Option Investor
Newsletter

Daily Newsletter, Monday, 11/9/2015

Table of Contents

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

Market Wrap

Is The Rally Over?

by Thomas Hughes

Click here to email Thomas Hughes
Weak data from China, lowered GDP estimates, another new twist in the Greek bail-out plan, rate hike conjecture and diminished expectations for earnings weigh the market down.

Introduction

The bulls were not out today. Last week's better, much better, than expected NFP report has helped solidify December rate hike expectations and that, along with today's global headlines, pushed the indices lower.

Starting in Asia, weak Chinese trade data renewed fear of a slowing China economy but markets bucked sentiment in favor of other news. There are rumors that the Chinese IPO market would reopen soon, following a 4 month hiatus dating back to the summer swoon. Mainland indices, as well as the Japanese Nikkei, rose more than 1.5% while the Hong Kong index declined by -0.6%. European markets were more focused on the weak trade data, as well as a new development in the ever-present but often forgotten Greek bail-out deal. Greek creditors in the Eurozone have held off on an expected $2 billion payment due to a lack of compliance with some of the 50 reforms expected to have taken place by now. Indices across the region fell in the range of -1% to -2%.

Market Statistics

US stock futures were indicating a lower open all morning. Declines in the range of -0.25% to -0.5% were expected and that held through into the open. There was a little earnings activity in the ealry hours, and no economic data today at all, to help or hinder today's trading. The indices fell with the opening bell, as expected, and the decline continued throughout the morning, not reaching daily bottom until just after 12 noon.

Economic Calendar

The Economy

No official US economic data today and very little this weak compared to last. Tomorrow we will get the Wholesale Inventory data along with Import/Export prices. No data on Wednesday either, save for the weekly oil inventories reports. Thursday is weekly Jobless Claims, Treasury Budget and the JOLTs report on job openings and labor turnover. Friday wraps up the week with Business Inventories, Retail Sales, Michigan Sentiment and PPI. On a single release basis the PPI may be the biggest release of the week but retail sales, inventories and PPI will all carry some weight. Look out for signs of labor market health, strength/weakness in the consumer and indications/expectations for producer level inflation, all of which could affect the December rate hike outlook.

The OECD (Organization for Economic Cooperation and Development) lowered its outlook for 2015 global GDP to 2.9% in a presentation given earlier today. They expect to see global growth pick up in 2016 and 2017 to 3.6% and 3.9% but predicate that on a rebalancing of activity in China and increased investment in the developed world. GDP in the Eurozone is expected to strengthen in the next year while growth in China is expected to continue slowing, falling to 6.2% in 2017.

Moody's Survey Of Business Confidence fell again. This is the 10th week of decline. The reading for last week fell -0.9% to 34.4%, another new low. However, despite the drop, Moody's economist Mark Zandi says that business confidence is still high relative to historic levels. North American businesses have seen the most notable decline in sentiment, led by a decline in forward outlook.


According to Factset 444 of the 500 S&P 500 companies have reported earnings so far this season. The blended rate for earnings growth this season is now -2.2%, this is down a tenth from last week and counter to trend. Of those who have reported 74% have beaten on earnings estimates, above average, while only 46% have beaten on the revenue side, below average. Based on the long running trend in earnings we can still expect to see the blended rate rise another 0.5% to 1%, there are another 17 S&P companies reporting this week and another month before the last one reports.

Energy continues to be the laggard, posting a blended earnings decline of -56.6%. This is better than the -64% predicted at the start of the quarter with growth not expected to return in the sector until next year. Ex-energy the blended rate for this quarter is 4.5%, in line with expectations and will possibly go higher over the next few weeks.

Looking out to next quarter and next year. The 4th quarter is still estimated to post a decline, and that decline has grown. The projected rate of growth is now -3.7%, this is a decline of -1% from last week. Based on the long running average we can still expect to see this number come in flat to slightly positive by the end of the next reporting season, better than -3.7% but not great considering the fact that estimates have been steadily declining for the past month and more. Ex-energy 4th quarter earnins should be in the range of 2.1% to 6%.

Looking past next quarter to the first quarter of 2016 earnings growth is projected at 2.1%, revenue decline is still expected. Full year 2016 estimates are also falling, nearly a full percent in the last week, but still robust at 8.3%. Based on these estimates I think it safe to say we are still in an earnings trough and on the upslope but it may take yet another quarter for this scenario to play out. That being said, 4th quarter expectations could weigh on the market until revisions to estimates begin to increase rather than decrease.

The Oil Index

Oil prices fell today after briefly spiking in early trading. A statement from OPEC to the effect they were not going to cut production, and that they expected to see demand growth in 2016, was cause for the spike. The jump in price did not last as the weak Chinese data and current high levels of supply and production, along with OPEC's own pledge to keep production levels high, brought traders back to reality. WTI fell a little more than -0.6% to trade just above $44. Oil prices could continue to fall to retest the October low just below $43.

The Oil Index fell more than -1% in today's trade. The index is making a new one week low, below last weeks broken resistance, with increased chance for a return to support. The indicators remain consistent with my theory the index reached a peak with last week's false-break-out and are on the verge of rolling over into a bearish signal. Current downside target is near the short term moving average in the range of 1,150 and 1,175 with a possible break below that level should oil prices decline further.


The Gold Index

Gold prices held steady today, trading in a range of less than $5. Of course, prices held steady just above 3 month lows near $1090 following last week's impressive fall, driven by rate hike expectations and the wickedly surprising NFP report. The report, along with testimony from Janet Yellen and other economic data has strengthened the dollar as expected, sending the DXY to a 7 month high just below the historic high near $100. With rate hikes on the table, economic growth expected and still no obvious signs of inflation my outlook for gold remains bearish and will likely remain so as long as data points to rate hikes, economic growth and stronger dollar. Support is near $1075 but a break below this level could see it move significantly lower, and fast.

The gold miners also held fairly steady in today's action. The Gold Miners ETF GDX gained just over 2.25% after testing a new one month low, the candle however represents sideways movemet in the market more so than it does a real gain. The indicators remain bearish and weak, with downside momentum rising and at the strongest levels since last March. Current downside target is $13 with chance for a break below this level should support be broken.


In The News, Story Stocks and Earnings

There were quite a few earnings reports today but M&A activity overshadowed them. One of the earliest reported buy-outs was Weyerhausers deal to merge with Plum Creek Timber. Plum Creek shareholders will receive shares of the new company, retaining the Weyerhauser name, at the rate of 1.6 for each share of Plum Creek. The deal will create a combined company worth more than $23 billion and the largest privat holder of timberland in NA. Shares of Weyerhauser fell nearly -6% at the open and closed with a loss of -3% on the news while those of Plum Creek jumped nearly 18%.


Shares of Norfolk Southern were halted for a brief time in today's session following word of a takeover bid from Canadian Pacific. There has been no official word from either company at this time but shares of both stocks surged on the rumor. CP did release a statement saying there was no material news at this time and that they don't comment on rumors. Shares of CP gained about 5% shares of NSC gained about 10%.


Shares of Dean Foods, leading processor of milk and dairy products, surged in early morning trading after reporting earnings that beat estimates. The company reported adjusted earnings of $0.30, reversing a loss in the year ago period, and raised guidance for the next quarter. The stock opened with a gain near 5% and traded higher from there, closing with a gain near 7.5%. The stock is now trading near the top of its 12 month range but remains down nearly -80% from its all time high, set in 2007.


Priceline reported earnings in the pre-opening session as well but did not impress investors. The company reported a 7% gain in bookings with a 12% gain in profits but still fell short of consensus and lowered guidance for the next quarter. The company posted substantial gains in international business but was hurt by strong dollar exhange rates. Shares fell nearly -10% during the sesssion resulting in a loss of nearly $140 from the all-time high, set last week.


The Indices

The market sold off today. Rate hike fears may have been the cause but with so many other things for traders to focus on today it is hard to say. Regardless the reason the decline was led by the NASDAQ Composite which closed with a loss just over -1%. The tech heavy index set a new one week low in today's session but did not cross below the 5,050 support line (the 2,000 all time high). The indicators remain bullish although momentum is rapidly declining and stochastic is showing some near term weakness. The index could pull back to the 5,050 level over the next few days with a chance of breaking it and moving down to the short term moving average near the 5,000 level.


The second largest declining index in today's session was the Dow Jones Industrial Average which lost exactly -1%. The blue chips, as a group, were led lower by IBM which lost more than -2.10%, perhaps driven by Warren Buffet revelation Berkshire Hathaway has lost about $2 billion on its investment in the company. Whatever the spark, the blue chips fell and are approaching a near term support target near the 17,600 level. The indicators remain bullish, but like the NASDAQ Composite show declining momentum and near term weakness. The index could retreat the rest of the way to first support target with a chance of breaking through and moving down to the 17,500 level and the short term moving average. The short term trend is still up and the indicators show this most recent upswing in momentum is strong relative to the past 12 months so this dip appears to be another buying opportunity on the march to retest the all-time highs.


The S&P 500 made the third largest decline, just under -1.0% and coming to rest on the 2,075 suppot line. The support line was broken on an intraday basis but late day buying helped to bring it back above. The indicators here are also showing near term weakness and rapidly declining momentum so further testing of support could happen. A move below the current level could take the index down to the 2,050 level and the short term moving average.


The Dow Jones Transportation Average made the smallest decline, only -0.32%, possibly supported by merger rumors between Norfolk Southern and Canadian Pacific. The transports remain the laggard in relation to the October/November rally, today's action testing resistance near 8,275. The indicators here are very non-commital. Momentum has been trending near 0 for the last week, stochastic is trending near the middle of the range, both showing an index actively traded without underlying direction. As of now it looks like the short term moving average is supporting the index and holding it up against my resistance line. A break of either of these lines could result in swift movement. Upside target is near 8,500, downside target is near 7,750. As I mentioned earlier, 4th quarter earnings expectations could weaken the index in the near to short term, with long term expectations for economic and earnings growth providing support.


It really should not be any suprise to see the indices selling off as they did today. The sell-off was sharp, but not overly strong, and is more likely than not profit taking following the 16% (SPX) rally we have seen since the end of September. Unless some other negative factor emerges I see this is yet another buyable dip and will be looking for signs of support throughout the week.

Earnings are likely not going to be a big catalyst this week, there are some big names but not many considering that more than 85% of the S&P and a comparable number of Dow stocks have already reported. What could impact this week's trading is economic data. We'll get more labor data as well as reads on inflation, the consumer and inventories, all of which tie into growth expectatoins, earnings expectations and Fed rate hikes. I remain a bull, closely watching my stop levels and looking to buy on the dip.

Until then, remember the trend!

Thomas Hughes


New Plays

Unemployment Has Fallen To Seven-Year Lows

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Paychex, Inc. - PAYX - close: 52.73 change: -0.07

Stop Loss: 51.25
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 09, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 2.3 million
New Positions: Yes, see below

Company Description

Trade Description:
Last week the Bureau of Labor Statistics announced that the nonfarm payroll (jobs) report for October showed a gain of +271,000. That was way above expectations. The separate household survey showed a gain of +320,000 jobs. This pushed the unemployment rate down to 5.0%, the lowest reading since early 2008. Many believe that the U.S. has now reached full employment. Do you know what that means? It means more Americans working. That means more paychecks to be delivered and more HR services to be handled.

PAYX is in the services sector. According to the company, "Paychex, Inc. (PAYX) is a leading provider of integrated human capital management solutions for payroll, HR, retirement, and insurance services. By combining its innovative software-as-a-service technology and mobility platform with dedicated, personal service, Paychex empowers small- and medium-sized business owners to focus on the growth and management of their business. Backed by more than 40 years of industry expertise, Paychex serves approximately 590,000 payroll clients across 100 locations and pays one out of every 15 American private sector employees."

PAYX earnings have been slowly and consistently creeping higher. Revenues have been rising about 8% the last couple of quarters. This company's most recent earnings report was September 30th. They beat estimates on both the top and bottom line, which helped fuel another rally in the stock.

PAYX management has been very consistent about paying a dividend. PAYX now sports a dividend yield of 3.7%. That could draw more and more income investors looking for a safe company to buy.

A recent article on Forbes.com, by Brett Owens, noted that "demand for payroll outsourcing (60% of Paychex's latest quarterly revenue) will grow at a 3.9% compound annual rate between 2013 and 2018. HR outsourcing (40% of revenue) is on a stronger tear, with a projected 12.3% yearly gain in the same period" (source)

We like PAYX's relative strength. Shares are up +14.2% year to date. That compares to a +1.0% gain in the S&P 500 and a +7.6% rally in the NASDAQ. The NASDAQ composite is up +18% from its August low but PAYX is up +26.7%. The rally in PAYX has produced a buy signal on the point & figure chart, which is also forecasting a long-term target at $72.00.

On Friday PAYX found short-term support near $53.00. Tonight we are suggesting a trigger to launch bullish positions at $53.15.

Trigger @ $53.15

- Suggested Positions -

Buy PAYX stock @ $53.15

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

Buy the JAN $55 CALL (PAYX160115C55) current ask $0.65
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 Retreat On Disappointing Economics

by James Brown

Click here to email James Brown

Editor's Note:
Weaker than expected Chinese economic data started the new week on a sour note. Of course traders could have been looking for an excuse to sell after the U.S. market notched its sixth weekly gain in a row.


Current Portfolio:


BULLISH Play Updates

Bed Bath & Beyond - BBBY - close: 60.11 change: -1.14

Stop Loss: 59.35
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 07, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 1.9 million
New Positions: Yes, see below

Comments:
11/09/15: The stock market retreated on Monday and retail-related stocks were hit harder than most thanks to some disappointing earnings in the group. Shares of BBBY fell -1.8%. The stock should find short-term support in the $60.00 area. The 50-dma is at $59.73.

Currently we are on the sidelines waiting for a new relative high. Our suggested entry point is $61.55.

Trade Description: November 7, 2015:
Retail stocks have been showing some resilience lately. There have been multiple analyst calls suggesting that this holiday season might be a disappointment. Yet the retail stocks have continued to shrug off these headlines.

BBBBY is in the services sector. They are part of the home furnishings industry. According to the company, "Bed Bath & Beyond Inc. and subsidiaries is a retailer selling a wide assortment of domestics merchandise and home furnishings which operates under the names Bed Bath & Beyond, Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, Harmon or Harmon Face Values, buybuy BABY and World Market, Cost Plus World Market or Cost Plus. Customers can purchase products from the Company either in-store, online or through a mobile device. The Company has the developing ability to have customer purchases picked up in-store or shipped direct to the customer from the Company's distribution facilities, stores or vendors. In addition, the Company operates Of a Kind, an e-commerce website that features specially commissioned, limited edition items from emerging fashion and home designers. The Company also operates Linen Holdings, a provider of a variety of textile products, amenities and other goods to institutional customers in the hospitality, cruise line, healthcare and other industries. Additionally, the Company is a partner in a joint venture which operates retail stores in Mexico under the name Bed Bath & Beyond."

The earnings outlook for BBBY has been lukewarm. The company has been reporting earnings in-line with estimates. Guidance has also been in-line with expectations. BBBY's comparable stores sales are virtually flat with +0.7% gain last quarter. Meanwhile management is boosting their stock buyback program. Their prior repurchase plan had dwindled down to $300 million. They just announced another $2.5 billion buyback plan.

Why are investors buying BBBY with growth stalling? It's possible traders see BBBY shares as cheap. The stock has retreated from resistance near $80 in early 2015 down toward support in the $55-56 area (late September-early October). With the bounce off its October lows the stock still trades with a P/E less than 12.

If there is a time to bet on a bounce in retail-related stocks then the Q4 time frame is it. The U.S. has a strong labor market. Unemployment just fell to 5%, which for many is considered full employment. Wages for U.S. workers are rising (finally!). Gasoline prices are nearing their lowest levels since 2008. Consumers should have more money in their pocket.

Technically shares of BBBY seem to have bottomed. The point & figure chart is already bullish and forecasting at $69 target. The last several days have seen BBBY's stock breakout past major resistance near $60.00 and its long-term trend line of lower highs. Traders just bought the dip at prior resistance (new support) this past week. Tonight we are suggesting a trigger to launch bullish positions at $61.55.

Trigger @ $61.55

- Suggested Positions -

Buy BBBY stock @ $61.55

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

Buy the 2016 JAN $65 CALL (BBBY160115C65)

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


Eaton Corp. - ETN - close: 56.36 change: -0.86

Stop Loss: 53.45
Target(s): To Be Determined
Current Gain/Loss: -1.4%
Entry on November 03 at $57.15
Listed on November 02, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 3.4 million
New Positions: see below

Comments:
11/09/15: The market's broad-based pullback today pushed ETN toward short-term support near $56.00 before it started to bounce.

No new positions at this time.

Trade Description: November 2, 2015:
When a company reports bad news but the stock doesn't sink it could indicate shares have found a bottom. That appears to be the case for ETN.

ETN is in the industrial goods sector. According to the company, "Eaton is a power management company with 2014 sales of $22.6 billion. Eaton provides energy-efficient solutions that help our customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 99,000 employees and sells products to customers in more than 175 countries."

On October 19th ETN issued an earnings warning for their Q3 results. Surprisingly the stock rallied the next day. When ETN reported earnings on October 30th they still missed analysts' lowered estimates. Earnings were $0.97 a share, a -25% drop from a year ago. Revenues were down -9.2% to $5.2 billion, also under expectations. Negative currency headwinds account for -6% of its revenue decline.

The funny thing is ETN's stock rallied. The company said their business environment remains soft and the plan to boost their current restricting efforts. The rally has produced a bullish breakout in the stock above technical resistance at the 50-dma and above price resistance near $55.00. The point & figure chart has produced a triple-top breakout buy signal that is forecasting at $64 target.

Tonight we are suggesting a trigger to launch bullish positions at $57.15.

- Suggested Positions -

Long ETN stock @ $57.15

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

Long 2016 JAN $60 CALL (ETN160115C60) entry $0.75

11/03/15 triggered @ $57.15
Option Format: symbol-year-month-day-call-strike


Microsoft Inc. - MSFT - close: 54.16 change: -0.76

Stop Loss: 52.15
Target(s): To Be Determined
Current Gain/Loss: -0.8%
Entry on November 04 at $54.60
Listed on November 03, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 35.4 million
New Positions: see below

Comments:
11/09/15: MSFT traded below short-term support at $54.00 this morning. Shares pierced their simple 10-dma but bounced near $53.50. A late day rally lifted MSFT back above the $54.00 level. I am suggesting investors wait and see how MSFT performs tomorrow before considering new bullish positions.

Trade Description: November 3, 2015:
MSFT is more than just a software company. MSFT is in the technology sector. It is considered part of the business software industry. According to the company, "Microsoft is the leading platform and productivity company for the mobile-first, cloud-first world, and its mission is to empower every person and every organization on the planet to achieve more."

The company is run under three segments. They have their productivity and business processes segment. This includes commercial office software, personal office software, and more. One of their fastest growing segments is MSFT's Intelligent Cloud business, which includes their server software and enterprise services. Then they have their "More Personal Computing" segment. This includes their Windows operating software, MSN display advertising, Windows phones, smartphones, tablets, PC accessories, Internet search, and their Xbox platform.

The stock has been dead money for almost a year. MSFT peaked near round-number resistance at $50.00 back in November 2014. Shares channeled sideways between support at $40 and resistance at $50 for months. That changed last month.

MSFT reported its 2016 Q1 results on October 22nd. Analysts were expecting a profit of $0.59 a share on revenues of $21.04 billion. MSFT beat both estimates with a profit of $0.67 a share. Revenues came in at $21.66 billion. Their Intelligent Cloud segment saw sales rise +8% but it was actually +14% on a constant currency basis.

Shares of MSFT soared the next day with a surge to 15-year highs. The big rally is based on investors' belief that MSFT and its relatively new management is successfully transitioning away from declining PC sales and moving quickly towards the cloud (and mobile).

Normally I would hesitate to buy a stock like MSFT after a big gap higher. Too often stocks tend to fill the gap. However, shares of MSFT have been able to levitate sideways in the $52.50-54.50 zone as traders keep buying the dips. Odds are growing we could see MSFT rally toward its all-time highs near $60.00 a share from December 1999. The big gain in October produced a buy signal on the point & figure chart, which is now forecasting a long-term target of $82.00. Tonight we are suggesting a trigger to launch bullish positions at $54.60.

- Suggested Positions -

Long MSFT stock @ $54.60

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

Long 2016 JAN $55 CALL (MSFT160115C55) entry $1.54

11/04/15 triggered @ $54.60
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Denny's Corp. - DENN - close: 10.14 change: -0.41

Stop Loss: 10.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 05, 2015
Time Frame: 4 to 8 weeks
Average Daily Volume = 527 thousand
New Positions: Yes, see below

Comments:
11/09/15: Wow! It was another volatile day for shares of DENN. The stock spiked up toward resistance this morning and just as quickly reversed lower.

The spike higher this morning appeared to be a knee-jerk reaction to news that DENN had launched an accelerated stock buyback program worth $50 million. Management is trying to defend their stock but traders sold into the rally. DENN erased Friday's bounce by today's close.

Shares look poised to breakdown below round-number support at $10.00 soon. Our suggested trigger for bearish positions is $9.90.

Trade Description: November 5, 2015:
Wall Street seems to have soured on restaurant stocks. The group has been underperforming and this stock is accelerating lower.

DENN is in the services sector. According to the company, "Denny's is the franchisor and operator of one of America's largest franchised full-service restaurant chains, based on the number of restaurants. As of July 1, 2015, Denny's had 1,696 franchised, licensed, and company restaurants around the world with combined sales of $2.7 billion including 108 restaurants in Canada, Costa Rica, Mexico, Honduras, Guam, Curacao, Puerto Rico, Dominican Republic, El Salvador, Chile and New Zealand, and 160 company operated restaurants in the United States."

The stock rallied in early August on its earnings report but that proved to be a bull-trap. The breakout past resistance near $12.00 didn't last. When the market corrected lower in August, shares of DENN plunged toward its 200-dma and the $11.00 level. Shares spent the next eight weeks churning sideways with investors selling the rallies near resistance.

This week DENN reported their Q3 earnings report. The company delivered a profit of $0.11 a share. Revenues were up +5.8% to $123.8 million. These were in-line with estimates. Actually revenues were just slightly above expectations. The company's guidance was in-line with analysts' estimates. Evidently these results were not good enough as shares of DENN plunged on the news.

The stock has broken down below multiple layers of support. Now shares are on the verge of breaking through round-number support at $10.00. If shares to trade below $10.00 it should generate a new sell signal on the point & figure chart. Tonight we are suggesting a trigger to launch bearish positions at $9.90.

Trigger @ $9.90

- Suggested Positions -

Short DENN stock @ $9.90

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

Buy the DEC $10 PUT (DENN151218P10)

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


Skechers U.S.A. Inc. - SKX - close: 28.37 change: -0.90

Stop Loss: 32.05
Target(s): To Be Determined
Current Gain/Loss: +3.5%
Entry on November 05 at $29.40
Listed on November 04, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
11/09/15: The relative weakness in shares of SKX continued on Monday. The broader market fell about -1% but SKX lost another -3.0% today.

More conservative traders may want to start lowering their stop loss.

Trade Description: November 4, 2015:
Sometimes investors can get spoiled when a company is executing really well. When that company suddenly stumbles the reaction can be extremely painful. SKX definitely stumbled when they reported their Q3 results on October 22nd.

SKX is in the consumer goods sector. According to the company, "SKECHERS USA, Inc., based in Manhattan Beach, California, designs, develops and markets a diverse range of lifestyle footwear for men, women and children, as well as performance footwear for men and women. SKECHERS footwear is available in the United States and over 120 countries and territories worldwide via department and specialty stores, more than 1,200 SKECHERS retail stores, and the Company's e-commerce website. The Company manages its international business through a network of global distributors, joint venture partners in Asia, and 13 wholly-owned subsidiaries in Brazil, Canada, Chile, Japan, Latin America and throughout Europe."

SKX has turned in some impressive numbers this year. Back in April they reported their Q1 results, which beat estimates on both the top and bottom line. Revenues were up +40% from a year ago and hit a company record for quarterly sales. Three months later SKX did it again. They reported their Q2 results on July 29th. SKX beat estimates on both the top and bottom line. Revenues were up +36% from a year ago and another new record.

You can imagine the market's surprise when SKX reported their Q3 results on October 22nd and missed estimates on both the top and bottom line. Analysts were expecting a profit of $0.55 a share on revenues of $876 million. SKX only delivered $0.43 a share. Revenues were up +27% to $856 million. It was another record quarter for sales - their highest ever. Yet investors were suddenly worried about a slowdown in growth. There does seem to be a trend developing. Q1 revenues were +40%. Q2 was up +36%. Q3 +27%.

Prior to SKX's Q3 report the stock was up +150% year to date. The stock was up +400% from its 2014 lows. You could say the stock had gotten ahead of itself and suddenly investors hit the expectations reset button. Shares of SKX plunged -31% in one day (Oct. 23rd). Management said that negative foreign currency exchange rates in Brazil, Canada and Chile, combined with a slow domestic retail environment hurt results.

In SKX's Q3 press release they provided more details:

The Company's diluted earnings per share for the third quarter of 2015 was negatively impacted by several factors including foreign currency translation and exchange losses of $13.5 million, and increased deferred rent expenses of $3.5 million related to the new Fifth Avenue Skechers retail store, which opened during the third quarter, and a second Skechers location in Times Square, which just opened. Additionally, during the third quarter of 2015 diluted earnings per share were impacted by increased legal expenses of $5.0 million related to the settlement of personal injury lawsuits from the Company's toning footwear business; and $5.9 million in higher legal fees and associated costs primarily related to intellectual property litigation, which included the matter of Converse, Inc. v. Skechers U.S.A., Inc., which went to trial before the International Trade Commission in August of this year. The Company believes that most, if not all, of these legal matters will come to a conclusion by early next year. During the third quarter of 2015, these additional expenses reduced diluted earnings per share by $0.15.
Technically the big drop in shares of SKX has done a ton of damage. The point & figure chart is now forecasting a long-term target of $11.00 (I doubt SKX will get that low). It is significant that there has been almost no oversold bounce. SKX tried to bounce but it failed at its 200-dma. Now after consolidating sideways the last several days SKX is starting to breakdown again. Shares underperformed the market today with a -4.9% decline.

The intraday low on October 23rd was $29.55. Tonight we are suggesting a trigger to launch bearish positions at $29.40. I suspect the $25.00 level is potential round-number support and could make a good short-term target for the bears.

FYI: SKX had a 3-for-1 stock split on October 15, 2015.

- Suggested Positions -

Short SKX @ $29.40

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

Long 2016 JAN $25 PUT (SKX160115P25) entry $1.00

11/05/15 triggered @ $29.40
Option Format: symbol-year-month-day-call-strike


iPath S&P500 VIX Futures ETN - VXX - close: 19.03 change: +0.99

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: +12.8%
2nd position Gain/Loss: +34.4%
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:
11/09/15: The market's widespread drop today fueled a rebound in the volatility index (VIX), which surged +15%. The VXX only gained +5.4%.

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

11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
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