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Daily Newsletter, Tuesday, 9/1/2015

Table of Contents

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

Market Wrap

Risk Off

by Jim Brown

Click here to email Jim Brown

Markets rolled over after hovering at resistance for two days. Japan, China and U.S. economics were blamed but it was more than likely just a normal correction continuation.

Market Statistics

The overnight sell off was started by news out of Japan. Capital spending by Japanese companies fell -1.8% in Q2. This reflects a slowdown in demand because of the first sales tax increase in 17 years. Corporate revenue and profits also fell an estimated -3.2% as the economy continued to deteriorate. Preliminary GDP estimates for Q2 showed a contraction of -6.8%. The revised estimates are due out next week. Mizuho Securities is predicting a decline of -7.9%. The prior week a report showed consumer spending declined -5.9% year over year for July. All of this negative data is coming from a country that is in the middle of a massive QE program and debt is now 230% of GDP.

The central bank has been buying 8-12 trillion yen in Japanese bonds every month and they have nearly exhausted the market supply. That equates to an average of $83 billion in QE purchases every month. The Mizuho Research Institute said the QE purchases could continue until 2020 in an unimaginable accumulation of debt. I have said multiple times in the past, "Japan is a bug in search of a windshield" and that windshield could be here sooner rather than later.

Obviously, with the economic data showing an accelerating decline in the economy the concerns are increasing over an eventual disaster. Since Japan is the third largest economy in the world, the implications are clear. If Japan's economy collapses, it will be a global event. The Federal Reserve will need to factor in the new Japanese forecast before they hike rates.

The Japanese Nikkei declined -3.84% on Monday and odds are good it will see new lows in the days ahead.


As if the Japanese data was not bad enough China's manufacturing sector fell into contraction with the government Purchasing Managers Index (PMI) falling from 50.0 to 49.7 for August. Government numbers are seen as questionable and having the official number fall into contraction is an admission that conditions are worse than reported. In a private survey by Markit/Caixin that is seen as more reliable the PMI declined from 47.8 to 47.3. That is a 6.5 year low and it is accelerating to the downside. Analysts are expecting China's GDP to grow by 6.4% rather than the official government projection of 7.0%. Some analysts are actually expecting the "real" GDP to be closer to 5% growth.

When the China PMI numbers were released, it was just one more weight on the overnight futures. The Shanghai Composite Index declined only -1.23%, which was remarkable since the Chinese government said it was no longer going to support the market. The month long effort to buy securities as a form of market support cost China's regulatory agency more than $200 billion and the market continues to make new lows. The regulator said it would focus on bringing parties to justice that were working against the government. Translated that means short sellers and any institution that is not holding the required number of securities mandated by government demands over the last month. The government has instructed firms, funds, large investors, etc to buy securities over the last month in an effort to support the market. Those efforts failed.


When the U.S. economic reports began to flow, they were not much help. The ISM Manufacturing for August declined from 52.7 to 51.1 for the second consecutive drop. That is the lowest reading since June 2013. New orders declined from 56.5 to 51.7 and production fell from 56.0 to 53.6. However, backorders rose slightly from deep in contraction territory at 42.5 to 46.5. That is the third consecutive month in contraction and is a good projection of what the headline number will look like in the months ahead. A lack of backorders suggests a weak manufacturing cycle.

New export orders declined from 48.0 to 46.5 and the fourth consecutive monthly decline. The strong dollar is reducing sales and with the emerging market currencies in free fall, it should only get worse.

Ten of the 18 manufacturing industries reported growth but six were in contraction with two neutral. Customer inventories rose a whopping +9 points to 53 and high inventory levels suggest a slowdown in customer sales and a potential drop in future orders. If customer inventories are too high because of slow sales they will not reorder. Eighteen percent of respondents said inventories were now too high compared to only 10% in July.

I warned about this report last week after several of the regional surveys showed unexpected declines into contraction territory. This ISM report is national and shows the manufacturing sector as a whole is weakening.


The Intuit Small Business Employment Index declined -0.02% and the first decline since 2011. That percentage equals a loss of -5,000 jobs by small businesses. The recent high was 0.13 in May, which declined to 0.11 in June and 0.04 in July. Small business employment has now declined for three consecutive months.

The Texas Service Sector Outlook Survey for August declined from 7.9 in July to 2.1 and a three-month low. The revenue component dropped nearly 10 points from 19.1 to 9.3. Employment declined from 10.1 to 6.1 and hours worked declined from 5.3 to 2.3. The index of future business activity (optimism) declined from 20.6 to 9.1.

On Monday, the Texas Manufacturing Outlook Survey dipped farther into contraction from -4.6 in July to -15.8 in August. New orders declined from barely positive at +0.7 to well into contraction at -12.5.

Clearly the economic conditions in Texas are slowing just as we have seen in New York and other Fed regions. While Texas manufacturing is contracting, the service sector is not yet into contraction but rapidly approaching that level. This is more than likely the result of the slowdown in the energy sector.

The only positive report for the day came from the auto sector. Sales for August rose to a seasonally adjusted annual rate of 17.8 million units. That is the highest rate since July 2005. Sales of light trucks rose to 57% and a ten-year high. This is undoubtedly a result of the lower gasoline prices convincing consumers to upgrade their class of vehicle. The light truck category includes models like surburbans, SUVs, etc. Sales of imported vehicles rose from 3.5 to 3.9 million. Chrysler had the biggest individual gain from 2.0 to 2.2 million units. Chrysler light truck sales rose +10% but auto sales declined -16% over August 2014. Overall, dealers sold 5% fewer imported cars but 28% more imported trucks. Overall 2015 sales are expected to exceed 17.1 million and the best year since 2001.

Wednesday will be a big day for economics. The ADP Employment will be the key in the morning and a material deviation from the forecast for 205,000 new jobs could dramatically impact the markets. A weak number could add to fears about the slowing U.S. economy. A strong number would increase the chances for a September rate hike. While the ADP number is not the official number the Fed watches it is a predictor of what to expect from the Nonfarm Payroll report on Friday. It is a preview of things to come.

The Fed Beige Book on Wednesday afternoon is another trouble spot. If conditions n the 12 Fed regions deteriorated over the last month then a September rate hike is probably off the table. Conversely if conditions improved, which would be a shock given the weak manufacturing reports, it would increase the chances for a rate hike.


One of the big stories for this week came from the oil sector. Crude oil rebounded from the prior week low of $37.75 to $49.30 at Monday's close for a 30% gain. The motive power that continued last week's short squeeze was talk about potential talks. Putin and Venezuelan president Maduro were going to meet in China on Wednesday to talk about stabilizing oil prices. Both Russia and Venezuela are large producers that have suffered significantly from the drop in oil prices. Venezuela is begging OPEC to call an emergency meeting to cut production. Since Venezuela cannot meet its current production quotas because of economic problems in the country, they want everyone else to cut production so prices will rise. Venezuela has nothing to lose and everything to gain. China is a major oil consumer and has loaned Venezuela billions of dollars which is being repaid with oil.

Nothing will come from the talks by those three countries. China is benefitting from the low oil prices because they are a big importer. It is not in China's best interest to see prices return to higher levels. Russia needs every dollar it can generate and is not going to cut production regardless of whether there is a joint agreement with OPEC to do so. Russia will claim it has cut and continue to pump at full speed. Remember, Russia did not invade Ukraine. Those Russian soldiers were on vacation according to Putin.

Crude prices collapsed -$4.04 or -8% during the regular session and WTI has declined another -$1.31 in the afterhour's session. Energy equities imploded with the rest of the market on the drop in crude prices.


Wynn Resorts (WYNN) declined another -5% after news that gaming revenue in Macau declined -35% in August. That is the 15th consecutive monthly decline. Wynn gets 72% of its revenue from Macau. WYNN shares closed at a new five-year low.


Netflix (NFLX) was knocked for a -8% loss despite Bank of America raising the price target to $133. The company said it was not renewing the content agreement with Epix when the deal expired at the end of September. The deal with Epix was not exclusive and the same movies were also available on other services. Starting on October 1st all the Epix movies will be available on Hulu. Netflix said it was going to allocate the money previously spent on the Epix content to developing additional original content for Netflix subscribers. Also, starting in 2016 Netflix will have exclusive rights to all the Disney content including Pixar, LucasFilm and Marvel productions. Think of the legions of children that will be downloading Star Wars movies for years to come.

This looks like another buying opportunity for Netflix investors. A drop to $101 would be a bargain.


GoPro (GPRO) hit a five-month low at $42.09 with a -6% drop on no news. The market correction is crushing all the momentum stocks that led the market to its recent highs. China could be a problem for GoPro because they do expect to sell a lot of cameras into that market. However, their manufacturing operations benefit from the cheaper yuan. It is hard to tell if the decline is over since the $38-$40 level was support in March. The low today was $42 and that could be a buy point for those traders that want to be early. I would buy it tomorrow with a stop loss at just under $38.


Ambarella (AMBA) reported earnings after the bell. The company reported earnings that rose +138% to 88 cents and beat estimates of 80 cents. Revenue rose +89% to $84.2 million. Analysts were expecting $81.7 million. However, the company guided for the current quarter to revenue of $90-$93 million, up +39% at the middle of that range. That was just short of analyst estimates for $92.3 million. The company said wearable camera revenue in Q3 would be down slightly because GoPro released their new model earlier than normal and pulled sales into the prior quarter. Historically that bump has come in Q3.

Last week there were rumors that Qualcomm (QCOM) may be considering entering the camera chip market and shares of AMBA declined sharply. Analysts said investors overreacted because neither Sony or Qualcomm could compete with Ambarella technology. Shares of AMBA declined to $81 in afterhours. I would look for a bottom to form in AMBA and I would be a buyer around $75.


The Biotech sector was a major drag on the Nasdaq the last two days after it failed at the resistance of the 200-day average. Biotechs have had a rocky period since the July high. Despite several mergers and attempted mergers it looks like investors are less excited than they were over the last year when the sector gained +83% from April 2014 through March 2015. I am sure the glory days will return but there needs to be some consolidation at this lower level in order to build a base.


Markets

Today's decline was textbook perfect for a rebound failure at resistance. Monday's lackluster session with a -115 point Dow decline was the actual failure. Today was a continuation that was accelerated because of the China/Japan headlines.

In theory, the rebound from the prior week's lows should have happened regardless of the headlines. We went from very oversold into a short squeeze relief rally and once that momentum faded we should have rolled over to begin the retest of the lows.

That is the typical pattern for an August/September correction. The process should take weeks to complete. However, the first two weeks of September normally have a positive bias. That could be erased by the pending FOMC meeting.

We always need to remember that historical trends are interesting to compare but they are never a guarantee. We need to trade what we see rather than what we expect to see. If the two happen to match then we should be happy campers.

Art Cashin has been warning for several weeks that cash on hand at mutual fund companies is at historic lows. That means a lot of redemptions will require the funds to sell stocks rather than redeem out of the cash balance. Art said if the decline today caused a lot of fund holders to put in redemption requests it will turn into market on close sell orders for Wednesday.

I would expect a lot of investors were shell shocked by last week's events. When the rebound occurred, they were calmed to some extent. When this week started out negative and then accelerated to the downside, it may have prompted quite a few to put in their redemption requests. Tomorrow afternoon we will see the results if that actually happened.

The S&P fell -58 points to close at 1,914 after hitting an intraday low of 1,903. The 1,920 level was seen as a potential support point and it held for a couple hours but finally collapsed near the close. Resistance is now around 1,928 and 1,940.

The lows from last week were 1,867 on Monday and Tuesday. We do not have to actually hit that low for a retest. Any decline and rebound from the 1,885 to 1,900 range would qualify and there may be some aggressive traders already placing their long bets in that range.

Tonight I am expecting a rebound at the open, assuming we are not hit by another round of negative headlines and that includes the ADP Employment report at 8:30. What happens after that opening rebound is going to be critical. I am sure the shorts loaded up again on today's decline and we could see another squeeze if there are no headlines to spoil the day.


All 30 Dow components were negative and most of the losses were big. The Dow was down nearly -550 points at 3:40 and was rescued by some market on close buy orders. The low was 15,979 or just slightly under 16,000. That 16,000 level should be decent support even though it was pierced last week. The high intensity plunge on Monday declined to 15,370 so we are nowhere near those lows. However, the closing low was 15,666 on Tuesday and that would be a support point.

There is nothing to prevent the Dow from continuing its decline. Half of the Dow stocks are in a bear market and most of the rest are down more than -10%. Until the individual stocks find their own support levels, the Dow should remain the weakest index. The Dow stocks are international companies and they have the most exposure to global economic weakness.

I would look for 15,780 to come back into play as minor support if the 16,000 level breaks.



The Nasdaq was crippled by some huge losses in the big cap momentum stocks. Google, Amazon, Netflix, Priceline, etc. The index lost -140 points and finished very close to its lows. There were no headlines specifically targeting tech stocks. There were simply more sellers than buyers and the momentum stocks were the ones getting sold.

Support is 4600, 4545 and 4500. Resistance would be the morning highs at 4715.



The small cap Russell 2000 had been the best performing index until today. The -2.7% decline was right in line with the big cap declines and there was no last minute buying in the small caps. They sold off from the open right through the close.

The decline back below 1150 is a sell signal and support may not appear until 1105 followed by 1050.


S&P futures are up slightly as I write this commentary and suggest a positive open. However, there is a lot of darkness before the dawn and anything can happen. Even if we do have a positive open we have seen market gains erased in minutes over the last two weeks. Because of the big decline today, I would expect some additional margin selling on Wednesday and we could have mutual fund selling at the close.

This rebound and fade scenario suggests we could retest the lows at some point in the weeks ahead. While that is not mandatory, it is typical for this calendar period. Remember to trade what you see rather than what you expect to see.

Investors with retirement accounts saw their net worth cut in half in the financial crisis. Then they were shocked again by the flash crash. Now the headlines are screaming global recession. I would not be surprised if a lot of potential retirees are calling in their sell orders to go to cash rather than face a potential 50% haircut once again. Be prepared for continued volatility in both directions.


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Enter passively, exit aggressively!

Jim Brown

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New Plays

This Company Faces Tougher Competition

by James Brown

Click here to email James Brown


NEW BEARISH Plays

QUALCOMM Inc. - QCOM - close: 55.02 change: -1.56

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 1, 2015
Time Frame: 4 to 6 weeks
Average Daily Volume = 12.5 million
New Positions: Yes, see below

Company Description

Trade Description:
There seem to be a ton of bulls shouting at everyone to buy QCOM even though the stock is in a bear market. QCOM peaked in early 2014 around $81-82 a share. Since then it has been a very bumpy decline lower.

The company is facing rising competition. More importantly some of that competition is coming from its own customers. QCOM has been a very dominant player in the mobile phone chipset market. Yet lately the company has been facing competition from mobile phone manufacturers choosing to use their own chips instead of QCOM's.

Almost half of QCOM's revenues come from two companies: Apple (AAPL) and Samsung. Both of these mobile phone makers have been slowly beefing up their own in-house chip design and production abilities. Earlier this year QCOM lost out when Samsung picked its own chip sets for a handful of new mobile phone models instead of QCOM's.

The rising competition is taking a bite out of sales. QCOM's earnings performance has been mixed over the last year. It tends to beat estimates on the bottom line but revenues have been disappointing. After a couple of quarters of revenue growth in the +7-8% range QCOM just reported Q3 revenues fell -14.3%, which was worse than expected. Another big challenge is management's guidance. QCOM has lowered its guidance the last four quarterly reports in a row!

The company has tried to soften the bad news by announcing a massive $15 billion stock buyback program but that was back in March this year. They promised to spent $10 billion on buybacks between March 2015 and March 2016. The big buyback has not stopped QCOM's stock from falling to new multi-year lows.

Bullish investors have tried to argue that QCOM might split up the company to unlock value. That was a very popular idea when activist investors Jana Partners got involved in QCOM. Jana is one of the reasons QCOM did such a big stock buyback earlier this year.

Right now the market's focus on China's weakness could be killing QCOM's stock. The company does a huge amount of business with China.

Meanwhile technically QCOM looks very weak. The point & figure chart is bearish and forecasting at $48.00 target. The oversold bounce from last week's lows appears to be rolling over. Today's intraday low was $54.69. We are suggesting a trigger to launch bearish positions at $54.45. We'll plan on exiting in the next four to six weeks.

Please note that I do want to offer one potential warning. Apple Inc. (AAPL) has a special event scheduled for September 9th. We do not know what AAPL will announce. If they happen to announce something that uses QCOM equipment then it could be a bullish catalyst for QCOM but that's probably a big "if" at the moment.

Trigger @ $54.45

- Suggested Positions -

Short QCOM stock @ $54.45

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

Buy the OCT $50 PUT (QCOM151016P50) current ask $1.16
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:

Weekly Chart:



In Play Updates and Reviews

The Market's Oversold Bounce Is Failing

by James Brown

Click here to email James Brown

Editor's Note:
Last week's huge bounce off its August 24th low appears to be failing. Stocks were down around the world today. The U.S. market slipped -3%. Volatility spiked on another big down day.

Our bearish LCI trade is open.


Current Portfolio:


BULLISH Play Updates

Keurig Green Mountain, Inc. - GMCR - close: 55.10 change: -1.50

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: +0.0%
Entry on August 31 at $55.10
Listed on August 29, 2015
Time Frame: Exit prior to earnings in November
Average Daily Volume = 2.6 million
New Positions: see below

Comments:
09/01/15: GMCR dipped back toward $55.00 today. This level was previous resistance so it's not surprising to see it act as new support. If this level fails the next support area could be $52.00.

Trade Description: August 29, 2015:
When everyone has the same opinion on a stock sometimes shares will move the opposite direction.

It has not been a good year for GMCR. Shares are down -59% year to date and off -65% from its all-time high set on November 18, 2014 ($157.10). After months and months of declines GMCR could be poised for a big bounce.

If you're not familiar with GMCR they are in the consumer goods sector. When they launched their single-serving coffee brewer it changed the coffee world forever.

According to the company, "As a leader in specialty coffee, coffee makers, teas and other beverages, Keurig Green Mountain (Keurig) (GMCR), is recognized for its award-winning beverages, innovative brewing technology, and socially responsible business practices. The Company has inspired consumer passion for its products by revolutionizing beverage preparation at home and in the workplace. Keurig supports local and global communities by investing in sustainably-grown coffee and by its active involvement in a variety of social and environmental projects. By helping consumers drink for themselves, we believe we can brew a better world."

The company is suffering from heavy competition in the single-serving coffee/hot beverage pod business. The consumer market did not react well when GMCR introduced their Keurig 2.0 brewer, which was designed to only work with company-specific pods. They have also suffered multiple delays on introducing their Keurig Kold machine, which is a cold beverage machine similar to Sodastream.

The stock peaked in November 2014 right before its quarterly earnings report. They beat earnings and revenue estimates but management guided lower. GMCR has guided lower every quarter since then.

In February 2015 they reported earnings and revenues that missed estimates (and guided lower). In early May they reported earnings and revenues that missed estimates (and guided lower). On May 15th the stock sank after the company's presentation on its new Keurig Kold machine. Wall Street is worried that GMCR is pricing their Kold machine too high (around $300) when rival Sodastream's cold beverage maker is only $99.

GMCR's most recent earnings report was August 5th. They reported Q3 earnings of $0.80 per share, which actually beat estimates by a penny but revenues were down -5.2% to $970 million, which was a miss. Management lowered their Q4 guidance. The company said brewer machine sales were down -26%.

Management tried to soften the blow of this disappointing quarterly report and lowered guidance by announcing a $1 billion stock buyback program. The stock collapsed anyway with a plunge from $75 to $52.65.

Everything looks bearish for GMCR. So why are we suggesting a bullish trade? Basically GMCR's stock is so oversold that when it bounces it could see a big bounce. Wall Street analysts have been downgrading GMCR's stock and lowering price targets for the last several months. Everyone is so bearish that an unexpected rally could spark some serious short covering.

When the market collapsed on Monday, August 24th, GMCR fell from $50 to $45.25 but ended the day at $$51.30. That's right. GMCR actually ended Monday with a gain. Shares are now up five days in a row. The $55.00-56.00 area is resistance but a breakout could spark a rally toward $60-65 or its simple 50-dma (currently near $66.50). Technically, last week's bounce, has produced a bullish engulfing candlestick reversal pattern on GMCR's weekly chart. This pattern needs to see confirmation and we want to be ready if this rebound continues.

Friday's high was $54.46. Thursday's high was $54.61. Tonight we are suggesting a trigger to launch bullish positions at $55.10. More aggressive traders might want to consider jumping in early around the $54.75 area. GMCR can be very volatile. I do consider this an aggressive, higher-risk trade.

*small positions to limit risk* - Suggested Positions -

Long GMCR stock @ $55.10

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

Long NOV $60 CALL (GMCR151120K60) entry $3.07

08/31/15 triggered @ $55.10
Option Format: symbol-year-month-day-call-strike


NuVasive, Inc. - NUVA - close: 52.01 change: -0.71

Stop Loss: 49.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 29, 2015
Time Frame: Exit 6 to 8 weeks (option traders exit prior to expiration)
Average Daily Volume = 592 thousand
New Positions: Yes, see below

Comments:
09/01/15: We are not giving up on NUVA (yet). The NASDAQ fell -2.95% today. NUVA only slipped -1.3%. Currently we are still on the sidelines. Our suggested entry point is $54.55.

Trade Description: August 29, 2015:
Investors want to see earnings growth and NUVA has delivered. The company's bullish results have helped fuel a +14% gain year to date. The NASDAQ composite is only up +1.9%. Traders were quick to buy the dip when the market crashed a few days ago and shares look poised to run.

NUVA is in the healthcare sector. They're part of the medical device industry. According to the company, "NuVasive is an innovative global medical device company that is changing spine surgery with minimally disruptive surgical products and procedurally-integrated solutions for the spine. The Company is the third largest player in the $9.0 billion global spine market. NuVasive offers a comprehensive spine portfolio of more than 90 unique products developed to improve spine surgery and patient outcomes. The Company's principal procedural solution is its Maximum Access Surgery, or MAS®, platform for lateral spine fusion. MAS was designed to provide safer, reproducible, and clinically proven outcomes, and is a highly differentiated solution with fully integrated neuromonitoring, customizable exposure, and a broad offering of application-specific implants and fixation devices designed to address a variety of pathologies."

NUVA has reported strong growth and offered a bullish outlook this year. Starting in January 2015 NUVA raised its full year guidance. They reported earnings on February 24th and beat estimates. They guided higher again on April 1st. Their earnings report on May 4th beat estimates on both the top and bottom line and management raised their 2015 guidance. That pattern repeated with their July 28th earnings report. NUVA beat estimates on both the top and bottom line. The company raised their 2015 estimates above Wall Street expectations. The stock soared to new multi-year highs on this news.

NUVA started to see some profit taking in early August. When the market collapsed a few days ago shares spiked down to $48.00. This was a -14% correction from its early August high. Traders bought the dip and NUVA is up four days in a row. The point & figure chart is bullish and forecasting at $63.00 target.

Tonight we are suggesting a trigger to open bullish positions at $54.55. This would be a new two-week high. We will start this play with a stop loss at $49.85.

Trigger @ $54.55

- Suggested Positions -

Buy NUVA stock @ $54.55

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

Buy the OCT $55 CALL (NUVA151016C55)

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


Oshkosh Corp. - OSK - close: 40.79 change: -1.26

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -3.6%
Entry on August 31 at $42.30
Listed on August 27, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.1 million
New Positions: see below

Comments:
09/01/15: Last night's announcement that OSK was adding 10 million shares to their buyback program didn't do much for the stock. Shares did see a small gap higher at $42.30 and then they plunged -2.99%, which was inline with the broader market's weakness. The $40.00 level should be short-term support.

I am not suggesting new positions at this time.

Trade Description: August 27, 2015:
The future looks a little brighter for OSK after a big contract win from the U.S. military. OSK has been making vehicles for the military for over 90 years. Earlier this year (January) the military tested new prototypes for a new Humvee design from the likes of Lockheed Martin, AM General, and OSK. This week the Wall Street Journal reported that OSK had won the contract.

OSK is in the consumer goods sector. According to the company, "Oshkosh Corporation is a leading designer, manufacturer and marketer of a broad range of specialty access equipment, commercial, fire & emergency and military vehicles and vehicle bodies. Oshkosh Corporation manufactures, distributes and services products under the brands of Oshkosh®, JLG®, Pierce®, McNeilus®, Jerr-Dan®, Frontline®, CON-E-CO®, London® and IMT®. Oshkosh products are valued worldwide in businesses where high quality, superior performance, rugged reliability and long-term value are paramount."

The new Humvee contract is a big deal. The Pentagon has been cutting back on spending the last few years. This new contract could last 25 years. OSK won with its design that is lighter in weight, providers greater range, and better protection against mines and roadside bombs. Officially the vehicle is called a Joint Light Tactical Vehicle (JLTV).

The initial contract is valued at $6.75 billion for 17,000 vehicles. It could be extended out to year 2040 since the U.S. army wants to buy almost 50,000 new JLTVs for itself and about 5,500 for the Marines. The overall program could be worth $30 billion over 25 years.

OSK's revenues last year were only $6.2 billion so this is a nice boost.

Technically shares of OSK appear to have produced a bullish double bottom. The stock market's spike lower on Monday morning pushed OSK toward its late July lows. This week's rebound in the market has seen OSK breakout past resistance near $40.00 and its 50-dma. This reversal higher has produced a new buy signal on the point & figure chart, which is forecasting a long-term $63.00 target.

Today's high was $42.21. Tonight we are suggesting a trigger to launch bullish positions at $42.30.

- Suggested Positions -

Long OSK stock @ $42.30

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

Long 2016 Jan $45 CALL (OSK160115C45) entry $3.30

08/31/15 triggered @ $42.30
Option Format: symbol-year-month-day-call-strike


Starbucks - SBUX - close: 53.50 change: -1.21

Stop Loss: 51.15
Target(s): To Be Determined
Current Gain/Loss: -3.0%
Entry on August 27 at $55.15
Listed on August 25, 2015
Time Frame: Exit prior to earnings in October
Average Daily Volume = 8.0 million
New Positions: see below

Comments:
09/01/15: SBUX gapped open lower this morning and bounced. Unfortunately the bounce failed at its 10-dma. Shares settled near its 100-dma with a -2.2% decline. If this market weakness continues tomorrow we should expect SBUX to test the $52.00 area.

No new positions at this time.

Trade Description: August 25, 2015:
The sell-off in shares of SBUX is a bit ridiculous. The Thursday-Friday-Monday sell-off in the market saw SBUX fall from $57.59 to $42.05. That was a -27% drop in less than three days. The company's fundamentals didn't deteriorate -27%. The recent market turmoil presents an opportunity to buy SBUX. Jump to the bottom of this play description for details.

Here's a little bit about SBUX and the company's performance:

The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. SBUX broke out of that sideways funk after it reported earnings in January 2015.

Five-Year Plan

In late 2014 SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

Earnings results:

It was a very strong holiday period for SBUX thanks in part to astonishing gift card sales. The amount of money loaded onto SBUX gift cards during the holidays surged +17% to a record $1.6 billion. One out of every seven Americans received a SBUX gift card. The company also saw significant growth overseas with its China and Asia-Pacific business soaring +85% to sales of $495 million. Their mobile transactions have reached seven million transactions a week.

SBUX reported its Q2 (2015) on April 23rd. Earnings of $0.33 a share were in-line with estimates. Revenues were up +17.8% to $4.56 billion, slightly above expectations. It was their strongest growth in four years. Customers are responding well to new drink options and an updated food menu. They're also developing new delivery options, mobile pay options, and alcoholic drinks available at select locations.

Worldwide same-store sales grew +7%. This was significantly above estimates. It also marked the 21st consecutive quarter where SBUX's comparable store sales were +5% or more.

The company issued mixed guidance. The stronger dollar is having an impact. They see fiscal 2015 results in the $1.55-1.57 range. That compares to Wall Street estimates for $1.57 per share. However, the company's revenue estimates are more optimistic. They're forecasting +16-18% sales growth into the $19.1-19.4 billion zone compares to analysts' estimates of $19.1 billion.

The trend of earnings pops continued in July with shares gapping up to new all-time highs following its Q2 report on July 23rd. Earnings were $0.42 per share, a penny above estimates. Revenues were up +17.5% to $4.88 billion, just a hair above expectations. Global same-store sales were up +7% and their non-GAAP operating margin improved 100 basis points to 19.5%. Management is still guiding 2015 revenues to rise +17% in the $19.1-19.4 billion range.

Recent Sell-off & Entry Point

The recent stock market bloodletting saw SBUX breakdown below a multitude of support levels. The weakness on Monday morning was just ridiculous. SBUX opened on Monday, August 24th near technical support at its 200-dma and then it plunged to $42.05. The stock bounced back to $50 by the closing bell. The rebound struggled today but SBUX displayed relative strength with a +1.48% gain versus a -1.35% drop in the S&P 500 and a -0.4% decline in the NASDAQ.

If the stock market continues to sink we want to take advantage of the weakness in SBUX and launch bullish positions on a dip near its 200-dma. Today the simple 200-dma is at $48.04. We will set our entry trigger at $48.00. We are starting this play without a stop loss. More conservative investors might want to wait on launching positions since the next few days could be volatile for the broader market (SBUX included).

- Suggested Positions -

Long shares of SBUX @ $55.15

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

Long NOV $57.50 CALL (SBUX151120C57.5) entry $2.00

08/29/15 new stop at $51.15
08/27/15 Triggered @ $55.15
08/26/15 Entry point adjustment - move the buy-the-dip trigger from $48.00 to $50.00. Plus, add a secondary trigger to open bullish positions at $55.15.
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Lannett Co. - LCI - close: 47.29 change: -0.66

Stop Loss: 51.55
Target(s): To Be Determined
Current Gain/Loss: -1.9%
Entry on September 01 at $46.42
Listed on August 31, 2015
Time Frame: Exit 6 to 8 weeks (ahead of October option expiration)
Average Daily Volume = 858 thousand
New Positions: see below

Comments:
09/01/15: Our new bearish trade on LCI was triggered on the gap down this morning. Shares opened a $46.42. LCI managed to pare its losses by the close with a -1.3% decline on the day. I would still consider new positions at current levels but more conservative traders might want to wait for a drop below $46.0 before initiating positions.

I am not suggesting new option positions. The option pricing this morning was whacky. Our entry price on the put option jumped higher and killed our entry point.

Trade Description: August 31, 2015:
LCI has seen tremendous earnings and revenue growth over the last few years but it looks like their growth rate might be slowing down.

LCI is in the healthcare sector. According to the company, "Founded in 1942, Lannett develops, manufactures and distributes generic prescription pharmaceutical products in tablet, capsule and oral liquid forms to customers throughout the United States. Lannett markets its products primarily to drug wholesalers, retail drug chains, distributors, and government agencies."

Looking at LCI's last four quarterly reports the company has beaten Wall Street's earnings estimates every time. The trend in revenue growth could be a warning. Their Q1 revenues (announced Nov. 3rd, 2014) were up +103.8%. Q2 revenues (Feb. 4th) rose +69.7%. Q3 revenues were only up +24.3%.

LCI's most recent earnings report was August 25th. The company delivered a profit of $0.91 per share. That was four cents above estimates and a +42% improvement from a year ago. Revenues grew +23% to $99.28 million, also above expectations. The market's problem with the results seems to be LCI's 2016 guidance, which was a little soft.

LCI's full-year 2015 earnings growth was an impressive +162%. Unfortunately the stock market is always looking forward, not backward. It appears that investors are growing cautious.

Technically the stock broke down back in May following its Q3 earnings report. Then during the June-through-early August time frame shares of LCI produced a bearish head-and-shoulders pattern. That pattern broke when LCI fell below short-term support at $55.00 and long-term technical support at the 200-dma.

Now it looks like the oversold bounce from last week's low is failing. Shares underperformed the market with a -3.8% decline today. LCI has also broken below a long-term trend line of support. I suspect that LCI could fall toward round-number support near $40.00.

Tonight we are suggesting a trigger to launch bearish positions at $47.25. However, I want to caution readers to limit their risk and use small positions. The most recent data listed short interest at 26% of the relatively small 26.74 million share float. That much short interest raises our risk of a short squeeze and could make LCI more volatile.

- Suggested Positions -

Short LCI stock @ $47.25

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

long OCT $45 PUT (LCI151016P45) entry $5.00

09/01/15 triggered on a gap down at $46.42, suggested entry was $47.25
Option Format: symbol-year-month-day-call-strike


iPath S&P500 VIX Futures ETN - VXX - close: 30.76 change: +3.91

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -41.0%
Entry on August 25 at $21.82
Listed on August 24, 2015
Time Frame: Exit prior to October option expiration
Average Daily Volume = 50 million
New Positions: see below

Comments:
09/01/15: Buckle your seat belt. The market's decline today fueled a big move in volatility. The VIX surged +10% while the VXX rallied +14.5% to new six-month highs.

Check out the chart below. The weekly chart suggests spikes in the VXX do not last very long.

If think stocks are going to collapse into a new bear market then I probably would not launch bearish positions on the VXX. However, if you think this is just a temporary pullback in stock prices then that means this spike in volatility is temporary.

We are still optimistic on the market and expect a rebound. Therefore we are doubling down on this bearish VXX trade. Launch new bearish positions at the opening bell tomorrow. You may want to limit your risk by using the options. I would not be surprised to see another spike higher at the open.

I'm listing a new entry point below.

Note - I have extended our time frame. Exit prior to October option expiration.

Trade Description: August 24, 2015
The U.S. stock market's sell-off in the last three days has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on this long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

(see VIX chart from the August 24th play description)

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet. Our time frame is two or three weeks (or less).

- Suggested Positions -

Short the VXX @ $21.82

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

Long OCT $20 PUT (VXX151016P20) entry $2.93

- Double Down On The September 1st Spike Higher -

- Launch new bearish positions at the open tomorrow (Sep. 2nd)

Short the VXX @ the open

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

Buy OCT $20 PUT (VXX151016P20) current ask $0.63

09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82
Option Format: symbol-year-month-day-call-strike

chart: