Option Investor

Daily Newsletter, Wednesday, 11/4/2015

Table of Contents

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

Market Wrap

Taking A Breather

by Thomas Hughes

Click here to email Thomas Hughes
The bulls took a break today which may be a good thing, two days ahead of the NFP. The ADP jobs number was OK and December rate hikes are on the table.


The market took a breather today, retreating from recently set 3 month highs. This may be a good thing as it will allow the market to consolidate, if only for a day or two, and could lead to new all-time highs later this week. We're all waiting on the NFP number which seems for now to be deciding data point for yes-or-no on the rate hike in the absence of rising inflation; the release could be the trigger that sends the market higher, or spark correction. Today's ADP report indicates jobs creation was steady last month, if the same is true for the NFP then December rate hike expectation could become more firmly entrenched in the mind of the market.

International markets were mixed. Asian indices were cheered by the rally we had yesterday, European indices were weighed down by the widening VW scandal. The mainland Shang Hai index led in Asia with gains near 4.25%. In Europe indices were mostly flat on the day save for the DAX which fell a little more than -0.8%. This, along with early morning data and earnings releases helped to keep US futures trading in the green. Indicated gains were small, only 2-3 points for the SPX, but this strengthened a little after the data and going into the opening bell.

Market Statistics

Bulls were present at the open and pushed the indices higher for gains near 0.25% right out of the gates. These gains did not last, sellers quickly outpaced buyers sending the indices back to break even levels and below. Selling was not wild, there was no rush to get out of the market, merely an orderly drift lower down toward near term support levels. By early afternoon the SPX was down a little over -0.5%, about 12 points, but that proved to be the low of the day. From then on the market bobbed along support levels until the close of the day.

Economic Calendar

The Economy

Economic data started rolling out pretty early today. Mortgage applications started it off at 7AM. Mortgage applications fell last week by -0.8% as higher rates impacted traffic. Last week applications fell by -3.5%. The 30 year fixed rate was 4.01%, up 3 basis points.

ADP employment figures came out at 8:15AM. According to their estimates 182,000 new jobs were created in the private sector last month. This is inline with expections, last months figure was revised lower to 190,000. The sector to drag on job growth was manufacturing. Small business created 92,000 jobs. Good producing sector created 24,000, services combined created 158,000. There were 35,000 new construction jobs which helps to reinforce the housing data and recovery there. Transportation/Trade&Utilities created another 35,000 new jobs. Not an overly strong report but a steady one. The high number of services jobs is a concern but we have been shifting to services for a long time.

Trade balance was released at 8:30AM. The trade deficit shrank in September, to $40.8 billion from the slightly revised $48 billion reported last month. The cause for the decline is an increase in exports, along with a decrease in imports. On a year to date basis the deficit is up 3.9% from this time last year.

The ISM Non-Manufacturing Survey was released at 10AM. The survey came in better than expected at 59.1. Analysts had been predicting 56.5, a small decline from last month's 56.9. Within the report the three main indices all rose. Business activity rose to 63%, new order rose to 59.1% and employment rose to 59.2%, a gain of 0.9%. The survey is a welcome sign after the manufacturing sector survey and shows that this segment of the economy is growing, and growing faster.

Tomorrow Challenger report on planned layoffs and the weekly jobless claims numbers come out before the bell. On Friday look out for the NFP, unemployment rate and average hourly earnings.

The Oil Index

Still no sign declining production or rig counts US is impacting supply US crude oil supply. Today's EIA reports shows that storage levels increased by 2.8 million barrels in the last week, ahead of expectations but down from last week's injection of 3.38 million barrels. WTI had bee trading flat, near yesterday's high above $48, but went ducking back to support when the storage data was released WTI lost more than -3.25% and closed below $46.50. The idea of reduced production/supply in 2016 may be supporting prices above $45 but current productions, supply and storage are keeping them from sustaining any kind of rally.

The Oil Index fell in response to oil's quick turnaround, shedding about -1.2% in today's session. The index fall came to rest on resistance-now-possible support at 1,230 and the 50% retracement line broken yesterday. The indicators are bullish at this time but a wicked divergence is present, one of the deepest I think I've ever seen, so the chance of false break-out is high. A fall below the 50% retracement could take the index back to longer term support near 1,160 and the short term moving average. I remain bearish on oil prices in the near to short term, until storage levels come down and/or production levels are more in line with consumption. Longer term the outlook for prices is bullish, as are earnings expectations, so I would be looking to buy on any dip.

The Gold Index

Gold slid to a new one month low today. Janet Yellen's testimony before congress restated the FOMC's openness to a rate hike in December. According to her December is a "live" meeting, her statement adding momentum to dollar bulls and sending gold prices down to $1106, nearly 7% below prices we saw just last week before the FOMC meeting. Gold prices are now back to long term support levels but could slide another $20 before hitting really firm support, if at all. At this time it is more and more likely the Fed will tighten, inflation remains absent and the ECB and BOJ are still loosening so this move could just be getting started.

The gold miners are not responding well to low gold prices. The miners ETF GDX fell -1.35% in a move that confirmed resistance at the short term moving average. The ETF tried to move higher in ealy trading, counter to gold's fall, but the moving average capped gains and then sent it shooting lower. The indicators are both moving lower, pointing to lower prices in the ETF, with MACD showing increased momentum and stochastic falling sharply toward the lower signal line. Downside targets remain near the long term low around $13.

In The News, Story Stocks and Earnings

The dollar gained a bit of steam from Yellen's testimony. The testimony was fun to watch, she got a thorough grilling on a few topics including the FOMC possibly overstepping its bounds, its assumption of authority under Dodd-Frank and a few complaints coming through the House Financial Services Committee from the banking sector. In terms of rate hikes and the economy, she says the economy is healthy, the banking sector is resilient and that the December meeting was a live one for possibly raising rates. The dollar rose nearly a full percent after the move, setting a new three month high, and creating a long white candle closing at the high of the day. The indicators are on the rise and showing some strength although divergence may be forming. The near term trend is up but resistance is just above today's close near $98.25.

About 350 earnings reports today. The list represented a pretty broad slice of the market, not too many names jumped out at me but one thing I did notice that juast about every other name on the list ended in pharm, pharmaceutical, biopharm, bioscience, therapeutic or some other reference to the health care sector in general. The sector has been lagging the broader market over the past few weeks despite earnings growth more than double projections. Today the XLV Health Care SPDR closed with a loss near -0.25 after reaching lows near twice that on an intra-day basis.

The ETF looks like it might be consolidating in preparation for another move higher, the indicators are bullish and showing a little strength relative to the past 12 months. MACD is retreating from a peak in the nearest term but that peak is convergent with the rally and recent high, suggesting higher prices. Stochastic is also showing some strength but at this time still below the upper signal zone and possible indicating resistance and the top of a range. A break above resistance, near $63.25, would be a bullish sign and could take the ETF as high as $77.50.

Allergan reported before the opening bell. The maker of Botox and target of Pfizers planned tax inversion reported earnings of $13.29 per share, $3.28 on an adjusted basis, verus the adjusted $3.20 consensus estimate. Revenue for the quarter was near double the same period last year with strong sales increases across the range of branded products. Botox sales alone accounted for 11% of revenue. Shares of the stock jumped in pre-market trading and opened with a gain. During the day they sold off, closing with a loss near -0.75%. Despite the losses the stock remains near recent highs and above the $300 level.

Facebook reported after the closing bell. The leadig social media website was expected to report $0.50 per share and blew estimates out of the water with $0.57. Revenue also beat, $4.5 billion versus $4.37 expected, with mobile accounting for 58%. Monthly active users is also up and helped to send the stock 3% higher in after hours trading.

The Indices

Trading was lack luster today. The indices moved lower on low volume but did not break any significant support levels. Action was led by the Dow Jones Transportation Average with a loss of -0.65%. The transports remain the laggard of the group and below resistance levels at 8,250. Today's action may be sign the index will remain range bound in the near term, the indicators are weak and suggest the same. Both stochastic and MACD have weakened in the near term and could be leading prices lower. However, the short term moving average is still supporting prices and pushing them up against said resistance. This could turn out into a test of the two, sooner or later one will break. Support is near 8,125, resistance is near 8,260. A break above resistance could go to 8,600, a break below support could take it down to 7,750.

The next biggest decline was posted by the S&P 500. The broad market lost -0.35% in a move that tested support at 2,000. The indicators remain bullish, despite the drop, so a test of the all time high is still looking pretty likely. Momentum is also still slowing weakening, divergent from the rally, so it is very possible resistance at the all-time could be substantial. Long term outlook remain positive though so any dips will be buying opporutunities.

The Dow Jones Industrial Average made the third largest decline, -0.28%. The blue chip index met resistance at the underside of the long term trend line, broken 2 months ago, as expected. The indicators remain bullish, the index riding a fairly strong wave of buying, so it is still possible it will break above the index, or trade up along the underside of it, to test the all time highs. That being said, momentum is winding down steadily and approaching the zero line so a peak in this rally is fast approaching. This could lead to a sideways consolidation or a pull back to find solid support levels.

The NASDAQ Composite made the smallest decline in today's trading. The tech heavy index fell only -0.05% and remains at the 3 month high. The indicators are bullish, momentum showing a little more strength than on the other indices, but once again are winding down in the near term. Near term trend is up with no real sign of a top yet but it is very possible the index will hit a peak in the very near future. Current target is the underside of the long term trend line, broken this past August, with a chance at the all time high.

The rally is still on although today the bulls took a breather. The market is riding a wave of buying that is now being supported by better than expected earnings, steady economic data and positive forward outlook. It's only natural for there to be periodic pauses in the up trend.

It looks like that the indices will reach and test their current all time highs, if not set new ones, but momentum is declining so caution is due.Tomorrow's trading could be more of the same while we wait for the big data point later this week. The NFP report on Friday could be the catalyst that breaks the market to new highs, or gives excuse for profit taking. Regardless, I remain a bull and will by on the dips, and until then keep my stops tight.

Until then, remember the trend!

Thomas Hughes

Important Limited Time Offer - ONE WEEK ONLY

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New Option Plays

Investors Applaud Massive Buyback

by James Brown

Click here to email James Brown


United Technologies - UTX - close: 100.33 change: +0.33

Stop Loss: 97.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.1 million
Entry on November -- at $---.--
Listed on November 04, 2015
Time Frame: Exit PRIOR to January option expiration
New Positions: Yes, see below

Company Description

Trade Description:
It has been a tough year for UTX investors. The stock peaked near $124 a share in February 2015. Shares spent the next seven months in retreat. UTX finally bottomed in the $85-87 range in late September. Now shares appear to have reversed.

UTX is in the industrial goods sector. According to the company, "United Technologies, based in Farmington, Connecticut, provides high-technology systems and services to the building and aerospace industries." The company operates through different segments. They are: UTC Building & Industrial Systems, Pratt & Whitney (aircraft engines), UTC Aerospace Systems, and Sikorsky (helicopters). UTX is selling its Sikorsky unit to Lockheed Martin for $9 billion. The deal should close soon.

One of the biggest challenges for UTX has been an economic slowdown overseas and the strength of the U.S. dollar. The company gets more than 60% of their sales outside the U.S. That makes negative currency headwinds a serious issue.

Their most recent earnings report was October 20th. Analysts were expecting a profit of $1.56 a share on revenues of $14.59 billion. UTX beat the bottom line estimate with $1.67 a share, but that was still a double-digit decline from a year ago. Revenues were down -5.6% to $13.79 billion. Management reaffirmed their fiscal year 2015 guidance of $6.15-6.30 a share and revenues in the $57-58 billion range, which is in-line with Wall Street estimates. That was good enough for the street. The stock rallied.

The big reasons investors are looking past the disappointing earnings and revenue growth has been stock buybacks. Plus the current management has been selling off non-core assets as they try to streamline the company for better growth.

I mentioned earlier that UTX is selling their Sikorsky unit to LMT for $9 billion. UTX is going to use $6 billion of that money in an accelerated stock buyback program because they believe their stock is too cheap. Furthermore, UTX announced they were adding an extra $12 billion to their stock repurchase program. Altogether the company plans to spent $16 billion on stock buybacks through 2017.

Investors seem to like the news with shares up sharply from their Q3 report. The point & figure chart has turned bullish and is forecasting at $112 target. At the moment UTX is hovering near short-term resistance in the $100-101 zone. Tonight we are suggesting a trigger to buy calls at $101.15.

I will point out that UTX's daily chart seems to have resistance about every $5.00 ($105, $110, etc.). Odds are good we could see UTX rally back toward its simple 200-dma (currently near $109).

Trigger @ $101.15

- Suggested Positions -

Buy the 2016 JAN $105 CALL (UTX160115C105) current ask $1.03
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

Markets Dip On Yellen and Oil

by James Brown

Click here to email James Brown

Editor's Note:

A pullback in crude oil weighed on the market today. Hawkish comments from Fed Chairman Yellen didn't help either as she said a rate hike in December is a "live possibility".

Our new bearish play on ANTM is now open.

Current Portfolio:

CALL Play Updates

The Boeing Company - BA - close: 148.19 change: +1.01

Stop Loss: 144.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.8 million
Entry on November -- at $---.--
Listed on November 02, 2015
Time Frame: 6 to 8 weeks.
New Positions: Yes, see below

11/04/15: BA began trading ex-dividend this morning. The company paid a cash dividend of $0.91 a share. The stock bounced off its morning gap down and spent the rest of the session drifting sideways near $148. Our suggested entry point is $150.25.

Trade Description: November 2, 2015:
Defense stock investors have had a frustrating year with the group peaking in March 2015 and sliding lower the next six months. Fortunately the defense industry appears to have reversed higher. BA is leading the charge.

BA is in the industrial goods sector. According to the company, "Boeing is the world's largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security systems. A top U.S. exporter, the company supports airlines and U.S. and allied government customers in 150 countries. Boeing products and tailored services include commercial and military aircraft, satellites, weapons, electronic and defense systems, launch systems, advanced information and communication systems, and performance-based logistics and training."

The company has delivered strong earnings results the last three quarters. Their most recent report was October 22nd. Wall Street was expecting BA's Q3 numbers to be $2.20 per share on revenues of $24.78 billion. The company beat expectations on both fronts. Earnings rose +18% from a year ago to $2.52 a share. Revenues were up +9% to $25.85 billion. Their free cash flow surged from $317 million a year ago to $2.3 billion. Their backlog is huge at $485 billion and nearly 5,700 commercial airplanes.

If that wasn't good enough BA's management raised their guidance. The company upped their fiscal year 2015 earnings guidance from $7.70-7.90 to $7.95-8.15. They also raised their revenue estimate from $94.5-96.5 billion to $95.0-97.0 billion. This compares to Wall Street estimates at $8.08 per share on revenues of $95.4 billion.

BA's president and Chief Executive Officer Dennis Muilenburg commented on his company's performance:

"By continuing to profitably deliver on our large and diverse backlog, we are driving strong growth in revenue, earnings and cash flow. Solid operating performance across our commercial and defense businesses during the quarter also supported our continued investment in innovation and our people, and our commitment to return cash to shareholders.

Three quarters of solid results and confidence in our continued operating performance enabled us to raise our revenue, earnings per share and operating cash flow guidance for the year. Looking ahead, our teams remain focused on improving productivity and quality and delivering improved capabilities to meet our customers' expectations."

Shares of BA bottomed in August with the market's sharp correction lower. Traders bought the dip in late September near $127.50. Since then BA's stock has surged toward $150. We see a breakout past round-number resistance at $150.00 as a potential entry point. If BA breaks out it could rally toward its 2015 high near $159.00. The point & figure chart is bullish and forecasting at $165 target. Coincidentally the average analyst price target is also $165.

Tonight we are suggesting a trigger to buy calls at $150.25.

Trigger @ $150.25

- Suggested Positions -

Buy the 2016 JAN $155 CALL (BA160115C155)

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

Costco Wholesale - COST - close: 157.15 change: -1.65

Stop Loss: 155.40
Target(s): To Be Determined
Current Option Gain/Loss: -27.9%
Average Daily Volume = 1.9 million
Entry on October 30 at $158.85
Listed on October 29, 2015
Time Frame: Exit PRIOR to earnings in mid December
New Positions: see below

11/04/15: COST displayed relative weakness today. Shares marched lower as traders sold each intraday rally attempt. The stock closed below short-term support at its 10-dma and posted a -1.0% loss on the session. The S&P 500 only fell -0.3% and the NASDAQ only lost -0.05%.

Shares should find short-term support in the $155.50-156.00 area. If not our stop loss is at $155.40. No new positions at this time.

Trade Description: October 29, 2015:
We are bringing COST back to the Option Investor newsletter. Shares have been doing well since they bottomed in August this year. We were in COST last week and were unexpectedly stopped out on this Monday's gap down.

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.

Wall Street is generally bullish on COST. Out of the twenty analysts that cover the stock 12 of them have a "strong buy" rating. COST has seen its price target upgraded twice this month. The most recent upgrade was this week with a $180 target. The point & figure chart is very bullish and forecasting a long-term target of $239.00.

The last few days have seen COST consolidating gains with a sideways move in the $155.00-158.50 area. The intraday high was set last week at $158.80. Tonight we are suggesting a trigger to buy calls at $158.85. We will plan on exiting prior to COST's earnings report in December.

- Suggested Positions -

Long DEC $165 CALL (COST151218C165) entry $1.36

11/03/15 new stop @ 155.40
10/30/15 triggered @ $158.85
Option Format: symbol-year-month-day-call-strike

Salesforce.com, Inc. - CRM - close: 78.39 change: -0.24

Stop Loss: 75.75
Target(s): To Be Determined
Current Option Gain/Loss: +21.3%
Average Daily Volume = 3.6 million
Entry on October 12 at $76.25
Listed on October 07, 2015
Time Frame: Exit PRIOR to earnings on November 18th
New Positions: see below

11/04/15: CRM quietly drifted lower and settled with a -0.3% decline, which matched the drop in the S&P 500. Shares are nearing what should be short-term technical support at the rising 20-dma (currently at $77.50.

No new positions at this time.

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

10/31/15 new stop @ 75.75
10/17/15 new stop @ 74.75
10/12/15 triggered @ $76.25
Option Format: symbol-year-month-day-call-strike

The Home Depot, Inc. - HD - close: 125.38 change: -0.28

Stop Loss: 121.75
Target(s): To Be Determined
Current Option Gain/Loss: +72.7%
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

11/04/15: HD encountered some profit taking this morning but traders bought the dip twice near $124.60. Shares managed to pare their loss to -0.22% by the closing bell.

No new positions at this time. We plan on exiting prior to HD's earnings report on Nov. 17th.

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: 118.29 change: -0.06

Stop Loss: 114.85
Target(s): To Be Determined
Current Option Gain/Loss: +32.3%
Average Daily Volume = 36 million
Entry on October 28 at $116.55
Listed on October 24, 2015
Time Frame: 6 to 8 weeks
New Positions: see below

11/04/15: The small cap IWM held up reasonably well today. Shares did post a loss but they closed almost unchanged. The selling pressure wasn't that strong today.

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.

- Suggested Positions -

Long 2016 JAN $120 CALL (IWM160115C120) entry $1.89

11/03/15 new stop @ 114.85
10/28/15 triggered @ $116.55
Option Format: symbol-year-month-day-call-strike

Lear Corp. - LEA - close: 124.17 change: +0.14

Stop Loss: 121.45
Target(s): To Be Determined
Current Option Gain/Loss: -10.8%
Average Daily Volume = 951 thousand
Entry on October 28 at $123.65
Listed on October 27, 2015
Time Frame: Exit PRIOR to December option expiration
New Positions: see below

11/04/15: It is encouraging to see LEA post a gain today. Yesterday's decline looked somewhat ominous. The lack of follow through lower is a good sign. The stock dipped to $123.29 but traders bought the dip at that level twice forming a mini double bottom pattern midday.

No new positions at this time.

Trade Description: October 27, 2015:
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. .

- Suggested Positions -

Long DEC $125 CALL (LEA151218C125) entry $3.70

11/03/15 new stop @ 121.45
10/28/15 triggered @ $123.65
Option Format: symbol-year-month-day-call-strike

Lam Research Corp. - LRCX - close: 77.01 change: +0.67

Stop Loss: 73.85
Target(s): To Be Determined
Current Option Gain/Loss: -9.1%
Average Daily Volume = 2.5 million
Entry on October 30 at $76.25
Listed on October 28, 2015
Time Frame: 6 to 8 weeks
New Positions: see below

11/04/15: The SOX semiconductor index displayed relative strength with a +0.26% gain today. LRCX managed to outpace its peers with a +0.8% gain on the session. Monday's intraday high was $77.07. I would consider new positions on a rally above $77.10.

Trade Description: October 28, 2015:
Wall Street loves mergers and this month LRCX has jumped into the 2015 buying spree. Semiconductor stocks had a rough summer with the SOX semiconductor index plunging from early June through late August. Fortunately the group appears to have bottomed. LRCX's recent earnings news and acquisition announcement has accelerated the stock's rebound.

LRCX is part of the technology sector. According to the company, "Lam Research Corp. (LRCX) is a trusted global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. Lam's broad portfolio of market-leading deposition, etch, and clean solutions helps customers achieve success on the wafer by enabling device features that are 1,000 times smaller than a grain of sand, resulting in smaller, faster, more powerful, and more power-efficient chips. Through collaboration, continuous innovation, and delivering on commitments, Lam is transforming atomic-scale engineering and enabling its customers to shape the future of technology. Based in Fremont, Calif., Lam Research is a Nasdaq-100 Index and S&P 500 company whose common stock trades on the Nasdaq Global Select MarketSM under the symbol LRCX."

LRCX's most recent earnings report was October 21st. Analysts were expecting a profit of $1.72 per share on revenues of $1.6 billion. LRCX delivered earnings of $1.82 a share. Revenues were up +38.8% from a year ago to $1.6 billion. Management then raised their Q2 earnings guidance to $1.32-1.52 a share, which is significant above analysts' estimates.

The news didn't stop there. LRCX also announced they were buying KLA-Tencor (KLAC) for $10.6 billion. This new combined company will have $8.7 billion in revenues.

Here are a few highlights from the LRCX-KLAC merger deal:

Creates Premier Semiconductor Capital Equipment Company: Strengthened platform for continued outperformance, combining Lam's best-in-class capabilities in deposition, etch, and clean with KLA-Tencor's leadership in inspection and metrology

Accelerates Innovation: Increased opportunity and capability to address customers' escalating technical and economic challenges Broadens Market Relevance: Comprehensive and complementary presence across market segments provides diversity, scale and value creating innovation opportunities

Significant Cost and Revenue Synergies: Approximately $250 million in expected annual on-going pre-tax cost synergies within 18-24 months of closing the transaction, and $600 million in annual revenue synergies by 2020 Accretive Transaction: Increased non-GAAP EPS and free cash flow per share during the first 12 months post-closing

Strong Cash Flow: Complementary memory and logic customer base, operational strength, and meaningful installed base revenues strengthen cash generation capability Anstice concluded, "We have tremendous respect for the company KLA-Tencor employees have built over nearly 40 years - their culture, technology, and operating practices. I have no doubt that our combined values, focus on the customer, and complementary technologies will create a trusted leader in our industry, capable of creating significant opportunity for profitable growth and in turn delivering tremendous value to all of our stakeholders. This is the right time for the right combination in our industry." You can read more details about the merger here.

The combination of the earnings beat, raised guidance, and the merger news launched LRCX stock higher. Traders have been consistently buying the dips since then. Now shares of LRCX are poised to break through technical resistance at its 200-dma soon. Shares have been upgraded with a new price target of $85.00. Meanwhile the point & figure chart is bullish and forecasting at long-term target of $107.00.

LRCX looks like it could run towards the 2015 highs in the $84-85 region. Today's intraday high was $76.19. We are suggesting a trigger to buy calls at $76.25.

- Suggested Positions -

Long JAN $80 CALL (LRCX160115C80) entry $3.30

11/03/15 new stop @ 73.85
10/30/15 triggered @ $76.25
Option Format: symbol-year-month-day-call-strike

Pepsico, Inc. - PEP - close: 100.62 change: -0.30

Stop Loss: 99.40
Target(s): To Be Determined
Current Option Gain/Loss: -7.5%
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

11/04/15: Uh-oh! PEP did not see any follow through on yesterday's bounce from support near $100. Shares only lost 30 cents today but it doesn't bode well for the bulls. The intraday high was $101.34.

I am suggesting investors wait for PEP to trade above $101.55 again before initiating new bullish positions.

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

11/02/15 PEP underperforms the broader market (Monday)
10/31/15 new stop @ 99.40
10/22/15 triggered @ $101.00
Option Format: symbol-year-month-day-call-strike

Signet Jewelers Limited - SIG - close: 148.20 change: +0.04

Stop Loss: 144.15
Target(s): To Be Determined
Current Option Gain/Loss: -30.2%
Average Daily Volume = 889 thousand
Entry on October 29 at $150.75
Listed on October 26, 2015
Time Frame: Exit PRIOR to earnings on November 24th
New Positions: see below

11/04/15: SIG's performance today was almost a mirror image of yesterday. There was a little bit of volatility at the opening bell and then shares just drifted sideways. The stock closed virtually unchanged on the session.

No new positions at this time.

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.

- Suggested Positions -

Long DEC $155 CALL (SIG151218C155) entry $4.30

10/29/15 triggered @ $150.75, upgraded by Goldman Sachs
Option Format: symbol-year-month-day-call-strike

PUT Play Updates

Anthem, Inc. - ANTM - close: 135.34 change: -1.71

Stop Loss: 141.00
Target(s): To Be Determined
Current Option Gain/Loss: -9.8%
Average Daily Volume = 2.2 million
Entry on November 04 at $134.25
Listed on November 03, 2015
Time Frame: 6 to 8 weeks
New Positions: see below

11/04/15: Our new bearish trade on ANTM is open. Shares broke down below support near $135.00 and tagged our entry point at $134.25. The stock hit $133.09 and then bounced back above the $135.00 level.

I am suggesting investors wait for ANTM to trade back below $134.50 before initiating new bearish positions.

Trade Description: November 3, 2015:
The big healthcare stocks used to be unstoppable. The group delivered huge gains in 2013 and 2014. Unfortunately the rally has peaked in 2015 and now the major names are retreating, in spite of increased M&A in the industry.

ANTM is in the healthcare sector. According to the company, "Anthem is working to transform health care with trusted and caring solutions. Our health plan companies deliver quality products and services that give their members access to the care they need. With over 72 million people served by its affiliated companies, including more than 38 million enrolled in its family of health plans, Anthem is one of the nation's leading health benefits companies."

The big story for healthcare has been consolidation. The handful of major insurers are getting bigger as they gobble each other up. Last July ANTM announced they were buying smaller rival Cigna (CI) for $54 billion. ANTM is holding a special shareholder meeting on December 3rd to approve the issuance of more stock to help pay for the merger. The deal is not expected to close until the second half of 2016. When it does CI should add to ANTM's earnings.

Speaking of earnings, ANTM is still growing. They reported their Q3 earnings on October 28th. Wall Street expected a profit of $2.32 a share on revenues of $19.65 billion. ANTM beat both estimates with a profit of $2.73 a share. Revenues were up +7.6% to $19.77 billion.

Investors seemed disappointed with ANTM's rising costs. Their benefit expense ratio rose 110 basis points to 83.6%. Furthermore ANTM raised their fiscal year 2015 guidance to $10.10-10.20 a share but that was seen as anemic. Wall Street estimates were already at $10.22 a share.

The IBD recently noted that all five of the big health insurers saw ObamaCare exchange enrollments fall in the third quarter. The average decline was -8.3%. That could be significant. The Affordable Care Act (ObamaCare) has driven a lot of growth for the big insurers over the last few years. Unfortunately the ACA has been plagued with problems and rising costs.

A couple of weeks ago a Credit Suisse analyst downgraded the healthcare sector over high valuations. The sector has been underperforming. Furthermore analysts earnings revisions have been slowing. Essentially Wall Street thinks growth is slowing for the group. ANTM has seen analysts lowering their price targets on the stock.

Technically the healthcare sector and shares of ANTM peaked this past summer. Currently ANTM is flirting with a breakdown into bear market territory with a -19.8% drop from its June closing high. The point & figure chart is already bearish and forecasting at $122 target. A decline under $134.00 would reaffirm the sell signal. ANTM does have significant support in the $134.50-135.00 zone. We want to be ready when it does break down. Tonight we are suggesting a trigger to buy puts at $134.25.

- Suggested Positions -

Long 2016 JAN $130 PUT (ANTM160115P130) entry $5.60

11/04/15 triggered @ $134.25
Option Format: symbol-year-month-day-call-strike

Canadian Pacific Railway - CP - close: 138.15 change: -3.79

Stop Loss: 143.75
Target(s): To Be Determined
Current Option Gain/Loss: -9.8%
Average Daily Volume = 1.0 million
Entry on November 02 at $139.75
Listed on October 31, 2015
Time Frame: Exit PRIOR to earnings in January
New Positions: see below

11/04/15: Great news! There was no follow through on yesterday's bounce in CP. Instead the stock reversed sharply lower with a -2.6% drop and a new four-week low.

Trade Description: October 31, 2015:
Transportation stocks have been significant underperformers this year in spite of lower fuel costs. The Dow Jones Transportation Average peaked in late 2014-early 2015 and has fallen -11% year to date. Railroad stocks have fared even worse. The DJUSRR railroad index is down -26% for the year. Shares of CP are down -27% this year and look poised to extend their losses.

CP is in the services sector. According to the company, "Canadian Pacific is a transcontinental railway in Canada and the United States with direct links to eight major ports, including Vancouver and Montreal, providing North American customers a competitive rail service with access to key markets in every corner of the globe. CP is growing with its customers, offering a suite of freight transportation services, logistics solutions and supply chain expertise."

One of the challenges for the railroad companies has been falling coal demand. The White House has been pressure the coal industry. Meanwhile falling natural gas prices have made it a more attractive alternative to coal. One estimate suggest coal demand in the U.S. could fall by 100 million st this year and 2016 will be even lower. A lot of that coal gets moved by train but falling demand means less carloads to transport.

Another challenge for the railroad industry has been falling capex spending from the energy companies across North America. Depressed oil prices make it less profitable to invest in new wells and that means less demand to move that equipment and fracking supplies by rail. Wall Street analysts have been reducing their earnings estimates on the railroad companies and cutting their price targets.

A U.S. economy stuck near 2% growth doesn't help either. GDP growth fell from +3.9% in Q2 to +1.5% in Q3. Last week the latest durable goods orders (from September) were another disappointment and suggest the economy is slowing.

The stock market's plunge in August pushed shares of CP from $160 to $130. The stock almost made it back to $160 by early October but the rebound has reversed. Disappointing earnings news in the transportation industry this past week sparked another sell-off. Now the trading in CP over the last two months looks like a bear-flag consolidation pattern (see chart). The point & figure chart has turned bearish and is currently forecasting a $128 target but it could get worse. Tonight we are suggesting a trigger to buy puts at $139.75.

- Suggested Positions -

Long 2016 JAN $130 PUT (CP160115P130) entry $4.10

11/03/15 new stop @ 143.75
11/02/15 triggered @ $139.75
Option Format: symbol-year-month-day-call-strike

Darden Restaurants - DRI - close: 61.42 change: -1.13

Stop Loss: 63.65
Target(s): To Be Determined
Current Option Gain/Loss: +20.9%
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

11/04/15: Many of the restaurant stocks reversed lower today. Shares of DRI underperformed the market with a -1.8% decline and closed at a new multi-month low.

No new positions at this time.

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

10/31/15 new stop @ 63.65
10/21/15 triggered @ $63.40
Option Format: symbol-year-month-day-call-strike