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Daily Newsletter, Saturday, 10/31/2015

Table of Contents

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

Market Wrap

Market Weakness on Schedule

by Jim Brown

Click here to email Jim Brown

The market week played out exactly as expected with a consolidation dip early, a final boost from window dressing on Wednesday and then weakness late in the week as that dressing faded and traders positioned themselves for next week.

Market Statistics

I wrote several times over the last week that I expected Thursday/Friday to be weak as window dressing faded and cautioned that next week could also be soft as some of that window dressing is removed. I am encouraged that the profit taking over the last two days was not any worse. Now we just have to get through next week without a big decline.

Typically, the first couple days of a month are positive from end of month retirement contributions being put to work. In November, those incoming contributions will be offset somewhat by managers taking some cash out of the market to rebuild their redemption reserves. As long as the selling is light, they may decide to leave some of their window dressing buys in place. November is supposed to be the starting point for the best three months and best six months of the year cycles.

On the flip side, the S&P was up +8.3% in October, Dow +8.5% and Nasdaq +9.4%. October was the best month in four years and with November the beginning of a new fiscal year for mutual funds they may want to take some profits.

Friday was a lackluster day in the market with the only news coming from Thursday earnings reports, a couple of weak economic reports and a continued crash in Valeant (VRX) shares.

Consumer sentiment for October came in at 90.0 in the final revision. That is up from 87.2 in September but well below the 92.1 in the first version. That is the second lowest reading since November of 2014 at 88.8. The present conditions component rose slightly from 101.2 to 102.3 but was the laggard. The expectations component rose from 78.2 to 82.1 thanks in part to the stock market gains.


Personal income for September rose only +0.1% and less than the +0.4% in each for the last four months. Analysts were expecting +0.2%. Wages and salaries declined from +0.5% to zero gain.

Personal spending for September rose only +0.2% after a +0.4% gain in August. Spending on goods was flat. Spending on durable goods rose +0.6% but non-durable goods declined -0.3% and spending on household furnishings declined -0.3%. Food and beverage spending declined -0.6% while spending on clothing rose +0.8%. Thank the back to school shopping cycle for that gain.

Of the most interest to the Fed was the -0.1% decline in the Personal Consumption Expenditure (PCE) Deflator. This is the Fed's preferred inflation indicator. The PCE Deflator has now been flat at zero for the last three months after a +0.1% gain in July. That is down from an average gain of +0.2% in the months preceding July. Falling energy prices are the culprit. Prices for gasoline and other energy goods declined -8.2% in September.

The PCE is now up only +0.2% for the trailing 12 months or almost zero inflation and declining. The Core PCE, excluding food and energy, is up +1.3% and dead flat for the last 8 months and is only expected to rise to 2% at the end of 2016. The headline PCE will give the Fed a headache over raising rates but the Core PCE will be their crutch.

Next week is payroll week with the ADP Employment on Wednesday and Nonfarm Payrolls on Friday. The ADP report is expected to show a decline in new jobs but the Nonfarm forecast is for a gain of +180,000 jobs. That is more than the +142,000 jobs in September. Because the weekly jobless claims are at multi-decade lows the majority of analysts are expecting a return to the 200,000+ level in the coming months. They view the declines in the last two months as an anomaly and problem with the data.

The ISM Manufacturing Index on Monday is expected to fall into contraction territory at 49.6 after peaking at 58.1 in August 2014. This should also be a headwind for the Fed but they are in "hear no evil, see no evil" mode and will probably ignore it.


Lastly, Janet Yellen will testify in the House on Wednesday. That is normally good for producing market volatility.


The first reading on Q3 GDP came in at +1.5% growth, down from +3.92% in Q2 and up from +0.64% in Q1. Inventories lifted GDP in Q2 and crushed it in Q3. The big positive swing in Q2 was blamed on the West Coast port strike and the sudden influx of goods when that strike was over. That made the Q2 number artificially high and Q3 is now artificially low as those inventories decline.

However, the Atlanta Fed GDPNow for Q3 went out at +1.1% growth so the outlook is for a decline in the official Q3 numbers when they are revised over the next two months. The current average for the first three quarters is 2% and the current outlook for Q4 is +2.5% so it has not been a banner year for growth. It is amazing to think the Fed is ready to raise rates in December with manufacturing in contraction and economic growth hovering at +2%.


Q3 GDPNow Forecast

Abbvie (ABBV) reported earnings on Friday of $1.13 that beat estimates by a nickel. Revenue of $5.95 billion also beat estimates. The company guided to full year earnings of $4.26-$4.28 and above analyst estimates of $4.24. Even better, Abbvie guided to a better than 10% annual growth rate to revenue of $37 billion by 2020. Analysts were only projecting $30 billion in 2020. The guidance projected full year earnings of $8.80 in 2020 or more than twice the forecast for 2015. Shares of Abbvie rallied +10% on the report.


The CBOE (CBOE) reported earnings of 76 cents compared to estimates for 73 cents. Transaction fees spiked +39% and trading volumes jumped +6% to 5.25 million contracts per day. However, the CBOE warned that costs were rising and analysts pointed out that trading volumes were declining as Q4 progressed. The average revenue per contract rose from 32.9 cents to 43.1 cents because of a price hike in Q3. Operating expenses rose +16% in the quarter. Shares declined -3% on the news.


CVS Health (CVS) reported earnings of $1.28 that missed estimates by a penny. That is the first time CVS has missed estimates in 7 quarters. Revenue of $38.6 billion beat estimates for $37.9 billion. The company guided for 2016 earnings to $5.68-$5.88 per share and analysts were expecting $6.02. Same store sales rose +1.7% with pharmacy same store sales up +4.6%. The chain said earnings were hurt by the introduction of numerous generic drugs with lower profit margins. Shares declined -$5 on the news.


Chevron (CVX) beat drastically reduced estimates of 79 cents with earnings of $1.09 on $34.32 billion in revenue. Chevron does not report onetime adjustments so there is no way to really compare apples and apples. The reported earnings represented a net income of $2.0 billion, a -64% decline from the year ago quarter. Chevron said it was cutting 7,000 jobs (11%) and cutting costs by another 25%. Additional cuts would be made in 2017 and 2018 if crude prices did not recover. Refinery earnings rose +54% in the U.S. to $1.2 billion. International refinery operations saw a +66% jump in profits to $962 million. Shares rallied $1 on the news.


Exxon (XOM) reported earnings of $1.01 compared to estimates for 89 cents. That represents net income of $4.24 billion. Refining profits nearly doubled to $2 billion. Production increased +2.3% to 3.9 million barrels of oil equivalent per day and they still expect to finish 2015 at 4.1 mboe. Exxon is planning on spending $34 billion on exploration and production in 2015 and less than that in 2016 and 2017. Shares were up fractionally on the news.


Companies that reported earnings on Thursday evening and seeing their shares move on Friday included Linkedin (LNKD). Shares rose +11% on a strong earnings beat.


SolarCity (SCTY) shares fell -22% after they reported terrible earnings and warned that they were going to focus on cutting costs and improving cash flow rather than generating higher growth. Multiple brokers slashed price targets and this decline will likely be the start of a further drop in price.


Shares of Baidu (BIDU) rallied +11% after reporting earnings of $1.43 compared to estimates for $1.28. Revenue rose +36%. The company announced a $2 billion share buyback, the second in 3 months.


Expedia (EXPE) reported earnings of $2.07 compared to estimates for $2.02. The value of bookings rose +21% to $15.4 billion. The company said it would see a meaningful increase in revenue from its acquisition of Orbitz. Expedia raised full year guidance.


Cybersecurity firm Imperva Inc (IMPV) reported earnings of 19 cents compared to estimates for a loss of 5 cents. Revenue of $63.3 million also beat estimates for $56.5 million. They raised full year revenue guidance from $215-$217 million to $228-$229 million. They raised earnings estimates to breakeven or 7 cents loss from a loss of 44-46 cents.


More than 340 S&P companies have reported earnings for Q3. Of those 76% have beaten on earnings and 47% have beat revenue estimates. The blended earnings growth for Q3 as of Friday was -2.2%. On September 30th, the blended estimate was for a -5.2% decline according to Factset. Just last Friday the estimate was for a -3.9% decline so the outlook is improving.

The average earnings beat is 5.9% above estimates. The average revenue miss is -2.9%. The earnings for Q4 are currently expected to decline -2.4%. The energy sector has provided the biggest earnings beats with an average of +22%. Even with the energy beats, they are still a drag on earnings. If you exclude energy, earnings for Q3 would be up roughly +6.3%. That is still the fourth consecutive quarterly decline but much better than a -2.2% drop.

If earnings do decline for Q3, it will be the first decline since Q3-2009. However, it will be the third consecutive quarterly decline for revenue.

Next week 105 S&P companies and 2 Dow components (V, DIS) will report.

The highlights for the week will be Tesla on Tuesday, Facebook on Wednesday and Disney on Thursday. The volume of earnings will begin to decline the following week.


After hitting a historic high of $105 on Thursday, Facebook was downgraded on Friday and shares gave back -$3 on the news. Jyske Bank cut Facebook from buy to sell ahead of its earnings report on Wednesday. Jyske is a private bank and they should not have that much impact on Facebook shares but coming 3 days in front of an earnings report probably triggered some additional cautious selling. JMP Securities and Wedbush both reiterated a buy rating after the Jyske Bank call. There are 46 buy ratings, 3 holds and 2 sells. The other sell is Societe Generale.

Facebook shares average about a $3 move after earnings. Options are currently pricing in a 5.4% move.

Analysts expect Facebook to report earnings of 52 cents on revenue of $4.37 billion. Monthly active users should be around 1.38 billion with daily users at 1.1 billion.


Bill Ackman of Pershing Square Capital Management is in a lot of trouble. His second largest position in Valeant Pharmaceuticals (VRX) has fallen from $264 per share to $94 with much of that decline over the last few weeks. Ackman owns 21.4 million shares of Valeant and the position is down about $1.8 billion and severely crimping the $16 billion Pershing portfolio.

He spent four hours on a conference call on Friday trying to explain why Valeant would recover and rally to $448 per share over the next several years. Short seller Citron dumped their typical report on Valeant a couple weeks ago claiming they were Enron part II and saying their accounting was fraudulent. They do this to a different company about once a year.

In this case, they may have gotten it right. Valeant had an illicit relationship with mail order pharmacy Philidor Rx Services. There are some questions on how drugs shipped to Philidor were paid for and whether it was a circular scheme to inflate Valeant profits. I do not know enough about it to pass judgment but CVS and Express Scripts have both dropped Philidor from their network after researching the Citron claims. There is a good chance Philidor will go out of business.

Ackman claims Valeant made some bad decisions and shares will probably lose more ground before a recovery appears. He expects them to pay a fine for their misdealing and then continue business as usual. What would you expect Ackman to say with another $1 billion at risk and already losing -$1.8 billion? He has to talk the stock back up or he is going to take a monster hit that could end his firm after investors flee to avoid the next mistake. Ackman bet $1 billion that Herbalife would go out of business and shares are back above his entry price. That did not turn out well either.


Microsemi (MSCC) raised its offer for PMC-Sierra (PMCS) to $11.88 per share. That is $9.04 in cash and 0.0771 shares of MSCC. That compares to an all cash bid of $11.60 by Skyworks Solutions (SWKS). Initially Skyworks agreed to buy PMCS for $9.50 per share but MSCC swooped in with a higher offer. Now there is a bidding war in progress with analysts saying a likely offer of $12-$13 is expected. MSCC could use its stock to offer up to $15 per share but analysts do not expect the bidding to go that high. Skyworks will probably end up the victor because they have no debt and could fund the entire acquisition in cash. PMCS shares closed at $11.92 and above the MSCC offer so investors are expecting a higher bid. Shares were $6.35 when the bidding started.


Hewlett Packard (HPQ) splits into two companies this weekend. They will become HP Inc (HPQ) and HP Enterprise (HPE). The new HP Enterprise will sell servers, software, storage, networking, cloud and associated services. HP Inc will sell printers and PCs. Each company will be a Fortune 50 company with about $57 billion in revenue each.


Crude inventories rose +3.4 million barrels for the week but crude prices rallied sharply. Traders were heavily short and a flurry of news headlines caught them off guard. A Reuter's survey found that Iraq and Saudi Arabia pumped less oil in October than expected. Active oil rigs declined -16 suggesting production is eventually going to decline. China said they were boosting their oil import plans for 2016 in order to fill their strategic storage. Lastly, the U.S. said it was sending Special Forces troops to Syria to assist forces on the ground fighting ISIS.

The potential for a U.S.-Russian conflict or possible accidental bombing of U.S. forces caused crude prices to rise. There are pipelines from Saudi Arabia and Iraq crisscrossing Syria and the more the conflict heats up the better chance some of those pipelines are bombed accidentally.

After falling to $42.58 on Tuesday, crude spiked +6% on Wednesday on the various headlines and ended the week at $46.60. In theory, crude inventories will continue to build and prices should fall but the Syrian conflict is the wild card. Anything is possible. There are currently four active wars in the region and ISIS/Al-Qaeda could attack oil facilities at any time.

In September Saudi Arabia thwarted a terrorist attack at Abqaiq, the world's largest oil processing facility that can process up to 7.0 million barrels per day. There are 46 pipelines connected to Abqaiq including a major pipeline to Ras-Tanura, the largest export terminal in the Persian Gulf. With Saudi Arabia bombing Yemen and also part of the coalition fighting ISIS in Syria we could see ISIS strike back against these facilities at any time. Therefore, oil prices may not follow the normal pattern of declines in Q4 as inventories build.


Active rigs declined by 12 to 775 for the week ended on Friday but that was the ninth consecutive week of declines for oil rigs. Oil rigs declined -16 to 578 and a decade low but gas rigs rose +4 to 194. Offshore rigs declined -2 to 33.


Markets

The major indexes completed four weeks of gains with the exception of the NYSE Composite and the Dow Transports. After gaining more than 8% in October, it should be time for some profit taking. Fund managers should be ecstatic that October pulled them back to zero to close the year unless they were heavy in tech stocks. The S&P is now up a whopping 0.99% for the year, the Nasdaq Composite +6.7% and the Nasdaq 100 big caps +9.7%. The Dow is still negative by about -0.9%.

This has been a tough year for most funds and especially tough for hedge funds. Almost every day we get a report about some hedge fund down double-digit percentages for the year. Investors are fleeing those funds and going back to self-management of their accounts. Index funds and index ETFs are seeing huge inflows of cash.

Now that November begins on Monday and the best six months of the year we should see continued inflows because a lot of investors believe in that strategy. That may not protect us next week because the profit piper must be paid. The gains from October's window dressing will need to be harvested. This could take a couple days or longer depending on how much month end retirement cash is going to be put to work or alternately used by fund managers to replenish the cash coffers.

We have a new wild card in play. The Fed came very close to saying "we are going to hike rates in December" with the change in their post meeting statement. After an initial dip, the market rallied on Wednesday but that was the last day for window dressing so we do not really know if it was Fed or funds pushing stocks higher. In theory, the market is ready for a rate hike and the Fed statement was seen as a warning for December. However, the payroll reports will have to cooperate. The reports for both October and November will need to be over 200,000 for the Fed to have a green light. Inflation will have to flat line or improve. If the PCE numbers continue to decline it could keep the Fed on hold even though they want to hike.

The October rebound should have energized investors ahead of the November kickoff for the best six months cycle. The next three months are the best three-months in the year so investors should be excited. That means any profit taking that produces a dip will probably be bought. Earnings are coming in better than expected and overseas markets are exploding higher. Multiple companies have said they see improvement in the European economy. That is good news for the U.S. outlook.

The S&P is so overextended that it generated a technical short-term sell signal on Wednesday. There are three components to this signal. The extension and the width of the gap on the MACD, the nearness of the 70 level on the RSI and the 72-point spread between the Wednesday close at 2,090 and the 20-day average at 2,018. Note that the 20-day typically runs in the middle of the price range and not 72 points below. The MACD is at the point where it would typically roll over and the RSI is at the high for the year. Previous tops have been at 60.

All these indicators really mean is that the S&P has come too far too fast and we need some profit taking to reduce the pressure.


However, the S&P Bullish Percent Index has spiked to the highest level since May at 69.4%. That means 69% of the S&P-500 stocks are showing a buy signal on a Point & Figure chart. This is very bullish and indicates that the breadth of the rally is expanding.


The percentage of stocks trading over their 50-day average is over 78% and that is a high for 2015. While that sounds really bullish this is the result of the averages being pushed lower in September and the rebound has lifted stocks back over those lowered averages. This is bullish because it shows breadth but needs to be taken in context.


The Advance/Decline Line Index on the S&P is at the highest level since May but notice the MACD at the bottom. The indicator is rolling over and suggests some weakness ahead which I believe will be short-term.


The S&P opened at resistance at 2,090 on Friday and failed to extend its gains. The late day decline knocked off -10 points to close just under 2,080. The index has support at 2,075, 2,065 and 2,020 but I doubt we will dip that far. There is always the possibility we will not dip at all but I view that as less likely.


The Dow managed to cling to a 16-point gain for the week but it was very close. The Dow hit 17,799 at 1:45 and it was all downhill from there culminating in a -78 point drop in the last 10 minutes. There was no headline and it was purely based on market on close orders. A decline like this on the last day of the quarter is normally positioning for some early month selling.


Only a handful of the Dow components lost more than $1 but the declines were three times the advancers. Goldman Sachs and UnitedHealth were the biggest losers with each giving back -$2 in the last hour. It appeared the selling was concentrated in those two issues with the other charts showing limited end of day declines.


The Dow has decent support at 17,550 and 17,350 followed by 17,150. Resistance is 17,775-17,800. The 200-day average is 17,577 but the Dow is not very reactive to moving averages. Two Dow components report this week. Those are Visa on Monday and Disney on Thursday.


The Nasdaq Composite held its gains really well and is stubbornly refusing to retest psychological support at the 5,000 level. Most of the big cap tech stocks have already reported so the potential for a big earnings disappointment is fading. Facebook is the only material big cap tech reporting next week and I would be surprised to see a big decline.

Support is about 5,010 and resistance is rock solid at 5,085.



The Nasdaq 100 closed within ONE point of a new high on Wednesday. The prior high of 4,679.68 was nearly reached with the 4,678.58 close at the high of the day. This is a clear example that the big cap tech stocks have been leading the market higher. That prior high has turned into serious resistance with the index coming to a dead stop just below that level for the last two days.


The Russell 2000 small caps just cannot hold a gain over resistance at 1,165. Wednesday's spike to close at 1,178 looked like a breakout but it was immediately sold the next day to close back at 1,161 on Friday.

In theory, November is when the small caps begin to shine as the January Effect begins to be felt. Historically fund managers would buy small caps in January but as that trend became known traders would buy the small caps earlier and earlier in order to front run the funds. Now the effect tends to appear in the middle to end of November and run through Christmas. Let's hope the buying interest is about to begin.


I think I was clear in stating my bias above. I expect some short-term profit taking soon and then the market should rally into Thanksgiving week. The major earnings are over but there are still about 700 companies reporting this week and there will be some hits and misses. With 105 S&P companies reporting there will still be some sector hiccups if there are some earnings disasters. However, overall the earnings are coming in better than expected. The bar was really low but a beat is still a beat. I would be a dip buyer next week.

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Random Thoughts


How good was October?

The three major indexes had their best month since October 2011.

Since 1992, there have only been four months with bigger point gains for the Dow.

Since 1987 the S&P gained more than 8% in a month only 12 times.

The German Dax gained +12.3%.

The Japanese Nikkei gained +9.75%.

The Chinese Shanghai Composite gained +10.8%. That was the first monthly gain in five months.


First time jobless claims were 260,000 last week. That is the third consecutive week at 260K or lower. The last time that happened was in November 1973. Jobless claims are low not because there is suddenly a surge in employment but because more people are dropping out of the labor force. This is a bad trend hiding under a seemingly positive data point. Jobless Claims Low

Chart from Bespoke


Stupidity is rampant in Washington. The new budget deal passed last week authorizes the sale of 58 million barrels of oil from the Strategic petroleum Reserve (SPR) in order to raise $5 billion in revenue to go into the general fund. Really? Oil is at post crisis lows at $45 and when the last barrels went into the SPR from 2000-2005 the price of oil was rising to the $75 range. Buying high and selling low never makes sense in the stock market so why does it make sense in the SPR? Fortunately, the sales do not start until 2018 so there is time for calmer heads to prevail. The sale was rationalized as a test to see if oil from the SPR could be sold on the open market in a time of stress. We never had trouble extracting oil from the SPR in the past so why should we have trouble in the future? The SPR contains 694 million barrels.


Sam Stoval at S&P Capital IQ authored a piece on "Stealing from Santa." In this article he pointed out that the S&P gained more than 8x normal in October. Since 1945 a gain of more than 7% in October resulted in a drop in the November/December gains to an average of +1.9% versus an average gain of +3% for all 70 years. After a strong October, the frequency of additional gains fell to 60% rather than the normal 77%. He also found that the sectors that led in October lagged the rest of the year. Stealing from Santa


The Titan supercomputer in Knoxville Tennessee can process 20,000 trillion instructions per second. This is the equivalent of 10 million times faster than your PC. Titan Supercomputer


Russia is planning on restarting civilian defense training on how to protect themselves in case of nuclear war. The deputy prime minister in charge of defense said after a meeting with Putin that the U.S. was upsetting the nuclear balance by developing new weapons systems. Russia has no choice but to react to the aggressive capabilities of the United States. Russia Increasing Nuclear War Defenses

Russian Bombers Buzz Navy Ships


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Amateurs built the Ark, professionals built the Titanic. "

Richard J Needham, 1979

 

Important Limited Time Offer - ONE WEEK ONLY

Long time readers of Option Investor know we launch our End of Year subscription special on Thanksgiving weekend. It will be 18 years this Thanksgiving. If you already know you want to renew your subscription at the cheapest price of the year then click the link below. I am offering an Early Bird Special with an additional $50 off for anyone that subscribes this week only. Once the special actually begins on Black Friday the price will revert to the normal price.

CLICK HERE FOR ADDITIONAL $50 OFF EOY SPECIAL

 


New Plays

Sales Have Soured For This Company

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Keurig Green Mountain, Inc. - GMCR - close: 50.75 change: -0.97

Stop Loss: 54.25
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on October 31, 2015
Time Frame: Exit PRIOR to earnings on November 18th
Average Daily Volume = 2.5 million
New Positions: Yes, see below

Company Description

Trade Description:
Oh how the mighty have fallen. Shares of GMCR rallied from $17.00 in summer of 2012 to almost $160 in November 2014. A couple of days later, on November 19, 2014, GMCR reported earnings and guided lower. That warning has kicked off a year-long decline in the stock.

GMCR is in the consumer goods sector. According to the company, "Keurig Green Mountain, Inc. (Keurig) (GMCR) is reimagining how beverages can be created, personalized, and enjoyed, fresh-made in homes and workplaces. We are a personal beverage system company revolutionizing the beverage experience through the power of innovative technology and strategic brand partnerships. With an expanding family of more than 80 beloved brands and more than 575 beverage varieties, our Keurig® hot and Keurig KOLD® beverage systems deliver great taste, convenience, and choice at the push of a button. As a company founded on social responsibility, we are committed to using the power of business to brew a better world through our work to build resilient supply chains, sustainable products, thriving communities, and a water-secure world."

GMCR really has revolutionized how the world drinks coffee with their single-serving machines and coffee pods. Unfortunately they got a little greedy. When they released their Keurig 2.0 brewer (summer of 2014). The new design had an optical scanner that read the top of each pod placed in the brewer. If you placed an unauthorized (third-party) pod in the machine it would not brew. Consumers rebelled and sales plunged.

Since then sales of brewing machines and pods have suffered. GMCR is facing growing competition for both the brewers and the coffee pods. It does seem like everyone is selling the individually packaged coffee pods these days including Starbucks, Dunkin' Brands, McDonalds, and many more.

GMCR's most recent earnings report was in early August. Wall Street was expecting a profit of $0.79 a share on revenues of $1.04 billion. GMCR delivered $0.80 a share but revenues fell -5.2% to $969 million, below estimates. Furthermore GMCR drastically reduced their Q4 guidance to $0.70-0.75 a share. Analysts' estimates were $0.97. GMCR said revenues would like fall -11% to -13%. GMCR management tried to soften this bad news by announcing an additional $1 billion to their stock buyback program. It didn't work. The stock collapsed. You can see the gap down on the daily chart.

The market has also been disappointing with GMCR's newest product the Keurig Kold, which brews cold beverages (sodas). It's easy to see why GMCR would want to get into this market. Estimates put the hot beverage market (in the U.S.) at $10 billion. Yet the nonalcoholic cold beverage market in the U.S. is over $50 billion. The funny thing is soda/cola/pop consumption has been falling for 10 years in a row. Consumers are slowing turning away from soda drinks over healthy concerns.

Another challenge with GMCR's new Keurig Kold machine is the price. It's very expensive at $370 a pop. You can buy a Sodastream machine for less than $100. GMCR does have an advantage over Sodastream thanks to GMCR's partnerships with companies like Coca-cola (KO) and Dr. Pepper (DPS). Consumers might be tempted to make their own Coca-cola flavored drinks at home than some no-name, generic cola. However, if you want to make your own coke or Dr. Pepper at home it's going to cost $1.00 a drink. That's expensive when you can buy cans of coke or Dr. Pepper for $0.50-0.75 each. Plus, consumer reviews note that the machine is slow nor does the product taste the same as the store-bought variety.

The oversold bounce from its August plunge peaked in September. Shares of GMCR have been falling under a bearish trend of lower highs. The bears have been right on this stock. The most recent data listed short interest at 14% of the 115 million share float. While the trend is down there is a risk that any good news could spark a short-term squeeze higher.

After a plunge from $160 to $50 some analyst might decide it's "cheap" and upgrade GMCR. That could produce a brief spike higher. GMCR has long been rumored to be an acquisition target by a larger beverage company. Coca-cola (KO) is the most often rumored buyer. KO does have a stake in the company. KO purchased a 10% stake back in February 2014 and upped it to 16% in early 2015. These are likely the two biggest risks if you're short.

The trend is down and falling sales would suggest this trend continues. If GMCR trades under $49.00 it will generate a new sell signal on the point & figure chart. The October low was $49.51. We are suggesting a trigger to launch bearish positions at $49.40. We will plan on exiting prior to GMCR's earnings report in mid November. There is no official earnings date yet but they will likely report in the next two or three weeks.

Trigger @ $49.40

- Suggested Positions -

Short GMCR stock @ $49.40

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

Buy the DEC $45 PUT (GMCR151218P45) current ask $2.50
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

Stocks Sag Into Month End

by James Brown

Click here to email James Brown

Editor's Note:
Stocks ended October on a soft note but the month was a big winner for the bulls. Tonight we are trimming an uncooperative candidate.

ADXS has been removed.


Current Portfolio:


BULLISH Play Updates

Carnival Corp. - CCL - close: 54.08 change: +0.00

Stop Loss: 50.75
Target(s): To Be Determined
Current Gain/Loss: -0.3%
Entry on October 30 at $54.25
Listed on October 29, 2015
Time Frame: Exit prior to earnings in mid December
Average Daily Volume = 4.0 million
New Positions: see below

Comments:
10/31/15: CCL resisted the market's decline on Friday but just barely. The stock rallied to a new 2015 high at $54.59 but gains had vanished by the closing bell.

The intraday rally was enough. CCL hit our suggested entry point to launch bullish positions at $54.25. At the moment I would wait for a new rally above $54.30 before initiating new positions.

Trade Description: October 29, 2015:
Cruise lines appear to be doing a great business this year. CCL, RCL, and NCLH are all trading near their 52-week highs. CCL looks interesting as shares push through resistance this week.

CCL is in the services sector. According to the company, "Carnival Corporation & plc is a global cruise company and one of the largest vacation companies in the world. Our portfolio of leading cruise brands includes Carnival Cruise Line, Holland America Line, Princess Cruises, Seabourn, and Fathom in North America; P&O Cruises and Cunard in the United Kingdom; AIDA Cruises in Germany; Costa Cruises in Southern Europe; and P&O Cruises in Australia.

These brands, which comprise the most recognized cruise brands in North America, the United Kingdom, Germany and Italy, offer a wide range of holiday and vacation products to a customer base that is broadly varied in terms of cultures, languages and leisure-time preferences. We also own a tour company that complements our cruise operations: Holland America Princess Alaska Tours in Alaska and the Canadian Yukon. Combined, our vacation companies attract 10 million guests annually.

Headquartered in Miami, Florida, U.S.A., and Southampton, England, Carnival Corporation & plc operates a fleet of more than 100 ships, with another seven ships scheduled for delivery between January 2015 and March 2017. With approximately 200,000 guests and 77,000 shipboard employees, there are more than 277,000 people sailing aboard the Carnival fleet at any given time."

CCL has been a consistent winner on the earnings front. The company has beaten Wall Street's bottom line earnings estimates the last four quarters in a row. Their most recent report was September 22nd. Analysts were looking for a profit of $1.63 a share on revenues of $4.81 billion. CCL delivered a profit of $1.75 a share. Revenues fell -1.3% to $4.88 billion, above estimates. The company enjoyed a -33% drop in fuel expenses last quarter.

CCL's President and CEO is Arnold Donald. He commented on their quarter, "We have just enjoyed a record quarter and are on track to achieve a nearly 35% annual non-GAAP earnings improvement. That's over $0.5 billion of year-over-year profit improvement on top of the 25% annual earnings improvement we achieved in 2014... This year is clearly trending ahead of pace with constant currency yield now forecasted to be up 4%. We overcame numerous headwinds including ongoing macroeconomic malaise in Europe, global geopolitical disruptions, public health scares like MERS, and even ship construction delays."

CCL is also seeing growth in China. According to Mr. Donald, "China has clearly made world news in recent weeks but continues to be an aggressive growth region for us. In fact, we will grow to a six ship fleet next year from a base of four, strengthening our position as industry leader, yet still representing only 5% of our global capacity next year. Given the low penetration levels for cruise and the pent-up demand for travel, we remain very confident in the long-term potential for this expansive market." CCL isn't stopping there. They are adding two more ships dedicated to the Chinese market with one coming online in 2017 and another in 2018.

Technically shares of CCL have rallied off support in early October. Now it's starting to break through resistance in the $54.00 area and ended today's session at a new multi-year high. The point & figure chart is very bullish and forecasting a long-term $72.00 target. Tonight we are suggesting a trigger to launch bullish positions at $54.25. We will plan on exiting prior to CCL's earnings report in mid December.

- Suggested Positions -

Long CCL stock @ $54.25

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

Long 2016 JAN $55 CALL (CCL160115C55) entry $1.95

10/30/15 triggered @ $54.25
Option Format: symbol-year-month-day-call-strike

chart:


Delta Air Lines - DAL - close: 50.84 change: +0.34

Stop Loss: 47.75
Target(s): To Be Determined
Current Gain/Loss: -0.8%
Entry on October 23 at $51.23
Listed on October 22, 2015
Time Frame: Exit prior to earnings in early January
Average Daily Volume = 9.8 million
New Positions: see below

Comments:
10/31/15: The XAL airline index showed relative strength on Friday with a minor gain versus the market's decline. DAL outperformed its peers with a +0.67% gain on Friday.

More conservative investors may want to start raising their stop loss.

Trade Description: October 22, 2015:
Depressed crude oil prices have kept jet fuel prices low. This has provided a big cushion for the major airlines. The recent strength in DAL has boosted shares to an all-time closing high.

DAL is in the services sector. According to the company, "Delta Air Lines serves more than 170 million customers each year. Delta was named to FORTUNE magazine's top 50 World's Most Admired Companies in addition to being named the most admired airline for the fourth time in five years. Additionally, Delta has ranked No.1 in the Business Travel News Annual Airline survey for four consecutive years, a first for any airline. With an industry-leading global network, Delta and the Delta Connection carriers offer service to 318 destinations in 58 countries on six continents.

Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft. The airline is a founding member of the SkyTeam global alliance and participates in the industry's leading trans-Atlantic joint venture with Air France-KLM and Alitalia as well as a joint venture with Virgin Atlantic. Including its worldwide alliance partners, Delta offers customers more than 15,000 daily flights, with key hubs and markets including Amsterdam, Atlanta, Boston, Detroit, Los Angeles, Minneapolis/St. Paul, New York-JFK, New York-LaGuardia, Paris-Charles de Gaulle, Salt Lake City, Seattle and Tokyo-Narita. Delta has invested billions of dollars in airport facilities, global products and services, and technology to enhance the customer experience in the air and on the ground."

DAL's most recent earnings report was October 14th. Wall Street was expecting a profit of $1.72 per share on revenues of $11.1 billion. DAL beat estimates with a profit of $1.74 a share. Revenues fell -0.6% to $11.11 billion, essentially in-line with estimates. At $1.74 a share DAL's earnings were up +45% from a year ago. That's thanks to the low cost of jet fuel.

Oil prices have been depressed long enough that airlines have started lowering air fares. This drop in air fares is hurting PRASM (passenger revenue per available seat mile). Fortunately DAL's fuel expense, plunged -40% from a year ago.

DAL management is forecasting Q4 PRASM to fall -2.5% to -4.5% but they are still guiding for strong operating margins (16-18%). Plus they see Q4 earnings growth of +40% or more. Think about that. How many other companies are forecasting +40% profit growth for Q4?

DAL's CEO made headlines following their Q3 earnings when he said there is a bubble in wide-body jets. What does he mean? There are a lot of wide-body jets that are being leased by other airlines. Once their lease expires there could be a flood of used jets for sale. DAL believes the price of wide-body jets (and possibly narrow-body jets) will decline and allow the company to purchase additional planes at a discount.

Oil prices are expected to remain low for the foreseeable future. Meanwhile we are approaching the busy holiday season, which means more travel by consumers. Technically shares of DAL appear to be breaking out from a multi-month consolidation pattern. The point & figure chart is bullish and forecasting at $62.00 target.

The January 2015 highs are in the $50.80-51.06 area. Tonight we are suggesting a trigger to launch bullish positions at $51.15. This is a multi-week trade.

- Suggested Positions -

Long DAL stock @ $51.23

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

Long 2016 JAN $55 CALL (DAL160115C55) entry $1.25

10/23/15 triggered on gap open at $51.23, suggested entry was $51.15
Option Format: symbol-year-month-day-call-strike

chart:


Wayfair Inc. - W - close: 42.27 change: -0.67

Stop Loss: 39.85
Target(s): To Be Determined
Current Gain/Loss: +2.7%
Entry on October 16 at $41.15
Listed on October 15, 2015
Time Frame: Exit PRIOR to earnings on November 10th
Average Daily Volume = 1.1 million
New Positions: see below

Comments:
10/31/15: W spent most of Friday's session drifting sideways. Thanks to a gap down at the opening bell W posted another loss. We can watch for short-term support at the 20-dma near $41.25 and the $40.00 level.

I am not suggesting new positions at this time.

Do not forget that W has earnings coming up on November 10th. We plan to exit prior to the announcement.

Trade Description: October 15, 2015
W displayed relative strength today and just closed above resistance. Shares could be poised for some serious short covering.

According to the company, "Wayfair Inc. offers an extensive selection of home furnishings and decor across all styles and price points. The Wayfair family of brands includes:

Wayfair.com, an online destination for all things home
Joss & Main, an online flash sales site offering inspiring home design daily
AllModern, a go-to online source for modern design
DwellStudio, a design house for fashion-forward modern furnishings
Birch Lane, a collection of classic furnishings and timeless home decor
Wayfair is headquartered in Boston, Massachusetts, with additional locations in New York, Ogden, Utah, Hebron, Kentucky, Galway, Ireland, London, Berlin and Sydney."

Shares of W came to market with an IPO in October 2014 and priced at $29.00. They opened at $36.00 and spiked up to $39.43 on the first day of trading. The IPO excitement faded and shares didn't find a bottom until about $17.00 in December 2014.

Revenue Growth

The company seems to be growing at a tremendous pace. Their first earnings report as a public company was November 10th, 2014. Revenues soared +41.7% to $336.2 million. Their direct retail business surged +57%. W said their gross profit was $79.0 million versus $58.6 million a year ago.

Additional 2014 Q3 highlights included the number of active customers for their direct retail business rose +61% to $2.9 million year over year. Their LTM Net revenue per active customer increase $342 or +8.6% year over year and +3.0% from the second quarter of 2014.

W reported their Q4 results on March 4, 2015. The company delivered a loss of ($0.18) per share, which was 10 cents better than expected. Revenues were up +38.4% to $408.6 million, above expectations. Management raised their Q1 guidance significantly above Wall Street estimates.

The company beat expectations again with their Q1 report on May 11th. Results were a loss of ($0.23) per share. Revenues accelerated with a +52% gain to $424.4 million.

The earnings beats kept coming when W reported its Q2 results on August 12th. Analysts were forecasting a loss of ($0.29) per share on revenues of $438.4 million. Wayfair delivered a loss of ($0.15) per share. Revenues roared +66.5% to $491.8 million. Management said their number of active customers was up +53.5% from a year ago to four million. Repeat customer orders hit 56%. Orders delivered shot up +80%.

Big Potential

Following their Q1 results back in May the company's CEO talked about their future. On their Q1 conference call the CEO noted that their potential markets are huge. Estimates suggest that spending in their industry will hit $264 billion in the U.S. and $308 billion in Europe by 2018 (a combined total of $572 billion market).

Bears will argue that W's valuations are outrageous. They're probably right. The recent rally in the stock has bumped the company's market cap to $3.6 billion. At the same time analysts are expecting W to operate at a loss for the next two fiscal years. On a short-term basis the market doesn't seem to care about W's valuation. If this rally continues W could see a short squeeze.

A few months ago in an interview one of the co-founders said that together the two co-founders own between 40% and 50% of the stock. The current float is only 30.2 million shares, which is relatively small. The most recent data listed short interest at 79% of the float.

Shares of W have been consolidating sideways beneath resistance at the $40.00 level for about two weeks. Today shares displayed relative strength with a +3.0% gain and a close above resistance. Tonight we are suggesting a trigger to launch bullish positions at $41.15 (hopefully W does not gap too far past our trigger tomorrow). We will plan on exiting prior to W's earnings report on November 10th.

- Suggested Positions -

Long W stock @ $41.15

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

Long NOV $45 CALL (W151120C45) entry $2.80

10/20/15 new stop @ 39.85
10/16/15 triggered @ $41.15
Option Format: symbol-year-month-day-call-strike

chart:




BEARISH Play Updates

DSW Inc. - DSW - close: 24.94 change: +0.30

Stop Loss: 25.75
Target(s): To Be Determined
Current Gain/Loss: -4.4%
Entry on October 27 at $23.90
Listed on October 26, 2015
Time Frame: Exit prior to earnings in late November
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
10/31/15: DSW is not cooperating. Shares rallied +1.2% on Friday. This stock's rebound off last week's low is troubling if you're bearish.

I am not suggesting new positions at this time. Currently our stop loss is $25.75. More conservative traders may want to use a stop closer to $25.40 instead.

Trade Description: October 26, 2015:
Investor sentiment regarding footwear retailers has soured dramatically. Recent earnings reports have not helped. Skechers (SKX) reported earnings last Wednesday (night). They missed estimates on both the top and bottom line. This report from SKX sent shockwaves through the footwear industry. Nike (NKE) seems to be the only one that was unaffected. The rest of the group has turned bearish.

DSW falls in that category. Officially DSW is in the services sector. According to the company, "DSW Inc. is a leading branded footwear and accessories retailer that offers a wide selection of brand name and designer dress, casual and athletic footwear and accessories for women, men and kids. DSW operates 469 stores in 42 states, the District of Columbia and Puerto Rico, as well as 370 leased departments for other retailers in the United States under the Affiliated Business Group. We also operate an e-commerce site, http://www.dsw.com, and a mobile site, http://m.dsw.com. Through its partnership with Town Shoes of Canada, the company operates two stores in Canada as well as the e-commerce site http://www.dswcanada.ca."

DSW's most recent earnings report was August 25th. Their earnings of $0.42 a share was in-line with estimates. Unfortunately revenues missed expectations. DSW's management provided soft guidance that was below Wall Street estimates. Traders sold the stock and DSW fell to new 2015 lows at the time. Since then shares have continued to melt.

Today DSW underperformed the market with a -1.9% drop. Shares got some help with a downgrade by Canaccord Genuity. Canaccord reduced DSW from a "buy" to a "hold" and slashed their price target. The analyst is concerned that DSW will not be able to maintain their comparable store sales. Traditional retailers do face a challenge this year. Foot traffic during the holiday season is expected to decline as more consumers shop online.

Technically DSW has broken down to new 18-month lows with today's drop. The point & figure chart is bearish and forecasting a very bearish $11.00 price target. There is a chance that DSW bounces near the 2014 low near $23.50 but we think its momentum will carry it past this level. I am suggesting investors start with small positions to limit risk. Yesterday's intraday low was $24.11. We'll use a trigger at $23.90.

*small positions to limit risk* - Suggested Positions -

Short DSW stock at $23.90

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

Long DEC $22.50 PUT (DSW151218P22.5) entry $0.90

10/27/15 triggered @ $23.90
10/27/15 DSW downgraded a 2nd time in as many days
Option Format: symbol-year-month-day-call-strike

chart:


iPath S&P500 VIX Futures ETN - VXX - close: 18.83 change: +0.25

Stop Loss: None, no stop at this time.
Target(s): $16.25
Current Gain/Loss: +13.7%
2nd position Gain/Loss: +35.1%
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:
10/31/15: The VXX essentially spent last week churning sideways in the 18.25-19.50 zone. If the market can deliver another big rally I would expect the VXX to break down under the 18.00 level. Our exit target is 16.25.

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

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

Short the VXX @ $29.01

10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
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:



CLOSED BULLISH PLAYS

Advaxis, Inc. - ADXS - close: 11.09 change: -0.66

Stop Loss: 10.75
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 28, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 1.4 million
New Positions: see below

Comments:
10/31/15: Our aggressive trade on ADXS never got off the ground. Biotech stocks have slipped lower the last couple of sessions. Yet shares of ADXS have just plunged the last two days. Our trade never opened.

Trade did not open.

10/31/15 removed from the newsletter, suggested entry was $13.05

chart: