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Daily Newsletter, Saturday, 9/5/2015

Table of Contents

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

Market Wrap

Long Weekend Worries

by Jim Brown

Click here to email Jim Brown

Fears of what could happen over the Labor Day weekend and worries over a pending rate hike caused investors to sell stocks again on Friday. With Asian markets open on Sunday night and Monday night there would be two trading sessions before the U.S. markets could react.

Market Statistics

Japan's Nikkei 225 Index declined -2.15% on Friday to trade down for four of the last five days on a struggling economy. The Chinese markets have been closed for two days and will reopen on Monday. With the Nikkei down -7% for the week and accelerating the weakness is likely to carry over into the U.S. markets on Tuesday. The Shanghai Composite was down -2.23% for the week and still falling.



With the U.S. markets closed on Monday that means the Asian markets will trade two complete sessions before the U.S. markets reopen on Tuesday. Anything is possible and Japan and China could trade down significantly leading to a horrendous gap lower in the U.S. markets on Tuesday. Traders not wanting to be caught in that potential downdraft exited long positions early on Friday. Shorts not wanting to bet on Tuesday's market direction exited those short positions late afternoon on Friday and lifted the Dow more than 160 points off its lows. The Dow traded down to 16,026 at 2:PM (-348) before rebounding to 16,190 at 3:45. Sell on close orders knocked it back to 16,106 and a loss of -272 points.

Ahead of the open the weak S&P futures sank even lower after Jeffery Lacker, a voting member of the FOMC said it was time for the Fed to raise rates regardless of the economy. He said, "I am not arguing that the economy is perfect, but nor is it on the ropes, requiring zero interest rates to get it back into the ring. It is time to align our monetary policy with the significant progress we have made." He said the China problem would only make a difference of a tenth or two in U.S. GDP growth.

The weak jobs report also caused the market to decline because after the Lacker comments it appears the Fed is prepared to cut rates no matter what the data says.

The Nonfarm Payroll report for August showed a gain of +173,000 jobs compared to estimates for a gain of +215,000. In a Bloomberg survey of 97 economists, the estimates ranged from 130,000 to 253,000.

The private sector gained only +140,000 jobs. June numbers were revised up by +14,000 to 245,000 and July was revised by +30,000, also to 245,000. That means the three month average is now 221,000 and well over the "greater than 200,000" target for the Fed to hike rates.

The August numbers are normally revised higher. In 21 of the last 27 August reports, the total was revised higher later. There is a problem in estimating August employment because of the abnormally low responses from employers. The rapidly disappearing summer means fewer people are in the office to respond to the survey. For this report, the response rate was unusually low at 69.9%. That was the lowest since August 2006. The average upward revision for August is a total of 61,000 jobs over the next two revisions. Obviously, the Fed is aware of this and the probability the final number will be closer to +250,000 than +173,000.

Goods producing sectors saw jobs decline -24,000 in August. New service sector gains declined from +232,000 in July to +197,000 in August. Private sector job gains declined from +224,000 in July to +140,000 in August. Average hourly earnings rose +0.32%. The average workweek rose one tenth to 34.6. The managed unemployment rate declined from 5.3% to 5.1% or 8.029 million. The real unemployment rate (U6) declined -0.1% to 10.3% (16.215 million) but still well above the pre recession rate of 8%. The labor force declined -261,000 and the labor force participation rate was flat at 62.6%.

Manufacturing lost -17,000 jobs and the energy sector lost -10,000 jobs. July numbers for those sectors were revised lower. The energy/mining sector has lost -90,000 jobs since December. Government jobs rose +31,000 after a +21,000 spike in July. Most of that was from workers returning to public schools for the fall session.

According to the Fed's guidance, the economy has reached full employment. In March, they lowered the range to 5.1%-5.2% and with Friday's reading at 5.1% that means the Fed is on target for a September rate hike. Of course they could lower the range again as they did in March.

However, in an August 22nd speech Yellen appeared to have a moment of clarity and suggested "our understanding of labor market developments and their potential implications for inflation remain far from perfect. As a consequence, monetary policy ultimately must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy." She went on to talk about the surprisingly rapid decline in unemployment from the 8.1% post recession level and how the falling labor force participation rate and the high U6 number of total unemployed was skewing the numbers. She pointed out that the significant number of dislocations in the labor market had caused numerous analysts to suggest the Fed focus solely on inflation and ignore the current labor market conditions. Full Speech Here

While ignoring the labor market is not likely to happen the low unemployment rate may be a lot smaller factor in the Fed's decision to hike rates. Until the fed either changes the guidance range or gives us some new decision matrix for a rate hike the focus is now on the September meeting as the first rate hike. Employment may appear to be up but inflation is declining and that puts the Fed in a box for September. The best solution would be for the Fed to hike 25 basis points and then issue guidance that suggests it will be a long time before the next hike. That would take the market's focus off the timing of the first hike and then calm the market by saying it will be mid 2016 before they consider a second hike.


There are no major economic reports due out next week. All eyes will be focused on the FOMC announcement the following Thursday. However, there is a flurry of economic data coming out of China. That will probably have the most impact on our market.


It was the last summer Friday and the amount of stock news was minimal. Only a handful of companies made headlines. Blackberry (BBRY) announced it was acquiring mobile security company Good Technology for $425 million. Good has clients in global financial firms and experience in providing security for both Android and iOS cell phones. Good already provides security for the Apple Watch. Blackberry is rumored to be preparing an Android based phone and this acquisition suggests those rumors are true. Blackberry phones have had very few security issues because of the way the messaging system was written. Shares declined more than -2% on the news.


Noble Energy (NBL) was the recipient of some unusual options action. More than 18,000 September $30 calls were purchased against an open interest of only 863. More than 5,200 October $30 calls were purchased against an open interest of only 100. Shares closed at $30.73 after a 50-cent gain. Three-day weekends are known for concluding merger and acquisition agreements. Just in case nothing happens by the open on Tuesday, we are listing this as a short-term play in Option Investor.


Disney (DIS) announced the availability of Star Wars toys based on the new movie coming out in December. Disney called it "Force Friday" as it unveiled the event in a YouTube video. It was an 18+ hour global event with more than 3,000 stores in the U.S. opening at midnight for fans to get the first look at the new toys. A major city in every time zone opened to feature a specific toy for that region in what was called a global "unboxing" event. Disney press release with toy details

Fans that subscribed to the Star Wars page were treated to new videos of each toy as they were announced. This is going to be a major profit maker for Disney with the film alone expected to gross $2.2 billion. The toys are expected to gross another $1 billion. The BB-8 Droid, $149, is already sold out in some locations. The droid has its own programming but can also be controlled by an iPhone or an Android device. Disney shares lost $1 for the day but with all the Star Wars promotion over the next couple of months the decline will be short lived.



B&G Foods (BGS) sprinted to a new high after General Mills (GIS) agreed to sell the Green Giant brand for $765 million in an all cash transaction. BGS will also get the Le Sueur vegetable business. General Mills will continue to operate the European Green Giant business under license from BGS. Proceeds of the sale will be used for share repurchases and debt retirement. BGS expects the acquisition to be immediately accretive. General Mills just took a $260 million write down on the value of the Green Giant business in Q2. Apparently, they were not seeing any bidders at the higher valuation. GIS shares lost $1.


Cooper Companies (COO) reported earnings of $1.97 that was in line with estimates. Revenues rose +6.8% to $461.7 million but missed estimates for $467 million. Earnings were hurt by weakness in the surgical procedures business with revenue down -8% and -11% in the fertility business. Shares were hurt by slightly lowered guidance.


Chipotle Mexican Grill (CMG) shares lost -$5.76 after an attack ad by the Center for Consumer Freedom. The full-page ad ran in the New York Post. The ad attacked Chipotle food as unhealthy and called their marketing hypocritical.

The ad depicted a seriously overweight man with no shirt saying "Eat two 'all natural' Chipotle burritos a week and you could gain 40 pounds in a year." The ad claims the food is NOT GMO and antibiotic free as Chipotle claims.



Twitter's board met last week and there were no announcements regarding a new CEO. The company still has a heavy event schedule over the next few weeks as different products are launched and analysts still believe a CEO announcement is imminent. Shares only declined -15 cents in a very bad market. The acquisition rumor resurfaced on Friday but that is not likely to happen until a new CEO has been installed.


Esterline Technologies (ESL) reported earnings of $1.33 but that missed estimates for $1.47. Revenue of $496.2 million also missed estimates for $531.4 million. Shares declined -6% on the news.


Apple shares are clinging to the $110 level ahead of the product announcement event at 1:PM on Wednesday. This is expected to be the iPhone 6 refresh, an update for Apple TV and possibly the 12.9-inch iPad Pro. There is a lot of buzz surrounding the booking of the 6,000 seat Bill Graham Civic auditorium for the announcement since they only send out about 750 invitations to the press. This has the rumor mill buzzing but so far no real clues. You can bet that whatever it is will be extravagant.


WhatsApp founder Jan Koum announced on Facebook that the messaging application had crossed the 900 million monthly active user mark. WhatsApp was purchased by Facebook for $22 billion and they have yet to monetize the application. The fee to be a user on WhatsApp is 99 cents a year. WhatsApp has more users than Facebook Messenger at 700 million, WeChat at 600 million, Viber 236 million and Line at 205 million. With Facebook owning the top two messaging applications Mark Zuckerberg controls the world of messaging. Twitter is not a person-to-person messaging app but they have 300 million users. While WhatsApp still has no business model you can bet Mark has plans for it. Once they turn on the advertising, it will be a money-printing machine.


When a public company wants to release bad news that they hope nobody will notice it is done after the close on a Friday before a holiday weekend. Yahoo announced late Friday that Aman Kothari, senior vice president, global controller and chief accounting officer, is leaving on September 11th. Not a month from now or 3 months or when a replacement has been hired. He is leaving next Friday. That type of immediate exit is never good news. No reason was given for the departure. CFO Kenneth Goldman will assume his duties until a replacement is hired. Shares of Yahoo were unchanged because of the lateness of the announcement at 4:30 on Friday. Shares of Yahoo have been in a decline since the $52 high in November.


After the monster short squeeze last week we saw crude prices trade mostly over $45 and retain much of their gains. Support came from comments from Jack Lew that Iranian sanctions would not be lifted until they complied with the various terms of the nuclear agreement. Analysts are now projecting late Q2-2016 for the potential release date. That means additional Iranian oil should not be on the market until next summer. They currently have about 50 million barrels stored on tankers in the Persian Gulf and elsewhere in anticipation of the sanctions being removed. That is going to be a long wait. However, there have been previous reports of tankers meeting up with other tankers in a clandestine bay and transferring oil so it does not look like it came from Iran. How much of that is currently being done is unknown.

We are entering a period where demand is going to decline sharply and inventories are going to surge. The Labor Day weekend is the end of the driving season. Demand will not pickup again until Thanksgiving and the holiday shopping season.

Analysts are predicting gasoline prices will decline under $2 in the weeks ahead. They are currently $2.44 per gallon and 96 cents less than the same period last year. This is the lowest price for Labor Day gasoline since 2004. Consumers are going to save roughly $1.4 billion over the 4-day weekend starting on Friday.


Active oil rigs declined -13 to 662 last week and a six-week low. The low for this cycle was 638 back on July 17th. Gas rigs were unchanged at 202 and an 18-year low.


Markets

It was a tough week in the market, the second worst of the year, and a JP Morgan strategist claims the volatility is only half done. Marko Kolanovic wrote in a note to clients that robotic selling by quantitative investment funds tuned to volatility and price contributed to the July losses in stocks and is only half over.

Traders using a trend-following strategy in futures and those using a risk-parity strategy will have to sell another $100 billion in stocks over the next one to three weeks. A week ago, he said the risk was $300 billion and some of that has now passed with the -3% decline in the market over the last week.

Back on August 21st Kilanovic warned that market swings would accelerate now that the S&P had broken below the trading band that had lasted for most of the year. In his Friday note, he said the three largest firms with the risk parity strategy were midway through their rebalancing. One firm had completed, the second firm had about $60 billion left and the third firm had about $40 billion in selling to complete. He warned clients that the best strategy was to wait in cash until the volatility generated by these moves was over.

Other analysts have warned that equity funds were becoming increasingly desperate to liquidate positions in order to salvage what little year to date gains they had left. Whatever the reason the volatility is increasing with Thursday's triple digit gains erased and Friday's decline never in doubt.

The Dow lost -3.25%, S&P -3.4% and Nasdaq -2.99% for the week. The biotech index declined -3.91% and the energy sector fell -4.09%.

In addition to the weakness coming from Asia there are fundamental problems in the U.S. as well. Q3 earnings are now expected to decline -4.1% compared to estimates for -1.0% on July 1st. With earnings declining and worries over events overseas pushing earnings even lower, it is no wonder that stocks are declining. However, most analysts believe the fundamental adjustment is already complete.

The problem is that once a correction begins it tends to take on a life of its own. Millions of investors, each exposed to a different subset of market views and trading experiences, see the market risk differently. Every big decline like the one we had on Friday scares another group out of the market while other investors step in to buy the dips.

I believe the late week decline was almost entirely due to the risk of the Asian markets trading for two days while the U.S. markets will be closed. Add in the risk for a September rate hike in two weeks and market sentiment was negative.

I think nearly every investor would tell you that a 25 basis point hike will not harm the market or the economy but the crowd sentiment regarding the hike is still negative. Overall sentiment has reached a neutral point.

The AAII Investor Sentiment survey for the week ended on Wednesday after a +293 point Dow gain, reflected about one-third of investors in each category. Bearish sentiment had declined -6.6% after Wednesday's rebound. Neutral sentiment rose by an equal amount and bullish sentiment remained flat. If Friday's lows are broken next week I would expect a dramatic shift in sentiment.


At the risk of repeating myself too often the historical trend for corrections in August/September is for a retest of the initial high intensity low after several days or weeks have passed. As of Monday that low will be two weeks ago and we are definitely in the valid retest period. That does not mean that a dip back to 1,867 next week is going to be the magic bullet that kills this correction. With the Fed meeting the following week, I would expect some continued weakness or at least some lackluster upward movement. As before, we probably have a major short squeeze in our near future but resistance is strong.

I am an aggressive trader. I am looking to buy any future retest of the lows and add some quality stocks that are oversold and will probably become more oversold. If the 10% correction turns into a bear market drop of 20% I will suffer for my aggressiveness. I would suggest investors with a longer time horizon consider the same strategy. Do your research, pick a few stocks and put in some limit orders at a price you would be willing to pay.

Support on the S&P is 1,912 and 1,867. We have seen the S&P move 50-60 points in a single day multiple times over the last three weeks. That means the Friday close at 1,921 could be 1,971 or 1,871 by the close on Tuesday or anywhere in between depending on events in Asia over the long weekend.

Several analysts are targeting the October lows at 1,820. I am not. That would be a 15% correction and it is possible but today I am not expecting it. We would have to drop to 1,704 to enter a bear market with a 20% decline and I am definitely not expecting that.

A retest of the October lows at 1,820 would produce some tremendous buying opportunities but it would definitely crush investor sentiment and kill all the year-end forecasts by analysts. Individual investors with retirement accounts are already going to cash to preserve their nest eggs and a decline to 1,820 would remove another large percentage of them from the market. The problem is that many would not come back. After the financial crisis, the flash crash, and now the current crash they may decide to move to the safety of bonds or annuities rather than risk further losses in the market. I hope this does not happen. With 10,000 baby boomers retiring every day there are a lot of investors that are going to be reconsidering the market's future if the current weakness continues much longer.


The longer-term trend is more disturbing. The 13-week EMA has only crossed below the 34-week EMA twice before in the last 10 years. The third time was two weeks ago. If history repeats, we could be looking at some significantly lower lows. This type of long-term trend following is used by institutions and hedge funds. Obviously, had you acted on each cross over the last ten years you would have always been on the right side of the market.


I went through the charts for the 30 individual Dow stocks. Eighteen were still in a downtrend and only about five were showing any positive trend. The rest had flat lined over the last week and could not be considered positive or negative. For instance, Disney has stabilized at just over $100 and is neither rising or falling. The MACD is showing a potential reversal higher but it has not yet happened so I counted Disney as neutral.


With the majority of the Dow stocks still in decline, it would be tough to predict a rally next week. Anything is always possible and I am sure those declining stocks are short squeeze fodder but the overall trend is still down.

Unlike the S&P, I do expect the Dow to retest its lows at 15,370 or somewhere in that vicinity. The 16,000 level is too close to sustain any material decline on Tuesday and that means the next target is the low from the prior Monday.

Support is 16,000, 15,780 and 15,666 on the way to the 15,370 retest. Resistance is 16,500, 16,660.



The Nasdaq has performed better on a relative basis than the Dow and S&P. The tech index has moved roughly sideways since the rebound but it still lost -2.9% for the week. The Nasdaq has risk to 4,500 with interim support at 4,635. The biotech sector was a major weight on the index for the week but there were some stocks switching sides on Friday with Clovis (CLVS) up +$2.44 as an example. The additional gain came afterhours. There are a couple conferences next week that could lift biotech shares.


Nasdaq 30 min chart

The Nasdaq has decent support at 4,605 and 4,545 and that should cushion any further attempt to retest the August lows.


The Russell 2000 small caps are a problem. The index declined under support at 1,150 and that is now resistance. The Russell did decline the least of any major index at -2.3% but it is at a lower relative position on the chart. The odds of a retest of the 1,104 low are good on any material bout of market weakness. Interim support is 1,129 and it closed at 1,136 after rebounding slightly from 1,130 on Friday.


Last week I said, "If you missed the correction and did not buy anything on the quick drop, be patient. You may still get your chance. Build your shopping list and put in some buy orders at ridiculous prices. You may actually get filled in the weeks ahead. That is still my recommendation for this week.

This could be a really volatile week. Try not to act on emotion and have a game plan prepared in advance that considers both the potential for a decline and for a short squeeze.


If you did not get the posts I made to the Option Investor Facebook page last week, please like our page so you will receive the posts on specific stock events this coming week.


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

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Random Thoughts


The percentage of newsletter editors bullish on the market is at the lowest level since March 2009. The Investor Intelligence Survey is different than the AAII sentiment survey I discussed earlier. Readings in the IIS report show bullish advisors have declined below 30%. That reading is 2.5 standard deviations below the mean. This has only happened three other times in the last 20 years. Those were in October 2002, November 2008 and March 2009. Nice chart


ECB president Mario Draghi said there could be even more QE as a result of the weakness in China. Draghi said the ECB is ready to increase the 1.1 trillion euro QE program where they are currently buying 60 billion euros a month of mostly government bonds. He said the ECB stood ready to extend the "size, composition and duration" of its existing program. Currently the existing QE program is slated to last until "at least" September 2016.

The ECB is targeting 2% inflation in Europe. However, Japan has been doing QE off and on for nearly three decades and the U.S. for half a decade and neither program has had any impact on increasing inflation. ECB growth forecasts were recently lowered to 1.4% for 2015, 1.7% for 2016 and 1.8% for 2017. The inflation forecast for 2015 was revised lower to only +0.1% and 1.1% in 2016.

Since $4 trillion in QE in the U.S. and tens of trillions of yen in QE in Japan has not worked it is amazing that the ECB wants to continue down that path. The world appears headed for a deflation cycle rather than inflationary growth.


Comstock Partners believes that the market will not only test the 1,820 level on the S&P but break below it. In their Deflation Cycle chart below, they note that we have been stuck at the "competitive devaluation" level for several years. With China slashing the value of the yuan by -4% and all the emerging markets racing to push their currencies even lower in order to compete the end result will be the global export of deflation. Full article here



The IMF implored central banks to maintain a "supportive policy" and avoid raising interest rates in this time of global stress. While the letter was to all the central bankers in the G20, it was directed at the Federal Reserve. The rest of the world is fighting even lower growth than the U.S. and they are not going to be raising rates in the near future. IMF Warns against Rate Hikes

The IMF also warned the slowdown in China would impact global growth and countries should prepare now for the rough times ahead. China has grown at roughly 10% for the last three decades and they may only be growing at 5% or less today despite the official government manipulated 7% rate. Investors have pulled more than $1 trillion out of emerging markets over the last year as Asian growth slowed. That is twice the amount that left during the financial crisis. IMF Warns on Slowdown


Despite the increase of +173,000 jobs in August there is another number that is more troubling. Another -261,000 workers dropped out of the labor force to push that number to more than 94 million and a record. The labor force participation rate at 62.6% is the lowest since 1977. More than 1.8 million workers have dropped out of the labor force in the past year. These are not retirements but people who have given up looking for work. Since the financial crisis began in 2007, more than 14.9 million people have dropped out of the labor force. Over that same period, only 4 million jobs have been created.


It is not a coincidence that five Chinese naval vessels came within 12 miles of the Alaskan coast last week while President Obama was touring Alaska and visiting glaciers on a boat. The U.S. said this was the first time Chinese vessels had intruded on U.S. territorial waters and they were monitored at all times. China later said they were only "transiting" on their way to the Bering Sea for training. China must be taking pointers from Putin on how to tease the U.S. and test our response.

Two days ago, the U.S. military spotted a Russian spy ship off the coast of Kings Bay Georgia. That just happens to be the home of the Navy's East Coast ballistic missile submarine fleet. The ship carries 200 sailors, contains high-tech electronic surveillance equipment and surface to air missiles. The ship is designed to loiter and gather radio and electronic intelligence as well as conduct electronic warfare.


The Fed's real time GDPNow forecast for Q3 has risen to the high for the cycle at +1.5% growth, up from +1.3% the prior week. It is strange to see the Fed considering a rate hike at 1.5% growth and 0.3% inflation.



 

Enter passively and exit aggressively!

Jim Brown

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"Remember, it is easy to find reasons to sell; what's hard is finding reasons not to every single day. Experienced investors know that riding winners is far harder than cutting losses."

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New Plays

The Oversold Bounce Is Dead

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Ingersoll-Rand - IR - close: 52.84 change: -0.83

Stop Loss: 55.75
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on September -- at $---.--
Listed on September 5, 2015
Time Frame: Exit
Average Daily Volume = 2.3 million
New Positions: Yes, see below

Company Description

Trade Description:
In the last week of August the second estimate on U.S. Q2 GDP growth was revised higher from +2.3% to +3.7%. Q3 GDP is expected to dip down to +1.5%. The good news is that the U.S. is still growing. The bad news is that much of the world is slowing down. Big companies that do a lot of business overseas are seeing their sales slow. That's in addition to the negative impact of currency headwinds.

Industrial stocks have suffered this year. Sector ETFs like the XLI and IYJ are down about -9% year to date. IR is in the industrial sector and it is underperforming its peers with a -16% decline in 2015.

Here's a brief description of the company, "Ingersoll Rand (IR) advances the quality of life by creating comfortable, sustainable and efficient environments. Our people and our family of brands-including Club Car®, Ingersoll Rand®, Thermo King® and Trane®-work together to enhance the quality and comfort of air in homes and buildings; transport and protect food and perishables; and increase industrial productivity and efficiency. We are a global business committed to a world of sustainable progress and enduring results."

That big drop on IR's daily chart was the market's reaction to their earnings report. Wall Street was expecting a profit of $1.23 a share on revenues of $3.69 billion. IR missed on both counts with a profit of $1.20 on revenues of $3.6 billion. Management lowered their guidance for the current quarter below analysts' expectations.

Technically the oversold bounce from this post-earnings drop didn't make it very far. Then the broader market started correcting lower in a violent fashion and shares of IR plunged to new 52-week lows. The oversold bounce from the late-August crash has already failed. This decline has generated an ugly sell-signal on the point & figure chart, which is forecasting at $36.00 target for IR.

Currently IR appears to have short-term support at $52.50. We are suggesting a trigger to launch bearish positions at $52.40.

FYI: IR will begin trading ex-dividend on September 9th. The dividend is $0.29 a share.

Trigger @ $52.40

- Suggested Positions -

Short IR stock @ $52.40

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

Buy the OCT $50 PUT (IR151016P50) current ask $1.40
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

Jobs Data Fuels Uncertainty Over Rate Hike

by James Brown

Click here to email James Brown

Editor's Note:
The August jobs report fueled uncertainty over a potential rate hike and Wall Street hates uncertainty (almost as much as it hates rate hikes). The stock market delivered widespread losses ahead of the holiday weekend.

Our BDC and QCOM trades were triggered on Friday.


Current Portfolio:


BULLISH Play Updates

Keurig Green Mountain, Inc. - GMCR - close: 58.38 change: +0.95

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: +6.0%
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:
09/05/15: The relative strength in GMCR continued on Friday with another +1.65% gain. The stock is up two weeks in a row.

No new positions at this time since the $60.00 level is potential round-number resistance.

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

chart:


Oshkosh Corp. - OSK - close: 39.60 change: -0.81

Stop Loss: 37.45
Target(s): To Be Determined
Current Gain/Loss: -6.4%
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:
09/05/15: I'm starting to worry about OSK. The stock is down three of the last four days. Shares traded below support at its 10-dma, 20-dma, 50-dma and the $40.00 level on Friday.

Tonight we are adding a stop loss at $37.45. No new positions.

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

09/05/15 new stop loss @ 37.45
08/31/15 triggered @ $42.30
Option Format: symbol-year-month-day-call-strike

chart:


Starbucks - SBUX - close: 54.28 change: -0.41

Stop Loss: 51.15
Target(s): To Be Determined
Current Gain/Loss: -1.6%
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:
09/05/15: The stock market's widespread decline on Friday pushed SBUX to a -0.74% decline. SBUX spent the day churning sideways in the $53.85-54.60 range. Shares actually held up better than expected but I would not start 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

chart:




BEARISH Play Updates

Belden Inc. - BDC - close: 48.95 change: +1.39

Stop Loss: 51.75
Target(s): To Be Determined
Current Gain/Loss: -3.9%
Entry on September 04 at $47.11
Listed on September 3, 2015
Time Frame: Exit 4 to 6 weeks
Average Daily Volume = 388 thousand
New Positions: see below

Comments:
09/05/15: BDC broke down below short-term support as expected. Shares actually gapped down on Friday morning because the market was so weak. Our trigger to launch positions was $47.20 but BDC opened at $47.11. Shares sank to $46.83 and then reversed higher. The rebound is bad news for bears but I would not panic yet. BDC displayed relative strength with a +2.9% gain but the rally stalled at short-term resistance at its 10-dma.

I am not suggesting new positions following Friday's bounce. Our stop loss is at $51.75. More conservative traders might want to use a stop closer to $50.00 instead.

Trade Description: September 3, 2015:
Industrial stocks are not have a good year. Sector ETFs like the XLI and IYJ are both down about -8% to -9% year to date. BDC is in the industrial sector and shares have been crushed. The stock is down -39% for the year and down about -50% from its 2015 highs.

They are considered part of the electrical equipment industry. According to the company, "Belden Inc. delivers a comprehensive product portfolio designed to meet the mission-critical network infrastructure needs of industrial, enterprise and broadcast markets. With innovative solutions targeted at reliable and secure transmission of rapidly growing amounts of data, audio and video needed for today's applications, Belden is at the center of the global transformation to a connected world. Founded in 1902, the company is headquartered in St. Louis and has manufacturing capabilities in North and South America, Europe and Asia."

The company has a history of beating earnings estimates but revenues have been suffering. BDC reported their Q4 results in February this year. Q4 revenues were down -19%. BDC management lowered their revenue guidance.

They reported their Q1 results in late April. They beat the bottom line estimate but revenues missed with revenues falling -12%. Again the company lowered their guidance.

Q2 results were announced on July 29th and earnings beat estimates but revenues were down -3.2% and significantly below expectations. Once again BDC management lowered their guidance. This time they lowered both Q3 and 2015 guidance.

The market was relatively forgiving until the Q1 report on April 30th. Investors had finally had enough and sold BDC on its disappointing results. Shares flat lined for almost two months before breaking down. The stock collapsed on its earnings report in July. Now it's about to break down below its lows from last week when the market was crashing.

The path of least resistance is lower and the next major support level could be the $40.00 area. Shares have short-term support at $47.40. We are suggesting a trigger to launch bearish positions at $47.20.

NOTE: BDC does have options but the spreads are too wide to trade them.

- Suggested Positions -

Short BDC stock @ $47.11

09/04/15 trade opened on gap down at $47.11, trigger was $47.20
Option Format: symbol-year-month-day-call-strike

chart:


QUALCOMM Inc. - QCOM - close: 54.29 change: -1.26

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: +0.3%
Entry on September 04 at $54.45
Listed on September 1, 2015
Time Frame: 4 to 6 weeks
Average Daily Volume = 12.5 million
New Positions: see below

Comments:
09/05/15: QCOM's decline on Friday outpaced the broader market. The NASDAQ sank -1.0%. Chip stocks fell -1.8%. QCOM gapped open lower at $54.94 and slid to a -2.26% decline. Our trigger to open bearish positions was hit at $54.45.

Trade Description: September 1, 2015:
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.

- Suggested Positions -

Short QCOM stock @ $54.45

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

Long OCT $50 PUT (QCOM151016P50) entry $0.96

09/04/15 triggered @ $54.45
Option Format: symbol-year-month-day-call-strike

chart:


iPath S&P500 VIX Futures ETN - VXX - close: 29.32 change: +2.00

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -34.4%
2nd position Gain/Loss: -1.1%
Entry on August 25 at $21.82
2nd position: September 2nd at $29.01
Listed on August 24, 2015
Time Frame: Exit prior to October option expiration
Average Daily Volume = 50 million
New Positions: see below

Comments:
09/05/15: Another big sell-off for the stock market on Friday sparked a rebound in the volatility index. The VXX followed suit and rallied +7.3%.

No new positions at this time.

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

Sept. 2nd - 2nd position (Double Down On The September 1st Spike)

Short the VXX @ $29.01

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

Long OCT $20 PUT (VXX151016P20) entry $0.78

09/02/15 2nd position begins. VXX gapped down at $29.01
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: