better than expected earnings (not good earnings) and low expectation of an FOMC rate hike. They are now at resistance waiting on economic data and two central bank meetings. This week is going to be about the data.

Today's round of data shows that the economy has cooled off a bit from December, yet remains steady to positive from year ago levels. I think what we need to see the rest of the week is confirmation that the economy is still growing, but not growing so fast as to push the FOMC into raising rates. Basically, Goldilocks numbers. The most important piece, at least the piece with the most attention paid to it, will be the NFP.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Ready to Rumble?

by Jim Brown

Click here to email Jim Brown

Editors Note:

Game consoles appear to be one section of the market where growth is continuing and piper Jaffray said last week the outlook is strong.


NEW DIRECTIONAL CALL PLAYS


EA - Electronic Arts -
Company Description

Electronic Arts develops, markets and distributes game software for online games, game consoles, internet connected devices, PCs, mobile phones and tablets worldwide.

Some of their major game brands are Madden NFL, The Sims, Battlefield, Dragon Age and Plants vs Zombies. In Q4 the company sold more than 13 million copies of Star Wars: Battlefront. That quantity was three months ahead of what they anticipated.

Piper Jaffray said last week that the current generation of game consoles has a long way to go to catch up with the prior generation. They view that as a positive for EA.

The current console cycle is in its third year and Piper said the uptake rate has been 40% to 50% faster than in prior cycles. However, only about 40% as many Xbox One and PS4 consoles have been shipped as the prior generation of Xbox 360 and PS3s. Sales of the older models reached 162 million units and the current generation has only sold about 60 million. Considering the newer versions have many more features the analyst believes the trade up rate will continue to grow for several years. At the end of 2015 EA had 8,400 employees.

The analyst also believes the shift towards digital delivery will also drive margins higher. Piper has an $87 price target on EA.

At the end of January EA reported earnings that beat estimates but revenue of $1.8 billion narrowly missed estimates for $1.81 billion. They raised their full year guidance to $4.52 billion and $3.04 per share. Analysts were expecting $3.10 and $4.56 billion. EA has a history of issuing very conservative guidance. They also said because they sold so many of the star Wars game in Q4 that sales estimates for Q1 were lower. Shares crashed on the news from $71 to $53. Shares rebounded quickly from that crash and closed at $64 on Monday.

Last week EA announced the sale of $600 million in notes and a $500 million stock buyback program that will be completed by the end of May. Rarely do companies announce buyback programs with only a 90-day window. This should continue to lift the shares in the weeks ahead.

EA will present at the Morgan Stanley Media conference at 6:25 PM ET on Tuesday.

I believe EA shares will recapture that $70 level if the market cooperates. I am recommending a short term April $67.50 call, currently $1.62. If the current rebound fades we will not have much at risk.

I am using an entry trigger just in case the afternoon fade today was the start of something bigger. The entry point will be $65.45 and just over the intraday high at $65.25.

Earnings may 5th.

With EA trade at $65.45

Buy April $67.50 call, currently $1.62, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Rebalance Drop

by Jim Brown

Click here to email Jim Brown

Editors Note:

The MCSI index rebalance at the close caused a $1 billion sell order imbalance starting about 2:PM. The 9 MCSI indexes added 85 stocks and deleted 135 stocks and rebalanced the weightings of the existing stocks in the indexes.

The S&P stalled right at resistance for the third consecutive day after spiking higher at the open on rising oil prices. The MCSI selling knocked the S&P back from the 1,958 high to close at 1,932.

The 1,950-1960 level on the S&P remains the key indicator for this week. The S&P has traded over 1,950 for the last three days and the 1,960 level it turning into the intraday resistance level to watch. Friday's high was 1,963 and exactly at the 50% retracement level of the decline from the November highs. Today's high was 1,958.

I do not view Monday's market decline as material and the dip should be bought. You can never game the last day of the month because funds tend to close positions. The first two days of the month typically has a bullish bias as month end fund inflows are put to work.

Despite the closing dip the market volume was light indicating no conviction and all MSCI rebalance oriented.



Current Portfolio




Current Position Changes


AKAM - Akamai

The long call play remains unopened until a trade at $55.75.


KR - Kroger

Exit the long call position at the close on Tuesday.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



BULLISH Play Updates


AKAM - Akamai Technologies -
Company Description

Comments:

Akamai failed to push through to our entry trigger at $55.75. Shares were flat most of the day until the market selling appeared at the close to knock $1.27 off the stock.

The position remains unopened until AKAM trades at $55.75.

Original Trade Description: February 26th.

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

With a AKAM trade at $55.75

Buy April $57.50 call, currently $1.67, initial stop loss $51.85.


AOS - AO Smith - Company Description

Comments:

AOS had a similar pattern to the market with shares flat early and then diving at the close to $70.38.

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.


ATVI - Activision Blizaard Company Description

Comments:

Only a minor loss and $32 is now resistance again.

Original Trade Description: February 24th.

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.

Position 2/25/16 with an ATVI trade at $32.15

Long May $34 call @ $1.51, see portfolio graphic for stop loss.


DNKN - Dunkin Brands - Company Description

Comments:

We definitely cannot complain about an 9 cent loss at five month highs.

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:

FB cannot seem to gain any momentum and the $107.85 level remains resistance. All the losses were in the afternoon decline on rebalancing.

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, see portfolio graphic for stop loss.


IWM - Russell 2000 ETF - ETF Description

Comments:

The IWM rallied to $104 in the morning but caved in with the market decline in the afternoon to lose 46 cents. Not a problem given the relative strength.

Original Trade Description: February 25th

The Russell 2000 has come alive. Over the last two weeks the small cap index has been surging with bigger daily gains than the big cap indexes. The final resistance hurdle is 1,035 with another speed bump at 1,050 then it is clear sailing until 1,150. That is better than 100 points from today's close.

While we cannot guarantee it will happen the green shoots are appearing Today's gains was confirmation that the Wednesday rebound could be the start of a major move to the upside.

I am recommending we buy calls on the IWM in hopes of capturing the gains on a breakout that could run to the 115 level. The IWM is actually a little ahead of the Russell and was testing that local resistance today.

Position 2/26/16 with an IWM trade at $103.25

Long April $105 call @ $1.91, see portfolio graphic for stop loss.


JNJ - Johnson & Johnson - Company Description

Comments:

Minor decline was strictly market related. No specific news.

Original Trade Description: February 24th

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.

Position 2/25/16:

Long May $110 call @ $1.30, see portfolio graphic for stop loss.


KORS - Michael Kors - Company Description

Comments:

Kors squeezed out another 8-month high despite the market drop. 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.

Target $59.85 for an exit.


KR - Kroger - Company Description

Comments:

Kroger rallied $1 in a weak market but gave back 50 cents at the close. I changed the exit target to $40.35, just under today's high, and I raised the stop loss to $39.75 just in case the market decline continues.

Kroger has earnings before the bell on Thursday. I am recommending we close this position at the close on Tuesday if our stops are not hit. Shares sometimes react negatively on the day before earnings as people with gains head for the exits. I want to be a day early. Hopefully the market will rebound from its rebalance headache and our upside target will be hit at the open.

Target $40.35 for an exit. Stop loss was raised to $39.75. If neither are hit Tuesday morning, exit the position at the close.

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:

Shorts were forced to cover again as Netsuite rallied +1.62 in a weak market and closed only a few cents below the high for the day.

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


PII - Polaris Industries - Company Description

Comments:

Polaris collapsed despite the KeyBanc price target rise to $100 on Friday. Shares fell -3.7% on no news. This is likely some profit taking from the big gain over the prior three days of $6. This puts resistance at $88 back into play again. Support is now $84.50.

Original Trade Description: February 25th.

Polaris makes off road vehicles, snowmobiles and motorcycles. They compete with Arctic Cat and have 8,100 employees. They are about four times larger than ACAT. They had some earnings issues from the lack of snow but their motorcycle business helped smooth out the rough spots. The company reduced guidance in December and shares declined from $96 to $68 by late January.

In Q4 sales declined -20% because of the lack of snow but also because of the oil recession. They sell a lot of off road equipment to oil field workers and they are not buying today. When oil field workers are employed they make a lot of money with starting wages in the $70-$80K range when times are good so there is a lot of extra cash floating around. Retail sales in oil regions were down -10% in Q4.

However, despite the lack of snow and a rough Q4 the company still managed to increase sales for 2015. That is impressive when snowmobile sales declined -25%. We have had some significant snowstorms in 2016 so that snowmobile inventory is probably shrinking in Q1.

Motorcycle sales rose +43% in Q4 so there is a bright side to warm weather and no snow. Sales in that division were up +74% for the full year.

Polaris is the number one off road vehicle manufacturer in the U.S. and are expecting a better 2016 with most of the growth in the second half.

Earnings are April 26th.

Shares are about to break over resistance at $89, market permitting. I am recommending the April $95 calls currently $2.00 on a breakout.

Position 2/26/16 with a PII trade at $89.50

Long April $95 call @ $2.15, see portfolio graphic for stop loss.


QCOM - Qualcomm Company Description

Comments:

Minor loss of 35 cents but back below resistance at $51.25. Support is now $50.

Original Trade Description: February 24th.

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.

Position 2/25/16:

Long April $52.50 call @ $1.58, see portfolio graphic for stop loss.


SBUX - Starbucks - Company Description

Comments:

Decent relative strength with only a 13 cent decline. Resistance at $59.50 is the next challenge.

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:

Minor decline from a new two-month high. Good relative strength.

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, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)


HPQ - Hewlett Packard - Company Description

Comments:

HPQ tried to move higher again but the morning gain was partially erased. No specific news.

We should see a directional move begin now and I would be perfectly happy if it was higher. We are agnostic on direction since we have both a put and call but the prior direction was bullish and the call is already profitable. We do not care which direction it moves just as long as it moves several dollars in that direction over the next two months.

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 only gained a little and it was all in the afternoon when the rebalance selling began. If we could get 2-3 more days of market gains we could see a significant decline. The alternating gains/losses in the S&P is keeping volatility high.

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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