Option Investor
Newsletter

Daily Newsletter, Monday, 3/21/2016

Table of Contents

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

Market Wrap

Market Struggles For Gains

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market struggled for gains this Monday as we wait on the next earnings cycle, and to see which way oil prices are heading. Not much was happening in terms of market moving news today, except a little volatility in the oil patch and a statement from the Fed's Dennis Lockhart. He says the next interest rate hike could come as soon as April; we're closer and closer to full employment with a mid term expectation to hit inflation targets.

While our markets were mostly mixed in today's session, international markets were not. Chinese markets saw big gains driven by newly relaxed margin lending requirements. Margin lending curbs, one of the reasons for China's market melt down last year, have been relaxed by the state run China Securities Finance Corporation which will start offering short term loans to Chinese securities companies. Japan was closed for a holiday. European markets had a seesaw day, first down then up and then down again as oil prices and the news from China wrestled for dominance.

Market Statistics

Futures trading was light in the early morning session. The US indices were indicated to open flat to slightly negative and held steady up to and until the opening bell. There were no economic or market moving earnings releases in the pre-market session to affect trading and even a decline in oil prices had little impact. The open was as expected, flat to mildly negative with a brief test of Friday's closing levels which led to a small pull back during the first few hours of trading.

By noon the early losses were reversed, the indices were back to break even levels and struggling with resistance. The market wrestled with this level for the next hour and by 1PM was breaking out to new highs. Afternoon trading was much the same as the morning, sideways drift, except above break even levels instead of below. No indices made significant gains but gains were made across the board and were held into the close of the day.

Economic Calendar

The Economy

Only one piece of official economic data today, Existing Home Sales, and it was not positive. Existing sales fell -7.1% versus an expected fall of only -2%. The annualized rate is now 5.08 million, down from 5.48 million last month and an expectation for that level to hold fairly steady into this month. Two reasons for the decline are low inventory and rising prices, the median price rose to reach the 2007 high and the highest level since before the housing crunch.

Moody's Survey of Business Confidence declined this week by -0.5%. This is the first decline in 5 weeks but the diffusion index remains near recent lows. According to Mr. Zandi's commentary business sentiment has stabilized since falling off over the winter, expectations for current conditions are the weakest with those for the summer beyond more positive. The US and EU show the brightest expectations while Asia and South American businesses are more negative.


According to FactSet expectations for first quarter 2016 continue to decline. In their statement they say expectations are flat from last week but that means they fell only -0.1% to -8.4%. This is the lowest level of expectations for the first quarter, down from +15% in the middle of last year. Full year 2016 projections also fell, by -0.2%, to -2.5% and the lowest levels we've seen for this figure as well.


Looking further out, to next quarter the 3rd quarter, the 4th quarter and next year changes to expectations are mixed. 2nd quarter projections held steady at -2.2% for the 2nd week running but are at the low of the series. 3rd quarter projections fell -0.2% to 4% and are the low of their series. 4th quarter projections held steady at 9% for the 2nd week, the low of that series. Full year 2017 projections have ticked higher, by 0.1%, and are at the highest level of that series. Looking at them all together it appears as if near term expectations are still weakening, mid term expectations are holding flat and long term expectations are rising.


There is not much on the economic calendar this week. The next major report is the New Homes Sales data on Wednesday, followed by durable good orders and weekly jobless claims on Thursday and then the 3rd estimate for 4th quarter GDP on Friday. Next week however things pick up again, it will be the turn of another month which means monthly job data and a host of other macro economic events.

The Oil Index

Oil prices were a bit volatile today but in the end were mostly steady around $40. Early in the morning saw prices decline bu about 2% on last week's rise in rig counts. The rise breaks nearly 3 months of continuous rig declines but only adds one to the total. Later in the day prices rose by about 2% on a reported draw down at the Cushing storage facility. The draw down, about 560,000 barrels, brings the Cushing supply to about 69.5 million barrles, just shy of 70 million and full capacity at the facility. Neither bit of news is definitive in terms of oil prices or supply/demand outlook which remains biased toward the supply side. Prices may rise further in the near term but the fundamentals remain supportive of lower oil prices so caution is due.

The Oil Index fell about -0.5% in today's session even after oil prices regained their footing. The index created the third of three spinning top candles, at resistance and a two month high. Resistance is near 1115 and if broken would make a 3 month high. The indicators persist in bullishness; momentum continues to rise although the rate of change has fallen off and stochastic is trending in the upper signals zone. Based on these I would expect to see the Oil Index at least test resistance further, a break out may however be dependent on oil prices and/or earnings results for the 1st quarter. The energy sector is expected to post a greater than -90% decline in year over year earnings growth, reason enough to be cautious in this sector over the next month or two.


The Gold Index

Gold prices fell a bit today as the dollar regained some of the ground it lost last week. Aiding this was comments from Lockhart to the effect that an April rate hike was on the table. Lockharts statements are more of the same kind of rhetoric we've been getting all along, neither indicating an official stance nor helping to clarify the situation and only serving to add volatility to an already skittish market. Based on today's home sales data it doesn't look to me like a rate hike is coming next month but we'll have to wait until then to know for sure. In the meantime we have what the FOMC actually did last week, weaken the dollar, and what the ECB did the week before, strengthen to euro, to guide us. In that light it looks like the dollar will remain low or move lower until inflation data is more firmly pointing to FOMC rate hikes which should at least support gold prices near their current levels if not move it higher. Today spot gold fell about -0.75% to trade near $1243.

The gold miners fell in tandem with gold but are also holding near the recent highs. The Gold Miners ETF GDX lost about -1% but remain above the $20 level. The high was driven on a strong wave of momentum but that movement may be coming to an end. Both MACD and stochastic have fallen off since reaching the high, diverging from it, and are now pointing lower. This may not result in a pull back, or a very deep one, but do not support additional upside at this time. If gold prices are able to stage a comeback, move back to their highs or higher, the index will likely follow. If not a correction/profit taking should be expected. Resistance is between $21.00 and $21.50, first target for support is near $19 and the short term moving average.


In The News, Story Stocks and Earnings

The Dollar Index made some small gains from last week's low. The low, driven by dovish fed outlook on inflation targets and the rate hike time line, may hold although I doubt it will not be retested. There is little in the way of economic data this week to provide support or resistance but the outlook, at least for now, is bearish. The indicators are mixed, stochastic is rolling over within the lower signal zone while MACD remains bearish, but are more consistent with a bear market relief rally than not.


Apple was big in the headlines today due to a product release event. The event was rather lack luster in that nothing really new was revealed. They released a smaller version of the iPhone, a cheaper price for the watch, a smaller iPad and a few other non-needle moving items. The news helped to send shares of Apple up to a new 2.5 month high but the lack of a really new and innovative product helped to reverse that gain. By end of day shares of Apple were showing a loss and closed down by about -0.25%.


Starwood Hotels is still in the news as the bidding war to buy the company heats up. The latest development is that Marriot has upped their bid, outbidding Anbang, and is now the superior offer. The newly amended offer values Starwood at $79.53 a share and would deliver $21 and 0.80 shares of Marriot for each share of Starwood. The news sent shares of Starwood up by another 4.25% to trade above $84.


The Indices

Today's action was very lack luster. Action was sideways at best, a little bias to the upside, although gains were made across the board. The biggest gainer was the NASDAQ Composite which posted an increase of only 0.27%. Today's candle is another small white bodied candle, little more than a spinning top, but it did set a new high. The indicators are pointing higher in the near term, momentum is positive and stochastic %K is moving up, although there is growing sign of weakness in the rally. Momentum is fading and stochastic %D is moving lower, both divergent from the new high. The market could continue to move higher on momentum alone, but I think that if a correction begins it could be sharp and fast. Upside target is near 4880 with first target for support near 4750.


The Dow Jones Industrial Average made the 2nd largest gain in today's session, about 0.12%. The blue chips also made a small spinning top type candle and also set a new a new high. The move is driven on a wave of strong momentum that could carry it up to the 18,000 level but like with the techs the move is showing some weakness. MACD momentum, while positive, is slowing and stochastic is showing signs of rolling over, both indicative of potential weakness. If this index should pull back first target for support is near 17,200 and the long term trend line.


The S&P 500 made the third biggest gain in today's session, about 0.08%, and created a small spinning top candle. This index is also riding high on a wave of strong momentum, momentum that could keep carrying it higher, but that momentum is waning with signs of weakness present in the indicators. The index could keep moving higher with targets near 2075 and 2100 but any move beyond that would require a bullish catalyst and I can not think of a possible one at this time. First target for support is near 2025 with next target near 2000 and the short term moving average.


The Dow Jones Transportation Average is today's laggard posting no gain, and no loss, 0.00%. I've been watching the market a long time and this is the only time I can remember in which there was ZERO gain or loss for the day. Today's action created a perfect doji style spinning top with mixed indicators. MACD is pointing higher and on the rise, stochastic is pointing lower and falling beneath the upper signal line; both are diverging from the current high. The index is riding a wave of momentum like the rest of the market that could carry it higher, upside target near 8,350, but this is no time for new positions. Down side target should the index pull back is near 7,700.


Today's action was light and without direction. Following last week's rally this is not to surprising, the market needs time to come to terms with where it is, what is going on and what is expected to happen. Without much in the way of data, earnings or other catalysts there is a good chance that the market could could continue to meander at or near current levels, especially considering that this is a holiday shortened week.

The risk at this time is still the upcoming earnings season. Expectations continue to fall, outlook is the worst it's been for this cycle and for any of the preceding 3 quarters of negative growth, and that could derail the rally. On top of that we have the end of a quarter to contend with. Next week will see the end of the first quarter and could also see some heavy selling as managers seek to lock in whatever gains they have managed to make this quarter and to re-position for the earnings cycle and later in the year.

I remain bullish into the end of the year, earnings are expected to improve in the second half and next year, but am very wary of the market at its current levels and expectant of a correction in the near to short term.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Trendy Becoming Passé

by Jim Brown

Click here to email Jim Brown

Editors Note:

This new arrival on the restaurant scene is losing its luster. Eight insiders sold $30 million in shares last week and full year earnings guidance was weak. Time to dump the SHAK?


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS


SHAK - Shake Shack -
Company Description

Shake Shack owns, operates and licenses Shake Shack restaurants in the U.S. and internationally. The currently operate more than 50 domestic stores and 30 international stores. The stock started off with a bang because the majority of their stores in early 2015 were in the Northeast and traders and investors were familiar with the brand. Shares rocketed to a market cap of about $2 billion despite only having about 50 stores at the time.

After topping out at $97 in May of 2015 shares have fallen to just over $30. The bloom is off the rose and the brand has become just another hamburger stand with plenty of competition from stores like Five Guys, an improved McDonalds, an aggressive Burger King, Jack in the Box with its Qdoba Mexican unit, Good Times, Wendy's, etc.

The reported earnings in early March and shares dropped -17% even though they beat earnings and revenue estimates. The problem came from guidance. They forecast same store sales for all of 2016 of 2.5% to 3.0% growth compared to 13.3% growth in 2015. Analysts have lost the love for the SHAK. There are ten analysts that follow the stock. Only one has a buy rating, 7 have hold ratings and 2 have sell ratings. The consensus price target has declined to about $35, which is where it is trading now.

Even worse eight insiders combined to sell more than $30 million in shares last week with officers and directors dumping a lot of their shares. With a PE of -52 the stock is not growing its fundamentals.

Earnings May 12th.

Buy the May $32.50 put, currently $2.65, initial stop loss $36.75.




In Play Updates and Reviews

Digesting Options

by Jim Brown

Click here to email Jim Brown

Editors Note:

After five weeks of gains the markets barely moved off the flat line on Monday. This was consolidation from the quadruple witching option expiration. Traders dumped stocks they were put and decided what they wanted to do with stock they may have gotten from exercised calls. Post expiration Mondays are rarely directional because traders are cleaning up from the prior option cycle.

Tuesday could be a different story. Since the markets are normally bullish going into the Good Friday holiday we could see a steady creep higher the next couple days. Without a catalyst to move the market I doubt we will see any outstanding gains.

We need the S&P to gain a few more points to trigger our bearish SPY put play. The S&P gained only 2 points on Monday. We need about 3 more SPY points or roughly 30 S&P points to trigger our short position.



Current Portfolio




Current Position Changes


OA - Orbital ATK

The long call position was opened with a trade at $82.80 today.


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:

Still stuck to the $55-$56 resistance. No material move but still creeping higher.

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:

Another three month high on a minor move. We are only $2 away from the exit target.

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.


CRM - SalesForce.com - Company Description

Comments:

CRM cannot free itself from resistance at $72. There could be a short squeeze breakout in the future because lows are rising. No news.

Original Trade Description: March 14th.

Salesforce.com provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide. They provide an entire menu of applications tailored to various industries with an emphasis on sales force automation and customer resource management.

The last six analysts ratings changes have been upgrades with four new analysts initiating coverage with a buy. Salesforce is growing quickly with revenues growing 24% in 2015 to $6.67 billion. Subscription and support revenues rose to $6.21 billion and accounted for 93% of all revenue. These fees continue from quarter to quarter and should continue growing.

Morgan Stanley said customer demand for applications software was expected to remain quite strong and Salesforce.com was positioned to make the most of this development.

The Salesforce.com CEO said sales efforts to enterprise customers were becoming more time consuming because of the greater complexity of the large enterprises but once sold they became very profitable long term assets. Once a large enterprise invests in Salesforce.com and trains its thousands of employees there is a huge inertia factor that prevents them from leaving. That subscription revenue becomes repeatable for a long time.

These longer sales and implementation cycle means that Salesforce.com has a lot of delayed revenue that it will recognize in future quarters in addition to the current revenue for those quarters. This is the equivalent of a snowball rolling down hill. Future revenue is growing even though it is not readily apparent. In Q4, the company reported deferred revenue of $4.29 billion and its unbilled deferred revenue was $7.1 billion.

For Q4 Salesforce reported earnings of 19 cents that matched estimates but revenue of $1.81 billion beat estimates for $1.79 billion. The company guided higher for 2016 and shares rose 8% on the news.

The next earnings are May 18th.

Shares moved sideways from the earnings spike for three weeks and are just now starting to move higher. Given a positive market, I think they will retest the highs in the weeks ahead.

I am recommending the May $75.00 call even though it is a little farther away from the money and slightly more expensive than the April $72.50 call. With only 32 days left in the April cycle we are reaching the point where premium decay will accelerate. If we hit a soft patch in the market the April premiums may not have time to recover. The May premium will cover the earnings on May 18th so when we exit before earnings there will still be some expectation built into the premium.

Position 3/14/16

Long May $75 call @ $2.75. See portfolio graphic for stop loss.


DLPH - Delphi Automotive - Company Description

Comments:

Delphi declined slightly again after the big gains last week.

On Wednesday Wells Fargo named it one of three winners in the move to autonomous emergency braking by all the major auto makers. The other two were Mobileye (MBLY) and Autoliv (LIV).

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.

Position 3/17/16 with a DLPH trade at $72.50

Long May $75 call @ $2.50. See portfolio graphic for stop loss.


EMR - Emerson Electric - Company Description

Comments:

Another encouraging day by EMR with a minor gain to a new 9 month high. I did raise the stop loss to$53.85.

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.


JWN - Nordstrom - Company Description

Comments:

Nordstrom dipped slightly after Piper Jaffray downgraded the retailer from overweight to neutral. We lost a day's gains on the dip.

Original Trade Description: March 17th.

Nordstrom is a fashion specialty retailer offering apparel, shoes, cosmetics and accessories for men, women and children in the U.S. and Canada. They have a growing online presence as well as the Nordstrom Rack discount stores. They have a private label credit card through Nordstrom FSB, a federal savings bank and two Nordstrom Visa car offerings. As of February they operated 323 stores in 39 states in addition to Canada and Puerto Rico. The company was founded in 1901.

This is a really strange bullish recommendation since 61% of analysts (19 out of 31) have a hold rating and three have a sell rating as of February 22nd. So far in March two new analysts have initiated coverage with a sell rating. The consensus price target is $52.75 and shares closed today at $58.22.

Apparently investors are ignoring the analysts ratings because they think they have it wrong. With all of those negative ratings there are probably a lot of shorts that are cussing as each day goes by with another gain.

The analysts with buy ratings claim Nordstrom's mix of brick and mortar stores and online websites as well as their chain of discount and clearance stores will power the earnings higher in the months to come. Cowen & Company said "Going forward, we believe leveraging Nordstrom's unique multi-channel approach should benefit the top-line given that multi-channel customers spend three-to-four times more than other customers." Stifel wrote, "We do believe that Nordstrom is a market share gainer in what will likely prove to be a contracting market for apparel sales. With its best-in-class omnichannel experience, outstanding customer service and compelling merchandise assortments, both broad and deep, we believe Nordstrom can be a winner despite the more challenging environment.

In late February the company reported earnings of $1.17 and revenue of $4.19 billion that missed estimates for $1.22 and revenue of $4.22 billion. However, revenue did increase 5.2% and same store sales rose +1%. They guided for full year 2016 for revenue to rose 3.5% to 5.5% and earnings in the range of $3.10 to $3.35. Analysts were expecting $3.37. Nordstrom said the weak sales were the result of acquisition expenses, the strong dollar deterring tourist sales and the weak holiday season.

Shares fell to $46 on the news. However, that was the bottom and shares have only been down four days since those earnings. The close today at $58.22 was above strong resistance at $57.75. Since then they have declared a quarterly dividend of 37 cents payable on March 22nd to holders on March 7th.

Earnings May 12th.

I am recommending this as a breakout play with today's close over resistance at $57.75 and the next material resistance at $67. However, just to be cautious I am putting an entry trigger on the play at $58.75. I have been burned several times lately by one day wonders that spike slightly over resistance only to fall back again for a week or two.

Position 3/18/16 with a JWN trade at $58.75

Long July $62.50 call @ $1.83, initial stop loss $55.25.


KR - Kroger - Company Description

Comments:

Minor gain with resistance at $38.50 holding for the last six days. No reason to exit yet. We have a July option.

Original Trade Description: March 11th.

Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.

While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.

They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.

Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.

While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.

At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.

Shares declined from $43 in early January to $36 on the Feb-11th crash. This is long-term support and shares were very oversold. In a previous play we bought the dip in February and rode the stock back up to $40.35 and exited before earnings in early March.

In the March earnings Kroger reported earnings of 57 cents compared to estimates for 54 cents. Revenue rose +4% to $26.2 billion and narrowly missed estimates for $26.3 billion. Sales excluding fuel rose +7%. Same store sales rose +3.9% but that was less than the 4.0-4.5% they had predicted in January. Kroger said shifting the Super Bowl into February hurt sales for the quarter ended January 31st. Warmer weather and fewer snow storms also hurt because people stock up on food ahead of storms but shop as normal in regular weather.

The retailer said they expect earnings to rise 6-11% in 2016 to $2.19-$2.28 per share. Same store sales are expected to rise 2.5-3.5%. This is lower than 2015 because of lower inflation.

Investors were not happy with the earnings because most never look at the details and only read the one sentence headline to make their decisions. Shares declined from $40.50 to $36.50 to give us another entry point at support.

I believe Kroger will make a new high this time. Earnings are well out in the distance on June 16th and that will allow us to buy a longer dated option and give it time to mature. Kroger is a slow mover so we need time for it to grow. With support at $36 dating back to the August crash it should be a relatively safe position.

Position 3/14/16:

Long July $40 call @ $1.55, no initial stop loss


N - NetSuite - Company Description

Comments:

Another nice gain after the breakout over resistance on Friday. Now only $1.60 from our exit target. 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


NTAP - NetApp - Company Description

Comments:

Only a minor loss on a downgrade from neutral to underperform by Macquarie. We need that short squeeze breakout soon.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Long May $28 call @ 99 cents, no initial stop loss.


OA - Orbital ATK - Company Description

Comments:

OA spiked at the open to trigger the position and then faded slightly into the close as the Dow gave up some gains. Once it moves over resistance at $82.85 we should be in good shape.

Original Trade Description: March 19th.

Orbital ATK was created in 2015 by the merger of Orbital Sciences and Alliant Techsystems. The company develops and produces aerospace, defense and aviation related products for the U.S. Government, allied nations, prime contractors and other customers in the U.S. and internationally.

The currently have a contract to convert the four segment Space Shuttle Solid Rocket Booster into a five segment booster for the new Space Launch System that will carry astronauts back into space. They are working on a new rocket booster to replace the boosters the U.S. is currently buying from Russia. They also develop satellites for commercial, scientific and security applications. They also produce the Cygnus spacecraft that delivers cargo to the International Space Station and returns with completed experiments.

The Defense Systems Group provides tactical missiles, defense electronics and medium to large caliber ammunition, fuzed warheads, etc. The Flight Systems Group produces the Pegasus, Minotaur and Antares launch vehicles.

One of their newest projects is the Mission Extension Vehicle or "space tug." When an existing satellite develops a problem and engineers believe it can be repaired, the space tug would go get the satellite and push it towards the International Space Station where it can be repaired and the tug would then push it back into orbit where it belongs. Since these satellites cost from hundreds of millions to billions of dollars each, having the capability to repair them would save a lot of money.

Sometimes the satellite has simply been active for so long that its orbit has degraded. The space tug would attach itself to the satellite and then lift it back into an orbit that would give the old satellite several more years of useful life. Then the tug would disconnect and repeat the process with a different satellite. The tug could also push dead satellites into a descending orbit where they will burn up reentering the atmosphere. That would essentially remove the trash from what is becoming an increasingly crowded orbital space. The first space tug is expected to have enough fuel to keep it active for up to 15 years. They plan to launch 5 by 2020 and with dozens of very expensive communication satellites running low on fuel every year, it will be a very profitable venture. Clients are already entering into discussions on how the tug can help their satellites.

These are just some of the hundreds of thing Orbital ATK has in the works. They were also named a subcontractor on Northrop's new $120 billion B-21 stealth bomber program.

In early March Orbital reported earnings of $1.45 that beat estimates for $1.09. Revenue of $1.137 billion beat estimates for $1.11 billion. Order backlogs were over $13.5 billion. They guided for the full year to earnings of $5.25-$5.50. Shares crashed from $87 to $74 the next day after they filed a statement with the SEC saying the financial statements covering the Q2-Q3 in 2015 were not accurate due to an accounting error that occurred when the two companies merged. It was a non-cash error covering long-term contracts that were accounted for using different accounting methods in each company. There was no material impact from the restatement but shares always crash when an "accounting error" is disclosed.

After two weeks, shares began to rise again one the smoke cleared. Shares hit resistance at $82.60 on Friday and pulled back only slightly. I am recommending we buy a breakout over that resistance with a target at $90.

Earnings May 30th.

Position 3/21/16 with an AO trade at $82.80

Long May $85 call @ $2.80, initial stop loss $76.15.


PII - Polaris Industries - Company Description

Comments:

Another 3 month high on a minor gain but we still need to move over $100 soon to stimulate new buying.

Target $105.85 for an exit.

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.


PKG - Packaging Corporation of America - Company Description

Comments:

Biggest gainer of the day with a solid move. No news.

Target $64.25 for an exit.

Original Trade Description: March 7th.

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.

Position 3/11/16:

Long April $55 call @ $2.20, no initial stop loss.


QSR - Restaurant Brands Inc - Company Description

Comments:

Minor retracement from Friday's 5 month closing high. No news.

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.

Position 3/9/16 with a QSR trade at $38.15

Long April $39 call @ $1.15. See portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)


SPY - S&P 500 ETF - ETF Description

Comments:

No daily news until we get closer to the launch point.

Original Trade Description: March 16th.

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

With a SPY trade at $207

Buy June $200 put, estimated premium $4.50, initial stop loss $213.

If the market continues higher I plan on adding to that position at $210.




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