Option Investor
Newsletter

Daily Newsletter, Thursday, 3/10/2016

Table of Contents

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

Market Wrap

ECB Fires Both Barrels

by Thomas Hughes

Click here to email Thomas Hughes
The ECB exceeded expectations but may have fired their last shot in the war on sluggish economic growth.

Introduction

The market went on a wild ride today, first up, then down and then up again. Driving today's action was the ECB policy decision, Mario Draghi's comments during the press conference, news out of of OPEC and a wild swing in oil prices.

The ECB exceeded expectations with today's policy announcement but hinted more QE is not to come. The news first sent the euro crashing, then soaring, as traders weigh the effects of the new policy versus comments from Mario Draghi and expectations for the FOMC meeting next week. The news initially sent indices in both the EU and here at home shooting higher until Draghi's comments cooled the market off, and other news from the oil patch sent the oil price plummeting.

The ECB move is seen by many analysts as a last gasp in the stimulus efforts and leaves the bank little room, if any, to do more to spur growth. Today's changes include lowering the refi rate to 0%, the deposit rate to -0.4%, an increase of 20 billion euros to the monthly asset purchase plan and an extension of the QE timeline to March of 2017. Mr. Draghi effectively gave the market what it wanted while negating the effects of it at the same time; you can have your QE but don't expect any more.

Market Statistics

Asian indices ended their day mixed; the Nikkei gained the Chinese markets fell as they awaited the news from Europe. European indices were first flat, then skyrocketed by nearly 4% after the policy announcement only to fall back to break even and lower on nullified expectations of even more QE and falling oil prices. EU markets closed with losses in the range of -2%.

Futures trading on the US indices indicated a flat open for much of the morning until the ECB policy announcement, at which time they gained nearly 1.5%. This held more or less steady until the open despite news from OPEC the March meeting in Russia was likely to be 86'd. The open was positive but action was mild, the indices moved higher in the first 30 minutes but only posted gains in the range of 0.5% versus the gains seen in futures trading.

The morning high was hit shortly after 10AM at which time the bears stepped in and drove the indices lower. The mid day sell off was slow and steady, pushing the indices lower by about -1% at the low of the day. The low was hit shortly after 1PM and was followed by a rally which took the indices back to break even levels by the close of trading.

Economic Calendar

The Economy

Not much economic data today, only the jobless claims, and they were good. Surprisingly the news was largely overlooked by the media in the face of the ECB decision and volatility in the oil patch. Initial claims fell by -18,000 versus an expected drop of only -2,000 to hit 259,000. This is the lowest level in nearly 5 months and very near the long term low set last fall. The four week moving average also fell, by -2,500, to hit its lowest level in 4 months. On a not adjusted basis claims fell by -6.7% versus an expected drop of only -0.1% and are now -10.1% lower than last year at this time. The states with largest increase in claims are New York and California with gains of +17,920 and +4,346. The states with the largest decline in claims are Massachusetts and Michigan with declines of -3,413 and -1,054.


Continuing claims also fell shedding -32,000 to hit 2.225 million. The four week moving average of continuing claims fell -4,500 to hit 2.252 million. Continuing claims are at their lowest level in about 2 months but basically holding steady around the 2.250 million level, as is the moving average. Based on the initial claims data these figures are likely to fall further over the next couple of weeks. Regardless, continuing claims remain stable near the long term lows and consistent with ongoing labor market recovery.

The total number of claims for unemployment benefits rose by +60,535 to hit 2.719 million, the highest level in 4 weeks. This rise remains consistent with historical trends and below the post holiday peak set the first week of January and is -6% lower than this same time last year. Based on the historical trends and the initial and continuing claims data this figure should begin to fall in the next 3-4 weeks.


There is very little data on tap for tomorrow, only the import/export prices figures. Next week is another big week for data and could move the market on a number of levels. The big event will be the FOMC meeting at which, according to the CME's Fed Watch tool, there is 0% expectation for a rate hike. Also on tap next week are reads on CPI and PPI along with retail sales, several reads on the state of manufacturing, business inventories, housing starts and building permits. The overshadowing theme next week will be what the Fed does, what they say about the future and how the data fits into the outlook.

The Oil Index

Oil prices got hit by rumor/news once again. Early trading saw WTI move higher to trade above $38 only to have remarks concerning the March meeting to discuss output caps send prices lower. The latest news is that the meeting between Russia and OPEC at large is likely not going to happen due to Iran's lack of support for output caps. The news sent WTI heading lower, at least during the first half of the day, with intraday losses in the range of -2.5% at the low of day. Support stepped in around $37.50 and sent prices back to break even going into the close of trading. Supply and demand is still out of balance, in the favor of supply, so there is a distinct possibility oil prices could fall further.

The Oil Index fell about -1.5% in the early part of today's session but regained most of the loss by end of day. Today's candle is more of a spinning top than anything else but does help confirm support at or near the 1,050 level. The indicators are convergent with the high set on Monday so I would expect to see this high retested although near term indications are pointing lower. If broken next support is along the 1,025 level, aided by the short term moving average, and may be retested depending on which way the oil news points tomorrow morning. A break below this level could see a retest of 950. Upside will be dependent on the supply/demand outlook, and also upon which way the news is pointing.


The Gold Index

Gold prices got a boost today, not because Draghi increased QE but because of his outlook for more QE. Now that hopes for increasing QE in Europe has been quashed the FOMC and low expectations for US rate hikes are dominating the dollar, sending it lower and helping to boost gold. Spot prices initially dipped on the ECB policy statement then made a $25 turnaround on the press conference for a gain of $15 over yesterdays prices. Gold is now back above $1270 and likely to go higher provided the FOMC remains dovish on rate hike outlook into the end of the year.

The Gold Index rose along with the underlying commodity to gain a little more than 4.5%. The index is approaching the $20.50 resistance level and highs set over the past two weeks but may be halted there. The indicators are a bit mixed, they are pointing lower, but in light of the strong uptrend could just as easily be setting up another entry for bullish positions as indicating reversal. I am still bullish on gold with the caveat that data and the FOMC could pressure it lower. In terms of earnings the miners are expected to see robust increases over the next quarter or so due to higher realized prices and that alone could help support the index. Resistance is near $20.50, first target for support is now near $19 with next target near $18.


In The News, Story Stocks and Earnings

The Dollar Index fell today even though the ECB exceeded market expectations. The driving factor turned out not to be the policy changes or the extent of policy changes but the fact that Mario Draghi has taken further QE off the table. This move firmed the euro which, along with dovish FOMC expectations, weakened the dollar. The index moved up about 1.25% on the policy statement, and then reversed the gains for a loss near -1.25% on the outlook. The DXY set a new one month closing low in today's session with downward pointing indicators and looks set to retest support near $95.50.


Dollar General released earnings before the bell. The discount retailer announced record quarterly and full year results beating top and bottom line estimates. The company guided in-line for the current year and also raised the dividend. The dividend was raised by 14% to $1.00 per share and is part of the company's plan to increase shareholder returns over the next year. In addition to the new dividend execs also announced a roughly $1 billion stock buy back plan for 2016. Results were driven by strength in candy, snacks, perishables and tobacco products. Shares of the stock gapped up at the open and closed with a gain near 9%, setting a new all time high on 3X average daily volume.


Bojangles, maker of delicious spicy fried chicken and biscuits, reported after the bell. The fast food chain reported better than expected top and bottom line results despite a slight miss on comp store sales. Guidance for the coming year is in line with estimates but may be low considering the addition of 16 new stores opened during the past quarter. Shares of the stock traded flat during the day and then popped more than 2.5% in after hours trading.


The Indices

Today's action was wild to say the least. The indices climbed, fell and climbed again driven by ECB policy, Draghi's comments and more rumor from the oil patch. By days end the market was basically flat on the day, led by a small gain in the broad market. The S&P 500 closed with a gain of 0.02% after making a near 2% swing from the high of the day to the low. Today's candle is a doji of significant size that appears to be confirming support at the 1980 level. The indicators remain bullish but continue to weaken so caution is due, especially with next week's big data push and FOMC meeting.


The Dow Jones Industrial Average closed near to flat with a loss of only -0.03%. The blue chips also created a significant looking doji candle but where the S&P action appears to confirm support this one appears to confirm resistance. Today's action tested the underside of my up trend line near the 17,100 level. The indicators remain bullish but are showing nearer term weakness so there could be additional downside, testing of support or consolidation. Support target is near 16,750.


The Dow Jones Transportation Average closed with a loss of -0.14% and created a doji like spinning top candle. Today's action confirms near term support along the 7,500 level and the bottom of a possible consolidation range I mentioned on Monday. This range could hold for the next few trading days at least while we wait on data and the Fed meeting. Upside limit is near the 7,700 level, downside limit appears to be at 7,500. The indicators remain bullish as with the SPX and DJI but also shows nearer term weakness, consistent with Monday's touch to resistance and today's move down to support.


The NASDAQ Composite made the largest decline today, about -0.26%, and created the most bearish looking candle although it too shows a significant amount of lower shadow, indicative of support. Today's action tested support at the 4,600 level and confirmed, closing above 4,650. This index is within a consolidation range, between 4,600 and 4,750, and looks likely to remains so for the next few trading days. The indicators remain bullish but are showing the same near term weakness as the others.


Today's action was wild but all in all I would say is at least promising, if not positive. Neither Draghi's surprising comments or the swing in oil prices was able to derail the market. To me this shows some resilience in the market, in the very least it shows indecision ahead of the Fed meeting and that traders are focused on the FOMC for cues on what to expect moving forward.

For now it appears as if the bounce from February lows remains intact, whether or not that remains true will come down to what happens next week. So long as the data remains in the sweet spot, not too hot and not too cold, the FOMC is likely to keep normalization on hold. This may be enough to keep the market moving higher but that is yet to be seen. Any indication another rate hike will be soon could spook the market.

Oil prices remain a major driver of day to day action in the market as well. If not for the ECB meeting today's news from the oil patch could easily have been the talk of the day and resulted in a much larger swing in oil prices, and the broader market.

I remain bullish for the longer term, into the end of the year and next, but cautious in the near term. The bounce may continue higher but I think the next few days are better for watching the market, and waiting for signals, than entering new positions.

In my opinion it will come down to earnings. Expectations for the coming season remain weak and in decline; that fact alone could easily drive the market back to test longer term, stronger, support levels before any significant move higher is seen. Once we finally exit the earnings recession and expectations begin to brighten I think we will see another extended period of rising stock prices.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Sleeper Stock

by Jim Brown

Click here to email Jim Brown

Editors Note:

There are multiple stocks in the cardboard and packaging sector but International Paper (IP) is the one that gets the most press. Other companies include:

KS - KapStone Paper
GLT - Glatfelter Company
WRK - Westrock Co
GPK - Graphic Packaging
CLW - Clearwater Paper
PKG - Packaging Corporation of America

Packaging Corp appears to be making all the right moves.


NEW DIRECTIONAL CALL PLAYS


PKG - Packaging Corporation of America -
Company Description

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 25th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Buy April $55 call, currently $1.45, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Very Lucky

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow traded in a 309-point range from +130 to -179 and back to flat and only one position was stopped out. That was the Russell 2000 ETF long that was stopped out on the wild swings.

I mentioned earlier in the week that you never know when a post event spike will turn into a sell the news event and today was the day. Draghi's comment in the press conference that he did not expect any further rate cuts triggered a market swoon and the rest is history.

The afternoon rebound is actually positive. Coming back from that big a swing shows that a lot of investors bought the dip. That should put some support under the market for Friday but anything is always possible.

Would you buy this chart?



Current Portfolio




Current Position Changes


DLPH - Delphi Automotive

This position remains unopened until DLPH trades at $72.50.


IWM - Russell 2000 ETF

This position was stopped out when IWM traded at $105.85.


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:

No material move despite the big market swings. AKAM continues to base at resistance at $55.50 and still 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.


AON - AON Plc - Company Description

Comments:

Big spike to $99.50 to open the position but then faded with the market reversal. Now we are ready for a rally.

Original Trade Description: March 9th.

AON offers risk management services, insurance and reinsurance brokerage, human resource consulting and outsourcing services globally with operations in more than 120 countries.

Q4 earnings of $2.09 were up +34%. Revenues of $3.28 billion narrowly missed estimates for $3.33 billion due to the impact of the strong dollar. The dollar reduced earnings by 10 cents. They repurchased 4.2 million shares for $400 million. For the ful lyear free cash flow increased 10% to a record $1.7 billion.

The CEO said in the earnings release "In a year of substantial earnings volatility driven by macroeconomic factors and industry headwinds, investments in our industry leading platform contributed to our strongest rate of organic growth in Risk Solutions since 2007."

Earnings April 29th.

I have wanted to add AON as a position since their post earnings spike in early February but the stock just kept climbing. The last three days provided some consolidation and allowed the call premiums to shrink. I believe AON will continue higher out of this consolidation period to test resistance at $102.50, which would be my exit target.

I want to see a trade at $99.50 to insure we do not enter a new play just as the market rolls over. That is closer to the preferred strike price so the option is going to cost a little more than the price listed below.

Position 3/10/16 with an AON trade at $99.50

Long April $100 call @ $1.70, initial stop loss $97.75


AOS - AO Smith - Company Description

Comments:

AOS rallied in a weak market so it appears the selling fears from Wednesday have passed.

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:

Cabelas ended flat for the day much like the broader market. No change in position.

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:

Today's dip looks a lot like the dip from the 24th where shares were weak for 4 days after a 6 day sprint higher. DLPH has been weak for 4 days after a new 2 month high on the 4th. All of the loss was in the opening drop with the market.

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:

Still holding at support. No change.

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 rebounded off support at $50 to close positive for the day. This could be a good sign.

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 recovered the early morning losses to close at a 2 month high.

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 early morning reversal in the market dropped the IWM to $104.81 and stopped us out at $105.85 for a gain of $1.29. Now the market will probably go straight up.

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

Stopped 3/10/16: Long April $105 call @ $1.91, exit $3.20, +1.29 gain.


JNJ - Johnson & Johnson - Company Description

Comments:

New 15-month high intraday at $107.50. 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:

Minor dip in a weak market to erase some of yesterday's gains. No news.

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:

Minor loss in a weak market. No news.

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:

Early morning dip with the market erased with an afternoon rebound to close positive.

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.


QSR - Restaurant Brands Inc - Company Description

Comments:

QSR spiked to nearly $38.50 at the open again but faded slightly when the Dow rolled over.

The company is presenting at the BAML Consumer and Retail conference on March 15th a 2:40 PM ET.

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.

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:

The VXX traded in a wide range but ended lower after the markets rebounded to the flat line.

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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