Option Investor

Daily Newsletter, Saturday, 2/27/2016

Table of Contents

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

Market Wrap

Hole in the Middle

by Jim Brown

Click here to email Jim Brown

It was a good week for the markets but it would have been a lot better without the hole in the middle. The Dow declined -499 points from Monday's high to Wednesday's low then rebounded +471 points into Friday's close. Without that hole, we could have been a lot higher today.

Market Statistics

Friday Statistics

The Dow hit 16,664 on Monday and then crashed to 16,165 at the low on Wednesday. The rebound that started at that low added 471 points to close at 16,636 or 28 points below the Monday high.

They midweek market flush cleared out all the stop losses and gave portfolio managers an entry point for new positions. Those managers were hesitant to buy the market at resistance but they jumped right in when the market dipped. The Dow is now up +1,133 points from the February 11th low at 15,503.

You can thank oil prices for the Friday fade. After spiking to $34.69 at 9:AM and a five week high, crude fell back to $32.84 at the close. The Dow opened at 16,795 on the strong oil gains and then fell back -159 points to close near the lows for the day.

The economics were actually positive for a change and you would have expected that to be a plus for the market. However, the worry that stronger economics could put the Fed back in play when they meet in two weeks was one factor in the decline.

The Q4 GDP revision came in much better than expected at +1.0% growth. That is up from +0.7% in the first release and significantly better than the +0.4% revision analysts expected. Consumer spending and residential investment provided an upward lift. Inventories, exports and nonresidential investment were a downward drag.

Spending added +1.38% while exports subtracted -0.25%, inventories -0.14%, nonresidential investment -0.24% and government -0.1%. The strong dollar continues to impact exports and tourist spending. Lower oil prices are good for consumer spending but they are a drag on spending by energy companies and the 150,000 workers that have been laid off by the crash.

Despite the recent positive economics, the Atlanta Fed GDPNow forecast for Q1 has taken a sudden negative turn to 2.1% growth. With two more months of data to impact the Q1 numbers, it may go a lot lower.

The final reading of Consumer Sentiment for February came in at 91.7 and up +1 point from the original reading of 90.7. The January reading was 92.0 so only a minimal decline.

The present conditions component rose from 106.4 to 106.8 and the expectations component declined from 82.7 to 81.9. Cheap gasoline prices probably had the biggest impact on the present conditions and the election politics the biggest impact to the expectations decline.

The Personal Income and Spending data for January were all positive. Personal income rose +0.5% after a +0.3% increase in December. Personal spending rose +0.4% after a +0.1% rise in December. The PCE Deflator, the Fed's preferred measure of inflation, rose +0.1% after a -0.1% decline in December. The core rate, excluding food and energy, rose +0.3%, up from only +0.1% in each of the prior three months. On a 12 month basis the headline number is up +1.3% and the core rate +1.7%. The Fed wants to see inflation in the 2.0% range. Energy was the biggest drag at -2.9% after a -3.0% drop in December.

The Fed is going to be challenged to hike rates with the GDP at only 1% and core inflation at 1.7%. While inflation is moving towards their goal, the GDP is actually growing at a subpar rate. Prior to December, the Fed has never hiked rates with a 1% GDP. The Fed will be forced to restate their policy at the March meeting and it will be interesting to see how they phrase it. Yellen has said, "If inflation comes back quicker, rates could go up faster."

The economic calendar for next week is very busy and this is payroll week. The ISM Manufacturing for February is expected to remain in contraction for the fifth consecutive month. The Beige Book on Wednesday is expected to show deterioration in economic activity in several regions because of the recession in the manufacturing sector. The ISM nonmanufacturing on Thursday needs to stay in expansion territory over 50 or the economic conversation will take a sharp turn for the worst.

The ADP Employment on Wednesday is expected to show another slowdown in job gains to 190,000 for February, down from 205,000 in January. The Nonfarm Payrolls on Friday are expected to show a rise in job gains from 151,000 in January to 193,000 in February. Some analysts believe the low number in January was a fluke onetime event while others believe it was finally stating correctly after the large Q4 adjustments for seasonal workers. Another low number for February will be very negative for the Fed's decision and their messaging. The next Fed meeting is in two weeks.

There are worries over the Super Tuesday election event next week. Twelve states hold their primary contests on Tuesday and historically it can be unsettling for the equity markets. Investors hate uncertainty and having a large field of candidates supplies that uncertainty. When the Super Tuesday contests deliver a clear winner with a strong chance of being the nominee the market tends to rejoice regardless of who that nominee may be. They view it as a point of certainty and they can plan their investments based on how that candidate will impact the market. When Super Tuesday produces a mixed field with no clear winner, the market tends to be volatile because of the potential for multiple diverging economic programs.

This year the potential for Clinton and Trump to surge ahead and produce an election that nobody wants could frustrate the market. Those two candidates may be leading in the delegate totals and the polls but they both have the highest level of dislike by the rest of the voters. A recent Gallup poll found that 51% of voters dislike Clinton while only 29% like her as a candidate. For Trump, it is worse with 60% of voters viewing him negatively and only 33% having a favorable opinion. The dislike for the front-runners has made party loyalty a negative for the voters. Only 29% of people polled will admit to being a democrat and only 26% will admit to being a republican.

Once we get past Tuesday, March has the third best record for the market on average since WWII according to Sam Stovall from S&P.

Friday was a relatively slow news day for stock news. Stamps.com (STMP) shares spiked +21% to $116 after reporting earnings of $1.57 compared to estimates for 95 cents. Revenue of $69.9 million blew away estimates for $58.4 million. They guided for the full year for earnings of $5.00 to $5.50 and analysts were expecting $4.33. That is a heck of a guide higher.

China's equivalent to Google, Baidu (BIDU), reported a 19.7% rise in earnings to $545.7 million on a 33% rise in revenue to $2.86 billion. Monthly active search users rose +21% to 657 million. Mobile search users rose +43% to 302 million. Gross merchandise volume rose +397% to $2.3 billion. Baidu Wallet activations rose +189% to 53 million.

If Bill Ackman is still short Herbalife (HLF), he had a very bad day on Friday. The company posted earnings of $1.19 compared to estimates for 92 cents. Revenue of $1.1 billion also beat estimates for $1.05 billion. They guided to earnings of $.97-$1.07 for Q1 and below estimates for $1.09. However, shares exploded higher after the company said it was approaching a resolution of the FTC investigation. They are in discussions with the FTC over a settlement. Herbalife said the potential outcomes of the discussions were a potential contested lawsuit, a settlement that includes a monetary payment or the closure of the regulatory probe without any action. Shares spiked 20% to $55 on the news.

Zoes Kitchens (ZOES) reported a loss of 3 cents compared to estimates for a loss of 6 cents. Revenue of $52.7 million beat estimates for 50.5 million. Same store sales rose +7.7%. The company has been on an extreme growth spurt. At the beginning of 2015, they owned 5 company-operated restaurants. As of December 31st, they owned 163 company-operated stores. That means they were opening an average of three per week. Obviously, there was a reason for them to post a loss for the quarter with all of the expansion costs.

A week ago Carl Icahn's, Icahn Enterprises (IEP), was on the verge of having its debt downgraded to junk. On Friday, shares rallied +11% after the company acquired the Trump Taj Mahal casino in Atlantic City. Trump Entertainment Resorts was in chapter 11 bankruptcy and was acquired by IEP. Trump forfeited his 10% ownership in the business with the acquisition by Icahn. The billionaire also acquired the Tropicana Casino in Atlantic City out of bankruptcy.

Biopharmaceutical company Tesaro (TSRO) reported a loss of $1.89 compared to estimates for a loss of $1.84. Revenue of $230,000 fell well short of estimates for $2.9 million. However, full year earnings were $6.38 or $251.4 million. Shares were up +14% after the company announced the sale of 4.4 million shares at $35.19 in a private placement to raise $155 million.

G-III Apparel Group (GIII) rallied 8% on Friday after announcing it had taken a 19% stake in the parent company of the Karl Lagerfield brand. G-III also holds a 49% stake in a North American joint venture that holds the rights to the Karl Lagerfield trademarks for consumer products. Lagerfield is the head designer for Chanel and Fendi as well as his own brand. G-III said the Lagerfield venture could generate $300-$400 million a year within five years. Earlier this month G-III signed a licensing deal with Tommy Hilfiger Licensing, which is owned by PVH Corp.

Berkshire Hathaway (BRK.A) reported earnings on Saturday. The company earned $4.67 billion in Q4 and $17.36 billion for the year. Earnings rose +32% to $3,333 per Class A share. Analysts were expecting earnings of $3,129 per share. That is up from $2,529 in the year ago quarter. Revenue rose 7% to $51.8 billion. Berkshire completed the Precision Cast Parts (PCP) acquisition in January for $32 billion for Berkshire's largest deal ever. Next week Berkshire will acquire Duracell for $3.8 billion in PG stock and $1.7 billion in cash.

In his annual letter to shareholders, Warren Buffett warned a major nuclear, chemical, biological or cyber attack was a "clear, present and enduring danger" and "there was no way for American corporation or their investors to shed this risk." This warning from Buffett come on the heels of the nuclear deal with Iran and the "satellite" launch from North Korea. See further comments in the Random Thoughts section below.

Foot Locker (FL) reported earnings of $1.16 that beat estimates for $1.12. Revenue of $2.1 billion matched estimates. Same store sales were up +7.9%. The company guided for mid single digit comp sales in 2016 and double-digit earnings growth. Despite the good earnings shares declined -4.3% on the news. This is just another example why we do not like to hold positions over an earnings report unless we are holding for the long term.

Under Armour (UA) is beating Nike on sales gains but Nike is still the overall winner in global sales. UA reported a 97.6% jump in sales for the week ended February 20th while Nike sales rose +8.2%, Adidas +28.3% and Skechers rose +18.5%. Reebok sales fell -51.9%. While UA reported the biggest percentage sales gain it was from a very small base. This is the equivalent of having sales rise from $1 million to $2 million for UA when Nike sales rose from $100 million to $110 million. The percentages can be misleading.

The earnings cycle is about over but the warnings are still flowing. On Friday, only one company issued positive guidance, 6 companies issued in line guidance and 11 companies warned about future earnings/revenue.

A study done last week suggested the quality of earnings was declining. We always report the "adjusted" earnings rather than GAAP earnings because the analysts forecast based on the adjusted numbers that do not include things like charges for restructuring, acquisitions and other onetime events. The theory is that adjusted earnings represent the true picture of the ongoing business without the major swings of the special items.

However, the survey showed that GAAP earnings for Q4 were 25% lower than adjusted earnings. That is the widest spread since 2009. Companies are stretching to classify everything possible in the GAAP side so the adjusted earnings are better. Analysts warn that we may not be looking at the true picture of corporate health because the adjustments are getting out of line.

FactSet said on Friday that 96% of the S&P-500 companies have reported Q4 earnings. Of those 69% beat on the earnings side while only 48% have reported revenue above estimates. The earnings decline for Q4 is now -3.3% and the first time we have seen three consecutive quarters of earnings decline since Q1-Q3 2009. Average revenue has declined -3.9% and that is the fourth consecutive quarter of declines.

For Q1 2016, 88 S&P companies have issued negative earnings guidance or 80% of those giving guidance and only 22 have issued positive guidance. Analysts do not expect the S&P to return to earnings growth until Q3. The current forecast for Q1 earnings is a decline of -7.4% and -1.6% for Q2, +4.7% for Q3 and +9.4% for Q4. The increase in Q3/Q4 is the result of very low comparisons to Q3/Q4 2015.

If the earnings forecasts continue as expected we will have an earnings recession that lasts five quarters and a six-quarter revenue recession. However, forward estimates more than one quarter in advance are notoriously inaccurate and normally overstated. That -1.6% decline for Q2 could be 4% off in either direction by the time the earnings are actually reported.

Crude oil rallied to $34.69 at the open on Friday on more headlines from the Middle East on the potential for a production freeze. The Nigerian oil minister said Russia and Saudi Arabia were on board and the other producing nations were coming into the agreement. He tried to continue hyping the potential for future action by saying a production freeze would establish a base line of cooperation that could be expanded on for a production cut at the June 5th OPEC meeting. The vast majority of analysts, company executives and OPEC oil ministers believe there is zero chance of a production cut in June but the headlines continue to flow and oil prices are rising. The Saudi Arabian oil minister specifically said there will be no cut during a speech in Houston last week. Whatever they say is the official position.

The Nigerian oil minister said oil prices would return to $50 by the end of the year. He said there was no technical or historical reason but prices would rebound to that level. Sounds like wishful thinking to me and he is trying to talk the price up with his comments.

The active rig count declined -12 to 502 rigs and -1,429 off the 2014 peak of 1,931. Oil rigs declined -13 to 400 and gas rigs rose +1 to 102. The Canadian rig count imploded with a -31 rig drop (-18%) to 175 rigs. Oil rigs declined -26 (-24%) to only 83 active rigs.

The Dow Transports have risen more than 16% from their January lows and supported the broader market rally. Some analysts believe this is the top in that rebound. The railroads have rallied on no change in fundamentals. Shipping in the energy sector continues to decline. The airline sector has been moving higher on the drop in oil prices and reduction in capacity. However, load factors are shrinking despite the changes. SkyWest (SKYW) reported revenue seat miles declined to only 77% meaning they had a lot of empty seats in January. They run multiple brands and function as a feeder airline into the larger carriers. Charts on the individual airlines show they have rallied into major resistance.

The Transport ETF (IYT) has rebounded to its 38% Fibonacci retracement level and analysts believe the $135 price point will be the end of this rally.

If the transport sector rolls over the broader market may follow. However, the transports began to decline in March 2015 and it was not until July that the broader markets followed. Some do not believe we will see that lag time if the transports decline again.


On a closing basis, the S&P cannot move above horizontal resistance at 1,950. That level needs to be broken to sustain a continued rally. On an intraday basis, the S&P rallied to exactly the 50% retracement level at 1,963 and failed. This is an 8.5% rebound off the 1,810 lows from February 11th but a 50% rebound from the -306 point decline from the November highs at 2,116. This is a natural resistance point and from the selling on Friday there were a lot of traders watching that level.

The next material Fibonacci resistance is 1,999 and the 61.8% retracement level. With the market moving from oversold to overbought in two weeks that makes the resistance at 1,963 a continued target for sellers. However, for the last two days the S&P has closed right at that 1,950 resistance level and suggesting that is where the battle will be fought.

The RSI at 56.04 is approaching resistance at 60 dating back to November. The MACD is still bullish and suggesting there could be more upside.

The point here is that we have reached some significant resistance levels and just getting over 1,950 intraday does not mean the battle has been won. That is one battle in a larger war.

The Dow chart has the same problem as the S&P chart. The 50% retracement level is 16,718 and the index was sold the instant it moved over that level on Friday. However, the 16,500 resistance has been broken and the index closed well above the 16,665 resistance at 16,696 on Thursday. Because the Dow is only a 30 stock price weighted index, it tends to be less respectful of technical indicators like the Fibonacci levels or moving averages. However, the 50% retracement level is a beacon flashing "sell me."

The defensive stocks including PG, KO, JNJ, HD, MCD, PFE and VZ sold off on Friday, which normally happens when investors are putting risk on rather than taking it off. Portfolio managers may be preparing to move into higher risk asset classes like small caps, banks, biotechs or techs in general. It is also possible these safety stocks have just run too far too fast. It produces a problem for investors because there is no clear direction for next week.

The Nasdaq has a ways to go before it reaches the 50% retracement level at 4,692. The decline in the biotech sector has retarded the Nasdaq rebound. The index still has decent resistance at 4,600 and that is where is failed on Friday. There are no leaders on the index with different stocks outperforming every day and different laggards.

The Russell 2000 was the best performing broad market index last week with a +2.69% gain compared to +1.58% for the S&P and +1.51% for the Dow. The small caps are coming back but they have a long way to go. The resistance at 1,035 is in play and the Friday close at 1,037 is an example of its influence. There is also resistance at 1,050 but we do not begin to get into the Fibonacci levels until 1,078 and 1,120. That would be a significant rebound from here.

The small caps were crushed in the decline thanks to drops in the financials, biotechs and energy stocks. Once those sectors begin to heal, we could see a rapid recovery. The bounce over the last two weeks is very encouraging but we have to get over those 1035-1050 levels to really get the ball rolling.

I would like to think that the stall at the current resistance levels is temporary and we are going higher next week. However, until we get through that resistance at 1,950 on the S&P, 1,035 on the Russell and 4,600 on the Nasdaq there may be a lack of confidence by investors. If we can close significantly over those levels, we could see an influx of money into the markets.

The earnings cycle is nearly over and we have six weeks before it starts again. The bad earnings news is now priced into the market and everybody knows the dollar is killing revenue. That is an old story now.

The holdup for next week could be the employment reports. However, we could be back in the bad news is good news scenario where weak jobs and weak manufacturing is seen as good news because it keeps the Fed on the sidelines longer. With the ECB likely to announce more stimulus on the 10th that could also weigh on the Fed and force them to wait until June or later for their next hike. Raising rates at the same time Europe, Japan and China are lowering rates just makes the dollar stronger and reduces exports and revenue even further and pushes the manufacturing sector further into recession.

We need to trade what the market gives us and watch those resistance levels especially on the Russell and S&P. Those are the road signs on the market road ahead.

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Random Thoughts

There have been numerous articles and warnings in recent weeks about the potential for an ElectroMagnetic Pulse (EMP) attack in the near future now that North Korea has the capability to launch a nuclear weapon into orbit over the USA. Officials believe a successful EMP attack could kill up to 75% of the U.S. population in the 12 months that followed "through starvation, disease, and societal collapse" according to Peter Pry, executive director of the Homeland Security EMP Task Force in congressional testimony last May. An EMP would destroy the electrical grid and take years to restore power. Electronic devices like cell phones, computers, televisions, cars, trucks, etc would be destroyed by the EMP. Without electricity, there would be no water, food, gasoline, medical care, credit cards, ATMs, stock markets, etc for months or even years. PDF on EMP Impact

The members at the G20 meeting in China this weekend were unable to agree on a joint plan for new economic stimulus measures. While the ECB and Japan are expected to add stimulus the rest of the G20 world decided to wait on further economic reports in the coming weeks before making independent stimulus decisions. Several finance ministers warned that a UK exit from the eurozone would be a powerfully negative geopolitical shock. The exit vote is June 23rd.

Investor sentiment for the week ended on Wednesday saw bullish sentiment rise +3.6% and bearish sentiment decline -6.4%. Since Wednesday was a major decline and even larger rebound, I am surprised the bullish sentiment was not higher. That dip/rebound must have confused some traders because neutral sentiment rose 2.8%.

Venezuelan state run oil company PDVSA is facing debt payments of $5.2 billion in 2016 with most of it in October and November. Since the government spent the last $1.5 billion in cash reserves last week the outlook for PDVSA is grim. The socialist government has confiscated all the cash from PDVSA, banks, utility companies and any entity they can seize in order to stave off economic collapse and their bank account is still empty.

PDVSA is going to be in trouble before their debt comes due because they have to import ultralight oil to blend with their heavy crude to make it saleable on the open market. Without cash to pay for that light crude we could see a sharp drop in the crude available for export and further crimping the cash flow. Suppliers are already seeing significant delays in payments and PDVSA is being forced to look for other sources where they do not already have a large balance due. Existing suppliers already worry they will never get paid.

Venezuela exports about 2.0 mbpd and the inability to import light crude for blending would reduce that by about 250,000 bpd initially and more as the problem grows worse. Most of the output from PDVSA is secured against long-term loans so PDVSA does not get to use all the money when it is received. PDVSA has asked Chevron and Rosneft to supply some additional light crude for blending and that may have to be done outside Venezuela in order to keep the cash proceeds from being seized.

Socialism is great until you run out of other people's money. (Margaret Thatcher)

Honeywell (HON) chairman and CEO David Cote sold $36 million in stock, half his position in Honeywell only 3 days before the company announced the offer for United Technology (UTX). Shares of Honeywell fell -10% on the news. David, answer your phone. The SEC is calling.

Some analysts are still bullish on 2016. Oppenheimer's John Stoltzfus reiterated his 2016 price target on the S&P at 2,300 on Friday. He said the economic worries are overdone and the negative earnings are already priced into stocks. Let's hope he is right.

Other recent S&P target revisions

2000 JP Morgan
2000 Bank America
2100 Goldman Sachs
2150 Citigroup
2175 Morgan Stanley
2175 UBS
2200 Deutsche Bank
2200 Barclays
2300 Oppenheimer

Americans are well on their way to being the most overweight and diseased population in history. The U.S. Census Bureau said Americans gained more than 582 million pounds in 2015. That 1% gain was the most since 2011.

The average American man weighs 196 pounds, up 3 pounds in 2015. The average woman lost 2 pounds to 155 on average. There are 322 million people in America totaling 56.4 billion pounds.

The American obesity rate rose to a historic high at 28%. More than 42% of men reported they weight more than 200 pounds, up from 36% in 2014.

More than 29 million people or 9.3% of the population have diabetes with an estimated 8.1 million people undiagnosed. They spend more than $245 billion a year on healthcare. More than 86 million are considered pre-diabetes or 1 in 3 adults. Diabetes is nearly 100% curable by diet alone. We are eating ourselves into an early grave.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Freedom is the last, best hope of earth. "

Abraham Lincoln.


Index Wrap

Bulls Pushing For A Positive February

by Keene Little

Click here to email Keene Little
The market swoon following last Monday's high had it looking like we might have February finishing in the red but a big recovery off Wednesday's low got many of the indexes into the green for the month. The bulls need to reverse Friday's small loss in order to ensure February closes in the green on Monday.

Week's Indexes

Review of Major Stock Indexes

Following January's rough start to the year for the bulls it was looking like February was going to make it two months in a row for the bears. But the big rally off Wednesday's lows put the majority of the indexes in the green, except for the techs which are still struggling in the red, but Monday will be important for the bulls since the small gains could evaporate quickly.

Oil had a good week, which helped the stock market since the two are currently joined at the hip (the algorithmic traders are currently using the correlation for their trading of the stock market). Oil's +10.5% rally this past week sounds like a lot but the $3.12 gain to 32.84 is not much to brag about when you consider it was trading $50-60 last year. The metals finished down for the week, especially silver (which reflects the industrial relationship vs. the more emotionally-driven gold), and commodities in general were flat.

Bonds finished relatively flat but slightly down for the week, which is supportive of the stock market rally since you like to see money rotating out of bonds and into stocks if you want to see the rally continue (it needs the liquidity freed up from bond sales).

Other than the intermarket relationships mentioned above, there wasn't much in the geopolitical arena or economic/earnings picture to drive this week's stock market. In fact the big swoon on Tuesday and into Wednesday morning, followed by the big rally that followed was done on very little news and seems to have been driven by oil's rally more than anything else. Trading volume was a tad stronger than the previous week but both weeks' gains were on lower volume than we saw during the decline, so that's a little worrisome. The rally could certainly continue but bulls would like to see some more pressure behind it.

After China lost 6.4% on Thursday it was impressive that the U.S. market did not follow. The overnight futures dipped but by the start of trading on Thursday it was basically even and then continued the rally off Wednesday's low. That provided confidence for the bulls to stick with their positions and add to it and scared more shorts out of the water. We saw some profit taking in front of the weekend with selling following Friday's gap-up start to the day but the impression I have from the pullback is that we'll see another leg up on Monday. That could give us a positive close for the last day of the month and a positive month. March might not be as good for the bulls but we'll have clues along the way before we see warning signs that the bears will do some damage.

A Look At the Charts

Dow Industrials, INDU, Weekly chart

This week's rally for the Dow brought it back up to the bottom of its broken up-channel for the rally from 2009. It poked above the bottom of the channel but then pulled back, closing slightly above it on Friday and leaving both sides guessing whether or not it will hold as resistance. Bullishly we have the oscillators turning back up after leaving a bullish divergence at the February low. The bulls want to see RSI get above the 50 line (red horizontal line) to prove this is more than a reactionary bounce following the decline. Bounces in a bear market will typically see RSI fail at or below the 60 level. You can see how RSI only pulled back to about 50 for most of the rally in 2013-2015 and did not drop below the line until last August and then back below it again in January. A rollover from the bottom of its up-channel and RSI rolling over from 50 would support the bears.

Dow Industrials, INDU, Daily chart

The daily chart shows Friday's close was marginally above the bottom of its up-channel from 2009, currently near its 50-dma at 16585. That level should hold as support if there's more work to do on the upside. On Thursday it closed marginally below its 50% retracement of its December-February decline, at 16702, and then poked above it Friday morning but closed below it. Assuming support will hold, we should see a move at least up to the next line of resistance at price-level S/R near 16900. Above that it will have to deal with the 62% retracement at 16985 and its 200-dma near 17216.

Key Levels for INDU:
-- bullish above 16,900
-- bearish below 16,165

Dow Industrials, INDU, 60-min chart

There's an interesting pattern on the Dow's 60-min chart after the three back-tests of the broken uptrend line from January 20 - February 3. You can see the rallies into the February 17-18 highs were stopped by this broken uptrend line, followed by two more attempts last Monday and again on Friday. As noted on the chart, there is the potential for this to be a "3-drives-to-a-high" topping pattern and you can see the bearish divergence at each new high. Friday's pullback looked corrective and suggests another leg up, ideally at least to the 16900 area, but keep this pattern in mind since it could be warning us a top for the bounce is in place.

S&P 500, SPX, Daily chart

SPX looks a lot like the Dow with Friday's poke above its 50% retracement of its December-February decline, at 1957, but then a close below it. It too is above its 50-dma, currently near 1943, and the important weekly close above that MA is bullish. SPX stays bullish as long as it holds above the 38% retracement, near 1922, which is also where its old broken/recovered downtrend line from July 2015 is currently located. There's upside potential to price-level S/R at 1992, which is also the 62% retracement, and it would be more bullish above that level. Short term, keep an eye on 1975 if reached since that's where the 2nd leg of the rally from February 11th would be 62% of the 1st leg and the rally could run out of steam at that level.

Key Levels for SPX:
-- bullish above 1992
-- bearish below 1891

S&P 100, OEX, Daily chart

On the OEX chart I don't show the retracements of the December-February decline but the 50% is at 874.75 and Friday's high was 874.95. It also achieved a price projection at 871.77 where it has two equal legs up from the January low (for a possible a-b-c bounce correction that finished on Friday). OEX also bumped back up to the bottom of a parallel down-channel for the first part of its decline off the November high, near 871. Closing back below 871 on a weekly basis was not bullish and while it doesn't prevent the continuation of the rally, this one looks a little more bearish than the others if only because it tagged the upside target zone at 871-875 but could hold it. The bulls would be in better shape above 872 on a closing basis whereas the bears will be back in control if Wednesday's low near 842 is broken.

Key Levels for OEX:
-- bullish above 872
-- bearish below 842

Nasdaq-100, NDX, Daily chart

NDX finally made it back above its broken uptrend lines from March 2009 - August 2015 and June 2010 - November 2012, near 4196 and 4223, resp., so that's bullish. It almost made it up to its 50-dma Friday morning, near 4293, with a high at 4275, but it has a little more work to do after dropping back into the red around midday on Friday. It would be more bullish above 4325, but the bottom line with the NDX pattern, as is true for all of the major indexes, is that we could see price chop around in a whippy correction to its December-February decline. It's an impulsive decline, which means the trend is now down. The bounce off the February low is therefore a correction to the decline and the only question is what form it will take and how high it will go. But it's not to be trusted since the upside is counter-trend now.

Key Levels for NDX:
-- bullish above 4325
-- bearish below 3900

Nasdaq Composite, COMPQ, Daily chart

The Nasdaq looks like NDX except for being marginally weaker relative to its 50-dma, currently near 4650. As long as it holds its uptrend line from February 11-24, currently near 4515, it stays bullish. But with its 50-dma 25 points higher and then its 50% retracement at 4693 the bulls have their work cut out for them, especially with the short-term overbought conditions.

Key Levels for COMPQ:
-- bullish above 4700
-- bearish below 4099

Russell-2000, RUT, Daily chart

On Friday the RUT stopped 29 cents shy of its price-level S/R at 1040 and what the bulls need now is a gap up to jump over resistance (the favorite way for this market to deal with breaking either support or resistance). Near this level is its broken uptrend line from March 2009 - October 2011 and the 38% retracement of its December-February decline (at 1043). This is a lot of resistance to break through on its first attempt with overbought conditions and I would expect at least a pullback from resistance before punching through it. Above 1040 it would likely have a clear shot up to the next resistance area at 1074-1080. As depicted on its chart, one idea to consider is a larger consolidation pattern through March, which is shown on the chart as a sideways triangle consolidation pattern. It's just an idea but it would fit as a continuation pattern in the larger move down from last year. It's a wide range but between 940 and 1040 it could be a tough area to trade.

Key Levels for RUT:
-- bullish above 1040
-- bearish below 940

SPDR S&P 500 Trust, SPY, Daily chart

SPY has made it above price-level S/R at 194.50 and into an area with lower Volume At Price (VAP) and that leaves it with less resistance to further upside movement. As you can see by the candles following the big drop from the December 29th high, especially following the gap down on January 5th, there's not much price action there. This could "suck" price up to the 200 area without much of a problem. The upper BB is being pushed higher and price could continue to push it higher before dropping back down to at least the midline (20-dma), now at 190.58. But as the MFI shows, it's been stuck near the 50 line, even for the rally from February 11th, which indicates there's not much strength behind the move. The volume for the leg up from February 11th is less than the 1st leg up off the January 20th low. These don't add up as very bullish and therefore a rally up near the top of the BB makes it a risky place for bulls.

Powershares QQQ Trust, QQQ, Daily chart

The QQQ has not yet made it up near the top of its BB, currently at 106.31, about 3 points higher. The good news for bulls was Wednesday's back-test of price-level S/R at 99.50 so it stays bullish above that level. But the two warning signs for bulls come from the two indicators at the bottom. Williams %R is now in overbought, which has more often than not led to a reversal back down. However, it's important to remember that this indicator can stay in overbought, indicating a strong rally (see last October). As for SPY, the declining volume in the rally from February 11th shows a lack of interest in real buying, meaning much of the buying could be mostly short covering and once it finishes there won't be enough buying interest to keep things going to the upside.


A push to get the indexes into the green for the month appears to be on track following the recovery off Wednesday's low. We have one more day to finish the month and then the possibility for a bullish first day or two of the new month. As long as the buyers (short covering or real buying) can keep the market from pulling back sharply we should look for higher prices. But the indexes are up against resistance, overbought and showing waning momentum, which is not a good recipe for a rally. If you're long the market and trading (not holding), trail your stops and take what the market will give you. We don't have enough evidence of a top to the bounce for the bears to get aggressive on the short side so at this point I would say it's best for both sides to trade cautiously.

Trade safe, have a good week and good luck with your trading. I'll be back with you next weekend.

Keene H. Little, CMT

Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville

New Option Plays

Resistance Eroding

by Jim Brown

Click here to email Jim Brown

Editors Note:

Akamai sprinted higher after earnings as long-term shorts from the four-month decline were forced to cover. I am sure there are quite a few left that cannot believe the stock is continuing to climb. The resistance at $55 is eroding and Friday's close was 28 cents over that level. The stock appears primed for a breakout and another round of short covering.


AKAM - Akamai Technologies -
Company Description

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

With a AKAM trade at $55.75

Buy April $57.50 call, currently $1.67, initial stop loss $51.85.


No New Bearish Plays

In Play Updates and Reviews

Weekend Caution

by Jim Brown

Click here to email Jim Brown

Editors Note:

Investors took some profits on Friday as the indexes failed to push through resistance. Worries over declining oil prices, the G20 meeting in China and another Sunday night meltdown in the Asian markets weighed on investor sentiment.

The S&P stalled right at resistance at 1,950 for the second consecutive day after spiking higher at the open on rising oil prices. When oil rolled over and turned negative for the day the Dow and S&P saw profit taking as well.

The 1,950 level on the S&P remains the key indicator for next week and we should add to longs over that level and reduce positions on any material decline.

Current Portfolio

Current Position Changes

PII - Polaris Industries

The long call play was opened Friday morning.

IWM - Russell 2000 ETF

The long call play was opened Friday morning.

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 continued its breakout with a nice gain despite the market rolling over.

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


Gains from Thursday faded and prior resistance at $32 is now support.

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


Another minor gain as DNKN climbs slowly higher. No complaints!

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.

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.

IWM - Russell 2000 ETF - ETF Description


Russell 2000 gained 5.6 points for the biggest index gain on Friday and a close over resistance at 1,035. The IWM was positive but held at resistance. We need one more daily gain to get the ball rolling.

Original Trade Description: February 25th

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.

Position 2/26/16 with an IWM trade at $103.25

Long April $105 call @ $1.91, see portfolio graphic for stop loss.

JNJ - Johnson & Johnson - Company Description


Minor decline of 60 cents after gaining $3 over the prior two days. No complaints.

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 squeezed out 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 rallied $2 over the prior 4 days and only gave back a penny on Friday 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


Finally a breakout after a week of consolidation. A really nice $2.57 gain on short covering on no news.

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

PII - Polaris Industries - Company Description


Great way to open a position with a +2.66 gain! Keybanc raised the price target to $100 and shares closed at $91.

Original Trade Description: February 25th.

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.

Position 2/26/16 with a PII trade at $89.50

Long April $95 call @ $2.15, see portfolio graphic for stop loss.

QCOM - Qualcomm Company Description


Minor loss of two cents on no news after a strong gain for the week.

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


Minor profit taking on no news. Simple consolidation after a rebound from Wednesday low.

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)

HPQ - Hewlett Packard - Company Description


HPQ actually traded at a new two month high intraday at $10.99 before fading with the market. No specific news.

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 opened lower at $23.76 but rallied in the afternoon when the Dow/SPX rolled over to close the day negative. Friday's market decline should be ignored. It was simply profit taking ahead of weekend risk.

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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