Option Investor

Daily Newsletter, Thursday, 2/25/2016

Table of Contents

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

Market Wrap

Oil News Moves The Market

by Thomas Hughes

Click here to email Thomas Hughes


Oil prices moved higher on news, and the market followed. The market moved higher today, primarily driven by rising oil prices although economic data was good as well. Oil prices began the day in retreat, giving up most of if not all of the gains made yesterday, but ended higher by nearly 2.5% after another supportive headline hit the market. The new news is that the Venezuelan oil minister says a meeting has been set for March to discuss proposed production caps.

Other positive factors supporting the market today was economic data; the labor market remains stable and durable goods order rose much more than expected. While good in terms of growth the question of how the FOMC will react to this data remains to be answered. Today at least good news was good news.

Market Statistics

The international markets were mostly up in Thursday trading, the one exception was China which saw a -6% decline led by the mainland Shang Hai index. Tightening liquidity and a lack of confidence in regulators helped to spark another round of profit taking in China's small cap sector.

In Japan the Nikkei rose by nearly 1.5%, perhaps supported by BOJ governor Kuroda's assurance to parliament that negative interest rates were having the intended affect. European indices moved higher on positive earnings and an upgrade to UK 4th quarter GDP.

Futures trading here at home indicated a positive, if barely, open for most of the morning. There was a little give and take during the early hours but little noticeable impact from today's data or the early weakness in oil. The opening was as expected, the indices posted small gains within the first minutes of trading and then proceeded to trade in a tight range around break-even levels until shortly after lunch. The Russia/OPEC headlines hit the market just before 1PM which is when today's rally got underway. The indices made steady gains throughout the afternoon, hitting their highs shortly before the close of the day.

Economic Calendar

The Economy

We got some fairly promising economic data today in the form of Durable Goods orders. New orders for durable goods rose by 4.9%, nearly double the expectations and a positive tailwind for 1st quarter GDP. Within the number durables ex-transportation rose by 1.8%, more 9 times better than the 0.2% expected and a sign that more than just auto sales is driving the numbers. Shipments rose 1.9%, unfilled orders rose by 0.1% and inventory fell by -0.1%; all pointing to a pick up in demand. In terms of capital goods, new orders rose a stunning 21.6%.

Jobless claims remain steady and at levels consistent with healthy labor markets. Initial claims rose by 10,000 from last week's not revised figure to hit 272,000. The four week moving average of initial claims fell -1,250 to hit 272,000. On a not adjusted basis claims fell by -3.8% versus an expected decline of -7.4% as predicted by the seasonal factors. On a year over year basis not adjusted claims are now down -11.4%.

The states with the biggest increase in claims were Wisconsin and Minnesota with increases of +387 and +106. The states with the biggest decreases in claims were Pennsylvania and Texas with declines of -3739 and -2342. No reasons were cited by those states showing increases but a couple of common themes emerged from those showing decreases; most states saw a decline in layoffs in construction, manufacturing and F&B.

Continuing claims fell by -19,000 to hit 2.253 million, last week's figure was revised lower by -1,000. The four week moving average of continuing claims fell 5,250 to hit 2.257. Continuing claims have been hovering around this level for the past month and appear to be topping out following the declines we've seen in the initial claims numbers in that same time frame.

Total claims fell -12,802 to hit 2.707 million. This is the fifth week total claims have been at/near this level following the post-holiday spike we saw in the first week of January. Total claims are now down -5.5% from last years level at this time and remain consistent with the historical perspective, as well as labor market health. Based on the historical data we should start to see the total number of Americans begin to fall within the next month or so as we enter the spring hiring season.

Tomorrow's data could be a real market mover. Most important will be the GDP revision even though it is a lagging indicator and 2 months out of date. Expectations are for 4th quarter GDP to fall to 0.4% from the previous estimate of 0.7%. Other data due out tomorrow includes Personal Income and Spending, expected to rise 0.4% and 0.3% respectively, and Michigan Sentiment.

The Oil Index

Oil prices were, you guessed it, volatile in today's session. WTI flirted with the $32.50 level during the early part of the session, moving lower by 3% or so. Later in the day the Russia/OPEC news helped push prices higher and left WTI with a gain of near 3%, closing above $33 at settlement time.

The good news, at least in the near term, is that prices seem to be holding above $30 on the hopes that prices have bottomed, and that output/supply will be coming down over the next year or so. The bad news is that prices are still range bound, driven by rumors more than anything else and subject to quick reversal.

The announced meeting is good news for prices but at this time there is no real sign of a change in fundamentals so any uptick in prices remains highly questionable. At best we may see prices continue to stabilize at or near current levels until a clearer picture of the supply/demand outlook emerges.

The Oil Index fell about -1% in today's session, falling just below the 30 day moving average, only to regain the loss following the OPEC/Russia news hitting the market. Despite the late day rally the index remains range bound in consolidation waiting for a more concrete signal that supply/demand imbalance is stabilizing. The indicators, particularly stochastic, are consistent with a range bound asset and suggest the index will be testing support again in the near term. First target for support is the 950 level with 900 next target should 900 fail. Resistance is the 1,000 level and likely not to break unless oil prices make a significant move higher, or the earnings projections for the energy sector begin to move higher.

The Gold Index

Gold prices were a little volatile in today's session. Spot gold moved down by about -1% in the early part of the day only to regain the loss and a little more by early afternoon.

The bull case for gold seems to be gaining strength. First, safety seekers around the world are moving into gold. Second, fund inflows are supporting gold prices as managers buy to match demand, a report today detailed how year to date inflows to the GLD have already surpassed outflows for all of 2015. Third, spot prices are approaching a significant technical signal, a bullish crossover of the 200 day moving average by the 50 day moving average, the golden cross. Fourth, low expectation for additional or aggressive FOMC rate hiking it putting pressure on the dollar. Resistance is at $1250 as evidenced by yesterday's action, aA break above resistance, could easily attract momentum players (and short covering, don't forget about the Goldman Sachs call to short gold) and send prices up to $1300.

The miners moved higher in today's action, the Gold Miners ETF GDX gaining about 1.5%. The move may be loosing steam in the near term, momentum is waning, but the strength of the rally and extreme peak in MACD suggests a pullback will be another entry point for the bulls. The ETF is trading near the mid point of two support/resistance targets, $18 to the downside and $20.50 to the upside, leaving plenty of room for the sector to move up or down before hitting strong support or resistance.

In The News, Story Stocks and Earnings

The Dollar Index is caught in an incredibly narrow range between resistance and support while the market waits on economic data. Support is the 30 day moving average, resistance is just above the moving average, at the 38.8% retracement level near $97.50. Strong data will likely increase the expectations for a rate hike and strengthen the dollar, weak data the opposite. At this time the Fed Funds Futures are predicting the chance of a March hike at 6%, not very high, but this could change quickly if the data is better than expected.

Domino's Pizza released earnings before the bell and confirmed their dominance in the global pizza delivery business. The company beat on the top and bottom lines driven by strong comp store sales domestically and abroad, as well as a growing store count. US comp sales rose 10.7% for the 4th quarter, 12% for the year. International comp store sales rose 8.6% extending the trend of consecutive quarters of positive comp growth to 22 years. Aiding the results, and setting them up for yet another strong year, was the addition of 901 new location in 2015. Shares of the stock jumped on the news, gaining more than 13% on 5 times average daily volume.

Shares of Williams Cos and Energy Transfer Equity were halted briefly this afternoon when a report hit the wires that the latter was trying to pull out of a deal to acquire the former. According to the NY Times report ETE has considered offering a $2 billion payment to Williams Cos to back away from the deal, which has lost significant value in the 5 months since it was closed. Williams Cos fell more than -10% on the news, triggering circuit breakers, while ETE briefly surged higher. Both companies closed the day with a loss but off of the lowest levels of the day.

Weight Watchers reported earnings after the bell, disappointing investors. Although the company says the partnership with Oprah is progressing nicely earnings came in at -$0.03, $0.05 below consensus. Guidance is also on the weak side and helped to send the stock down by nearly -20% in after hours trading.

The Indices

The day began rather quietly, the indices opened flat and traded flat for more than half the day. By early afternoon things had changed dramatically, rising oil prices helped the bulls gain control and send the indices up by 1% or more. Today's leader was the Dow Jones Industrial Average which gained 1.29% to close at the highest levels in nearly 2 months. Today's action created a long white candle that broke above the 16,600 resistance level with bullish indicators. Both MACD and stochastic are pointing higher with today's action suggesting a move to next resistance at 17,000.

The S&P 500 was the next biggest gainer in today's session, adding 1.14%. The broad market created a long white candle moving up from the short term moving average and broke the 1950 resistance line. The move looks bullish and the indicators are confirming so a move up to next resistance near 1980 looks likely.

The Dow Jones Transportation Average made the third largest gain today's session and is the only of the four major indices not to make a new high. The transports gained 1.08% and appear to be on the way to retest the 7 week high set on Monday. Momentum remains strongly bullish, although it is also waning, and stochastic has begun to show some strength with a cross of the upper signal line. Upside target here is at least 7,500 as indicated by the most recent peak in the MACD. This peak is convergent with the index high and a long term extreme, indicative of a retest of the high if not higher prices.

The NASDAQ Composite brings up the rear in today's action with a gain of only 0.87%. The tech heavy index moved up after testing support at 4,535 and the short term moving average to set a new one month high. Along with the index high is a new high in the MACD, an extreme peak, that suggests growing momentum and higher index prices. Stochastic is also moving higher although it is still near the middle of its range. Next upside target is near 4,635 with a possible move to 4,750.

The market wants to move higher and has some fairly strong momentum behind it. Based on the charts it looks like they will continue to move higher in the near term at least, although there are some risks present.

The first is that today's rally was based largely if not entirely on the move in oil prices, a move sparked by the suggestion of a meeting to curb production and not an actual change in fundamentals. The news could turn out to be real, there could be an actual meeting and production could be curbed but until it happens is little more than rumor. Oil prices could just as easily give up today's gains as build on them, and just as easily sand bag the equities market.

Another risk is the data, and the FOMC. There is a lot of data due out over the next week including tomorrows release of GDP. It's hard to say how the market will react but I think it safe to say that if it is too strong the specter of higher interest rates will reemerge to weigh the market down.

I'm hopeful, still bullish, but also still very cautious. No matter what happens with oil, the data or the FOMC I still think it is earnings we need to be worried about and we have yet to see an uptick in expectations.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Looking for a Breakout

by Jim Brown

Click here to email Jim Brown

Editors Note:

The +212 point Dow gain today was confirmation of the +319 point Dow rebound yesterday. This may be the start of something big. If the S&P breaks over resistance at 1,950 on Friday and the Russell 2000 moves over 1,035 the bears will be running for the forest.

The market is finally starting to find its sea legs after a very rocky start to 2016. While we cannot guarantee that we will not suffer from another bout of seasickness in the coming days the internals are starting to turn positive.

Today's gain was even more amazing since the Shanghai Composite was down -6.4% last night. U.S. investors are starting to ignore China and that is positive for our markets.

The Fed is on the sidelines for the rest of the year according to some measures and it appears portfolio managers are trying to capture some gains before the "Sell in May" cycle, which is particularly strong in an election year.

I am adding a couple more longs and could have added a dozen more because suddenly there is an over abundance of candidates with good charts and stories. Assuming we don't crash and burn on Friday, I will add some more this weekend.


PII - Polaris Industries - Company Description

Polaris makes off road vehicles, snowmobiles and motorcycles. They compete with Arctic Cat and have 8,100 employees. They are about four times larger than ACAT. They had some earnings issues from the lack of snow but their motorcycle business helped smooth out the rough spots. The company reduced guidance in December and shares declined from $96 to $68 by late January.

In Q4 sales declined -20% because of the lack of snow but also because of the oil recession. They sell a lot of off road equipment to oil field workers and they are not buying today. When oil field workers are employed they make a lot of money with starting wages in the $70-$80K range when times are good so there is a lot of extra cash floating around. Retail sales in oil regions were down -10% in Q4.

However, despite the lack of snow and a rough Q4 the company still managed to increase sales for 2015. That is impressive when snowmobile sales declined -25%. We have had some significant snowstorms in 2016 so that snowmobile inventory is probably shrinking in Q1.

Motorcycle sales rose +43% in Q4 so there is a bright side to warm weather and no snow. Sales in that division were up +74% for the full year.

Polaris is the number one off road vehicle manufacturer in the U.S. and are expecting a better 2016 with most of the growth in the second half.

Earnings are April 26th.

Shares are about to break over resistance at $89, market permitting. I am recommending the April $95 calls currently $2.00 on a breakout.

With a PII trade at $89.50

Buy April $95 call, currently $2.00, stop loss $83.85

IWM - Russell 2000 ETF - ETF Description

The Russell 2000 has come alive. Over the last two weeks the small cap index has been surging with bigger daily gains than the big cap indexes. The final resistance hurdle is 1,035 with another speed bump at 1,050 then it is clear sailing until 1,150. That is better than 100 points from today's close.

While we cannot guarantee it will happen the green shoots are appearing Today's gains was confirmation that the Wednesday rebound could be the start of a major move to the upside.

I am recommending we buy calls on the IWM in hopes of capturing the gains on a breakout that could run to the 115 level. The IWM is actually a little ahead of the Russell and was testing that local resistance today.

With an IWM trade at $103.25

Buy April $105 call, currently $1.83, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Buyers Back in Control

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow extended its Wednesday rebound with a +212 gain today to close over resistance at 16,665. The -455 point two day dip that cleared out all the stop losses has been forgotten with a +532 point rebound.

The best news was the close at 16,697 above resistance and the S&P closing at 1,951. That is strong resistance on the S&P but the chart suggests we are going to break out. If that happens, we could see some major gains on individual stocks.

In a perfect world, we would buy everything in sight on a break through 1,950. This is not a perfect world. The market has a habit of doing the exact opposite of what we expect so we need to be careful in our choices.

Current Portfolio

Current Position Changes

JNJ - Johnson & Johnson

The long call play was opened this morning.

QCOM - Qualcomm

The long call play was opened this morning.

ATVI - Activision Blizzard

The long call play was opened with a trade at $32.15 this morning.

BABY - Natus Medical

This long put position was closed at the open.

Profit Targets

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

AOS - AO Smith - Company Description


AOS broke over resistance at $70 and sprinted for a gain of more than $1. Perfect technical breakout.

Original Trade Description: February 18th.

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 19th market crash and had been moving steadily higher. The market took it lower again to retest that bottom on February 9th. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade at $70.45.

Position 2/23/16 with an AOS trade at $70.45

Long April $75 call @ $1.88. See portfolio graphic for stop loss.

ATVI - Activision Blizaard Company Description


Break over resistance at $32 at the open to trigger the position. Some fade late in the day but still positive.

Original Trade Description: February 24th.

Activision announced on Wednesday they had completed their acquisition of King Digital (KING) for $5.9 billion. This is a major milestone for Activision and they now have more than 500 million gamers making them the largest game network in the world.

They produce Candy Crush, World of Warcraft, Call of Duty and more than 1,000 other titles that can be played on mobile devices, consoles and PCs. The games are played in 196 countries. Activision was named one of Fortune's 100 Best Companies to Work For in 2015.

King Digital had 318 million monthly actuve users as of December 31st and offers games in more than 200 countries.

The combination of these two companies creates a powerhouse that will cross market to the combined subscriber base and new subscriptions and sales of new games to the combined user base will explode in 2016. Earnings are going to rocket higher. Activision is projecting 2016 revenue of $6.25 billion, earnings of $2 billion and earnings per share of $1.75. This compares to 2015 revenue at $4.62 billion and $1.19 in earnings.

The earnings on February 11th missed estimates for a variety of reasons and shares fell to a six-month low at $26.50. The rebound was immediate on the impending announcement of the completion of the King Digital acquisition. Shares closed today at $31.72.

With the higher earnings estimates and the King acquisition behind them I am expecting the shares to continue to rise. The high was $40 in December.

Earnings are May 12th.

Position 2/25/16 with an ATVI trade at $32.15

Long May $34 call @ $1.51, no initial stop loss.

DNKN - Dunkin Brands - Company Description


After a big gain on Wednesday, we should have expected some profit taking but it was very minor.

Original Trade Description: February 17th.

Everybody knows Dunkin Donuts. Consumer consultancy, Brand Keys, named Dunkin Donuts coffee as the top brand for consumer loyalty for tenth consecutive year. I know, you would probably have said Starbucks if you were asked the question but Dunkin Donuts coffee is the most loved. Dunkin was also number one in packaged coffee loyalty for the fourth consecutive year. Starbucks sells more units because Dunkin Donuts did not sell their K-Cups in supermarkets for a long time. Up until recently, if you wanted to buy Dunkin K-Cups you have to go to a Dunkin store. Now they are available everywhere, even in Kohl's stores and Ace Hardware.

Dunkin is changing their business model. They are opening 62 "non-traditional" stores in 2016 in addition to their normal stores. Those non-traditional stores will be located in airports, transportation terminals, casinos and resorts, hospitals, stadiums, grocery stores, military bases, colleges and universities. They are also opening multibranded stores featuring both Dunkin Donuts and Baskin Robbins, their ice cream brand. That will allow for traffic from the morning donut and coffee to the after dinner ice cream treat. They are also adding other bakery goods to their donut menus including a full range of breakfast sandwhiches.

Dunkin currently has 11,700 stores under the Dunkin brand, with 750 of those now non-traditional. They also run more than 7,600 Baskin Robbins in 40 countries. They operate more than 220 stores in Europe.

Dunkin prides itself on the "blue collar" appeal compared to the sometimes snobby views of Starbucks with $10 coffees.

Their Q4 earnings were 52 cents that beat estimates by 2 cents. Revenue of $203.8 million increased 5% and also beat estimates. U.S. same store sales comps rose +1.4%.

Shares peaked just under $44 on February 5th, just before earnings. Post earnings depression and the weak market knocked them back to $40 but they have rebounded to close at $44 today and a five-month high.

No entry trigger because the June option is cheap and we have a long time before expiration. However, earnings are April 21st. We will decide on an exit strategy as we near that date.

Position 2/18/16

Long June $45 call @ $2.05, see portfolio graphic for stop loss.

FB - Facebook - Company Description


Still struggling with that resistance at $107.85 but pushing higher.

Original Trade Description: February 23rd.

I do not really need to tell you what Facebook does. They are turning into the biggest online marketing portal on the planet and they still have not fully monetized WhatsApp, Instagram and several other web portals they own.

Facebook beat estimates for Q4 earnings at 79 cents compared to estimates for 69 cents. Revenue of $5.84 billion beat estimates for $5.37 billion. Earnings rose +46% and revenue +52%. Full year revenue rose +44% to $17.93 billion.

Monthly active users rose to 1.59 billion. Monthly active mobile users rose to 1.44 billion. Every day users watch more than 100 million hours of video. Zuckerberg hinted they were going to create s video space similar to YouTube to expand that video viewing. Average revenue per users rose to $3.73 compared to estimates for $3.43. WhatsApp ended the year with nearly 1 billion monthly active users.

Mobile ad impressions rose 29%. More than 2.5 million advertisers are actively promoting products on Facebook.

Post earnings Facebook shares rallied to $117 before the February market crash knocked them back down to $97. In another newsletter I was trying to launch a play at the 200-day moving average at $94.50 and never got filled. The rebound over the last week to $108 on Monday was solid. With the close at $105 today this may be our best chance for a new entry.

Earnings are April 20th. I am using the April options because they are cheaper than the May by a lot. They expire on the 15th so we will be out before they report.

Because of the market decline today I am going to use an entry trigger. If the market continues lower, I would rather not be holding calls at this level if we can potentially buy them lower.

Position 2/24/16 with a FB trade at $106.45

Long April $110 call @ $3.30, see portfolio graphic for stop loss.

JNJ - Johnson & Johnson - Company Description


Excellent breakout over resistance at $105 and could easily push over the highs at $109 if the market cooperates.

Original Trade Description: February 24th

I have JNJ as a longer-term play in another newsletter so I am going to use part of that play description here to save time.

JNJ is broadly diversified with more than 250 subsidiaries. If you need a Band-Aid, mouthwash, cold capsule, cancer drug or artificial joint, they make it. They spent about $10 billion on research in 2015. Seven of the 15 new drugs they brought to market since 2009 have annual sales in excess of $1 billion.

They have increased their dividend for 53 consecutive years. The yield today is about 3%. They have a rare AAA credit rating and produce more than $11 billion in free cash flow annually. At the end of 2015 they had $38.5 billion in cash.

JNJ is recession resistant because their products are not bought on a whim. If you need a Band-Aid you buy it. If you have arthritis, you buy Motrin. If you have acid indigestion you take Pepcid. If you are sick you get a prescription for their drugs. This makes them relatively safe in times of economic weakness. With worries over a potential recession in the near future this has powered their shares to a 52-week high.

I do not need to explain JNJ to everyone because we have grown up with their brands. The company was founded in 1886 and is older than anyone reading this newsletter.

The close on Wednesday at $104.94 is right at resistance and a breakthrough here should retest the historic highs at $109 where a breakout to a new high is entirely possible. They have based at the $100 level for the last two years with the exception of the flash crash last August.

Earnings are April 12th.

Position 2/25/16:

Long May $110 call @ $1.30, no initial stop loss.

KORS - Michael Kors - Company Description


Kors surged to another 8-month high as the breakout over $52 continues. Excellent relative strength.

Original Trade Description: February 22nd

Michael Kors designs, markets and distributes branded women's apparel and accessories and men's apparel. They operate more than 350 stores in the USA and 200 stores internationally. They also license their brands.

Kors shares crashed from $100 in early 2014 to $35 at the end of January on declining sales in the expensive categories that impacted all the major retailers. Inventory levels rose and margins dropped. Kors went from being the premier brand to just another high priced name.

Fast forward to Q4 earnings and everything changed. The company reported a solid holiday quarter when everyone else was just getting by. Kors reported a 6.3% increase in revenue to $1.6 billion that beat estimates for $1.4 billion. Earnings rose to $1.59 and also beat estimates for $1.46. Same store sales rose +2%. Sales overseas boomed +14% with Japan leading with a 68% rise. U.S. same store sales declined -0.9% but that was significantly better than the -8.5% drop in the prior quarter.

Kors heard what customers wanted and shifted to fill that demand. Kors introduced a new line of smaller leather handbags that cost less and customers snapped them up in volume. The company said they were selling so good they were going to raise prices and increase margin. The trend is away from the larger bags that made Kors famous but they adapted and sales are rising again.

Kors also suffered from the strong dollar and weak currencies overseas but overcame the headwinds to easily beat on earnings.

Shares spiked $12 on the news from $40 to $52. After trading sideways for the last three weeks the shares have broken out to a new 52-week high at $55 and appear to be headed for $60 or higher. Investors remember Kors as the leading fashion merchandiser and they believe the company is back on top again.

I want to take that ride to $60 and then see what happens when we reach that level.

Earnings are May 26th.

Position 2/23/16 with a KORS trade at $55.25

Long May $57.50 call @ $2.48, see portfolio graphic for stop loss.

KR - Kroger - Company Description


Kroger pushed over resistance ahead of its earnings on Wednesday. Plan on exiting this position early next week.

Target $41.50 for an exit ahead of the resistance at $42.

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. See portfolio graphic for stop loss.

N - NetSuite - Company Description


Recovered Wednesday's loss and tried to move over resistance at $57.75 but fall back. There was no news but SalesForce.com posted strong earnings.

Original Trade Description: February 19th.

NetSuite provides cloud based financials/enterprise resource planning (ERP) and omnichannel commerce suites in the U.S. and internationally. They also offer customer relationship management (CRM) and professional services automation (PSA). NetSuite OneWorld manages various companies or legal entities across multiple countries with different currencies, taxation rules and reporting requirements.

NetSuite reported adjusted earnings on January 28th of 5 cents compared to expectations for 4 cents. Revenue of $206.2 million rose +33% and beat estimates for $205 million. They reported several new accounts including Snapchat, American Express Global Business Travel and Lucky Brand to name a few. They added 616 new customers in the quarter and replaced SAP in 17 accounts. Recurring revenues rose +30% and now make up 80% of revenue. Nonrecurring revenue of $41.7 million rose +34%. They ended the quarter with $379 million in cash.

Revenue for 2016 is expected to rise 28-31% with earnings growing 80% to 100% to a range of 40-45 cents.

NetSuite was upgraded by Canaccord Genuity from hold to buy after earnings.

Not many companies are growing annual revenue by 30% and earnings by 100%. This is NOT Tableau software but it was punished for Tableau's weakness.

Earnings are April 21st.

Position 2/22/16 with a trade at $56.50

Long April $60 call @ $2.40, see portfolio graphic for stop loss

QCOM - Qualcomm Company Description


Minor gain as it tries to break free of resistance at $51.25.

Original Trade Description: February 24th.

Qualcomm holds the major patents on the 3G/4G wireless technology and their chips are showing up in more and more phones every month. Several days ago they signed a new licensing agreement with Lenovo for 3G and 4G technology for use in China. The devices will be marketed under the Motorola and Lenovo brands. Under the agreement Qualcomm will receive royalties on 3G (WCDMA and CDMA2000) and 4G (LTE-TDD, TD-SCDMA and GSM) devices. Lenovo will design, produce and market lower priced phones for the Chinese market.

A couple days later NXP Semiconductors (NXPI) and Qualcomm announced the integration of an industry-leading near field communication (NFC) and embedded secure element (ESE) solutions for Qualcomm's Snapdragon 800, 600, 400 and 200 processor platforms. This provides Qualcomm an end-to-end solution for mobile transactions and payment processing.

A day later Qualcomm announced the Snapdragon 820 processor with integrated Snapdragon X12 LTE modem for 33% faster 4G+ LTE download speeds and 200% faster LTE upload speeds, would power the new Samsung Galaxy S7 and S7 Edge phones. When coupled with the Samsung TruSignal multi-antenna boost technology, these will be the fastest phones currently in production.

A day later Qualcomm announced its collaboration with Ericsson (ERIC) on the new 5G technology, which is expected to be in production in 2018. The companies are doing the development work necessary on the 3GPP platform to insure rapid adoption of the new ultra high speed wireless technology. This puts Qualcomm at the forefront once again.

According to ABI Research, Qualcomm held a 65% market share of the 4G LTE baseband chipsets in 2015. The 4G LTE market is expected to grow at a 78.6% CAGR through 2019 when the 5G phones will begin to be plentiful. ABI said the Snapdragon 820 chip would probably increase Qualcomm's market share in 2016. Because of their dominance ABI believes Qualcomm will be able to increase the average selling price as the demand for the high end phones increases.

All the buzz about the new partnerships and deals has lifted QCOM shares out of a two-year decline. Shares fell while Qualcomm was fighting various companies about royalty payments in China. The new agreements with Chinese companies clearly show those problems are behind Qualcomm. All the analyst ratings changes in 2016 have been upgrades. Bernstein upgraded them to a buy last week.

I believe the long term downtrend is being reversed and although Qualcomm is up $10 over the last two weeks the positive rebound can continue. Normally I would not touch a company with a 25% rally in progress but the news is so strong I believe it is worth a chance. The most recent analyst price target is $70.

Earnings April 27th.

Position 2/25/16:

Long April $52.50 call @ $1.58, no initial stop loss.

SBUX - Starbucks - Company Description


Starbucks posted a decent but not exciting gain. Shares are moving through congestion and it may be tough getting through resistance at $59.50.

Original Trade Description: February 19th

You know what Starbucks does. They are the premier coffee retailer in the U.S. and Europe. Shares were crushed in early February after sales growth slowed in Europe. CEO Howard Schultz said they were headed for a record Q4 until the Paris attacks and everything just stopped. Consumers avoided the streets and especially retail establishments. Schultz said conditions were returning to normal and 2016 would be a good year.

U.S. same store sales rose +9% and +6% internationally excluding Europe. Earnings are expected to grow 15% annually for the next five years. They are opening 500 stores a year in China over that same period. The currently operate 21,000 stores in 66 countries. Schultz expects annual revenues to double from $16 billion last year to $30 billion by 2019.

To do this they are constantly adding more menu items including baker goods, sandwiches, desserts and even beer and wine to create an "evening experience" to expand their profitable hours. The average Starbucks customer visits a store 16 times a month with many making daily visits.

The post earnings crash in early February was more market related than earnings related. With double digit earnings and revenue growth and a proven business model there is nothing not to like about Starbucks.

Shares have rebounded from the $53 low on February 8th to $57.66 on Friday. Nomura initiated coverage on Friday with a buy rating and $70 price target. I am recommending the June $60 call and we will exit before earnings. I am using the June options so there will still be an earnings expectation premium when we exit before the event.

Earnings April 21st.

Position 2/22/16 @ $58.63:

Long June $60 call @ $1.46, see portfolio graphic for stop loss.

THO - Thor Industries - Company Description


Thor continued its rebound and closed at a new two-month high.

Earnings March 7th. Target $56.85 for an exit.

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)

BABY - Natus Medical - Company Description


The position was closed at the open as resistance at $36.50 failed. We lost 32 cents on the option so the damage was minimal.

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

Closed 2/25/16: Long April $30 put @ $1.15, exit .83, -.32 loss.

HPQ - Hewlett Packard - Company Description


Shares dipped back to $9.95 at the open but traded higher as the day progressed. The weak guidance weighed on the post earnings crowd but the positive comments about the future is lifting the shares. They only lost 48 cents for the day after closing at a six-week high on Wednesday.

We should see a directional move begin now and I would be perfectly happy if it was higher. We are agnostic on direction since we have both a put and call but the prior direction was bullish and the call is already profitable. We do not care which direction it moves just as long as it moves several dollars in that direction over the next two months.

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.

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


The VXX did not decline as much as I expected given the +212 gain on the Dow. However, most of that gain was in the afternoon so most traders are probably still cautious. The S&P closed at 1,951 and strong resistance. If we get a breakout there I would expect the VXX to drop quickly. We need to see it in the 20 range over the next couple of weeks.

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

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now