Option Investor

Daily Newsletter, Monday, 2/8/2016

Table of Contents

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

Market Wrap

Could It Be Capitulation?

by Thomas Hughes

Click here to email Thomas Hughes
The market sank more than -2.5% in Monday trading, weighed down by oil, rate hike fears and financial market turmoil. . . and then tried to bounce back.


The market sank more than -2.5% in today's action as weak oil prices, weak global growth and uncertainty over the FOMC rate hike timeline weighs on future outlook. Despite the near term negativity forward outlook for earnings remains positive so I ask the question, could this be capitulation. If it is we can expect to see buyers step into the market, if not this week then very soon. If not the market could be in for a real roller coaster ride.

Market Statistics

International markets were affected as well, those that were open, all except the Japanese Nikkei. The Nikkei rose a little more than 1%, snapping a losing streak, possibly in response to market to closures throughout the Asia region. It is the start of the Chinese Lunar New Year and markets from China to Taiwan and Korea are closed for the week. European indices fell more than -3% and hit a 15 month low.

Futures trading here at home indicated a weak open right from the start in extension of Friday's sharp sell-off. At 7:30AM indices were indicated to open with losses near -1.25%, by 8:30AM the indicated loss had been extended to greater than -1.5%, led by a -2.25% decline for the NASDAQ.

At the opening bell the indices lost more than -1% in the first minute of trading and extended that loss throughout the morning. All ten sectors of the S&P were hit but the tech sector was hit the hardest. Last week's poor showing from LinkedIn, among others, is really taking its toll. The early low was hit around 11AM, followed by a couple of hours of basically sideways trading. The days lowest low was hit just after 2:30PM, 2:32 to be exact, and this was followed up by a bounce that carried the indices into the close and recovered more than half of today's losses.

Economic Calendar

The Economy

There was no official economic data released today, the calendar for the rest of the week is pretty light as well. Other than Thursday, weekly jobless claims, Friday is the only the day that I see as a potential market mover in terms of new data. On this day we can expect to see Import/Export Prices, Michigan Sentiment, Retail Sales and Business Inventories and I am not expecting to get much in the way of bullish data.

Next week's calendar is more likely to move the market. We'll get the FOMC minutes, several reads on the housing sector as well as CPI and PPI, among other reports.

Moody's Survey of Business Confidence fell another -1.1 to hit 29.5 and a new low dating back to late 2013. The survey index has been in decline since August, driven by deteriorating global financial markets, and does not appear to be bottoming. According to Mr. Zandi concern for present conditions is the weakest while outlook for summer 2016 remains strong.

According to data from FactSet the blended rate for Q4 earnings growth is now -3.8%, a +2% increase from last week's data. This move is due to upside surprises in 6 of the 10 S&P sectors, led by Materials, Healthcare and Information Technology. Energy remains the laggard posting a blended earnings decline of -74.3%, much larger than first expected.

On an ex-energy basis the all-index blended rate stands at +2.2%. Within the energy sector 7 of 8 sub-sectors are posting earnings declines. The only one with positive earnings growth is the Storage and Transportation sector with growth of +29%.

Looking forward I can say that 2016 earnings growth expectations have officially hit the crapper. First quarter growth expectations have declined by nearly -2% to hit -5.4%, second quarter estimates have now turned negative and stand at -0.4%, 3rd quarter expectations fell nearly a full percent and 4th quarter projections by nearly 3% leaving full year 2016 earnings growth expectations at 4.0%, well below the 15% analysts were projecting as recently as early fall 2015.

All ten sectors are experiencing downward revisions to 2016 earnings projections but the energy sector remains the real drag. Projected earnings decline for the sector have doubled in the first quarter alone, from -42% on 12/31 to -84% today. As for the full year calendar 2016, projections are 5 times worse than just 5 weeks ago, falling to -49.2% from -9.8% at the end of December.

So long as projections continue to decline I see little reason for the market to sustain a rally, the bottom in earnings decline I have been looking for is not here and it looks now that we may have two more quarters to go before it happens. Of course, if oil prices can stabilize/rebound and/or the benefits of low oil prices begin to show themselves in the economy this may change.

The Oil Index

The news of the day in the oil patch is a lack of news, concerning the non-OPEC/OPEC rumor for a deal to support prices. Without that to buoy sentiment supply/demand imbalances return to the forefront. Supply remains high, production remains high and demand expectations remain diminished. Today WTI fell more than -3% intraday to break below the $30 level, and close with a loss near -3.75. Without catalyst for support this could drop to the recent lows or further.

The Oil Index fell as well, dropping more than -1.5% intraday to fall below the 950 level. The index is in down trend, concurrent with the underlying commodity, with indicators consistent with a move lower. The bullish MACD is in decline, showing a loss and reversal of upward momentum, with a bearish crossover on stochastic, indicative of a return to support, with target near the 900 level. If oil prices continue to fall this index is likely to fall with it and set a new low. A break below 900 could go as low as 800 in the near to short term.

The Gold Index

There be gold in them there hills! The price of gold skyrocketed today on flight to safety concerns and weaker dollar. Today spot prices shot up nearly $40, 3.35%, to come very close to hitting the $1200 resistance target. This move is gaining strength and indicated to move higher and at least test resistance. If resistance sparks profit taking or other form of pull-back this will likely be a good entry for bullish positions into the short term. I say this because the current MACD peak is very strong, setting a +12 month extreme, and indicative of higher prices and/or a retest of current highs.

The gold miners got a boost too, rising gold prices are going to do wonders for their earnings and margins, coupled with lower energy costs, and will likely be seen in the reports as early as next reporting season. Today the miners ETF GDX gained 4.30% after gapping up at the open and has exceeded all my targets. The indicators are very strong, MACD is setting an extreme peak and stochastic has crossed the upper signal line, so I expect to see a test of the $18 level if not new highs in the coming weeks. Resistance may spark profit taking or consolidation which would be prime time for additional bullish entries. Today's candle, a possible shooting star or pin bar, is indicative resistance or profit taking is already setting in.

In The News, Story Stocks and Earnings

The dollar remains weak with no expectation of strengthening this week. Today the DXY fell about a half percent after attempting to move higher and is now sitting on the 50% retracement level hit last week. The index appears to be consolidating into what could become a bearish flag. If so a move below the 50% line is likely to take to the 61.8% line, near $95.50. There is very little data to move the market this week and what there is comes out on Friday. EU GDP could move the EUR, US retail sales could move the dollar, both will affect central bank outlook. In order for the dollar to strengthen the data will need to either show a much weaker EU economy, or a much stronger US consumer, than currently expected. Simply speaking of US data, weak or lackluster retail sales may decrease FOMC rate hike expectations and further weaken the dollar all on its own.

The techs got hammered again today. Last week's poor results and weak guidance from LinkedIn has put a hurting on the sector along with some massive downward revisions to earnings expectations for companies like Yelp(reported today after the bell), Tesla, Zynga, Groupon and Pandora, many of which report this week. Facebook lost -6% in today's session, Zynga -8% and Yelp -13.5%. Today the XLK Technology Sector SPDR fell more than -2.5% and is approaching a 6 month closing low.

It wasn't all pain in the market today. Tyson Foods surged more than 5% to hit an all time high. This is after hitting an all time high last week, on the heels of a much better than expected earnings report, and comments from company execs to the affect that record profits would be reached again in 2016 (1st quarter profits rose nearly 50% from the previous year). Today the stock is riding high on more than 4X average daily volume with strong momentum and strengthening stochastic.

Yelp's earnings, scheduled for release after the bell, actually hit the market around 1PM due to a software bug. The report was better than expected but came with weak guidance and the announced departure of company CFO. This quarters report, while better than expected, nevertheless showed a loss compared to last year's profit and helped to send the stock down more than -13% to hit a 4 year low.

The Indices

The indices got hit hard today there is no doubt about that. What there is also no doubt of is that buyers stepped in at the lows. Today's action was led by the tech heavy NASDAQ Composite which closed with a loss of only -1.65% after hitting an intraday low more than -3%. Today's action created an opening gap, a move higher, a move lower and a close near the open, setting a new low and leaving a doji candle below previous support. The doji, along with indicators that are highly divergent from the low, suggest we may in fact be at or near the bottom of the current correction. Resistance is at 4,350, next target for support should the index fall further is near 4,100. A move back above 4,350 would confirm this bottom, at least in the near to short term.

The broad market S&P 500 did not form a doji today but it did form a long lower shadow attached to a medium size black candle that confirms support at the 1,850 level, the second such candle in the last month of trading days. The indicators are weakening, pointing to possible further testing of support, but also divergent from today's new closing low in support of support. This combination, indicators and candles, is setting the index for a possible bounce back to resistance but that is yet to be seen. If a bounce occurs resistance is near 1,900. If support fails a move to 1,800 could happen pretty fast.

The Dow Jones Industrial Average made the third largest decline in today's session, -1.10%. Today's candle has a relatively small body, not big or not small, with a long lower shadow in confirmation of the 15,600 support level. Today's action is not overly bullish but when combined with the previous test of the 15,600 level and bullish bias to the indicators make the blue chips look like an index setting up to rally off a bottom. Current support target is the 15,600 level which may be tested again, resistance target is near 16,500. A break below support would be bearish, a break above resistance bullish, in the meantime look for continued consolidation driven by news, earnings and the ever shifting price of oil.

The Dow Jones Transportation Average was today's smallest loser and actually touched into positive territory before closing with a loss of only -0.26%. The transports have long been the leader of the market; they led the rally to new all time highs for many years, they led the market into correction last year and now look as if they might be leading us again, out of correction. Today's action created a small doji candle, confirming both the near term resistance of the short term moving average but also rising support following the January bottom. The indicators are bullish and gaining strength so I would expect to see at least a retest of the short term moving average if not a break above. MACD momentum is also setting an extreme peak, if not a very strong one, which is often indicative of a more prolonged move to follow. A break above the 7,000 level would be bullish, at least in the near term, and could carry the index up to 7,500.

I don't want to come out and say that we are at the bottom, there are certainly risks and reasons to be worried about the economy and the market, but there is also a case to be made in defense of a bottom. The indices have bounced from support, bearish peaks in momentum are, across the board, divergent from the lowest lows, bullish peaks are at least 12 month extremes and today's market action is at least reminiscent of capitulation.

The flipside of the coin is that, before we see positive earnings growth, we're going to see some more negative earnings growth. This could, and is likely to, weigh on the market and at least cap any gains we see if not keep the market trending at or near these levels up to and until earnings expectations begin to brighten. Worst case scenario, we're getting set up for another leg lower before hitting bottom.

In the meantime there is the FOMC to contend with; Janet Yellen speaks twice this week, FOMC minutes are due out next week and the next meeting is about a month away. Rate hikes are still on the table however unlikely the data makes them seem. At this point it's hard to handicap what they might do, and how the market may take it. Dovishness could send the market into stimulus driven rally or scare it into thinking the economy is falling apart. Hawkishness could scare the market into thinking the recovery will be quashed, or confirm that it is on solid footing.

And the oil factor. Plunging oil prices have helped to tank the market. Low prices are bad for energy companies which we have seen. Low prices are good for EVERYONE else, which we have yet to see. In the end, it will all come down to earnings and earnings expectations.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Buying the Dip

by Jim Brown

Click here to email Jim Brown

Editors Note:

The severely oversold market is due for a bounce. Buckle your seatbelts and go for a ride.

When the market drops significantly for several consecutive days there is normally a rip your face off short squeeze rally in our near future. We cannot predict the exact date but we know it is coming. The Nasdaq Composite had declined -423 points from last Monday's highs to today's lows. That is a 9% drop in five days.

The Dow Transports have stopped declining after a -31.5% drop. Low oil prices appear to be fueling a rebound in that sector as well.

On a very bearish day I know some readers would expect some new bearish plays. With the market this oversold it is not wise to add new shorts in these oversold conditions.


QQQ - Nasdaq 100 ETF -
ETF Description

This is purely a rebound play and not based on fundamentals. The major large cap stocks in the Nasdaq 100 have been crushed and the $NDX had declined -411 points at today's lows, down from 4,300 the prior Monday. This is a -9.5% drop and represents a severely oversold market.

I warned in my weekend Option Investor commentary that we we could expect some follow through on Monday as portfolio managers who missed the Friday reaction drop hit the sell button today. I also mentioned the potential for those managers that did raise cash on Friday to come back to today with a calmer mind and start bargain hunting.

The afternoon rebound suggests those bargain hunters appeared and once the smoke clears we could see a major short squeeze.

With a QQQ trade at $98.45

Buy March $100 call, currently $2.02, stop loss $94.25, just under today's lows.

IYT - Dow Transports ETF - ETF Description

The Dow Transports typically lead the Dow industrials. The transports have been weak because of the slowdown in the manufacturing sector, competition in the airline sector and slowing rail traffic due to the weak shipments of coal and oil field equipment.

For some reason the transports quit declining about three weeks ago about the time oil prices appeared to have bottomed. Now with analysts extending their estimates for low oil prices into 2017 the transports are starting to rise again. Summer is a very busy time for airlines and with low oil prices, their profits should be much stronger even with the added competition.

The transports are very oversold. In Monday's market drop the IYT shares barely moved and ended the day down -38 cents. If we are looking at a potential rebound in the market the transports could lead because of their severely oversold position. The individual stocks have been crushed since early December. The Dow Transports declined -31% off their highs to the January lows.

This is a play on a rebound in the transportation sector. While I admit the fundamentals are still weak the IYT has refused to dip below support for three weeks and set a new high for 2016 last Thursday. This relative strength in a very negative market suggests investors are making their bets there is a rally in the future.

With an IYT trade at $125.85

Buy March $130 call, currently $2.15, initial stop loss $118.75


No New Bearish Plays

In Play Updates and Reviews

Rebound Ahead?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq rebounded +62 points off its intraday lows to close just under 4,300. Normally a 62 point gain would be a great day but that still left the index with a -79 loss.

The intraday rebound on the Nasdaq and a +223 point rebound on the Dow from -400 intraday suggests the bargain hunters bought the dip. In the last newsletter I said, "If I had to bet today I would bet on the Broncos and a continuation move lower on Monday."

The Broncos got the win, thanks to their defense, and we got the continuation move when portfolio managers who missed the move on Friday hit the sell button this morning. We also saw significant buying at the bottom. Once the margin selling that normally starts at 2:PM was over there was a solid surge of buying that started at 2:30.

With the market this oversold we could be in for a strong short squeeze sometime this week. With Yellen testifying on Wednesday and more than likely going to downplay future rate hikes the market should rally before her testimony. Whether it lasts more than one day is the big question.

Because of the potential for a big short squeeze, I lowered the stop losses on some of the puts. See the portfolio graphic for details.

Current Portfolio

Current Position Changes

AOS - AO Smith

Cancel the AO Smith call recommendation.

FL - Foot Locker

The Foot Locker call remains unopened but the entry trigger was lowered.

LULU - LuluLemon

The LULU call position was stopped out.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

AOS - AO Smith - Company Description


I am cancelling the call recommendation on AOS. It has crashed with the market and it does not have the same followers as the tech stocks. It may not rebound at the same rate as a Facebook or Starbucks. I will bring this position back if it returns to the $70 level.

Original Trade Description: February 1st

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 29th market crash and have been moving steadily higher. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade over today's intraday high.

No current recommendation. Cancel prior entry trigger.

FL - Foot Locker - Company Description


Shares sharply lower again on no news but there was a decent rebound off the lows. The dip to $63 was a key support level.

If the market is getting prepared for a bounce the high interest momentum stocks like Nike, UA and others should be the biggest rebounders when the short squeeze begins.

I am lowering the entry trigger to $64.75

Original Trade Description: February 3rd.

Foot Locker is a specialty athletic retailer with more than 3,400 stores in 23 countries and it a leading provider of athletic shoes. February is kickoff month for Foot Locker and they run a series of new ads on TV ahead of the March Madness.

This year the ads will feature comedian Kevin Hart in both Foot Locker and Kids Foot Locker promotions. In Q3 same store sales rose +8% and retailers for sports apparel reported a good holiday season. Foot Locker reports earnings on March 4th.

Nike and UnderArmour already reported strong earnings. UnderArmour reported a record quarter claiming accelerating sales of athletic footwear were growing market share and profitability. Nike reported earnings that increased 21.6% at 90 cents that were 5.1% above consensus. That was the 14th consecutive quarter that Nike has beaten estimates.

The country is currently undergoing a "social fitness" phenomenon with sales of sports watches and fitness training products exploding. Millennials, those born between 1980-2000, have changed the landscape of retail. They now represent 25% of the population. Millennials are far more health conscious than boomers and tend to try lots of different activities unlike boomers that stuck to 1 or 2 sports. Boomers played golf or tennis. Millennials are cyclists, runners, basketball players and any number of other active sports. They are not golfers. Each of these sports requires different shoes. This is where Foot Locker shines in providing a wide range of affordable shoes and athletic apparel.

Foot Locker should have a good quarter when they release earnings next month. With the Foot Locker commercials in February plus the Super Bowl and the build up to March Madness, investors will think of Foot Locker and shares should rise.

With a FL trade at $64.75:

Buy March $70 call, currently $2.65, initial stop loss $66.45

PG - Procter & Gamble - Company Description


That was an excellent way to open a new play. PG rallied +1.42 in a bad market because there is nothing wrong with the fundamentals. This stock is recession proof, as much as any stock can be.

I raised the stop loss to $79.65.

Original Trade Description: February 5th

Procter & Gamble was started in 1837 and has grown to be an international company with hundreds of brands that are household names. This includes products like medicines, diapers, toothpaste, mouthwash, soap of all types, toilet paper, razors and hundreds more. There is not a person in America that does not have at least one P&G product in their home today and most probably have dozens.

They reported Q4 earnings in January of $1.12 that rose +37% on a currency neutral basis. Revenue was $16.9 billion. Revenue declined -9% due to an 8% impact from the strong dollar and a 3% impact from reorganizing in Venezuela as a result of their economic collapse.

P&G saw operating cash flow of $4.5 billion, up +117%. They repurchased $2 billion in stock and paid $1.9 billion in dividends in the quarter.

The guided for flat to low single digit growth in 2016 after an expected 7% drag due to currencies and a continued 3% drag from Venezuela. Absent Venezuela and currencies they could see high single digit revenue growth despite the weakness in the global economy.

In 2016, they expect to pay additional dividends of $7 billion and repurchase another $8 billion in shares.

Everybody knows P&G. This is a no brainer play. P&G has relative strength to the market and no material impact to its operations from the economy. P&G is recession proof because their brands are used every day by everyone.

This is a technical setup with PG shares about to break over resistance at $81. Earnings are a long way off on April 26th. If the market continues lower, we have the protection of relative strength. If it moves higher we should see PG shares retest resistance at $85 or even higher. The December 2014 high was $94.

Position 2/8/16 with a PG trade at $81.50

Long April $82.50 call @ $1.93, see portfolio graphic for stop loss.

KR - Kroger - Company Description


Sharp drop with the market on no news. Shares dipped to $35.42 intraday and rebounded +1.40 to close back near $37. This was excellent relative strength on the rebound suggesting investors were looking for recession proof bargains.

Original Trade Description: January 28th

Kroger is a retail grocery chain with $108 billion in sales in 2014. In Q3, 2015 their same store sales comps rose +5.4% without factoring in gasoline. They have recently been adding service stations to their offerings. They operate 2,774 supermarkets, 148 with in store clinics, 786 convenience stores, 1,330 fuel centers and 326 Fred Meyer jewelry stores in the USA. In all they have more than 161.3 million square feet of operated retail space. They have 37 food-processing plants, 27 dairies, 6 bakeries and 36 distribution centers.

While most people know them as a grocery store they are much more. They operate those grocery stores under many name brands, more than two dozen, as a result of the acquisition of regional chains. They also operate multi-department stores like a small Walmart or Target.

They have more than 422,000 employees and operate in 34 states. They filled 175 million prescriptions in 2014 worth over $9 billion. Kroger earned $3.223 billion in profits in 2014.

Where Kroger is kicking butt is their new organic product lines. They are significantly cheaper than Whole Foods Markets (WFM), Fresh Market (TFM) and Sprouts Farmers Markets (SFM). They are able to compete with Walmart on organics and private label brands because they own their own food processing and distribution centers. They have dozens of store brands than encompass nearly every isle in the stores from frozen pizzas, vegetables, fruit, toilet paper, snack chips and salsa to a complete customer deli in their larger stores. Their private label organic produce covers 60% of their produce department. Their Simple Truth Organic brand is now the largest natural food brand in the USA.

While Kroger has been outperforming the other grocery and fresh food stores their shares took a hit in early January when a division president, Lynn Gust, president of the Fred Meyer division retired after 45 years. He started out as a package clerk in 1970 and rose up through the ranks to be named president and then led the division to more than $10 billion in annual sales.

At the same time Credit Suisse lowered their rating on Kroger because of deflation risks. The deflation risk means prices for products are going to continue lower. However, I view that as a positive. Kroger's costs are going down but the price of their products do not have to go down in lock step. This is a profit opportunity for Kroger. The analyst also said fuel prices will eventually rise and that will take money out of consumer's pockets. Since that will happen across the board to all grocery stores it makes sense to own the one that is making money on gasoline with their 786 convenience stores regardless of the prices.

Shares declined from $43 in early January to $36 on the Wednesday crash. This is long term support and shares are very oversold. Earnings are March 3rd and I expect the stock to rebound, assuming the market cooperates. With support at $36.50 and the stock at $37.81 I view this position as very limited risk unless the overall market crashes.

Shares have consolidates over the last year after a monster rally from $17.50 in early 2014.

Earnings March 3rd. We will exit before earnings.

Position 1/29/16:

Long April $40 call, entry $1.05. No stop loss because of the cheap option.

LULU - LuluLemon - Full Company Description


LULU, a Nasdaq stock, finally cracked on the big intraday decline on the Nasdaq. We were stopped out at $57.85. Shares had shown great relative strength up until today when it was down almost $6 intraday to $55.37. There was a $3 rebound in the afternoon as bargain hunters appeared. I will put LULU back in the portfolio once strength returns.

Fortunately we only lost 29 cents because of the prior gains and raised stop loss.

Original Trade Description: January 22nd

LuluLemon designs, manufactures and sells athletic apparel and accessories for women, men and female youth. They operate through corporate owned stores and sell direct to the consumer online. They are best known for their yoga style clothing.

LuluLemon surprised everyone when they raised their guidance for Q4 sales saying they had a great holiday season. The company preannounced strong sales when most other retailers were posting losses or mediocre gains. The company now expects Q4 revenues in the range of $690-$695 million compared to prior guidance for $670-$685 million. This represents nearly 19% year over year growth on a constant currency basis.

Earnings guidance was raised to a range of 78-80 cents, up from 75-78 cents. Analysts were expecting 77 cents. The company said it entered 2016 with a bang thanks to a better than expected holiday season and continued increases in store traffic.

Cowen raised the target price from $52 to $66. Wells Fargo ungraded them from neutral to outperform with a target of $65. Jefferies upgraded it from hold to buy and gave it a $70 price target. Credit Suisse maintained its outperform rating but raised the target to $60. Suntrust Robinson reiterated a buy with a $66 target. Morgan Stanley reiterated an overweight with a target of $68. Morgan called it their favorite "turnaround" stock for 2016. Barclays issued an overweight rating with a target of $85.

It is amazing what a little positive guidance can do for Street ratings.

Earnings are March 9th.

Position 1/26/16, closed 2/8/16:

Closed March $60 calls, entry $2.90, exit $2.61, -.29 loss.

THO - Thor Industries - Company Description


Major intraday dip to support at $48 followed by a big rebound. Bargain hunters were waiting. No change in position.

Original Trade Description: January 29th, 2016:

Thor designs and manufacturers recreational vehicles for the U.S. and Canada. Some of its brands include Airstream International, Flying Cloud, Land Yacht, Eddie Bauer, Interstate and AutoBahn class B motorhomes. They have dozens of other brands in the conventional travel trailers and fifth wheels.

You would think that motorhomes would be a tough sell in the current economy. We know that Harley Davidson (HOG), Polaris (PII) and Arctic Cat (ACAT) have been having some challenges. That is not the case for Thor. Towable RV sales in the U.S. hit a record high in 2015.

In the last quarter, Thor reported earnings of 97 cents, up from 73 cents. Revenue rose +11.7% to $1.03 billion. Profit margins rose from 12.8% to 14.8%. They have $180 million in cash and no debt. They pay nearly a 3% dividend.

At the end of October Thor's backlog in orders for towable RV units was $710 million. The order backlog for motorized RVs was $341 million. With total backlogs of more than $1 billion and headed into the RV selling season, Thor is positioned to capitalize on price increases, margin expansion and even more sales.

Earnings are March 3rd.

Shares collapsed with the market in early January and bottomed the prior week at $48. Despite market volatility last week, they have been moving steadily higher. I am recommending the March options and we will exit before earnings.

Position 2/1/16 after a THO trade at $52.75

Long March $55 call @ $1.15, no stop loss because of the cheap option.

BEARISH Play Updates (Alpha by Symbol)

AMBA - Ambarella - Company Description


Another big drop in Ambarella shares. The stock is finally headed in our direction. I lowered the stop loss to $38.75.

Original Trade Description: January 27th

Ambarella develops full motion HD video chips for video capture, sharing and display worldwide. The system on a chip handles HD video, audio, image processing and system functions on one chip. Their largest customer is GoPro.

GoPro (GPRO) reported two weeks ago that holiday sales have been dismal and would report Q4 revenue of $435 million, down -31% from the year ago quarter. Analysts were expecting $512 million and that number had already been lowered by analysts fearing sales were declining.

GoPro said it was cutting 7% of its workers and would incur up to $10 million of restructuring expenses in 2016.

Ambarella shares tanked along with GoPro despite having numerous other customers that also buy their chips. Unfortunately, GoPro is their biggest customer by far. In the prior quarter, Ambarella missed estimates for "near-term headwinds" which translates to "GoPro cameras are not selling." This means the current quarter that they will report on March 3rd is not likely to be any better. There is probably an earnings warning lurking in the near future.

GoPro is being hampered by a flurry of new competitors at cheaper prices. This means competition is only going to get worse and GoPro has already cut its prices twice in the last 3 months. All of this means GoPro is losing market share and that means fewer Ambarella chips will be needed.

With Apple shares crashing and estimates for Q1 iPhone sales declining by about 20%, this is going to put a cloud over the entire personal electronics market.

Ambarella is not overpriced with a PE of 13. They are just too reliant on GoPro for the majority of their revenue. If Ambarella could accelerate some purchases by their other customers, the stock would recover quickly. Apparently that is not yet happening and shares are about to decline to an 18-month low under $35.

Earnings March 3rd.

Position 2/5/16

Long March $32.50 put @ $1.78, initial stop loss $41.55

BABA - Alibaba - Company Description


Another nice decline to a four-month closing low. Target $58.25 for an exit.

I lowered the stop loss to $64.25.

Original Trade Description: January 29th.

This Chinese retailer reported earnings of 73 cents that beat estimates for 70 cents. Revenue of $5.33 billion also beat estimates for $5.08 billion. However, gross merchandise volume rose only 23% to $149 billion and the slowest growth in more than three years. Alibaba has 80% market share in China and they are starting to see the impact of the economic slowdown.

Shares declined after the earnings on Thursday and then declined again on Friday. If it were not for a burst of short covering at the close, they would have ended in the red in a very strong market. They gained only 11 cents on the short covering.

Shares have been declining since mid December when the Chinese economics and equity markets began to weaken further. Investor sentiment is fading as continued questions over accounting issues cloud their results.

It is not that investors are terribly disappointed in Alibaba. They are worried more about China's economic direction with multiple CEOs including Howard Schultz at Starbucks saying China sales are slowing. Add in the constant accounting rumors and investors are leaving the stock.

Shares bumped up against a solid top in Nov/Dec and then faded in January. The stock is about to experience a death cross of the 50-day below the 200-day average. I am looking for a retest of support at $57 from September.

The low last week was $65.34. I am recommending a put position with a trade at $64.85.

Position 2/2/16 with a BABA trade at $64.85:

Long March $65 put @ $3.90, see portfolio graphic for stop loss.

BABY - Natus Medical - Company Description


BABY declined to a new low but only gave up 23 cents. There is no stop loss because of the cheap option. That option is not cooperating with the premium shrinking faster than the stock is declining. We need a big dip by BABY to reinflate the premiums.

Original Trade Description: February 4th.

Shares of BABY spiked higher on the 27th when they posted a 27% increase in earnings but revenue only rose +6.4% and failed to meet their projections. They guided for $100 million and came close at $99.951 million so rounded up they did hit their target. However, investors sold the stock almost immediately and the stock has continued slowly lower.

There is nothing wrong with the company. They are transitioning away from selling devices and systems as their primary revenue and more to supplies and services as a continuing revenue source. Once you sell a hospital a bunch of devices it will be years before they buy again. By moving into the supplies area they will develop a constant revenue stream as those supplies are consumed.

One of their products is called NicView that allows families and friends to view the babies over the Internet while they are in the neonatal intensive care units. More than 80 hospitals now have that installed.

They guided for Q1 to revenue of $86.5-$97.5 million, down slightly from Q4 and earnings of 34-35 cents. Full year revenue guidance was $445-$455 million and also down from the Q4 run rate. Earnings are good but that slowing revenue is a challenge.

Earnings are April 27th.

I like Natus as a company. I wish their stock was rising so I could play it on the upside. However, shares are struggling to hold over $34. If this level breaks the next support is in the $25 to $28 level.

With the biotech sector very weak and expected to get weaker I am afraid it is going to rub off on Natus and we will see that breakdown.

Position 2/5/16 with a BABY trade at $33.50

Long April $30 put @ $1.15. No stop loss because of the cheap option.

HPQ - Hewlett Packard - Company Description


HP dipped below support but refuses to pick a direction other than sideways. We have plenty of time.

This is a long-term play to hold over the Feb 24th earnings. Earnings news by other companies will be the driver over the next several weeks.

Original Trade Description: January 25th

Back in October Hewlett Packard spun off its enterprise server business into Hewlett Packard Enterprise (HPE) and the old Hewlett Packard that sells PCs and printers remained (HPQ). The problem with this spinoff is that the enterprise company is where the profits are. The PC business has been declining for years and that is why HP split the two entities.

Since the spinoff at $14.75 in October the HPQ shares have been in decline. They closed at a new low on Monday. I see no reason where HPQ should rally in the near future. PC sales are still expected to decline in 2016 only at a slower pace. There is nothing to produce excitement in the PC company.

In theory we could probably just buy a cheap put and sit on it but HPQ has earnings on February 24th. I expect those earnings to be disappointing. However, you never know if they will pull a rabbit out of the hat and announce something that powers the stock higher. This is why I am recommending a strangle rather than just a straight put play.

HPQ shares closed at $9.49 on Monday and halfway between the $9 put and $10 call. I am recommending the April strangle so we can benefit from the long-term trend if HPQ continues to decline. If earnings disappoint we could see HPQ at $5 by then.

Earnings are February 24th.

Position 1/26/16:

Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.

JUNO - Juno Therapeutics - Full Company Description


JUNO is fighting the drop in biotechs. Shares rallied +.37 today to touch downtrend resistance at $27.65. I do not know why JUNO is suddenly stronger than the sector but I lowered the stop loss to $28.25 just in case it continues higher.

Original Trade Description: January 22nd

Juno is a biopharmaceutical company that develops cell based cancer immunotherapies. Juno has been very active in buying up its competitors. On January 11th the company announced the acquisition of AbVitro for $125 million. That is their third acquisition in 12 months. However, Illumina (ILMN), ten times larger than Juno, is also on the same track and announced a similar acquisition on the same day.

Juno claims there is more than enough room in the space for both Juno, Illumina and Celgene (CELG) another competitor in the space. Apparently investors are not convinced. Shares of Juno have been in decline since early December and they hit a post IPO low last week. The rebound was lackluster and in a good market on Friday, they only gained 8 cents.

Update 1/26/16: The National Institute of Health (NIH) researchers published a study showing off-the-shelf T-cell therapy could induce remissions in patients with advanced blood cancers. This new "allogenic" T-cell therapy study represents a competitive threat to therapies from Juno, Kite and Novartis.

Earnings are March 17th.

Position 1/26/16:

Long March $27.50 put @ $1.75, see portfolio graphic for stop loss.

VXX - iPath S&P 500 VIX Futures ETN - ETF Description


Market crashed, VIX went higher. I doubt anyone is surprised. Eventually the volatility will ease. It is only a matter of time.

Original Trade Description: January 16th

At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.

The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.

No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.

Stocks normally don't move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.

Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.

Position 1/19/16:
Long March $23 Put @ $2.41, no stop loss

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