Option Investor
Newsletter

Daily Newsletter, Thursday, 4/9/2015

Table of Contents

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

Market Wrap

The World Rallies

by Thomas Hughes

Click here to email Thomas Hughes
Global market reach new highs, we may be next.

Introduction

A host of news and developments helped propel the Asian and European markets to new highs while leaving our markets struggling within recent trading ranges. US traders,it seems, are still trying to figure out what to expect from the FOMC, the economy and earnings. Depending on who you listen to, which day of the week it is and the most recent FOMC related headline the market is either on the road to expansion or the cusp of “earnings recession”.

Looking back at just the last ten days alone expectations concerning the FOMC interest rate hikes have gone from a June target, to a September target, to a possible 2016 target and back to June; all because of one weak month of NFP and spurred by comments from several Fed governors indicating both patience and not patience at the same time.

Market Statistics

News impacting early trading includes earnings, Greece, the Bank Of England and economic data, both domestic and foreign. Greece made its loan payment deadline and has staved off near-term default fears. The long term is still in question; an exit from the EU is still an outlier possibility and real reform is yet to be seen. In England the BOE held rates steady, as expected. On the economic front this week's unemployment claims rose less than expected, remain low and are in support of a healthy labor market.

In terms of earnings expectations the outlook for the 1st quarter is still negative. There is still talk of another quarter, or two, of earnings declines yet earnings releases so far this season suggest we may in for more of the same; better than expected with areas of isolated weakness. Futures trading indicatied a flat to lower opening for most of the pre-market session. Individual news bits such as the employment data and earnings reports helped to lift the trade but none were able to sustain the movement. The indices were able to open flat and move higher in the first minutes following the opening bell but like in the early session, were not able to hold the gains. The indices dipped into negative territory by 10AM and proceeded to hover around break-even for the next hour or so.

The afternoon session was a little different. The market tread water just above break even levels for most of the afternoon and then shortly after 2:30 the indices started to catch a bid and began to move higher. A new intraday high was set just after 3:00 and then another around 3:30. From there the market held near those levels into the close of the day.

Economic Calendar

The Economy

Today's unemployment claims figures are still supportive of healthy labor conditions, as were the JOLTs and KC Fed LMCI released earlier this week. On the unemployment front initial claims gained 14,000, less than expected, and reached 281,000. This is on top of a -1,000 revision to last week. The four week moving average fell by -3,000 to 282,500, a 15 year low. On a not adjusted basis claims rose by 5.5% versus the expected 0.2% predicted by the seasonal factors. Oregon posted the biggest increase in claims, +1.044, Pennsylvania the biggest decrease, -2,338. Texas also posted a decrease in claims. Despite the rise in claims initial claims remains near the long term low and at levels suggesting a drop in overall unemployment and decreased labor turnover.


Continuing claims fell -23,000, better than expected, to 2.304 million. This is also a new 15 year low. The previous week was revised up by 2,000 but the 4 week moving average was still able to post a decline. The four week moving average is at a new 14 year high and suggesting that there are plenty of jobs for those who find themselves out of work for a week.

The total number of claims for unemployment also fell, by -141,794. This is not a new 15 year low but it is a new 13 week low and approaching levels not seen since last Nov/Dec. This number is also supportive of a healthy and improving labor market, and with the rest of the data suggests to me there could be significant revisions in both the NFP and unemployment data for March. One thing to consider though is the fact that Easter week is earlier this year than last and may be influencing the March employment claims data.


Just to touch base on the JOLTs figures it is showed job openings was “little changed” in February at +3.5%. The quits rate was also “little changed” at +1.9% indicating a strengthening of confidence among labor market participants.

The Kansas City Federal Reserve Index of Labor Market Conditions, a composite of 24 top labor indicators, is also in support of an improving labor market. Momentum declined in March, not unexpected given the time of year and other factors, but remains near all time highs while conditions continued to improve. The labor market conditions index rose from -0.330 to -0.262, a continuation of the 5 year trend and current labor market recovery. Over the past 6 months the biggest contributor to improving conditions is the increase in hourly earnings. At the current rate of improvement the index could reach the zero line over the summer, an event that can be associated with economic boom.


Wholesale inventories and sales data was released at 10AM. The news is both better and worse than expected, but only marginally so in either direction. Wholesale inventories rose by 0.3% versus an expected 0.2%, wholesale sales fell by -0.2% versus an expected flat reading.

The Oil Index

Oil prices got a lift today despite the massive build in US stockpiles reported yesterday. Today's news includes renewed fear the Iran nuclear deal was falling apart and strong economic data from Germany. On the Iranian front the deal has reached a sticking point on sanctions, which Iran demands be lifted immediately upon signing of any nuclear deal. In Germany strong auto sales helped to lift spirits and put the Iran deal in better perspective.

Both WTI and Brent rose in today's trading, gaining 2.26% and 3.60% respectively. WTI Is now trading above $51.50 and there is new talk of a bottom. I am leery of oil prices at these levels. There seems to be a premium building into the market that is not substantiated by storage levels, Saudi production levels and demand outlook.

The Oil Index got a lift from today's rise in oil prices. The index gained about 1.5% and was one of today's market leaders. Today's move extends the trend line bounce which began last month and is approaching possible resistance at the top of the 4 month trading range near 1,400. The indicators are bullish, in-line with the bounce and suggest that the index will at least test resistance; MACD is on the rise and stochastic is forming a relatively strong bullish crossover, one that is occurring while %D is crossing the upper signal line. This could indicate strength and a possible break to new 4 month highs but could also be indicating over-bought conditions and the top of the range. The index looks bullish but caution is due until it breaks above 1,400, if it can. As mentioned on Monday, the major oil producers report at the end of the month which, along with forward guidance, could produce a catalyst strong enough to move the sector.


The Gold Index

Gold prices fell below $1200 today as dollar values firmed. The FOMC minutes keep the “early” rate hike on the table thereby strengthening the dollar and depressing gold values. On the flip-side, by keeping the early hike on the table the FOMC is also indicating underlying strength in the economy, enough strength to keep them on track for rate hikes and the economy on track for inflationary pressures to build. Dollar strength may continue to pressure gold lower, which is still above $1190 support zone, but long term inflationary outlook will bring the buyers back in. A break below $1190 could take it as far as $1150. Until then it appears as if gold is trying to stabilize around $1200 while the Dollar Index consolidates between $97.50 and $100.

The gold miners fell in tandem with today's drop in the underlying metal. The GDX Gold Miners ETF lost more than -1.25% in today's session and is testing my rising support line near $18.80. This line connects the peaks of the two peaks of the double bottom reversal I described on Monday, the two peaks that in themselves are each a double bottom. Each of these peaks is progressively higher, suggestive of support and confirmed by the indicators.

In the near term the indicators are weak and are pointing to further testing of support, testing which could go on up to and until the miners report earnings later on this month. The rising support line could be broken, taking the index down to $17.50, but will likely be another buying opportunity for investors. Earnings among the miners are likely to show growth from the last quarter simply because gold prices were on average higher this quarter than last.


In The News, Story Stocks and Earnings

There was quite a lot of business news today. M&A activity is still robust and earnings are starting to roll in. On the M&A front LinkedIn is reported to be buying Lynda.com. Lynda.com is an on-line educational service geared toward helping professionals realize their potentials. The deal is worth roughly $1.5 billion and could be a good move for LinkedIn, if they can capitalize on it. The news moved the stock up by 1.25% but failed to cross above the short term moving average.


Shares of Bed Bath & Beyond fell in the pre-opening session after reporting a mixed quarter. Earnings per share rose to $1.80 from $1.60, partially on an increase in revenue but mostly because of share repurchases over the course of the past year. This might have been enough to hold share prices up but guidance for the current quarter is below estimates. Shares of BBBY fell by roughly 3% in the after-hours market and then doubled that loss during today's session.


The Walgreens Boots Alliance reported before the opening bell and gave the market what it wanted, signs the merger was working. The company reported earnings and revenue above expectations and sent the stock shooting higher. Forward guidance is a little weak but the company also announced another $500 million in cost savings through a closure of stores that helped sweeten the bitter pill. Shares of the stock soared nearly 5% higher and closed near the top of the day's range.


PriceSmart reported after the bell. The discount retail change was expected to report quarterly earnings of $1.00 with full year guidance of $3.95. The company reported an 11.6% increase in net sales but failed to meet earnings expectations. The company blamed a massive devaluation of the Columbian peso for a $0.16 impairment that would have brought earnings in line with expectations. Shares of the stock fell sharply on the news.


The Indices

The indices began to simmer today as earnings season unfolds. So far the earnings picture is not as bad as feared, certainly not the -4.6% predicted by FactSet. Of course we still have a lot more earnings to come, and in particular the energy sector, so this could change. In any event today's reports are showing that the first quarter was not as bad as expected, that there is some growth in the marketplace and that the future growth may not be out of the question either.

Today's gains were led by the NASDAQ Composite. The tech heavy index gained 0.48% and is approaching its long term high just above 5,000. Today's move is a continuation of a bounce from support and the long term trend line begun earlier this week. It is accompanied by promising indicators, I say promising because once again the indicators are rolling into a potentially strong trend following signal but it has not yet been confirmed. Stochastic is making a bullish crossover but MACD has not yet made its crossover and resistance still needs to be broken. It looks like resistance is going to be tested with an upside target near 5,040 but beyond that will come down to the earnings.


The Dow Jones Transportation Average made the next biggest gains today, 0.46%. The transports are bouncing up from the bottom of the 6 month trading range and remain range bound. The indicators are rolling over in confirmation of that range but are yet to gain strength. The index is facing several potential resistance level between the current level and the top of the range near 9,250 but the first two that jump out at me are 8,750 and then the short term moving average near 8,825. These levels could be tested over the next few days with support on a pullback found near 8,575.


The S&P 500 made the next largest move, 0.44%. The broad market moved up from the long term trend line and the short term moving average but was not able to move past the 2,090 resistance line. This index, despite being capped by resistance in today's session, is looking the most bullish of the three because the indicators are both confirming the move. Stochastic is making a strong trend following signal and MACD is confirming with a zero-line crossover. This combination is pointing to a test of the all-time high at least and a possible continuation of the long term trend.


The Dow Jones Industrial Average made the smallest gain in today's session, only 0.31%. The blue chips moved up from the short term moving average and look like they may move higher. The indicators are in support of the move with only the resistance of 18,000 standing in the way. Stochastic is making a bullish crossover but only a moderate one, neither weak or strong, while MACD has made its crossover so a test of resistance is likely if not probable. Support is just below the current level in the form of the short term moving average and then below that in a range around 17,500.


The FOMC is confusing the market with patient/impatient double speak but at heart there is no sign of underlying market weakness. Whether they raise rates or not the economy is growing and policy is expected to remain accommodating into the foreseeable future. In my opinion they either need to make the first rate hike or stop talking about it.

On the earnings front expectations are cloudy at best and could lead to a round of positive surprises. Expectations and guidance are set very low, a situation that has led to such surprises in recent quarters. However, even with positive surprise earnings are rear looking. It will be the guidance that leads the market.

The indices are winding up for a move and it very well could be earnings driven. Now that the season has started the next thing to watch is the financial sector. The big banks begin to report earnings early next week and are expected to show some impressive growth in the face of this quarters low expectations. If they deliver, and there are no surprises elsewhere in the market, we very well could see the indices retest the all-time highs if not set new ones.

Until then, remember the trend!

Thomas Hughes


New Plays

Double-Digit Revenue Growth

by James Brown

Click here to email James Brown


NEW BULLISH Plays

CDW Corp. - CDW - close: 38.37 change: +0.42

Stop Loss: 36.40
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on April -- at $---.--
Listed on April 09, 2015
Time Frame: Exit PRIOR to earnings in mid May
Average Daily Volume = 1.0 million
New Positions: Yes, see below

Company Description

Why We Like It:
Traders have been consistently buying the dips in information technology stock CDW. Now the stock is poised to breakout to new highs.

The company offers a broad range of hardware, software and integrated IT solutions to its clients. These include mobility, security, cloud computing, virtualization, data center optimization, and more.

Their website describes the company as "CDW is a leading provider of integrated information technology solutions in the U.S. and Canada. We help our 250,000 small, medium and large business, government, education and healthcare customers by delivering critical solutions to their increasingly complex IT needs. A Fortune 500 company, CDW was founded in 1984 and employs more than 7,200 coworkers. In 2014, the company generated net sales of more than $12.0 billion."

Earnings last year were healthy. CDW has consistently beaten Wall Street's earnings and revenue estimates for the last four quarters in a row. Revenues have been showing double-digit growth for the last year. Their most recent report was February 10th when CDW delivered its Q4 results. Analysts were expecting a profit of $0.53 a share on revenues of $2.95 billion. CDW reported $0.59 a share with revenues up +12.4% to $3.05 billion.

Analysts seem optimistic on CDW. Barclays has listed CDW as one of its top picks and noted that the company has very little exposure to Europe or Asia so the strong dollar shouldn't hurt it that bad. Another analyst, with RBC Capital Markets, believes that any softness in the consumer market will be overshadowed by strength in the enterprise market.

Technically the bullish trend of higher lows in CDW has been coiling more tightly. Now, with the stock up four days in a row, CDW is on the verge of breaking through resistance in the $38.00-38.50 area. Tonight we are suggesting a trigger to launch bullish positions at $38.65.

Trigger @ $38.65

- Suggested Positions -

Buy CDW stock @ $38.65

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

Buy the MAY $40 CALL (CDW150515C40) current ask $0.80
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:



In Play Updates and Reviews

Stocks Rebound Intraday

by James Brown

Click here to email James Brown

Editor's Note:
Traders were in a buy-the-dip mood on Thursday. The major U.S. indices bounced off their late morning lows. The big cap indices managed to post widespread gains while the Russell 2000 small cap index lagged behind.

CGNX and VIPS both hit our bullish entry triggers today.


Current Portfolio:


BULLISH Play Updates

Allegion Plc. - ALLE - close: 61.44 change: -0.25

Stop Loss: 59.75
Target(s): To Be Determined
Current Option Gain/Loss: -1.1%
Entry on April 06 at $62.10
Listed on March 30, 2015
Time Frame: Exit prior to earnings (late April - early May)
Average Daily Volume = 674 thousand
New Positions: see below

Comments:
04/09/15: ALLE ignored the market's late day rally and spent the afternoon drifting sideways. Shares continue to hover just below resistance near $62.00.

I am suggesting a rally to $62.20 as our next entry point.

Trade Description: March 30, 2015:
It feels like the world is growing more dangerous. It was only a few weeks ago that the world was shocked by the terrorist shootings in Paris. It should be no surprise that demand for more security at our homes and places of work is growing.

ALLE provides security solutions. According to the company, "Allegion (ALLE) creates peace of mind by pioneering safety and security. As a $2 billion provider of security solutions for homes and businesses, Allegion employs more than 8,000 people and sells products in more than 120 countries across the world. Allegion has more than 25 global brands, including strategic brands CISA®, Interflex®,LCN®, Schlage® and Von Duprin®."

After a slow start last year ALLE's earnings have improved over the last couple of quarters. Their Q3 report last October showed earnings and revenues coming in above expectations.

They did it again with their Q4 earnings report, released on February 18th. Earnings rose +26.7% to $0.76 a share. Wall Street was only looking for $0.68. Revenues were up +5.5% to $573.5 million, above estimates.

ALLE management provided 2015 guidance. They expect revenues to rise +3% to +4% over last year. However, when you factor in currency headwinds and adjustments for their Venezuelan business, revenues could actually decline -3% to -4%. ALLE is forecasting earnings to grow +12% to +17% in 2015.

Investors took ALLE's cautious guidance in stride. There was a one-day pullback and investors quickly jumped in to buy the dip. A month later ALLE's stock was breaking out past resistance at the $60.00 level. Today ALLE has retested $60.00 as new support and just closed at new record highs. The point & figure chart is very bullish and forecasting a long-term target at $81.00. Tonight we're suggesting a trigger to launch bullish positions at $62.10. We will plan on exiting prior to earnings in very late April or early May.

- Suggested Positions -

Long ALLE stock @ $62.10

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

Long MAY $65 CALL (ALLE150515C65) entry $1.00

04/06/15 triggered @ 62.10
Option Format: symbol-year-month-day-call-strike


Cognex Corp. - CGNX - close: 51.32 change: +0.22

Stop Loss: 49.45
Target(s): To Be Determined
Current Option Gain/Loss: -0.1%
Entry on April 09 at $51.35
Listed on April 08, 2015
Time Frame: Exit PRIOR to earnings in May
Average Daily Volume = 515 thousand
New Positions: see below

Comments:
04/09/15: Our new trade on CGNX is open. The plan was to launch bullish positions at $51.35. Traders bought the dip midday and shares look poised to continue its climb tomorrow.

CAUTION: I am urging caution if you're trading the options. The option spreads have widened significantly. You may want to consider limit orders (but you'll risk not being filled) instead of market orders.

Trade Description: April 8, 2015:
Shares of CGNX are trading at all-time highs and with good reason. The company has been consistently beating analysts' earnings estimates and guiding higher.

CGNX is in the technology sector. According to the company's marketing materials, "Cognex Corporation designs, develops, manufactures and markets a range of products that incorporate sophisticated machine vision technology that gives them the ability to 'see.' Cognex products include barcode readers, machine vision sensors and machine vision systems that are used in factories, warehouses and distribution centers around the world to guide, gauge, inspect, identify and assure the quality of items during the manufacturing and distribution process. Cognex is the world's leader in the machine vision industry, having shipped more than 1 million vision-based products, representing over $4 billion in cumulative revenue, since the company's founding in 1981. Headquartered in Natick, Massachusetts, USA, Cognex has regional offices and distributors located throughout the Americas, Europe and Asia."

Research is forecasting the machine vision industry to grow more than +12% a year for the next six years. By 2020 the market for this business could be more than $9 billion. CGNX appears to be leading the pack. Looking at the last three quarters they have beaten earnings estimates. Revenues have consistently been in the double-digit growth range. The company has raised their guidance twice. In their last quarter gross margins hit 75%. The biggest customer is Apple (AAPL).

In CGNX's earnings report Dr. Robert Shillman, Chairman of Cognex commented on their results saying, "2014 was a fabulous year for Cognex! We reported the highest annual revenue, net income and earnings per share in our 34-year history. In addition, operating margin expanded to 30% driven by the substantial leverage in our business model. That level is a dramatic increase over the 24% reported for 2013 and was achieved despite the significant investments that we made in sales and engineering during the year."

CGNX guided Q1 above Wall Street estimates. They expect strong revenue growth year-on-year and gross margins in the mid 70% range.

Technically shares of CGNX just recently broke out above round-number resistance at $50.00. The point & figure chart is very bullish and forecasting a long-term target at $79.00. Traders quickly bought the dip today. Tonight I am suggesting a trigger to open bullish positions at $51.35.

- Suggested Positions -

Long CGNX stock @ $51.35

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

Long MAY $50 CALL (CGNX150515C50) entry $5.20

04/09/15 triggered @ 51.35
Option Format: symbol-year-month-day-call-strike


Ingles Market, Inc. - IMKTA - close: 53.66 change: -0.24

Stop Loss: 49.75
Target(s): To Be Determined
Current Option Gain/Loss: +2.5%
Entry on April 06 at $52.35
Listed on April 04, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 159 thousand
New Positions: see below

Comments:
04/09/15: After a huge bounce yesterday shares of IMKTA spent today's session digesting its gains in a sideways consolidation.

I'm not suggesting new positions at the moment.

Trade Description: April 4, 2015:
Fifty years of sales growth. If you don't live in the South Eastern U.S. you may not be familiar with IMKTA. The company is in the services sector. They're part of the grocery store industry. Last year (2014) was the company's 50th consecutive year of sales growth.

Here is how the company describes itself: "Ingles Markets, Incorporated is a leading supermarket chain with operations in six southeastern states. Headquartered in Asheville, North Carolina, the Company operates 202 supermarkets. In conjunction with its supermarket operations, the Company operates neighborhood shopping centers, most of which contain an Ingles supermarket. The Company also owns a fluid dairy facility that supplies Company supermarkets and unaffiliated customers."

IMKTA reported their Q4 2014 results on December 8th. Quarterly revenues were up +1.7% but earnings per shares soared +16%. Revenues for the whole year hit $3.84 billion. Earnings for all of last year grew +15%.

The streak of earnings growth continued in the first quarter of 2015. IMKTA reported results on February 6th. Revenues were up +1.8%, above estimates. Earnings per share exploded with a +75% improvement over a year ago. Comparable sales were up +2.3% with their average transaction up +3.1%. Analysts are forecasting +20% earnings growth in 2015.

Technically the stock looks bullish and trading at all-time highs. The $50.00 area was round-number resistance but now that IMKTA has broken out the $50 mark should be new support. The point & figure chart is very bullish and forecasting a long-term target of $99.00.

I am concerned that IMKTA does not trade a lot of volume. It's average volume is only 159,000 shares a day. The big drop in January came out of nowhere and snapped a run of seven up weeks in a row. Tonight we are suggesting a trigger to open bullish positions at $52.35. Keep positions small to limit risk.

*small positions* - Suggested Positions -

Long IMKTA stock @ $52.35

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

Long AUG $55 CALL (IMKTA150821C55) entry $3.50

04/06/15 triggered @ 52.35
Option Format: symbol-year-month-day-call-strike


Prestige Brands Holdings - PBH - close: 43.99 change: +0.09

Stop Loss: 40.35
Target(s): To Be Determined
Current Option Gain/Loss: +3.9%
Entry on March 20 at $42.35
Listed on March 19, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 342 thousand
New Positions: see below

Comments:
04/09/15: PBH certainly looks like it wants to trade higher. Shares have tagged new record highs in four out of the last five trading days. Yet PBH is not making that much progress as traders keeping selling the rallies. Eventually this overhead supply will dry up and PBH will likely break through this $44.00 area.

I would not launch new positions at this time.

Trade Description: March 19, 2015:
Shares of PBH are outperforming the broader market. The relative strength has lifted the stock to new all-time highs and a +20% gain in 2015.

PBH is part of the services sector. According to the company, PBH "markets and distributes brand name over-the-counter and household cleaning products throughout the U.S. and Canada, and in certain international markets. Core brands include Monistat® women's health products, Nix® lice treatment, Chloraseptic® sore throat treatments, Clear Eyes® eye care products, Compound W® wart treatments, The Doctor's® NightGuard® dental protector, the Little Remedies® and PediaCare® lines of pediatric over-the-counter products, Efferdent® denture care products, Luden's® throat drops, Dramamine® motion sickness treatment, BC® and Goody's® pain relievers, Beano® gas prevention, Debrox® earwax remover, and Gaviscon® antacid in Canada."

The company's most recent earnings report was noteworthy. Analysts were expecting a profit f $0.40 a share on revenues of $190.2 million. PBH delivered $0.48 a share, which is a +60% improvement from a year ago. Revenues were up +36.4% to $197.6 million, another beat. PBH's OTC products saw +37.2% sales growth in North America and +107.8% growth internationally.

Matthew M. Mannelly, President and CEO of PBH commented on his company's performance, "In light of our excellent year to date and third quarter results, we are updating our previously provided outlook for fiscal year 2015. We are tightening our expected adjusted EPS range from $1.75 to $1.85 per share to $1.82 to $1.85 per share, and anticipate revenue growth at the high end of our previously provided outlook of 15-18%. The update is driven by anticipated organic growth in the legacy business during the fourth quarter."

Wall Street analysts are forecasting 2015 Q1 (PBH's Q4) results to see +29% EPS growth and +30% revenue growth.

It's also worth noting that PBH is a potential buyout target. They have been targeted before. Back in 2012 Genomma Lab offered $834 million in cash but PBH rejected the offer, calling it too low.

The better than expected earnings in early February launched PBH above major resistance in the $37.00 area. Shares spent four weeks digesting those gains and now they're back in rally mode. The point & figure chart is bullish and forecasting at $54.00 target. Tonight we are suggesting a trigger to launch bullish positions at $42.35.

- Suggested Positions -

Long PBH stock @ $42.35

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

Long JUL $45 CALL (PBH150717C45) entry $1.55

03/21/15 new stop @ 40.35
03/20/15 triggered @ 42.35
Option Format: symbol-year-month-day-call-strike


Providence Service Corp. - PRSC - close: 51.17 change: -0.09

Stop Loss: 49.85
Target(s): To Be Determined
Current Option Gain/Loss: -2.5%
Entry on March 27 at $52.50
Listed on March 26, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 136 thousand
New Positions: see below

Comments:
04/09/15: PRSC bounced off its simple 20-dma but closed relatively unchanged for the session.

I'm not suggesting new positions.

Trade Description: March 26, 2015:
PRSC is a small cap momentum stock. Shares are outperforming the broader market with a +40% gain in 2015. The stock has done a pretty good job ignoring the market's recent weakness.

PRSC is in the healthcare sector. According to their marketing materials, "Providence is a Tucson, Arizona-based company that provides and manages government sponsored human services, innovative global employment services, in-home health assessment and care management services, and non-emergency transportation services."

"Providence is unique in that it provides and manages its human services primarily in the client's own home or in community based settings, rather than in hospitals or treatment facilities and provides its non-emergency transportation services clients through local transportation providers rather than an owned fleet of vehicles. The Company provides a range of services through its direct entities to approximately 57,400 and 232,000 human services and workforce development services clients, respectively, with approximately 20.7 million individuals eligible to receive the Company's non-emergency transportation services. Its workforce development services include nearly 180 delivery sites spanning 10 countries and its health assessments are performed by over 700 nurse practitioners in 33 states."

The company is not afraid of acquisitions. In the last year they have purchased Matrix Medical Network and Ingeus.

PRSC's most recent quarterly report was March 16th. Analysts were expecting Q4 earnings of $0.29 a share on revenues of $416 million. PRSC delivered $0.45 a share, which is up +87.5% from a year ago. Q4 revenues were up +63.8% to $453.6 million, significantly above estimates. If you exclude the recent acquisitions PRSC's Q4 revenues were up +21.4%. The company's full-year 2014 sales hit $1.5 billion, up +32% from the prior year.

The stock rallied on this better than expected earnings report. The $48-50 area was significant resistance and PRSC has broken out above this zone. As previously mentioned the stock has been able to resist the market's recent sell-off. The point & figure chart is bullish and forecasting a long-term target of $68.00.

Tonight PRSC looks like it's about to break out from its recent consolidation in the $50-52 area. Last week's highs are around $52.30. We are suggesting a trigger to open small bullish positions at $52.50. I'm suggesting small positions because PRSC does not trade a lot of volume and we want to limit our risk.

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

Long PRSC stock @ $52.50

03/27/15 triggered @ 52.50


Steel Dynamics Inc. - STLD - close: 20.70 change: +0.28

Stop Loss: 19.20
Target(s): To Be Determined
Current Option Gain/Loss: -0.5%
Entry on March 24 at $20.81
Listed on March 21, 2015
Time Frame: Exit prior to earnings on April 20th
Average Daily Volume = 3.6 million
New Positions: see below

Comments:
04/09/15: It was a good day for STLD bulls. The stock outperformed the broader market with a +1.37% gain and it closed above technical resistance at its 200-dma for the first time in months.

At the closing bell the company announced they were selling $700 million worth of debt with a 5.125% yield and another $500 million at 5.5%. I'm not seeing any reaction in the stock price after hours.

No new positions at this time.

Trade Description: March 21, 2015:
The bad news in the steel industry might be priced in and some are forecasting another turnaround in the second half of 2015. STLD looks like a bullish candidate as shares are outperforming its peers: U.S. Steel (X), Nucor (NUE), and AK Steel (AKS).

STLD is in the basic materials sector. The company describes itself as "Steel Dynamics, Inc. is one of the largest domestic steel producers and metals recyclers in the United States based on estimated annual steelmaking and metals recycling capability, with annual sales of $8.8 billion in 2014, over 7,700 employees, and manufacturing facilities primarily located throughout the United States (including six steel mills, eight steel coating facilities, two iron production facilities, over 90 metals recycling locations and six steel fabrication plants)."

This past week had a lot of bad news for the steel industry. Three companies issued bearish earnings guidance. STLD, NUE, and AKS all lowered their forecasts. CNBC suggested this industry is on the front lines of the currency war. All three companies blamed a surge in steel imports for hurting results. The rising U.S. dollar makes foreign products cheaper and steel imports into the U.S. rose +38% in 2014. Combine that with a glut of steel from domestic producers and both sales and margins have been hammered lower. The price of rolled steel is already down -20% in 2015. Many analysts are forecasting another tough year for the industry.

On March 18th, 2014, STLD lowered its Q1 guidance into the $0.12-0.16 range compared to Wall Street's estimate of $0.23. This also compares to $0.17 a year ago and $0.40 in the fourth quarter. However, the stock rallied. In addition to its lowered guidance the company offered a positive outlook for the second half of 2015.

Here's an excerpt from the company's press release on March 18th:

"During the first quarter of 2015, two important industry developments occurred:

− Domestic steel product pricing declined to levels that are now globally competitive, which the company believes will result in reduced steel import levels beginning in the second quarter 2015. Despite continued solid domestic steel consumption, product pricing decreased meaningfully due to delayed customer orders caused by the volatility in scrap prices and inventory buildup related to excessive fourth quarter 2014 steel imports. The company believes the surplus inventory can be right-sized in the April and May 2015 timeframe, which coupled with continued demand, should result in increased domestic steel mill utilization.

− Ferrous scrap pricing declined between 25% and 30% during February, which the company believes will benefit metal margin. Ferrous scrap pricing disconnected from iron ore pricing during 2014, as iron ore prices declined dramatically, while scrap prices remained relatively unchanged. Historically these commodities are highly correlated; therefore, a sharp decline in scrap prices was not unexpected.

The company believes these events, coupled with continued strength in domestic steel consumption from the automotive, manufacturing and construction sectors, should support a stronger second quarter, and second half 2015, based on the expectation of reduced domestic steel import levels, reduced raw material costs, and increased orders as customer inventory levels decline. Historically, the construction industry has been the largest single domestic steel consuming sector. The construction market grew during 2014, improving meaningfully from the lows experienced in 2009 and 2010. Despite the first quarter of each year being historically weaker for the construction industry due to seasonality, the company's fabrication operations are expected to achieve solid first quarter 2015 financial results. These results could approach those achieved in the third quarter 2014, which is traditionally the strongest construction quarter of a calendar year. The company believes this is evidence of the continued growth in non-residential construction.

Shares of STLD surged on this outlook and shares are now hovering just below technical resistance at its 200-dma. A breakout here could signal the next leg higher. Currently the point & figure chart is still bearish but a move above $21.00 would generate a new buy signal. Tonight we are suggesting a trigger to open bullish positions at $20.75.

FYI: The stock will begin trading ex-dividend on March 27th. The quarterly cash dividend should be $0.1375 a share.

- Suggested Positions -

Long STLD stock @ $20.81

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

Long MAY $20 CALL (STLD150515C20) entry $1.80

03/24/15 triggered on gap higher at $20.81, trigger was $20.75
Option Format: symbol-year-month-day-call-strike


Vipshop Holdings - VIPS - close: 29.77 change: +0.11

Stop Loss: 27.45
Target(s): To Be Determined
Current Option Gain/Loss: -1.3%
Entry on April 09 at $30.15
Listed on April 01, 2015
Time Frame: 8 to 12 weeks (option traders, exit prior to expiration)
Average Daily Volume = 6.3 million
New Positions: see below

Comments:
04/09/15: The bounce continued in VIPS today. Shares briefly traded above resistance at $30.00 and hit our suggested entry point at $30.15. It's frustrating to see VIPS close below round-number resistance at $30.00. I would wait for a new relative high above today's intraday peak of $30.17 before initiating new positions.

Trade Description: April 1, 2015:
The main Chinese stock market has broken out to multi-year highs. This has provided fertile ground for shares of VIPS to grow. The company is an online retailer that specializes in flash sales of female-oriented products.

According to the company, "Vipshop Holdings Limited is China's leading online discount retailer for brands. Vipshop offers high quality and popular branded products to consumers throughout China at a significant discount to retail prices. Since it was founded in August 2008, the Company has rapidly built a sizeable and growing base of customers and brand partners."

Earnings have been strong. Looking at the last four quarterly report VIPS has beaten Wall Street estimates and raised guidance four quarters in a row. We're talking triple-digit growth for earnings and revenues.

VIPS' most recent report was its Q4 results on February 17th. Earnings were 12 cents a share, which was actually two cents below expectations. However, revenues soared +109% to $1.36 billion. Gross margins improved from 24.5% to 24.9%. Active customers grew +114% to 12.2 million (plenty of room to grow).

In their earnings press release Mr. Donghao Yang, chief financial officer of Vipshop, commented, "We are very proud of our fourth quarter financial results, which exceeded our prior expectations. Our progress in mobile, market expansion, along with our long-standing commitment to customers enabled us to further boost both the total net revenue and the net income attributable to our shareholders. During the fourth quarter of 2014, the mobile contribution of our platform reached approximately 66% of our gross merchandise volume. Looking ahead, we are firmly confident that by executing our growth strategies and further investing judiciously in fulfillment, technology and talent, we will be able to further fortify our position as the leading online discount retailer in China and continue delivering a satisfying shopping experience to our growing base of customers."

Management issued bullish guidance again. They see 2015 Q1 revenues in the $1.25-1.30 billion range, which suggest +78% to +85% growth from a year ago. Analysts estimates were at $1.21 billion. You can see how the stock reacted to the news and optimistic guidance.

Chinese stocks got another pop recently when a Chinese official suggested their government might provide even more stimulus. Here's a quote from a recent Bloomberg article, "China has room to act with both interest rates and 'quantitative' measures, People's Bank of China chief Zhou Xiaochuan said in remarks at the Boao Forum for Asia, an annual conference on the southern Chinese island of Hainan. Analysts surveyed by Bloomberg expect the PBOC will lower both benchmark lending rates and banks’ required reserve ratios, adding to cuts made in recent months." Link to the Bloomberg article.

Technically shares of VIPS have broken out past all of its major resistance levels and now it's flirting with a breakout past round-number resistance at $30.00. The point & figure chart is bullish and forecasting at $38.50 target. Tonight we are suggesting a trigger to launch bullish positions at $30.15.

- Suggested Positions -

Long VIPS stock @ $30.15

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

Long MAY $30 CALL (VIPS150515C30) entry $1.94

04/09/15 triggered @ $30.15
Option Format: symbol-year-month-day-call-strike


Web.com Group, Inc. - WWWW - close: 19.64 change: +0.10

Stop Loss: 18.45
Target(s): To Be Determined
Current Option Gain/Loss: +3.4%
Entry on March 30 at $19.00
Listed on March 28, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 533 thousand
New Positions: see below

Comments:
04/09/15: It was a quiet session for WWWW with the stock trading on either side of technical resistance at its simple 200-dma. If you look closely WWWW is three cents above its 200-dma. The stock has closed above this moving average since June 2014. The next hurdle for the bulls will be round-number resistance at $20.00.

No new positions at this time.

Trade Description: March 28, 2015:
WWWW is a small cap technology company. After a -60% correction from its 2014 highs it looks like the worst might be behind it.

If you're not familiar with WWW here's a brief description, "Web.com Group, Inc. (WWWW) provides a full range of Internet services to small businesses to help them compete and succeed online. Web.com is owner of several global domain registrars and further meets the needs of small businesses anywhere along their lifecycle with affordable, subscription-based solutions including website design and management, search engine optimization, online marketing campaigns, local sales leads, social media, mobile products, eCommerce solutions and call center services."

On the daily chart you can see the big gap down in November 2014. That was a reaction to the company's lowered guidance. The stock appears to have produced a bullish double bottom with its lows in November and January.

Shares surged in mid February with is Q4 earnings results. WWWW beat analysts' estimates on both the top and bottom line. Revenues for the full year were up +14%.

February was also noteworthy for WWWW agreeing to give an activist investor fund two seats on the Board of Directors. Okumus Fund Management is now the largest shareholder in WWWW with almost 15% of its outstanding shares.

Shares of WWWW have been building on a new bullish trend of higher lows and managed to ignore most of the market's sell-off this past week. The point & figure chart is bullish and forecasting a target of $23.00.

If WWWW continues higher it could spark some short covering with the most recent data listing short interest at more than 10% of the 36.5 million share float.

Tonight we are suggesting a trigger to open bullish positions at $18.95 with an initial stop loss at $17.85. I would start with small positions. The $20.00 level and the 200-dma (also nearing $20) could both be overhead resistance.

- Suggested Positions -

Long WWWW stock @ $19.00

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

Long MAY $20 CALL (WWWW150515C20) entry $1.30

04/01/15 new stop @ 18.45
03/30/15 triggered on gap open at $19.00, suggested entry was $18.95
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Strayer Education, Inc. - STRA - close: 52.16 change: -0.42

Stop Loss: 56.15
Target(s): To Be Determined
Current Option Gain/Loss: +1.5%
Entry on April 07 at $52.95
Listed on April 06, 2015
Time Frame: Exit prior STRA's earnings report on May 6th
Average Daily Volume = 124 thousand
New Positions: see below

Comments:
04/09/15: STRA is still sinking. Shares are down five days in a row and closed at new lows for the year. I'm not suggesting new positions at this time.

Trade Description: April 6, 2015:
The for-profit education stocks have not had a good year. The group is getting crushed. Student enrollments are falling as the labor market improves. Last week we saw the March jobs report was a disaster but the prior 12 months were all above +200,000 jobs a month, the best string of job growth in years. The unemployment rate has fallen to six-year lows. This is reducing the number of potential students for companies like STRA.

STRA was founded back in 1892. According to the company, "Strayer Education, Inc. (Nasdaq: STRA) is an education services holding company that owns Strayer University. Strayer's mission is to make higher education achievable for working adults in today's economy. Strayer University is a proprietary institution of higher learning that offers undergraduate and graduate degree programs in business administration, accounting, information technology, education, health services administration, public administration, and criminal justice to working adult students. Strayer University also offers an executive MBA online and corporate training programs through its Jack Welch Management Institute. The University is committed to providing an education that prepares working adult students for advancement in their careers and professional lives."

Another challenge for the for-profit industry is the U.S. government. Plenty of students are graduating with piles of debt and still can't get a job. Some schools have unusually high dropout rates. The authorities are investigating some schools for predatory enrollment practices. A new challenge is President Obama's proposal to make community college free for everyone, for the first two years. Of course "free" is a relative term since tax payers will be paying for it. No word yet on if or when this proposal gets off the ground but it generates headwinds for the for-profit educators.

STRA has been struggling with falling student enrollments and lower revenue per student. They reported Q4 earnings results on February 6th. STRA's $1.32 per share beat estimates by 14 cents. However, revenues plunged -6.4% to $116.1 million. Their fiscal 2014 earnings were down -7.8% from the prior year. Revenues dropped -11.4% in 2014.

The company is hoping that enrollment trends will turn positive in the first half of 2015 but they don't expect revenues to turn positive until the second half of the year.

Investors are bearish on the stock with short interest at 15% of the very, very small 10.0 million share float. This time the bears are probably right. Technically STRA looks ugly with a clear trend of lower highs and lower lows. You can see the sell-off on its Q4 report in the daily chart. The weakness accelerated in late March. The point & figure chart is bearish and forecasting at $46.00 target.

We are suggesting bearish positions with an entry trigger at $52.95. Investors will want to keep their position size small to limit risk. The small float and the high short interest could make this stock volatile. I suggest the put option, which would limit your risk to the cost of the option.

*small positions to limit risk* - Suggested Positions -

Short STRA stock @ $52.95

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

Long MAY $50 PUT (STRA150515P50) entry $2.25

04/07/15 triggered @ $52.95
Option Format: symbol-year-month-day-call-strike


Olympic Steel Inc. - ZEUS - close: 11.95 change: -0.38

Stop Loss: 13.55
Target(s): To Be Determined
Current Option Gain/Loss: +4.0%
Entry on April 08 at $12.45
Listed on April 07, 2015
Time Frame: 3 to 4 weeks
Average Daily Volume = 56 thousand
New Positions: see below

Comments:
04/09/15: The breakdown in ZEUS continued on Thursday with another -3.0% decline. The stock is now down four days in a row.

No new positions at this time. I want to remind readers that this is a higher-risk, more aggressive trade.

Trade Description: April 7, 2015:
We are adding ZEUS to the newsletter as a momentum trade. You could also consider it a hedge against our STLD trade, which hasn't really panned out as expected.

If you're not familiar with ZEUS, here's a brief description: "Founded in 1954, Olympic Steel is a leading U.S. metals service center focused on the direct sale and distribution of large volumes of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel and aluminum products. The Company's CTI subsidiary is a leading distributor of steel tubing, bar, pipe, valves and fittings, and fabricates pressure parts for the electric utility industry. Headquartered in Cleveland, Ohio, Olympic Steel operates from 35 facilities in North America."

The steel industry has been really struggling with a flood of cheaper imports. We saw three major steel companies, STLD, NUE, and AKS, all lower guidance in March. The biggest complaint was a surge in imports, which has continued into 2015. The good news is that imports are slowing down because the glut of supply has driven prices lower. The bad news is that steel prices have been crushed.

Shares of ZEUS have been in a bear market for about a year. The earnings picture has not helped with ZEUS missing Wall Street's bottom line earnings estimates the last four quarters in a row.

Steel companies are hoping for the price of steel to find a bottom in the May-June time period. A couple of the companies listed above have suggested that the second half of 2015 will be better. That might just be wishful thinking. The economic slowdown in the first quarter of 2015 doesn't bode well for basic material companies.

Meanwhile the path of least resistance for ZEUS is lower. The point & figure chart is bearish and forecasting at $10.00 target. Today we saw ZEUS breakdown under support near $13.00 on double its average volume.

I consider this a higher-risk, more aggressive trade because ZEUS is not very liquid. The daily volume is exceptionally low. Plus, the options are not tradable because the spreads are too wide. I'm suggesting small bearish positions if ZEUS trades at $12.45 or lower. We're not setting a target tonight but I'd aim for the $10.00 area.

*small positions to limit risk* - Suggested Positions -

Short ZEUS stock @ $12.45

04/08/15 triggered @ $12.45