Option Investor

Daily Newsletter, Tuesday, 10/27/2015

Table of Contents

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

Market Wrap

Earnings Excitement Fading

by Jim Brown

Click here to email Jim Brown

The excitement over earnings appears to be fading after several high profile companies disappointed. Even a sudden burst of merger mania could not lift the indexes back into positive territory ahead of Apple earnings.

Market Statistics

The morning started negative after UPS reported earnings that beat estimates but missed on revenue and said negative things about the U.S. economy. UPS reported earnings of $1.39 compared to estimates for $1.37. Revenue of $14.24 billion declined -0.4% and missed estimates for $14.41 billion. The company said full year earnings could be at the higher end of estimates from $5.05 to $5.30 per share. That would be a 6-12% increase over 2014. They will hire 95,000 temporary workers for the holiday season.

That would seem like a bullish report but the company said the U.S. economy had been "soft" over the last quarter and the strong dollar was impacting revenue. UPS said revenue would have been 1.8% higher without the dollar impact. UPS has had two consecutive fourth quarters that disappointed investors. The company said holiday shipments would rise 6-12% but FedEx said shipments would rise 12.4%. Using the midpoint on the UPS estimate suggests UPS growth is lagging FedEx. Shares were down -3% on the news.

JetBlue Airways (JBLU) warned it would make less money per mile in October than it did in 2014. The company said it expected to earn $80 million from bag fees, up from $65 million. However, passenger unit revenue will decline -2% in October before improving later in the year. JetBlue sees capacity rising 8.5% to 10.5% in Q4. The warning sparked fears of excess capacity in the sector. Shares fell -9% at the open on the profit warning but recovered to end down -3%.

Spirit Airlines (SAVE) added to the gloom when it warned of a "volatile pricing environment." Spirit posted earnings of $1.35 that beat estimates by 3 cents. Revenue rose +10.6% to $574.8 million and beating estimates for $571.8 million. Despite the good earnings, shares fell 9% on the pricing warning.

Helping to cause the volatile pricing environment was the announcement by American Airlines (AAL) that they would offer cheap airfares to match the discount carriers. American shares are breaking out of a four-month base on the news much to the dismay of the discount carriers.

The multiple hits to the transportation sector sent the Dow Transports ($TRAN) down -3% earlier in the day. With transports crashing it is hard to maintain a positive trend on the Dow Industrials. The comments from UPS about a soft U.S. economy and the rising capacity and volatile pricing in the airline sector knocked the transports to a three week low. Railroads were also weak with Union Pacific (UNP) dropping -5%, KSU -4.5% and CSX -4%. Even a decline in oil under $43 could not save the index.

The Dow crashed to a low of -80 intraday after IBM warned that they were being investigated by the SEC for revenue recognition for how it accounts for business transactions in the USA, UK and Ireland. The company said it learned of the investigation in August and they have been cooperating with the SEC on the matter. However, you have to wonder why they did not disclose the investigation when they reported earnings earlier this month. The investigation was already two-months old when they reported. Why wait until now? IBM shares fell -$6 on the news.

The economic reports did not start the morning off in a good mood. The Durable Goods report for September showed a decline of -1.2% after a -3.0% decline in August. There was a bit of good news. That -3.0% was revised higher to only -2.0% but that was a small consolation. Nondefense orders declined a whopping -7.6% suggesting the weakness was widespread. Backorders declined -0.6% suggesting October will also be weak.

Consumer Confidence for October declined from 102.6 to 97.6. Consumers are starting to worry about the economy after two months of declining jobs. The present conditions component declined from 120.3 to 112.1 and the expectations component declined from 90.8 to 88.0. Those respondents that believe jobs are plentiful declined from 24.8% to 22.2%. Respondents that believe business conditions are good declined from 28.1% to 26.5%.

Buying plans were mixed. Those planning on buying a car declined from 13.1% to 10.6% but prospective homebuyers rose from 48.8% to 49.3%.

Confidence is still high relative to the last several years but well off the 104 high back in January.

The Richmond Fed Manufacturing Survey for October rose slightly from -5 to -1 but remains in contraction territory. Counting the zero reading in August this is the third month without any manufacturing growth. New orders rose from -12 to zero or flat with last month. Backorders rose from -24 to -7 and a definite improvement. Inventories rose from 21 to 25 suggesting sales are slowing. However, this is the pre-holiday period so this could be normal stockpiling.

The separate services survey rose from 10 to 18. The wage component declined from 20 to 14 but the employment index rose from 12 to 17. Expected retail demand declined from 33 to 10 and that cannot be good ahead of the holidays. Retail employment rose from -19 to -12 suggesting employers are cautious on adding extra help for the holidays.

The calendar for Wednesday has only one important event and that is the FOMC announcement. While most analysts are now projecting hikes in 2016 there are still a few that believe December is a possibility. It will be interesting to see if the Fed leaves the "appropriate to hike in 2015" language in the statement.

The estimates for the Q3-GDP on Thursday ticked lower on the Atlanta Fed forecast to +0.8% growth. What the government bean counters say on Thursday could be materially different since they recently changed the way they calculate the number in order to "smooth" out the volatility. That means they do not like to see negative numbers so they are modifying their seasonal adjustments to average out the results. This report could be a market mover.

After the bell Apple reported earnings of $1.96 that rose +38% and beat estimates for $1.88. Revenue of $51.50 billion rose +22% and beat estimates for $51.11 billion. The beat came even after an -8% revenue hit on the strong dollar. Cash on hand rose +33% from the comparison quarter to $206 billion.

iPhone sales were 48.04 million compared to estimates for 48.6 million and 39.3 million in the Q3-2014 quarter. iPad sales were 9.88 million compared to estimates for 10.5 million and sales of 12.3 million in the year ago quarter. Mac sales rose +3% to 5.71 million but still the slowest growth rate since Q3-2013. However, that was the most Macs ever sold in a quarter. More than 62.2% of Apple's revenue came from the iPhone.

NOTE: The September quarter only had 2 business days when the 6s models were available for sale.

Apple did not disclose sales of the Watch. The "other products" segment, which includes the Watch, rose +61% to $3.04 billion.

Apple guided for revenue of $75.5-$77.5 billion in Q4 compared to analyst estimates for $77 billion. Since Apple usually guides low that suggests the possibility of an $80 billion quarter in Q4. Tim Cook said Apple's sales to businesses rose 40% this year to $25 billion. Cook said businesses/enterprises were a "major growth vector" for Apple. Chinese revenue doubled from $6.29 billion to $12.52 billion. The iPhone has become a premium brand in China similar to Prada and that allows them to maintain their premium pricing. iPhone shipments to China rose +70%.

Analysts are forecasting sales of 78 million phones in the current quarter. That would be more than the 74.46 million sold in Q4-2014 despite this being an upgrade cycle rather than a new product cycle. Cook said he expected unit volume to grow this quarter so the forecasting will be volatile as the holidays progress. More than 70% of existing iPhones currently in use are model 5s or older. That gives Apple a very large upgrade base for the holidays.

Apple shares closed at $114.55 and traded in a range from $110.81 to $118.33 after the report before closing slightly lower at $114.26.

Twitter (TWTR) shares imploded after reporting earnings of 10 cents compared to estimates for 5 cents. Revenue rose +57.6% to $569.2 million compared to estimates for $559.4 million. The problem came in the guidance and the user growth. The company projected revenue of $695-$710 million compared to analyst estimates for $739.7 million. Twitter had 320 million active monthly users, up from 316 million but missing expectations for 324 million. User growth was the slowest since the company went public in 2013.

There were some positive factors. Advertisers exceeded 100,000 for the first time and Twitter began making money from logged out users, or those without accounts that visit the website. Revenue did rise +57.6% and that was totally ignored.

The weak guidance knocked TWTR shares for an 11% loss of -$4.19 in afterhours.

Alibaba (BABA) shares rallied +4% after reporting earnings of 57 cents that beat estimates for 54 cents. Revenue rose +32% but mobile revenue rose +182% and accounted for 62% of total revenue. Gross merchandise volume rose +28% to $112 billion. Apparently, Asian shoppers are addicted to online spending.

Earnings due out on Wednesday include Amgen, GoPro, and Anthem. Thursday is the next big day with Linkedin, Mastercard, Starbucks and MGM Resorts.

Rite Aid Corp (RAD) saw its shares spike +42% after news broke that Walgreens Boots Alliance (WBA) was close to a deal to acquire the chain. After the bell Walgreens announced it would acquire RAD for $17.2 billion or $9 in cash.

Competing shares of CVS rose +2% on the expectations for WBA/RAD to be forced to divest some stores in order to get it approved by regulators. Walgreens has 13,200 stores and Rite Aid more than 5,000.

Express Scripts (ESRX) shares fell -$1.50 because they had always been expected to be an acquirer of Rite Aid.

McKesson (MCK) shares fell -4% because they have a pharmacy distribution deal with Rite Aid. Amerisource Bergen (ABC) shares rallied because they have a similar deal with Walgreens and that would probably be extended to the Rite Aid stores after the acquisition.

Fairchild Semiconductor was up +5% intraday on rumors they were in talks to be acquired by STMicroelectronics (STM). There were no confirmations and shares faded into the close.

GM shares declined slightly on news of a 1.4 million-vehicle recall. This is the second time for the same problem for some of these cars made between 1997-2004.

Ford (F) declined -5% after reporting earnings of 45 cents that missed estimates by a penny. The company cautioned that year-end sales promotions could cut into profit margins in the current quarter. Ford is launching a "Friends and Neighbors" discount program next week to boost sales in Q4.

Crude prices fell to $42.58 intraday and a two-month low but rebounded on the normal Tuesday afternoon short covering ahead of the inventory reports. The drop in crude prices caused a -3% decline in the production sector. This will continue to push gasoline prices lower, which are currently $2.19 but many states already have prices under $2.

Natural gas prices dipped under $2 to $1.95 intraday before rebounding to $2.09. Natural gas in storage has risen to 3,814 Bcf and will likely exceed 4,000 Bcf (4 Tcf) in the coming weeks. That will be a new record. Inventories are +434 Bcf over year ago levels. Gas prices are flirting with a decade low under $2. The decline in active rigs has not slowed the amount of gas being produced and projections for mild weather in the Northeast over the next month means continued weak demand.


Despite the fear over Apple earnings and tomorrow's Fed announcement, the markets held up relatively well. The Nasdaq 100 ($NDX) is only 40 points away from a new high. I would never have expected to say that just a couple weeks ago. The big cap tech stocks are leading the market higher thanks to aggressive window dressing by fund managers. Every fund manager wants to show those stocks in their portfolio when their fiscal year ends on Friday.

With Apple earnings out of the way with no apparent disaster this should allow funds to make their final buys of the week on Wednesday, assuming the Fed does not muddy the waters.

The biotech sector helped lift the Nasdaq with a +3.5% gain for the day. The winners and sinners list is heavily populated with biotech winners.

The Nasdaq Composite is lagging the Nasdaq big caps but still holding its gains at 5,030 and well above support at 5,008.

The S&P-500 is struggling somewhat thanks to the big drop in IBM -6, PCLN -11, CMI -10, AKAM -10, MCK -8 and UNP -5. Resistance at 2,075 has held for two days and we closed under light support at 2,068 today.

This appears to be simply consolidation after three weeks of big gains. This was helped by the losses above and the dozens of post earnings declines. The lack of a material bout of profit taking suggests fund managers are still involved. Unfortunately, they are not buying the small caps and that is still troubling.

The Dow was helped by UnitedHealth (UNH) and Boeing (BA) but their gains were offset by the losses in IBM. Pfizer and Merck were both fractionally positive after earnings and that help could be missing tomorrow.

As long as the Dow remains over 17,500 the rally will remain healthy. Should we fall under that level it could produce some selling that knocks us back to 17,000. We do not want to go there so keep your fingers cross the Fed announcement is neutral.

The Russell 2000 small caps lost -1.22% of -14 points to close at 1,141 and well under resistance at 1,165 and prior support at 1,150. This is not a good sign with major resistance having held and the index only 10 points from a four week low.

For whatever reason the small caps are being kicked to the curb in favor of the large cap tech stocks and that suggests fund managers are looking for liquidity in hopes of a quick exit if the market weakens.

Futures are flat in the overnight session and Apple has given investors no reason to run to the sidelines. They may not have given them a reason to jump into Apple shares as well but that could change once the analysts start revising their forecasts.

If you bought the dip this week I would tighten your stop losses and hope that Wednesday is positive and the Fed is neutral. I would not chase any prices higher after today. Keep what you are holding and look for window dressing to fade late in the week. I could be completely wrong but that is my bias and I am sticking with it.

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

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Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Relative Strength In Auto Parts

by James Brown

Click here to email James Brown


Lear Corp. - LEA - close: 122.53 change: +2.40

Stop Loss: 117.80
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 951 thousand
Entry on October -- at $---.--
Listed on October 27, 2015
Time Frame: Exit PRIOR to December option expiration
New Positions: Yes, see below

Company Description

Trade Description:
Shares of LEA experienced a correction this summer but the stock has come charging back. Year to day LEA is up +25% against the S&P 500, which is virtually flat with a +0.3% gain. The relative strength has been very evident in the last couple of months. The S&P 500 is up +10.6% from its August-correction lows. LEA is up +36% off its August intraday lows.

LEA is in the consumer goods sector. They are part of the auto parts industry. According to the company, "The Lear Corporation is a Fortune 500 company with world-class products designed, engineered and manufactured by a diverse team of talented employees. As a leading supplier of automotive seating and electrical, Lear serves its customers with global capabilities while maintaining individual commitment. With headquarters in Southfield, Michigan, Lear maintains 235 locations in 35 countries around the globe and employs approximately 135,000 employees. Lear is traded under the symbol [LEA] on the New York Stock Exchange."

The strong dollar has created negative currency headwinds for LEA but the company continues to beat on the bottom line. Their Q2 results, announced on July 24th, were better than expected with earnings of $2.82 per share. That was 34 cents above estimates. Management raised their full-year 2015 guidance.

The trend of better than expected earnings continued in the third quarter. LEA just announced their Q3 results a few days ago on October 23rd. Analysts were expecting a profit of $2.37 a share on revenues of $4.41 billion. LEA delivered a profit of $2.56 a share. That is a +33% jump from a year ago. Revenues were only up +2.3% to $4.33 billion. That missed expectations. However, if you discount negative currency headwinds, sales were up +11%. LEA management raised their 2015 outlook again.

These results were good enough to generate some bullish analyst comments on LEA and a new price target at $138.00. Coincidentally the point & figure chart is bullish and forecasting at $138 target. The current rally in LEA has produced a bullish breakout past major resistance in the $118.00 region, which should now become new support. More aggressive traders may want to buy calls now. We are suggesting a trigger to buy calls at $123.65, which would be a new all-time high.

Trigger @ $123.65

- Suggested Positions -

Buy the DEC $125 CALL (LEA151218C125) current ask $3.20
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

Another Quiet Session Ahead of Big Headlines

by James Brown

Click here to email James Brown

Editor's Note:

Stocks slowly drifted lower on Tuesday ahead of some major headlines. After the bell tonight was earnings from high-profile technology names like Apple (AAPL) and Twitter (TWTR). Meanwhile tomorrow brings the FOMC meeting decision and Thursday will bring the Q3 GDP estimate.

Prepare to exit our CVS trade tomorrow morning.

Current Portfolio:

CALL Play Updates

Salesforce.com, Inc. - CRM - close: 77.75 change: -0.47

Stop Loss: 74.75
Target(s): To Be Determined
Current Option Gain/Loss: +14.8%
Average Daily Volume = 3.6 million
Entry on October 12 at $76.25
Listed on October 07, 2015
Time Frame: Exit PRIOR to earnings in November
New Positions: see below

10/27/15: The broader market continued to drift lower on Tuesday and CRM continues to follow. Shares tested their simple 5 and 10-dma today. If this decline continues we could see CRM retesting what should be support in the $76.00 area.

I am not suggesting new positions at current levels.

Trade Description: October 7, 2015:
Cloud computing and software giant CRM has been churning sideways for almost seven months. In spite of this lack of upward movement CRM is still outperforming the broader market. The NASDAQ composite is up +1.2% year to date. CRM is up +26%. The good news is that CRM looks poised to breakout past major resistance and begin its next leg higher.

CRM is part of the technology sector. According to the company, "Salesforce is the world's #1 CRM company. Our industry-leading Customer Success Platform has become the world's leading enterprise cloud ecosystem. Industries and companies of all sizes can connect to their customers in a whole new way using the latest innovations in cloud, social, mobile and data science technologies with the Customer Success Platform."

CRM's revenues have been consistently growing in the mid +20% range the last few quarters. Their Q4 revenues were up +26%. Q1 revenues were +23%. The company's most recent quarter was announced August 20th. Analysts were expecting Q2 results of $0.17 a share on revenues of $1.6 billion. CRM beat both estimates with a profit of $0.19 as revenues grew +23.5% to $1.63 billion. Management raised their Q3 and full year 2016 revenue guidance.

Technically the stock is in a long-term up trend and the point & figure chart is forecasting an $85.00 target. The $75.00-76.00 area is major resistance with CRM failing in this region multiple times. The recent rally has boosted CRM back to this level and the stock looks poised to breakout soon.

(Side note - CRM did hit an intraday high of $78.46 on April 29th thanks to M&A rumors. The company is still considered a potential acquisition target by larger rivals.)

We like CRM's relative strength and consistently strong earnings and revenue growth. A breakout here could spark a run that lasts until the company's earnings report in November. Tonight we are suggesting a trigger to buy calls if CRM trades at $76.25 (or higher).

- Suggested Positions -

Long DEC $80 CALL (CRM151218C80) entry $3.05

10/17/15 new stop @ 74.75
10/12/15 triggered @ $76.25
Option Format: symbol-year-month-day-call-strike

CVS Health Corp. - CVS - close: 105.29 change: +1.82

Stop Loss: 99.40
Target(s): To Be Determined
Current Option Gain/Loss: +21.3%
Average Daily Volume = 4.7 million
Entry on October 13 at $103.75
Listed on October 12, 2015
Time Frame: Exit PRIOR to earnings on October 30th
New Positions: see below

10/27/15: There was big news in the drugstore industry today. Walgreens/Boots (WBA) is said to be in advanced talks to buy smaller rival Rite Aid (RAD). Shares of RAD soared +42.5% and WBA rallied +6.3%. Normally news like this could push competitor's stocks lower but today shares of CVS rallied +1.75%. Odds are any deal between WBA and RAD may including selling some locations to CVS to make it through anti-trust approval.

We were planning to exit our CVS trade tomorrow at the close. Tonight we are changing our time frame. We want to exit immediately tomorrow morning.

- Suggested Positions -

Long NOV $105 CALL (CVS151120C105) entry $2.07

10/27/15 Exit tomorrow morning!
10/24/15 prepare to exit by Wednesday.
10/13/15 triggered @ $103.75
Option Format: symbol-year-month-day-call-strike

The Walt Disney Company - DIS - close: 113.77 change: +0.25

Stop Loss: 109.25
Target(s): To Be Determined
Current Option Gain/Loss: +219.3%
Average Daily Volume = 9.9 million
Entry on October 12 at $106.50
Listed on October 10, 2015
Time Frame: Exit PRIOR to earnings on November 5th
New Positions: see below

10/27/15: DIS shrugged off the market's general malaise today as the stock continued to march higher. There is no change from my prior comments.

More conservative investors will want to seriously consider taking profits right now.

No new positions at this time.

Trade Description: October 10, 2015:
The Force is strong with this one. DIS is poised to reap a galaxy of profits as the company re-launches the Star Wars franchise.

DIS has been a big cap superstar with strong, steady gains off its 2011 lows. That changed in August this year. Shares of DIS plunged into a very sharp and painful correction. The catalyst for the drop was the company's earnings report. Disney reported earnings on August 4th and beat the street with earnings of $1.45 compared to estimates for $1.42. The very next day shares fell -$11.00 to $110. The sell-off accelerated in August thanks to the global market meltdown. Since then shares have recovered.

Disney posted $13.1 billion in revenue compared to estimates for $13.2 billion. That minor miss was not the reason for the huge decline in the stock. Disney said revenues in its cable products rose +5% BUT they had seen some pressure from online streaming. Subscription growth to the ESPN cable bundle had slowed, not declined, just slowed.

There are multiple reasons. There were no major sporting events this summer like the World Cup, Olympics, etc. Some consumers are cutting the cord to cable because they are now getting their TV programming from Netflix, Hulu, etc. Cable is expensive compared to the streaming options. The drop off in ESPN growth is not related specifically to Disney. CEO Bob Iger said subscriptions would pick back up in 2016 and expand sharply in 2017 thanks to a flood of sporting events due to come online next year.

Disney has already purchased the rights to nearly every sporting event available in the next five years but the old contracts with the prior rights holders have yet to expire. As those contracts expire and the new Disney contracts begin the content on ESPN will surge.

(sidenote - The advertising environment for television should also improve in 2016 thanks to the U.S. presidential election.)

This slowdown in ESPN growth should be ignored. This is just a small part of the Disney empire and everything else is growing like crazy. Parks and resorts revenue rose +4%. Consumer products revenue rose +6% thanks to Frozen, Avengers and Star Wars merchandise. The only weak spot was interactive gaming, which declined -$58 million to $208 million. Disney expects that to rebound in Q4 as new games are released and holiday shopping begins.

The real key here is the theme parks, cruises and most of all the movie franchises. They have five Star Wars movies in the pipeline and the one opening this December is expected to gross $2.2 billion and provide Disney with more than $1 billion in profits. This is just one of the blockbusters they have scheduled.

Analysts are claiming Disney shares could add 25% before the end of December because of their strong movie schedule and coming attractions. The Avengers movie in April was a hit and added greatly to their Q2 earnings. However, that will just be a drop in the bucket compared to the money they are going to make on the Star Wars reboot in December. That is the first of five Star Wars movies on the calendar. Remember, Disney now has Marvel, Pixar and Star Wars (Lucasfilm) all under the same roof.

Disney Movie Schedule (partial list)

Dec. 18, 2015 - "Star Wars: Episode VII - The Force Awakens"
2016 - "The Incredibles 2"
2016 - "Frozen" sequel
April 2016 - "Captain America: Civil War"
June 2016 - "Finding Dory"
Dec. 2016 - "Star Wars Anthology: Rogue One"
May 2017 - "Star Wars: Episode VIII"
June 2017 - "Toy Story 4"
Late 2017 - "Thor: Ragnarok"
May 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

Content is still king and DIS rules. They're going to make a hoard of money off their Star Wars movies but that's just the tip of the iceberg. There will be tons of money made on merchandising from toys, clothing, video games, and just about everything else under the sun they can slap a Star Wars logo on.

The stock's correction from $121 to $90 was abrupt. DIS quickly fell from correction territory to bear-market territory in just a few days. Fortunately DIS produced a pretty good rebound. Yet the oversold bounce stalled under resistance near $105 and its 200-dma.

The breakdown under round-number support at $100 in late September looked ugly but there was no follow through lower. Since the late September low shares have rallied and Friday, October 9th, saw DIS close above resistance at its 50-dma and above resistance at $105.00. Now it just needs to clear technical resistance at the 200-dma currently at $106.21. We are suggesting a trigger to buy calls at $106.50.

We will plan on exiting prior to DIS' earnings report in early November. More aggressive investors might want to hold over the report (if that's you I suggest considering the January 2016 calls).

- Suggested Positions -

Long NOV $110 CALL (DIS151120C110) entry $1.66

10/24/15 Less than two weeks to go on this trade
10/22/15 new stop @ 109.25
Investors may want to take some money off the table with our option up +200%
10/17/15 new stop @ 104.40
10/15/15 new stop @ 101.85
10/12/15 triggered @ $106.50
Option Format: symbol-year-month-day-call-strike

The Home Depot, Inc. - HD - close: 124.47 change: -0.54

Stop Loss: 121.75
Target(s): To Be Determined
Current Option Gain/Loss: +55.2%
Average Daily Volume = 5.3 million
Entry on October 08 at $120.25
Listed on October 05, 2015
Time Frame: Exit PRIOR to earnings on November 17th
New Positions: see below

10/27/15: Tuesday turned out to be another quiet day of trading for HD. The stock slowly drifted lower and spent much of the session hovering near the $124.00 level.

There is no change from my recent comments. More aggressive traders may want to keep their stop loss below the $120.00 mark for now.

No new positions at this time.

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.

- Suggested Positions -

Long NOV $125 CALL (HD151120C125) entry $1.43

10/22/15 new stop @ 121.75
10/10/15 new stop @ 117.45
10/08/15 triggered @ $120.25
Option Format: symbol-year-month-day-call-strike

iShares Russell 2000 ETF - IWM - close: 113.80 change: -1.26

Stop Loss: 113.35
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 36 million
Entry on October -- at $---.--
Listed on October 24, 2015
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

10/27/15: Small caps underperformed today with a -1.0% decline. The IWM is nearing the bottom of its recent $112.50-116.00 trading range.

We are on the sidelines and waiting for a breakout past resistance. Our suggested entry point is $116.55.

Trade Description: October 24, 2015:
If you haven't noticed the market is in rally mode. Worries over the Fed raising rates in 2015 are fading while the rest of the world is trying to add stimulus to their economies. Concerns over a terrible Q3 earnings season are also fading. Yes, earnings results have been bad but the bar was set low enough that companies are beating estimates. Now the U.S. market is surging.

One area of the market has lagged behind and that is the small cap stocks. The NASDAQ composite ended the week with a +6.3% gain for 2015. The S&P 500 edged back into positive territory with a +0.8% gain for the year. Yet the small cap Russell 2000 index is still down -3.2%. It's time for the small caps to play catch up with the rest of the market.

A couple of issues have driven this divergence. Right now big caps are outperforming because mutual fund and hedge fund managers are probably window dressing their portfolios for the end of their fiscal year (October 31st). Another factor has been weakness in the biotech stocks. Biotechs reversed sharply in the last three months and they have struggled to keep up with the market's rebound. Currently there are a lot of small biotech companies in the small cap index. Biotechs now account for about 7% of the Russell 2000 index. This group has definitely lagged the rest of the market over the last three weeks.

The good news is that the IWM small cap ETF, which tracks the Russell 2000 index, looks poised to breakout higher. It has been coiling below resistance in the $116 area the last several days. When it finally breaks higher it can move pretty quick.

Tonight we are suggesting a trigger to buy calls at $116.55. If triggered we will start with a stop loss at $113.35. This is a multi-week trade.

Trigger @ $116.55

- Suggested Positions -

Buy the 2016 JAN $120 CALL (IWM160115C120)

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

Pepsico, Inc. - PEP - close: 102.94 change: +0.40

Stop Loss: 94.75
Target(s): To Be Determined
Current Option Gain/Loss: +45.9%
Average Daily Volume = 5.0 million
Entry on October 22 at $101.00
Listed on October 19, 2015
Time Frame: Exit prior to expiration in January
New Positions: see below

10/27/15: PEP displayed some relative strength today. Traders bought the dip near $102 for the second day in a row. PEP then bounced to a +0.39% gain in spite of the market's relatively widespread decline.

Trade Description: October 19, 2015:
Soda sales remain the biggest chunk of non-alcoholic drinks. Unfortunately for big soda makers like PEP and KO trends are changing. Consumers are become more health conscious. Sugary soda drink sales have fallen ten years in a row. The good news is that more and more consumers are reaching for bottled water and other drinks perceived to be healthier than traditional colas. Bottled water sales are on pace to surpass soda as the beverage of choice for U.S. consumers soon. (FYI: PEP's bottled water brand is Aquafina)

PEP is a consumer goods giant with a global presence. According to the company, "PepsiCo products are enjoyed by consumers one billion times a day in more than 200 countries and territories around the world. PepsiCo generated more than $66 billion in net revenue in 2014, driven by a complementary food and beverage portfolio that includes Frito-Lay, Gatorade, Pepsi-Cola, Quaker and Tropicana. PepsiCo's product portfolio includes a wide range of enjoyable foods and beverages, including 22 brands that generate more than $1 billion each in estimated annual retail sales."

The stock has been stuck consolidating sideways in the $90-100 trading range for almost a year. It looks like that consolidation may be nearing its end.

Earnings have been better than expected. I looked at the last three quarters. PEP has managed to beat Wall Street's estimates on both the top and the bottom line. Revenues have declined year over year but that is due to negative foreign currency exchange rates that is shaving off about -10% from earnings and revenues. The company says their gross margins and operating margins continue to improve.

PEP's Q3 results showed a +7.4% jump in organic revenues. On a constant currency basis their operating profit was up +12%. Earnings were up +14% from a year ago and their core gross margins surged 120 basis points. They have raised their full year 2015 core constant currency EPS guidance twice this year. Thus far PEP has saved $1 billion in productivity savings and returned $9 billion to shareholders in 2015.

The U.S. market is up the last three weeks in a row but it's relatively flat for the year. Investors are confused with all the different global cross currents, exchange fluctuations, central bank moves, and more. Fund managers are probably tempted to park cash in a huge, liquid big cap like PEP and get paid 2.8% a year with dividends. Why not? PEP is still growing with solid single-digit growth.

Technically PEP looks poised to breakout past major resistance in the $100 area. The point & figure chart is already bullish and forecasting at $120.00 target. Tonight we are listing a trigger to buy calls at $101.00.

- Suggested Positions -

Long 2016 JAN $100 CALL (PEP160115C100) entry $2.81

10/22/15 triggered @ $101.00
Option Format: symbol-year-month-day-call-strike

Signet Jewelers Limited - SIG - close: 147.70 change: -0.08

Stop Loss: 144.15
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 889 thousand
Entry on October -- at $---.--
Listed on October 26, 2015
Time Frame: Exit PRIOR to earnings on November 24th
New Positions: Yes, see below

10/27/15: SIG closed virtually unchanged on the session after traders bought the dip intraday near $145.75. I do not see any changes from last night's new play description. Our suggested entry point is $150.75.

Trade Description: October 26, 2015:
The holiday shopping season is almost here. A lot of retailers launch their holiday sales push in the first week of November. Soon investors are going to be looking for a Santa Claus rally. SIG looks like a tempting candidate since it has a history of outperforming the S&P 500 during the fourth quarter.

SIG is in the services sector. According to the company, "Signet Jewelers Limited is the world's largest retailer of diamond jewelry. Signet operates approximately 3,600 stores primarily under the name brands of Kay Jewelers, Zales, Jared The Galleria Of Jewelry, H.Samuel, Ernest Jones, Peoples and Piercing Pagoda. Further information on Signet is available at www.signetjewelers.com. See also www.kay.com, www.zales.com, www.jared.com, www.hsamuel.co.uk, www.ernestjones.co.uk, www.peoplesjewellers.com and www.pagoda.com."

Kay, Zales, and Jared are the first, third, and fourth biggest brand names in the jewelry business. In spite of having such a dominant position SIG only has about 8% of the $74 billion U.S. jewelry market. That leaves plenty of room to grow.

The company is integrating its recent acquisition of Zales. The results have boosted sales. Their 2016 Q1 and Q2 results (announced in May and August) came in better than expected. Same-store sales have been healthy at more than +4%. They are also seeing strong growth in their online sales.

Wall Street seems positive on SIG. A Nomura analyst recently labeled SIG as one of their best multi-year growth stories in retail. The stock has been showing relative strength too. SIG is up +12% in 2015 versus an S&P 500 that is virtually flat for the year.

Technically shares have a bullish trend of higher lows and higher highs. The point & figure chart is bullish with a quadruple top breakout buy signal and a $187 price target. On a short-term basis SIG has resistance in the $150.00 area. The recent high was $150.65. Tonight we are suggesting a trigger to buy calls at $150.75.

Trigger @ $150.75

- Suggested Positions -

Buy the DEC $155 CALL (SIG151218C155)

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

Constellation Brands Inc. - STZ - close: 135.68 change: -0.32

Stop Loss: 133.20
Target(s): To Be Determined
Current Option Gain/Loss: -40.0%
Average Daily Volume = 1.29 million
Entry on October 23 at $138.38
Listed on October 22, 2015
Time Frame: Exit PRIOR to earnings in early January
New Positions: see below

10/27/15: STZ is still drifting lower although the stock found support near $135.00 again. I am still suggesting caution after Friday's performance. No new positions at this time.

Trade Description: October 22, 2015:
Major beer brands have suffered from the boom in craft beers. Yet STZ's Corona and Modelo have seen significant growth, especially in the U.S. The company's earnings and revenue growth has fueled a rally in the stock that has outpaced the major marker indices.

STZ is in the consumer goods sector. According to the company, "Constellation Brands (NYSE:STZ and STZ.B) is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world`s leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company`s premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky.

Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,200 talented employees."

STZ has been reporting strong earnings numbers. Back in January they reported their Q3 2015 numbers that beat estimates on both the top and bottom line numbers. STZ management raised their 2015 guidance. Their Q4 results were out on April 9th. Earnings were up +37% from a year ago. Gross margins improved. Their fiscal year 2015 sales were up +24%. Management guided 2016 earnings growth in the +12% to +17% range.

Their 2016 Q1 report came out in July. They managed to beat estimates again on both the top and bottom line. STZ management raised their guidance again. Their most recent earnings report was October 7th. STZ said their 2016 Q2 earnings were $1.56 a share. That was 24 cents better than expected. Revenues were up +7.8% to $1.73 billion, which was in-line with estimates. The company remains optimistic and raised their guidance yet again.

This strong track record of earnings growth has fueled a long-term rally in STZ. The stock is also outperforming the broader market. The S&P 500 index is flat for the year (-0.3%) while STZ is up +40% in 2015.

After a big rally off its late September lows (about $122 to almost $139) shares dipped to their 10-dma and bounced (around $133.25). The market's current rally has lifted STZ back toward its all-time highs. Tonight we are suggesting a trigger to buy calls at $138.25.

- Suggested Positions -

Long 2016 JAN $145 CALL (STZ160115C145) entry $2.50

10/23/15 triggered on gap open at $138.38, entry trigger was $138.25
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Cracker Barrel Old Country - CBRL - close: 140.93 change: -1.20

Stop Loss: 145.05
Target(s): To Be Determined
Current Option Gain/Loss: -43.8%
Average Daily Volume = 395 thousand
Entry on October 22 at $136.90
Listed on October 21, 2015
Time Frame: Exit PRIOR to earnings on Nov. 24th
New Positions: see below

10/27/15: Our bearish play on CBRL looks better today after the stock erased yesterday's bounce. A drop below today's intraday low ($139.61) could be used as a new bearish entry point.

Trade Description: October 21, 2015:
Some of the restaurant stocks are struggling. Disappointing consumer spending, slower foot traffic, and tougher comparisons are weighing on the group.

CBRL is in the services sector. According to the company, "Cracker Barrel Old Country Store restaurants provide a friendly home-away-from-home in its old country stores and restaurants. Guests are cared for like family while relaxing and enjoying real home-style food and shopping that's surprisingly unique, genuinely fun and reminiscent of America's country heritage...all at a fair price. Cracker Barrel Old Country Store, Inc. (Nasdaq:CBRL) was established in 1969 in Lebanon, Tenn. and operates 637 company-owned locations in 42 states."

Earnings have taken a turn for the worse with CBRL. Back in June this year CBRL delivered a very upbeat earnings report. Profit was $1.49 per share, which was 12 cents above estimates. Revenues were up +6.3% to $683.7 million, beating expectations. Comparable store sales were relatively healthy and management raised their guidance.

Fast-forward to September 16th and CBRL reported their fiscal Q4 results of $1.97 a share. That did beat estimates but revenue growth slowed down to +3.8% to $719 million, which missed estimates. Comparable store sales slowed down to +0.6%. Management lowered their fiscal 2016 Q1 guidance.

Technically CBRL has developed a bearish trend of lower highs and now lower lows. This past week has seen the oversold bounce fail at resistance near its 200-dma. The point & figure chart is bearish and forecasting at $124.00 target.

I'm a little bit worried about the elevated short interest. The most recent data listed short interest at 22% of the small 19.0 million share float. That could make CBRL more volatile than normal but the shorts are probably right on this one, at least for a little while.

Tonight we are suggesting a trigger to launch bearish positions at $136.90. We are not setting an exit target tonight but the $130.00 and $120.00 levels are potential support (and thus possible bearish targets).

- Suggested Positions -

Long DEC $130 PUT (CBRL151218P130) entry $3.20

10/22/15 triggered @ $136.90
Option Format: symbol-year-month-day-call-strike

Darden Restaurants - DRI - close: 63.22 change: -1.49

Stop Loss: 66.30
Target(s): To Be Determined
Current Option Gain/Loss: -16.3%
Average Daily Volume = 1.7 million
Entry on October 21 at $63.40
Listed on October 20, 2015
Time Frame: Exit PRIOR to earnings in December
New Positions: see below

10/27/15: Restaurant stocks were underperforming the market again and DRI fell -2.3% on Tuesday. Shares look poised to challenge their recent lows in the $62.50 region soon.

Trade Description: October 20, 2015:
Consumer spending has been disappointing and some of the restaurant names are suffering for it. DRI has actually raised guidance two quarters in a row but investors are ignoring this news and seem to be focusing on the larger macro trends for the industry.

DRI is in the services sector. According to the company, "Darden Restaurants, Inc., (DRI) owns and operates more than 1,500 restaurants that generate $6.8 billion in annual sales. Headquartered in Orlando, Florida, and employing 150,000 people, Darden is recognized for a culture that rewards caring for and responding to people. Our restaurant brands - Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's and Yard House - reflect the rich diversity of those who dine with us. Our brands are built on deep insights into what our guests want."

DRI reported their Q4 report on June 23rd. They beat Wall Street's EPS estimate and raised their 2016 guidance. Shares popped on the news and the stock continued to rally into late summer. Unfortunately shares produced a bearish double-top pattern in the July-August time frame. DRI began to correct lower.

The company reported its 2016 Q1 results on September 22nd. Earnings of $0.68 per share beat estimates by 10 cents. Revenues were up +5.7% to $1.69 billion, which was above estimates. Same-store sales were up +3.4% for the quarter. Management raised their 2016 earnings guidance again. This looked like a pretty good report. Yet three days later investors sold the rally.

Nationwide the pace of consumer spending has been lower than expected. A few days ago an industry research firm said U.S. restaurant sales were up +1.5% in Q3 but that was slower than Q2's +1.8% growth. A higher tab helped offset slower traffic numbers. The outlook for traffic is worrisome. This firm expects restaurant traffic numbers to be stagnant. This is inline with another research note that expects foot traffic at retailers to fall -8% this holiday season.

The market used to think that consumers would take the money they saved from lower gasoline prices and spend it elsewhere. That doesn't seem to be happening. Now the restaurant industry is facing tough comparisons to last year's relatively healthy Q4 numbers.

Technically DRI is now in a bearish trend of lower highs and lower lows. Shares have broken down below their 200-dma. The oversold bounce just failed at resistance near $66.00. The point & figure chart is bearish and forecasting at $55.00 target. Tonight we are suggesting a trigger to buy puts if DRI trades down to $63.40. This is a multi-week trade. We will plan on exiting prior to earnings in December.

- Suggested Positions -

Long 2016 JAN $60 PUT (DRI160115P60) entry $2.15

10/21/15 triggered @ $63.40
Option Format: symbol-year-month-day-call-strike

Nordstrom Inc. - JWN - close: 64.58 change: -0.65

Stop Loss: 70.05
Target(s): To Be Determined
Current Option Gain/Loss: +114.2%
Average Daily Volume = 1.4 million
Entry on October 15 at $66.40
Listed on October 14, 2015
Time Frame: Exit PRIOR to earnings on November 12
New Positions: see below

10/27/15: Today's performance in JWN was encouraging. Shares did not see any follow through on yesterday's bounce. Instead JWN underperformed the market with a -0.99% decline. My only complaint is how JWN rebounded when it tested yesterday's intraday low (near $63.73).

No new positions at this time.

Trade Description: October 14, 2015:
Normally Q4 is the time investors think about buying retail-related stocks in anticipation of a strong holiday shopping season. This year the retailers' Q4 is off to a weak start.

JWN is in the services sector. According to the company, "Nordstrom, Inc. is a leading fashion specialty retailer based in the U.S. Founded in 1901 as a shoe store in Seattle, today Nordstrom operates 316 stores in 39 states, including 120 full-line stores in the United States, Canada and Puerto Rico; 188 Nordstrom Rack stores; two Jeffrey boutiques; and one clearance store. Additionally, customers are served online through Nordstrom.com, Nordstromrack.com and HauteLook. The company also owns Trunk Club, a personalized clothing service serving customers online at TrunkClub.com and its five clubhouses. Nordstrom, Inc.'s common stock is publicly traded on the NYSE under the symbol JWN."

JWN's earnings results have struggled this past year. Last November they beat estimates by a penny but guided lower. When JWN reported earnings in February 2015 they missed expectations and guided lower the second quarter in a row. In May this year they missed estimates again. Their most recent earnings report was August 13th. JWN beat Wall Street estimates by three cents with a profit of $0.93 a share. Revenues were up +9% to $3.6 billion, slightly above estimates. Management actually raised their 2016 guidance. The stock popped higher on the earnings beat and bullish guidance. Unfortunately the rally did not last.

Shares of JWN reversed and formed a bearish double top. Since then investors have continued to sell the rallies. The big drop on October 7th was an adjustment for JWN's special cash dividend of $4.85. There has been virtually no bounce.

Today JWN underperformed as the market reacted to Wal-Mart's earnings warning. Suddenly investors are concerned that consumer spending this holiday season may be weaker than expected. That doesn't bode well for JWN. The trend is already down and the point & figure chart is forecasting at $58.00 target.

Shares readers could argue there is potential support near the $65.00 level but we think JWN is headed a lot lower and could drop toward round-number support at $60.00. Tonight we are suggesting a trigger to buy puts at $66.40. Prepare to exit prior to JWN's earnings report in November.

- Suggested Positions -

Long NOV $65.15* PUT (JWN151120P65.15) entry $1.13

10/15/15 triggered @ $66.40
*NOTE: The odd option strike is due to JWN's special cash dividend of $4.85 per share. The ex-distribution date was Wednesday, October 7, 2015. The option market adjusted all the prior option strikes down -4.85.

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