Option Investor
Newsletter

Daily Newsletter, Sunday, 1/17/2016

Table of Contents

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

Leaps Trader Commentary

Stocks Caught In A Global Rout

by James Brown

Click here to email James Brown

Stocks were trapped in a storm of selling that continued to batter the global markets for the second week in a row. Last week started with a -5.3% drop in the Chinese Shanghai index and it ended on Friday with another -3.5% drop in Chinese stocks. Worries about a weak Chinese economy and a potentially weaker Chinese yuan continue to pressure markets around the world.

The non-stop decline in crude oil is also undermining markets. WTI crude oil crashed -5.7% on Friday, which pushed its weekly decline to -11%. Oil's drop on Friday was investor reaction to news from the International Atomic Energy Agency that Iran had met its requirements to end sanctions. If sanctions are lifted Iran will be free to sell their crude oil on the open market - a market that is already deluged by an oversupply of oil. On Saturday the U.S. announced that sanctions on Iran would be lifted in accordance with the controversial deal lead by the Obama administration last year.

Oil's fall fueled a -3.7% drop in energy stocks and a -4.1% decline in oil service stocks last week. One analyst at Oppenheimer said half of U.S. shale drillers may end up going bankrupt. This was followed by news that loan loss reserves at major banks were rising for the first time in years seemingly in anticipation of debt trouble in the energy industry. Oil settled at $29.44 a barrel, the lowest level since November 2003. There is a growing camp of analysts forecasting oil will fall to $25 a barrel or lower.

Overall it was a sour week for equity markets. It didn't help we had a high-profile market call from RBS telling clients to "sell everything." The NASDAQ composite lost another -3.3%, which pushes its 2016 loss to -10.4%. The big cap S&P 500 index fell -2.1% for the week. This leaves the S&P 500 down -8.0% for the year. The small cap stocks have fared worse with the Russell 2000 index losing -3.6% last week and down -11.3% year to date.

Investors were indeed selling just about everything. Transportation stocks are down -10.9% year to date. The SOX semiconductor index is down -13.4%. Banking stocks are off -13% in the first two weeks of 2016. Biotech stocks have been hammered with a -16% plunge this year. You already know about oil's decline. Copper and platinum prices fell to seven-year lows last week. Traders tried to find safety in U.S. bonds, which drove the yield on the 10-year note down to 2.03%.

It has been a global market rout. European stocks were down -2% on Friday. The Stoxx Europe 600 index fell -3.4% for the week and is now down -9.8% for the year and down -20% from its April 2015 highs, putting Europe in a bear market. The Chinese Shanghai index fell -9.0% for the week. It's down -18% in the first two weeks of January and also in bear market territory.

Economic Data

It was another busy week for economic data in the United States. The New York Empire State manufacturing survey for January crashed from -4.6 to -19.4. It was the biggest drop in seven years. We haven't seen this index at these levels since early 2009 (during the financial crisis). The new orders component plunged from -6.2 to -23.5.

U.S. industrial production for November was revised lower from -0.6% to -0.9%. Meanwhile the reading for December came in at -0.4% when economists were hoping for -0.1%. This is the fifth monthly decline in a row. Elsewhere the business inventory data showed a -0.2% drop in November following a flat reading in October.

Inflation at the wholesale level, as seen in the Producer Price Index (PPI), was up +0.3% in November but declined -0.2% in December, which was lower than expected. On a year over year comparison the PPI is down -1.1%. The core PPI, which excludes food and energy, managed to rise +0.1%. Overall there is virtually zero inflation in the U.S.

Another big disappointment last week was the retail sales figures. The Commerce Department said December retail sales fell -0.1%. That is definitely bad news during the crucial holiday shopping season. Restaurants managed to see a gain in December but it was overshadowed by declines in apparel sales, electronics, and general merchandise. December's -0.1% reading is the slowest pace of retail sales in the U.S. since 2009. For the whole year retail sales rose +2.1% in 2015. That is significantly below the +5.1% average seen over the prior five years.

Falling gasoline prices at the pump likely helped boost consumer sentiment. The latest consumer sentiment survey for January improved from 92.6 to 93.3. This could decline as the next survey accounts for the plunge in stocks.

Overseas Economic Data

The latest round of economic data out of China continues to worry the markets. Their Consumer Price Index (CPI) for December was actually in-line with estimates at +0.5% for the month. China's Producer Price Index (PPI) was not so lucky and showed a -5.9% decline. China also announced that their December exports fell -1.4%, which was better than expected but still the sixth month in a row of year-over-year declines.

Nearby Japan said their Core Machinery Orders for November plunged -14.4% for the month. This was almost twice as bad as expected and down from +10.7% the prior month.

Looking toward Europe, Span said their industrial production for November was up +4.2%, which was above expectations. Italy announced their industrial production for November fell -0.5%. The Eurozone said their industrial production for November declined -0.7%, following a +0.8% gain in October. Spain also reported their CPI, which fell -0.3% for the month. Italy's CPI for December was flat at 0.0%. France said their CPI for December was up +0.2%. Essentially there is no inflation in Europe either.




Major Indices:

The brutal two-week decline has shaved off -8.0% in the S&P 500 index. Friday's decline left the index down -10.8% from its early November highs, which puts it in correction territory. That's the bad news. The good news is the index is severely oversold and could be ready to bounce.

You can see on the daily chart that the S&P 500 pierced what should have been support at its August and September lows. The good news is that it bounced intraday and failed to close below that area. Friday's sell-off was a combination of many factors including option expiration and the last day ahead of a long, three-day weekend. Cautious traders wanted to sell instead of holding over a long weekend where there could be more negative headlines overseas.

Should the S&P 500 rebound from here then every support level it broke on the way down is now potential resistance. I'd focus on the 1,950 level as a pivotal area to watch. On the other hand, if the S&P 500 doesn't bounce from here then the next spot to watch for potential support is the October 2014 low near 1,820.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite has been hammered this year with a -10.4% drop in the first ten trading days of 2016. It is tough to say where support might be with the NASDAQ below its late September low (see chart). If the NASDAQ were to bounce from current levels I'd use a Fibonacci retracement tool to look for potential resistance areas. The 4,600-4,800 area could be a challenge. If the sell-off continues then the August low near 4,300 is potential support.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

Small cap stocks have been crushed this year. The normal December-January strength did not show up. Investors seeking to avoid risk have fled the small cap arena. Part of the problem is the large amount of smaller energy companies and biotech firms inside the Russell 2000. These two groups have been decimated and they are dragging the rest of the small caps lower.

The Russell 2000 ($RUT) fell -3.6% for the week. It's now down -11.3% year to date (two weeks). The $RUT is now down -22% from its June 2015 highs, putting it firmly in bear-market territory. It's tough to say where the next support level is. The $RUT pierced support at the 1,000 level but managed to pared its loss on Friday. There is a chance it rebound now. If not the next support area might be the 950 level.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

China remains in focus this week. The country will provide an update on its retail sales, its industrial production, and its Q4 GDP estimate. Right now economists are expecting Chinese Q4 growth to be +6.9%, the slowest pace in years.

Overseas there are several countries announcing their latest interest rate decisions. These include Brazil, Canada, Kenya, and Turkey. The only one of any real importance to the market will be Europe. The ECB has an interest rate meeting on Thursday followed by a press conference. Will they announce changes to their QE program?

- Monday, January 18 -
Chinese Retail Sales
Chinese Industrial Production
China Q4 GDP estimate
Bank of Japan Governor Haruhiko speaks
Martin Luther King, Jr. Day (U.S. markets closed)

- Tuesday, January 19 -
NAHB Housing market index

- Wednesday, January 20 -
World Economic Forum begins in Davos, Switzerland
Consumer Price Index (CPI)
Housing Starts and Building Permits

- Thursday, January 21 -
European Central Bank interest rate decision
ECB press conference
Philadelphia Fed Survey

- Friday, January 22 -
Eurozone manufacturing data
Existing Home Sales
Chicago Fed national activity index
U.S. Markit manufacturing PMI

Additional dates to be aware of:

Jan 18th - 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:

It should be no surprise that investor sentiment has soured significantly. The latest AAII survey showed bearish investors rose +7.3% to 45.5%. This number could jump even further since the survey was taken midweek, prior to Friday's plunge.

AAII sentiment

It did not help when we have major analyst firms telling clients to "sell everything". The Royal Bank of Scotland (RBS) made waves on Tuesday when they issued a note to clients that 2016 could be a "cataclysmic year". They warned investors that stocks could plunged -20% and brent crude oil could fall to $16 a barrel. Their suggestion was to "sell everything except high quality bonds. This is about a return of capital, not return on capital." The RBS research team believes that the markets is flashing the same warning signals shown just before the 2008 financial crisis. Of course not everyone agrees. Multiple market pundits and analysts firms came out with their own opinions saying this is not 2008 all over again.

Recession Imminent?

There has already been a lot of speculation about a corporate earnings recession. The S&P 500's Q3 earnings were negative. Now analysts are forecasting Q4 earnings growth to be somewhere in the -3% to -6% range depending on who you listen to. That would be two consecutive quarters of earnings declines, i.e. an earnings recession.

Now there is a looming worry that the global economy and the U.S. economy could be facing a recession. If you haven't noticed the commodity index ($CRB) just sank to new 44-year lows on Friday. Falling commodity prices would suggest weak and declining global growth. The parade of slowing economic data has pressured forecast at the Atlanta Fed. They publish their GDPNow estimate, which is now forecasting U.S. Q4 growth of just +0.6%. We will find out how close they are when the government publishes their first estimate on Q4 growth on January 29th.

We should note that since the end of World War II the U.S. has experienced a recession, on average, about every five years. It has been seven years since our last one so we are a bit overdue. Here is an article on CNBC discussing the prospects of a recession and how the next one will be worse: link.

Pace of Fed Rate Hikes

One of the biggest stories last week and likely the rest of 2016 will be the pace of rate hikes at the Federal Reserve. The Fed raised rates in December for the first time in nearly a decade. It was a controversial move as many believed the economy did not support a rate hike. Now it looks like the critics were right. The U.S. economy continues to slow.

Yet Fed officials continue to talk about raising rates this year. St. Louis Fed President James Bullard spoke last week and shared his opinion that the Fed will likely raise rates four times in 2016. The market disagrees. Bond traders are only forecasting two rate hikes this year. Meanwhile some market watchers wonder if the Fed will be forced to postpone rates altogether due to lousy economic conditions. A few outliers suggest the Fed may have to backtrack and lower rates again. Here's a Reuters article on the subject: Murmurs of a Fed Reversal.

Market Outlook

I cautioned readers last week about the rash of bearish signals suggesting trouble ahead for the market. On a short-term basis there are some factors that suggest we are oversold enough for a bounce soon. The question is whether or not traders will buy the bounce or will they sell the rally?

There were a few high profile earnings reports last week. While the companies beat estimates traders sold the news anyway. That doesn't bode well for this earnings season. Hopefully it was merely a reflection of the broader market weakness last week.

Currently the market faces a lot of uncertainty and that is the one thing Wall Street hates most. The short-term trend is down but if we are patient there are still opportunities for longer-term traders like ourselves. We just need to be exceptionally picky about what we trade and when we trade it.

Now is probably a good time to build a watch list of stocks you'd like to buy when they bounce from support. There is no need to try and catch the absolute bottom as that tends to be a dangerous game.

~ James





Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Another week, another brutal decline in stocks. The market is not reacting well to constantly disappointing economic data and the non-stop plunge in crude oil prices.

HD, PPC, and STZ all graduated from our watch list to our play list.

HD, MSFT, NOC, OA, PEP, RCL, RHT, SWHC, TRV were all stopped out in last week's carnage on Wall Street.

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

Be Wary Of The Bounce

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(January 17, 2016)

The worldwide sell-off in stocks continued last week. Europe is now in bear-market territory (-20% or more from its highs). The Chinese market is now in bear-market territory. The big cap U.S. indices are in correction territory (-10% or more). The small cap Russell 2000 index is in bear-market territory.

In last week's market wrap I noted how the "average" stock was in a bear-market. The selling only accelerated last week. The market might be oversold enough that it could see a bounce in the week ahead. However, I would be wary of trusting the rebound. Q4 earnings season is about to pick up speed. We need to see how the investors are going to react to corporate results and guidance. This could set the tone for the market for the next several weeks.

No new trades tonight. Last week we had three watch list candidates graduate to active trades. Tonight I am adding M as a new watch list candidate. Plus, I have updated my radar screen.

Radar Screen:
Here is a list of stocks on my radar screen. These have potential to be LEAPS trades down the road if the right entry point presents itself. In no particular order:

SKX: Shares look interesting with a show of relative strength on Friday. The stock did not breakdown below its November lows.

WMT: The rally in early January broke through significant resistance. If shares can bounce from current levels we could see a bullish set up forming.

CLX: The stock has held up pretty well in spite of two weeks of severe selling across the market.

SWHC: Last week's market drop pushed SWHC to new relative lows and hit our stop loss. This is probably a temporary decline. The story for SWHC hasn't changed.

NOC: Defense stocks were not immune to the market's sell-off. The recent weakness could be an opportunity but I would not be in a rush to launch positions. Keep an eye on it.

LMT: This is another defense contractor that has held up reasonably well during the market's decline.

DIS: Shares seem to be unfairly punished over worries about consumer cord-cutting in the cable industry and falling subscriber growth for DIS' ESPN unit. Watch for major support near $90.00.

MSFT: Wall Street is generally bullish on MSFT as it strengthens its position in the cloud computing industry. The stock should have major support in the $48-50 zone. Watch for it to test support and bounce.



Play Updates

Bears Wreak Havoc On Stocks

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's widespread plunge last week played havoc with our active play list. Several stocks were stopped out as the selling pressure intensified.

We did see HD, PPC, and STZ all graduate from our watch list to our play list but HD was stopped out by week's end.


Closed Plays


HD, MSFT, NOC, OA, PEP, RCL, RHT, SWHC, and TRV were stopped out.



Play Updates


Adobe System Inc. - ADBE - close: $89.17

Comments:
01/17/16: It was another rough week for the stock market but ADBE managed to post a gain. Shares spent most of last week consolidating sideways in the $88-92 zone. The market's plunge on Friday pushed ADBE to gap down at $86.84 but that was the low of the day. The stock pared its loss to -0.7% on the session and back above short-term support at $88.00.

We are leaving our stop loss unchanged 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 $6.50/6.80

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


Kimberly-Clark - KMB - close: 125.36

Comments:
01/17/16: KMB weathered the market's storm relatively well. Shares eked out a fractional gain for the week. The $124.00 area remains short-term support. However, if the market continues to sink we could see KMB drop to the next level of support near $122.50 and its 50-dma (currently $122.95).

Currently our stop is at $119.40. More conservative investors may want to raise their stop loss closer to $122 instead. No new positions at this time.

FYI: KMB has earnings coming up on January 25th.

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 $7.00/7.70

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


Pilgrim's Pride Corp - PPC - close: 21.85

Comments:
01/17/16: PPC is a new trade. We added it to the watch list last weekend. The plan was to buy calls if shares traded at $23.55 (intraday trigger). The stock broke out past short-term resistance on Monday (Jan. 11th) and hit our entry point. The rally continued and PPC was hitting five-month highs by Wednesday. Then shares reversed sharply on Thursday and Friday.

Friday's decline in PPC was pretty ugly (-5%) thanks to the combination of the market's widespread plunge and headlines that there is a new outbreak of avian flu. All the stocks of chicken producers were hammered on Friday as this story broke. Avian flu is responsible for the destruction of millions of birds last year as producers try to limit the damage by eliminating entire flocks to prevent the spread of the disease. Another outbreak could definitely be bad news. Fortunately shares of PPC found support right where it was supposed near its 50-dma and the $21.00-21.25 area.

I am not suggesting new positions at this time. The bird-flu story just hit on Friday. Wait and see how PPC performs this week and we will re-evaluate next weekend.

Trade Description: January 10, 2016:
PPC is an aggressive, technical trade. Shares had a terrible 2015 but it looks like all the bad news is priced in.

PPC is in the consumer goods sector. According to the company, "For over six decades, Pilgrim's has produced healthy, high-quality food products that go into some of the world's finest recipes. Working with approximately over 4,000 family farms throughout the U.S. and Mexico, we are dedicated to providing these wholesome, high-quality products at a great value. As the second-largest chicken producer in the world Pilgrim's has the capacity to process more than 34 million birds per week for a total of more than over 7 billion pounds of live chicken annually. With corporate headquarters located in Greeley, Colorado, we have operations in 12 U.S. states as well as in Mexico and Puerto Rico. We are committed to the 35,000 plus team members who work with us to provide products to foodservice, retail and frozen entree customers. The company's primary distribution is through retailers, foodservice distributors and restaurants as well as through the export of chicken products to customers all over the world. Pilgrim's Pride is a part of the JBS USA family. JBS S.A., the world's largest protein company, owns 75.5% of our outstanding common stock."

PPC's most recent earnings report was October 28th. The company delivered their Q3 results and missed estimates. Wall Street was expecting a profit of $0.69 a share on revenues of $2.17 billion. PPC missed both estimates with earnings of $0.58 a share. Revenues fell -6.9% to $2.11 billion.

The industry as a whole has been suffering from the widespread avian flu last year that forced business owners to destroy millions of birds. PPC is also facing serious competition from a handful of competitors. Management is actively seeking ways to reduce their costs and make their business more competitive and their financial results more stable.

It looks like investors might believe the worst is behind it for PPC. Their Q3 earnings came out on October 28th and the stock plunged to new two-year lows on October 29th. That proved to be the low for the year. Investors have since been buying the dips. It is important to note that there is still a large camp of traders who are bearish on PPC. The most recent data listed short interest at 56% of the 59.0 million share float. That much bearishness can work against them. If PPC continues to rally the stock could see a short squeeze.

The intermediate trend is up and the point & figure chart is bullish with a $33 target. PPC managed to ignore the market's sell-off on Thursday and Friday last week. The stock actually broke through resistance on Friday. Tonight I am suggesting small bullish positions if PPC can trade at $23.55. This is an intraday trigger. We will start with a stop loss at $20.65.

- Suggested Positions -
JAN 11, 2016 - entry price on PPC @ 23.55, option @ 3.00
symbol: PPC170120C25 2017 JAN $25 call - current bid/ask $1.70/4.00

01/11/16 triggered at $23.55
Option Format: symbol-year-month-day-call-strike

Chart of PPC:

Current Target: To Be Determined
Current Stop loss: 20.65
Play Entered on: 01/11/16
Originally listed on the Watch List: 01/10/16



Starbucks Corp. - SBUX - close: 58.00

Comments:
01/17/16: I've got good news and bad news with our SBUX trade. The good news is that shares displayed relative strength and actually managed a gain for the week, outperforming the rest of the market. The bad news is that the midweek rally failed at resistance near $60.00 and its trend of lower highs. Odds are good SBUX will retest short-term support near $56.00 and its 200-dma soon.

No new positions at this time. SBUX has earnings coming up soon on January 21st.

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 $2.11/2.27

*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


Constellation Brands - STZ - close: 142.75

Comments:
01/17/16: STZ has graduated from our watch list to our active play list. We added STZ to the watch list last weekend with a buy-the-dip trigger at $145.00. If I had know the market was going to crash again I would have been more aggressive and used a lower trigger price.

Friday's performance was interesting. STZ gapped down at the open like many stocks. Yet shares bounced near Thursday's intraday. The stock rallied only to fail near round-number resistance at $145.00. The bullish up trend remains intact.

Nimble traders may want to try and buy calls on a dip near support in the $140.00-141.00 area. I am suggesting less nimble investors wait for STZ to close above $145.25 before initiating new bullish positions.

Please note that I am adjusting our stop loss down to $138.25 so it's just below the January 4th low. The market has been volatile and I'd hate to get stopped out on just an intraday dip.

Trade Description: January 10, 2016:
New Year's was just a few days ago and many people were thinking hard about their new year's resolutions. For most folks it's a desire to be healthier. Instead of working hard for six-pack abs you may want to just stop by the store for a six pack of whatever STZ is selling. This company appears to be running at full speed and the stock shows it.

STZ is in the consumer goods sector. According to the company, "Constellation Brands is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world's leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company's premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky... Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,700 talented employees."

STZ has been killing it on the earnings front. They have beaten earnings the last three quarters in a row. Management has raised their guidance the last three quarters in a row. Their most recent earnings report was last week on January 7th. Analysts were expecting a profit of $1.30 a share on revenues of $1.62 billion. STZ beat estimates with a profit of $1.42 a shares. Revenues were up +6.4% to $1.64 billion. Strong beer sales has helped fuel double-digit shipment increases. The company announced they were building another brewery and raised their guidance again.

This bullish outlook sparked a couple of new price target upgrades ($174 and $185). The stock soared to new highs and broke through key resistance near the $145.00 level. The market's current decline, should it continue, will likely pull STZ back toward $145.00, which should be new support. Tonight I am suggesting a trigger to buy calls on a dip at $145.00. We'll start with a stop loss at $139.45. More conservative investors may want to wait and see if STZ dips closer to the $140-142 area as an alternative entry point.

- Suggested Positions -
JAN 11, 2016 - entry price on STZ @ 145.00, option @ 7.90
symbol: STZ170120C165 2017 JAN $165 call - current bid/ask $4.80/6.90

01/17/16 adjust stop loss lower from $139.45 to $138.25
01/11/16 triggered @ $145.00
Option Format: symbol-year-month-day-call-strike

Chart of STZ:

Current Target: To Be Determined
Current Stop loss: 138.25
Play Entered on: 01/11/16
Originally listed on the Watch List: 01/10/16


Tyson Foods, Inc. - TSN - close $51.49

Comments:
01/17/16: TSN was on track to post a gain for the week at Thursday's close. That all changed on Friday when a news story broke about a flock of turkeys in Indiana catching the avian flu. All of the publicly traded poultry producers saw their stocks crushed on Friday. TSN actually held up better than its peers only losing -2.6%. TSN issued a press release stating that they do not have any poultry production in the affected area.

Shares reacted to the news story with a plunge toward round-number support at $50.00 and its simple 50-dma (about $50.30). TSN managed to trim its losses by the closing bell but the intraday action still looks bearish.

No new positions at this time.

FYI: TSN has earnings coming up on February 5th, before the opening bell.

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 $4.10/7.50

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


CLOSED Plays


The Home Depot - HD - close: 119.23

Comments:
01/17/16: The market volatility was too much for our new HD trade. Last week we added HD to the watch list with a plan to buy calls on a dip near support at $120.00. Our trigger was hit on Thursday at $120.25. The $118.00-120.00 zone looked like significant support so we put our stop loss at $117.45. Sadly the market's plunge on Friday sparked a gap down in HD and shares opened at $117.12, closing our new play.

I would keep HD on your radar screen. A close above $121.50 might be an alternative entry point for bullish positions.

- Suggested Positions -
JAN 14, 2016 - entry price on HD @ 120.25, option @ 5.42
symbol: HD170120C135 2017 JAN $135 call - exit $4.45 (-17.9%)

01/15/16 stopped out on gap down @ 117.12, stop was $117.45
01/14/16 triggered @ $120.25
Option Format: symbol-year-month-day-call-strike

Chart

Current Target: To Be Determined
Current Stop loss: 117.45
Play Entered on: 01/14/16
Originally listed on the Watch List: 01/10/16


Microsoft Corp. - MSFT - close: 50.99

Comments:
01/17/16: The market's plunge last week finally pushed MSFT below the top of its October 2015 gap higher. We were stopped out on Monday at $51.95.

MSFT was volatile midweek with a rally back toward $54.00, new resistance, and a plunge back to new two-month lows. Shares were testing technical support at the 100-dma on Friday. The $48.00 level should be support for MSFT. I would keep MSFT on your radar screen for a dip or bounce near $48 as another bullish entry point. We are re-adding to the watch list tonight with that strategy.

- Suggested Positions -
DEC 08, 2015 - entry price on MSFT @ 55.05, option @ 3.20
symbol: MSFT170120C60 2017 JAN $60 call - exit $2.06 (-35.6%)

01/11/16 stopped out @ 51.95
12/08/15 triggered @ 55.05
Option Format: symbol-year-month-day-call-strike

Chart

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: 184.21

Comments:
01/17/16: NOC is another victim of last week's market sell-off. Shares broke support on Thursday and hit our stop loss at $184.35. Traders bought the dip on Friday near the next level of support at $180.

Our play is closed but I would keep NOC on your radar screen. If the sell-off continues I'd look for an entry point in the $172-176 area. If NOC rebounds then you may want to wait for a new closing high.

- Suggested Positions -
DEC 30, 2015 - entry price on NOC @ 191.40, option @ 6.30
symbol: NOC170120C220 2017 JAN $220 call - exit $4.30 (-31.7%)

01/14/16 stopped out @ $184.35
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

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: $85.66

Comments:
01/17/16: OA is another defense stock that was swept up in the market's sell-off late last week. Friday's market plunge pushed OA to new three-week lows. Shares broke down below its 50-dma and the $85.00 level. Our stop was hit at $84.75.

- Suggested Positions -
OCT 23, 2015 - entry price on OA @ 82.00, option @ 6.60*
symbol: OA160520C85 2016 MAY $85 call - exit $6.80 (+3.0%)

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

01/15/16 stopped out
01/10/16 new stop @ 84.75
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

Chart

Current Target: To Be Determined
Current Stop loss: 84.75
Play Entered on: 10/23/15
Originally listed on the Watch List: 09/08/15


Pepisco, Inc. - PEP - close: 93.93

Comments:
01/17/16: The market's decline last week slowly pressured shares of PEP lower. By Wednesday it was breaking down under its 200-dma. Friday's market drop sparked a big gap down in PEP and shares opened at $93.95. That was below our stop loss at $94.75 and immediately closed our play.

- Suggested Positions -
OCT 23, 2015 - entry price on PEP @ 103.32, option @ 4.00
symbol: PEP170120C110 2017 JAN $110 call - exit $1.44 (-64.0%)

01/15/16 stopped out on gap down at $93.95
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

Chart

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: 82.92

Comments:
01/17/16: The bearish reversal in shares of RCL has been severe. The stock has just collapsed in the last two weeks. The last three days has been exceptionally harsh. RCL broke down below support on Wednesday and hit our stop loss at $89.00.

- Suggested Positions -
SEP 28, 2015 - entry price on RCL @ 90.00, option @ 6.30
symbol: RCL170120C110 2017 JAN $110 call - exit $4.57 (-27.5%)

01/13/16 stopped out at $89.00
01/10/16 RCL was crushed last week with a -9% drop in profit taking
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

Chart

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: 73.57

Comments:
01/17/16: It was only a few weeks ago that RHT was hitting all-time highs following better than expected earnings news. Unfortunately the rally peaked in the last couple of days of 2015. The profit taking has been merciless. Last week saw RHT breakdown under key support and hit our stop loss at $76.90.

- Suggested Positions -
DEC 30, 2015 - entry price on RHT @ 83.56, option @ 5.00
symbol: RHT170120C100 2017 JAN $100 call - exit $2.55 (-49.0%)

01/13/16 stopped out
01/10/16 adjust stop loss to $76.90
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: 76.90
Play Entered on: 12/30/15
Originally listed on the Watch List: 11/29/15


Smith & Wesson Holding - SWHC - close: 20.55

Comments:
01/17/16: Investors have been selling just about everything, especially their winners. The rush to lock in profits has been rough on shares of SWHC. The stock has retreated from multi-year highs near $26 back toward round-number support at $20.00. Our stop loss was hit last week at $20.90.

The fundamental story for SWHC has not changed. Odds are good this is a temporary, knee-jerk reaction lower to the market's widespread decline. I would definitely keep SWHC on your radar screen. If shares dip toward support in the $18-19 zone and bounce it could be another bullish entry point.

- Suggested Positions -
NOV 25, 2015 - entry price on SWHC @ 18.70, option @ 2.90
symbol: SWHC170120C20 2017 JAN $20 call - exit $4.10 (+41.4%)

01/13/16 stopped out
01/10/16 new stop @ 20.90
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

Chart

Current Target: To Be Determined
Current Stop loss: 20.90
Play Entered on: 11/25/15
Originally listed on the Watch List: 11/08/15


The Travelers Companies, Inc. - TRV - close: 105.10

Comments:
01/17/16: It looked like our TRV might survive last week's storm in the stock market. The stock was consolidating sideways in the $106-108 zone for most of the week. Unfortunately the stock gapped down on Friday morning at $103.28. That was below our stop loss at $104.65 and immediately closed our play.

- Suggested Positions -
JAN 04, 2016 - entry price on TRV @ 110.50, option @ 5.20
symbol: TRV170120C120 2017 JAN $120 call - exit $2.80 (-46.2%)

01/15/16 stopped out on gap down at $103.28, stop was $104.65
01/04/16 triggered on buy-the-dip entry at $110.50
Option Format: symbol-year-month-day-call-strike

Chart

Current Target: To Be Determined
Current Stop loss: 104.65
Play Entered on: 01/04/16
Originally listed on the Watch List: 01/03/16



Watch

The Bottom Is In For This Retailer

by James Brown

Click here to email James Brown

Editor's Note:

We had a successful week for the watch list. HD, PPC, and STZ all graduated to our active play list.

Tonight I have removed DAL as a candidate.


New Watch List Entries

M - Macy's Inc.


Active Watch List Candidates

EQR - Equity Residential

GE - General Electric


Dropped Watch List Entries

HD, PPC, and STZ all graduated to our active play list.

DAL has been removed.



New Watch List Candidates:

Macy's Inc. - M - close: 37.88

Company Info

Leading up to the 2008 financial crisis shares of Macy's (M) were already in decline. The stock fell nearly -90% from its 2007 highs and by late 2008 M traded near $5.00 a share. The market didn't bottom until early 2009. At that time M was trading about $6.25. The stock rallied the next six years in a row. It looked like 2015 would make it seven years in a row. Then momentum suddenly reversed in July 2015. The stock surged to all-time highs near $73.00 on rumors of an activist investors getting involved. That proved to be the peak. Macy's collapsed from about $73.00 in July to $34.50 in December - a 52% plunge. Recent action suggest Macy's has bottomed and all the bad news is priced in.

M is part of the services sector. They are in the department story industry. According to the company, "Macy's, Inc., with corporate offices in Cincinnati and New York, is one of the nation's premier retailers, with fiscal 2014 sales of $28.015 billion. The company operates about 900 stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names of Macy's, Bloomingdale's, Bloomingdale's Outlet, Macy's Backstage and Bluemercury, as well as the macys.com, bloomingdales.com and bluemercury.com websites. Bloomingdale's in Dubai is operated by Al Tayer Group LLC under a license agreement."

U.S. retail sales were very disappointing last year. All of 2015 saw retail sales rise +2.1%. That's down from the five-year average of +5.1%. All year long analysts were expecting consumers to spend more because they were saving more money at the gasoline pump due to falling oil prices. That extra spending never showed up. This lack of spending weighed on several retailers and M's stock continued to sink. Macy's management took advantage of their falling stock price and bought back over 30 million shares last year.

Of course stock buybacks will also do so much. On January 6th Macy's slashed their full-year guidance due to weak sales during the holiday shopping season. Cold weather apparel and goods were not selling due to an unusually warm winter. Macy's said their comparable-store sales dropped -4.7% during the November-December time frame. The company reduced their full-year outlook from $4.20-4.30 a share down to $3.85-3.90 a share. Wall Street was expecting $4.24. That same night Macy's announced a major restructuring program. They will close 36 stores this spring. Plus they will reduce staff and cut costs in an effort to save $400 million a year. Shares rallied the next day.

If a company can cut its earnings guidance and rally then all the bad news is probably priced in. If you haven't noticed lately the stock market is plunging. The S&P 500 is already down -8.0% in the first ten trading days of 2016. Shares of Macy's are moving the opposite direction and the stock is up +8.2% year to date. The recent lows near $34.00 look like a bottom. However, we would like to see M breakout past technical resistance at its 50-dma and past its recent highs.

The late November high was $40.69. Tonight I am suggesting investors wait for M to close above $40.75 and then buy calls the next day with a stop loss at $36.45.

Breakout trigger: Wait for M to close above $40.75
Then buy calls the next morning with an initial stop at $36.45.

BUY the 2017 Jan $45 call (M170120C45) current ask $2.97

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

Chart of M:

Weekly Chart of M:

Originally listed on the Watch List: 01/17/16



Active Watch List Candidates:


Delta Air Lines - DAL - close: 44.50

Comments:
01/17/16: Tonight we are cutting DAL loose and removing it from the watch list. You might assume that multi-year lows for oil would be bullish for the airline industry and you'd be right. However, worries over a global slowdown and concerns about too much capacity continue to pressure the industry.

Trade did not open.

01/17/16 removed from the watch list.

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


Equity Residential - EQR - close: 78.58

Comments:
01/17/16: We are not giving up on EQR. It was another rough week for the stock market and EQR only lost about 30 cents for the week. Shares bounced near support on Friday morning and pared its loss to close virtually breakeven on the session.

The area to watch is overhead resistance near $82.00. We are waiting for EQR to close above $83.00 as our entry trigger.

Trade Description: January 3, 2016:
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 break out 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)

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

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


General Electric - GE - close: 28.49

Comments:
01/17/16: I am surprised that GE did not hit our buy-the-dip trigger at $28.00 in the face of another violent market decline. Shares seemed content to just consolidate sideways in the $28.00-29.00 zone last week.

More aggressive investors may want to jump in early right now. We currently have two different triggers list - the $28.00 trigger and a close above $31.55 as an alternative entry point.

FYI: GE has earnings coming up on January 22nd.

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.

Trigger #1: 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)

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Trigger #2 Buy-the-dip @ $28.00 (intraday trigger) start with a stop at $25.85

BUY the 2017 Jan $30 call (GE170120C30)

01/10/16 Add a secondary entry trigger -- buy the 2017 Jan. $30 call if GE trades down to $28.00 (start with a stop loss at $25.85)
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