Option Investor

Daily Newsletter, Tuesday, 7/28/2015

Table of Contents

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

Market Wrap

Fed Short Squeeze

by Jim Brown

Click here to email Jim Brown

After five consecutive days of declines, the sellers finally relented and began to cover ahead of the FOMC announcement on Wednesday. Recent history has seen the market rally around a Yellen controlled Fed meeting and the market was very oversold. That was a recipe for a short squeeze.

Market Statistics

The pace of buying was gradual and it was not a typical "gap and flat" where the Dow opens up 150 points and then holds that level the rest of the day. I think there were quite a few traders that were not convinced there would be a pre Fed rally this time. However, once the initial bounce was sold at 10:AM and there was not a big decline the buying accelerated gradually until about 2:30 when the bids began to evaporate.

The market also breathed a sigh of relief when several companies had positive earnings before the open. UPS reported earnings of $1.35 that beat estimates for $1.26. However, revenue of $14.1 billion did miss estimates for $14.5 billion. Investors gave UPS a pass since revenue took a -6.4% hit due to the strong dollar. In constant currency terms that meant revenue was closer to $15 billion. International revenue growth rose +17.2% and supply chain and freight revenue rose +17.6%.

The company reiterated full year guidance in the range of $5.05-$5.30 with EPS growth at the higher end of the range. Operating income in the U.S. for the first half is up +6.3% while revenue rose only +2.7%. This was due to a change in the pricing structure that eliminated some of the excessively large packages and charged more for those that were shipped. Shares spiked 5% on the news.

The positive earnings from UPS and others helped fuel the positive sentiment at the open. Unexpectedly decent economics also lifted spirits. The Richmond Fed Manufacturing Survey for July rose from the previously reported 6.0 to 12.6 and the highest level since August and the biggest monthly gain in more than a year. June was revised higher from 6.0 to 7.5. As you can see in the graphic below, the individual components have been steadily improving. The exception is the employment component which is slowly declining.

The separate Services survey rose from 19 to a very strong 32. That is the highest level since my data capture began in September 2012. However, the retail component fell from -4 to -22. The six-month outlook for retail fell from -9 to -36. Shopper traffic fell from +15 to -25 and the big-ticket sales component fell from +27 to -25. Those are some seriously negative numbers in the outlook. Let us hope they do not come to pass.

The Texas Service Sector Outlook Survey rose slightly from 4.1 to 7.9. The internal components were mixed and I will not bore you with the details. This survey is normally ignored.

On the negative side, the Consumer Confidence for July imploded. Confidence declined from 101.4 to 90.9 compared to analyst estimates for 100.5. That is a ten-month low. The present conditions component declined from 110.3 to 107.4 but the big damage came in the expectations component. That dropped from 92.8 to a 17-month low of 79.9. Respondents saw a worsening job market and expectations for pay raises declined.

Those planning on buying a vehicle fell from 13.1% to a ten-month low of 10.8%. Potential appliance purchasers rose from 47.4% to 52.2% and homebuyers rose slightly from 5.6% to 5.9%.

It is not a good sign for the economy for consumer confidence to be falling so dramatically. Worried consumers do not spend money.

The big hurdle on Wednesday is of course the FOMC announcement at 2:PM. Two-thirds of analysts polled still believe the first rate hike will be in September with one-third expecting December. There are a few stragglers looking for October and January but the bulk are Sept/Dec.

The slowdown in China will be a concern but it will be offset by the fact that Greece is not being allowed to sink into the ocean. The crisis in Europe is being resolved by the Troika but long term they are just kicking the can down the road again. It is the short term the Fed is worried about and they can check Greece off their list of problem areas.

With earnings coming in mixed for Q2 and economics improving slightly the Fed will probably continue to say a future rate hike in 2015 will be appropriate. Since the September meeting on the 16th is only six-weeks away, investors are likely to begin worrying as soon as the July meeting is over. Couple that with August/September being the worst months for the market the July announcement may be the starter's gun for portfolio rebalancing.

The last update on the Q2 GDP on Thursday should not be a problem as long as the number is close to the 2.6% growth expectations. This is the last revision and sometimes they are volatile.

Reynolds American (RAI) announced a 2:1 split with earnings. The split date is a long way off on August 31st. UnderArmor has not yet announced their split date. We are waiting for board approval.

Honeywell (HON) agreed to buy the Elster unit from Melrose Industries for $5.1 billion. Elster is a maker of gas, electric and water meters. The Honeywell CEO, Dave Cote, had said his goal was $10 billion in acquisitions by 2018. He is now halfway there.

Cote said he wanted to spend the company's cash hoard on acquisitions to expand the company's business rather than on dividends and buybacks. The company reaffirmed their 2015 forecasts and said the deal will close in Q1-2016. Elster employs 6,800 people. The transaction is the largest since Honeywell was acquired by Allied Signal in 1999 for $16.1 billion. Shares rose +2.50 on the news.

Anadarko (APC) continued the recent trend of energy companies beating drastically lower estimates. Anadarko posted adjusted profits of a penny but that was well above analyst estimates for a loss of 53 cents. Revenue of $2.64 billion also beat estimates for $2.57 billion. Production volumes of 846,000 Boepd were flat with the comparison quarter but 18,000 Boepd higher than guidance because operating improvements boosted margins and allowed the company to drill more than 100 new wells so far in 2015.

BP Plc (BP) reported adjusted earnings of 43 cents compared to estimates for 49 cents. Revenue of $61.8 billion easily beat estimates for $54 billion but was drastically lower than the $94 billion in the comparison quarter. The CEO said oil prices could fall even further based on their view of the market. He said "I am confident that positioning BP for a period of weaker oil prices is the right course to take."

Events in Libya forced a $600 million write down. Also included was a previously reported $6.1 billion charge for the Gulf oil spill. Total charges for that spill are up to $54 billion. BP has finally settled with all the state, local and federal governments relating to fines and penalties for that spill. Capex spending declined -20% to $4.7 billion in Q2. The company is forecasting $20 billion for all of 2015, down from $24 billion in 2014.

Merck (MRK) reported earnings of 86 cents that beat estimates for 81 cents. Revenue of $9.79 billion declined -11% and was only slightly below estimates for $9.81 billion. Currency issues deducted 7% from the revenue numbers. The company raised its full year guidance from $3.35-$3.48 to $3.45-$3.55. Shares initially declined but rebounded slightly on the raised guidance.

Pfizer (PFE) reported adjusted earnings of 56 cents and beat estimates by 4 cents. Revenue of $11.85 billion beat estimates for $11.42 billion even after a $1 billion hit because of the strong dollar. Pfizer raised full year guidance from $1.95-$2.05 to $2.01-$2.07. Sales of cancer drugs rose +25% for the quarter to $713 million. Sales of Lipitor still totaled $509 million for the quarter to put it at a run rate of about $2 billion for the year. At its peak Lipitor sales reached $13 billion in annual sales.

After the bell the fireworks began to fly. Twitter (TWTR) posted earnings of 7 cents that beat estimates for 4 cents. Revenue of $502 million beat estimates of $481 million. Monthly active users (MAU) rose from 302 million to 316 million. The company raised full year revenue guidance from $2.17-$2.27 billion to $2.20-$2.27 billion. Life was good and after rising +1.84 in the regular session to close at $36.50 shares spiked to $41 in afterhours.

Unfortunately, fame is fleeting. Shares crashed back to close at $33 after the conference call. Apparently, the MAU number contained 12 million of SMS Fast Followers and the real MAU only rose +2 million to 304 million. A SMS Fast Follower is just a receiver of tweets in their SMS texting application. They do not have to have a Twitter account to follow specific twitter users. SMS followers do not have the image rich (advertising) screens that actual Twitter users have.

Interim CEO Jack Dorsey said the growth rate was unacceptable since it was the slowest growth since Twitter went public in 2013. The CFO said we do not see "sustained meaningful growth in active users until we start to reach the mass market."

Investors were not happy with the call and shares crashed to $33 in afterhours.

Gilead Sciences (GILD) reported adjusted earnings of $3.15 that rose +23%% compared to estimates for $2.71. Revenue of $8.24 billion rose +26% and was well above estimates for $7.61 billion. Hep-C drugs sales totaled $4.9 billion, which was also above estimates for $4.31 billion. Harvoni has only been on the market for ten months and brought in $3.61 billion. The company said they are preparing to launch the Hep-C drugs in Japan and several other countries. Roughly 2.7 million Americans have Hep-C and that rises to more than 150 million worldwide and Harvoni cures it 90% of the time. Gilead raised its full year revenue guidance from $26-$27 billion to $29-$30 billion. This company can do no wrong and they are building up a pile of cash to acquire additional drug pipelines. Shares rose about $4 to $117 on the news.

Yelp (YELP) posted adjusted earnings of 2 cents compared to estimates for a 1-cent loss. Revenue of $134 million barely beat estimates for $133 million. However, the company lowered guidance and the Chairman, Max Levchin, is stepping down. The CEO, Jeremy Stoppelman, said he was confident Yelp would be producing $1 billion in annual revenue by 2017. That is more than double the projected $545-$550 million for 2015. Shares were crushed in the afterhours with a decline from $33.50 to $27.85.

Express Scripts (ESRX) posted adjusted earnings of $1.44 compared to estimates for $1.40. Revenue of $25.45 billion was well under estimates for $26.15 billion. The company guided for earnings in a range of $1.41-$1.45 for the current quarter and analysts were expecting $1.43. Shares gained $1.60 in afterhours.

Reynolds American (RAI) reported adjusted earnings of $1.02 that beat estimates by 8 cents. Revenue rose +11% to $2.4 billion. They raised guidance from $1.83-$1.90 to $1.90-$2.00 for the full year. They also announced a 2:1 stock split to occur on August 31st. They raised the dividend by 7.5% to $1.44 annually on a post split basis. Shares spiked $5 on the news.

Earnings in the spotlight for Wednesday include Anthem, Facebook, Humana, MasterCard, Marriot and Solar City to name a few. Facebook is of course the report everyone will be watching.

Crude prices rose 75 cents but you would have thought it was $7. Oversold and heavily shorted energy stocks exploded higher and helped power the market rally. Dow components Chevron (CVX) gained $3.85 and Exxon (XOM) +$3.22 and together added more than 50 points to the Dow. More than one analyst immediately said this was a perfect selling opportunity.

In the WTI chart below, the days gain does not even register on the far right. It is lost in a sea of red candles from the last three weeks. It would be a huge stretch of the imagination to claim a crude rebound had begun.


Short S-q-u-e-e-z-e. Today was simply an oversold bounce/squeeze ahead of the Fed announcement. The early earnings news was not that exciting and there was only a dribble of market news. With recent Fed days positive, there was a good reason to exit shorts and maybe nibble at some longs ahead of the event.

Volume was decent at 7.4 billion shares and advancers were 5:2 over decliners. It was a good day in the market regardless of the reason for the rebound. It was driven in part by the grossly oversold energy sector and a huge rebound in biotechs. Biogen (BIIB) was actually positive with a $10 gain and that took the pressure off the sector and the NYSE Biotech Index ($BTK) rallied +2.2%.

The rebound on the S&P stalled at 2095 after closing at 2068 on Monday. This +25 point gain was very nice but it was a dead stop at the 100-day at that 2095 level. The rebound did not change the overall negativity in the S&P with the Bullish Percent Index rising only 0.4% to 50.6%.

Resistance remains 2095-2100 and getting back to the highs at 2130 could be a challenge.

The Dow rebounded from a six-month low at 17,440 with a +189 point gain. That only brought it back above prior support at 17,585. While it was a big day, the index was down -650 points since the highs the prior week. It has a long way to go. Other than short covering, there is not a lot to move the Dow on Wednesday with no Dow components reporting. If you look at the Dow chart below is that a chart you would want to rush to buy? I doubt it. One day does not make a trend.

Resistance is 17,750 and 17,800. Support is yesterday's lows at 17,400.

The Nasdaq rebounded thanks to the biotechs with help from TSLA, PNRA and PCLN. It was a challenge because Baidu (BIDU) missed on earnings and took a -30 point header into the cheap seats and a new 52-week low.

Amazon, Google and Netflix were no help on Tuesday. Shares in those big caps were flat to down suggesting the big caps leaders are not going to lead us higher.

Resistance at 5100 was almost touched with the high at 5097.69. That 5100 level is the number to watch on Wednesday. A move over 5100 will find additional resistance at 5150 and again at 5200. There are not a lot of high profile Nasdaq stocks reporting on Wednesday so headlines will be scarce until Facebook reports after the close.

The small cap Russell 2000 rebounded +10 points and was the smallest gain of all the major indexes. The rebound failed to recover the 1230 resistance level with a high of 1226. This appears to be simply a dead cat bounce because of the very oversold conditions and the short covering ahead of the Fed. The Russell has a long way to go to prove itself and help rebuild investor sentiment.

At the risk of repeating myself too many times I don't believe today's rebound was material. I view it as an oversold short squeeze ahead of an event that has produced market gains for the last several meetings.

I warned in the weekend newsletter that a short squeeze was imminent and what happened after the rebound was the key. If we continue higher after the fed announcement then I am positioned to enjoy those gains. If the market rolls over after the Fed then we could be looking at significantly lower declines.

Depending on what the Fed says the market is going to be positioning itself going into the August/September doldrums and the potential for a September rate hike. We all know a rate hike will have no real impact on the market but it is the perceived impact that shakes up investors. Once past the first hike we could have a decent Q4 rally if the global economy does not tank. The average analyst estimate for the end of December is 2,231 on the S&P. I would love to see that come to pass.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Back In Rally Mode

by James Brown

Click here to email James Brown


Stryker Corp. - SYK - close: 101.61 change: +1.59

Stop Loss: 99.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.1 million
Entry on July -- at $---.--
Listed on July 28, 2015
Time Frame: Exit PRIOR to September option expiration
New Positions: Yes, see below

Company Description

Trade Description:
The healthcare sector has consistently delivered a strong bullish performance for the last three years in a row. When you think of healthcare you might think health insurance providers. They are not the only healthcare stocks in rally mode. Tonight's candidate is in the medical equipment and supplies industry.

According to the company, "Stryker is one of the world's leading medical technology companies and together with our customers, we are driven to make healthcare better. The Company offers a diverse array of innovative products and services in Orthopaedics, Medical and Surgical, and Neurotechnology and Spine, which help improve patient and hospital outcomes. Stryker is active in over 100 countries around the world."

Late last year the company's earnings growth was lackluster at best but the company has turned things around the last couple of quarters. SYK reported their Q1 results on April 21st. They beat the bottom line estimate. Revenues were only in-line with estimates. Yet management raised the low-end of their 2015 sales and earnings guidance. You can see the reaction to the stock price in April.

Their most recent earnings report was July 23rd. Wall Street was expecting Q2 earnings of $1.17 per share on revenues of $2.41 billion. SYK beat both estimates with earnings growth of +11% to $1.20 per share. Revenues were up +2.9% to $2.43 billion. On a constant currency basis their sales were up +7.6%.

SYK management raised their organic growth forecast to +5.5% to +6.5%. They raised both their Q3 and 2015 earnings forecast above analysts' estimates. SYK now expects full year earnings in the $5.06-5.12 range versus consensus estimates at $5.03 per share. Analyst reaction has been positive with several price target upgrades into the $107-110 range. The point & figure chart is bullish and currently forecasting at $111.00 target.

We like how SYK displayed relative strength last week and resisted most of the market's sell-off (prior to their earnings report). The better than expected Q2 results launched SYK to new all-time highs. Traders bought the dip this morning and today is a new all-time closing high for SYK. Tonight we are suggesting a trigger to buy calls at $102.15.

Trigger @ $102.15

- Suggested Positions -

Buy the SEP $105 CALL (SYK150918C105) current ask $1.10
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 & Commodities See Oversold Bounce

by James Brown

Click here to email James Brown

Editor's Note:

Commodities have been plunging but the group finally bounced on Tuesday. This helped the equity market. Some of the major indices had hit key technical support levels yesterday so they were poised to bounce as well. Overall the U.S. market delivered widespread gains and the S&P 500 snapped a five-day losing streak.

UA hit our entry trigger. XLE hit our stop loss.

Current Portfolio:

CALL Play Updates

Advance Auto Parts Inc. - AAP - close: 170.30 change: +1.96

Stop Loss: 165.85
Target(s): To Be Determined
Current Option Gain/Loss: -14.3%
Average Daily Volume = 1.0 million
Entry on July 23 at $170.25
Listed on July 18, 2015
Time Frame: Exit PRIOR to earnings on August 13th
New Positions: see below

07/28/15: The stock market's widespread rally allowed AAP to bounce back toward the top of its trading range. Shares closed above round-number resistance at $170.00 to score a new all-time closing high.

If both the S&P 500 and AAP are positive at the open tomorrow I would consider new bullish positions. Keep in mind our time frame. We plan to exit prior to AAP's earnings on August 13th.

Trade Description: July 18, 2015:
If you listen to financial media long enough you will eventually hear pundits talk about "bulletproof stocks". AAP just might be a bulletproof stock. The company has lowered its earnings guidance three quarters in a row and yet traders continue to buy the stock. Today AAP is hovering at all-time, record highs.

AAP is part of the services sector. According to the company, "Headquartered in Roanoke, Va., Advance Auto Parts, Inc., the largest automotive aftermarket parts provider in North America, serves both the professional installer and do-it-yourself customers. As of January 3, 2015, Advance operated 5,261 stores and 111 Worldpac branches and served approximately 1,325 independently owned Carquest branded stores in the United States, Puerto Rico, the U.S. Virgin Islands and Canada. Advance employs approximately 73,000 Team Members."

There seems to be a divergence in the U.S. We are half way through 2015 and new car sales are surging. Dealers have already sold more than 8.5 million vehicles and the industry is on pace to challenge the all-time record of 17.4 million autos in one year. Yet the age of the average car on the road continues to climb. Next time you're stuck in traffic and all you see is a river of cars, bear in mind that the average car is now 11.4 years old. It's forecasted to 11.7 years old by 2019. Americans are keeping their car longer and longer (because most can't afford a new car). That's really good news for car part sales.

I mentioned AAP's earnings guidance earlier. AAP has actually missed Wall Street's bottom line estimates the last two quarters in a row. They have lowered their guidance three quarters in a row. On May 21st AAP reported its Q1 results of $2.39 per share. Revenues were up +2.3% to $3.04 billion. They lowered their fiscal year 2015 earnings guidance from $8.35-8.55 per shares down to $8.10-8.30. Analysts were expecting $8.51. AAP seems to be having a few issues digesting its acquisition of General Parts International, which took place in 2014.

Normally when a company lowers guidance the stock gets crushed. Yet traders keep buying the dips in AAP. Looking at the AAP's recent announcements there is an knee-jerk reaction gap down in their stock price and then shares of AAP immediately rebound. It's happened multiple times. You have to like that kind of resilience. You could say AAP is almost bulletproof.

The stock has been trading off technical support as it climbed from its May 2015 lows. Last week's breakout past resistance near $165.00 is very bullish. The point & figure chart is forecasting at $193.00 target. Odds are AAP will rally up to its earnings report on August 13th. We want to exit prior to the announcement.

- Suggested Positions -

Long AUG $175 CALL (AAP150821C175) entry $3.50

07/25/15 new stop @ 165.85
07/23/15 triggered @ $170.25
Option Format: symbol-year-month-day-call-strike

GoPro, Inc. - GPRO - close: 62.42 change: +1.15

Stop Loss: 58.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 6.1 million
Entry on July -- at $---.--
Listed on July 25, 2015
Time Frame: Exit PRIOR to earnings
New Positions: Yes, see below

07/28/15: GPRO managed to outperform the broader market with a +1.8% gain. Shares still have further to rally before hitting our suggested entry point at $65.05.

Trade Description: July 25, 2015:
The U.S. stock market delivered one of its worst weekly performances all year long as investors reacted to disappointing earnings results. GPRO managed to buck the trend and shares rallied to new six-month highs thanks to significantly better than expected earnings results.

Here's the company's rather self-confident description, "GoPro, Inc. is transforming the way consumers capture, manage, share and enjoy meaningful life experiences. We do this by enabling people to self-capture engaging, immersive photo and video content of themselves participating in their favorite activities. Our customers include some of the world's most active and passionate people. The quality and volume of their shared GoPro content, coupled with their enthusiasm for our brand, virally drives awareness and demand for our products.

What began as an idea to help athletes document themselves engaged in their sport has become a widely adopted solution for people to document themselves engaged in their interests, whatever they may be. From extreme to mainstream, professional to consumer, GoPro has enabled the world to capture and share its passions. And in doing so the world, in turn, is helping GoPro become one of the most exciting and aspirational companies of our time."

GPRO came to market with its IPO in June 2014. The stock opened for trading at $28.65 and by October 2014 shares were nearing $100 per share. That proved to be the peak. GPRO spent the next six months correcting lower and finally bottomed near $37 in March 2015.

GPRO reported their 2015 Q1 results on April 28th. Wall Street was expecting a profit of $0.18 per share on revenues of $341.7 million. GPRO beat estimates with a profit of $0.24 a share. Revenues were up +54% from a year ago to $363 million.

Management said it was their second highest revenue quarter in history. Their GAAP results saw gross margins improve from 40.9% in Q1 2014 to 45.1% today. Their net income attributable to common stockholders increased 98.2% compared to the first quarter of 2014. International sales surged +66% and accounted for just over half of total sales in Q1 2015. GPRO shipped 1.3 million devices in the first quarter. This was the third quarter in a row of more than one million units.

GPRO management raised their guidance. They now expect 2015 Q2 revenues in the $380-400 million range with earnings in the $0.24-0.26 region. Analysts were only forecasting $335 million with earnings at $0.16 a share.

The better than expected Q1 results and the upgraded Q2 guidance sparked several upgrades. Multiple analysts raised their price target on GPRO. New targets include: $56, $65, $66, $70, and $76.

GPRO reported its Q2 report on July 21st. Results were way above expectations. Analysts were expecting earnings of $0.26 per shares on revenues of $396 million. GPRO said Q2 earnings came in at $0.35 per shares. That's a +337% improvement from a year ago. Revenues were up +71.7% to $419.9 million, significantly above the estimate. Gross margins improved from 42.2% to 46.4%.

Naturally GPRO management was enthusiastic. GoPro Founder and CEO, Nicholas Woodman, commented on their quarterly results saying, "I couldn't be more proud of our aggressive pace of innovation. With the introduction of HERO4 Session and HERO+ LCD, we've launched five new cameras in the past 10 months, exciting both new and existing customers and contributing to strong second quarter results. Our core business is enjoying terrific momentum as we charge forward into attractive adjacent markets."

This better than expected Q2 result sparked another round of upgrades. Piper Jaffray raised their GPRO target to $72. Barclays bumped theirs to $71. Another firmed raised theirs to $70. Shares of GPRO saw a bit of a short squeeze this past week. There are plenty of traders who think GPRO is overpriced and too rich with a P/E above 42, especially when you consider the company is facing rising competition.

The biggest argument against GPRO is competition from a Chinese rival Xiaomi who has produced a competitive action camera that they're selling for less than half of GPRO's similar model. GPRO critics are worried this could kill GPRO's growth in China and the rest of Asia. It's too early to tell who will be right but momentum is currently favoring the bulls. The point & figure chart is forecasting a long-term target at $95.00.

The stock experienced some profit taking on Friday with a -2.7% decline. Shares failed at the $65.00 level on Thursday and Friday. We want to be ready if GPRO reverses higher again. Tonight we're suggesting a trigger to buy calls at $65.05. We'll start with a wide stop loss at $58.65, making this a more aggressive, higher-risk trade. It might take GPRO a couple of days to get back to $65.00. I don't expect a new relative high on Monday.

Trigger @ $65.05

- Suggested Positions -

Buy the SEP $67.50 CALL (GPRO150918C67.5)

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

Under Armour, Inc. - UA - close: 97.85 change: +1.42

Stop Loss: 93.65
Target(s): To Be Determined
Current Option Gain/Loss: -0.4%
Average Daily Volume = 2.3 million
Entry on July 28 at $97.55
Listed on July 27, 2015
Time Frame: Exit PRIOR to September option expiration
New Positions: see below

07/28/15: Our new bullish play on UA is off to a strong start. Shares gained +1.47% and set a new all-time closing high. Our trigger to buy calls was hit at $97.55.

Trade Description: July 27, 2015:
UA is in the consumer goods sector. They make shoes and athletic wear. According to the company, "Under Armour (UA), the originator of performance footwear, apparel and equipment, revolutionized how athletes across the world dress. Designed to make all athletes better, the brand's innovative products are sold worldwide to athletes at all levels. The Under Armour Connected Fitness platform powers the world's largest digital health and fitness community through a suite of applications: UA Record, MapMyFitness, Endomondo and MyFitnessPal."

The athletic shoe and athletic apparel business is very competitive. Nike (NKE) has dominated the space for years. UA is about 10% the size of NKE but it's actively fighting for market share and recently overtook Adidas as the second biggest athletic wear brand inside the United States. Nike had sales of $27.8 billion in 2014. UA is a fraction of that with 2014 sales of $3.08 billion but they saw growth of +32%.

UA has been firing on all cylinders with its earnings results. Most of last year saw the company not only beating Wall Street's estimates but also raising guidance. UA reported their 2014 Q4 results on February 4th. The company reported a profit of $0.40 a share with revenues climbing +31% to $895 million, which was above estimates for $849 million. UA's CEO Kevin Plank, in a recent interview, said his company will grow at 20%-plus in 2015. The company's current estimates are $3.76 billion in sales for the year.

There was a steady stream of analysts raising their price targets on UA after its February earnings report. The company's most recent earnings report was April 21st when UA announced Q1 results. After raising guidance back in February the company reported earnings of $0.05 per share, which was in-line with Wall Street's new estimates. Revenues were up +25.4% to $804.9 million, which beat expectations.

UA management raised their outlook again. They expect 2015 operating income to improve +13-to-15%. UA expects 2015 revenues to rise +23% to $3.78 billion.

The company delivered a repeat performance when they did it again with their Q2 earnings on July 23rd. Analysts were expecting a profit of $0.05 per share on revenues of $761.7 million. UA beat both estimates with a profit of $0.07 per share. Revenues were up +28.5% to $783.5 million. Management raised their 2015 revenue guidance from $3.78 billion to $3.84 billion. That's above analysts' estimates of $3.83 billion.

Wall Street reacted to UA's Q2 report with a wave of price target upgrades. Several firms upped their target on UA into the $105-114 range. Naturally the stock rallied on this bullish earnings report and the analyst outlook. The stock soared past resistance near $90.00. More importantly UA has managed to maintain these gains in the face of a widespread market sell-off. We like that kind of relative strength.

Tonight we are suggesting a trigger to buy calls at $97.55. We'll try and limit our risk with an initial stop loss at $93.65.

- Suggested Positions -

Long SEP $100 CALL (UA150918C100) entry $2.66

07/28/15 triggered @ $97.55
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Bed Bath & Beyond Inc. - BBBY - close: 65.30 change: +0.21

Stop Loss: 67.65
Target(s): To Be Determined
Current Option Gain/Loss: +19.6%
Average Daily Volume = 2.0 million
Entry on July 24 at $66.80
Listed on July 23, 2015
Time Frame: Exit PRIOR to earnings in late September
New Positions: see below

07/28/15: BBBY tagged new 2015 lows this morning. Yet the market's widespread rally finally lifted BBBY back into positive territory for the day. Shares still underperformed the market by only rising +0.3%.

No new positions at this time.

Trade Description: July 23, 2015:
This year is not shaping up very well for bullish investors in BBBY. The stock is down -11.6% year to date. The trouble started with its earnings report back in January.

If you are not familiar with BBBY they are in the services sector. According to the company, "Bed Bath & Beyond Inc. and subsidiaries (the "Company") 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. 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, food service, 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. Shares of Bed Bath & Beyond Inc. are traded on NASDAQ under the symbol "BBBY" and are included in the Standard and Poor's 500 and Global 1200 Indices and the NASDAQ-100 Index. The Company is counted among the Fortune 500 and the Forbes 2000."

On January 8th BBBY reported its 2014 Q3 results. Earnings were in-line with estimates but revenues missed. Management lowered their same-store sales guidance. The stock plunged the next day. A few weeks later BBBY had managed to recover but the rally failed producing a bearish double top.

The trouble continued in April. BBBY had rallied up into its earnings report and then disappointed. Their 2014 Q4 results were in-line with estimates at $1.80 a share. Yet revenues missed estimates again. They lowered their Q1 guidance. The stock plunged the next day.

On June 24th BBBY reported earnings of $0.93 per share. That was down -1% from a year ago and a penny worse than expected. Revenues were only up +3% to $2.74 billion, which met expectations. Yet comparable store sales were +2.2% when Wall Street was expecting +2.5%. Management lowered their Q2 guidance. Guess what happened the next day? Yup, the stock dropped. Traders immediately sold the bounce and BBBY now has a clearly defined bearish trend of lower highs and lower lows. One has to wonder how bad would BBBY's Q1 results have been had the company not spent $385 million buying back stock last quarter?

In summary, BBBY has been missing Wall Street's revenue or earnings estimates the last three quarters in a row. They have warned twice and same-store sales are disappointing. Technically shares have broken down below multiple layers of support. The company is more of a home furnishing store so back to school season may not give them much of a boost. The point & figure chart is bearish and forecasting at $60.00 target. The last few days have seen some support near $67.00. We are suggesting a trigger to buy puts at $66.80.

- Suggested Positions -

Long NOV $65 PUT (BBBY151120P65) entry $2.55

07/25/15 new stop @ 67.65
07/24/15 triggered @ $66.80
Option Format: symbol-year-month-day-call-strike

PowerShares QQQ ETF - QQQ - close: 111.13 change: +0.95

Stop Loss: 111.65
Target(s): To Be Determined
Current Option Gain/Loss: +52.1%
Average Daily Volume = 27.5 million
Entry on July 21 at $114.02
Listed on July 20, 2015
Time Frame: 4 to 6 weeks
New Positions: see below

07/28/15: Biotech stocks were some of the market's best performers today. The group helped lifted the NASDAQ-100 index and thus the QQQ to a +0.8% gain. The intraday high for the QQQ was $111.35 and our stop is at $111.65.

No new positions at this time.

Trade Description: July 20, 2015:
Big cap technology stocks have been strong performers this year and that has boosted the NASDAQ-100 index ($NDX) to new all-time highs. The $NDX is also outperforming the broader market with a +10% gain year to date versus a +3.4% gain in the S&P 500 index. The long-term up trend for the $NDX is still intact and yet we are short-term bearish on the $NDX. It's move too far, too fast, and on very, very narrow leadership. One way for us to play the $NDX is options on the QQQ ETF that tracks the index.

The QQQ is one of the largest and most liquid exchange traded funds. This particular ETF tracks the NASDAQ-100 index, which includes 100 of the largest non-financial stocks on the NASDAQ (lots of technology stocks). AAPL, MSFT, AMZN, GOOG, GOOGL, FB, GILD, INTC, CMCSA, CSCO and AMGN are its top holdings. You can see a list of the top twenty five holdings here.

The lack of leadership in the NASDAQ-100 (and QQQ) has been exceptionally narrow. That's a bearish sign.

On Friday the QQQ surged to new highs even though three stocks declined for every two advancing stocks in the QQQ. Today there were two declining stocks for every one stock that advanced (on the NASDAQ composite). More than 50% of the NASDAQ-100 components are actually negative for the year. So how is the index (and the Qs) at a new record high? The answer is because the $NDX is a market-cap weighed index.

The rally in the QQQ has been fueled by just four stocks with huge market caps. Here are the four stocks driving the QQQ (and their July gains):

Google (GOOG/GOOGL) +29%
Amazon.com (AMZN) +11%
Facebook (FB) +10%
Apple (AAPL) +3%
Those are some impressive numbers in just the last three weeks.

Now consider their market cap and their impact on the QQQ. AAPL's weighting in the QQQs is 13.9%. GOOG is 4.3% while GOOGL is 3.75%. AMZN is 4.19% and FB is 3.9%. For the record Microsoft (MSFT) is 7.0% of the QQQ.

The NASDAQ-100 index has a market cap of $5.4 trillion. If we combine the market cap of AAPL, AMZN, FB, and GOOG they are worth $1.7 trillion. These four stocks are almost 31% of the $NDX market cap. So what happens to the QQQ when these four stocks start to see some profit taking after those big July gains?

Cable television business and stock market channel CNBC noted the above observations on air today. They also posted an article regarding this interesting situation on their website. You can read the CNBC article here.

CNBC also noted that the NASDAQ-100 index is more than three standard deviations above its simple 50-dma. That almost never happens. It's so rare it's only happened nine times in the last 35 years. While that is not a big sample size the $NDX was down the following week 8 out of 9 times.

There are no guarantees in the market. However, odds are good that the QQQ is due for a pullback that should happen soon. The lack of leadership driving the $NDX higher makes the rally very fragile.

There is one big caveat here. Apple (AAPL), the biggest component in the $NDX, is scheduled to report earnings on Tuesday evening, after the closing bell. AAPL tends to beat Wall Street's earnings estimates 90% of the time. Thus expectations tend to be pretty bullish for AAPL's results. If they disappoint it could have a significant negative impact on the QQQ. Since expectations are already bullish for AAPL's quarter they probably need to really blow the doors off and crush the estimate to move the QQQ. It's possible but it seems unlikely that AAPL will singlehandedly lift the QQQ on Wednesday.

We suspect the market could start to see some profit taking tomorrow. Therefore we are suggesting traders buy QQQ puts at the opening bell tomorrow morning (Tuesday, July 21st). If you're worried about AAPL's earnings you could wait until Wednesday morning to buy puts. That way you could hear the results and see how the markets is reacting to AAPL's numbers after hours and pre-market on Wednesday.

Please note we are not setting a stop loss for this trade yet. We'll add a stop in the Wednesday evening newsletter.

- Suggested Positions -

Long SEP $112 PUT (QQQ150918P112) entry $1.88

07/27/15 new stop @ 111.65
07/25/15 new stop @ 113.25
07/23/15 expect the QQQ to gap higher tomorrow in reaction to AMZN's earnings report tonight
07/22/15 new stop @ $114.50
07/21/15 trade begins. QQQ opened @ $114.02
Option Format: symbol-year-month-day-call-strike


Energy SPDR ETF - XLE - close: 68.51 change: -1.00

Stop Loss: 70.25
Target(s): To Be Determined
Current Option Gain/Loss: +26.6%
Average Daily Volume = 13.3 million
Entry on July 22 at $71.22
Listed on July 21, 2015
Time Frame: Exit PRIOR to September option expiration
New Positions: see below

07/28/15: Commodities finally produced an oversold bounce and this fueled a big bounce among the energy stocks. The XLE surged +2.8% and hit our new stop loss at $70.25.

The overall trend for the XLE is still bearish. I'd look for this bounce to fail near $72.00.

- Suggested Positions -

SEP $70 PUT (XLE150918P70) entry $1.84 exit $2.33 (+26.6%)

07/28/15 stopped out
07/27/15 new stop @ 70.25
07/25/15 new stop @ 72.25
07/22/15 triggered on gap down at $71.22, suggested entry was $71.25
Option Format: symbol-year-month-day-call-strike