Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/8/2016

Table of Contents

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

Market Wrap

China Triggers Profit Taking

by Jim Brown

Click here to email Jim Brown

Terrible economic numbers out of China knocked the Dow for a -152 point loss at the open but the dip buyers were waiting. Unfortunately, for the Russell 2000 the short squeeze in commodities may be over.

Market Statistics

The Dow recovered intraday much like the Asian markets recovered from a huge drop at the open to end only slightly lower. Overnight China reported a 25.4% decline in exports in February, while imports declined -13.8%. Analysts had expected a 12.5% drop in exports compared to an 11.2% decline in January.

According to Reuters, the decline in exports was the steepest since May 2009. China's trade surplus fell to $32.50 billion in February compared to analyst expectations for $50.1 billion.

Analysts blamed the weak numbers on the timing of the Lunar New Year. In 2015, the holiday fell later and that pushed all the pre-holiday orders into February, which saw an unusually large spike in exports of 48.9%. This caused exports to decline -14.6% in March 2015. That means the March 2016 numbers will have a more favorable comparison and should show gains.

Last week China's leaders predicted GDP growth in 2016 of 6.5% to 7.0% and said they were willing to spend more on the economy to boost consumption. The PBOC also cut the reserve rate for the 5th time in a year to boost lending.

The U.S. markets opened lower and the Russell 2000 failed to rebound like the Dow. The Russell had been the strongest index over the last two weeks because of the short covering in oil, commodities, financials and the biotech sector. That all came to an abrupt halt today when oil prices gave back -4.4% or -$1.66 to close at the low for the day.

After the close the API inventory report showed a gain of 4.4 million barrels for the week ended on Friday. Crude prices after the report were flat. Traders are waiting to see if the EIA inventory numbers on Wednesday confirm the rise.


Commodity prices follow oil prices and the entire commodity complex declined today, with the exception of corn and lumber. That meant energy stocks and mining stocks gave back some of the 50% gains over the last week in the most heavily shorted companies.

The biotech sector lost more than 3.75% meaning all the biotech stocks in the Russell also gave back their gains.


Financials gave back -1.6% because the weakness in China should push further Fed rate hikes farther out into the future. Yields on treasuries declined with the yield on the ten-year falling to 1.83% or a -3.7% drop for today. Declines in financial stocks also weighed on the Russell.

Unfortunately, the Russell 2000 is the sentiment index for the broader market. The sharp decline in the Russell helped keep the other indexes in negative territory. The afternoon decline in the Russell blunted the Dow rebound to drag it lower at the close.


There was only one economic report of interest for today. The NFIB Small Business Survey for February declined from 93.9 to 92.9. The headline decline was the least troubling part of the report. In the internals, the employment component declined from 11 to 10 and earnings trends fell from -18 to -21 suggesting competition is heating up or sales are declining. Respondents planning to raise prices fell from 16 to 14 and those planning to raise compensation fell from 15 to 12. Those expecting the economy to improve remained flat at -21 and those expecting sales to rise fell from 3 to zero.

This is a report that reflects the optimism in the small business community and conditions are worsening.

Moody's Chart

There is only one material economic report on the calendar for Wednesday and that is the Wholesale Trade. The big news for the week will come from the ECB on Thursday morning. Expectations are high so there is a strong potential for market disappointment.


Goldman Sachs was active in the market today with multiple calls causing trouble. Goldman said the recent commodity spike was not sustainable. They said the short squeeze in oil was counterproductive and unsustainable. Inventories are still rising and the headline triggered rebound would run its course with oil prices sinking back again. I completely agree and I have said that multiple times in these pages.

Kuwait, an OPEC country that produces 3 million barrels per day said they would only freeze production if all the other major producers cooperate, including Iran. They are not the first to make that claim. That is a problem because Iran has said multiple times they are not going to freeze production and will be adding 700,000 bpd over the rest of 2016.

There was a headline on Monday that Latin American producers were planning to meet on Friday to discuss production levels and that helped boost oil prices on Monday. Since Mexico is the biggest Latin America producer and their production is declining already and their budget is in serious trouble as a result of the oil crash, it is not likely Mexico will agree to anything that costs them more money. However, if your production is already falling then agreeing to a freeze in hopes of lifting prices with a new headline would be a temporary strategy.

Goldman said rising oil prices only delay the inevitable because producers will cling to the lifeline of being able to hedge some production at a higher number but in the short term, the prices will decline. Any material rally would only entice producers to put more rigs back to work to increase production in a market that already has 2 mbpd of excess supply. Nothing good would come of that.

Everyone is producing every barrel they can. North Sea production is now above 2.0 mbpd for the 8th consecutive month and April will likely be a four-year high.

The IEA said demand growth in 2016 is likely to increase by only 80,000 bpd, down from their prior forecast of 110,000. China said vehicle sales in February declined -3.7% and that suggests China's oil demand growth will also slow. On the positive side February imports did rise +19.1% to 8 mbpd as they fill their strategic reserves. However, that 19.1% growth number compares against a holiday impacted February in 2015.

The S&P Oil Exploration ETF declined -8% as sellers raced to take profits on their big gains.


Lumber Liquidators (LL) dropped -15% after hedge fund manager Whitney Tilson said he had renewed his short on the company. Tilson profited from a major short position in early 2015 after he revealed the products LL was importing from China had high levels of cancer causing chemicals. He entered the short around $65 and exited the short in late 2015 at $14. He said today he just reentered the short at $12. He now believes there is a 50:50 chance the company will go bankrupt.

The reason he reentered the short at such a low level was based on a new report by the CDC saying people with these laminate floors from China were three times more likely to get cancer than previously estimated. Tilson said he had information from his "most reliable source" that LL's sales had fallen off a cliff in recent weeks. Tilson said knowing products have formaldehyde is one problem but knowing customers are three times more likely to develop cancer is a business killer. Over one million people have laminate floors from LL.


Dicks Sporting Goods (DKS) reported earnings of $1.13 that missed estimates by 2 cents. Revenue of $2.24 billion also missed estimates for $2.28 billion. Same store sales declined -2.5%. The company guided to full year earnings of $2.85-$3.00 and analysts were expecting $3.23. Same store sales are expected to rise +2%. For Q1 the company expects earnings of 48-50 cents with analysts expecting 54 cents. Dicks said they were hurt by the warm winter as sales of winter clothing slowed. Shares dropped sharply at the open but rebounded to close fractionally positive.

Dicks said they were going to pursue the customers of Sports Authority, which filed bankruptcy last week. The chain said it was planning to close or sell about a third of its 463 stores. Sports Authority was the largest sporting goods retailer several years ago. Dicks said about 100 of its locations overlap with 140 Sports Authority stores. The liquidation sales from those stores will hurt sales at DKS until the other stores close.


Navistar International (NAV) reported a loss of 40 cents compared to expectations for a loss of 77 cents. Revenue of $1.77 billion fell well short of estimates for $2.05 billion. They blamed the weak performance on the weak economy in Brazil and the ending of the Blue Diamond Truck joint venture. That was responsible for 25% of the revenue decline. Navistar guided for full year revenue of $9.0 to $9.5 billion with EBITDA of $600-$650 million. The company reiterated its guidance to be profitable and cash-flow positive by the end of 2016. The company did say demand for commercial trucks was declining.


Chipotle (CMG) cannot catch a break. Four employees at a store in Billerica Mass became ill on the job and the store closed voluntarily to undergo a full sanitation. The company said they do not know what caused the illness but after recent problems, they were taking no chances. Shares declined -$24 in afterhours.


Blue Buffalo (BUFF) reported earnings of 16 cents that beat estimates for 14 cents. Revenue of $265 million beat estimates for $259.8 million. The company guided for the full year for earnings of 72-74 cents on revenue of $1.12-$1.14 billion. Analysts were expecting 70 cents and $1.13 billion. Shares rallied 9% to $21 in afterhours.


Citigroup initiated coverage of Boston Beer (SAM) with a sell rating and price target of $186. The analyst said craft beers are taking market share from the big brewers. This was an echo of what the chairman, Jim Koch, said when they reported earnings a couple weeks ago. He said Boston Beer was losing market share as craft brewers enter the market and existing brewers expand their territories.

CSLA downgraded SAM from outperform to underperform, the same as a sell rating, with a price target of $200. The analyst pointed to "ongoing weakness in its flagship brews." Shares of SAM fell -12% to $175.


JetBlue (JBLU) warned that revenue per available seat mile (RASM) declined by 10% in February and they believe RASM will decline by 7% to 8% for all of Q1. The company said "load factors remain solid but yields are lower." That means the discounting required to fill those seats is taking a toll on profits. JetBlue also said their capacity rose 19.6% over year ago levels.

Southwest Airlines (LUV) said its load factor in February declined from 79.9% to 79.0%. Southwest said capacity rose 14.7% over the same period.

The Dept of Transportation said the average airfare declined -6.2% to $372 and the lowest since 2010. So far in 2016 there have been six attempts to raise fares with the most recent on March 2nd instigated by American on 460,000 routes. On March 3rd, Delta and United had matched the increase but on March 4th, United began rolling them back and by 4:PM all three airlines had cancelled the price hikes.


Autonation (AN) was cut from neutral to sell by Goldman Sachs. The broker said they saw pricing pressure on used vehicles plus limited upside from additional spending on marketing. Shares fell -6% on the downgrade.


Citigroup (C) warned that equity and fixed income revenue would be down -15% in Q1 and that was the good news. They also warned that investment-banking revenue would decline -25%. The CFO announced this at the RBC Capital Markets Financial Conference in New York. JP Morgan warned about similar weakness in trading income a couple weeks ago. It is not going to be a good quarter for the banking sector. Citi shares fell -4%.


Markets

We knew there would be a day of reckoning, we just did not know when. The S&P failed at the 1,999 resistance level for two consecutive days and S&P futures were already weak last night when the news broke about Chinese exports falling 25.4% in February. Futures immediately tumbled into a double-digit decline but improved slightly after the Asian markets recovered from an ugly open.

The Shanghai Composite is down another 2% tonight but the S&P futures are mildly positive. Let's hope that carries over through Wednesday's open.

The S&P declined -22 points to close at 1,979. The closest technical support is the 50% retracement level at 1,963.

Jeffery Gundlach, of DoubleLine Capital, was quoted after the bell as saying that the S&P has 2% risk to the upside and 20% risk to the downside. He said it would be "really dicey" for the Fed to hike rates next week. He also said it would be difficult for oil prices to move over $38. He believes stocks will likely fall but the U.S. will not drift into recession.

Gundlach is very well respected and when he speaks, investors listen. However, I do not see a 20% risk for the S&P from here. I believe we have risk to 1,950 but the double bottom in Jan/Feb at 1,810 is the bottom. That means investors should be looking for a dip to buy.

The dip we got today was meaningful and the S&P closed on the lows. On the way up to 1,999 the S&P created some support in the 1969-1979 range and that is exactly where we stopped at the close at 1,979. While that does not mean we cannot move lower, I believe it would take another catalyst to push us significantly lower. Like China on Monday night, it would have to be something unexpected.

However, the ECB rate decision on Thursday morning is a risk. Mario Draghi has implied additional stimulus too many times to take a pass here. It would be market negative.

I would look to buy a dip on Wednesday if one appears, just in case the ECB does what the market expects and we move higher. If the ECB disappoints I would be looking for a dip to 1,950 to buy. Under 1,950 the next support is 1,927.

Obviously, I would love to see the S&P positive from the open tomorrow and move back up to resistance at 1,999.


The Dow fell -109 points at the close after being down -152 at the open and rebounding to only -8 at 2:PM. The Dow was handicapped by the financials and the energy stocks with oil in crash mode. The index is still stuck to resistance at 17,017 despite the slightly lower close. That level has an attraction for the Dow and I would expect it to gravitate back to that level.

This is the 61% Fib retracement of the January decline and is such an easy target for investors that it is likely to be in play again this week. The 100-day average at 17,044 is also a confusion factor. The Dow is rarely observant of moving averages but it has been for the last six months. Worst-case support is back at 16,179.



The Nasdaq spent six days flirting with resistance at 4,691 before finally crashing away today. The -59 point drop was material but the opposite of yesterday. The FANG stocks all sold off on Monday and they all rallied intraday on Tuesday although Amazon fell $11 right at the close to lose -$2.

The biotech sector was the anchor for the Nasdaq with the $BTK losing -4% for the day. This tanked the Nasdaq and the Russell 2000. The biotechs cannot seem to hold a gain. The resistance at 3,000 on the $BTK was too much to conquer.



Support on the Nasdaq should be around 4,576 or 72 points below where we closed. Resistance remains that 4,691 level where we failed today.


The Russell 2000 was being supported by the short squeeze in energy, financials, commodities and biotechs. All of those sectors were crashing today and that knocked -26 points off the Russell or -2.4%. The Russell has support at the 1,050 level followed by 1,035.


Buy a dip to those support levels I outlined above but I would be cautious about buying a positive open. I find it hard to believe the three weeks of gains were all resolved with only one day of profit taking. I will not complain if the market goes higher but I understand the overbought conditions may not have been resolved.

Beware the ECB announcement on Thursday morning. That could provide a boost or a bust and therefore a potentially pivotal event.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Turnaround Tuesday III

by Jim Brown

Click here to email Jim Brown

Editors Note:

This is the third consecutive Tuesday with a major decline that threw the market outlook into confusion. On both the prior Tuesdays, the decline was resolved with a market rebound although Wednesday the 24th started off with -30 point S&P decline.

Today the S&P futures are fractionally positive but the Chinese markets are worsening as the night progresses.

The S&P failed at resistance on Friday and Monday with a lower high on Monday. Today's decline was sharp but I am not sure it was sharp enough to fully compensate for the three weeks of gains.

I did recommend in my commentary tonight to buy a dip to known support levels but I cautioned about buying a positive market at the open. I would not be surprised to see a positive open that turns negative.

We should only launch new plays when we have a reasonable chance of success. For that reason I am not recommending any new plays tonight.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

That Was Not Fun

by Jim Brown

Click here to email Jim Brown

Editors Note:

We did not have anything stopped out but several plays gave back recent gains. I am really regretting not closing the IWM position last night but in retrospect there was no way to have known that China would tank the market so badly with their economic data.

I still kick myself all the time for not taking quick profits when offered but Peter Lynch always said, "Cut the weeds and let the flowers grow." That meant sell the losers and keep the winners. Many times I have exited positions for what I thought was a great profit and surely the stock cannot go up any more only to have it run for a couple more weeks. I ended up with a fraction of what I could have had with a continued hold. Obviously, there are multiple strategies for dealing with that situation like taking profits on half a position and letting the rest run.

While we were not stopped out on anything there are several positions that are very close. In reality we have had three days of declines because the S&P quit moving higher on Friday. Now we are faced with the age old questions of "higher or lower?" Was this just a one day wonder and tomorrow will begin a uptrend or was this just the first day of a new decline that will take us back to the 1,950 level. Time will tell.



Current Portfolio




Current Position Changes


DLPH - Delphi Automotive

This position remains unopened until DLPH trades at $72.50.


QSR - Restaurant Brands

This position remains unopened until QSR trades at $38.15.


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 sold off with the market but the 75 cent drop was not material. If the market rebounds I would expect Akamai to rebound as well. They are holding their recent gains.

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, See portfolio graphic for stop loss.


AOS - AO Smith - Company Description

Comments:

Minor gain in a weak market so no complaints here.

Target $77.65 for an exit.

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.


CAB - Cabellas - Company Description

Comments:

Only a minor decline of 51 cents. Cabelas is still holding its rebound gains.

Original Trade Description: February 17th.

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, see portfolio graphic for stop loss.


DLPH - Delphi Automotive - Company Description

Comments:

Delphi dropped back to support at $69. The next couple of days will be key for direction.

The position remains unopened until DLPH trades at $72.50.

Original Trade Description: March 5th.

Delphi manufacturers vehicles components and provides electrical and electronic, powertrain and safety technology solutions to the automotive and commercial vehicle markets worldwide. Whether you are buying a new car or repairing an old one the odds are very good you are using Delphi parts.

Vehicle sales in February were 17.54 million units on an annualized basis. As we move farther into spring and summer those numbers are going to rise sharply. Cheap gas means consumers are going to buy more new cars and upgrade their rides to the SUV category when possible.

Delphi reported earnings of $1.39 and beat consensus estimates for $1.37. Revenue of $3.88 billion rose +11% and also beat estimates for $3.79 billion. The company guided for full year earnings of $5.80-$6.10 and revenue of $16.6 to $17.0 billion.

Shares rallied after earnings and broke through resistance at $68 last week to close at $71.53. The next significant resistance is $77.25. Earnings are April 28th.

I am recommending we buy the May $75 calls at $2.40 so there will still be some earnings expectation premium in them when we exit before earnings. April options expire on the 15th so premiums will deflate significantly before we ever get to the earnings event. I am recommending an entry point at $72.50 and just over Friday's high. If the market does take profits early in the week we can lower the strike price and entry target depending on what happens to Delphi shares.

With a DLPH trade at $72.50

Buy May $75 call, currently $2.40, initial stop loss $65.85.


EA - Electronic Arts - Company Description

Comments:

EA skillfully evaded our stop loss at $62.45 for another day with a 63 cent drop. We need a rebound here soon or we will be stopped out.

Target $70.35 for an exit.

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.


EMR - Emerson Electric - Company Description

Comments:

Emerson took two steps back in the weak market. We need a couple more days of gains to get us over the speed bump at $52.50.

Original Trade Description: March 3rd.

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.

Position 3/4/16

Long June $52.50 call, entry $1.60, see portfolio graphic for stop loss.


HPQ - Hewlett Packard - Company Description

Comments:

HPQ lost 26 cents but that is not a material move given the gains over the last two weeks.

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.



IWM - Russell 2000 ETF - ETF Description

Comments:

The Russell collapsed after the short squeeze in oil faded. The biotech sector lost 4% today and the Russell has a lot of biotech stocks. Financials were also weak. The Russell lost -26 points or -2.4%.

I left the IWM position open yesterday because the market dips had been bought over the last couple days. There was no way to anticipate the ugly economic numbers from China overnight. That kicked the profit taking into high gear and we suffered a -$2.63 drop in the IWM.

Obviously, I am wishing I had recommended closing the position at the open today. I did recommend that cautious traders might want to take profits.

Now I am struggling with what to do with this position for Tuesday. They bought the dip in the Dow this morning but the Russell closed on its lows. We still have a gain in the position and I really hate to close it but the trend may have changed since the short squeeze is fading.

I am going to add a stop loss just under the close. If we open higher then we are still in the play. If we open down we will exit with a gain. There was a minor uptick in afterhours trading.

Add a stop loss at $105.85

Original Trade Description: February 25th

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

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

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

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

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


JNJ - Johnson & Johnson - Company Description

Comments:

Minor decline in a weak market. Still holding the gains from the prior three weeks. No news.

I am recommending an exit target at $108.75.

Original Trade Description: February 24th

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:

Still holding its gains but the momentum has faded. Only a minor gain in a weak market.

Target $59.85 for an exit.

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 material decline in a weak market. Good relative strength considering the gains from the last two weeks.

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:

Shares spiked $4 at the open on news they acquired Taylor-Dunn, a leading provider of industrial vehicles, serving a broad range of commercial, manufacturing, warehouse and ground support customers. No financial terms were given. Taylor-Dunn will become a wholly owned subsidiary and maintain its brand and operate from its current headquarters in Anaheim.

If it were not for the weak market I think we would be a lot higher on PII tonight. This is a good deal and expands the Polaris line of business vehicles.

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:

QCOM raised its quarterly dividend by 10% to 53 cents starting with the Q2 payment. However, they received some bad news that smartphone maker ZTE was hit with import restrictions into the U.S. because they had violated the sanctions against Iran. It is not that ZTE sales in the U.S. are such a big risk but analysts are afraid China will retaliate with restrictions on U.S. businesses including Qualcomm.

I raised the stop loss to $51.80 just in case the decline continues.

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.


QSR - Restaurant Brands Inc - Company Description

Comments:

QSR declined slightly with the weak market and possibly with the weak Shake Shack earnings. QSr continued to hold the majority of the gains from the last three weeks so it has good relative strength.

Original Trade Description: March 7th.

QSR is the new name for the Burger King and Tim Hortons brands. Both have been serving customers for more than 50 years. QSR currently operates more than 19,000 restaurants in 100 countries with more than $23 billion in sales. The name change and rebranding came a year ago when Burger King bought the Tim Hortons chain.

QSR has been flying under the radar for the last year with all the news about McDonalds all day breakfast and Starbucks expanded menu. They reported earnings of 35 cents that beat estimates of 31 cents.

Same store sales rose +5.6% at Tim Hortons and 5.4% at Burger King.

Burger King sales are accelerating because of a flood of new menu items. They have Chicken Fries, which are fries dipped in fried chicken batter and fried. They have Jalapeno Chicken Fries. On February 23rd they introduced the Whopper Hot Dog. This is a foot long hotdog flame grilled and served with whatever you want on them.

Burger King received tons of free press when the new hot dog was delivered. Some food aficionados are calling the hot dog a "culinary calamity." Others called is a "disgusting disgrace" but customers are waiting in line to order them.

Franchisees claim the demand has been "overwhelming" and while only a couple weeks old they are selling over 100 a day and rising rapidly as more customers realize they are available. Americans eat more than 20 billion hotdogs a year.

QSR will present at the UBS Global Consumer Conference on March 9th at 2:30 ET.

Earnings are May 27th.

QSR shares are currently $37.85 and a breakout over resistance at $37.65 is in progress. I am recommending we buy the April $39 call, currently $1.10, and plan on exiting at $41 if that higher level of resistance slows the rally.

With a QSR trade at $38.15

Buy April $39 call, currently $1.10, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)


VXX - iPath S&P 500 VIX Futures ETN - ETF Description

Comments:

Market down, VXX up, no big surprise.

Because we are running out of time on the March put, I have 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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