Option Investor
Newsletter

Daily Newsletter, Thursday, 11/12/2015

Table of Contents

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

Market Wrap

Central Bankers Rule The Day

by Thomas Hughes

Click here to email Thomas Hughes
Central bankers and central bank policy ruled the day. Speeches and comments from ECB and FOMC members moved the market.

Introduction

So many central bank members had speeches or made comments today you might have thought there'd been a policy meeting. There was no policy meeting, merely a half dozen speeches from Federal Reserve officials including Janet Yellen, as well as some comments from the ECB's Mario Draghi. The gist of the story remains the same; the ECB is dovish, perhaps more dovish the revealed at their last meeting, and the FOMC is still on the hawkish side, aiming for a rate hike in the near, near future.

Draghi says that the ECB is looking at a wide range of instruments with which they could affect policy. He also says that core inflation growth was weakening, and that downside risk for the economy were clearly visible. On the FOMC front the market received remaiks fromYellen, Bullard, Lacker, Evans and Dudley, all of whom see us on track for rising inflation, tight labor markets and rising core inflation. As a whole they remain data dependent but Dudley hedged by saying the risks of moving to fast or moving to slow were nearly balanced.

It is still unclear if they will raise rates or not come December but they all seem ready to do so if the economy firms up, or shows signs it will firm up, and there is an entire cycle of monthly data between now the next meeting to sway their decision.

Market Statistics

Pre-opening trading was quiet, the market was largely waiting on the Fed remarks which were scheduled for different events throughout the day. Asian markets were largely flat although their was a surprise rally in Hong Kong shares, they closed with a gain near 2.5%. European shares began the day just below break even levels and slowly lost traction throughout the day. Traders were not cheered by Draghi's dovish stance, or not enough to rally anyway, driving the DAX down by just over -1% and other indices in the region down nearly -2%.

Futures trading here at home indicated a flat to slightly negative open for most of the morning. Fed speak and economic data did nothing to support the market and the trade slipped going into the open. The market began to sell off as soon as the opening bell sounded and moved lower by more than -0.5% within the first 15 minutes of trading. Early bottom was hit by 9:45AM, some sideways movement carried into the lunch hour when a new intraday was low hit, near -0.85% for the SPX. Another intraday bottom was hit by 12:30 and induced another 2 hours of sideways action lasting until late afternoon when another new intraday low was made. Selling continued the rest of the day and into the close leaving the indices near their lows for the day.

Economic Calendar

The Economy

There was not a lot on today's economic calendar but it remains positive and in support of labor market health. First up is the weekly jobless claims data. Initial claims held steady at last week's unrevised 276,000. This is slightly higher than the estimated decline to 270,000. This is the 2nd week claims have been at this level, a one month high, but they remain just off the 43 year low and trending at historic low levels suggesting low low levels of job turnover and loss.

The four week moving average of initial claims rose by 5,000 with this weeks data but also remains in down trend and near historic lows. On a not adjusted basis claims rose by 12.5%, in line with the 12.5% expected by the seasonal factors. Not adjusted claims are now down -6% on a year over year basis. Michigan and California had the largest increases in claims, 3,942 and 2,250, while New York and South Carolina had the largest decreases, -777 and -571.


Continuing claims rose 5,000 from an upward revision of 6,000 to 2.174 million. The four week moving average of claims also rose, by 2,250, but remains in downtrend and near historic lows, as does the weekly figure. The total number of claims rose 13,565 to 1.925 million. This is the 3rd week in gains in total unemployment but this number is also still trending lower, and just off the long term historic lows.


Today's bonus data was the monthly JOLTs report on job openings and labor turnover. This data is lagging, this report is for September, but nonetheless gives insight to the labor market. This month job openings rose by 0.1 million to 5.4 million and is approaching the all time high, a bar set just two months ago. This number was driven by a surge in openings among business & professional services, health care providers and retailers. The hires rate fell slightly, to 3.6%, while the quits rate held steady for the 6th month in a row at 1.9%. The decline in the hires rates is a concern and may reflect a lack of available employee's as indicated by some reports and comments I've heard. The quits rate is a positive, it shows employee's with jobs remain confident of finding a new, different or better job should the need arise.


Tomorrow is a big data day with at least 5 important data points. First up is PPI, followed by Retail Sales, Michigan Sentiment and Business Inventories. Within the retail sales will be data on the auto industry, which has been booming, and could give a hint into next week's auto sales data. Next week will be important data wise too, as if any week isn't, including Empire Manufactuing, CPI, Industrial Production, Home Builders Index, Housing Starts, Housing Permits, Philly Fed, Leading Indicators and the FOMC minutes from the last meeting.

The Oil Index

Oil fell to a three month low today on a huge build in US stockpiles and a pledge from OPEC they would keep pumping. US inventory data was release today because of the Veterans Day Holiday yesterday, thank you to all vets reading this. Today's data showed a build more than 4 times expected, 4.2 million barrels, and adds weight to the supply/demand imbalance. At the same time OPEC is gearing up for their annual meeting, scheduled for next month, and are standing by their view demand would grow in 2016 and that they were going to keep pumping. Basically, still no reason to bet bullish in oil so far as I can see.

The Oil Index lost more than -2.2% today in a move that broke below the short term moving average. The index is on the hunt for support with targets just below today's closing level, near 1,150. The indicators have rolled over into a bearish signal, confirming each other, so a move down to support looks likely. If oil prices continue to lose ground the index could easily break support with next targets near 1,100 and 1,050.


The Gold Index

Gold did not make much of a move in today's trade, I'd have guessed the combination of Dovish Draghi and the Fed's cautious hawkishness would have helped support the dollar and crush gold. The metal had a volatile day, at first trying to move higher and then falling to new lows, only to bounce back to near break even for the day. I remain bearish on gold, I see no place for the dollar to go but up, and gold to go down, in light of the opposing stances taken by the FOMC and the ECB. Today's talk has helped cement that view, the market may be waiting for more data and/or an actual policy change.

The gold miners are slipping along with gold. The miners ETF GDX fell nearly -3% at the open but was able to regain most of the loss, closing down -1.25%. The miners have yet to make a new low, unlike gold, but are fast approaching support at the long term low, set 3 months ago, just below $13. The indicators are bearish and support a move down to test the low but may also be indicating support will hold, or at least cause a consolidation or bounce. Stochastic is low in the range and pointing lower but extremely oversold, MACD is bearish and strong, but retreating from a peak, conditions that combined with support targets are a good indication a decline may be paused or stopped at this level. The caveat as always is gold and gold prices, if gold breaks support at the long term low this index will likely follow.


In The News, Story Stocks and Earnings

The dollar lost ground today in the face of hawkish sounding Fed members and increased dovishness from Mario Draghi. The Dollar Index fell about a half percent on an intraday basis but did not break support. The index appears to be in a consolidation, above support and below resistance, with bullish outlook and conditions. The indicators are bullish but showing near term weakness, consistent with resistance near the all time high. The index may continue to move sideways from here while the data rolls in, and possible up to the actual December FOMC and ECB meetings, unless the data is good and clearly supports economic health.


Retailer Kohl's was able to buck today's sell-off. The high end discount chain reported earnings this morning that beat expectations, $0.75 adjusted versus $0.69 in the prior year, driven on a 1% increase in gross sales. Shares of the stock jumped on the news, soaring more than 7.5% in the pre-market session and gapping up at the open. The move was capped by the short term moving average which provided today's resistance. This one may have hit a bottom, it will be interesting to watch in the coming weeks.


Cisco reported after the closing bell and beat on the top and bottom line. The technology provider reported EPS of $0.59 versus the expected $0.56 consensus estimate. Margins also improved but despite the positive numbers shares of the stock fell, dropping -2.5% in after trading on weak guidance. The stock is now in the middle of the 12 month range with bearish indicators.


Nordstroms also reported after the bell. The nation wide retailer of fashionable goods did not meet expectations. Comparable earnings came in far below consensus, $0.54 versus $0.71 expected, on light revenue and poor comp store sales increases. Comps were up only 0.9%, consensus was over 3%, and resulted in higher than expected inventory levels and a reduction in full year guidance. Shares of the stock fell on the news, falling more than -15% in after hours trading.


The Indices

The market fell again today, putting many of them back in negative territory for the year. Today's move extends the pull-back begun last week and has brought the market down to possible support levels. The move was led by the Dow Jones Transportation Average which lost -1.56%. The index was able to break below the short term moving average but did not yet set a new low. This could lead to further downside and is confirmed by the indicators which both created bearish crossovers with today's action. However, the move today does not have a lot of strength behind it and looks more like a continuation of recent market churn than an indication of severe correction. First support target is near 8,000 with a possible move to 7,750.


The Dow Jones Industrial Average made the next biggest decline in today's session, -1.44%. The blue chips also had their largest decline in over 6 weeks, coming to rest right at the short term moving average. This could provide support but it will be tested, the indicators are both bearish and pointing lower. MACD momentum is bearish, but very weak at this time and consistent with a pull back to support within an uptrend. The previous bull wave has some underlying strength, it made an extreme peak before winding down with two smaller peaks, so could easily retest the current 3 month high ifnot hit my target of the all time highs. Support for now is along the short term moving average with next target near 17,225.


The S&P 500 made the third largest decline, -1.40%, and broke below support and the short term moving average. The index could be moving down to retest the long term up trend line, broken last summer and regained last month, with downside target near 2,000. The indicators are both pointing lower in support of at least a test of today's lows, if not a lower low. However, as with the blue chips, this index showed us some strength with the rally and is indicated to retest its highs so pullback such as this are still buying opportunities.


The NASDAQ Composite made the smallest decline in today's session, only -1.22%. The tech heavy index fell below 5,050 but did not break below the short the term moving average. The indicators are bearish and pointing to a test of support but not showing much strength in that move. Support target is the short term moving average and just below that near 4,090. This index looks best set to retest its highs; not only is did the rally leading up to the 3 month high show strength, the peaks are convergent with the rally.


The market is pulling back and that is exactly what it looks like, a pull back and not a major correction. Today's action was largely an extension of profit taking begun last week, and partly a reaction to worse than expected earnings from the retail sector. It was also a reaction to central bankers and their view on the economy. The FOMC indicated they think the economy is on the brink of strong enough to warrant a rate hike, a move at once confirming economic strength and spurring fear the next crash is near.

The economic trends are positive and if spotty in places are gaining strength in others. The recovery has always been hurky jerky, moving first in one direction and then in another, and I don't think anything has changed; we're still in recovery, some things are going better than others.

At the same time earnings outlook is beginning to brighten. The 4th quarter is likely to be last quarter of negative earnings growth, if it doesn't turn positive by end of season, and beyond that projections become good, and then robust,through the end of 2016. All things that add up to rally in my opinion. I remain a bull and looking to buy when the dip is done.

Until then, remember the trend!

Thomas Hughes


New Plays

Sales Growth Is Slowing

by James Brown

Click here to email James Brown


NEW BEARISH Plays

CarMax Inc. - KMX - close: 55.45 change: -0.57

Stop Loss: 57.25
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 12, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 1.8 million
New Positions: Yes, see below

Company Description

Trade Description:
The labor market in the U.S. is healthy. The October jobs report came in above estimates at +271,000 jobs. Wages are actually rising. You would think this would be bullish for consumer spending. Unfortunately the demand for used cars seems to be slowing down.

KMX is in the services sector. According to the company, "CarMax, a member of the FORTUNE 500 and the S&P 500, is the nation's largest retailer of used cars. Headquartered in Richmond, Va., we currently operate 151 used car stores in 76 markets. The unique CarMax consumer offer allows customers to shop for vehicles the same way they shop for items at other 'big-box' retailers. We provide low, no-haggle prices; a broad selection of CarMax Quality Certified vehicles; and superior customer service. During the fiscal year ended February 28, 2015, we retailed 582,282 used vehicles and we sold 376,186 wholesale vehicles at our in-store auctions."

It looks like low interest rates has fueled huge demand for new cars. Last month the number of new cars sold in the U.S. hit ten-year highs with an annual pace of 18.24 million units. This is probably stealing market share from the used car market. Looking at KMX's last couple of earnings reports both their comparable store unit sales and their quarterly revenues have come in below estimates. Keep in mind that used car sales are still seeing growth but growth is slowing. That's hurting KMX's stock price since they are the largest retailer of used cars.

This stock peaked in April this year. KMX set a lower high in June. Since then shares have been stuck in a bearish trend of lower highs and lower lows. KMX is now in a bear market (down -26% from its 2015 high) and currently testing support near $55.00.

If KMX breaks key support at $55.00 it could signal the next major leg down. I wouldn't be surprised to see a drop toward $50 or even the late 2014 lows in the $44 region. Tonight we are suggesting a trigger to launch bearish positions at $54.75. Please note this is going to be a relatively short-term trade. KMX has earnings coming up in mid December. We will plan to exit prior to their announcement.

Trigger @ $54.75

- Suggested Positions -

Short KMX stock @ $54.75

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

Buy the JAN $52.50 PUT (KMX160115P52.5) current ask $1.80
option price is a current quote and not a suggested entry price.

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

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

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Retreat Again

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market sank again on Thursday thanks to another down day in oil and further weakness across the retail-related names. Small caps underperformed.

ETN hit our stop loss.
LULU hit our entry trigger.


Current Portfolio:


BULLISH Play Updates

Microsoft Inc. - MSFT - close: 53.32 change: -0.33

Stop Loss: 52.15
Target(s): To Be Determined
Current Gain/Loss: -2.3%
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:
11/12/15: MSFT held up better than most of its rivals today. The NASDAQ slipped -1.2% while the S&P 500 fell -1.39%, its worst one-day drop in six weeks. MSFT only lost -0.6% today. Yet if this market retreat continues I expect MSFT to follow stocks lower. MSFT should have support near $52.50 but I am not suggesting new positions at this time.

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


Paychex, Inc. - PAYX - close: 52.85 change: -0.32

Stop Loss: 51.25
Target(s): To Be Determined
Current Gain/Loss: -0.6%
Entry on November 11 at $53.15
Listed on November 09, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 2.3 million
New Positions: see below

Comments:
11/12/15: PAYX was not immune to the market's widespread decline today. Fortunately shares only fell -0.6% versus the NASDAQ's -1.2% loss.

If this market decline continues we could get a buy-the-dip entry point in PAYX near the $52.50 area or even $52.00 if PAYX trades below its 10-dma.

Trade Description: November 9, 2015:
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.

- Suggested Positions -

Long PAYX stock @ $53.15

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

Long JAN $55 CALL (PAYX160115C55) entry $0.80

11/11/15 triggered @ $53.15
Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Denny's Corp. - DENN - close: 9.87 change: -0.09

Stop Loss: 10.85
Target(s): To Be Determined
Current Gain/Loss: +0.3%
Entry on November 10 at $9.90
Listed on November 05, 2015
Time Frame: 4 to 8 weeks
Average Daily Volume = 527 thousand
New Positions: see below

Comments:
11/12/15: The rally attempt in DENN this morning failed near yesterday's high. Shares reversed and set another new 10-month closing low. I would consider new bearish positions at current levels.

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.

- Suggested Positions -

Short DENN stock @ $9.90

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

Long DEC $10 PUT (DENN151218P10) entry $0.55

11/10/15 triggered @ $9.90
Option Format: symbol-year-month-day-call-strike


Lululemon Athletica - LULU - close: 48.16 change: +0.59

Stop Loss: 50.05
Target(s): To Be Determined
Current Gain/Loss: -1.9%
Entry on November 12 at $47.25
Listed on November 11, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 2.9 million
New Positions: see below

Comments:
11/12/15: Most of the retail-related names had another down day with the XRT falling -1.2%, which was in-line with the broader market. Athletic apparel giants like NKE and UA also followed the market lower. LULU was an exception. Shares of LULU dipped to new 2015 lows this morning, tagged our suggested entry point at $47.25, and quickly bounced. Shares rallied up towards $49 before paring their gains for the day with a +1.24% advance.

I don't see any specific news behind today's relative strength in LULU. I would wait for another drop below $47.40 or a drop below $47.00 before considering new bearish positions.

Trade Description: November 11, 2015:
Disappointing earnings guidance and rising competition have been tough on shares of LULU. It doesn't help that expectations for this holiday season are falling.

LULU is in the consumer goods sector. According to the company, "lululemon athletica inc. (LULU) is a yoga-inspired athletic apparel company with products that create transformational experiences for people to live happy, healthy, fun lives. Setting the bar in technical fabrics and functional designs, lululemon works with yogis and athletes in local communities for continuous research and product feedback."

LULU's most recent earnings report was September 10, 2015. The company beat the bottom line estimate by a penny. Revenues were up +16% from a year ago and came in above estimates. Comps showed strength with a +11% improvement on a constant dollar basis. However, management spoiled the news by drastically lowering their Q3 estimates below Wall Street expectations. The stock was crushed on this outlook.

LULU is facing a few challenges. The biggest challenge is rising competition. The athleisure trend in apparel has been around for a while now but everyone is trying to cash in on it. That includes heavyweights like Under Armour and Nike. Nike plans to almost double its sales in women's apparel by 2020. You can bet they plan on stealing some market share from its smaller rivals like LULU. LULU also has competition from other apparel stores like the Gap (with all of its various labels) and Victoria's Secret. If rising competition wasn't enough LULU has also raised their prices, which could further drive consumers toward lower cost alternatives.

Bigger picture the outlook for holiday spending this year is wilting. In the last couple of weeks multiple analyst firms have released reports that consumers will spend less time in stores (lower traffic). Plus, retail sales growth is expected to fall from last year, especially on apparel.

Technically LULU is in another bear market. The stock is down -32% from its 2015 highs. Shares have a bearish trend of lower highs as investors keep selling the rallies. Now LULU has fallen to short-term support in the $47.40-47.50 area.

My biggest concern is the elevated short interest. The most recent data listed short interest at 27% of the 110 million share float. That many shorts can make this stock volatile as weak hands could panic on any bounce. Of course longer-term the bears are probably right on LULU until the story changes. Readers may want to trade the put options to limit their risk. Tonight we are suggesting a trigger to launch bearish positions at $47.25. Plan on exiting prior to LULU's earnings report in mid December.

- Suggested Positions -

Short LULU stock @ $47.25

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

Long DEC $45 PUT (LULU151218P45) entry $2.40

11/12/15 triggered @ $47.25
Option Format: symbol-year-month-day-call-strike


Skechers U.S.A. Inc. - SKX - close: 26.60 change: +0.24

Stop Loss: 29.05
Target(s): To Be Determined
Current Gain/Loss: + 9.5%
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:
11/12/15: After a big drop yesterday SKX managed an oversold bounce today. Shares added +0.9% but that's after trimming its morning rally.

More conservative traders may want to tighten their stop loss further. No new positions at this time.

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

11/11/15 new stop @ 29.05
11/05/15 triggered @ $29.40
Option Format: symbol-year-month-day-call-strike


Seagate Technology - STX - close: 34.08 change: -2.04

Stop Loss: 37.25
Target(s): To Be Determined
Current Gain/Loss: +4.9%
Entry on November 11 at $35.85
Listed on November 10, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.9 million
New Positions: see below

Comments:
11/12/15: The sell-off in STX accelerated on Thursday with a -5.6% plunge to new two-year lows. I would not chase STX at current levels. More conservative investors may want to lower their stop loss again.

Trade Description: November 10, 2015:
A slowdown in PC sales is killing STX's performance. Share are significantly underperforming the broader market. The company's stock is down -45% year to date.

STX is part of the technology sector. According to the company, "Seagate creates space for the human experience by innovating how data is stored, shared and used." That doesn't tell us much. Visiting their website you can learn that "Seagate is the global leader in data storage solutions, developing amazing products that enable people and businesses around the world to create, share and preserve their most critical memories and business data." Essentially STX makes hard drives and data storage for both personal and business use. This includes desktop storage, laptop storage, backup solutions, data recovery, cloud computing storage, and a lot more.

Unfortunately for investors the earnings picture has been disappointing. STX management issued an earnings warning on October 15th as they reduced their guidance for Q1 earnings and revenues. You can see the drop in their stock price on the 15th.

STX reported their 2016 Q1 earnings on October 30th. Net income fell -63.6% from a year ago. Earnings came in at $0.54 a share, which was three cents below estimates. Revenues plunged -22.7% to $2.92 billion, which matches the levels they warned about two weeks prior. STX said their gross margins contracted from 28.1% to 24.2%.

Management knew the quarter was going to be bad so they tried to soften the bad news by announcing a +17% jump in their dividend just prior to their earnings announcement. The news didn't seem to help. Their 2016 Q2 guidance did not help either as management lowered their revenue forecast below analysts' estimates. Wall Street has been reducing their ratings and their price target on the stock in reaction to the company's lowered forecast.

I could see dividend investors looking a STX as a potential buy. The plunge in the stock price has driven the dividend yield up to 6.9%. Yet who wants to buy a stock for their dividend and watch your capital evaporate?

Technically STX is in a bear market. Shares displayed relative weakness today with a -4.5% decline and a drop to new multi-year lows. The point & figure chart is already bearish and forecasting at $26.00 target. If STX trades below $36.00 it will produce a new triple-bottom breakdown sell signal on its P&F chart. Tonight we are suggesting a trigger to launch bearish positions at $35.85.

- Suggested Positions -

Short STX stock @ $35.85

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

Long JAN $35 PUT (STX160115P35) entry $1.93

11/11/15 new stop @ 37.25
11/11/15 triggered @ $35.85
Option Format: symbol-year-month-day-call-strike


iPath S&P500 VIX Futures ETN - VXX - close: 20.56 change: +1.66

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: + 5.8%
2nd position Gain/Loss: +29.1%
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:
11/12/15: The market's recent pullback accelerated lower today. The S&P 500 delivered its worst, one-day session in six weeks. This fueled a big bounce in the volatility index (VIX), which rose +14.3%. The VXX gained +8.7%.

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



CLOSED BULLISH PLAYS

Eaton Corp. - ETN - close: 54.19 change: -1.33

Stop Loss: 54.75
Target(s): To Be Determined
Current Gain/Loss: -4.2%
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:
11/12/15: The stock market's widespread decline fueled the pullback in shares of ETN. Shares gapped down at the open and dropped -2.39% on the session. Shares stalled near $54 and its simple 50-dma. Our new stop loss was hit at $54.75.

- Suggested Positions -

Long ETN stock @ $57.15 exit $54.75 (-4.2%)

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

2016 JAN $60 CALL (ETN160115C60) entry $0.75 exit $0.30 (-60.0%)

11/12/15 stopped out
11/11/15 new stop @ 54.75
11/03/15 triggered @ $57.15
Option Format: symbol-year-month-day-call-strike

chart: