Option Investor
Newsletter

Daily Newsletter, Sunday, 10/11/2015

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

Junk Rally Jolts Market Higher

by James Brown

Click here to email James Brown

Stocks were in rally mode across the globe last week. The bullish reversal the prior Friday, October 2nd, when markets shrugged off the disappointing September jobs number, carried over into Monday. Bearish traders panicked and stocks soared to their best one-week performance in years. Commodities saw their best week since 2012.

Market pundits called it a "junk" rally. The third quarter's worst performers saw the biggest gains. Stocks and sectors that traders hated last quarter were suddenly screaming higher. All of the major U.S. indices posted big gains. Transportation stocks rallied +4.8%. Semiconductor stocks gained +3.4%. Banks were only up +2%. Housing stocks added +3.0%. Biotechs stuck out like a sore thumb with a -2.5% decline for the week. The group has essentially erased its gains for the year.

Energy stocks were some of the best performers thanks to a surge in crude oil. Russia's new involvement in the Syrian conflict boosted the fear premium in oil. Tensions are rising in the region with Russia's new influx of arms, men, and fighter jets. Crude oil rallied to new two-month highs and flirted with a breakout past resistance at $50.00 a barrel. For the week oil was up +8.5% in spite of news that U.S. inventories rose three million barrels on Wednesday.

Oil's big bounce lifted energy stocks up +9% and oil service stocks surged +12.4% for the week. Meanwhile the rig count continues to sink. Baker Hughes publishes a weekly count of active rigs. The latest poll saw rigs drop another -14 to 795 active rigs. That's a 10-year low.

Goldman Sachs said this rally in oil is not going to last. The fundamentals behind oil production have not changed. U.S. production may have dipped from multi-decade highs but the market is still oversupplied and now the oversupply is coming from outside the U.S. OPEC is not helping. The oil cartel is having their own little price war with each other. They keep cutting their prices to try and gain market share.

Economic Data

It was a quiet week for U.S. economic data. The ISM services (non-manufacturing) index fell from 59.0 in August down to 56.9 in September. Estimates were for no change (readers above 50.0 suggest growth). On Friday the Commerce Department reported that wholesale inventories for July were revised down from -0.1% to -0.3% and August inventories only rose +0.1%. That was actually higher than expected. However the inventory to sales ratio rose to 1.31. That means it would take 1.31 months to clear the shelves and it marks the highest level since May 2009. High inventory to sales ratios suggest an unwanted inventory build up, which is negative for the economy.

The biggest economic report for the week was probably the minutes from the September FOMC meeting. All but one member believed that a rate hike this year would still be appropriate. However, many committee participants felt it would still be "prudent" to wait for more data to confirm economic growth. Worries over the tumultuous stock market movement and economic weakness overseas were pivotal in the decision to postpone raising rates for the first time in years. The stock market interpreted the FOMC minutes to mean the Fed is actually unlikely to raise rates this year, especially following the huge miss in the September jobs number, and this view helped fuel additional gains for equities last week.

Overseas Economic Data

Europe

Economic data out of Europe was somewhat bearish. German factory orders for August fell -1.8%. Economists had been expecting a rise of +0.5%. It was the second monthly drop in a row following July's -2.2% decline. Germany's industrial production was also a disappointing -1.2% for the month.

European markets got a boost from dovish comments in the minutes from the last ECB meeting. Members of the European Central Bank suggested the region still has a lot of stimulus that needs to work its way through the system. The ECB has been buying 60 billion euros worth of QE every month since March. Now there are analysts suggesting the ECB may need to boost their stimulus.

Comments from ECB President Mario Draghi support the idea that additional stimulus could be coming. According to Draghi, "In light of renewed risks that have emerged on the bank of recent developments in global and in financial and commodity markets, we are closely monitoring all relevant incoming information." The ECB is "ready to use all the instruments available within our mandate to act, if warranted, in particular by adjusting the size, composition and duration of the asset-purchase program." The next ECB meeting is October 22nd.

While we are on the subject of central bank moves the Bank of England decided to leave their interest rate unchanged at 0.5% and their asset purchase program unchanged at 375 billion pounds. The BoE is worried that inflation is too weak to remove their easy money policy.

Asia

Economic data out of Japan was not very good either. The Leading Economic Index in Japan saw a -1.5% drop in August. That follows a -1.7% decline in July. Japan's core machinery orders for August plunged -5.7% for the month. That was significantly worse than the +3.2% estimate. Core machinery orders are down -3.5% year over year and marked their third monthly decline in a row.

The Bank of Japan met last week and decided to leave policy unchanged. There was growing expectations for Japan to boost their stimulus but the BoJ left their main interest at 0.1%. BoJ Governor Haruhiko Kuroda warned that the slowdown in emerging markets is a headwind for Japanese exports but he still believes that inflation will rise toward his 2% target is energy prices can stabilize.

China remains a huge warning signal for the market and the global economy. The International Monetary Fund (IMF) downgraded their growth estimates on China to +6.2% in 2016. Meanwhile China's slowdown seems to be having a very negative impact on U.S. corporate earnings. Alcoa (AA) warned that auto production and building construction in China was worse than expected Yum Brands (the company that runs Taco Bell, KFC, and Pizza Hut) said they experienced a huge slowdown late in the third quarter. Check out this article from Marketwatch.com on "China is becoming a red flag for U.S. stocks" China story .

It is important to note that the S&P 500 companies only generate 10% of sales from the Asia Pacific region. Most of that 10% is from China and Japan. While that may seem like a low number the region represents one of the biggest growth opportunities. Wall Street is keenly focused on China and its economic health. Later this week we'll hear China's trade data and inflation numbers. The next estimate on Chinese GDP should be October 19th.




Major Indices:

The rebound off the market's late September low has been impressive. The S&P 500 index came within four points of its late August correction low and reversed sharply. Traders are calling it a bullish double bottom. This index is up +7% in the last nine days and definitely looks short-term overbought.

Last week the S&P 500 added more than 63 points or +3.25%. This has narrowed its 2015 loss to -2.1%. The breakout past potential resistance at the 2,000 mark and past the simple 50-dma is encouraging. However, a few market pundits have called this big rally a trap with disappointing Q3 earnings as a potential catalyst to spark the next sell-off.

The S&P 500 has a ton of resistance in the 2,020-2,060 region. That does not mean the rally is over but it does mean the rally could struggle. Keep an eye on the simple 200-dma near 2,060.

5-day chart of the S&P 500 index:

Daily chart of the S&P 500 index:

The NASDAQ composite surged +2.6% for the week. This lifted the index back into positive territory for the year (with a 2015 gain of +2.0%). The rally past 4,800 is encouraging. However, as you can see on the daily chart below, the NASDAQ has stopped right at significant resistance near the declining 50-dma and its trend line of lower highs.

After a +330 point rally from its late September low I would expect a pullback and I'm probably not the only one. That probably means a breakout past this resistance could spark some serious short covering.

The 4,900 and 5,000 area still represents significant resistance.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index ($RUT) added +51 points or +4.6% last week. That boosts the rally from its late September-early October low to +7.8%. That's a pretty big move in just six trading days. I would expect some profit taking.

Optimistically the 1,140-1,150 area might be short-term support but I wouldn't bet on it. The 1,160-to-1,220 area still represents a lot of overhead resistance.

Year to date the $RUT is down -3.3%.

chart of the Russell 2000 index



Economic Data & Event Calendar

The week starts with Columbus Day. The U.S. bond market and most banks will be closed. That could mean light volume for the equity markets. Overall it is a relatively quiet week for data. We'll get both the PPI (wholesale) and CPI (retail) look at inflation in the U.S. The market will also digest the New York and Philly regional Fed surveys. The Beige book will provide a regional look at the U.S. economy. There are four voting members of the Federal Open Market Committee speaking this week. Any one of them could say something that might move the markets.

The biggest "event" is probably the first full week of Q3 earnings season. There are 35 S&P 500 companies reporting earnings this week.

- Monday, October 12 -
Q3 earnings season picks up speed.
Bond market (and most banks) closed for Columbus Day

- Tuesday, October 13 -
Germany ZEW index
Chinese inflation data
Chinese trade data

- Wednesday, October 14 -
Producer Price Index (PPI)
U.S. retail sales (September)
Business inventory data
Federal Reserve Beige Book report

- Thursday, October 15 -
Consumer Price Index (CPI)
New York Empire State manufacturing survey
Philadelphia Fed manufacturing survey

- Friday, October 16 -
Eurozone CPI data
Industrial Production
University of Michigan Consumer Sentiment

Additional dates to be aware of:

Oct. 19th - Chinese GDP estimate
Oct. 22nd - ECB meeting
Oct. 28th - FOMC meeting
Nov. 5th - U.S. debt ceiling deadline
Nov. 18th - $14 billion in U.S. social security payments due
Nov. 26th - Thanksgiving holiday (markets closed)
Dec. 16th - FOMC meeting, new forecast Dec. 16th - Fed Chairman Yellen's press conference
Dec. 24th - Christmas Eve (market closes early)
Dec. 25th - Christmas (market closed)

Looking Ahead:

Rising Geopolitical Risk

Looking ahead we could see the return of geopolitical risk influencing the market. I mentioned earlier that Russia has jumped into the Syrian conflict with both feet. Russia has been a long-time supporter for Syrian President Bashar al-Assad. Russia entered Syria under the pretext of fighting ISIS but most of their targets have been anti-Assad rebels. Russian jets violated Turkish airspace and Turkey warned Russia don't do it again.

How would the markets react if Turkey, a member of NATO, shoots down a Russian military jet? In the mean time France just bombed ISIS targets in Syria and the U.S. is still there (although we don't seem to be accomplishing much). That is a lot of countries flying fighter jets through Syrian airspace. I hope there aren't any mishaps that kick off a larger conflict. We could hear more about Turkey. The just had a horrific terrorist bombing at a peace rally. Turkish officials are blaming ISIS but no confirmation yet on who did it.

On the other side of the world China and U.S. seem to be on a collision course in the Pacific. The U.S. and most of the world has criticized China for months over China's artificial islands. China claims most of the South China Sea as their territorial waters regardless of other countries' claims to the region. To defend these claims China has built up several islands into small military bases with airplane runways.

The United States does not acknowledge China's claims for these international waters and said they will continue to operate wherever international law allows. This has sparked an outrage from Chinese officials who claim they will not allow any country to violate their territorial waters or airspace (within 12 nautical miles of these man-made islands).

An Earnings Recession

The U.S. is poised for +2.5% GDP growth in 2015 and does not seem to be in jeopardy of a recession (two consecutive quarters of negative growth). However, we could see an earnings recession.

At the end of June this year Wall Street was expecting Q3 earnings to be -1.0%. Today analysts are expecting a -5.5% drop in Q3 earnings, which would be the worst quarter in six years. 2015 Q2 earnings for the S&P 500 came in at -0.7%, which was better than the estimated -1.6%. If Q3 earnings are negative it would be the first back-to-back quarterly earnings decline since Q2-Q3 of 2009. Currently Q4 earnings estimates have fallen from +12% to -1%.

The research team at FactSet has outlined which sectors could see the biggest Q3 earnings declines.

Financials earnings estimates have fallen from +10.1% to +4.3%.

Earnings in the materials sector have fallen from -1.5% to -18.5%.

Industrials Q3 earnings have been revised down from +0.1% to -5.7%. Meanwhile energy company earnings have been downgraded from -58.9% to -64.3% (from a year ago).

Revenues are also expected to fall -3.3% from a year ago. This would be the third consecutive quarter in a row of year over year declines, which hasn't happened since 2009. FactSet has a lot of great information on their Q3 earnings outlook. Check it out here (.pdf file).

Investor Sentiment

Investor sentiment has seen some crazy swings lately. Last weekend we noted how bullish and neutral sentiment dropped and bearish sentiment surged +11.2%. It was the biggest one week surge in bearish sentiment since July.

Sentiment has reversed again. Last week's AAII survey showed bearish sentiment falling -11.7% to 28.2%. Neutral sentiment rose +2.3% (to 34.3%) and bullish sentiment surged +9.4% to 37.5%. Even with the big bounce in bullish sentiment it is the 28th week in a row that bulls have been under the long-term average of 38.7%. It has been a record 32 weeks since bulls were above 40%.

Investor Sentiment Survey (AAII)

Source: AAII

Unfortunately there are other signals hinting that investors are losing confidence in the market. NYSE margin debt is plunging. Some have argued that margin debt is falling too fast and suggests it represents a lack of demand for stocks. Another analyst noted that investors dumped money into money market accounts as a temporary safe haven to avoid stocks.

Bloomberg noted that bond investors, typically seen as "smart money", are losing faith, especially in central banks. The International Monetary Fund is also warning that central banks around the world need to be careful. IMF chief Christine Lagarde said that globally central banks have spent $7 trillion in quantitative easing since the 2008-2009 financial crisis and yet the global economy is stuck in a "mediocre" growth pattern.

Central banks are desperate to avoid deflation but after $7 trillion they still can't seem to generate any serious inflation. Last week Lagarde reiterated her request to the Federal Reserve to postpone raising rates for fear of squashing an already fragile global economy. Chicago Federal Reserve Bank President Charles Evans seems to agree. Evans is worried that inflation is still too low and that the Fed should be extra patient before removing stimulus from the system.

Seasonal Weakness

Wow! What happened to the "worst three weeks" of the year? The last two weeks have been up with last week up big. The normal seasonal trend of stocks sinking in the first half of October did not show up. It's possible the big plunge in late August pulled the correction forward.

I would still be cautious. The next few weeks will be flooded with Q3 earnings results but it's the next two weeks that will set the tone for earnings season. I still expect a Q4 rally. Ideally we see a dip in the next two weeks. This would alleviate the short-term overbought conditions and hopefully set a new higher low.

We are quickly approaching the best six months of the year for stocks (November through April). According to the Stock Trader's Almanac, the period from Halloween to Christmas is one of the most consistent winning trades for bulls. This time period has posted gains for the S&P 500 index in 25 of the last 33 years with an average gain of +4.2%. The Dow Industrials do even better with an average gain of +12% over the last twenty years. That could boost the DJIA back above the 18,000 mark by year end.

Another seasonal trend to be aware of is the fiscal year end for mutual funds. October 31st is the end of the fiscal year for most fund managers. The vast majority have underperformed the market this year. There could be a lot of window dressing and performance chasing between now and the end of October. This would suggest that declines going forward might be shallower than normal as active money managers jump in to buy the dip.

~ James





Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

It was another successful week for our watch list. We had three candidates graduate to our active play list. Plus another one just hit our entry trigger on Friday. SBUX will be joining our active trade list on Monday morning.

COST, DHI, and FIS have joined the active play list.

CLX, FB, RCL and V have new stop losses.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a play or option position exited or closed this week.




New Plays

Another Watch List Graduation

by James Brown

Click here to email James Brown


- New Trades -


Starbucks Corp. - SBUX - close: 60.07

Comments:
10/11/15: SBUX was a relatively new addition to the watch list. Our plan was to wait for shares to close above $60.00 and then buy calls the next morning. Shares met that requirement with Friday's close at $60.07. We want to buy calls on Monday morning.

Trade Description: September 20, 2015:
It's time to bring SBUX back to the LEAPStrader newsletter.

Here is an updated trade description on SBUX:

The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. SBUX broke out of that sideways funk after it reported earnings in January 2015.

Five-Year Plan

In late 2014 SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

SBUX continues to serve up strong earnings and revenue growth too. The fourth quarter of 2014 saw a huge jump in SBUX gift cards. One out of every seven Americans received a SBUX gift card. SBUX has been reporting very strong overseas sales growth and consistently healthy same-store sales growth globally.

Shares were very steady performers for much of 2015 and then during the market's correction in late August the stock just collapsed. It was shocking to see SBUX erase six month's worth of gains in just a few days. Of course it bounced back almost as fast. Tonight I want to use SBUX's volatility to our advantage. If the market declines over the next couple of weeks SBUX might be unfairly punished. The $50-52 area should be support. We want to use a buy-the-dip trigger at $52.00.

Wait for SBUX to close above $60.00,
Then buy calls the next morning (no initial stop)

BUY the 2017 Jan $70 call (SBUX170120C70) current ask $2.99

10/12/15 Trade begins
10/09/15 SBUX closed at $60.07, above our suggested entry of a close above $60.00
Option Format: symbol-year-month-day-call-strike

Chart

Current Target: To Be Determined
Current Stop loss: n/a
Play Entered on: 10/12/15
Originally listed on the Watch List: 09/20/15



Play Updates

A Rising Tide

by James Brown

Click here to email James Brown

Editor's Note:

The market's widespread rally last week was a tide that lifted all boats (unless your boat was biotech or AMBA).

COST, DHI, and FIS have graduated to our active play list.


Closed Plays



None. No closed plays this week.




Play Updates


Ambarella, Inc. - AMBA - close: $57.17

Comments:
10/11/15: Concerns over GoPro (GPRO) are killing our AMBA trade. Shares of GPRO were downgraded twice last week and this weighed on AMBA. GPRO is a big customer for AMBA and represents about 30% of sales. If these worries persist we could see shares of AMBA break down to new lows. Shares came close to testing their late September low near $54.00 this past week.

I am not suggesting new positions. We currently do not have a stop loss on this trade but more conservative investors may want to add one near $53.00.

Trade Description: September 8, 2015:
Shares of AMBA have come a long way from its IPO in October 2012 when the stock priced at $6.00 a share, below expectations. Even now, after a minus $55 drop from its 2015 highs the stock is still up +41% for the year.

AMBA is in the technology sector. They're considered part of the semiconductor and semiconductor equipment makers. The company was founded in 2004 and went public in 2012. That price was significantly below where AMBA was expected to price in the $9-11 range. Investor sentiment has definitely changed since then.

The company has grown from making broadcast-class encoders to making consumer and sports cameras, security cameras, and now automotive cameras. Their high-definition chips are being integrated into security IP cameras and wearable cameras. AMBA is also capturing part of a new market - cameras on consumer-level remote control drones.

The last two plus years have seen a strong performance in AMBA with the stock up more than +600% from its IPO price. AMBA has GoPro, Inc. (GPRO) to thank for part of that rally. When GPRO held its IPO last year (2014) it drew attention to AMBA who makes the chips for the video processing in GPRO's cameras. Shares of GPRO saw a huge decline 2014 highs but shares of AMBA have continued to rally.

Part of GPRO's trouble is competition from a large Chinese rival - Xiaomi. GPRO is currently seen as best of breed in the action camera market but it may not hold that spot forever. Xiaomi is selling similar cameras at a significant discount to GPRO and both cameras use AMBA's technology. Both camera makers have different models. GPRO's top of the line still has better components than Xiaomi's - at least for now. The real winner is AMBA since they supply to both companies. Multiple analysts have commented on AMBA's relationship with Xiaomi and believe it will bear significant fruit in the future.

The company has seen tremendous earnings and revenue growth over the last couple of years. Their most recent earnings report was September 1st, 2015. Revenues were up +79% from a year ago to $84.2 million, which was above expectations. The stock sank because management offered soft guidance. When a high-flying, high-valuation stock like AMBA starts to see revenues slow down their valuations collapse.

After a -42% decline from its highs AMBA is probably still has a rich valuation and that's the biggest complaint about the stock price. Shares will likely maintain a high P/E for a long-time as growth will continue. The pullback is most likely a temporary slowdown.

While we are longer-term bullish on AMBA I suspect the sell-off isn't over yet. We want to take advantage of any volatility.

Momentum stocks like AMBA climb and climb and climb and then suddenly reverse. When momentum stocks reverse lower they often fall farther and further than we might normally expect. Today (Sept. 8th) the broader market delivered a widespread rally with the major indices up +2.5%. Yet AMBA lost ground, losing -0.5%. If shares breakdown under short-term support at $70.00 the next support level is probably $60.00.

Tonight I am listing AMBA as an aggressive, higher-risk trade. We want to use a buy-the-dip trigger at $62.00. Options are expensive because AMBA is so volatile. I suggest small positions to limit risk. We are not listing a stop loss at this time and will and one as the trade progresses.

I am listing the 2016 January calls. I'd like to buy the 2017 Januarys but they are very expensive.

Use small positions to limit risk - AMBA is a volatile stock!

- Suggested Positions -
SEP 24, 2015 - entry price on AMBA @ 61.00, option @ 5.40
symbol: AMBA160115C70 2016 JAN $70 call - current bid/ask $3.30/3.90

10/11/15 worries over GPRO are hurting AMBA. Cautious investors may want to add a stop loss.
09/24/15 triggered @ $61.00
09/13/15 adjust the buy-the-dip trigger to $61.00
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: n/a
Play Entered on: 09/24/15
Originally listed on the Watch List: 09/08/15


The Clorox Co. - CLX - close: $120.52

Comments:
10/11/15: CLX continued to show relative strength. The stock has broken through round-number resistance at $120 and closed above its August highs. These are new all-time highs for CLX. The stock is up four weeks in a row so I would not be surprised to see a pullback.

Tonight we are raising the stop loss to $111.85. More conservative investors may want to use a higher stop loss.

Trade Description: September 8, 2015:
Clorox is not just a bleach and cleaners company. They also make food and personal care items. Actually they make a lot more.

CLX is in the consumer goods sector. According to the company, "The Clorox Company is a leading multinational manufacturer and marketer of consumer and professional products with about 7,700 employees worldwide and fiscal year 2014 sales of $5.5 billion. Clorox markets some of the most trusted and recognized consumer brand names, including its namesake bleach and cleaning products; Pine-Sol cleaners; Liquid Plumr clog removers; Poett home care products; Fresh Step cat litter; Glad bags, wraps and containers; Kingsford charcoal; Hidden Valley and KC Masterpiece dressings and sauces; Brita water-filtration products and Burt's Bees natural personal care products. The company also markets brands for professional services, including Clorox Healthcare, HealthLink, Aplicare and Dispatch infection control products for the healthcare industry. More than 80 percent of the company's brands hold the No. 1 or No. 2 market share positions in their categories."

Earnings have been pretty strong when you consider the negative impact of currency fluctuations on a big multi-national like CLX. On February 4th CLX announced its Q2 report and beat Wall Street estimates on both the top and bottom line. Management raised their 2015 guidance and their revenue guidance.

Their Q3 report, on May 1st, was a little bit softer. Earnings of $1.08 per share missed estimates by 2 cents. Revenues were up +2.6% to $1.4 billion but that was above expectations. Management raised their outlook again for their full year 2015 guidance.

Their most recent report was CLX's Q4 results on August 3rd. Earnings of $1.44 per share was seven cents above estimates. Revenues were up +4.0% to $1.56 billion, also better than expected. Management issued soft guidance, below Wall Street estimates, but the stock rallied anyway.

CLX has a strong, long-term up trend. Investors could seek safety in stocks like CLX if the global economy continues to struggle.

The stock market's correction saw CLX plunged back toward technical support near its 200-dma. Now the stock has been consolidating sideways in the $108-112 zone. I'd like to see CLX fill the gap ($112-114) before we launch positions. Therefore the plan is to wait for CLX to close above $114.25 and then buy calls the next morning.

This is a long-term trade. We're using the 2017 calls.

- Suggested Positions -
SEP 22, 2015 - entry price on CLX @ 113.65, option @ 5.25
symbol: CLX170120C125 2017 JAN $125 call - current bid/ask $5.60/7.60

10/11/15 new stop @ 111.85
09/27/15 new stop loss @ 105.85
09/22/15 Trade begins. CLX opens at $113.65
09/21/15 triggered. CLX closed @ $114.47, trigger was a close above $114.25
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 111.85
Play Entered on: 09/22/15
Originally listed on the Watch List: 09/08/15


Costco Wholesale - COST - close: 145.86

Comments:
10/11/15: COST was a popular stock last week with the bulls. Shares rallied more than $8.00 and broke through resistance near its July and August highs. We had COST on our watch list. The plan was to wait for shares to close above $147.60 and then buy calls the next morning. COST closed at $148.07 on October 5th. Our trade opened the next day at $148.15. Now the stock has surged to new six-month highs and looks poised to challenge the all-time high set in February this year.

I am not suggesting new positions at this time. COST looks short-term overbought. Broken resistance in the $147.00 area should be support. Wait for a pullback.

Trade Description: October 4, 2015:
After five years of solid gains the rally in COST peaked in the $155 area in early 2015. The stock has spent the last several months in a massive consolidation that could be coming to an end.

If you're not familiar with COST they are in the services sector. The company runs a membership warehouse business that competes with the likes of Sam's Club (a division of Wal-Mart). According to the company, "Costco currently operates 686 warehouses, including 480 in the United States and Puerto Rico, 89 in Canada, 36 in Mexico, 27 in the United Kingdom, 23 in Japan, 12 in Korea, 11 in Taiwan, seven in Australia and one in Spain. The Company plans to open up to an additional 16 new warehouses (including one relocation to a larger and better-located facility) prior to the end of its fiscal year on August 30, 2015. Costco also operates electronic commerce web sites in the U.S., Canada, the United Kingdom and Mexico."

Revenue growth has been lackluster this year. COST has managed to beat Wall Street estimates on the bottom line but the revenue number has been soft. Their most recent quarterly report was announced on September 29th. Earnings were up +10% from a year ago to $1.73 a share. That beat estimates. Yet COST said their Q4 revenues were virtually flat (+0.7%) to $35.78 billion. That missed expectations. Comparable store sales were up +2% in the U.S. but down -10% in Canada.

A lot of COST's revenue troubles have come from lower oil, which has pushed gas prices lower. The big drop in gas prices cuts their revenue growth. Plus the stronger dollar hurts their foreign sales. The company continues to expand its presence in the U.S. and overseas. Management plans to launch 12 new warehouses this quarter. Overall COST plans to build 32 new stores in the next 12 months, including its first store in France.

The stock looks poised to breakout past its July, August, and September highs and make a run at its 2015 highs. We suspect COST is going to grab more investor attention as we approach the holiday shopping season. The stock tends to see a rally from September into Black Friday (the day after Thanksgiving).

COST has resistance in the $147.00 area. The August intraday high was $147.59 while the August closing high was $146.89. Tonight I am suggesting we wait for COST to close above $147.60 and buy calls the next morning. More conservative traders may want to wait and make sure COST closes above $148.00 instead since a close above this level would generate a new buy signal on the point & figure chart.

- Suggested Positions -
OCT 06, 2015 - entry price on COST @ 148.15, option @ 8.70
symbol: COST170120C160 2017 JAN $160 call - current bid/ask $9.80/10.35

10/06/15 trade begins. COST @ $148.15
10/05/15 triggered. COST @ $148.07, above trigger @ $147.60
Option Format: symbol-year-month-day-call-strike

Chart of COST:

Current Target: To Be Determined
Current Stop loss: 139.75
Play Entered on: 10/06/15
Originally listed on the Watch List: 10/04/15


DR Horton Inc. - DHI - close: 30.65

Comments:
10/11/15: Last weekend we added a secondary trigger to our watch list candidate DHI. The plan was to wait for shares to close above $30.65 and then buy calls. The stock closed at $31.07 last Monday. Our trade opened on Tuesday at $31.15. I would still consider new bullish positions now but more conservative investors might want to wait for DHI to close above last week's high ($31.15) before initiating positions.

FYI: DHI is scheduled to report earnings on November 10th.

Trade Description: September 13, 2015:
Believe it or not but homebuilders have been some of the market's better performers this year. The group is up about 15% year to date. DHI has outperformed its peers with a +24% gain in 2015. The stock is poised to breakout past resistance near $32.00 and hit new multi-year highs.

If the Federal Reserve does announce a rate hike on Thursday it could spark a temporary sell-off in the homebuilders. I want to be ready to buy the dip in DHI. The stock should have support in the $27.00-28.00 area. Tonight I am suggesting a buy-the-dip trigger at $28.50 and we'll list a stop loss at $25.75.

- Suggested Positions -
OCT 06, 2015 - entry price on DHI @ 31.15, option @ 3.70
symbol: DHI170120C35 2017 JAN $35 call - current bid/ask $2.43/3.50

10/06/15 Trade begins. DHI @ $31.15
10/05/15 Triggered. DHI @ $31.07, above $30.65 trigger
10/04/15 Add a second trigger - a close above $30.65 as another entry to buy calls
10/04/15 adjust the buy-the-dip trigger from $28.50 to $27.75 and move the stop loss down to $25.45.
Option Format: symbol-year-month-day-call-strike

Chart

Current Target: To Be Determined
Current Stop loss: 25.45
Play Entered on: 10/06/15
Originally listed on the Watch List: 09/13/15


Facebook, Inc. - FB - close: 93.24

Comments:
10/11/15: Last week's market rally was all about an oversold bounce in the market's worst performers. Strong stocks like FB underperformed but shares still managed another gain. Traders bought the dip midweek near $90.00.

I am not suggesting new positions at this time. Tonight we are adjusting the stop loss up to $83.75.

FYI: FB is scheduled to report earnings on November 4th.

Trade Description: September 13, 2015:
We are bring FB back to the LEAPStrader newsletter. Cross your fingers and hope for a big dip!

Facebook probably needs no introduction. It's the largest social media platform on the planet. The company is quickly approaching 1.5 billion monthly active users. A couple of weeks ago they hit a new milestone - one billion people logged into Facebook in a single day.

The company continues to grow. In addition to their Facebook social media powerhouse they also own Facebook Messenger, WhatsApp, and Instagram. Their WhatsApp product is the largest messaging service on the planet with over 900 million monthly active users. Meanwhile FB's photo-sharing Instagram property has more than 300 million active users. The company has been ramping up their advertising efforts to slowly monetize Instagram. FYI: FB also owns Occulus Rift, the virtual reality company, but it's probably a few more years before VR goes mainstream.

Shares of FB have been incredibly volatile over the last few weeks. After surging to all-time highs in July following its earnings report the stock crashed in August. The market's correction lower sparked some extreme moves in FB with a plunge down to $72.00 on August 24th. This past week FB displayed relative strength and has rallied back above its 50-dma. However, I do not want to chase it here.

FB has already demonstrated that it can be volatile when the market sees big moves. If stocks sell-off on the Fed's decision this week we want to be ready to buy it on weakness. I view the $80-85 region as likely support. Tonight I am suggesting a buy-the-dip trigger at $85.00. If triggered we'll start this play with a stop loss at $79.75.

- Suggested Positions -
SEP 29, 2015 - entry price on FB @ 86.50, option @ 9.25
symbol: FB170120C100 2017 JAN $100 call - current bid/ask $11.60/11.90

10/11/15 new stop @ 83.75
09/29/15 Triggered @ $86.50
09/20/15 adjust the buy-the-dip trigger from $85.00 to $86.50
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 83.75
Play Entered on: 09/29/15
Originally listed on the Watch List: 09/13/15


Fidelity National Info. Svcs. - FIS - close: $70.50

Comments:
10/11/15: FIS' rebound off its late September low continued last week. Shares also garnered some bullish analyst comments. The stock broke through short-term resistance and met our entry point requirement with a close above $71.00. Our trade opened on Friday morning.

Friday saw FIS dip toward $70.00 and start to bounce. I'd watch for another close above $71.00 as our next entry point.

Trade Description: September 8, 2015:
We are adding FIS as a relative strength trade. The stock has been marching higher for years. Shares are outpacing the broader market this year with a +9.0% gain year to date.

FIS is in the technology sector. According to the company, "FIS is a global leader in banking and payments technology as well as consulting and outsourcing solutions. With a long history deeply rooted in the financial services sector, FIS serves more than 14,000 institutions in over 130 countries. Headquartered in Jacksonville, Fla., FIS employs more than 42,000 people worldwide and holds leadership positions in payment processing and banking solutions. Providing software, services and outsourcing of the technology that empowers the financial industry, FIS is a Fortune 500 company and is a member of Standard & Poor’s 500 Index."

FIS just recently announced it was acquiring financial software maker SunGard Data Systems for $9.1 billion in cash and stock. SunGard was about to go public and FIS gobbled them up. The combined company will have $9.2 billion in annual revenues and over 55,000 employees.

The big spike higher on FIS' daily chart was the market's reaction to this acquisition news. Shares of FIS filled the gap during the market's correction lower. Now traders are back to buying FIS. The point & figure chart is bullish and forecasting at $92.00 target.

Tonight I am suggesting we wait for FIS to close above $71.00 and then buy calls the next morning. We will start with a stop loss at $64.75.

- Suggested Positions -
OCT 09, 2015 - entry price on FIS @ 71.26, option @ 2.00
symbol: FIS160115C75 2016 JAN $75 call - current bid/ask $1.20/1.42

10/09/15 trade begins. FIS @ $71.26
10/08/15 triggered. FIS @ $71.30, above $71.00 trigger
Option Format: symbol-year-month-day-call-strike

Chart

Current Target: To Be Determined
Current Stop loss: 64.75
Play Entered on: 10/09/15
Originally listed on the Watch List: 09/08/15



Lions Gate Entertainment - LGF - close: $40.10

Comments:
10/11/15: Early last week stories started to circulate that LGF was in advanced talks to buy (merge) with cable movie channel Starz. Rumors about these two companies getting together have been floating around for months. Wall Street's reaction was positive with shares of LGF surging on the news. The combined company would be a "media powerhouse" according to one analyst that could pursue even more acquisitions. The combined company would have revenues of more than $4 billion.

Shares of LGF are still floating just below resistance in the $40.75 area. I would wait for LGF to close above this level before initiating new bullish positions.

LGF could see a rally ahead of its release of The Hunger Game: Mockingjay, Part 2, which hits theaters on November 4th.

Trade Description: September 8, 2015:
If at first you don't succeed, try, try, try again. We tried trading LGF recently but we were shaken out thanks to the market's late August crash and LGF's spike to 2015 lows. Naturally the stock has recovered and is on the verge of a major breakout past resistance near $39-40.

What follows is an updated version of my original play description:

Have you ever wanted to trade the hype on a particular movie release? We might be able to do just that with LGF.

LGF is in the services sector. According to the company, "Lionsgate is a premier next generation global content leader with a strong and diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution, new channel platforms, video games and international distribution and sales. Lionsgate currently has more than 30 television shows on over 20 different networks spanning its primetime production, distribution and syndication businesses, including such critically-acclaimed hits as the multiple Emmy Award-winning Mad Men and Nurse Jackie, the broadcast network series Nashville, the syndication success The Wendy Williams Show, the hit series Orange is the New Black, the critically-acclaimed drama Manhattan and the breakout series The Royals."

What that company description neglects to mention is the Hunger Games franchise. LGF makes the movies for the extremely popular franchise and the fourth and final movie is due to hit the U.S. market in November this year. Shares of LGF will likely rally into November as hype builds for the "Hunger Games: Mockingjay - Part 2" movie.

LGF is also considered a takeover target. Everyone is scrambling for quality TV programming and LGF has the awards to prove it can deliver. Potential suitors include any of the major media companies. There are rumors that LGF could be a target by someone like AAPL who wants to jump into media creation or possibly NFLX, who just lost LGF's content when they failed to renew their contract with EPIX.

I am suggesting we wait for LGF to close in the $40.00-41.00 range. If shares close in this range then buy calls the next morning. No initial stop loss.

- Suggested Positions -
SEP 18, 2015 - entry price on LGF @ 39.61, option @ 4.50
symbol: LGF170120C45 2017 JAN $45 call - current bid/ask $3.60/4.90

10/11/15 Rumors are growing that LGF is poised to buy Starz
09/18/15 Trade begins. LGF opens at $39.61
09/17/15 LGF closed at $40.06, inside our $40-41 entry range
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: n/a
Play Entered on: 09/18/15
Originally listed on the Watch List: 09/08/15


Royal Caribbean Cruises - RCL - close: 92.50

Comments:
10/11/15: Traders bought the dip in RCL on Wednesday and shares slowly rallied the rest of the week. The stock eked out another gain for the week. The $94.00 level looks like short-term resistance. Tonight I am adding a stop loss at $84.75.

Trade Description: September 20, 2015:
If you are looking for stocks with relative strength then RCL fits the bill. Shares tagged new all-time highs last week and posted their third weekly gain in four weeks.

RCL is in the services sector. According to the company, "Royal Caribbean Cruises Ltd. is a global cruise vacation company that owns Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises, Pullmantur and CDF Croisieres de France, as well as TUI Cruises through a 50 percent joint venture. Together, these six brands operate a combined total of 44 ships with an additional eight under construction contracts, and two under conditional agreements. They operate diverse itineraries around the world that call on approximately 480 destinations on all seven continents."

Barclays just upped their outlook on the cruise liners and believes the group is seeing improved strength in pricing. Meanwhile RCL has been cashing in on the growing trend of Chinese tourism. The recent change in ties between the U.S. and Cuba also represents a new opportunity for the cruise lines.

Technically RCL looks very bullish and the point & figure chart is forecasting at $121.00 target. Yet I don't want to buy it here. The market looks poised for a pullback. We will use a buy-the-dip trigger at $90.00. More conservative investors may want to hold out for a dip to $88.00 instead.

- Suggested Positions -
SEP 28, 2015 - entry price on RCL @ 90.00, option @ 6.30
symbol: RCL170120C110 2017 JAN $110 call - current bid/ask $6.10/6.45

10/11/15 new stop @ 84.75
09/28/15 triggered @ $90.00
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: n/a
Play Entered on: 09/28/15
Originally listed on the Watch List: 09/20/15


Visa Inc. - V - close: 73.98

Comments:
10/11/15: Visa bounced off its 200-dma on October 2nd and hasn't looked back. Shares rallied through resistance in the $71.00-72.00 area and broke out past its 50-dma. Tonight I am adding a stop loss at $66.75, just below its late September low.

Trade Description: August 9, 2015:
The world is moving closer and closer to a cash-less society. Big payment processing companies like Visa and MasterCard will benefit from this transition.

According to the company, "Visa Inc. (NYSE:V) is a global payments technology company that connects consumers, businesses, financial institutions, and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. We operate one of the world's most advanced processing networks - VisaNet - that is capable of handling more than 56,000 transaction messages a second, with fraud protection for consumers and assured payment for merchants. Visa is not a bank and does not issue cards, extend credit or set rates and fees for consumers. Visa's innovations, however, enable its financial institution customers to offer consumers more choices: pay now with debit, pay ahead of time with prepaid or pay later with credit products."

It's important to note that V does not extend credit to consumers. There's no credit risk for bad loans here. V makes money on transactions. That business is booming.

On July 23rd V report its Q3 results, which were $0.74 per share. That beat estimates by 16 cents. Revenues were also higher than expected at $3.52 billion, up +11.5%. Management offered strong guidance and upped their EPS estimates into the mid teen percentage range. Long-term V is expected to grow earnings at almost 15%.

One of the big stories to come out of V's recent earnings report was news of a merger brewing. Visa is talking to former subsidiary Visa Europe. Estimates suggest the price target could be in the $15-20 billion range. Wall Street is positive on the deal and Visa expects it would add to earnings in fiscal 2017.

Another reason to be bullish on Visa is the fact that China recently opened its market to foreign companies to participate in clearing domestic bank card transactions. Previously only Chinese companies could do this. Now giants like V and MasterCard can compete in a market valued at more than $6.8 trillion. Considering V's expertise in this field we should expect them to grab a healthy chunk of the market.

Shares of V recently surged to new all-time highs and traded above $76 per share. After four up weeks in a row V posted a loss last week. Technically it produced a bearish engulfing candlestick reversal pattern on its weekly chart. If shares do correct lower we want to take advantage of the pullback. Broken support near $70.00 should be support. Tonight we are suggesting a buy-the-dip trigger at $70.50.

- Suggested Positions -
AUG 24, 2015 - entry price on V @ 64.16, option @ 2.76
symbol: V170120C80 2017 JAN $80 call - current bid/ask $5.35/5.60

10/11/15 new stop @ 66.75
08/30/15 Remove the stop loss
08/24/15 triggered on gap down at $64.16, suggested entry was a buy-the-dip trigger at $70.50.
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 66.75
Play Entered on: 08/24/15
Originally listed on the Watch List: 08/09/15



Watch

Software, Cereal, and Air Travel

by James Brown

Click here to email James Brown


New Watch List Entries

ADBE - Adobe Systems Inc.

K - Kellogg Co.

LUV - Southwest Airlines


Active Watch List Candidates

AAPL - Apple Inc.

CRM - Salesforce.com

DIS - Walt Disney Co.

HSY - The Hershey Company

OA - Orbital ATK Inc.


Dropped Watch List Entries

COST, DHI, and FIS graduated to our active play list.

SBUX has been moved to the new play section.



New Watch List Candidates:

Adobe System Inc. - ADBE - close: $83.82

Company Info

Back in the old days you used to buy software in a store, bring it home, and install it on to your personal computer. You paid for it. It was your copy to use forever - a perpetual license. Today the business model has changed, especially at ADBE. Nowadays you download the software from the internet to your computer and pay for it on a monthly, subscription basis.

If you're not familiar with ADBE here's a brief company description: "Adobe is changing the world through digital experiences. Content built and optimized with Adobe products is everywhere you look - from websites, video games, and smartphones to televisions, tablets, and beyond. Adobe Creative Cloud software offers the most innovative tools for creating digital media, while Adobe Marketing Cloud delivers groundbreaking solutions for data-driven marketing. Our leadership in these two emerging categories, Digital Media and Digital Marketing, provides our customers with a real competitive advantage, positioning Adobe for continued growth well into the future. As one of the largest software companies in the world, Adobe achieved revenue of more than US$4 billion in 2013."

The company's Q1 earnings report was March 17th. Results were $0.44 a share, which was five cents better than expected. Revenues were up +10.9% to $1.11 billion, also above expectations. The company continues to see success with their subscription model and added 517,000 new creative cloud subscriptions, a +28% improvement from a year ago.

Q2 results came out on June 16th. ADBE beat the bottom line with earnings of $0.48 a share (3 cents above estimates). Revenues were up +8.8% to $1.16 billion, which was in-line with expectations. Management lowered their Q3 and 2015 guidance. This sparked a one-day sell-off that traders quickly used to buy the dip.

The company delivered a similar performance in its fiscal Q3. ADBE reported on September 17th. They beat estimates by four cents. Revenues improved +21% from a year ago to $1.22 billion, slightly ahead of estimates. Yet management lowered their Q4 estimate again. The stock gapped down the next day and then rallied.

This past week ADBE lowered their guidance yet again. This time they adjusted their fiscal 2016 numbers below estimates. What happened? Wall Street defends the stock and shares see a one-day decline. There seems to be a trend of investors buying bad news. It's probably because these are all short-term issues for ADBE and a good chunk of the problem is foreign currency headwinds. ADBE is still forecasting double-digit percentage gains for most of its businesses through 2018. Revenues growth is forecasted to grow +20% while earnings are forecasted to grow +30% over the next few years.

Technically ADBE is still in a long-term up trend in spite of some volatile moves in the last few months. Shares are only a few points away from new all-time highs. The peak is $87.25 set in August this year. Tonight I am suggesting we wait for ADBE to close in the $87.50-89.00 range and buy calls the next morning with a stop loss at $77.85.

Breakout trigger: Wait for a close in the $87.50-89.00 range.
Then buy calls the next morning with a stop loss at $77.85

BUY the 2017 Jan $100 call (ADBE170120C100)

Option Format: symbol-year-month-day-call-strike

Chart of ADBE:

Originally listed on the Watch List: 10/11/15


Kellogg Co. - K - close: $69.44

Company Info

Shares of this giant consumer goods sector company are poised for a massive breakout higher.

If you are not familiar with K, here's a brief description: "At Kellogg Company (NYSE:K), we are driven to enrich and delight the world through foods and brands that matter. With 2014 sales of approximately $14.6 billion, Kellogg is the world's leading cereal company; second largest producer of cookies and crackers; a leading producer of savory snacks; and a leading North American frozen foods company. Every day, our well-loved brands nourish families so they can flourish and thrive. These brands include Kellogg's®, Keebler®, Special K®, Pringles®, Kellogg's Frosted Flakes®, Pop-Tarts®, Kellogg's Corn Flakes®, Rice Krispies®, Kashi®, Cheez-It®, Eggo®, Coco Pops®, Mini-Wheats®, and many more. To learn more about our responsible business leadership, foods that delight and how we strive to make a difference in our communities around the world."

At first glance you would think K's products are on the wrong side of the growing health food trend in the U.S. You would probably be correct. Consumption of breakfast cereals in the United States has been falling for the last five years. However, K is seeing impressive growth overseas, especially in emerging markets.

The downside to all this growth overseas is foreign currency headwinds. Negative FX trends have crimped K's revenue growth all year long. The company expects bearish foreign currency trends to shave off 9 cents a share in 2016 earnings. Fortunately it appears that investors are looking past the currency trouble.

The stock has been consolidating beneath major resistance at the $70.00 level for months. A breakout could spark the next major leg higher. Dividend investors should be drawn to K for its 2.8% yield. The point & figure chart is bullish and forecasting a long-term $92.00 target.

Tonight I am suggesting investors wait for K to close in the $70.25-71.75 range and buy calls the next morning with a stop loss at $64.75.

FYI: K's earnings are coming up on November 3rd. Cautious investors may want to wait and see how the market reacts to K's results before initiating new positions.

Investors should also note that the spreads on the 2017 calls are relatively wide. We may have to hold this trade several months before the spreads contract.

Breakout trigger: Wait for a close in the $70.25-71.75 range.
Then buy calls the next morning with a stop loss at $64.75

BUY the 2017 Jan $75 call (K170120C75)

Option Format: symbol-year-month-day-call-strike

Chart of K:

Originally listed on the Watch List: 10/11/15


Southwest Airlines - LUV - close: $39.94

Company Info

Airlines can be a cutthroat business. Yet LUV has managed to be profitable for 42 years in a row.

LUV is part of the services sector. According to the company, "In its 45th year of service, Dallas-based Southwest Airlines (LUV) continues to differentiate itself from other air carriers with exemplary Customer Service delivered by more than 47,000 Employees to more than 100 million Customers annually. Southwest operates more than 3,600 flights a day, serving 95 destinations across the United States and six additional countries. Southwest service to Belize City, Belize, begins Oct. 15, 2015. Subject to foreign government approval, service to Liberia, Costa Rica, begins Nov. 1, 2015.

Based on the U.S. Department of Transportation's most recent data, Southwest Airlines is the nation's largest carrier in terms of originating domestic passengers boarded. The Company operates the largest fleet of Boeing aircraft in the world, the majority of which are equipped with satellite-based WiFi providing gate-to-gate connectivity while over the United States. That connectivity enables Customers to use their personal devices to access streaming music provided by Apple Music or to view video on-demand movies and television shows, as well as nearly 20 channels of free, live TV compliments of our valued Partners. Southwest is the only major U.S. airline to offer bags fly free® to everyone (first and second checked pieces of luggage, size and weight limits apply, some airlines may allow free checked bags on select routes or for qualified circumstances), and there are no change fees, though fare differences might apply."

2015 has been a relatively challenging year for airline stocks. Investors have been worried that airlines would add too much capacity and thus put pressure on fares. Fares have begun to drop recently but that is more of a reflection in lower fuel prices for airlines thanks to low oil prices.

The third quarter was relatively strong for the industry. Several companies have guided higher. 2015 has not been a great year for airline stocks but it could be a record year for the industry in terms of profits. Domestic airlines are seeing strong free cash flow and they're buying back stock.

After the summer slump shares of LUV appear to have bottomed. Both the industry and Wall Street could be looking ahead to the busy holiday travel season. September was a good month for LUV. The company reported revenue passenger miles were up +11.4% last month.

Meanwhile Wall Street is bullish. The average analyst price target is about $50. Goldman Sachs recently said LUV has +34% upside. If shares of LUV can rally past $41.00 it will generate a new triple-top breakout buy signal on the point & figure chart.

Currently shares are challenging resistance near $40.00 and its simple 200-dma (also near $40). The August high was the $40.85 area. Tonight I am suggesting we wait for LUV to close above $41.00 and then buy calls the next morning with a stop loss at $36.85.

Breakout trigger: Wait for LUV to close above $41.00,
then buy calls the next morning with a stop loss at $36.85

BUY the 2017 Jan $50 call (LUV170120C50)

Option Format: symbol-year-month-day-call-strike

Chart of LUV:

Originally listed on the Watch List: 10/11/15


Active Watch List Candidates:



Apple Inc - AAPL - close: 112.12

Comments:
10/11/15: AAPL delivered a +1.5% gain last week but that actually underperformed the market, which raced past it. Investors could be in a wait and see mood as they sit on the sidelines ahead of AAPL's Q3 report. The company should report on October 27th.

Considering AAPL's underperformance last week we will keep our buy-the-dip trigger at $101.00 for now.

More aggressive investors may want to consider a breakout entry strategy if AAPL can close above resistance near $117.00 or above its simple 200-dma currently at $121.35.

Trade Description: September 13, 2015:
Love it or hate it AAPL always has Wall Street's attention. It has a cult-like following. The company's success has turned AAPL's stock into the biggest big cap in the U.S. markets with a current valuation of more than $651 billion.

The company is involved in multiple industries from hardware, software, and media but it's best known for its consumer electronics. The iPod helped perpetuate the digital music revolution. The iPhone, according to AAPL, is the best smartphone in the world. The iPad helped bring the tablet PC to the mass market. The company makes waves in every industry they touch with a very distinctive brand (iOS, iWork, iLife, iMessage, iCloud, iTunes, etc.) and they've done an amazing job at building an Apple-branded ecosystem. Now they're getting into the electronic payments business with Apple Pay.

Earnings growth has been significant as consumer snapped up the iPhone 6 and 6+. The company expects the iPhone to be a major driver as only 20-25% of their user base has upgraded. This past week AAPL held their annual event in September and introduced several upgrades.

AAPL has unveiled new stuff for their smartwatch, they introduced the iPhone 6s and 6s+, they introduced a new, larger iPad that's being called the iPad Pro. The company also introduced a new Apple TV system. They also unveiled a new leasing program for their iPhones.

Normally consumers buy iPhones through their wireless carrier. This past week AAPL announced a deal where consumers could lease their phone from Apple for $32.00 a month and get a free upgrade every year. For the iPhone fanatics it's probably a great deal.

The 2015 holiday shopping season will be here sooner than you expect and AAPL stands to benefit from their parade of new products announced last week. Yet I don't want to buy AAPL at current levels. Odds are good that stocks could sell-off following the FOMC decision this coming Thursday. We want to take advantage of any temporary weakness in shares of AAPL.

Tonight I am listing a buy-the-dip trigger at $101.00. No initial stop loss but investors might want to consider a stop under the August 24th low ($92.00).

We will re-evaluate our entry strategy next weekend after seeing how the market reacted to the Fed meeting.

Buy-the-dip trigger at $101.00
No stop, initially

BUY the 2017 Jan $120 call (AAPL170120C120)

Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 09/13/15


Salesforce.com - CRM - close: 75.25

Comments:
10/11/15: CRM delivered its fifth weekly gain in a row. Yet shares are still struggling to breakout past resistance at $76.00.

Currently we have two different entry strategies. If stocks retreat we have a buy-the-dip trigger on CRM at $65.25 except I am adjusting that up to $68.00. If CRM continues to rally then we want to buy calls if shares can close above $76.25.

Trade Description: September 20, 2015:
If you're looking for a long-term bullish candidate CRM definitely fits. Founded in 1999 and headquartered in San Francisco the company has become a huge player in the cloud computing industry.

CRM is part of the technology sector. According to the company, "Salesforce is the world's #1 CRM company. Our industry-leading Customer Success Platform has become the world's leading enterprise cloud ecosystem. Industries and companies of all sizes can connect to their customers in a whole new way using the latest innovations in cloud, social, mobile and data science technologies with the Customer Success Platform."

CRM's revenues have been consistently growing in the mid +20% range the last few quarters. Their Q4 revenues were up +26%. Q1 revenues were +23%. The company's most recent quarter was announced August 20th. Analysts were expecting Q2 results of $0.17 a share on revenues of $1.6 billion. CRM beat both estimates with a profit of $0.19 as revenues grew +23.5% to $1.63 billion. Management raised their Q3 and full year 2016 revenue guidance.

Technically the stock is in a long-term up trend and the point & figure chart is forecasting an $85.00 target. Considering where we are on the calendar and the fact that the next three weeks tend to be the worst weeks of the year for stocks, I am suggesting a buy-the-dip trigger. Wait for CRM to dip to $65.25 and then buy calls.

Buy-the-dip trigger: $68.00, initial stop loss $63.75

BUY the 2017 Jan $75 call (CRM170120C75)

- or -

Breakout trigger: Wait for CRM to close above $76.25
Then buy calls the next morning (no stop)

BUY the 2017 Jan $85 call (CRM170120C85)

10/11/15 strategy update: move the buy-the-dip trigger to $68.00 and adjust the stop loss to $63.75
If CRM continues to rally, buy calls if the stock closes above $76.25
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 09/20/15


The Walt Disney Co. - DIS - close: 105.59

Comments:
10/11/15: DIS' participation in the market rally last week lifted shares above resistance at $105.00 and its 50-dma. DIS has yet to breakout past its simple 200-dma (near $106.20).

We do have a deep, buy-the-dip trigger of stocks sell-off hard again. That seems unlikely at the moment. I would focus on our secondary, breakout trigger. If DIS closes above $106.50 we want to buy calls the next morning.

Trade Description: September 27, 2015:
The Force is strong with this one. DIS is poised to reap a galaxy of profits as the company re-launches the Star Wars franchise.

DIS has been a big cap superstar with strong, steady gains off its 2011 lows. That changed in August this year. Shares of DIS plunged into a very sharp and painful correction. The catalyst for the drop was the company's earnings report. Disney reported earnings on August 4th and beat the street with earnings of $1.45 compared to estimates for $1.42. The very next day shares fell -$11.00 to $110. The sell-off accelerated in August thanks to the global market meltdown. Since then shares have recovered.

Disney posted $13.1 billion in revenue compared to estimates for $13.2 billion. That minor miss was not the reason for the huge decline in the stock. Disney said revenues in its cable products rose +5% BUT they had seen some pressure from online streaming. Subscription growth to the ESPN cable bundle had slowed, not declined, just slowed.

There are multiple reasons. There were no major sporting events this summer like the World Cup, Olympics, etc. Some consumers are cutting the cord to cable because they are now getting their TV programming from Netflix, Hulu, etc. Cable is expensive compared to the streaming options. The drop off in ESPN growth is not related specifically to Disney. CEO Bob Iger said subscriptions would pick back up in 2016 and expand sharply in 2017 thanks to a flood of sporting events due to come online next year.

Disney has already purchased the rights to nearly every sporting event available in the next five years but the old contracts with the prior rights holders have yet to expire. As those contracts expire and the new Disney contracts begin the content on ESPN will surge.

(sidenote - The advertising environment for television should also improve in 2016 thanks to the U.S. presidential election.)

This slowdown in ESPN growth should be ignored. This is just a small part of the Disney empire and everything else is growing like crazy. Parks and resorts revenue rose +4%. Consumer products revenue rose +6% thanks to Frozen, Avengers and Star Wars merchandise. The only weak spot was interactive gaming, which declined -$58 million to $208 million. Disney expects that to rebound in Q4 as new games are released and holiday shopping begins.

The real key here is the theme parks, cruises and most of all the movie franchises. They have five Star Wars movies in the pipeline and the one opening this December is expected to gross $2.2 billion and provide Disney with more than $1 billion in profits. This is just one of the blockbusters they have scheduled.

Analysts are claiming Disney shares could add 25% before the end of December because of their strong movie schedule and coming attractions. The Avengers movie in April was a hit and added greatly to their Q2 earnings. However, that will just be a drop in the bucket compared to the money they are going to make on the Star Wars reboot in December. That is the first of five Star Wars movies on the calendar. Remember, Disney now has Marvel, Pixar and Star Wars (Lucasfilm) all under the same roof.

Disney Movie Schedule (partial list)

Dec. 18, 2015 - "Star Wars: Episode VII - The Force Awakens"
2016 - "The Incredibles 2"
2016 - "Frozen" sequel
April 2016 - "Captain America: Civil War"
June 2016 - "Finding Dory"
Dec. 2016 - "Star Wars Anthology: Rogue One"
May 2017 - "Star Wars: Episode VIII"
June 2017 - "Toy Story 4"
Late 2017 - "Thor: Ragnarok"
May 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

Content is still king and DIS rules. They're going to make a hoard of money off their Star Wars movies but that's just the tip of the iceberg. There will be tons of money made on merchandising from toys, clothing, video games, and just about everything else under the sun they can slap a Star Wars logo on.

The stock's correction from $121 to $90 was abrupt. DIS quickly fell from correction territory to bear-market territory in just a few days. Fortunately DIS produced a pretty good rebound. Yet the oversold bounce stalled under resistance near $105 and its 200-dma.

We have two different entry points. We have a buy-the-dip trigger if stocks crash again. We also have a breakout trigger if DIS pushes through resistance.

Wait for DIS to close above $106.50,
Then buy calls the next morning, No stop loss (initially)

BUY the 2017 Jan $120 call (DIS170120C120)

- or -

Buy-the-dip trigger: $91.50
No stop loss (initially)

BUY the 2017 Jan $100 call (DIS170120C100)

10/11/15 updated the trade description
10/04/15 added a breakout entry trigger
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 09/27/15


The Hershey Company - HSY - close: 96.56

Comments:
10/11/15: We had a close call with HSY a couple of days ago. Last weekend we added HSY as a watch list candidate. Our plan is to wait for HSY to close above $97.00 and then buy calls the next morning. On Thursday, October 8th, HSY closed above technical resistance at its simple 200-dma. It also closed exactly at $97.00, not above $97.00. You're probably fine if you bought calls on Friday. However, we are sticking to the plan and waiting for HSY to close above $97.00. More conservative investors might want to wait for HSY to close above Friday's high of $97.40 before initiating positions.

Trade Description: October 4, 2015:
Not many companies make it past 100 years old. HSY is looking good for being 120 years old. The recent action in the stock suggest HSY has found a bottom.

If you are not familiar with HSY here's a description from the company, "The Hershey Company (HSY), headquartered in Hershey, Pa., is a global confectionery leader known for bringing goodness to the world through its chocolate, sweets, mints and other great-tasting snacks. Hershey has approximately 22,000 employees around the world who work every day to deliver delicious, quality products. The company, which has more than 80 brands around the world that drive over $7.4 billion in annual revenues, includes such iconic brand names as Hershey's, Reese's, Hershey's Kisses, Jolly Rancher and Ice Breakers. Hershey is focused on growing its presence in key international markets while continuing to build its competitive advantage in North America. Additionally, Hershey is poised to expand its portfolio into snacking categories beyond confectionery, finding new ways to bring goodness to people everywhere."

Thus far 2015 has been a bit disappointing. On June 19th the company issued an earnings warning and lowered their 2015 guidance below analysts' estimates. On August 7th they reported earnings. EPS beat expectations but revenues missed. Guidance was in-line with the prior lowered forecast. The stock dropped on both occasions but the sell-off didn't get very far before investors bought the dip in HSY. On the plus side HSY said their gross margins are improving.

HSY has a large, relatively safe domestic business in the U.S. The Q4 should be positive given all the holidays. HSY should see a seasonal uptick in sales. The company is also trying to expand overseas with a focus on China. Their recent acquisition in China has been fraught with troubles but expectations have already been reduced. The Chinese business disappointment has already been priced into HSY's stock price.

Wall Street opinion is mixed. Analysts are forecasting five-year earnings growth of +8% for HSY. JP Morgan seems optimistic since they just upgraded the stock and their price target. The point & figure chart is bullish and forecasting at $104.00 target. I think HSY can go a lot higher.

HSY saw a slow and steady correction from its all-time highs near $110 set in January this year. Shares have been building a base in the $87-94 range for months. Currently HSY appears to have major resistance in the $94-96 area but a breakout would signal the next leg higher. Tonight I am suggesting investors wait for HSY to close above $97.00 and then buy calls the next morning.

Wait for HSY to close above $97.00,
then buy calls the next morning (stop loss at $89.75)

BUY the 2017 Jan $110 call (HSY170120C110)

10/08/15 HSY closed @ $97.00, not above $97.00
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 10/04/15


Orbital ATK, Inc. - OA - close: $78.78

Comments:
10/11/15: Our patience with OA just might pay off. The stock has produced a very strong bounce off its 200-dma (tagged in late September). Now shares are showing relative strength and look poised to challenge their highs from August.

Currently our suggested entry point is a close in the $81.00-83.00 range.

Trade Description: September 8, 2015:
If you read the news it seems like the world is an increasingly dangerous place to live. Defense companies like OA are seeing their business strengthen.

OA is part of the industrial goods sector. According to the company, "Orbital ATK is a global leader in aerospace and defense technologies. The company designs, builds and delivers space, defense and aviation systems for customers around the world, both as a prime contractor and merchant supplier. Its main products include launch vehicles and related propulsion systems; missile products, subsystems and defense electronics; precision weapons, armament systems and ammunition; satellites and associated space components and services; and advanced aerospace structures. Headquartered in Dulles, Virginia, Orbital ATK employs more than 12,000 people in 18 states across the United States and in several international locations."

Their most recent earnings report was August 6th. OA reported its Q2 results of $1.28 per share. That is +16% improvement from a year ago and 26 cents above estimates. Revenues were up +7% to $1.13 billion, also better than expected.

David W. Thompson, Orbital ATK's President and Chief Executive Officer, commented on his company's results, "Orbital ATK reported excellent second quarter financial results characterized by better-than-expected revenue and very strong earnings. These results benefited from outstanding new orders, as well as continued solid operational execution on our major programs. As a result, we are increasing the company's outlook for sales and earnings this year and expanding our previously-announced capital deployment program as well.

Management raised their full year 2016 earnings to $4.60-4.80 a share and forecasted revenues in the $4.425-4.50 billion range. This is above Wall Street estimates of $4.51 a share on revenues of $4.41 billion.

Argus upgraded the stock and boosted their OA price target to $95.00. A Goldman Sachs analyst also upgraded the stock. Goldman said OA has "multiple unique exposures to drive faster than average 3-year growth."

The sell-off during the market's crash on August 24th was ridiculous. OA plunged from $75 to $56 in the blink of an eye and has since recovered. Moves like that are more than a little unnerving. Investors may want to use small positions to limit risk. The August peak was about $81.00. I am suggesting we wait for OA to close in the $81.00-83.00 range and then buy calls the next morning. No initial stop on this trade.

Technically this isn't a LEAPS trade. OA doesn't have LEAPS. We are choosing the 2016 February calls (you may want to consider May 2016s).

Breakout trigger: Wait for OA to close in the $81.00-83.00 range
Then buy calls.

BUY the 2016 Feb. $85 call (OA160219C85)

Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 09/08/15