After making a new S&P low at 1,810 on Thursday, the S&P has gained +85 points in only two-days. This is clearly a short squeeze and it is approaching resistance.
Last Tuesday evening I pointed out that 1,812 was the target for the S&P and we hit 1,810 on Thursday. That is the equivalent of a quadruple bottom dating back to April 2014.
The 85-point rebound was not due to investors suddenly deciding to buy stocks. The AAII survey that ended on Wednesday showed a monster move of 14% into the bearish category and bullish sentiment falling under 20%. This did not suddenly reverse just because the S&P hit 1,810 the next day.
Once the shorts are squeezed out of the market the real direction will appear.
Current Position Changes
BABA - Alibaba
Short position stopped at $64.25
RGLD - Royal Gold
RGLD recommendation cancelled.
Check the graphic above for any profit stops in green.
We need to always be prepared for a profit exit at resistance.
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
CSCO - Cisco Systems - Company Description
Cisco continued to surge higher after earnings and neared $26 intraday. I added a stop loss on this position. Target $27.25 for an exit.
Original Trade Description: February 11th.
Cisco reported after the bell yesterday and did more than please investors. The results, plus forward guidance, an increase to the dividend and an increase to the share buyback plan drove shares higher in today's session. The stock gained nearly 10%, broke above the previous resistance, moved up off the short-term moving average after gapping higher and all on 2.35X average daily volume.
Cisco Systems, Inc. supplies data networking products for the Internet. The Company's Internet Protocol-based networking solutions are installed at corporations, public institutions and telecommunication companies worldwide. The Company's solutions transport data, voice, and video within buildings, across campuses, and around the world.
Cisco reported earnings after the bell and did more than stun the market with its results. In the face of weak global growth and poor earnings results for the broader tech sector this company has been able to grow revenue, grow earnings and all on the back of increased demand.
Quarterly earnings rose to $3.1 billion or $0.62 per share, up 29.1% and 34% respectively from last year in the same period. Revenue rose 2% year over year due to a 2% increase in product revenue and a 3% increase in service revenue. All geographic segments saw growth, led by the Asia/Pacific region with an 11% increase. In terms of business segments product revenue was led by an 11% increase in security revenue, evidence of the ongoing need for business around the globe to bolster their online security. Margins are also on the rise driven by productivity improvement and a 7% decline in GAAP operating expenses.
The board of directors approved an increase to dividend, in line with the companies pledge to return 50% of free cash to investors. The new dividend is $0.26 per share, up $0.05 or 24% from the previous quarter.
The board also approved an increase to the current share repurchase program. The previously approved program totaled near $97 billion of which about $1.9 billion is left. The new addition is for another $15 billion, with no time limitation, making the total available for repurchase $16.9 billion.
The company also reaffirmed guidance for the 3rd quarter of fiscal 2016. Management is expecting earnings of $0.54 to $0.56, bracketing the consensus estimate, on revenue of $12.26 to $12.62 billion. Consensus revenue estimates are only $12.03 billion. High end estimates are closer to $13 billion, leaving plenty of room for Cisco to beat estimates yet again and if they continue to grow their customer base as they did this quarter it is sure to happen. Additionally, with the dollar falling to new lows and the strength shown in the Asia/Pacific region it is likely that current estimates are low.
There has already been one upgrade in the wake of the report and more are sure to come. Jeffries upped their rating to buy from hold. The consensus estimate if for share prices to rise to $31.61 with a high target of $37.00. Simply based on the consensus estimate there is a potential upside of 30%.
Our play, buy the April $25 call with a price trigger of $25 per share. As of today's action these options were going for $0.95 per share. Next earnings is in mid May so this position will be closed before then.
Position 2/12/16 with a CSCO trade at $25.00:
Long March $70 call @ $1.05, see portfolio graphic for stop loss.
FL - Foot Locker - Company Description
Another strong gain by Foot Locker. I raised the stop loss to $62.50. Target $69.25 for an exit.
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.
Position 2/10/16 with a FL trade at $64.75:
Long March $70 call @ $1.20, see portfolio graphic for stop loss.
IYT - Dow Transports ETF - ETF Description
Breakout by the IYT. I raised the stop loss to $121.25.
Original Trade Description: February 8th
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.
Position 2/9/16 with IYT trade at $125.85
Long March $130 call @ $2.55, see portfolio graphic for stop loss.
KR - Kroger - Company Description
Kroger paused at resistance from April/Aug at $38.75 but still showing positive momentum. News of a deal for Fresh Market could poser it higher.
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.
Long April $40 call, entry $1.05. No stop loss because of the cheap option.
QQQ - Nasdaq 100 ETF - ETF Description
We have a long way to go before hitting resistance at $104.50. The Qs closed at the high for the day thanks to short covering on the Nasdaq.
Original Trade Description: February 8th.
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.
Position 2/10/16 with QQQ trade at $98.45
Long March $100 call @ $2.61, see portfolio graphic for stop loss. .
RGLD - Royal Gold - Company Description
Goldman Sachs recommended shorting gold this morning and today was the second consecutive day of declines. I am cancelling this recommendation. We are more likely to go lower than higher from here, especially in positive equity market.
Original Trade Description: February 12th.
Gold just had its best week in over four years. As of the Friday settlement prices have risen nearly 15% from their lows set during the last fiscal quarter. In the first 6 weeks of this year alone spot prices have averaged near $1150, higher than the $1105 average price for the 4th quarter of 2015. Looking back at the entire past year, Friday's close is the highest price paid for gold since the first two weeks of 2015. All reasons to expect improved earnings among the gold miners. Now, factor in the low low price of fuel and the possibilities for earnings improvements only gets better.
Royal Gold, Inc. is engaged in the acquisition and management of precious metals royalties. They also seek to acquire existing royalties and to finance projects that are in or near production in exchange for royalty interests. Through subsidiaries they also explore and develop properties thought to contain precious metals in order to sell them to existing mining operations in return for royalty payments.
Why We Like Them
Even without the massive surge in gold prices Royal Gold is delivering results. The company has spent the past few quarters prior to the most recently reported ( Fiscal Q2 reported on 2/3/2016) investing heavily in new and current projects. This investment has begun to pay off in spades and is going to be supercharged by higher realized sales prices for the underlying commodity.
On an EPS basis RGLD missed by a penny, primarily due to the low prices of gold realized in the 4th quarter (the low for gold in the period was $1045 with an average reported sales price of $1094). Despite the low prices in gold revenues were much better than expected, 15% better, driven on increased production. Fourth quarter EPS also reversed a loss experienced in the comparable quarter of the previous year. Revenue was a company record, up 60% year over year. On a cash flow basis available free cash improved by 75% and all on the back of a 74% increase in gold volumes.
The end result is a company with a much stronger balance sheet, strong production and a positive forward impact related to higher gold prices. Looking at the current report one of the things that stands out to me is the 27,500 ounces of gold being held in reserve. Based on the 4th quarter average realized price this is worth about $30.085 million dollars. Factoring in the Friday price brings this total up to near $34 million, a 10% increase in value simply due to the price of gold.
From the RGLD earnings report;
â€œIncreased production from Mount Milligan and contributions from our recently acquired streams at Pueblo Viejo, Andacollo, Wassa and Prestea drove our record performance in the second quarter as expected,â€ commented Tony Jensen, President and CEO. â€œImpressive volume growth at these properties and stability within the rest of the portfolio are yielding solid financial results and generating strong free cash flow.â€
Looking forward there are a couple of things I think we can expect from this sector and company. For one, upgrades in the sector. Ever gold miner will benefit from higher prices, all will increase cash flow and all will be better positioned for future gains. Another is upgrades specifically for this company driven by the strong performance delivered in the last quarter. Additionally, stronger cash flow and improved balance sheet could lead easily lead to stock buy backs, special dividends and increased dividends in upcoming quarters.
Because this play is based on rising gold prices as much as it is on the performance of the company we need to be ready for some volatility. That being said, unless gold prices fall back below $1100 per ounce this company stands to do very well in terms of cash flow and cash available to share holders.
Central bank activity is the real risk here. If the FOMC continues to raise rates and strengthen the dollar gold could fall back to $1100 or lower. The mitigating factor is that EU GDP came in much stronger than expected last week and is not supportive of additional QE from the ECB. Without ECB QE, and with diminished expectations for aggressive FOMC rate hiking policy between the two banks is no longer diverging as it was in the 4th quarter of last year and should help keep dollar values low, if not moving lower.
No current recommendation for RGLD.
THO - Thor Industries - Company Description
Excellent 3.54% gain and we are still $2 below initial resistance at $53. 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)
BABA - Alibaba - Company Description
BABA exploded higher on news of the stake in Groupon. Personally I think that was negative news but the market did not ask my opinion. We were stopped out of the position at $64.25 for a 45-cent loss.
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 did not rebound with the short covering in the biotech sector. This should be good news because it means the next time biotechs are weak we should see BABY decline further.
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
HPQ cannot make up its mind. This rebound was purely a short squeeze because of the heavy short interest, market squeeze on no news. 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.
Long April $9 put @ 41 cents, no stop loss.
Long April $10 call @ 50 cents, no stop loss.
VXX - iPath S&P 500 VIX Futures ETN - ETF Description
Two days of market gains knocked -3 points off the VXX. We need this rally to continue! 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.
Long March $23 Put @ $2.41, no stop loss
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