Option Investor
Newsletter

Daily Newsletter, Monday, 11/3/2014

Table of Contents

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

Market Wrap

Election Eve

by Thomas Hughes

Click here to email Thomas Hughes
The major indices wrestled with new all-time highs on mixed economic data ahead of tomorrow's general elections.

Introduction

A round of mixed economic data as well as anticipation for tomorrows elections combined to create a day of cautious trading. Not bearish, just weak; the indices held to near break-even levels for most of the day with light volumes. Some were able to move into the green and set new all-time intraday highs while others were not, but all closed off of the day's highs.

Weaker than expected, but still expansionary, data from Asia and Europe helped the market start of on a somber note. Flash PMI reading from both regions were slightly less than expected but still above the expansionary 50 level. In China the reading was 50.4, a three month high, and in Europe the reading was 50.6, flat from the previous month.

Market Statistics

Earnings news ahead of the opening bell was positive but not too exiting. Economic data was more in focus but again was not all that exiting. Auto sales figures were released throughout the morning and were basically in line with expectations. ISM manufacturing was in line with expectations with a positive look forward into the next month. Construction spending was down versus an expected gain but not by a large margin.

The economic data did not spark a rally but it did help the indices hold near Friday's closing prices once the open session began. The indices rose to near break-even ahead of the bell and then held those levels throughout the morning. There was a little bit of churn but trading was held to a fairly tight range all day. The SPX was held to a range of 5 points, between 2015 and 2020 for most of the day but was able to move as high 2024.46 on an intraday basis.

Economic Calendar

The Economy

ISM and Construction Spending figures were both released at 10AM. The ISM gauge of business strength rose to 59, a gain of 2.6%. This is up from last month's reading of 56.6 and matches the August reading, which was a 3 year high. Within the report new orders rose by 5.8% to 65.8. The report highlights an increase in demand for items going into the holiday, employment and production levels.

Construction spending fell unexpectedly by -0.4%. This is versus an expected gain of 0.7%. The previous month was revised higher to -0.5%. On a year over year basis spending in September 2014 is up 2.6% from last year. On a year to date basis spending is up 6.1%. This shows spending is slowing this year, but still above levels seen last year. Most of the decline this month is due to a drop in public building projects.

Moody's Survey Of Business Confidence is still strong. In the highlight Mark Zandi reports that confidence remains strong and firm, with no signs of an impact from market volatility or Ebola. He goes on to say that conditions are a little soft but the outlook going into the end of the year and first part of next year is still strong. Conditions overseas are still weak, especially in Europe and South America.

Auto sales were released throughout the day on a maker by maker basis. GM reported a little lighter than expected, only 0.2%, but for the most part all were inline or slightly ahead. Toyota reported +6.9% versus an expected +6.1%. Chrysler reported a strong +21.7% gains on sales of Jeep and Ram trucks. Ford sales fell-1.7%, weak but not as weak as the -2.7% expected. As a whole the reports put the market on track for an annualized rate of about16.4 million units. The national data, released at 2PM today, revealed that the sales rate topped 16.5 million units on an annualized basis.

The Oil Index

Today WTI fell below $80 to a new low near $78.50. Today's action was largely due to a new price list from Saudi Arabi. The latest price list, which is really a list of price differentials for Saudi costumers, has them raising prices for Asia and Europe while lowering them for the US. A stronger dollar is also putting pressure on oil prices but the Saudi and greater OPEC situation is still an unanswered question that could keep prices from falling to far. The next OPEC meeting is November 27th at which several members are expected to call for a defense of oil prices through production cuts. New evidence shows that OPEC production is already falling even though there has been no official action to do so. The latest Reuters survey shows that production was down more than 120,000 million bpd in Oct.

The Oil Index traded to the downside today. The index moved down from resistance at 1480 and could be moving lower. The indicators are bullish but are peaking at this level and could lead to consolidation or pullback. Caution is definitely warranted here, especially in light of the upcoming OPEC meeting and it's potential influence on oil prices and expectations for profits among oil producers. The oil companies have so far been able to meet street expectations but with prices so low future profit growth is in serious doubt. I am still expecting a retest of support, possibly as low as 1,400 or 1,350, based on the October correction so I will be watching 1480 very closely. Today's move might be confirming this theory but I'm not that bearish on the index either, with potential support close beneath today's closing prices.


The Gold Index

Gold prices held steady today after falling to a new low last Friday. All my theories were completely blown out of the water by the BOJ move to expand its QE programs. This move, along with the FOMC decision/statement and recent moves by the ECB, helped send dollar value soaring and gold prices sinking. Gold is now below the previous support level of $1180 with indicators pointing to lower prices.

The Gold Index traded higher today, gaining 3.5% from the long term low set last week, a low dating back more than 10 years. Last weeks drop in gold helped the index to complete a full retracement of its prior bull market and then drop below the 100% line. The index is trading below potential support with bearish indicators and an underlying commodity under serious pressure. The indicators are bearish on the daily charts, pointing to lower prices, and confirmed by complimentary indications on the weekly chart. The long term trend in the index is down and I don't see that changing now, so long as gold prices remain so low. On a contrarian note, the indicators are still showing fairly substantial divergence from the current lows, a sign of weakening trend.


In The News, Story Stocks and Earnings

Earnings are still in focus. As of Friday more than 74%, 362, S&P 500 companies have reported. 78% of those have reported earnings above the projected average and 59% have reported sales above the projected average. As of now average earnings growth is 7.3%, up from last weeks average 5.6% and the 4.5% projected at the beginning of the quarter.

Sysco, one of the nations largest food suppliers, reported earnings this morning. The purveyor reported 6% increases in revenue and profits despite a decline in margins. Along with the good news the company reported that ongoing issues with the FTC anti-trust review of its purchase of US foods will prevent the merger from going forward until after the holidays at the earliest. Shares of the stock traded lower on the news, coming to rest just above $37.50. This level was established as potential support/resistance just about a year ago when the purchase of US Foods was first announced.


Ryanair, discount air carrier, reported an increase in earnings above expectations and lifted its full year guidance. The company was able to increase traffic volumes and revenue per customer and is only the latest airline to report similar results. Shares of the stock moved higher by more than 6.5% after gapping up at the open to trade just below long term resistance near $60. The indicators are bullish and gaining strength so I would expect to see resistance tested again.


Sprint move pretty fast after the bell, lower, on a poor earnings report. Shares of the telecom giant fell more the -7.5% after reporting a shortfall on revenue and earnings. The shortfall is due in part to a decline in revenue from post-paid users and has resulted in a downsizing of the company. Sprint reported it was cutting 2,000 jobs to reduce costs and streamline operations.


AIG also reported after the bell. The insurance giant reported earnings and revenue above expectations and sent shares higher. The company reported EPS of $1.21 versus the consensus estimate of $1.09 on revenue of $8.6 billion. Share gained about 1% after the announcement and look like they will move higher in the near term. The indicators are bullish and on the rise with resistance 2.5-5-5% above current levels.


The Indices

The market more or less traded flat today. The SPX closest to flat line than any, with a loss of only -0.01%. The index traded in a very tight range, at current all time highs, setting a new intra-day all time high with bullish indicators. Momentum is very strong but may have peaked or be at a peak while stochastic is very high in the range. The index is moving up and looks good to keep moving higher. I still think a retest of support is due, maybe not down to last month's lows, but maybe down to 2,000 or to the long term trend line around 1,950 if at all. So far there is no real sign it is coming, other than previous divergence, so until then I'm holding my position with tight stops.


The Dow Jones Industrial Average was the other major index to close in the red. The blue chips lost 0.14% after briefly moving into the green and setting a new intra-day high. The index created a spinning top around Friday's all-time closing high while traders wait to see what happens with the elections. The indicators are bullish, but unlike the SPX which is showing a possible peak in momentum, the Dow Jones is still gaining momentum. MACD is at an extreme bullish peak, a sign of strength, and stochastic is crossing the upper signal line. Based on the indicators I would expect to see higher prices in this index over the next few weeks and months.


The Dow Jones Transportation Average was able to close with a small gain, 0.15%. The trannies made a new all time closing high, but not a new all time intraday high. Regardless, the index is making new highs and is beginning to for what looks like a near term consolidation. This is because the index has traded sideways over the past five days, with bullish indicators, at all time high levels during a strong bullish move just ahead of major elections and a round of macro-economic data. MACD and stochastic both indicate strength in the previous move as well. MACD is at an extreme peak and stochastic is high in the range. Both indicators are showing some near term weakening of the move but this is also possibly a good sign. Weakening indicators while the market continues to trade at or near all time highs allows market to cool off and set up for another leg higher. Of course, this theory requires a break above resistance which is currently right around 1,870. If this plays out, and the index does make a break to the upside, targets are as high as 1,000 points above the current all time high. I know that may sound a little ridiculous but the index has already made a move of that extent, we may be only be at the midpoint of a larger move.


The NASDAQ Composite made the largest gain at 0.18%. The tech heavy index set a new all time closing and intraday high with bullish and rising indicators. Momentum is on the rise and stochastic is moving higher in the upper signal zone. The index is moving higher in the near term, in line with the long term trend and looking strong.


The indices tread water today. The underlying reasons they are at current levels have not disappeared but tomorrow's elections and the upcoming round of macro-economic data has provided reason to pause. Once the smoke clears underlying fundamentals will remain. The trends are up, the indices are breaking out to new highs and the indications are strong. The elections or the data could put an end to that but until then I remain bullish.

Until then, remember the trend!

Thomas Hughes


New Plays

Slowing User Growth

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Twitter, Inc. - TWTR - close: $40.21 change: -1.26

Stop Loss: 43.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 03, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 27.9 million
New Positions: Yes, see below

Company Description

Why We Like It:
TWTR is considered part of the technology sector. The company runs a micro-blogging, communication platform. Users can express themselves but they're limited to 140 characters. The platform is part of the social media/networking industry, which constantly gets a lot of attention from Wall Street.

TWTR came public with its IPO about one year ago. The stock priced at $26.00 and shares ended their first day of trading (November 7, 2013) at $44.90. It has been a roller coaster ride for the stock price. TWTR almost hit $75.00 in December last year and then fell to $30 by May 2014. The company has seen incredible growth but even with the growth its valuations fuel a lot of critics. Their P/E ratio is negative. The stock is trading around 20 times its annual revenues and over 100 times next year's earnings.

The stock's most recent earnings report was October 28th and Wall Street was not happy with the results. Analysts were expecting a profit of $0.01 per share on revenues of $351.59 million. TWTR delivered $0.01 cent, matching estimates, and revenues soared +114.9% to $361 million in the quarter.

TWTR's advertising revenue grew +109% to $320 million from the same quarter a year ago. International revenues were up +176%. With all of this growth and the revenue beat, why did TWTR's stock crash on this report?

The reason is user growth. The company's user growth appears to be slowing down. TWTR's Monthly Active Users (MAUs) hit 284 million in the third quarter. That's an improvement of 13 million from the same quarter a year ago. Wall Street was expecting 285 million MAUs and the whisper number was around 290 million or higher.

The 284 million MAU number is a +4.8% growth rate from the same quarter a year ago. Yet a year ago MAUs were growing +6.4%. The prior quarter Q2 2014 MAUs were growing +5.9%. You can see the concern here. TWTR's valuations are based on extremely strong growth, which is it seeing in its ad revenues, but if users aren't growing then ad revenues will likely stall as well.

Management issued Q4 revenue guidance in the $440-450 million range versus consensus estimates around $448 million. This is another reason traders could have hit the sell button. At least five firms downgraded TWTR following these results.

The stock plunged from the high $40s to low $40s on this earnings report. There has been almost no oversold bounce and now shares are hitting new three-month lows near support at $40.00.

Tonight we are suggesting a trigger to open bearish positions at $39.75. I do want to caution readers that there was a rumor of an activist investors getting involved with TWTR but nothing has been confirmed yet. Should that that story prove to be true it could spark some short covering.

Trigger @ $39.75

- Suggested Positions -

Short TWTR stock @ (trigger)

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

Buy the DEC $40 PUT (TWTR141220P40) current ask $2.60

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

Annotated Chart:

Weekly Chart:



In Play Updates and Reviews

Intraday Gains Fade On Monday

by James Brown

Click here to email James Brown

Editor's Note:
The market's intraday gains faded and the major indices closed relatively flat.

INSY hit our stop loss. LE hit our entry trigger.


Current Portfolio:


BULLISH Play Updates

Natus Medical Inc. - BABY - close: 33.86 change: -0.14

Stop Loss: 32.45
Target(s): To Be Determined
Current Option Gain/Loss: -3.2%
Entry on October 31 at $34.97
Listed on October 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 282 thousand
New Positions: see below

Comments:
11/03/14: BABY spent most of Monday churning sideways inside a 50-cent range.

I would wait for a new rally past $34.30 before initiating new positions.

Earlier Comments: October 30, 2014:
BABY is in the healthcare sector. The company makes medical equipment to treat newborns. The company's online profile describes NATUS as "a leading manufacturer of medical devices and software and a service provider for the Newborn Care, Neurology, Sleep, Hearing and Balance markets. Natus products are used in hospitals, clinics and laboratories worldwide. Our mission is to improve outcomes and patient care in target markets through innovative screening, diagnostic and treatment solutions."

If you like companies with consistent growth then BABY might work for you. The company has beaten Wall Street's top and bottom line estimates for the last five quarters in a row!

BABY's most recent earnings report was October 22nd. Wall Street was looking for a profit of $0.31 a share on revenues of $87.7 million. BABY delivered $0.33 with revenues rising more than 5% to $89.9 million.

Management then raised their guidance. They expect EPS in-line with analysts' estimates but they offered slightly bullish guidance on Q4 revenues, which should come in above consensus estimates.

Jim Hawkins is BABY's President and CEO. Mr. Hawkins commented on his company's third quarter results saying:

"I am very pleased with our third quarter results as we achieved record revenues and earnings. Both revenue and earnings exceeded the top end of guidance. I am most satisfied with our 63% gross profit margin as well as recording over 5% organic revenue growth. Consistent organic revenue growth and improving margins have been major goals for Natus in 2014 and our results demonstrate significant progress to the achievement of these goals.

I remain excited about our Peloton Hearing Screening Service business as we added 17 hospitals during the quarter and we ended the quarter with 39 hospitals under contact. Including contracts already signed during October, we have exceeded our 2014 goal of 40 hospitals under contract by the end of the year."

Technically shares have been showing relative strength and held up very well during the market's correction between mid-September through mid-October. The stock's recent performance has pushed shares to new all-time highs. Today's intraday high was $34.24. I am suggesting a trigger to open bullish positions at $34.35.

- Suggested Positions -

Long BABY stock @ $34.97

10/31/14 trade opened on gap higher at $34.97, suggested trigger was $34.35


Burlington Stores, Inc. - BURL - close: 42.40 change: +0.46

Stop Loss: 39.85
Target(s): To Be Determined
Current Option Gain/Loss: + 3.3%
Entry on October 30 at $41.05
Listed on October 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 663 thousand
New Positions: see below

Comments:
11/03/14: BURL displayed relative strength again with a +1.0% gain on Monday while most of the market drifted lower.

I am not suggesting new positions at current levels.

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.

- Suggested Positions -

Long BURL stock @ $41.05

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

Long DEC $40 call (BURL141220c40) entry $3.10

11/01/14 new stop @ 39.85
10/30/14 triggered @ 41.05
Option Format: symbol-year-month-day-call-strike


Land's End, Inc. - LE - close: 46.47 change: -1.00

Stop Loss: 45.95
Target(s): To Be Determined
Current Option Gain/Loss: - 4.2%
Entry on November 03 at $48.50
Listed on November 01, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 468 thousand
New Positions: see below

Comments:
11/03/14: Yuck! It was a frustrating session if you're a bull on LE. The stock rallied the first half of the day and broke out past resistance to hit new all-time highs. Our suggested entry trigger was hit at $48.50. Then mid afternoon LE started to reverse lower and is accelerated into a -2.1% decline. Shares almost hit our stop loss at $45.95.

If this weakness continues tomorrow morning I do expect to be stopped out. I am not suggesting new positions at this time.

Earlier Comments: November 1, 2014:
LE is in the services sector. The company was recently spun off from Sears Holding (SHLD) in April 2014. LE is probably best known for its catalog sales. They've grown into more than just a catalog. According to a company press release, "Lands' End, Inc. is a leading multi-channel retailer of casual clothing, accessories, footwear and home products. We offer products through catalogs, online at www.landsend.com and affiliated specialty and international websites, and through retail locations, primarily at Lands' End Shops at Sears and standalone Lands' End Inlet Stores. We are a classic American lifestyle brand with a passion for quality, legendary service and real value, and seek to deliver timeless style for men, women, kids and the home."

Now that LE has been unshackled from the Sears behemoth the company can shine on its own. Their most recent quarterly report was back on September 10th. LE reported a profit of 37 cents a share. That's up from 35 cents a year ago and significantly above Wall Street's estimates that were down in the 17-to-24 cent range. The direct sales business, which accounts for 83% of the company's revenues, said sales were up +7.1%. Gross margins rose 310 basis points to 48.5%. Their operating income was up +37.6%.

It has been a volatile year for shares of LE. That might be due to all the short interest. The bears have been getting killed. LE has bounced back toward its highs but the short interest is still at 4.3 million shares versus the float of 13.6 million. That's more than 31% of the float and definitely a receipt for another short squeeze. Right now LE is hovering just below resistance in the $48.00-48.25 level and if shares can breakout it could definitely spark some short covering.

Christmas is less than 54 days away. This year consumer spending is supposed to be above average. Online shopping should do exceptionally well this year. All of this bodes well for LE.

Tonight we are suggesting a trigger to open bullish positions at $48.50. We are not setting an exit target tonight but I will note that the point & figure chart is bullish and forecasting a long-term target at $67.00.

- Suggested Positions -

Long LE stock @ $48.50

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

Long DEC $50 call (LE141220c50) entry $4.55

11/03/14 triggered @ $48.50
Option Format: symbol-year-month-day-call-strike


Lowe's Companies - LOW - close: 57.45 change: +0.25

Stop Loss: 55.35
Target(s): To Be Determined
Current Option Gain/Loss: +4.4%
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:
11/03/14: Shares of LOW continue to levitate higher. There is no change from my prior comments. The stock is short-term overbought and due for a dip. I am not suggesting new positions at this time.

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*

11/01/14 new stop @ 55.35
10/23/14 triggered @ 55.05
Option Format: symbol-year-month-day-call-strike


The Pantry, Inc. - PTRY - close: 25.59 change: -0.18

Stop Loss: 24.85
Target(s): To Be Determined
Current Option Gain/Loss: +4.4%
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:
11/03/14: Traders bought the dip in PTRY midday but shares still underperformed the major indices with a -0.69% decline.

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*

11/01/14 new stop @ 24.85
10/30/14 new stop @ 23.80
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: 25.17 change: -0.04

Stop Loss: 24.45
Target(s): To Be Determined
Current Option Gain/Loss: +0.1%
Entry on October 29 at $25.15
Listed on October 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 738 thousand
New Positions: see below

Comments:
11/03/14: SONC spiked down at the open but shares rebounded near the $24.50 level. The stock made it back to virtually unchanged by the closing bell.

I would wait for a breakout past $25.50 before considering new positions.

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.

- Suggested Positions -

Long SONC stock @ $25.15

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

Long DEC $25 call (SONC141220C25) entry $0.95

11/01/14 new stop @ 24.45
10/29/14 triggered @ 25.15
Option Format: symbol-year-month-day-call-strike


Zumiez Inc. - ZUMZ - close: $33.33 change: -0.05

Stop Loss: 32.45
Target(s): To Be Determined
Current Option Gain/Loss: - 2.4%
Entry on October 29 at $34.15
Listed on October 28, 2014
Time Frame: Exit prior to earnings in early December
Average Daily Volume = 296 thousand
New Positions: see below

Comments:
11/03/14: ZUMZ retested short-term support near $33.00 and its simple 10-dma. The stock closed virtually unchanged on the session.

I am not suggesting new positions at this time.

Earlier Comments: October 28, 2014:
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.

- Suggested Positions -

Long ZUMZ stock @ $34.15

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

Long DEC $35 call (ZUMZ141220C35) entry $1.60

11/01/14 new stop @ 32.45
10/29/14 triggered @ 34.15
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Pandora Media, Inc. - P - close: 19.43 change: +0.15

Stop Loss: 20.55
Target(s): To Be Determined
Current Option Gain/Loss: - 2.0%
Entry on October 30 at $19.04
Listed on October 29, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 7.1 million
New Positions: see below

Comments:
11/03/14: The oversold bounce in Pandora continued on Monday. There was some speculation if shares of P got a boost today from headlines that pop star Taylor Swift had removed all of her music from rival streaming music company Spotify. Whatever the cause, shares of P soared +5% intraday before reversing and closing with a +0.7% gain.

Earlier Comments: October 29, 2014:
Pandora is in the services sector. The company provides streaming music over the Internet and through your mobile device. They have over 200 million registered users and over 76 million active users.

It has been a really rough year for shares of Pandora. The stock is down over 50% from its all-time high of $40.44 set in March this year. Traders have been selling the rallies for months. If you only looked at the profit numbers you might be surprised by Pandora's performance.

Pandora's most recent earnings report was October 23rd. They beat analysts' estimates with a profit of 9 cents per share. That's a +50% improvement from a year ago. Revenues were up +41.5% from a year ago to $239.6 million, which also surpassed analysts' estimates. Pandora said listener hours soared +25% to almost 5 billion hours in the third quarter versus a year ago. The company's guidance was actually somewhat bullish with Pandora guiding slightly above consensus estimates on both the top and bottom line.

Given this impressive growth from 2013 you might think the stock would be soaring. Unfortunately for Pandora shareholders the company is seeing growth actually slow down and that's due to significant competition.

The 4.99 billion listener hours last quarter may have been up from a year ago but it's down -1% from the second quarter. The company's active users came in at 76.5 million users in the third quarter. That's up +5.2% from a year ago but it's virtually flat versus the 76.4 million from the prior quarter.

The slowdown is likely a result of too much competition. There are a ton of streaming music services like Rdio, Deezer, Grooveshark, Xbox Music, Sony Music Unlimited, and Songza. Yet the major competitors for Pandora are probably Spotify, Amazon.com's Prime Music, Apple's iTunes radio, which will soon merge with Beats Music, and finally Google has their Google Play Music All Access service. If all the competition wasn't enough Pandora also has to contend with music labels constantly fighting to raise the royalties that Pandora has to pay.

There are plenty of bears in this name. The most recent data listed short interest at 13.2% of the 197.2 million share float. Given the stock's recent performance, the slowing growth, and rising competition, the bears should have the upper hand. The stock's performance has produced a bearish signal on the point & figure chart, which is forecasting a long-term target of $11.00.

Tonight we are suggesting bearish positions at the opening bell tomorrow morning. More conservative traders could wait for a new relative low under $18.90 instead. The next support level might be the $15.00 area.

- Suggested Positions -

Short P stock @ $19.04

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

Long 2015 Jan $19 PUT (P150117p19) entry $1.71

10/30/14 trade begins. P opens @ $19.04
Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

INSYS Therapeutics, Inc. - INSY - close: 40.68 change: -1.32

Stop Loss: 37.75
Target(s): To Be Determined
Current Option Gain/Loss: -6.2%
Entry on October 21 at $40.25
Listed on October 20, 2014
Time Frame: Probably exit prior to earnings on Nov. 11th
Average Daily Volume = 540 thousand
New Positions: see below

Comments:
11/03/14: Our higher-risk trade on INSY did not pay off. We noted in the previous newsletter that Friday's performance looked like a potential bearish reversal. INSY confirmed that reversal with significant weakness today as shares plunged -7.4%. Our stop loss was hit at $37.75.

*Small positions to limit risk* - Suggested Positions -

Closed INSY stock @ $40.25 exit $37.75 (-6.2%)

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

NOV $45 call (INSY141122c45) entry $1.60* exit $0.40 (-75.0%)

11/03/14 stopped out @ 37.75
11/01/14 Caution: INSY might be forming a double top
10/29/14 New analyst upgrade and price target send INSY higher
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

chart: