Option Investor
Newsletter

Daily Newsletter, Monday, 1/4/2016

Table of Contents

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

Leaps Trader Commentary

Investors Cautious Heading Into 2016

by James Brown

Click here to email James Brown

Stocks ended 2015 with a whimper. It was another holiday-shortened week and traders were in a selling mood the last couple of sessions. The prior week stocks were up +2.5%. Last week they reversed lower with -0.8% declines among the big caps and -1.6% declines for the small caps. All of the major U.S. indices posted declines in 2015 with the exception of the NASDAQ composite.

The pullback last week was relatively widespread. Transportation stocks lost -1.5%. Semiconductor stocks fell -1.6%. Banks slipped -1.4%. Housing stocks were down -1.3%. Crude oil continues to be a market mover and oil bounced +1.5% on Friday but still posted a -2.75% decline for the week. Oil closed at $37.13 a barrel. The weakness in crude fueled a -3.0% plunge in oil stocks.

Market Drivers in 2015

There were a lot of big stories in 2015. The U.S. Federal Reserve's decision to raise rates was one of the biggest. All year long the Fed kept threatening to raise rates. They finally did so, after years of keeping the fed funds rate near zero, the Fed raised rates in December by 25 basis points (to the 0.25-0.50% range). The funny thing is that the Fed promised their decision to raise rates would be data dependent. They raised rates in December as economic data was declining and the U.S. manufacturing sector is in recession and corporate earnings are falling. Current forecast suggest U.S. GDP only grew +1.3% in Q4 while inflation is virtually nonexistent in the U.S. The data doesn't support a fed rate hike but they did it anyway.

Central banks around the world were definitely market movers. Japan continues with their massive QE program as they desperately try to jump start their economy and fight off deflation. Meanwhile Europe is showing signs of improvement after the European Central Bank launched their version of QE in early 2015. China's government has also been very active as they try to prevent their economy from crashing. Chinese growth is down to the slowest pace in years even after the government devalued their currency twice and is actively trying to stimulate growth.

Crude oil was another major story for the market in 2015. Crude oil fell -32% in 2015. That followed a -47% drop in 2014. This pressured energy-related stocks lower with the group down -23% for the year. For a good portion of 2015 the slide in oil was an industry-specific problem. Eventually it started affecting the whole market. It got to the point that if oil was down then stocks were down. The impact of low oil prices drove significant volatility in the high-yield debt markets, which crashed to five-year lows.

Of course it wasn't all bad news in 2015. There was massive levels of corporate stock buy backs. Plus it was a record-breaking year for M&A deals. Yet overall it was a tough market to trade. Fund managers had their worst year in nearly two decades with 77% of funds missing their benchmarks.

Market Performance in 2015

The sell-off in the last two days of 2015 left the S&P 500 with a -0.73% decline for the year. That is excluding dividends. The S&P 500 has a yield around 2.0% so with dividends it was the seventh year in a row with gains. Excluding dividends it was the first down year since 2011. It was also one of the flattest.

The S&P 500's -0.7% decline in 2015 is only one of four times in the history of the index where it closed the year with a change of 1% or less. The most recent incident was 2011 where the S&P 500 lost a miniscule -0.002%. The most memorable decline in recent memory was 2008 where the S&P 500 fell -38.5%. Here's an interesting tidbit, for the last 140 years, the stock market always posted a gain in years that ended in "5". 2015 broke that trend. There is some good news - we haven't seen back-to-back annual losses since 1981 and most analysts are optimistic for 2016.

Here's a quick recap of 2015's performance:

S&P 500 = -0.73%
NASDAQ composite = +5.7%
Russell 2000 = -5.7%

S&P midcap = -3.7%
S&P small cap = -3.3%

NYSE biotech index = +10.9%
Consumer discretionary = +8.4%
Basic Material stocks = -10.0%
KBW Bank index = -1.59%
Energy stocks = -23%

Throughout the year there were constant complaints about the lack of leadership and how narrow the rally was. Five stocks accounted for a large chunk of the NASDAQ's gains. The large cap NASDAQ 100 index ended 2015 with a +8.4% gain. That was thanks to the F.A.N.G. stocks. These are Facebook (FB), Amazon.com (AMZN), Netflix (NFLX), and Alphabet (Google's parent company, GOOGL).

Facebook (FB) = +33%
Amazon.com (AMZN) = +118%
Netflix (NFLX) = +132%
Alphabet/Google (GOOGL) = +46%

Interestingly, the most widely followed stock in the world, and the biggest by market cap, Apple Inc (AAPL) did not have a good year. AAPL closed down -4.6% year to date and is down -21% from its 2015 high (bear-market territory).

Asian and European markets fared better than the United States.

France (CAC40) = +8.5%
Germany (DAX) = +9.5%
Japan (NIKKEI) = +9.0%
China (Shanghai) = +9.4%
It's worth noting that China was up +50% earlier in the year.

Emerging markets fell -17% in 2015.
The MSCI All-World index lost -4.2%

The U.S. bond market saw a minor loss. The yield on the 10-year note rose from 2.17% to 2.269% by the end of 2015. (FYI: the German 10-year bond yields 0.6% and the Japanese 10-year note yields 0.26%)

Economic Data

It was a quiet week for economic data. Consumer Confidence for December improved from 90.4 to 96.5. That was better than expected and snapped a three-month decline. The Case-Shiller 20-city home price index rose +5.5% in October. That's on top of the +5.5% gain the prior month.

Unfortunately the Midwest region is not looking so hot. The Chicago-region Purchasing Managers' Index (PMI) dropped from 48.7 in November to 42.9 in December. Economists were expecting a rose to 50.0. Numbers below 50.0 suggest economic contract and December was the lowest reading since summer 2009.

Overseas Economic Data

There wasn't much data from Europe last week. Spain reported their consumer price index (CPI) for December fell -0.3%. That was worse than expected. Year over year their CPI is flat (0.0%). They would like to see inflation in the 2% region. Italy reported their producer price index (PPI), which is a wholesale-level inflation gauge, fell -0.5% in November. That's down -3.3% from a year ago.

Japan released lot of numbers before the yearend. Their national CPI for November was up +0.3%. Household spending fell -2.2%, which helped account for the -1.0% drop in retail sales in November. Meanwhile Japan's unemployment rate rose from 3.1% to 3.3% in November, which was slightly worse than expected. The country's industrial production for November dropped -1.0%.

China continues to see slower economic growth. Industrial profits for November dropped -1.4% and marked the sixth monthly decline in a row. This weekend the country's official manufacturing Purchasing Managers' Index rose from 49.6 in November to 49.7 in December. It was the fifth month in a row this was below the 50.0 mark, which separates growth from contraction.




Major Indices:

The S&P 500's -0.7% decline last week left the big cap index beneath its 50-dma, under its 200-dma, and below potential support at 2,050. Last week's performance also generated another lower high. If the recent trend is any guide then we could see the S&P 500 drop back toward the 2,000 area. Actually it could go lower if it's building a bull-flag consolidation pattern (see chart).

Daily chart of the S&P 500 index:
%IMG1%

Weekly chart of the S&P 500 index:
%IMG2%

Monthly chart of the S&P 500 index:
%IMG3%

The NASDAQ composite lost -0.8% last week. That shaved its 2015 gains to +5.7%. It has also produced another lower high. However, you can also see on the daily chart that the NASDAQ still has a bullish trend of higher lows. It's currently testing support near this trend line and the 5,000 area (also bolstered by its 200-dma). A bounce from here would be encouraging. A breakdown probably means it will retest support near 4,900 and likely lower. You could argue the NASDAQ has built a bearish head-and-shoulders pattern over the last couple of months. Keep an eye on the neckline.

chart of the NASDAQ Composite index:
%IMG4%

Weekly chart of the NASDAQ Composite index:
%IMG5%

The small cap Russell 2000 index underperformed last week with a -1.6% decline. The index is down -5.7% for the year. You can see on the weekly chart that it has clearly broken its long-term up trend. The daily chart is not any better and it looks like the $RUT is building a bear-flag consolidation pattern. If the sell-off continues I would not be surprised to see the $RUT retest its lows near 1,080.

chart of the Russell 2000 index
%IMG6%

Weekly chart of the Russell 2000 index
%IMG7%



Economic Data & Event Calendar

It's a very busy week for economic data. It's the beginning of the month and investors will be eager for clues on the fourth quarter. The ISM, out on Monday, will likely show a contracting U.S. manufacturing sector. The ADP Employment report is expecting a decline from +217,000 private sector jobs to +190,000 in December. This sets up for the jobs report on Friday where analysts are forecasting +200,000 new jobs. The unemployment rate is expected to remain unchanged at 5%, a seven-year low.

The Federal Reserve will release the minutes from their pivotal FOMC meeting on December 15-16th. Wall Street will be gleaning it for clues on the Fed's pace to raise interest rates in 2016. The are multiple Federal Reserve presidents speaking throughout the week and you never know when one of them might say something market-moving.

It's also worth mentioning that CES will likely make headlines later in the week. The annual Consumer Electronics Show (CES) takes place from January 6-9th in Las Vegas. Over 170,000 people will attend.

- Monday, January 04 -
Caixin China manufacturing PMI
Germany CPI
Eurozone PMI
Construction spending
ISM index
U.S. Markit manufacturing PMI data

- Tuesday, January 05 -
German unemployment
Auto & Truck sales

- Wednesday, January 06 -
Eurozone services PMI
ADP Employment Change Report
Factory Orders
ISM Services index
FOMC minutes from December 15-16th meeting

- Thursday, January 07 -
Eurozone unemployment rate

- Friday, January 08 -
German industrial production
Nonfarm payrolls (jobs) report for December
Unemployment Rate
Wholesale inventory data

Additional dates to be aware of:

Jan 18th - Martin Luther king, Jr. Day (markets closed)
Jan 27th - FOMC policy update
Feb 15th - Presidents Day (markets closed)
Mar 16th - FOMC meeting, updated forecasts
Mar 16th - Fed Chairman Yellen's press conference
Mar 25th - Good Friday (markets closed)

Looking Ahead:

The week ahead launches a brand new year of trading. Everyone is out with their forecasts for 2016. After a frustrating and flat 2015 most market pundits are feeling optimistic for 2016. Multiple analysts are predicting +8%-10% gains in the year ahead. However, there are several warning that the second half of 2016 could sour. They're still forecasting gains but the impact of the 2016 presidential election could influence investor sentiment.

If you were sick of hearing about the Federal Reserve and their plans for interest rates in 2015 then I have bad news for you. The Fed will remain a major story in 2016 and the focus will move from if the Fed raises rates to how fast the Fed raises rates. There are some market veterans that believe the Fed may have to reverse course and cut rates again if the U.S. economy slows down too fast in 2016.

Stories to Watch in 2016

I've already mentioned the Federal Reserve. A lot of investors believe that European stocks will continue to outperform the U.S. this year. The Fed plans to raise rates while the ECB is still in the middle of its QE program, which it just extended recently. Investors (and thus stocks) love QE.

Iran's nuclear program could be a major story in 2016. The country continues to defy the U.N. and the West on developing its missile program and its nuclear capabilities.

The Syrian conflict will remain a major story. It will be interesting to see if Russia continues to defend Syrian President Assad. The current Syrian migration into Europe and the U.S. will make headlines.

The Islamic State (ISIS) will continue to export terror around the world. It's only a matter of time before another Paris-style terrorist attack hits another major metropolitan area. Terrorism will be a major story both around the world and for the U.S. 2016 presidential race. The threat of terrorism could also have an impact on the 2016 summer Olympics in Rio de Janeiro in Brazil this year.

Bloomberg put together a list of key events for the year ahead. You can check it out here.

Seasonal Trends

Last week I talked about how December is normally the strongest month of the year but 2015 was proving to be an exception. Well January is also one of the best months of the year for stocks but there are no guarantees. You'll likely hear market reporters talk about the January Effect. Stocks that were sold in December for tax-loss purposes could be seen as bargains in January. Small caps normally outperform in January as well with fund managers optimistically betting on names they believe will outperform in the year ahead.

Traditionally January is seen as a signal for the year ahead. So goes January so goes the year. According to the Stock Trader's Almanac this January signal can correctly forecast the yearly direction 75% of the time. Unfortunately the Stock Trader's Almanac also notes that the 8th year of a presidential term has been down five of the last six occurrences. The average loss is almost -14%.

Here's some good news. According to the Wall Street Journal, when the S&P 500 closes flat on the year the following year nearly always delivers a rally and often a double-digit return. So take your pick on which forecast you want to believe.

The latest investor sentiment survey might suggest the trading public is tired and cautious after last year's performance. Last week's AAII investor Sentiment Survey showed bullish sentiment falling -1.3% to 25%. Bearish sentiment fell -7.9% to 23.6%. Neutral sentiment soared +9.2% to 51.3%. That's extremely high neutral sentiment. No one wants to stick their neck out and pick a direction. The long-term average is only 31% neutral sentiment, 30% bearish, and 38.7% bullish.

AAII Investor Sentiment
%IMG8%

I am also neutral on the stock market. Last week's action would suggest the short-term trend is down. It wouldn't surprise me to see additional selling in the week ahead. However, I am also optimistic that many of the concerns of 2015 are over. After a year of disappointing earnings growth companies should see easier year over year comparisons. We could see the bull market resume and climb the wall of worry. I would be patient for the major indices to find support again and then look for an entry point.

~ James

Happy New Year 2016
%IMG9%
2016 Cartoon by Gary Varvel




Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The mid-December bounce rolled over late last week. Fortunately the damage wasn't that bad on our active trade portfolio.

NOC and RHT have graduated from our watch list to our play list.

OA has a new stop loss.

Note - some of our positions have been adjusted for the cost of short-term protective puts.

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

Geopolitical Risks Back In Play

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(January 03, 2016)

Good bye, 2015!

The traditional Santa Claus rally was a bit of a bust. Stocks ended the year with selling and the S&P 500, the Dow Industrials, and the small cap Russell 2000 index all posted losses for 2015. The FANG* stocks were strong enough to keep the NASDAQ composite in positive territory for the year.

The week ahead should be interesting. Will investors come back in a buying mood? Will crude oil continue to drive market momentum? Right now there are new headlines that Saudi Arabia has cut diplomatic ties with its arch rival Iran. That sounds like the first steps toward a potential military conflict, which would drive crude oil prices significantly higher. Geopolitical events will likely be a running theme in 2016.

At the moment I am market neutral. I looked at hundreds of charts again this weekend. Honestly a lot of stocks just look terrible. Q4 earnings season is right around the corner and expectations are not very high.

I am not adding any new trades tonight. Last week we had both NOC and RHT graduate from our watch list to our active play list. Tonight I am adding EQR and TRV as new watch list candidates.

No radar screen tonight.


* FANG stocks:

Facebook (FB)
Amazon.com (AMZN)
Netflix (NFLX)
Alphabet, a.k.a. Google (GOOGL)



Play Updates

Stocks' Santa Rally Stumbles

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's Santa Claus rally ran out of steam on Wednesday and Thursday last week. While the action last week looks bearish I am surprised the profit taking wasn't worse among our active plays. Overall the pullback wasn't that bad. However, the short-term trend does look down.


Closed Plays



None. No closed plays this week.




Play Updates


Adobe System Inc. - ADBE - close: $93.94

Comments:
01/03/16: ADBE managed to end the week relatively unchanged following Thursday's -1.4% pullback. The stock should have short-term support in the $90-92 area. More conservative investors may want to raise their stop closer toward the $88 level, which is another area of support. Currently our stop is at $85.75.

No new positions at this time.

Trade Description: October 11, 2015:
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.

- Suggested Positions -
OCT 19, 2015 - entry price on ADBE @ 88.15, option @ 6.80
symbol: ADBE170120C100 2017 JAN $100 call - current bid/ask $8.15/8.40

12/11/15 shares garner several upgrades
12/10/15 ADBE reports Q4 earnings above estimates
11/29/15 new stop @ 85.75
11/22/15 new stop @ 84.75
11/08/15 new stop @ 81.75
10/19/15: Trade begins.
10/16/15: Triggered. ADBE @ $88.67, in the $87.50-89.00 entry range
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 85.75
Play Entered on: 10/19/15
Originally listed on the Watch List: 10/11/15


Alaska Air Group - ALK - close: 80.51

Comments:
01/03/16: Airline stocks did not have a good week with the XAL index down three of the last four sessions. ALK is still outperforming its peers but shares did slip toward round-number support at $80.00 (underpinned by technical support at its 50-dma).

No new positions at this time.

Trade Description: November 22, 2015:
Depressed oil prices have been great for airline industry profits. Yet airline stocks, as a group, have struggled this year. The XAL airline index is down about -10% year to date. ALK is an exception. The stock has shown significant relative strength and is up +37% in 2015.

ALK is part of the services sector. According to the company, "Alaska Airlines, a subsidiary of Alaska Air Group (ALK), together with its partner regional airlines, serves more than 100 cities through an expansive network in the United States, Canada and Mexico. Alaska Airlines ranked 'Highest in Customer Satisfaction Among Traditional Carriers in North America' in the J.D. Power North America Airline Satisfaction Study for eight consecutive years from 2008 to 2015. Alaska Airlines' Mileage Plan also ranked 'Highest in Customer Satisfaction with Airline Loyalty Rewards Programs' in the J.D. Power 2014 and 2015 Airline Loyalty/Rewards Program Satisfaction Report."

ALK has beaten Wall Street's bottom line earnings estimates the last four quarters in a row. Their most recent report was October 22nd. The company raised its outlook. The past 12 months have seen ALK's revenues rise +4.8%. Net income and earnings have both grown more than +50%. Back in August the company announced at $1 billion stock buyback program (current market cap is about $10 billion).

Crude oil is expected to remain cheap and likely get cheaper in 2016. That should provide a strong tailwind for ALK's business. Currently the stock has been consolidating sideways the last few months. Yet the rally this past week has pushed ALK toward major resistance and shares could see a breakout. We want to hop on board if that occurs. Tonight I am suggesting we wait for ALK to close in the $83.00-84.00 zone and then buy calls the next morning with a stop loss at $74.75.

- Suggested Positions -
DEC 09, 2015 - entry price on ALK @ 83.50, option @ 9.20
symbol: ALK170120C90 2017 JAN $90 call - current bid/ask $6.40/7.00

12/09/15 triggered on a dip at $83.50
12/06/15 new entry trigger. ALK rushed past our suggested entry (a close in the $83.00-84.00 zone). Tonight we are listing a new entry - an intraday dip to $83.50
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 74.75
Play Entered on: 12/09/15
Originally listed on the Watch List: 11/22/15


The Clorox Co. - CLX - close: $126.83

Comments:
01/03/16: Thursday's -1.0% decline (-$1.37) pushed CLX's weekly loss to about $1.00. Shares closed the year near its pre-Christmas low. I suspect we will see CLX decline toward the next level of support near $125.00 and its 50-dma before it resumes its up trend. If that level breaks then look for CLX to hit our stop loss at $123.85.

No new positions at this time.

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 @ 6.60*
symbol: CLX170120C125 2017 JAN $125 call - current bid/ask $9.00/10.20

*Adjusted cost for the trade $5.25 + $1.35 = $6.60

12/27/15 new stop @ 123.85
11/29/15 new stop @ 118.85
11/22/15 new stop @ 116.40
11/17/15 planned exit for the short-term put (virtually $0.00)
11/15/15 plan on exiting the short-term Nov. $120 put on Tuesday, Nov. 17th at the close
11/08/15 new stop @ 113.40
10/30/15 bought the November $120 put at the closing bell
Put cost $1.35
10/25/15 Prepare to buy a short-term November put on Friday, Oct. 30th
10/18/15 CLX looks short-term overbought and due for a pullback
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: 123.85
Play Entered on: 09/22/15
Originally listed on the Watch List: 09/08/15


Costco Wholesale - COST - close: 161.50

Comments:
01/03/16: COST is holding up well. Shares only lost 25 cents for the week. COST did fail at short-term resistance near $164.00 again so don't be surprised to see another dip near toward its December lows.

No new positions at this time.

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 $13.55/13.95

12/09/15 COST reported earnings that missed estimates.
11/22/15 new stop @ 153.00
11/08/15 new stop @ 146.40
10/18/15 new stop @ 143.50
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

Current Target: To Be Determined
Current Stop loss: 153.00
Play Entered on: 10/06/15
Originally listed on the Watch List: 10/04/15


Salesforce.com - CRM - close: 78.40

Comments:
01/03/16: CRM saw its midweek rally fail near $80.00 and shares lost -0.9% on Friday. In spite of the pullback CRM still managed a gain for the week. Should the market continue lower we might see CRM dip toward the $76.00 area again.

No new positions at this time.

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.

- Suggested Positions -
OCT 14, 2015 - entry price on CRM @ 76.29 option @ 8.20
symbol: CRM170120C85 2017 JAN $85 call - current bid/ask $6.75/ 7.70

11/22/15 new stop @ 73.75
11/15/15 heads up - CRM has earnings on Nov. 18th
11/08/15 new stop @ 71.40
10/14/15 Trade begins. CRM @ $76.29
10/13/15 Triggered. CRM @ $76.63, above $76.25 trigger
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

Current Target: To Be Determined
Current Stop loss: 73.75
Play Entered on: 10/14/15
Originally listed on the Watch List: 09/20/15


DR Horton Inc. - DHI - close: 32.03

Comments:
01/03/16: DHI underperformed the broader market on Thursday with a -1.26% decline. Yet shares still weathered the market's decline reasonably well and only posted a minor loss for the week. The challenge for bullish investors is getting DHI above resistance near $33.00.

No new positions at this time.

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 $2.85/3.40

11/29/15 new stop @ 28.35
11/15/15 new stop @ 27.45
11/10/15 DHI reports earnings
11/01/15 new stop @ 25.90
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

Current Target: To Be Determined
Current Stop loss: 28.35
Play Entered on: 10/06/15
Originally listed on the Watch List: 09/13/15


Electronic Arts - EA - close: 68.72

Comments:
01/03/16: EA has spent the last two weeks churning sideways inside a $3.00 range. The stock only lost 22 cents last week. I'd keep an eye on support near $65-66 and its 200-dma (near $66.80). Nimble traders could buy dips near $65.00 since we have a stop loss at $64.65.

Trade Description: November 1, 2015:
EA has been one of the S&P 500's best performers this year. Just prior to EA's earnings report last week the stock was up +61% year to date. EA reported better than expected results but shares tanked -5.2% on Friday anyway. We see the pullback as an opportunity.

EA is part of the technology sector. According to the company, "Electronic Arts (EA) is a global leader in digital interactive entertainment. The Company delivers games, content and online services for Internet-connected consoles, personal computers, mobile phones and tablets. EA has more than 300 million registered players around the world.

In fiscal year 2015, EA posted GAAP net revenue of $4.5 billion. Headquartered in Redwood City, California, EA is recognized for a portfolio of critically acclaimed, high-quality blockbuster brands such as The Sims®, Madden NFL, EA SPORTS® FIFA, Battlefield®, Dragon Age® and Plants vs. Zombies®. More information about EA is available at www.ea.com/news."

Looking at EA's earnings results, they tend to beat Wall Street estimates on both the top and bottom line. Their prior to report EA beat estimates but lowered guidance both times. On Thursday night, October 29th, EA reported their Q2 results. Earnings were $0.65 a share. Revenues were down -6.1% to $1.15 billion. These results beat estimates for $0.44 a share on revenues of $1.1 billion.

EA management raised their Q3 earnings and revenue guidance as well as their full year 2016 guidance above analysts' estimates. The company sees a strong launch to their upcoming Star Wars: Battlefront game, which launches on November 17th. EA raised their estimated sales from 9-to-10 million units up to 13 million.

Analysts suggest there is actually more upside since EA tends to provide cautious guidance. One firm raised their price target on EA to $84.00 following EA's earnings report. That happens to coincide with the point & figure chart, which is forecasting an $85 target.

EA's long-term trend line of support should be in the $66-67 area. I suspect EA will drift toward this trend line and then rebound. Tonight I am suggesting a buy-the-dip trigger to buy calls at $68.00.

- Suggested Positions -
NOV 17, 2015 - entry price on EA @ 65.08, option @ 6.85
symbol: EA170120C75 2017 JAN $75 call - current bid/ask $ 6.90/7.50

12/27/15 new stop @ 64.65
11/17/15 triggered on gap down at $65.08
11/15/15 adjust the option strike from 2017 January $80 call to $75 call
11/15/15 Adjust the entry trigger from $68.00 down to $66.50.
Adjust the stop loss from $64.65 down to $62.85.
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 64.65
Play Entered on: 11/17/15
Originally listed on the Watch List: 11/01/15


Facebook, Inc. - FB - close: 104.66

Comments:
01/03/16: FB only lost about 40 cents for the week but I'm worried about Thursday's -1.4% drop. Shares closed below what should have been support near $105.00, its 50-dma, and its up trend of higher lows. Thursday's weakness may just be a reflection of low holiday volume and a lack of buyers but I am not suggesting new positions at this time.

Trade Description: September 13, 2015:
We are bringing 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 @ 11.10*
symbol: FB170120C100 2017 JAN $100 call - current bid/ask $16.95/17.20

12/27/15 new stop @ 99.00
11/21/15 short-term put has expired
11/08/15 new stop @ 97.25
11/04/15 FB reports strong earnings
11/03/15 Buy the November $97.50 put ($1.85)
* adjust the cost of our call by $1.85
11/01/15 Prepare to buy a short-term November put (expires Nov 20th) on Tuesday, November 3rd, to protect our position prior to FB' earnings
10/25/15 new stop @ 92.00
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: 99.00
Play Entered on: 09/29/15
Originally listed on the Watch List: 09/13/15



The Home Depot, Inc. - HD - close: 132.25

Comments:
01/03/16: HD only saw a minor pullback on Thursday. If the market continues to slip I would expect HD to test support near $130.00 again. At the moment HD is merely consolidating sideways in the $130-135 zone.

More conservative investors may want to move their stop loss closer to the $129-130 area. No new positions at this time.

Trade Description: October 18, 2015:
Home Depot's stock has outperformed the broader market in spite of the fact shares were stuck in a trading range for the last seven months. HD broke through significant resistance at the $120.00 level several days ago.

The big surge in the U.S. housing market this year has been a bullish tailwind for HD's business. The home remodeling and repair industry and consumer spending in this category is expected to hit levels not seen since before the "Great Recession" in 2008-2009. HD is poised to reap the benefits.

If you're not familiar with the company, HD is in the services sector. According to the company, "The Home Depot is the world's largest home improvement specialty retailer, with 2,270 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico. In fiscal 2014, The Home Depot had sales of $83.2 billion and earnings of $6.3 billion. The Company employs more than 370,000 associates. The Home Depot's stock is traded on the New York Stock Exchange (HD) and is included in the Dow Jones industrial average and Standard & Poor's 500 index."

HD has been showing steady earnings and revenue growth. The company has beaten Wall Street estimates on both the top and bottom line the last three quarters in a row. Management has also raised their guidance the last three quarters in a row.

Their most recent report was August 18th. HD announced its Q2 earnings were up +14% from a year ago to $1.71 per share. Revenues were up +4.3% to $24.83 billion. Comparable store sales came in better than expected with a +4.2% improvement.

Wall Street analysts seem bullish with firms like Deutsche Bank and UBS recently raising their price targets on HD. The recent breakout past $120 generated a new buy signal on the point & figure chart, which is now forecasting at $143 target.

The all-time high for HD was set in August this year at $123.80. Tonight I am suggesting investors wait for HD to close above $124.00 and then buy calls the next morning.

- Suggested Positions -
OCT 23, 2015 - entry price on HD @ 125.01, option @ 5.20
symbol: HD170120C140 2017 JAN $140 call - current bid/ask $7.40/7.70

11/30/15 sell half of our HD calls (exit $8.85, +70.1%)
11/29/15 plan on exiting HALF of HD calls on Monday morning (Nov. 30th)
11/29/15 new stop loss @ 124.65
11/22/15 new stop loss @ 118.45
10/25/15 new stop loss @ 113.45
10/23/15 trade begins. HD opens at $125.01
10/22/15 triggered. HD @ $124.36, above our $124.00 trigger
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 124.65
Play Entered on: 10/23/15
Originally listed on the Watch List: 10/18/15


Kimberly-Clark - KMB - close: 127.30

Comments:
01/03/16: KMB lost -$2.13 (-1.6%) on Thursday but still managed to eke out a gain for the week. The stock was setting new all-time highs near $130 a couple of trading days ago. If shares don't bounce off their 10-dma (near $126.90) I'd look for a drop toward $123.00-125.00.

No new positions at this time.

Trade Description: December 6, 2015:
There are not many public companies that have been around as long as KMB. The company has a history going back more than 140 years. It looks like investors are still bullish on it with KMB trading near all-time highs.

KMB is in the consumer goods sector. According to the company, "Kimberly-Clark (KMB) and its well-known global brands are an indispensable part of life for people in more than 175 countries. Every day, nearly a quarter of the world's population trust K-C's brands and the solutions they provide to enhance their health, hygiene and well-being. With brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, Kimberly-Clark holds No. 1 or No. 2 share positions in 80 countries."

The company has beaten Wall Street's earnings estimates the last three quarters in a row. A stronger labor market in the U.S. combined with lower gasoline prices should be a tailwind for consumer spending in the globe's biggest economy. Meanwhile KMB is pursuing high-growth opportunities in emerging markets.

Technically the stock has been trading sideways in the $117.00-123.00 zone the last seven weeks. The recent bounce near the bottom of its trading range might suggest a bullish breakout soon. The point & figure chart is bullish and forecasting at $163 target. Tonight I am suggesting investors wait for KMB to close above $123.00 and then buy calls the next morning with an initial stop loss at $116.95.

- Suggested Positions -
DEC 16, 2015 - entry price on KMB @ 124.75, option @ 7.50
symbol: KMB170120C130 2017 JAN $130 call - current bid/ask $7.20/7.70

12/27/15 new stop @ 119.40
12/16/15 Trade begins. KMB opens at $124.75
12/15/15 Triggered with KMB @ $124.44, above our $123.00 trigger
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 119.40
Play Entered on: 12/16/15
Originally listed on the Watch List: 12/06/15


Microsoft Corp. - MSFT - close: 55.48

Comments:
01/03/16: MSFT traded up to levels not seen since early 2000 before profit taking hit on Thursday. Shares should find short-term support in the $54.00 region.

No new positions at this time.

Trade Description: December 6, 2015:
MSFT is one of the biggest stocks in the U.S. market and shares just surged to new 15-year highs.

MSFT is more than just a software company. They are part of the technology sector. It is considered part of the business software industry. According to the company, "Microsoft is the leading platform and productivity company for the mobile-first, cloud-first world, and its mission is to empower every person and every organization on the planet to achieve more."

The company is run under three segments. They have their productivity and business processes segment. This includes commercial office software, personal office software, and more. One of their fastest growing segments is MSFT's Intelligent Cloud business, which includes their server software and enterprise services. Then they have their "More Personal Computing" segment. This includes their Windows operating software, MSN display advertising, Windows phones, smartphones, tablets, PC accessories, Internet search, and their Xbox platform.

The stock has been dead money for almost a year. MSFT peaked near round-number resistance at $50.00 back in November 2014. Shares channeled sideways between support at $40 and resistance at $50 for months. That changed in October.

MSFT reported its 2016 Q1 results on October 22nd. Analysts were expecting a profit of $0.59 a share on revenues of $21.04 billion. MSFT beat both estimates with a profit of $0.67 a share. Revenues came in at $21.66 billion. Their Intelligent Cloud segment saw sales rise +8% but it was actually +14% on a constant currency basis.

Shares of MSFT soared the next day with a surge to multi-year highs. The big rally is based on investors' belief that MSFT and its relatively new management is successfully transitioning away from declining PC sales and moving quickly towards the cloud (and mobile).

The stock has been relatively resistant to any serious profit taking. Last week's midweek market decline only pushed MSFT toward short-term support at its 10-dma near $54.00. The stock displayed relative strength on Friday with a +3.1% gain. Investors may want to jump in and buy calls now. I am crossing my fingers and hoping for a little pullback. Tonight I'm suggesting a buy-the-dip trigger at $55.05.

- Suggested Positions -
DEC 08, 2015 - entry price on MSFT @ 55.05, option @ 3.20
symbol: MSFT170120C60 2017 JAN $60 call - current bid/ask $3.05/3.20

12/08/15 triggered @ 55.05
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 51.95
Play Entered on: 12/08/15
Originally listed on the Watch List: 12/06/15


Northrop Grumman - NOC - close: 188.81

Comments:
01/03/16: NOC is a new watch list candidate that graduated to our active play list. We added NOC last week. The plan was to wait for shares to close inside the $191.00-193.00 zone and then buy calls the next morning. Shares closed at $191.48 on December 29th. Our trade opened the next morning at $191.40.

The Wednesday-Thursday drop back below $190.00, which should have been new short-term support, is a bit worrisome. Nimble traders may want to consider buying dips near NOC's rising 50-dma (currently about $186.25). Otherwise I am suggesting investors wait for NOC to close above $192.00 before considering new bullish positions.

Trade Description: December 27, 2015:
Defense stocks have come a long way from the sequestration fears from a few years ago. Back in 2011, politicians in Washington created massive defense spending and entitlement cuts in their sequestration budget cut threats. It was supposed to be a goad to provoke their peers and rivals to getting a budget deal done. It didn't work. The sequestration cuts were put into place in 2013 but instead of crushing the defense industry stocks the group has thrived.

NOC is in the industrial goods sector. According to the company, "Northrop Grumman is a leading global security company providing innovative systems, products and solutions in unmanned systems, cyber, C4ISR, and logistics and modernization to government and commercial customers worldwide." They focus on four business sectors: aerospace systems, electronic systems, information systems, and technical services.

One reason the major defense names have done so well was their focus on gaining new clients overseas. If the U.S. was going to cut back on spending (more like cut back on the pace of spending) then military contractors focused on generating new business with allies overseas and it worked.

NOC has beaten Wall Street's earnings estimates the last four quarters in a row. They've delivered better than expected revenue numbers three of the last four quarters. Plus, NOC management has raised guidance three of the last four quarters. As of their most recent earnings report on October 28th, NOC's backlog was about $36 billion.

NOC has been in a heated battle with rivals Boeing (BA) and Lockheed Martin (LMT) over one of the biggest defense contracts of all time. That is the Air Force's new Long Range Strike Bomber contract. Aerospace giants Boeing and Lockheed had teamed up together to win this deal. Some were calling it a David-versus-Goliath story. NOC was the underdog and surprisingly the U.S. government gave the contract, worth a potential $80 billion, to NOC in late October this year. BA and LMT have since chosen to protest this decision so the ultimate decision has yet to be finalized but it's a bullish development for NOC investors.

The LRSB contract has two parts. The engineering and manufacturing and development portion of the contract is worth more than $21 billion. Once it's finally developed the planes are supposed to cost the government $564 million apiece. Altogether the defense department could spend up to $80 billion on the program.

Another bullish tailwind for defense contractors like NOC is the ongoing global battle with radical Islamic terrorists and ISIS. The U.S. will likely boost its defense spending as it turns up the heat on this threat. Meanwhile after the terrorist attacks in Paris, analysts believe that NATO could generate an additional $100 billion in defense spending as they beef up their military might.

JPMorgan recently upgraded shares of NOC from "neutral" to "overweight" and gave the stock a $212 price target. They like NOC and believe it is a place of "safety and steadiness" in a volatile market.

The stock has shown significant relative strength this year with a +28% gain in 2015. The last few weeks have seen NOC consolidate sideways beneath resistance at $190 but with a bullish trend of higher lows as investors keep buying the dips. The stock looks ready to break out. Tonight we are suggesting investors wait for NOC to close in the $191.00-193.00 zone and use that as a bullish entry point to buy calls.

- Suggested Positions -
DEC 30, 2015 - entry price on NOC @ 191.40, option @ 6.30
symbol: NOC170120C220 2017 JAN $220 call - current bid/ask $5.00/5.40

12/30/15 Trade begins. NOC opens at $191.40
12/29/15 NOC closed at $191.48, inside our $191.00-193.00 entry range
Option Format: symbol-year-month-day-call-strike

Chart of NOC:

Current Target: To Be Determined
Current Stop loss: 184.35
Play Entered on: 12/30/15
Originally listed on the Watch List: 12/27/15


Orbital ATK, Inc. - OA - close: $89.34

Comments:
01/03/16: Thursday's -1.3% decline snapped a new two-week winning streak for OA. Overall the pullback was relatively mild with OA finding short-term support at its 10-dma.

Tonight I am raising our stop loss to $82.75. More conservative investors may want to use a stop closer to the $85.00 level instead. If this dip continues I expect OA to find support near its 50-dma (currently near $86).

No new positions at this time.

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 May calls.

- Suggested Positions -
OCT 23, 2015 - entry price on OA @ 82.00, option @ 6.60*
symbol: OA160520C85 2016 MAY $85 call - current bid/ask $8.40/9.50

*adjusted for cost of Nov. $75 put ($1.10)

01/03/16 new stop @ 82.75
12/06/15 new stop @ 79.45
11/21/15 short-term put has expired ($0.00)
11/01/15 new stop @ 76.40
10/26/15 Cost on the Nov. $75 put was $1.10
10/26/15 Buy the November $75 put at the opening bell
10/25/15 new stop loss @ 72.45
10/23/15 Trade begins. OA opens at $82.00
10/22/15 triggered. OA closes at $81.33, in the $81.00-83.00 entry range.
10/18/15 Adjust the option strike from 2016 Feb. $85 call to the 2016 May $85 call
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 82.75
Play Entered on: 10/23/15
Originally listed on the Watch List: 09/08/15


Pepisco, Inc. - PEP - close: 99.92

Comments:
01/03/16: PEP was setting new three-week highs last week. Unfortunately the market's two-day decline pulled PEP back below what should have been round-number support at $100 and below its 50-dma. If the intraday chart is any guide then the week ahead could see more selling pressure. Watch for support in the $96-97 area.

No new positions at this time.

Trade Description: October 18, 2015:
PEP is a consumer goods giant with a global presence. According to the company, "PepsiCo products are enjoyed by consumers one billion times a day in more than 200 countries and territories around the world. PepsiCo generated more than $66 billion in net revenue in 2014, driven by a complementary food and beverage portfolio that includes Frito-Lay, Gatorade, Pepsi-Cola, Quaker and Tropicana. PepsiCo's product portfolio includes a wide range of enjoyable foods and beverages, including 22 brands that generate more than $1 billion each in estimated annual retail sales."

The stock has been stuck consolidating sideways in the $90-100 trading range for almost a year. It looks like that consolidation may be nearing its end.

Earnings have been better than expected. I looked at the last three quarters. PEP has managed to beat Wall Street's estimates on both the top and the bottom line. Revenues have declined year over year but that is due to negative foreign currency exchange rates that is shaving off about -10% from earnings and revenues. The company says their gross margins and operating margins continue to improve.

The U.S. market is up the last three weeks in a row but it's relatively flat for the year. Investors are confused with all the different global cross currents, exchange fluctuations, central bank moves, and more. Fund managers are probably tempted to park cash in huge, liquid big cap like PEP and get paid 2.8% a year with dividends. Why not? PEP is still growing with solid single-digit growth.

Technically PEP looks poised to breakout past major resistance in the $100 area. The point & figure chart is already bullish and forecasting at $120.00 target. Tonight I am suggesting we wait for PEP to close above $101.00 and then buy calls the next morning. We will start this trade with a stop loss at $89.90.

- Suggested Positions -
OCT 23, 2015 - entry price on PEP @ 103.32, option @ 4.00
symbol: PEP170120C110 2017 JAN $110 call - current bid/ask $2.22/2.42

11/08/15 new stop @ 94.75
10/23/15 Trade begins. PEP @ $103.32
10/22/15 Triggered. PEP @ $103.08, above our $101.00 trigger
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 94.75
Play Entered on: 10/23/15
Originally listed on the Watch List: 10/18/15


Royal Caribbean Cruises - RCL - close: 101.21

Comments:
01/03/16: RCL displayed relative strength with a surge to new all-time highs. Shares suffered some profit taking on Thursday (-1.47%) but still posted a gain for the week. Broken resistance near $100 should be new short-term support.

More conservative investors may want to consider raising their stop loss into the $94-95 area. We are keeping our stop at $89.00 for the moment.

No new positions at this time.

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 $8.70/8.95

12/13/15 RCL endured the market's decline relatively well
11/22/15 Caution - RCL did not perform well last week
11/01/15 new stop @ $89.00
10/23/15 RCL delivered better than expected earnings and raised full year 2015 guidance.
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: 89.00
Play Entered on: 09/28/15
Originally listed on the Watch List: 09/20/15


Red Hat, Inc. - RHT - close: 82.81

Comments:
01/03/16: RHT is another watch list candidate that graduated to our active play list. The plan was to wait for shares to close inside the $83.00-84.00 zone. RHT was in rally mode most of last week and closed at $83.53 on December 29th. Our trade opened the next morning at $83.56. The stock briefly traded above $84.00 and tagged new all-time highs on Wednesday. Investors may want to wait for RHT to bounce again before initiating new positions. You may want to wait for RHT to close above $84.00 as an alternative entry point.

Trade Description: November 29, 2015:
Consistent earnings and revenue growth have helped power RHT shares to new multi-year highs. The stock has also shown relative strength with a +19% gain in 2015, outperforming the NASDAQ's +8% gain.

RHT is in the technology sector. According to the company, "Red Hat is the world's leading provider of open source software solutions, using a community-powered approach to reliable and high-performing cloud, Linux, middleware, storage and virtualization technologies. Red Hat also offers award-winning support, training, and consulting services. As a connective hub in a global network of enterprises, partners, and open source communities, Red Hat helps create relevant, innovative technologies that liberate resources for growth and prepare customers for the future of IT."

I mentioned that earnings have helped drive RHT's stock higher. The company has beaten Wall Street's estimates on both the top and bottom line the last four quarters in a row. Their most recent earnings report was their Q2 results announced on September 21st.

Analysts were expecting a profit of $0.44 a share on revenues of $494 million. The company delivered earnings growth of +15% with a profit of $0.47 a share. Revenues were up +13% to $504 million. Management raised their Q3 and 2016 guidance above analysts' expectations. RHT does do a lot of business overseas so the strong dollar has had a negative impact. On a constant currency basis their results are even stronger.

Technically shares are in a bullish trend of higher highs and higher lows. The point & figure chart is bullish and forecasting at $109 target. RHT's bounce from its November low has stalled just below short-term resistance near $83.00. Tonight I am suggesting bullish positions if RHT can close in the $83.00-84.50 range.

- Suggested Positions -
DEC 30, 2015 - entry price on RHT @ 83.56, option @ 5.00
symbol: RHT170120C100 2017 JAN $100 call - current bid/ask $4.00/5.00

12/30/15 Trade begins. RHT opens at $83.56
12/29/15 Triggered. RHT closed at $83.53, inside our $83.00-84.00 entry range
12/17/15 RHT reports better than expected earnings
Option Format: symbol-year-month-day-call-strike

Chart

Current Target: To Be Determined
Current Stop loss: 77.35
Play Entered on: 12/30/15
Originally listed on the Watch List: 11/29/15


Starbucks Corp. - SBUX - close: 60.03

Comments:
01/03/16: SBUX is still consolidating. Last week's bounce failed at resistance near its 50-dma and its eight-week trend line of lower highs. The stock is likely headed lower toward its December lows near $58.00 and potentially toward its new (8-week) trend of lower lows (probably near $57.00ish). If the market sell-off worsens and SBUX breaks below $58 then the 200-dma near $56.00 is potential support.

Currently our stop loss is at $54.95 but more conservative investors may want to adjust theirs higher.

No new positions at this time.

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.

- Suggested Positions -
OCT 12, 2015 - entry price on SBUX @ 60.35, option @ 3.91*
symbol: SBUX170120C70 2017 JAN $70 call - current bid/ask $2.43/2.55

*adjusted cost for the short-term put (Nov. $57.50)

11/22/15 new stop loss @ 54.95
11/21/15 short-term November put has expired
10/29/15 SBUX reported Q4 earnings
10/28/15 buy the Nov. $57.50 put, cost $0.61
10/25/15 prepare to buy short-term puts on Wednesday (Oct. 28th)
10/12/15 Trade begins. SBUX opens @ $60.35
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

Current Target: To Be Determined
Current Stop loss: 54.95
Play Entered on: 10/12/15
Originally listed on the Watch List: 09/20/15


Smith & Wesson Holding - SWHC - close: 21.98

Comments:
01/03/16: It was another rocky week for the stock market but SWHC managed to close virtually unchanged for the week. Shares have been consolidating sideways for two weeks in a row.

President Obama is back from his December vacation and threatening to use executive orders to launch new gun control initiatives. In the past any talk of tighter gun control laws has fueled stronger gun sales so SWHC might actually rally on this news.

More conservative investors may want to take some money off the table or raise their stop loss.

No new positions at this time.

Trade Description: November 8, 2015:
Shares of SWHC have been shooting higher all year long. The stock is showing massive relative strength with a +91% gain year to date. That dwarfs the +8.5% gain in the NASDAQ composite and +1.8% gain in the S&P 500 this year.

SWHC is considered part of the industrial goods sector. According to the company, "Smith & Wesson Holding Corporation (SWHC) is a U.S.-based leader in firearm manufacturing and design, delivering a broad portfolio of quality firearms, related products, and training to the global military, law enforcement, and consumer markets. The company's firearms division brands include Smith & Wesson®, M&P®, and Thompson/Center Arms®. As a leading provider of shooting, reloading, gunsmithing, and gun cleaning supplies, the company's accessories division produces innovative, high-quality products under several brands, including Caldwell® Shooting Supplies, Wheeler® Engineering, Tipton® Gun Cleaning Supplies, Frankford Arsenal® Reloading Tools, Lockdown® Vault Accessories, and Hooyman® Premium Tree Saws. Smith & Wesson facilities are located in Massachusetts, Maine, Connecticut, and Missouri."

The earnings picture for SWHC has been pretty strong. They have beaten Wall Street's earnings estimates the last four quarters in a row. Management has raised guidance three of the last four quarters.

Their most recent earnings report as August 27th. SWHC announced their 2016 Q1 results with earnings of $0.32 a share. That beat estimates of $0.23. Revenues surged +12% to $147.8 million, above expectations. Management raised their Q2 guidance and raised their fiscal year 2016 guidance.

The company benefits from strong retail trends. According to the FBI, gun sales in the U.S. have set a record for the last six months in a row. Now we are moving into the holiday shopping season and this trend should continue for the next two month (at least). Another benefit for SWHC is the current election cycle. Every time one of the democrat candidates says something about increasing gun control laws the sale of guns goes up. The closer we get to the 2016 election the louder these campaign promises about gun control could get.

Technically the trend in SWHC is bullish. The point & figure chart is forecasting at $26.50 target. The stock has been rising inside a big bullish channel (see chart). Rival Ruger (RGR) reported earnings a few days ago and their stock plummeted on a disappointing quarter. Yet shares of SWHC barely budged on the news. Today we see SWHC bouncing from support near the bottom of its bullish channel and its 100-dma. More aggressive investors may want to buy calls now. I am suggesting we wait for SWHC to close above $18.40 and then buy calls the next day.

- Suggested Positions -
NOV 25, 2015 - entry price on SWHC @ 18.70, option @ 2.90
symbol: SWHC170120C20 2017 JAN $20 call - current bid/ask $4.20/6.20

12/13/15 new stop @ 19.75
12/08/15 SWHC beats earnings estimates and raised guidance
11/25/15 trade begins. SWHC opens at $18.70
11/24/15 triggered. SWHC closed @ $18.65, above our $18.40 trigger
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 19.75
Play Entered on: 11/25/15
Originally listed on the Watch List: 11/08/15


Tyson Foods, Inc. - TSN - close $53.33

Comments:
01/03/16: TSN lost 60 cents last week, which snapped a six-week winning streak. Shares have been hovering near their highs around the $54.00 area. I suspect we'll see TSN retest short-term support near $52.00 soon.

More conservative investors may want to raise their stop loss again.

No new positions at this time.

Trade Description: October 25, 2015
TSN's beef business has struggled as a prolonged drought has hurt the cattle business. Yet TSN is seeing strong improvement in their chicken and prepared foods businesses.

TSN is in the consumer goods sector. According to the company, "Tyson Foods, Inc. (TSN), with headquarters in Springdale, Arkansas, is one of the world's largest food companies with leading brands such as Tyson®, Jimmy Dean®, Hillshire Farm ®, Sara Lee®, Ball Park®, Wright®, Aidells® and State Fair®. It's a recognized market leader in chicken, beef and pork as well as prepared foods, including bacon, breakfast sausage, turkey, lunchmeat, hot dogs, pizza crusts and toppings, tortillas and desserts. The company supplies retail and foodservice customers throughout the United States and approximately 130 countries.

Tyson Foods was founded in 1935 by John W. Tyson, whose family has continued to lead the business with his son, Don Tyson, guiding the company for many years and grandson, John H. Tyson, serving as the current chairman of the board of directors. The company currently has approximately 113,000 Team Members employed at more than 400 facilities and offices in the United States and around the world. Through its Core Values, Code of Conduct and Team Member Bill of Rights, Tyson Foods strives to operate with integrity and trust and is committed to creating value for its shareholders, customers and Team Members. The company also strives to be faith-friendly, provide a safe work environment and serve as stewards of the animals, land and environment entrusted to it."

After big gains in 2013 the stock ran out of steam. Shares have been consolidating sideways for more than a year and a half. That's probably because the earnings picture has been cloudy. The company has struggled to meet estimates and management has guided lower in recent quarters. That changed recently in September when TSN raised their 2016 guidance. The company should see +9% earnings growth in 2015 but earnings are expected to grow +21% in 2016.

Technically the bullish breakout in TSN this month is significant. The $44-45 zone has been major resistance for months. The current rally has generated a bullish buy signal on the point & figure chart, which is now forecasting at $63.00 target.

Tonight I am suggesting a little patience. Wait for a pullback in TSN. We are listing a buy-the-dip trigger to launch bullish positions at $45.50.

- Suggested Positions -
OCT 26, 2015 - entry price on TSN @ 45.50, option @ 4.00
symbol: TSN170120C50 2017 JAN $50 call - current bid/ask $7.30/8.10

12/21/15 Exit half of call position. Option bid $7.00 (+75%)
12/20/15 Plan on selling half of our call position on Monday, Dec. 21st to lock in a partial gain
12/13/15 new stop @ 49.45
12/06/15 new stop @ 45.75, readers may want to take some money off the table. Our option is already up +60%.
11/29/15 new stop loss @ 44.75
11/23/15 TSN reports earnings. The stock rallies
11/22/15 TSN could be volatile following its earnings report
10/26/15 triggered on a dip at $45.50
10/25/15 added to the watch list
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: 49.45
Play Entered on: 10/26/15
Originally listed on the Watch List: 10/25/15


Visa Inc. - V - close: 77.55

Comments:
01/03/16: Shares of Visa followed the market lower on Wednesday and Thursday. This has produced another lower high. Odds are good we could see V retest short-term support in the $75.00-76.00 region.

No new positions at this time.

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 $6.60/6.80

12/06/15 new stop @ 74.40
11/08/15 new stop @ 71.75
11/01/15 new stop @ 69.00
10/18/15 Our option has more than doubled in value. Investors may want to take some money off the table.
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: 74.40
Play Entered on: 08/24/15
Originally listed on the Watch List: 08/09/15


Watch

Doubling Down On Financials

by James Brown

Click here to email James Brown


New Watch List Entries

EQR - Equity Residential

TRV - The Travelers Companies, Inc.


Active Watch List Candidates

DAL - Delta Air Lines

GE - General Electric

UPS - United Parcel Service


Dropped Watch List Entries

NOC and RHT both graduated to our active play list.



New Watch List Candidates:

Equity Residential - EQR - close: 81.59

Company Info

The S&P 500 just delivered its worst yearly performance since 2008 with a -0.7% decline for 2015. EQR outperformed the broader market with a +13.5% gain last year. More importantly shares look poised to breakout and hit new highs in 2016.

EQR is part of the financial sector. According to the company, "Equity Residential is an S&P 500 company focused on the acquisition, development and management of high quality apartment properties in top U.S. growth markets. Equity Residential owns or has investments in 393 properties consisting of 109,540 apartment units."

Traditional wisdom says that you don't want to own big dividend paying REITs in a rising rate environment. REIT.com published an article challenging this very idea. In the article, titled "Misconceptions about REITs and Interest Rates", the author says, "Asset prices [REITs] often decline as the immediate response to a rise in interest rates because higher interest rates reduce the present value of future cash flows, including bond coupons and stock dividends. If future cash flows are not expected to rise, then increasing interest rates would have a clear negative impact on asset values, including the share prices of stock exchange-listed Equity REITs." They go on to discuss how rising interest rates due to stronger economic growth is good. A growing economy usually means more business spending, hiring new employees, more consumer spending. This leads to better occupancy rates for REITs and rental growth and overall better business fundamentals. You can read more about it here .

Barron's also published an article suggesting REITs are not an automatic sell if rates are rising. You can read it here .

The Federal Reserve did raise rates in December for the first time in almost a decade. It's widely anticipated that they will raise rates three or four more times in 2016. Yet shares of EQR ended 2015 near all-time highs. The threat of rising rates does not seem to scare away REIT investors.

The company's most recent earnings report was October 26th. They beat estimates on both the top and bottom line and raised guidance. Research firm CoreLogic is also bullish on rental demand. They recently published their outlook for 2016 and believe that this year should see about 1.25 million new households formed. Most of them will want to rent even though rents are high with vacancies near 30-year lows.

Technically EQR has been showing strength. Last week the point & figure chart produced a new triple-top breakout buy signal that is forecasting at $107 price target. EQR does have major resistance near $83.00. That's why a breakout past this level would be very bullish. Tonight I am suggesting investors wait for EQR to close above $83.00 and then buy calls the next day with a stop loss at $76.45.

Please note that readers may want to limit their position size to reduce risk. Last August (2015) the stock market experienced a sharp correction lower. The stock market plunged on August 24th. Shares of EQR experienced their own private little flash crash with the stock trading in a $20 range. There is no way to predict if and when something like that might occur again.

*Small positions to limit risk*

Breakout trigger: Wait for EQR to close above $83.00
Then buy calls the next morning with a stop loss at $76.45

BUY the 2017 Jan. $90 call (EQR170120C90) current ask $3.80

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

Chart of EQR:
%IMG1%

Originally listed on the Watch List: 01/03/16


The Travelers Companies, Inc. - TRV - close: 112.86

Company Info

TRV was founded over 150 years ago. It looks pretty good for its age. Shares gained +6.6% in 2015 versus the S&P 500's -0.7% decline. Furthermore TRV is only about -2.5% from its all-time highs set in November.

TRV is in the financial sector. They are in the insurance business. The company runs three divisions: business and international insurance makes up the biggest chunk of revenues (almost 60%), personal insurance (think automobile and home insurance) makes up nearly one third of sales, while bond and specialty insurance make up the rest. According to the company, "The Travelers Companies, Inc. is a leading provider of property casualty insurance for auto, home and business. A component of the Dow Jones Industrial Average, Travelers has approximately 30,000 employees and generated revenues of approximately $27 billion in 2014."

TRV has beaten Wall Street's earnings estimates the last four quarters in a row. They have beaten revenues estimates the last two quarters. Earlier in 2015 they raised their dividend and their stock buy back program.

One of the biggest stories last year was the U.S. Federal Reserve's conundrum to raise or not raise interest rates. The Fed finally raised rates in December 2015 and is poised to continue raising rates throughout 2016. Normally investors think of banks as being beneficiaries of rising rates but insurance companies win as well.

Brett Owens wrote an article for Forbes.com discussing the impact of rising rates for insurance companies. Owens said, "Insurance companies are constantly investing the premiums they collect in, among other things, government and corporate bonds, and yields on those bonds rise with the federal funds rate. Those higher yields fatten insurers' net interest margins, or the difference between investment returns and claims paid out to policyholders, resulting in higher profits."

Last week the latest AAII investor sentiment survey showed a surge in neutral sentiment. Investors are cautious heading into 2016. That could drive money into safe-haven trades like big, liquid, dividend-paying insurance companies and TRV certainly fits the bill.

Shares have been consolidating sideways in the $110-116 zone the last couple of months. Right now the stock is right in the middle of this range. The $110 level is support and if the market continues to sink we want to take advantage of the weakness. Tonight I am suggesting a buy-the-dip trigger to buy calls on TRV when shares hit $110.50. We'll try and limit our risk with a stop loss at $104.65. More conservative investors will want to consider a much tighter stop loss.

FYI: TRV does have earnings coming up on January 21st. They report before the opening bell. More conservative investors may want to wait until after we see TRV's earnings results before initiating positions.

Buy-the-dip trigger: Buy calls on a dip at $110.50
Start with a stop loss at $104.65

BUY the 2017 Jan $120 call (TRV170120C120) current ask $5.90

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

Chart of TRV:
%IMG2%

Originally listed on the Watch List: 01/03/16



Active Watch List Candidates:


Delta Air Lines - DAL - close: 50.69

Comments:
01/03/16: Airline stocks encountered some profit taking last week. DAL is dipping toward the $50.00 level and its 50-dma. I don't see any changes from last week's new play description.

Trade Description: December 27, 2015:
The XAL airline index is down -13% for 2015. One air line stock outperforming many of its peers is Delta (DAL), which is up +6% year to date and poised to rally into 2016.

DAL is part of the services sector. According to the company, "Delta Air Lines serves more than 170 million customers each year. Delta was named to FORTUNE magazine's top 50 World's Most Admired Companies in addition to being named the most admired airline for the fourth time in five years. Additionally, Delta has ranked No.1 in the Business Travel News Annual Airline survey for four consecutive years, a first for any airline. With an industry-leading global network, Delta and the Delta Connection carriers offer service to 327 destinations in 57 countries on six continents. Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 800 aircraft."

One of the biggest stories of 2015 was the drop in oil prices. This has been a major tailwind for airline profits as fuel is a huge expense for the industry. Yet instead of soaring on oil's weakness the airline stocks have struggled because investors were worried the industry would overbuild capacity, which would create too much supply and bring down air fares. Overall the industry has managed to keep capacity relatively in check. The last several weeks have seen some lowered guidance for PRASM from several airlines. PRASM is an industry metric for Passenger Revenue per Available Seat Mile. DAL was not immune and lowered its Q4 PRASM several weeks ago. Fortunately the outlook has improved following the company's investor day on December 17th.

A few of the highlights from their investor day include +36% earnings growth forecasted for 2015. They previously guided Q4 PRASM down -2.5% to -4.5%. Now they have adjusted that to -2%. Capacity growth is expected to be relatively flat in 2016. Management said that fuel prices are down about 35% from a year ago. They are forecasting about $3 billion in fuel savings next year. 2016 earnings should grow about +24%.

Following this investor day presentation a couple of analysts raised their price targets. One new target is $62 while another is $68. Currently the point & figure chart is bullish and forecasting at $65 target.

The stock has been showing relative strength, especially against many of its peers. Today DAL is trading near all-time highs and is poised to breakout. Tonight we are suggesting a trigger to buy calls. Wait for DAL to close above $53.00 then buy calls the next morning.

FYI: DAL will likely report earnings in mid to late January

Breakout trigger: Wait for DAL to close above $53.00
Then buy calls the next morning with a stop at $47.75

BUY the 2017 Jan $60 call (DAL170120C60)

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

Originally listed on the Watch List: 12/27/15


General Electric - GE - close: 31.15

Comments:
01/03/16: GE displayed relative strength last week. The stock also flirted with our suggested entry point but never quite made it. We have been waiting for GE to close above $31.35. Last week shares were finding resistance at $31.50. Tonight we are adjusting our entry trigger. Wait for GE to close above $31.55 and then buy calls the next morning.

Trade Description: December 20, 2015:
Tonight we are going old school with our new watch list candidate. GE has been slowly drifting higher since the 2009 market lows. Most of 2014 and 2015 the stock was stuck churning sideways. The situation changed in early October this year after a big activist investor got more involved. It's making a difference. The S&P 500 is down -2.6% year to date. Yet GE is up +20% in 2015 and should continue to outperform in 2016.

GE is in the industrial goods sector. According to the company, "GE is the world's Digital Industrial Company, transforming industry with software-defined machines and solutions that are connected, responsive and predictive. GE is organized around a global exchange of knowledge, the 'GE Store,' through which each business shares and accesses the same technology, markets, structure and intellect. Each invention further fuels innovation and application across our industrial sectors. With people, services, technology and scale, GE delivers better outcomes for customers by speaking the language of industry. www.ge.com"

One of the biggest changes at GE has been the company's long-term transformation to get rid of its financial assets that have been an albatross around its neck for so long. Management is focusing on the company's roots, which is industrial products and innovation.

The company recently held their annual meeting with analysts. The year ahead brings a lot of challenges. The global market is still struggling. The U.S. economy is limping along at +2% growth. Plus the strong dollar hurts sales outside the U.S. In spite of these headwinds GE's CEO Jeffery Immelt is bullish on 2016.

Management is forecasting 2016 earnings to rise +15% on revenue growth of +2% to +4%. That is impressive for such a massive company like GE who does so much business overseas. They also foresee paying investors $8 billion in dividends and spending $18 billion on stock buybacks in 2016. GE provided a long-term 2018 earnings forecast of more than $2.00 per share compared to $1.30-1.20 a share in 2015. They expect to return $55 billion to shareholders in dividends and buybacks between now and 2018. That sort of investor-friendly action could help GE weather any market volatility in 2016.

The stock has been showing relative strength the last few months. The stock held up pretty last week too during the market's volatile moves. GE tagged multi-year highs on Wednesday. The point & figure chart is bearish and forecasting a long-term target at $53.00.

The action in GE's stock over the last few weeks is either a new top or it's a new base. We are betting it is the latter. Tonight I am suggesting investors wait for GE to close above $31.35 and then buy calls the next morning.

FYI: GE is scheduled to report Q4 earnings on January 22nd.

Breakout trigger: Wait for a close above $31.55
Then buy calls the next morning with a stop at $29.40

BUY the 2017 Jan $35 call (GE170120C35)

01/03/16: Adjust entry trigger from a close above $31.35 to $31.55
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 12/20/15


United Parcel Service - UPS - close: 96.23

Comments:
01/03/16: The recent bounce attempt in UPS appears to be failing. Shares are down two weeks in a row and the stock is poised to break down under short-term support at $96.00. I am still expecting UPS to drop toward long-term, major support near $94.00.

Our suggested entry point is an intraday dip to $94.50.

Trade Description: November 29, 2015:
Black Friday has grown from a one-day sales event to a four-day weekend sales bonanza. Nowadays the theme of Black Friday holiday sales starts before Thanksgiving. Unfortunately the initial impressions from retailers this year is that crowds were smaller than expected. That's because more and more consumers are shopping online. One retail research firm is estimating that online sales will grow +8% this year versus the +5.8% we saw in 2014.

One way to play the growth of online shopping is the delivery business. UPS is in the services sector. According to the company, "UPS is a global leader in logistics, offering a broad range of solutions including transporting packages and freight; facilitating international trade, and deploying advanced technology to more efficiently manage the world of business. Headquartered in Atlanta, UPS serves more than 220 countries and territories worldwide."

Smaller rival FedEx (FDX) is forecasting a +12% surge in deliveries this holiday season (to 317 million packages). The U.S. Postal Services is forecasting +11% growth to nearly 600 million packages. UPS, the largest delivery company, is projecting +10% growth this holiday season. They expect to handle more than 630 million packages between Black Friday and New Year's Eve this year.

The combination of low gasoline prices and rising online shopping should be a bullish combination for UPS. I wouldn't be surprised to see online sales surpass the +8% growth estimate. More and more companies are trying to develop their online sales. Plus, following the tragic events in Paris this year, there is a heightened sense of wariness that could keep some consumers out of the malls this year.

The last few weeks have seen shares of UPS consolidating sideways in the $102.00-105.50 zone. We want to buy calls if UPS can breakout from this trading range. Tonight I am suggesting investors buy calls if UPS can close above $105.50.

Buy-the-dip @ $94.50, use a stop at $91.45

BUY the 2017 Jan $100 call (UPS170120C100)

12/13/15 Entry Point Strategy Update = adjust to a buy-the-dip strategy. Use buy-the-dip trigger at $94.50. Move the option strike to the 2017 January $100 call. Move the stop loss down to $91.45.
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 11/29/15