Option Investor

Daily Newsletter, Tuesday, 10/6/2015

Table of Contents

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

Market Wrap

Biotech Crashes Again

by Jim Brown

Click here to email Jim Brown

Two major events in the biotech sector had the index down -6% intraday and caused a major drag on the Nasdaq. Add in the weak healthcare sector and the major averages had a tough day.

Market Statistics

DNA sequencing company Illumina (ILMN) warned that it would miss on sales for both Q3 and Q4. The company blamed the disappointing sales on Europe and weakness in the Asia-Pacific region. The company said Q3 revenue would be $550 million and below forecasts for $569 million. Q4 guidance was cut to $570 million from $603 million. Shares of ILMN declined -20% at the open (-$33) but struggled back to end the day down -10% or -$17 at $145. Since the biotech crash began, ILMN is down from a high of $242.

Exact Sciences (EXAS) is less than half the stock it used to be after the FDA downplayed its colon cancer drug Cologuard and named it an "alternative choice" not a primary treatment. The draft recommendation was far less bullish than analysts were expecting and shares declined -46% to close at $10. FDA Recommendation

The news on EXAS and ILMN reminded investors that biotech stocks are risky investments and many cashed out rather than waiting for bad news in the Q3 earnings cycle. The ARCA Biotech Index ($BTK) was down more than 6% intraday. This was a major drag on the Nasdaq.

All eyes were focused on stock news because the economic news was minimal. The CoreLogic Home Prices for August showed a +6.9% rise over the same period in 2014 and that was the same level as July. The report was ignored.

The International Trade deficit for August rose from -$41.9 billion to -$48.3 billion and well over consensus estimates for -$45.3 billion. This was the biggest deficit since March's -$52.2 billion. Imports rose +$2.8 billion to $233.4 billion. Exports declined -$3.7 billion to $185.1 billion.

Food and beverage exports declined -2.5%. Industrial supply exports fell -5.9%. Automotive exports declined -3.8% and consumer goods fell -3.5%. The import numbers surged because of a +8.4% rise in consumer goods. Petroleum imports declined -6.7% to 280 million barrels. The trade deficit with China rose +14.6% from $28.7 billion to $32.9 billion. The strong dollar was blamed for the slowing exports. This report was also ignored.

The calendar for Wednesday is devoid of any market moving reports. The next hiccup could come from the FOMC minutes on Thursday.

The Dow started off with a gain after DuPont (DD) shares gained +$7 on news the CEO, Ella Kullman, will retire at the end of next week. Kullman had successfully fought off a challenge by activist investor Nelson Peltz back in May. It was a hard fought battle and investors eventually sided with Kullman. The fight caused the company to consider options for improving shareholder returns and they spun off The Chemours Company in May. DuPont is also on tract to reduce annual expenses by $1.3 billion by the end of 2016. Apparently the retirement is seen as an open door for Peltz or others to attack DuPont again in an effort to produce higher returns.

The $7 rally at the open added about 54 points to the Dow. The gain shrank to $4 at the close or roughly 30 Dow points.

Chevron (CVX) added another 23 points to the Dow with a $3 gain as oil prices exploded higher by +5%. Oil prices surged after the EIA said U.S. production declined -120,000 bpd in September. While that is old news for any Option Investor readers it was apparently news for some investors. Production is down from 9.61 million bpd in April to 9.096 million bpd last week. That is a decline of -516,000 bpd since April.

Also pushing prices higher was the increasing tensions in Syria. Turkey has repeatedly warned Russia about fighters intruding on Turkish airspace. Russian fighters have locked weapons radar on Turkish planes and remained in Turkish space for extended periods of time. Turkey is a member of NATO and NATO issued a stern ultimatum to Russia to stay away. Russia is claiming it has no MIG fighters in the area.

Russia is also claiming there are no Russian soldiers in Syria. However, Putin has said he would not prevent volunteers from traveling to Syria and aiding the Syrian government. This is similar to the Ukraine annexation. Putin always said it was army volunteers taking their vacation time to fight in Ukraine and Russia had not assigned any troops to the Ukraine. Of course, you have to wonder how those volunteers got permission to drive as many as 500 Russian tanks and artillery pieces to Ukraine. Hey, Vladimir, I am going on vacation for the next month and my car is in the shop. Can I drive one of your tanks? Can I also have ammo for target practice?Russian Aircraft in Turkey

This situation in Syria is rapidly accelerating to a conflict point. Russia also installed numerous radar jammer vehicles that jam radar and communications from US AWACs planes along with a large number of surface to air antiaircraft missiles. Since ISIS does not have aircraft, it is clear they are not to prevent ISIS from attacking Russian assets.

Oil prices will continue to rise as long as the Syrian situation continues to escalate.

After the bell, Adobe (ADBE) warned on full year revenue and earnings. The software company said full year revenue would be around $5.7 billion and earnings of $2.70 per share. Analysts were expecting $5.93 billion and $3.19 per share. Shares fell from the $85 close to a low of $74.30 before rebounding to cut the losses.

Yum Brands (YUM) fell -18% after reporting adjusted earnings of $1.00 compared to estimates for $1.07. Revenue of $3.43 billion also missed estimates for $3.68 billion. The company said the Chinese division was recovering slower than expected. Same store sales in China rose only +2% and well below the +9.6% rate analysts had expected. The company also said foreign exchange headwinds were worse than expected after China devalued the yuan. Shares of YUM declined from the $83.42 close to $68 in afterhours.

Nuskin (NUS) warned that Q3 revenue would be in range of $570-$573 million due to the strong dollar and slowing sales in China. Analysts were expecting $622 million. The dollar alone is expected to reduce full year revenue by $60 million. Earnings will be released on November 5th. Shares collapsed from the $46.57 close to $40 in afterhours.

PepsiCo (PEP) reported earnings of $1.35 that beat estimates by nine cents. Revenue declined from $17.22 billion to $16.33 billion due mostly to foreign currency translation. The company took a $1.9 billion charge for operations in Venezuela. The company is rapidly failing and hyperinflation is rampant. The country has instigated capital controls that prevent money from leaving Venezuela and this is impacting operations. If you cannot buy raw materials from outside the country and the price of your products is fixed at below your cost it is very hard to conduct business.

In the U.S., the company is expending profits by reducing package sizes. The traditional 10-ounce bag of potato chips is now 8 ounces. However, non-carbonated drink sales rose +10% while carbonated beverage sales declined -1.9%. Regular carbonated beverages declined -1% while diet beverages declined -6.5%.

Monsanto is the heavyweight announcing earnings on Wednesday. Acuity Brands (AYI), Constellation Brands (STZ) and Global Payments (GPN) round out the rest of the notables.

Team Inc (TISI) warned on revenue guidance for the current quarter. The company cut its forecast from $1.1 billion to $1.05 billion but earnings of $2.15 will remain the same. Analysts were expecting $2.15 and $1.08 billion. Shares declined -3% on the news.

Allegheny Technologies (ATI) warned it now expects a Q3 loss of 27-32 cents per share. Consensus estimates were for a 17-cent loss. The announcement came after the close and shares did not move.

O2Micro (OIIM) warned that revenue for Q3 would be in the range of $13.5-$13.8 million, down from guidance of $15.0-$16.2 million. Analysts were expecting $15.8 million. Shares fell -14% on the news.

Infinity Pharmaceuticals (INFI) cut revenue guidance from $105-$125 million to $100-$120 million. Analysts were expecting $130 million. Shares fell -9% on the news.

Quantum (QTM) warned that revenue for Q3 would be in the range of $116-$118 million compared to prior guidance in July of $120-$130 million. Shares declined -5% on the news.

Brinks (BCO) cut earnings guidance from $1.55-$1.75 to $1.40-$1.50 and blamed it on the weak economy in Brazil and the strong dollar. Revenue for 2016 is now expected to be $3.0 billion, down from prior guidance of $3.4 billion. Shares declined sharply at the open but recovered to end the day down only -1.2%.

Tesla (TSLA) shares declined -4.69 to $241 after Morgan Stanley cut their price target from $465 to $450. Yes, you read that correctly. They cut a price target that is nearly twice the current share price by only $15. Clearly, it was a publicity move rather than an actual downgrade. The average price target on Tesla is $288.

The analysts said Tesla's Model X was priced too high at $132,000 and they thought that would limit sales in 2016 to 20,000 units. Tesla said the current "Signature" models are fully priced because of the luxury trim and they would be rolling out some less expensive models in the coming months. Analysts claim the price is $10-$15,000 higher than expected and could cause some sticker shock. I believe anyone that was ready to write a check for $120,000 is probably not going to be deterred by an extra $12,000 because the trim is more luxurious than they expected.

The analysts cut their delivery estimates for the Model X in 2015 from just over 3,000 to 1,500 and down from 25,000 in 2016 to 20,000. Tesla delivered 2,400 cars in 2012 and another 22,480 in 2013. In 2014, they raised production to 31,800 and they are expected to deliver over 50,000 this year. Estimates for 2016 are for 80,000 cars.

Elon Musk said the debut of the Model X has caused a spike in orders for both the X and the S models. At last count, there were 32,000 Model X orders with $5,000 deposits. If Tesla is going to fall short on deliveries in 2016, it will be because of manufacturing problems rather than weak sales.

Disney (DIS) raised ticket prices again. The season passes are now over $1,000 and have blackout dates for busy periods. A new pass for $1,049 offers year-round access but has limited extra benefits. Another pass costs $849 with two weeks of blackout dates during the winter holidays. Individual single day passes are now $99, up from $50 ten years ago. Disney said the number of people that hold passes has risen +250% since 2001. Disney shares were flat for the day.


I was actually somewhat encouraged by the lack of a broad market crash today after the big gains on Monday. The S&P halted right at resistance at 1,990 on Monday and closed at 1,979 today. The various earnings disasters after the close only knocked the futures down about -5 points and they are recovering as I write this.

Given the dramatic moves in the biotech sector today we could have easily seen a material decline in the S&P. Instead, there was only a sharp decline at the open and then some cautious buying as the day progressed. It could have been a lot worse.

The S&P has not yet ventured into the strong band of resistance but it is close enough for a serious attack if buyers were to appear. Support appeared at 1,973 from yesterday morning and again today. That would be the initial line in the sand if we were to head lower. After Monday's huge spike on short covering, it could be a big drop if that initial support fails. The 1,900 level would be the next material support and that is a long way down.

The Dow was saved from negative territory by Du Pont and Chevron. Even Caterpillar got into the act with a $1.65 gain. Those three stocks accounted for 65 Dow points and the Dow closed up only +14.

The Dow punched through resistance at 16,666 on Monday and came to a stop at 16,750. That resistance held today despite the gains from those three stocks outlined above. A decent break above that level could attract some price chasing and additional short covering.

It was a miracle the Nasdaq did not decline more than 33 points. If you look at the size of the losses on the losers list below compared to the size of the gainers it is a serious mismatch. The majority of the losers were biotechs but there were a few odd stocks in the mix for variety.

The Nasdaq has resistance at 4,785 and 4,835. Support is well below at 4,700 and 4,565. The biotech implosion may not be over. The constant barrage of negative headlines is convincing investors that maybe the biotech bubble has finally burst for good. That could weigh on any attempted Nasdaq rebound this week.

The Russell 2000 ran into unexpected resistance at 1,140 and the biotech weakness turned into a major drag. The Russell declined almost exactly the same amount as the Nasdaq at -0.68% so there is nothing we can derive from its performance. It was not stronger or weaker and therefore not a signal.

The Dow Transports declined as expected given the big spike in oil prices. The 100-day average on the transports is now strong resistance and without some positive economic reports and weakening in oil prices, the path of least resistance is definitely lower.

I am somewhat encouraged by the lack of a significant decline after the biotech implosion and mostly negative earnings. However, ships can still sink in a calm sea. Futures are still down -5 at 8:PM ET but showing no signs of deterioration.

I would continue to be calm about adding new long positions until the resistance on the S&P has been broken or we return to the lows for another retest.

Sometimes the best trade is the one you do not make.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Healthcare Stocks Look Sick

by James Brown

Click here to email James Brown


The Cooper Companies Inc. - COO - close: 144.71 change: -3.47

Stop Loss: 150.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 469 thousand
Entry on October -- at $---.--
Listed on October 06, 2015
Time Frame: Exit PRIOR to November options expiration
New Positions: Yes, see below

Company Description

Trade Description:
Healthcare stocks have been strong market performers for years. The group seems to be struggling with healthcare down -11% in the third quarter. Shares of COO are also underperforming the broader market. COO is down -10.7% year to date but it's down -23.4% from its 2015 highs. That means shares are in a bear market.

If you're not familiar with the company, here's a brief description: "The Cooper Companies, Inc. is a global medical device company publicly traded on the NYSE Euronext (COO). Cooper is dedicated to being A Quality of Life Company(TM) with a focus on delivering shareholder value. Cooper operates through two business units, CooperVision and CooperSurgical. CooperVision brings a refreshing perspective on vision care with a commitment to developing a wide range of high-quality products for contact lens wearers and providing focused practitioner support. CooperSurgical focuses on supplying women's health clinicians with market leading products and treatment options to improve the delivery of healthcare to women. Headquartered in Pleasanton, CA, Cooper has close to 10,000 employees with products sold in over 100 countries."

Earnings results have been mixed but there has been one constant over the last three quarters. COO has missed Wall Street's revenue estimate the last three quarters in a row. Plus, COO management has lowered their revenue guidance three quarters in a row.

The company's most recent earnings report was its Q3 results, announced on September 3rd. Earnings were $1.97 per share. That beat estimates by two cents but represents a -2% drop from a year ago. Revenues were down -6.8% to $461.7 million.

Shares of COO plunged on its revenue miss and lowered revenue guidance. The oversold bounce in September has failed. Now shares are poised to breakdown down to new 2015 lows and could begin its next major leg lower. The stock found support near $142.00 last month. Tonight we are suggesting a trigger to buy puts at $141.75. Plan on exiting prior to November options expiration. Investors may want to limit their position size to reduce risk because COO's option spreads are a little bit wide.

Trigger @ $141.75

- Suggested Positions -

Buy the NOV $140 PUT (COO151120P140) current ask $3.70
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 Snap 5-Day Winning Streak

by James Brown

Click here to email James Brown

Editor's Note:

Another rally in crude oil failed to help the broader market on Tuesday. The S&P 500 index spent the day digesting gains. Tuesday's -0.35% loss ended the index's first five-day winning streak of the year.

Current Portfolio:

CALL Play Updates

Alkermes Plc - ALKS - close: 58.50 change: -1.27

Stop Loss: 54.25
Target(s): To Be Determined
Current Option Gain/Loss: -61.4%
Average Daily Volume = 1.0 million
Entry on October 05 at $61.17
Listed on October 03, 2015
Time Frame: Exit PRIOR to earnings in late October
New Positions: see below

10/06/15: Biotech stocks had another rough day on Tuesday. This short circuited the rally ALKS was likely to have due to the FDA announcement last night. Shares spiked to $61.59 and then plunged to an intraday low of $54.36 (a -11% drop) before paring its losses. ALKS closed down -2.1%.

I am not suggesting new positions at this time.

Trade Description: October 3, 2015:
The U.S. market delivered an impressive bounce the last few days. If this rebound continues the beaten-down biotech stocks could easily outperform. ALKS looks like a good candidate to capture the bounce.

ALKS is in the healthcare sector. According to the company, "Alkermes plc is a fully integrated, global biopharmaceutical company developing innovative medicines for the treatment of central nervous system (CNS) diseases. The company has a diversified commercial product portfolio and a substantial clinical pipeline of product candidates for chronic diseases that include schizophrenia, depression, addiction and multiple sclerosis. Headquartered in Dublin, Ireland, Alkermes plc has an R&D center in Waltham, Massachusetts; a research and manufacturing facility in Athlone, Ireland; and a manufacturing facility in Wilmington, Ohio."

The earnings picture for ALKS seems to be improving. Looking at the last few earnings reports ALKS has beaten Wall Street expectations on both the top and bottom line the last three quarters in a row. Their most recent report, on July 30th, was follow up with management raising their 2015 guidance above analysts estimates.

While the earnings picture is supportive for a bullish bias, today's trade is more of a technical one. The biotechs have been crushed lately (Thanks, Hillary Clinton!) and shares of ALKS plunged from resistance near $73.00 to support near $54.00. Now it's starting to rebound. This is not the first time ALKS has bounced from this area.

Tonight we are suggesting a trigger to buy calls at $60.75. Our target is $71.50. Plan on exiting prior to ALKS' earnings report in late October. Please note that I consider this a more aggressive trade because the option spreads on ALKS' November options are a little bit wide (and because ALKS is a biotech stock and biotech stocks tend to be more volatile anyway but regular readers already know that).

- Suggested Positions -

Long NOV $65 CALL (ALKS151120C65) entry $3.50

10/06/15 a very volatile day with ALKS down -11% from its intraday highs. Shares close down -2%.
10/05/15 triggered on gap open at $61.17, suggested entry was $60.75
Option Format: symbol-year-month-day-call-strike

Costco Wholesale Corp. - COST - close: 148.41 change: +0.34

Stop Loss: 141.85
Target(s): To Be Determined
Current Option Gain/Loss: +42.5%
Average Daily Volume = 1.9 million
Entry on October 05 at $146.25
Listed on October 03, 2015
Time Frame: Exit PRIOR to November option expiration
New Positions: see below

10/06/15: The rally in COST continued on Tuesday although shares spent most of the day churning sideways. Shares eked out a +0.22% advance while most of the market slipped into negative territory.

If the stock market dips again tomorrow it could weigh on COST and a dip near $147.00 could be used as a new entry point.

Trade Description: October 3, 2015:
Thus far 2015 has been a frustrating year for COST bulls. After years of steady stock price appreciation (2009-2014) the rally peaked in the first quarter of 2015. Shares spent months correcting lower but it looks like the worst may be behind it for COST.

If you're not familiar with COST they are in the services sector. The company runs a membership warehouse business that competes with the likes of Sam's Club (a division of Wal-Mart). According to the company, "Costco currently operates 686 warehouses, including 480 in the United States and Puerto Rico, 89 in Canada, 36 in Mexico, 27 in the United Kingdom, 23 in Japan, 12 in Korea, 11 in Taiwan, seven in Australia and one in Spain. The Company plans to open up to an additional 16 new warehouses (including one relocation to a larger and better-located facility) prior to the end of its fiscal year on August 30, 2015. Costco also operates electronic commerce web sites in the U.S., Canada, the United Kingdom and Mexico."

Revenue growth has been lackluster this year. COST has managed to beat Wall Street estimates on the bottom line but the revenue number has been soft. Their most recent quarterly report was announced on September 29th. Earnings were up +10% from a year ago to $1.73 a share. That beat estimates. Yet COST said their Q4 revenues were virtually flat (+0.7%) to $35.78 billion. That missed expectations. Comparable store sales were up +2% in the U.S. but down -10% in Canada.

A lot of COST's revenue troubles have come from lower oil, which has pushed gas prices lower. The big drop in gas prices cuts their revenue growth. Plus the stronger dollar hurts their foreign sales. The company continues to expand its presence in the U.S. and overseas. Management plans to launch 12 new warehouses this quarter. Overall COST plans to build 32 new stores in the next 12 months, including its first store in France.

The stock looks poised to breakout past its July, August, and September highs and make a run at its 2015 highs. We suspect COST is going to grab more investor attention as we approach the holiday shopping season. The stock tends to see a rally from September into Black Friday (the day after Thanksgiving).

Tonight we are suggesting a trigger to buy calls at $146.25. More conservative traders may want to wait for a rally past the September peak ($146.90) or even past short-term resistance $147.00. We want to jump in a little early as COST could surge wants it clears $147.00.

- Suggested Positions -

Long NOV $150 CALL (COST151120C150) entry $2.00

10/05/15 triggered @ $146.25
Option Format: symbol-year-month-day-call-strike

The Home Depot, Inc. - HD - close: 118.68 change: -0.52

Stop Loss: 114.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 5.3 million
Entry on October -- at $---.--
Listed on October 05, 2015
Time Frame: Exit PRIOR to earnings on November 17th
New Positions: Yes, see below

10/06/15: It was a very quiet session for HD. The stock traded sideways in a $1.25 range. Shares found short-term support near the $118.00 mark. We are suggesting a trigger to buy calls at $120.25.

Trade Description: October 5, 2015:
Home Depot's stock has outperformed the broader market in spite of the fact shares have been stuck in a trading range for the last seven months. That could be about to change.

The big surge in the U.S. housing market this year has been a bullish tailwind for HD's business. The home remodeling and repair industry and consumer spending in this category is expected to hit levels not seen since before the "Great Recession" in 2008-2009. HD is poised to reap the benefits.

HD is in the services sector. According to the company, "The Home Depot is the world's largest home improvement specialty retailer, with 2,270 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico. In fiscal 2014, The Home Depot had sales of $83.2 billion and earnings of $6.3 billion. The Company employs more than 370,000 associates. The Home Depot's stock is traded on the New York Stock Exchange (HD) and is included in the Dow Jones industrial average and Standard & Poor's 500 index."

HD has been showing steady earnings and revenue growth. The company has beaten Wall Street estimates on both the top and bottom line the last three quarters in a row. Management has also raised their guidance the last three quarters in a row.

Their most recent report was August 18th. HD announced its Q2 earnings were up +14% from a year ago to $1.71 per share. Revenues were up +4.3% to $24.83 billion. Comparable store sales came in better than expected with a +4.2% improvement.

Wall Street analysts seem bullish with firms like Deutsche Bank and UBS recently raising their price targets on HD. Currently the point & figure chart is bearish but a rally past $120.00 would generate a brand new buy signal.

Earlier I mentioned that HD has been stuck in a long trading range or consolidation for most of 2015. With the exception of a few days, shares of HD have been churning sideways in the $110-120 range. Today HD looks poised to breakout from this channel. The $120.00 level is round-number resistance. Tonight we are suggesting a trigger to buy calls at $120.25. Plan on exiting prior to HD's earnings report in mid November.

Trigger @ $120.25

- Suggested Positions -

Buy the NOV $125 CALL (HD151120C125)

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

PUT Play Updates

Currently we do not have any active put trades.