Option Investor
Newsletter

Daily Newsletter, Thursday, 3/3/2016

Table of Contents

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

Market Wrap

Market Climbs On Data

by Thomas Hughes

Click here to email Thomas Hughes
The market climbed to new 2 month highs after a round of monthly macro data, but we're still waiting on the NFP.

Introduction

The market held steady in today's trading after a round of monthly macro data. Today's data was a bit mixed but supports the idea of slow and steady economic improvement, and does not appear to be strong enough to force the Fed into another rate hike at the March meeting. Even with this data, and data released during the week, the market is still waiting for tomorrow's NFP and unemployment report for cues on what the Fed may do.

International markets were mixed. Asian indices were mostly higher, led by the Nikkei, following two days of gains in the US markets. European indices began the day in positive territory but fell in late day trading as oil prices began to retreat, closing flat to slightly negative for the day.

Market Statistics

Futures trading indicated a flat to slightly lower open for the US markets up to and until the 8:30AM release of jobless claims, productivity and labor cost data. After the data futures spiked, briefly, only to fall back to flat line going into the opening bell. The open was positive, barely, but indices fell to break even and below within the first few minutes of trading. The morning was spent in negative territory, average intraday loss was near -0.5%, but those losses were nearly erased heading into the 11AM hour.

The indices topped out just before 11AM and fell back to retest the early lows by 11:30. Bottom was hit and another bounce ensued, taking the indices back to break even level. By 1:30PM the market was testing resistance near the 11AM high and by 2PM most indices were moving higher, led by the transports. Once the early highs were reached and breached the indices drifted higher into the closing bell, leaving them at or near their highs for the day.

Economic Calendar

The Economy

Lots of data today, the Challenger Gray & Christmas report on planned lay offs was first on the list. According to them planned lay offs fell by -18% from January levels to 61,599, led by the energy sector. The energy sector announced 25,051 lay offs in Februay bringing the YTD total for the sector to 45,154, up 24% from the same period last year. The top three reasons for lay offs in February were oil prices, restructuring and store closings. The technology sector also has substantial gains in lay offs, up 143% YTD from last year, but were shrugged off in the report due to "heavy churn" in the sector related to start-ups, bankruptcies and a rapidly changing environment.

On a year over year basis February job cuts are up 22% from last year, on a year to date basis are up 32%. Backing out the effect of oil prices the way I like to do the month to month, YTD and YOY numbers improve significantly. Energy related job losses account for 40% of the February total and 33% of the YTD total. Based on comments from John Challenger it appears that the effect of low oil prices on job losses is not spilling over into other areas of the economy.

"Shockingly, we have not seen a precipitous rise in unemployment in the many cities that were benefiting from the recent oil boom, suggesting that the job losses are contained to the energy sector, for the moment,"


Initial claims for unemployment climbed 6,000 from last week's not revised figure to hit 278,000. This is slightly above the estimates which called for a drop of -1,000 but does not change the fact that claims are trending near long term lows and consistent with ongoing labor market recovery. The four week moving average of claims fell -1,750 to 270,250.

On a not adjusted basis claims rose by 7.1% versus an expected gain of 4.9%. On a year over year basis not adjusted claims are now down -15.5% from last year, a gap that has been growing over the past few weeks to its widest level in about 10 months. On a state by state basis Massachusetts and Missouri posted the largest increases in claims, +3268 and + 1012, while California and New York posted the largest decreases, -5515 and -1282.


Continuing claims for unemployment rose 3,000 on top of a 1,000 upward revision to last week to hit 2.257 million. The four week moving average of continuing claims fell -750 to hit 2.257 million. The number of continuing claims remains steady near 2.257 million as it has for the past two months. This figure is off of its long term low but remains consistent with ongoing labor market health.

The total number of Americans receiving unemployment benefits fell -48,512 to 2.659 million. This is the lowest level since hitting the post holiday peak and is -5% from last years levels. The total claims date remains consistent with historical trends and labor market health. Based on the historical data we may expect to see total claims hold near this level for another 2 to 3 weeks and then begin to fall off going into the spring hiring season.


The final data for 4th quarter productivity and unit labor costs was also released at 8AM. Productivity fell -2.2%, not good, but is better than the -3% first estimated and the -3.3% expected by economists. On a year over year basis productivity in the fourth quarter was up about 0.5%. Labor cost rose 3.3% versus the expected +4.7% on a rise in hours worked, +3.2%. Total out put is up 1%.

Factory orders and ISM services index were both released at 10AM. Factory orders rose 1.6% versus and expected gain of 2%. Within the report shipments rose 0.3%, unfilled orders rose 0.1% and inventory declined -0.4%.

The ISM services index fell -0.1% to 53.4% and shows continued expansion within the services sector. Within the report data shows an increase in business activity, up 3.9% to 57.86%, new orders fell -0.1% to 55.5% and employment fell -2.4% to 49.7%. Employment falling below the expansionary 50 level is a concern but when taken in perspective not as much as it could be, this is the first month in 2 years that the employment segment has fallen below 50. Looking forward, businesses surveyed are generally optimistic about the economy.

Tomorrow is the all important NFP and unemployment data. Consensus is in the range of 200K for NFP and 4.9% for unemployment. Based on my read on the employment data I think this could be light but so long as it is not overly strong should not negatively impact FOMC rate hike outlook.

The Oil Index

Oil prices were once again volatile as traders weigh the supply/demand imbalance against outlook for production, demand growth and the effects of an OPEC/Russian production cap. WTI hovered just below yesterday's $34.80 settlement price for most of the morning before a spike sent it up over $35 to its highest level since late January. The spike in prices was met by sellers who drove it back below $35 but only just. Even with the volatility today's action was relatively calm when compared to the past few months and left prices flat for the day. I still think it's too soon to say oil has reversed but it does looks like a bottom is in.

The Oil Index gained about a half percent in today's session, extending its move above resistance and the break out which began yesterday. The index is moving higher on higher oil prices and its impact on oil sector profits but the move higher is yet to be confirmed. Price action over the past two days is promising and supported by the indicators but not yet showing real strength. MACD momentum and stochastic are both moving higher but both are also still weak. If oil prices are able to hold near $35 the index could move higher with a target near 1,100 but I would also expect to see a retest of support before any kind of longer term move higher. Support target is now the 1,000 level and the short term moving average which is just below.


The Gold Index

Gold prices moved higher all day and gained more than 2% to trade above $1260. Today's action was supported by the economic data which on the one hand shows steady labor markets, expanding services and positive factory orders but on the other is still weak enough to keep FOMC rate hikes in March off the table. Gold is still below the most recent intraday high, near $1265, but appears to be moving higher with an upside target near term target of $1300. Risk include tomorrow's NFP and unemployment, next week's ECB meeting and the FOMC meeting the week after. I see gold moving higher so long as data remains in the Goldilocks range and the ECB doesn't surprise the market with more QE than expected.

The gold miners are loving the uptick in gold prices regardless of how long it lasts. The price of gold is about 20% higher than it was at the end of last quarter and will equate to higher earnings for this quarter as well as a mark up to physical gold held in reserve. Today the Gold Miners ETF gained more than 3.5% to set a new 9 month intraday and closing high. The indicators have weakened over the past few weeks and recently turned bearish but in light of the uptrend and its relative strength may not be the red flag they would be in a non-trending market. Generally, a decline in indicators of this type while prices remain high is a good sign and setting the ETF up for additional gains. Support is just below $19 with an upside target near $21.


In The News, Story Stocks and Earnings

The Dollar Index fell today on economic data. The data, while promising, was not strong enough to spur FOMC rate hike fears. Fed funds futures now indicate a less than 2% chance there will be a rate hike in March, down 6% from Monday when there was an 8% chance. Based on the information provided by the CME Fed Watch tool there is less than 40% of chance of another rate hike going out until September. December is has the highest probability and that is just over 50%. Expectations for rate hikes in all months have come down drastically over the past 30 days.

With the probability so low I think the only risk for a rising dollar comes with unexpectedly hot data, and the ECB meeting next week. The ECB is expected to do some form of QE'ing next week but will need to at least meet the markets expectations in order to significantly move the euro, and they have a history of doing unexpected things and not exactly matching expectations.


Kroger released earnings this morning before the opening bell and failed to meet expectations. The company beat on the earnings side but revenue fell short, mostly due to low gas prices. Comp store sales ex-fuel rose 3.7%. Guidance may have been what caused investors to sell, 2016 guidance is in line with estimates and only expects to see 3% comp store sales growth. The stock dropped more than 6% pre-opening and then moved lower from there. Shares closed with a loss greater than -7% on more than 3 times average daily volume.


Shares of Barnes & Noble gained nearly 7% today not on good news, but on less-bad news. Earnings, released before the bell, showed revenue in line with expectations with a $0.02 miss on earnings. Earnings of $1.04, while below expectations, are more than 230% better than the same quarter last year and reflect slower declines in Nook use and fewer store closings than expected. Sales were led by strength in adult coloring books, toys and music and helped increase comp sales by 1.3%.


Smith & Wesson reported after the bell. The firearm and outdoor lifestyle company reported earnings and revenue well above estimates and provided next quarter guidance above consensus estimates. The news sent shares shooting higher in after hours trading and temporarily triggered a halt to trading. Shares jumped more than 7% and are now trading at a new high.


The Indices

The entire market moved higher today but the hands down winner was the Dow Jones Transportation Average. The transports gained about 1.15% in a move that extended the break above resistance which began a few days ago. The index appears to be moving higher and this move is confirmed by the indicators which are both moving higher. There may be some resistance near 7,760 but once that is broken next upside target is about 500 points higher near 8,300.


The next biggest gainer, the S& 500, advanced nearly 0.35% and closed at the high of the day. The broad market has broken above the 1980 resistance line, set a new 2 month high and looks like it is going higher. The indicators are both pointing higher, consistent with a rising market, and both are convergent with this new high. Today's action also crossed the 150 day moving average. Next resistance target is near 2,015 -2,020 and may be strong enough to precipitate a pullback or consolidation. First target for support is now 1,980 with next target just below that near 1,965.


The third largest gain was posted by the Dow Jones Industrial Average, about 0.25%. Today's action moved up to the bottom of the long term up trend line and the bottom of the 150 day moving average which could provide enough resistance to pause or reverse the rally. The indicators are bullish and pointing higher so I would expect to see at least a test of resistance if not a break. A break above the trend line could attract new money and help drive the index higher with resistance targets near 17,250 and 17,600. Support target should the index fall from this level is 16,600.


The laggard in today's session was the NASDAQ Composite which gained only about 0.09%. Despite the small gains the index closed at the high of the day and at a new 2 month with bullish and convergent indicators. The index appears to be moving higher with at least a little room to run. Next upside target is near 4,800 with 4,650 as support should it decide to pull back.


The indices are moving higher on what appears to be a run of Goldilocks data and a handful of other positive factors. The data points have all been either better then expected, better than last year or, as in the case of labor, just plain decent while at the same time weak enough to keep rate hikes off the table. On top of this China driven turmoil is absent from the market, oil prices are rising and lifting the oil patch and gold prices are rising and lifting the miners. All in all a perfect storm of positive, if not bullish, factors.

My biggest concern, that of earnings and declining earnings outlook, remains. The good news though is that with oil prices rising the sector with the largest negative impact on earnings outlook should begin to see at least a stabilization of outlook, if not improving outlook. I am bullish but will remain cautious and skeptical while earnings projections continue to decline. When they begin to rise I think it'll be time to get more aggressive.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Electrical Jolt

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market needed a jolt of electricity today to shock it out of its doldrums. This stock would be the perfect one to perform that feat. Emerson Electric is an under the radar company that most traders ignore. It is a stable business with many different segments.


NEW DIRECTIONAL CALL PLAYS


EMR - Emerson Electric -
Company Description

While you may not have heard about Emerson Electric they have 110,800 employees and are involved in many different aspects of the economy. They design and manufacture products and deliver services to industrial, commercial and consumer markets worldwide. They specialize in process management valves, meters, switches, regulators and digital plant applications.

A major segment is providing infrastructure, power, uninterruptible power systems, thermal management equipment and integrated solutions for large datacenters and cloud computing installations. They handle climate control, heating and cooling, electrical control monitoring and management.

They reported earnings for Q4 of 56 cents that beat estimates for 51 cents. Revenue of $4.713 billion beat estimates for $4.642 billion. However, revenue was down -16% because of the recession in the energy sector. The CEO said, "Lower oil prices continued to apply downward pressure on oil and gas spending, particularly upstream projects, as well as power generating alternators used in upstream applications."

Shares declined sharply but began to rebound almost immediately. The company plans to spin off its network power business later this year, which will downsize revenue by about $8 billion. They are restructuring to lower costs until the energy sector recovers and are selling noncore assets to reduce complexity. Investors liked the plans that were presented.

The company also declared a 47.5 cent quarterly dividend which produced a 4% yield at the time it was announced.

Their next earnings are May 3rd.

Emerson has resistance at $50.50 and it broke through that level on Thrusday. The next material resistance would be well above in the $60 range with a speedbump at $52.50. I am recommending we buy the June $52.50 call and plan to exit well before earnings. By purchasing the June call it will still have earnings expectations in the premium when we exit before earnings.

Emerson is somewhat of a slow mover so the options are cheap thereby limiting our risk.

Buy June $52.50 call, currently $1.60, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Trouble Ahead

by Jim Brown

Click here to email Jim Brown

Editors Note:

The morning dip was bought again but this rally is nearing some strong resistance and there could be some serious profit taking soon. The strongest index, the Russell 2000, closed at 1,076 with strong resistance at 1,078. The S&P closed at 1,993 with strong resistance at 1,999. If we do not have some catalyst to produce a big market spike on Friday these resistance levels could be trouble.

The recent gains have been perfectly orchestrated. The morning dips are bought and afternoon buyers return the indexes to positive territory. However, the Nasdaq did not participate on Thursday. The minor 4-point gain on the Nasdaq Composite was better than the -8 point loss on the Nasdaq 100 but both have been near the flat line for the last two days. The Nasdaq rally may have run its course. The 50% retracement level on the Composite was 4,691 and we closed at 4,707. The Nasdaq 100 is only 10 points above its 50% retracement at 4,315. That is still close enough on both to exert influence.

Rather than dump all our positions and be guaranteed of being wrong on direction I tightened some of the stop losses. If we do see some profit taking I am hoping it is not a big swoon to the downside but more of a consolidation in place for a couple days. The market sentiment appears to have turned bullish so I am hoping that holds in the face of weakness.



Current Portfolio




Current Position Changes


CAB - Cabelas

The long call play was opened today at $49.05.


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 is still stuck to that resistance at $55.50 even though there have been three closes over that level. We need to be patient.

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 gain but still a two-month high.

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:

Not a good day with an intraday dip to $31.02. I raised the stop loss to $30.85 just in case the weakness continues.

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 after an ATVI trade at $32.15

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


CAB - Cabellas - Company Description

Comments:

Cabelas peeked over resistance at $48.75 to trigger the position. Shares need to move over $50 to trigger some short covering.

Original Trade Description: March 2nd.

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.

Position 3/3/16 after a CAB trade at $49.05

Long April $50 call, entry $2.07, initial stop loss $45.25


DNKN - Dunkin Brands - Company Description

Comments:

Another small gain but also a new 5-month high.

Target $48.75 to exit.

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:

It was not a good day for EA with a -$1.29 drop to erase Wednesday's gains. Five-day support at $64 held with a gain in the afternoon. I considered raising the stop loss but I am going to give it one more day before deciding.

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:

Dead stop at resistance at $110 but not a big decline. The uptrend is still in place.

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 rocket ride continued with the Russell 2000 up more than 10 points. However, the close at 1,075 is only 3 points from resistance at 1,078. That could be a challenge unless there is some event to cause a market blowout on Friday.

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:

Weak market and Dow stocks were flat. 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:

Very small loss after more than a week of gains. No worries yet. 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:

Outstanding gain after two days of consolidation.

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:

Excellent more with a gain of +$1.71 after they announced the 2016 Indian Springfield touring motorcycle.

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:

Two steps forward, one step back. Minor decline after a spike on Wednesday.

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 days of declines. I raised the stop loss to $57.85 just in case it continues.

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 posted another strong gain to push it within 9 cents of our exit target. Be ready in case we are hit on Friday.

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 closed over $11 but 20 cents off the highs. HPE reported earnings after the bell and HPQ gained 10 cents to $11.21. Maybe HPE will rub off on HPQ on Friday. HPE gained $1 in afterhours.

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 sharply despite a relatively weak day in the markets. It could hit $20 on one really bullish day. The exit target is $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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