Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/2/2016

Table of Contents

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

Market Wrap

End-of-Month/New-Month Bullish Pattern Holds

by Keene Little

Click here to email Keene Little
A pattern of price gains into the end of the month and then into the first or second day of the new month has held again. This pattern also suggests the market might not hold onto those gains in the next week or two so we'll soon find out if the pattern will continue or not.

Today's Market Stats

The end-of-month rally that typically leads into a beginning-of-month rally has once again played out and now we're left to wonder what will follow the strong rally off the February lows. It's easy to feel bullish looking at the daily charts but the intraday charts are showing reasons for worry as the volume in the rally is less than what we saw in the decline and we're seeing waning momentum (bearish divergence). As we head into Friday's pre-market nonfarm payrolls report it will be interesting to see how the market reacts.

Much of the trading today is done by program trading (about 80%) and much of that trading is done by large hedge funds. These funds derive a good portion of their income based on their assets under management (AUM), such as 2% of AUM and 20% of gains (they don't give back the 20% if they lose money). It's to their advantage to have their AUM at as high a level as possible at the end of each month so that they can bill their clients 2% of the asset value. It's no coincidence that there's typically an end-of-month rally to get the AUM as high as possible.

February ended at the highest level since the end of January, which was the highest level since the end of December, which was the highest level since December 1st, which was the highest since November 3rd. These end-of-month rallies, into the first day or two or three of the new month, are typically followed by a swoon into mid-month as these buyers step away and then come back in later in the month to start all over again. Rinse and repeat, collect 2%. Many times these "AUM drives" begin in opex week. So with the rally from February 11th looking a little tired I'd be a little careful chasing the market higher from here.

Today's economic reports included the ADP Employment Change report in the morning and the Fed's Beige Book this afternoon. The employment report came in a little stronger than expected -- 214K jobs added vs. expectations for 190K and a slight improvement over the +205K jobs added in January. It was a positive sign for the economy but not too strong to scare the Fed into thinking they'll have to move faster on the next rate increase. The futures market barely reacted to the pre-market news.

The Fed's Beige Book showed U.S. economic activity slowly expanding from early January through February but not smoothly. There was a large variation across different regions and within the different sectors. Consumer spending increased in a majority of the districts but manufacturing continued to lag behind other sectors. The strong dollar continues to get the blame for deteriorating export business while the decline in demand from the energy field is hurting many ancillary businesses that feed this sector. While the employment picture continues to look stable there is some concern that wage growth "varied considerably."

The report noted consumer prices were generally flat and it makes it more difficult for the Fed to justify another rate increase. There is concern that a global slowdown will drag the U.S. economy down as well and without inflation ticking higher it's going to be difficult for the Fed heads to argue for a rate increase at this time. The market likes that and the added rally this afternoon was likely a result of thinking the Fed will be forced to stand on the sidelines. Of course the reason for the Fed not being able to raise rates is exactly why the market should not be rallying but that point seems to be absent from most investors' thinking.

Not showing up in the Fed's Beige Book is a discussion about U.S. small-business activity, which is slowing. As the biggest driver in employment this is worrisome. The Thomson Reuters/PayNet Small Business Lending Index dropped significantly, down -13% in January to its lowest level since November 2014. This is a measure of borrowing by small businesses and according to Bill Phelan, the president of the loan-information company PayNet, this level of borrowing is insufficient to replace old equipment, let alone buy more. As Phelan reported, "This is a dramatic form, an extreme form of hunkering down."

Along with other signs of contraction that we're seeing for the economy, Thomson Reuters notes the PayNet index is "a strong leading indicator for U.S. economic growth one or two quarters down the road." This makes sense, since small businesses account for a huge portion of U.S. economic activity. If they're struggling, the broad economy is likely to follow. This will of course continue to make it difficult for the Fed to justify a rate increase -- no/slow growth and no/slow inflation growth will necessarily keep the Fed on the sidelines. The conditions are not good for the stock market either but for now it continues to be focused on the Fed to the near-exclusion of all else. The market has its back to the woods and the bears are sneaking out to attack...

Now that we've had a strong bounce off the February lows, with many of the indexes having retraced 50% or more of the December-February decline, it has turned many analysts bullish again on the stock market. If my assessment of the market's decline is correct, which is that it's the first leg down of a new bear market, then the bounce off the February low is just a correction to the decline and it will be followed by a drop to new lows. The first correction typically gets traders feeling very bullish at the worst time since the next leg of the decline if often the stronger one. It remains to be seen whether or not this pattern will play out but at the moment I think it's risky to chase the market higher. However, the indexes are also close to proving the bounce is something more bullish than just a correction and we should get a better idea in the coming week who will win the battle.


S&P 500, SPX, Weekly chart

With the assumption that the bounce off the February 11th low is a correction to the December-February decline and not the start of something more bullish, there are some key levels that will seriously jeopardize that assumption. If SPX rallies above price-level S/R at 1992 I'd turn more neutral and if it can rally above its 200-dma, near 2024, and its 50-week MA, near 2033, I'd turn more bullish. If it can rally above 1992 and hold that level on a back test I'd also turn more bullish. But for now, until proven otherwise, the February bounce should lead to a stronger decline in a new bear market and the next leg down could be very strong -- down to the June 2007 high at 1576 by June, followed by a bounce before continuing lower into the fall, potentially down to the May 2011 high at 1370 (to set up an end-of-year election rally).


S&P 500, SPX, Daily chart

The daily chart of SPX is not showing any signs of topping and therefore it's telling bears to be cautious about shorting the bounce. There is no bearish divergence on the daily chart for the rally from February 11th, which is not required for a top but it helps signal an end to the move. But a broken uptrend line from January 20 - February 3 has been holding back the rally and it currently crosses price-level S/R at 1992, which is also the 62% retracement of the December-February decline. That makes 1992 an important level for the bulls to break through. The next level of resistance above 1992 is the 200-dma, near 2024, and then the 78.6% retracement (a favorite retracement level for this market) at 2041. A rally above 2041 would be a strong indication we'll get new all-time highs. But the bounce pattern off the February low looks like a correction and that has me looking for evidence for where it will end since the next leg of the decline should be a strong one and therefore a good opportunity to short it.

One important note about yesterday's strong rally -- it was the strongest rally since January 29th and August 27th before that. Both of those days led to only small gains the following day and then either a significant pullback (into September) or a new low (into February). In other words the strong rally was more of a blowoff move (short covering) than something more bullish. You'll find the strongest rallies in a bear market, not a bull market. Today's rally produced a small gain so if the pattern is to repeat we'll have a down day tomorrow. If it doesn't decline but instead closes above 1992 then we'd have a bullish statement from the market.

Key Levels for SPX:
- bullish above 1992
- bearish below 1891


S&P 500, SPX, 60-min chart

The 60-min chart below shows a rising wedge pattern for the bounce off the February 11th low and bearish divergence at the highs since February 17th, which helps confirm the bearish interpretation of the pattern. Today's rally was holding at the top of the wedge until a quick pop above it with a small jam higher into the close. A decline tomorrow would leave a small throw over above the top of the wedge, which is a common way for the pattern to finish. But a rally above 1992 would effectively negate the bearish wedge and that in turn would be a strong bullish signal. We should find out quickly Thursday morning which way this is going to go.


Dow Industrials, INDU, Daily chart

The Dow's daily chart looks like SPX as it presses up against its broken uptrend line from January 20 - February 3 and price-level S/R near 16900, which was this afternoon's high. The day following Tuesday's big rally finished with a bearish hanging man doji at resistance, which needs a red day on Thursday to confirm the reversal pattern. But if the bulls press this higher on Thursday, the next level of resistance is the 62% retracement of its December-February decline, at 16985, and then its 200-dma, near 17195. Not shown on its daily chart, there are two internal price projections, based on the wave pattern, for the bounce off the February low, both of which point to the 16900 area for an upside target. Having achieved its upside target at price-level resistance and with short-term bearish divergence and overbought conditions it's a very good setup for the bears. We'll find out quickly on Thursday whether or not the bears are paying attention.

Key Levels for DOW:
- bullish above 16,900
- bearish below 16,165


Nasdaq-100, NDX, Daily chart

It's hard to see on the NDX daily chart below but today's candle is a hanging man doji, like the Dow, and following yesterday's big rally it could be a reversal pattern in the making. A red candle for Thursday would confirm the reversal pattern but as long as it stays above the 50% retracement at 4321 it remains bullish. The next level of resistance is near 4420, where it would retrace 62% of its December-February decline, achieve two equal legs up for its bounce off the February 11th low and test its 200-dma. Needless to say, that will be a tough level to crack if NDX continues to rally up to there. The 5-wave decline from December into February is what strongly suggests the bounce off the February low is not a new bullish leg but instead is a correction to the decline. That's the reason I'm looking for a top to the bounce to get short. It might lead to only a pullback in what will become a larger a-b-c bounce pattern but the more immediate bearish potential is for a decline to new lows from here.

Key Levels for NDX:
- bullish above 4325
- bearish below 4088


Russell-2000, RUT, Daily chart

The RUT was a strong leader to the upside today and that's bullish. Whereas the other indexes rallied roughly +0.3% (flat for NDX, +0.4% for SPX) the RUT was up +1.1% and as long as the RUT leads to the upside it will be good for the market. Rallying above strong resistance near 1040 yesterday, along with the bullish follow through today, tells bears to be very cautious trying to pick a top. The next level of resistance, if reached, will be 1074 (a 50% retracement of its December-February decline) and then price-level S/R near 1080. A drop back below 1040 would be a bearish heads up.

Key Levels for RUT:
- bullish above 1040
- bearish below 996


10-year Treasury Note emini, ZN, Weekly chart

I typically follow the Treasury yields but following bond prices is essentially the same, except for the inverse relationship. I noticed an interesting setup on the 10-year Note emini contract (ZN), which is shown on its weekly chart below. The rally in bond prices from December had ZN breaking its downtrend line from July 2012 - January 2015 in February and it then rallied up to the top of a parallel up-channel for the rally from September 2013. It poked above the top of the up-channel on February 11th and then created a strongly bearish shooting star for the day. That rally has been followed by a drop back down to its broken downtrend line from 2012 and we'll soon find out if it's going to hold as support on a back-test. If the back-test holds and Treasuries start rallying again it would very likely coincide with a decline in the stock market so keep an eye on bonds to help gauge how much the stock market rally, or decline, should be trusted. If ZN drops below 129 it would be supportive of a continuing stock market rally.


KBW Bank index, BKX, Weekly chart

A bounce pattern for the banking index, BKX, would have two equal legs up at 64.68 (for an a-b-c correction to its decline) and at the same level it would back-test its broken 200-dma and broken 50-week MA, both currently at 64.67. That should be tough resistance if reached. But if the buyers rally BKX above 64.68 they wouldn't run into the next strong resistance level until about 66.50. As with the other indexes, the risk following the bounce off the February 11th low is for a strong decline to a new low but at the moment I can't rule out the possibility for just a pullback this month and then higher into April for a larger a-b-c bounce off the February low.


Transportation Index, TRAN, Daily chart

The Transports have had a strong recovery off the January 20th low, with practically no pullback along the way. The TRAN could retrace 62% of its November-January decline, at 7611, if the buyers can keep at it this week. The bounce off the January low would likely be complete if it drops back below 7100.


U.S. Dollar contract, DX, Weekly chart

There's not much to add about the US$ as long as it continues to trade inside a 94-100 price range. Short term there is a down-channel for the pullback from December, the top of which was nearly tested with today's high at 98.59 and the intraday pattern looks like the bounce could be ending at any time. Another trip back down toward 95 could be the next move but it would look more bullish if it can rally above its January high at 99.95.


Gold continuous contract, GC, Weekly chart

Gold's daily chart shows a sideways triangle consolidation pattern following the February 11th high and that looks like a bullish continuation pattern. As long as it holds above the February 16th low, at 1191.50, it's looking like we'll see another leg up for gold, which is what I'm depicting on its weekly chart below. Another rally would break gold out of its down-channel from 2013 but I think it will turn into a fake-out breakout and catch too many gold bulls leaning too hard to the long side. But if a rally can break above its January 2015 high at 1307.80 I'd turn more bullish, especially if a pullback holds at/above the top of its down-channel, currently near 1255.


Oil continuous contract, CL, Daily chart

Oil's daily chart below shows an a-b-c bounce pattern off the January 20th low and it achieved two equal legs up at 34.68 (with a high so far at 35.17). If it's to be just a correction to the decline, which fits as a 4th wave in the leg down from June 2015, then there's another leg down coming, which would be the 5th wave. The downside projection for a 5th wave would be near 20, possibly by early April, and if that happens it would be a very good setup for a stronger bounce/rally in oil. But at the moment the bounce pattern off the January low looks corrective, like the stock market, and that keeps the downtrend intact. Only with a rally above 38 would things start to look more immediately bullish for oil.


Economic reports

Thursday morning's economic reports include the unemployment claims numbers, productivity, labor costs and ISM Services. None are market moving but some of the data will be used by the Fed in their evaluation of inflation risks (although at this point to say inflation "risks" is probably not correct since the Fed would dearly love to see higher inflation, even above 3%). Friday morning's NFP report will be the big one and after today's ADP report there could be some whisper numbers looking for 200K instead of 180K. Just not too strong so that the Fed can stay on the sidelines.


Conclusion

Following Tuesday's strong rally and more or less a consolidation day today (except for a more bullish RUT) there is a pattern from last August and January that suggests we could see a turn back down. Combine this pattern with the end-of-month "AUM" rally, which typically leads to a decline into mid-month and we have a setup for at least a pullback following the strong bounce off the February lows.

But if the market does not start a more significant pullback on Thursday, Friday at the latest, we'll have a market that's speaking bullishly to us. We could simply get a bigger bounce that corrects the December-February decline before heading lower but there is a bigger bullish pattern that calls for another rally leg to new all-time highs. It's the more bullish possibility that is reason enough for bears to be cautious here.

Since this is a setup for at least a deeper pullback into mid-month, and potentially something much more bearish, I think it's very important for bulls not to get complacent. If you missed your opportunity to lighten up on your exposure to the long side and you were kicking yourself for not selling sooner, this is your second chance. A much stronger decline would have you kicking yourself that much harder. Set your stops now and don't let the market get past you. Enjoy the ride higher, if that's where we're going, but protect yourself on the downside.

We have as good a setup for shorting the market as you'll see and a negative close on Thursday would be the trigger to play the short side (sell rallies).

Good luck and 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

Winter is Over

by Jim Brown

Click here to email Jim Brown

Editors Note:

What little winter we had is over and the sun is returning to the skies. When spring arrives, consumers rejoice and head outdoors again. They begin preparing for camping trips, fishing, boating and all sorts of outside activities. Consumers go into shopping overdrive as they begin to gather up all the accessories they will need on their trips. Cabelas sales reps are waiting with open arms. The low gasoline prices will allow for more outdoor trips and more money to spend in Cabelas.


NEW DIRECTIONAL CALL PLAYS


CAB - Cabellas -
Company Description

Cabelas is a specialty retailer and direct marketer of hunting, fishing, campiny and related outdoor merchandise. They operate more than 77 retail stores and a large e-commerce website along with direct mail catalogs. They also have a very profitable financial services segment offering a Cabelas Club Visa credit card.

The company has expanded profitability by moving most of its merchandise to its private label brand. Instead of being North Face, Coleman, Redwing, etc, everything is manufactured and sold using the Cabelas label.

Cabelas reported Q4 adjusted earnings of $1.26 that beat estimates for $1.22 per share. Revenue of $1.41 billion also beat estimates for $1.36 billion. Full year revenue was $4 billion and earnings of $2.67.

Merchandise sales rose +10.1% and retail store revenues rose +14.3%. same store sales comps rose only 4.9% because of the unusually warm weather that depressed the sale of cold weather clothing. Financial services revenue rose +15.7% with a 21.3% increase in interest collected. The number of active Visa accounts rose +14.4%.

The company guided for revenues to rise at a high single digit rate with earnings per share to grow in low double digits.

Cabelas shares from a low of $39 in the February dip to close at $48.40 today. I know that is a 25% jump in three weeks but I believe there is more to come. Shares are facing resistance at $48.75 but a breakout there could return to the March 2015 highs around $58. I recommend we position ourselves for the potential breakout.

Earnings are May 21st.

With a CAB trade at $49.05

Buy April $50 call, currently $1.95, initial stop loss $45.25


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Perfect Profit Taking

by Jim Brown

Click here to email Jim Brown

Editors Note:

You could not have scripted the market for Wednesday and done any better. The -99 point Dow drop at the open was completely erased to end with a gain. The &SP barely dipped and closed up another 8 points at 1,986. That index is targeting the next resistance at 1,999.

The Russell 2000 remained the strongest index with a 1.06% gain compared to 0.2% on the Dow and 0.4% on the S&P. The small caps are back and they should continue to lead the market higher.

There were no material moves in the portfolio with most stocks trading flat with minor gains or losses. The winner was of course the IWM thanks to the Russell performance.

If the market can take today's rebound and build on it with a decent gain on Thursday we should be setup for a strong Friday as shorts elect to cover rather than hold over the weekend.



Current Portfolio




Current Position Changes


AKAM - Akamai

The long call play was opened this morning at $55.75.


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 finally pushed through remaining resistance and posted a decent gain to trigger the position with a trade at $55.75 and a close at $56.21.

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.

Position 3/2/16 after an AKAM trade at $55.75

Long April $57.50 call @ $1.63, initial stop loss $51.85.


AOS - AO Smith - Company Description

Comments:

Minor profit taking after a nearly 4% gain on Tuesday.

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:

Still fighting that resistance at $32. Not a material loss but locked on to that $32 level.

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:

Dunkin closed well off the highs but still a decent gain.

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.



EA - Electronic Arts - Company Description

Comments:

Nice move in a weak market to continue its string of gains.

Original Trade Description: February 29th.

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.


FB - Facebook - Company Description

Comments:

After breaking through resistance at $107.85 Facebook tacked new resistance at $110 today and closed only a nickel under that level. A breakout appears imminent.

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 continued to rally with the Russell 2000 the strongest index again today. That is bullish for market sentiment and the market recovery at the close suggests more gains ahead.

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:

New 14-month intraday high but faded a little at the close. No news.

I am recommending an exit target at $108.75.

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:

Another 9-month high in a weak market. Prepare to exit at $59.85.

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.


N - NetSuite - Company Description

Comments:

No gain today but after a strong week we should be happy with only a 25 cent loss in a weak market.

Target $68.85 for an exit.

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 rebounded back over resistance again but there is still no excitement in the shares. We need to see a move over $91.50 and a 3 month high to create some buzz.

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:

Nice gain to a new three-month high close. Support is now the 100-day average at $50.75.

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:

Two steps forward, one step back. Minor dip after a nice gain on Tuesday.

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:

THO recovered from a sharp drop at the open and ended the day positive. The 6 cent gain was a new 2-month high close. That $56 level is turning into resistance. We need one big day over $56 to give us our exit ahead of earnings.

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 inching slowly higher and we have plenty of time. 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 declined again as the markets rebounded into the close. If we could add a couple more days of market gains could push it down to $20.

Because we are running out of time on the March put I added an exit target at $20. That should give us a small gain. The volatility rebound in mid February sidetracked the original play and we need to take a gain if one is offered.

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 do not 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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