Option Investor
Newsletter

Daily Newsletter, Tuesday, 10/28/2014

Table of Contents

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

Market Wrap

Fed Fears Fade

by Jim Brown

Click here to email Jim Brown

Investor fears over an unexpected Fed announcement on Wednesday apparently evaporated with the market racing higher ahead of the Fed announcement.

Market Statistics

The markets shook off any Fed fears after mixed economics led credence to the idea that the Fed will not say anything negative to disrupt the markets. Add in some positive earnings reports and suddenly a short squeeze was born.

Putting a wet blanket on any unexpected Fed moves was the Durable Goods report for September. New orders declined -1.3% after falling -18.3% in August. This was well below the consensus estimates for a +0.6% rise. The weakness was broad based with core capital goods orders declining -1.7% and orders excluding defense goods declined -1.5%. Core capital goods shipments fell -0.2%.

Orders for computers, machinery and electronics declined and suggested business activity was slowing. The bright spot in the report was a +7.4% gain in defense orders after a +4.9% rise the prior month.

The weakness in the Durable Goods orders, even though not nearly as bad as the -18.3% decline in August, should keep the Fed on "worry watch" for a weakening of the U.S. economic cycle.

Offsetting the weakness in the Durable Goods orders was a surge in the Richmond Fed Manufacturing Survey, which rose from 14 in September to 20 in October. New orders rose from 14 to 22 and backorders rose from 6 to 9. Inventories declined from 23 to 15 suggesting further manufacturing strength in the months ahead.

On the negative side the employment component declined slightly from 17 to 14 and hours worked fell from 10 to 9. Capital expenditure plans dropped sharply from 38 to 25.

The Richmond Services Survey rose from 21 to 27. Excluding retail the index rose from 18 to 28. The six month outlook rose from 22 to 27.

The combination of the manufacturing and services gains in the Richmond region far outpaced the weak readings in other regions. This is positive for the Fed's outlook that the economy is continuing to improve at a modest pace. The index is very close to a post recession high.


While the Richmond numbers were surging the Texas numbers were not. The Texas service sector outlook for October declined from 27.5 to 18.0. The revenue component fell from 26.9 to 14.0 and selling prices fell from 8.0 to 6.6. Capital expenditure plans declined from 14.5 to 11.1. The hours worked component fell sharply from 6.9 to 4.1 suggesting some rising unemployment issues in Texas. However, the employment component rose from 11.9 to 12.3. The hours worked is a shorter term number while the employment component is more forward looking. The recovery in Texas is still well above contraction territory but slowing.

Consumer confidence for October rose sharply from 89.0 to 94.5 and the highest level since 2007. When you consider the Ebola scare plus the market correction this spike was very unexpected. Both internal components posted gains but the six-month expectations component roared ahead with a jump from 86.4 to 95.0 and the highest level since February 2011. The present conditions component rose only slightly from 93.0 to 93.7. About the only reasons you can apply to this expectations spike is the expected election outcome and falling gasoline prices. Everything else was negative. Europe, Ebola, market crash, etc were all producing negative headlines during the survey period.

Even more confusing is that the sharp rise in expectations was not accompanied by positive buying trends. Those respondents planning on buying a car declined from 12.1% to 10.8%. Homebuyers were flat at 5.1% while appliance buyers declined from 51.5% to 49.1%. Only 16.5% felt jobs were plentiful with 29.1% saying jobs were hard to get. Both numbers were nearly unchanged from the prior month.

The Fed will be relieved to see confidence climbing rapidly because eventually this will translate into consumers spending money and boosting the economy.


The economic calendar for Wednesday is dominated by the FOMC announcement. There is almost zero doubt that they will not end QE. The only uncertainty is what they will do about the "considerable period" terminology. A survey of 39 economists and analysts believe the Fed will keep the language until the December meeting. That suggests the market could be volatile if they elect to drop it at this meeting. Everything else they might say is already priced into the market.

You may remember the "taper tantrum" when they first floated the idea of cutting QE purchases. We are not likely to see a QE event this time because the end of QE in October has been telegraphed for the last 8 Fed meetings and by Fed speakers including Yellen. Ending QE this week is not a surprise to anyone. What happens over the next month is the real unknown.

Those same survey participants don't believe the Fed will raise rates until July at the earliest. They expect a .9% interest rate by the end of 2015, 2.0% at the end of 2016 and 3.3% at the end of 2017. The Fed has been so transparent that the majority of investors are no longer surprised by any Fed actions.

The GDP numbers out on Thursday are expected to show +3.1% growth for Q3. This has been correlated by numerous analysts so the potential for a negative surprise is low. However, that means a surprise, if it does occur, could create some volatility.


Twitter (TWTR) was the big disappointment for the day with a -10% decline after reporting disappointing earnings on Monday after the close. Analysts were quick to downgrade the stock when subscriber growth slowed. Twitter said it had 284 million active users and that was below some estimates. That was up +23% from Q3-2013 but up only +5% from Q2-2014 compared to +6.2% growth from Q1 to Q2. Twitter guided for Q4 revenue between $440-$450 million and the midpoint was below the consensus estimate of $448.2 million.

The results were not all bad with mobile ad sales rising +114% to $361.2 million and beating estimates by $10 million. Despite the rising sales RBC Capital cut their price target from $65 to $47, Nomura cut the target from $55 to $45 and lowered them from buy to hold.


Cummins (CMI) posted earnings of $2.32 compared to estimates for $2.28. Revenue of $4.89 billion was well above estimates for $4.71 billion. They raised revenue guidance for the full year to grow 10-12% compared to prior guidance at 8-11%. That puts the midrange at $19.2 billion compared to analyst expectations for $19.02 billion. The strong earnings came from sales of vehicle components in North America, Europe and China. The company said customers are upgrading their fleets and buying more trucks. Compared to prior guidance from Caterpillar about slowing sales this was a breath of fresh air. Shares rallied +7% on the news and helped fuel the market rally by boosting economic sentiment.


Buffalo Wild Wings (BWLD) rallied +13% after reporting earnings of $1.14 compared to estimates of $1.06. Revenue rose +18.3% to $373.5 million and topped estimates of $371 million. Same store sales rose +6%. More than 190 stores now have tableside tablets allowing customers to play games while waiting for food and they are also installing an app that lets customers pay at the table rather than waiting for a waitress to collect the money and process credit cards.


After the bell Facebook (FB) reported advertising revenues that rose +64% to $2.96 billion. Overall revenue rose +59% to $3.2 billion. Mobile ad revenue rose to $1.95 billion or 66% of the total for the quarter. That is up from 62% in Q2 and 59% in Q1. The company had 1.35 billion average monthly users, up +14%. Daily users rose +19% to 864 million. Monthly mobile active users rose +29% to 1.12 billion. Earnings of 43 cents beat estimates for 40 cents.

Unfortunately the conference call did not go well and shares plunged from the nearly $81 close to trade at $72. On the call the company said 2015 revenue could grow 40-47% but expenses could rise 50-70%. When quizzed about why expenses were rising so sharply they said they were investing in their recent acquisitions and investing in more people to build out new features. Investors were not happy and shares collapsed.


Gilead Sciences (GILD) reported adjusted earnings of $2.05 compared to aggressive estimates of $1.92. Revenue rose more than double from $2.71 billion to $5.97 billion. However, sales of their Hep C drug Sovaldi hit $2.8 billion in Q3 compared to estimates of $2.97. Q2 sales were $3.48 billion. Sales slowed in Q3 because of the impending announcement of Harvoni, which is an all oral form of Sovaldi and includes the two corresponding injection drugs that were necessary with Sovaldi alone. The all oral Harvoni does not require the other drugs so many patients were holding off on treatment until Harvoni was available. Sovaldi costs $86,000 for the 12 week treatment and Harvoni is $94,500. Analysts were not concerned about the dip in Sovaldi because they expect a strong surge in sales in 2015 once Harvoni becomes wildly available. RBC Capital said they expect $15 billion in Hep C drug sales for Gilead in 2015. That is up from nearly zero two years ago.

The company raised the lower range of full year revenue estimates from $21 billion to $22 billion and left the upper range unchanged at $23 billion. Analysts were expecting $24.3 billion. Clearly analysts were too aggressive in their expectations for Sovaldi sales during the changeover to Harvoni. Shares of GILD fell -$4 in afterhours. I view this as possibly your last buying opportunity before this stock soars in 2015. They reported a $2.73 billion profit in Q3, up from $788 million in the year ago quarter. If they boost their sales by $15 billion on Hep C alone in 2015 that profit is going to more than double if not triple. Where else can you get growth like that?


Panera (PNRA) shares declined -$6 after the close after they reported earnings of $1.46 compared to estimates of $1.44 but they cut Q4 and full year guidance on rising ingredient costs. They lowered the full year range from $6.65-6.80 to $6.60-6.70. Same store sales rose +2.1% and better than the +1.7% estimates.


Electronic Arts (EA) reported earnings of 73 cents compared to estimates of 53 cents. Revenue of $1.22 billion beat estimates of $1.16 billion. They raised guidance for fiscal 2015 from $1.85 to $2.05 and revenue from $4.10 billion to $4.18 billion. EA said they were seeing continued growth of generation 4 consoles (PlayStation 4 and Xbox One) and solid results in products for the older consoles. Shares were volatile after the close but ended down only -$1 in afterhours.


Wynn Resorts (WYNN) reported earnings of $1.95 compared to estimates of $1.84 thanks to a +9% revenue surge in Las Vegas that offset a -5.6% decline in revenue from Macau. The corruption crackdown in China has put the squeeze on high rollers and many of them are going low profile to avoid showing up spending lavish amounts of money. Overall revenue declined -1.4% to $1.37 billion. They also announced a 20% hike in their quarterly dividend to $1.50 and added a special dividend of $1 for a total of $2.50 for the quarter. Shares spiked to $194 on the news but returned to $185 and their closing price in afterhours.


With 49% of the S&P reported more than 73% of companies have beaten on earnings, 8% reported in line with estimates and 19% missed estimates. This has been a good quarter despite only 49% beating on revenue. Earnings growth is just slightly over 5%.

Highlights for Wednesday will be ADP, Visa and WellPoint. Thursday is the big day with GoPro, Expedia, Starbucks, MasterCard, Linkedin and First Solar.


IBM has been known as a serial purchaser of its stock as it tried to manage earnings by reducing the number of shares outstanding. They announced another $5 billion buyback today on top of $1.4 billion still unspent from the prior authorization. As buybacks go for IBM that is chicken feed. They announced $20 billion in 2013, $12 billion in 2012, $15 billion in 2011 and $18 billon in 2010. They have bought back more than half their shares over the last 20 years. They have repurchased more than $125 billion in shares just since 2005. With shares at three year lows I am surprised today's announcement was only $5 billion. In the seven years ending in 2013 IBM earned about $100 billion and paid $20 billion in dividends and bought back $100 billion in stock in a frantic race to continually lower the outstanding shares and boost earnings per share. If they had taken that money and developed their business the stock price would probably not be at three-year lows today.


Tesla (TSLA) was in the news again after Elon Musk took exception to some sales numbers reported in the Wall Street Journal and he went to Twitter to express his comments. The WSJ article said "Tesla probably delivered through September 10,335 Model S cars in the U.S. market, down -26% from the same period in 2013. Meanwhile production increased by 10%. With Tesla's goal of 35,000 cars in 2014, Tesla would have to sell 17,500 cars in the USA. At the current pace the automaker will miss that target by a wide margin." a href="http://online.wsj.com/articles/tesla-unveils-lower-cost-lease-plan-1414427518" target="new">WSJ article

Musk tweeted that September sales hit a "record high" worldwide and North American sales were up +65% from last September. That appeared to be a rebuttal to the WSJ article BUT they may both be right.

Analysts said the U.S. sales may not be surging because of the lower number of cars available for sale. Tesla is sending more cars overseas because of high demand and the desire to get a lot of cars on the roads as an advertising tool for future sales.

Shares rose +9.5% on the Musk tweet.


Markets

It was a very good day in the markets with all the indexes posting strong gains. The Nasdaq 100 and the Dow Transports both closed at new highs. The winner by far was the Russell 2000 with nearly a +3% gain of 32 points. This was short covering on a major scale. Once it broke over the 1,120 resistance level the rocket boosters fired up and it was a race to the close. I hesitate to pound the table too much on this Russell rally because of the short covering component but this was a very big move. It would not surprise me to see a decent retracement on Wednesday once reality returns.

The close at 1,149 was above both the 100 and 200 day averages so technicians are probably cussing their charts tonight. In theory that is bullish but in reality we will probably dip back below those levels tomorrow.


The Dow Transports exploded past the prior highs to close at 8,759 and a new historic high. The low oil prices plus full planes and overbooked trains are a tough combination to beat. The ramp up from the October lows has been nearly vertical. The transports should be due for a rest but they are currently showing no weakness. I mentioned last week that I expected a new high and I think there is still room to run once it consolidates.


The S&P punched through the strong resistance at 1,962-1,967 and raced to the next major resistance level at 1,985 where it ended the day. This is going to be another resistance battle and given the earnings results after the close. The futures are down -5 points and we should see some profit taking at the open tomorrow.

Fortunately intraday support is not far below at 1,970. However, if by chance we were to give back all the gains for today that would be severely negative for sentiment. The 1,955-1,957 level would be the key. If that level holds on the initial decline we should be ok. While I don't expect to see that level again you never know what to expect around a Fed meeting.

A punch through 1,985 faces even stronger resistance between 2,000/2,012.


The Dow powered to a +187 point gains to close just over 17,000 but the real resistance is now 17,150. The resistance waypoints have been falling like dominoes but the next one is going to be the toughest.

Not to beat a dead horse but a lot of these index gains today were short covering. We need to consolidate these gains before I expect the indexes to move higher.



The Nasdaq 100 ($NDX) closed at 4,107 and a new 14 year closing high. You can thank all the regular names for the gain but Apple added more than 8 points of that +60 point spike.

The Nasdaq Composite punched through strong resistance at 4,485 and then closed above the next resistance level at 4,545 with a +78 point gains. This was a huge move but unfortunately much of it was short covering. If the Nasdaq can push over 4,600 we should be off to the races for a yearend rally. Intraday support is now 4,530.




I am thrilled by the market rebound from the October lows. However, we have come too far, too fast and today's short squeeze was probably a climax spike. We need to see traders take profits and consolidate at these levels before we have a chance of punching through to new highs.

The Fed meeting should not produce positive volatility because the expectations are already priced into the market. That means we could be at risk for a sell the news event.

I would be a dip buyer on any material dip because I believe we are going higher by the end of December. However, there is significant resistance at the market highs on the Dow, S&P and Nasdaq. We know there will be a large number of people that will exit when those levels are reached and happy to get their money back after enduring the October decline. We need to get past this profit taking before we make new highs.

Volume today was moderate at 6.7 billion shares and barely more than the prior two days. Rallies on low volume should not be trusted.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Strong Same-Store Sales

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Zumiez Inc. - ZUMZ - close: $33.83 change: +0.90

Stop Loss: 31.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 28, 2014
Time Frame: Exit prior to earnings in early December
Average Daily Volume = 296 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
ZUMZ is in the services sector. The company is considered a specialty retailer. The website describes the company as "a leading multi-channel specialty retailer of action sports related apparel, footwear, equipment and accessories, focusing on skateboarding, snowboarding, surfing, motocross and BMX for young men and women. As of October 4, 2014 we operated 594 stores, included 545 in the United States, 34 in Canada, and 15 in Europe. We operate under the name Zumiez and Blue Tomato. Additionally, we operate ecommerce web sites at www.zumiez.com and www.blue-tomato.com."

Apparel retailers as a group have been pretty hit or miss this year. Yet the sports-related names have been doing okay. ZUMZ's focus on sports-related clothing and equipment might insulate it from the normally finicky teen crowd.

ZUMZ's latest earnings report was back in September. You can see the gap down on the daily chart. ZUMZ beat EPS estimates by 4 cents as earnings grew +35%. Yet revenues only rose +11.9% and missed analysts' estimates. More importantly management issued somewhat soft EPS guidance. The good news for investors is that the post-earnings sell-off did not see any follow through. Instead ZUMZ continues to build on its multi-month trend of higher lows.

I suspect investors might be willing to over look guidance that was a couple of cents below Wall Street's estimates in favor of a company that continues to grow same-store sales. ZUMZ has a pretty good track record with the retailer reporting same-store sales growth that beat analysts' estimates several months in a row. Their latest sales data was very impressive. On October 8th ZUMZ said their net sales in September rose +12.5% while their comparable store sales soared +6.6% compared to estimates for only +2.7% growth.

The current rally has lifted ZUMZ stock to new 2014 highs and the point & figure chart is bullish and forecasting a long-term target of $46.00. Tonight we are suggesting a trigger to open bullish positions at $34.15. We will plan on exiting prior to ZUMZ's next earnings report in early December.

Trigger @ $34.15

- Suggested Positions -

Buy ZUMZ stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the DEC $35 call (ZUMZ141220C35) current ask $1.80

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

Annotated Chart:

Weekly Chart:



In Play Updates and Reviews

Breakout Past The 50-dma

by James Brown

Click here to email James Brown

Editor's Note:
The major U.S. indices broke through potential technical resistance at their 50-dma today.


Current Portfolio:


BULLISH Play Updates

Burlington Stores, Inc. - BURL - close: 40.34 change: -0.22

Stop Loss: 38.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 663 thousand
New Positions: Yes, see below

Comments:
10/28/14: BURL produced a rather disappointing decline today. There was no follow through on yesterday's relative strength. The fact that shares did not participate in the market's broad-based rally is surprising.

At the moment I don't see any changes from last night's new play description.

Earlier Comments: October 27, 2014:
Christmas is less than 60 days away. This year retail spending is expected to surge. The National Retail Federation is forecasting sales during the holiday shopping season to rise +4.1%. Analyst firm Deloitte LLP is expecting a +4.5% improvement. Last year we only saw +2.8% growth and the 10-year average is +2.9%.

If we take into account the positive impact low gasoline prices will have then the estimates above might be too low. Fuel prices are down nearly 20% from their early 2014 highs. That is a huge boost for consumer spending. Oil looks like it will continue to sink so the trend should continue.

The off-price retailers have been outperforming their regular price peers. BURL is part of the off-price group. According to their company website, "Burlington is a national off price retailer offering style for less for the entire family and the home with up to 65 percent off department store prices every day. Departments include ladies' dresses, suits and sportswear, juniors, accessories, menswear, family footwear, children's clothing, furniture and accessories for baby at Baby Depot, home décor and gifts, along with the largest selection of coats in the nation for the entire family. Burlington has 520 stores in 44 States and Puerto Rico."

Credit Suisse recently noted that BURL has delivered three years in a row of strong same-store sales growth. They did it again when the company reported earnings in early September. BURL said their same-store sales grew +4.7% in their second quarter, compared to estimates for +2-3% growth. Management also noted that their gross margins improved by 50 basis points to 38.2%.

Wall Street was expecting a loss of 8 cents per share on revenues of $1.03 billion. BURL delivered a loss of only one cent and revenues were up +8.2% to $1.05 billion. It was a big improvement from a loss of 19 cents a year ago. More importantly management raised their 2015 guidance for both their earnings and revenue estimates.

The bears will argue that BURL is expensive. It's hard to argue with them since BURL currently sports a P/E near 58. However, investors continue to buy the stock and now shares are poised for another bullish breakout. New highs could spark some short covering. The most recent data listed short interest at 13% of the very small 29.3 million share float.

Tonight we are suggesting a trigger to open bullish positions at $41.05.

Trigger @ $41.05

- Suggested Positions -

Buy BURL stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the DEC $40 call (BURL141220c40)

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


INSYS Therapeutics, Inc. - INSY - close: 39.02 change: +0.12

Stop Loss: 37.75
Target(s): To Be Determined
Current Option Gain/Loss: -3.1%
Entry on October 21 at $40.25
Listed on October 20, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 540 thousand
New Positions: see below

Comments:
10/28/14: Warning! The lack of movement in INSY is not healthy. The biotech stocks are soaring and significantly outperforming the rest of the market. Yet shares of INSY are just churning sideways under resistance near $40.00.

Investors will want to seriously consider an early exit right now. I am not suggesting new positions. We will move the stop loss to $37.75.

INSY will likely report earnings in the next two or three weeks and we plan to exit before the announcement.

Earlier Comments: October 20, 2014
INSY is a short squeeze candidate. The company is part of the healthcare sector, more specifically biotechnology. They currently market two drugs. One is their Subsys, which is a sublingual fentanyl spray to quickly treat pain for cancer patients. Thus far the product seems to be off to a strong start. INSY also markets a generic Dronabinol product to help treat chemotherapy induced nausea as well as anorexia related to patients with AIDS.

INSY is also developing treatments with cannabidiol, which has made headlines in the past. Cannabidiol is a component of marijuana that does not provide patients with a high. INSY has been working with cannabidiol to develop a treatment for Dravet Syndrome, a form of childhood epilepsy.

INSYS was recently granted orphan drug designation for its cannabidiol treatment for glioblastoma multiforme, which is the most aggressive version of malignant brain tumors in humans. Yet this good news has been offset by bad news that the FDA rejected the company's application for a new Dronabinol oral solution. The feds claim INSY submitted an incomplete study plan on the treatment's safety.

There is also the spectre of a federal investigation. Shares of INSY collapsed back in May after it was unveiled that one doctor in Michigan was fraudulently prescribing hundreds of INSY's Subsys painkiller treatment. This has sparked an investigation into INSY' marketing practices.

Technically shares of INSYS have been trending higher with a pattern of higher highs and higher lows. The most recent low happened to be on the day investors reacted to the FDA rejection on its dronabinol oral treatment. INSY was down about -10% intraday and then rebounded to a huge gain (Oct. 15th).

If this rally continues INSY could see a short squeeze. The most recent data listed short interest at 68.6% of the extremely small 10.19 million share float.

Tonight we are suggesting a trigger to open bullish positions at $40.25. More aggressive traders might want to consider a trigger just above $39.50 instead.

Please note that I am labeling this a higher-risk, more aggressive trade. Biotechs are already dangerous do to headline risk. INSY could be volatile with all the short interest.

*Small positions to limit risk* - Suggested Positions -

Long INSY stock @ $40.25

- (or for more adventurous traders, try this option) -

Long NOV $45 call (INSY141122c45) entry $1.60*

10/28/14 new stop @ 37.75, Investors will want to consider an early exit now!
10/23/14 new stop @ 37.45
10/23/14 INSY is not cooperating. Investors may want to exit early now.
10/21/14 triggered @ 40.25
Option Format: symbol-year-month-day-call-strike


Lowe's Companies - LOW - close: 56.06 change: +0.59

Stop Loss: 53.65
Target(s): To Be Determined
Current Option Gain/Loss: +1.8%
Entry on October 23 at $55.05
Listed on October 21, 2014
Time Frame: Exit PRIOR to earnings on November 19th
Average Daily Volume = 5.5 million
New Positions: see below

Comments:
10/28/14: LOW continues to follow the market higher and added another +1%. I am not suggesting new positions at this time. LOW is starting to look a little short-term overbought.

Earlier Comments: October 21, 2014:
LOW is in the services sector. They run the second biggest chain of home improvement stores in the country. Their 1,837 stores offer more than 200 million square feet of retail space through the U.S., Canada, and Mexico.

The company's most recent earnings report was back in August. LOW beat Wall Street's top and bottom line estimates. Revenues were up +18.2% from a year ago. Gross margins saw some improvement. Same-store sales were up +4.4%, which was impressive. Management provided a small reduction in their full year revenue guidance but this failed to have much impact on the stock. Shares of LOW gapped down on its earnings news and investors bought the dip at support near $50.00.

Since this August earnings report we've seen homebuilder confidence hit nine-year highs while shares of LOW were hitting all-time highs in the $54-55 zone. Investors keep track of the housing market because LOW's business seems to rise and fall with real estate.

The stock market's recent volatility drug LOW back to support near $50.00 and once again traders bought the dip. There was a recent analyst note that was cautious on LOW and its rival Home Depot. The analyst noted that a slow down in sales for building materials would suggest the slowdown should hit retailers too. We may have to wait for LOW's earnings report to see if the analyst is right. In the mean time shares of LOW just ended at an all-time closing high.

If you believe the U.S. economy will continue to improve and the labor market will continue to see job growth then home improvement retailers like LOW and HD should see steady improvement as well.

We are not setting an exit target tonight but I will point out that the point & figure chart is bullish and forecasting a long-term $75.00 target for LOW.

Use a trigger at $55.05 to open bullish positions. We will most likely exit ahead of LOW's earnings report on November 19th.

- Suggested Positions -

Long LOW stock @ $55.05

- (or for more adventurous traders, try this option) -

Long NOV $55 call (LOW141122c55) entry $1.45*

10/23/14 triggered @ 55.05
Option Format: symbol-year-month-day-call-strike


The Pantry, Inc. - PTRY - close: 25.43 change: +1.32

Stop Loss: 23.30
Target(s): To Be Determined
Current Option Gain/Loss: +3.8%
Entry on October 17 at $24.50
Listed on October 15, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 190 thousand
New Positions: see below

Comments:
10/28/14: PTRY delivered a strong session. The stock rallied nearly all day long and ended the session with a +5.4% gain. These are new multi-year highs. The stock is on track for its fifth weekly gain in a row.

I am not suggesting new positions at this time.

Earlier Comments: October 16, 2014:
This is a simple relative strength trade. PTRY has been almost bullet proof against the market's recent weakness. Instead of following the major indices lower PTRY has soared to new four-year highs.

The company website says, "Headquartered in Cary, North Carolina, The Pantry, Inc. is a leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country. As of September 25, 2014, the Company operated 1,518 stores in thirteen states under select banners, including Kangaroo Express, its primary operating banner. The Pantry's stores offer a broad selection of merchandise, as well as fuel and other ancillary services designed to appeal to the convenience needs of its customers."

PTRY is a small cap stock that has been dead money for years. That seemed to change with their last earnings report. When PTRY delivered earnings on July 30th they beat estimates on both the top and bottom line. The stock soared and broke out past key resistance. Several analysts have raised their earnings estimates on PTRY since that report.

Shares are currently hovering just under short-term resistance at $24.40. We are suggesting a trigger to launch small bullish positions at $24.50. I am suggesting small positions to limit our risk. Looking at a long-term weekly chart of PTRY you could argue that the $25.00 level might be resistance. We will try and limit our risk with a stop loss at $22.90, just under today's low.

*small positions to limit risk* Suggested Positions -

Long PTRY stock @ $24.50

- (or for more adventurous traders, try this option) -

Long DEC $25 call (PTRY141220c25) entry $1.60*

10/23/14 new stop @ 23.30
10/17/14 triggered @ $24.50
Option Format: symbol-year-month-day-call-strike


Sonic Corp. - SONC - close: 25.07 change: +0.41

Stop Loss: 23.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 738 thousand
New Positions: Yes, see below

Comments:
10/28/14: Traders bought the dip intraday and SONC rallied to a new high with Tuesday's +1.6% gain. The stock is poised to hit our suggested entry point at $25.15 soon.

Earlier Comments: October 25, 2014:
"Service at the speed of sound." That was SONIC's original slogan after the company was rebranded from a chain of Top Hat root beer stands decades ago. Today the company has over 3,500 locations in 44 states. That makes SONIC the largest chain of drive-in restaurants in the United States.

Shares of SONC saw big gains in 2013. The rally continues in 2014 but it has been a much more volatile year for the share price. Yet in spite of all the ups and downs SONC is still respecting the long-term bullish trend of higher lows. Now with strong earnings numbers the stock it hitting multi-year highs.

SONC recently reported its Q4 results on October 21st. Same-store sales in the quarter were up +4.6% and margins improved 150 basis points. Net profits came in at 34 cents a share, which is a 62% improvement from the same period a year ago. Revenues were up +3.1%, which beat Wall Street's estimates.

Management guided in-line and SONC expects profit growth of 18-20% in 2015. Multiple analyst firms raised their price target on SONC stock follow these results. The stock's rally has produced a buy signal on the point & figure chart that is forecasting a long-term target near $35.00.

Friday's high was $25.07. Tonight we are suggesting a trigger to open bullish positions at $25.15. We will start with a stop loss at $23.75. I will point out that the 2007 highs in the $25.30-26.20 area is potential resistance so this might be considered a more aggressive entry point.

Trigger @ $25.15

- Suggested Positions -

Buy SONC stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the DEC $25 call (SONC141220C25) current ask $1.05

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




BEARISH Play Updates

The Dow Chemical Co. - DOW - close: 47.98 change: +1.48

Stop Loss: 50.25
Target(s): To Be Determined
Current Option Gain/Loss: -1.5%
Entry on October 24 at $47.25
Listed on October 22, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 8.4 million
New Positions: see below

Comments:
10/28/14: DOW delivered a strong bounce today (+3.2%) but not enough to erase yesterday's losses. After today's reversal higher I would hesitate to launch new bearish positions at this time.

Earlier Comments: October 23, 2014:
DOW is the largest chemical company in the U.S. by sales. They make a huge variety of products from industrial chemicals, plastics, and agricultural chemicals. A main component for a lot of these is oil. The recent plunge in crude oil should be bullish for DOW and help boost margins.

The company recently reported earnings on October 22nd and they did see some margin improvement. DOW delivered a profit of 72 cents a share on revenues of $14.4 billion compared to analysts' estimates of 67 cents on revenues of $14.3 billion. Yet this better than expected quarterly report did not do much for the stock price. Shares spiked toward resistance near $50.00 and its 200-dma and then collapsed. Today was not much better. DOW hinted that they plan to cut expenses by $1 billion over the next three years and shares barely budged. The market soared with widespread gains and DOW eked out a seven-cent gain.

Technically DOW is broken. The big sell-off from its September highs sliced through all of its support levels. Now the oversold bounce appears to be failing.

I would consider this more of a technical trade. The current failed rally looks like a potential entry point for bearish trades. We'd like to see a little follow through lower. Tonight we are listing a trigger at $47.25. More conservative traders may want to see a drop under $47.00 instead.

- Suggested Positions -

Short DOW stock @ $47.25

- (or for more adventurous traders, try this option) -

Long Dec $45 put (DOW141220P45) entry $1.20

10/24/14 triggered @ 47.25
Option Format: symbol-year-month-day-call-strike


Mistras Group - MG - close: 16.13 change: +0.04

Stop Loss: 17.05
Target(s): To Be Determined
Current Option Gain/Loss: - 1.8%
Entry on October 27 at $15.85
Listed on October 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 81.5 thousand
New Positions: see below

Comments:
10/28/14: MG rallied up to $16.32 (a +1.4% gain) this morning before reversing. The stock pared its gain to just +0.24% versus the S&P 500's +1.19% move.

The relative weakness is encouraging but I would wait for a new drop under $15.90 before considering new bearish positions.

Earlier Comments: October 18, 2014:
MG is in the services sector. The company evaluates the structural integrity of infrastructure. A company press release describes MG as "a leading 'one source' global provider of technology-enabled asset protection solutions used to evaluate the structural integrity of critical energy, industrial and public infrastructure. Mission critical services and solutions are delivered globally and provide customers with asset life extension, improved productivity and profitability, compliance with government safety and environmental regulations, and enhanced risk management operational decisions."

Unfortunately, for MG investors the company is developing a habit of missing Wall Street's earnings estimates. They've missed three quarters in a row. Their most recent report was October 7th. Wall Street expected a profit of 12 cents a share. MG only delivered 4 cents.

This big earnings miss produced the spike down you see on the daily chart. There has been almost zero bounce and now MG has drifted lower to major support at the $16.00 level. A breakdown here would be very bearish. The Point & Figure chart is already forecasting a long-term bearish target of $6.00.

Tonight we are suggesting a trigger to launch bearish positions at $15.85. I am suggesting caution. This stock does not trade very much. Average volume is very low. That should make traders cautious. I'm suggesting very small positions or try and put options to limit risk.

*Very small positions to limit risk* - Suggested Positions -

Short MG stock @ $15.85

- (or for more adventurous traders, try this option) -

Long NOV $17.50 PUT (MG141122P17.50) entry $1.85

10/27/14 triggered @ $15.85
Option Format: symbol-year-month-day-call-strike