Option Investor

Daily Newsletter, Monday, 3/7/2016

Table of Contents

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

Market Wrap

The Market Drifts Higher

by Thomas Hughes

Click here to email Thomas Hughes


Th market drifted higher today as oil prices reached a new high. There was little in the way of market moving data today, aside from a 4.5% gain for WTI, and little due out this week. The biggest mover this week is likely to be the ECB meeting on Thursday when they are expected to increase QE in some form, what they will do and will it meet market expectations is the question.

Asian indices finished their Monday mixed. Japan fell, Shang Hai rose and the Hang Send finished the day flat. Moving those indices, or not, was a new set of data targets issued at the National Peoples Congress over the weekend. New targets for 2016 are GDP in the range of 6.5-7%, CPI of 3% and a budget deficit of 3% of GDP. Analysts seem to think the targets mean that China is not through with its stimulus efforts and expect to see an expansion of current programs in the coming months. Neither the China news nor ECB expectations were able to support the EU markets which closed with loses in the range of -0.25 to -0.45%, led by the German DAX.

Market Statistics

US futures began the day in negative territory and drifted lower up to about the 6AM hour. Losses at the low were in the range of -0.4% (S&P 500) and held relatively steady between 6AM and the opening bell. The open was a bit weak, the indices opened with the indicated losses and then ever so slowly crept higher. The Dow Jones Industrial Average was the first to hit positive territory and by noon the S&P 500 and Nasdaq Composite joined it. Intraday highs were reached in early afternoon, just after 1PM, about 0.25% for the SPX.

Once the highs were hit the market retreat back to the day's opening levels and by 2:30PM were bottoming. Late afternoon trading saw them bounce back to retest resistance at break even levels. By the close most were back in positive territory but did not regain the early highs.

Economic Calendar

The Economy

There was very little economic today and there will be very little this week. The only release aside from the Moody's Survey was consumer credit figures announced at 3PM. The big event of this week will be the ECB meeting, next week heats up with a full calendar including a BOJ meeting and the March FOMC meeting.

The Moody's Survey Of Business Confidence gained 0.7% from last week making this the third week of gains since hitting a multiyear low. This week's reading of 29.2% is an improvement but still very low relative to the high set last summer. According to Mark Zandi the number, even though week, is still indicative of a healthy and expanding economy. In his summary he says that businesses are most concerned about current conditions with outlook for the summer coming in much stronger. It is possible that sentiment has bottomed but whether or not it has reversed is yet to be seen.

The fourth quarter 2015 earnings reporting season is almost over. According to Factset 99% of the S&P 500 has reported earnings with only 2 scheduled to report this week. The blended rate for earnings growth is now -3.4%, slightly worse than what was reported last week and most likely what we will see as the final rate once the season is officially over.

Expectations for the first quarter and every quarter in 2016 have been revised lower from last week. The first quarter is now expected to post an all index earnings growth rate of -8.0%. This is down from 0.3% at the end of December and hurt by downward revisions in all 10 sectors, led by the energy sector. The energy sector is now expected to post an earnings decline of -94.9%, more than double the decline predicted on December 31st.

Projections for the 2nd, 3rd and 4th quarters have also come down in the past week but despite this full year projections gained a tenth to +2.9%. This is likely due to rising oil prices, at least in part, and could signal the bottom in declining projections. Another reason could be the utilities sector. This sector saw a massive increase in expectations for the full year over the past week, jumping to +25.2% from only 2.8% last week, while the other 9 sectors had only marginal downward revisions.

The Oil Index

Oil prices surged another 5.5% today as changing sentiment, fund in-flows and chatter from OPEC producers support prices. The overall supply and demand outlook is still on the bearish side with little expectation of increasing demand but the recent bottom, declining US rig counts, low output from Iraq and the upcoming meeting between Russian and OPEC have raised hopes. It is likely we will see a retest of support but when it may come is not clear. Today WTI climbed to near $38 with the next obvious resistance level at $40. If you have long positions keep your stops tight and ride it out.

The Oil Index climbed on the back of oil prices and has extended its move above resistance. The index has completed a double bottom reversal that appears to be confirmed by the break and extension above resistance at the 1050 level. The indicators are convergent with the break to new highs and consistent with a rising market. Next upside target is near 1115. First target for support on a pull back is 1050 with next target near 1015.

The Gold Index

Gold prices wavered a bit today but held near the $1265 level. In early trading spot prices were able to move higher by a few dollars and then later in the day they fell back to just below last week's closing prices. Spurring the move in early trading was FOMC rate hike and ECB QE expectations, later in the day comments from the Fed's Fischer and Brainard helped to push them lower although even their statements didn't keep them down. The two central bankers both see signs that inflation is on the rise but neither seemed to think that it was necessary to rush into raising rates just yet, Brainard at least argued for patience in the light of risks to economic growth.

The gold miners were able to move higher in today's session although gains were capped by golds late day reversal and Fedspeak. The Gold Miners ETF GDX gained about 3.5%. Today's candle helps to remove the threat posed by Friday's pin-bar/shooting star candle although consolidation or reversal is not out of the question. The indicators are equally indicative of consolidation or potential reversal so caution and tight stops are advisable. This index, and the underlying commodity are still riding a strong wave of upward momentum and could continue higher but with the ECB and FOMC meetings coming up risk of reversal is present, even with a read on expectations there is still no telling what either may do. Resistance is near $21 with first target for support near $18.

In The News, Story Stocks and Earnings

The dollar remains under pressure. The next two weeks is going to be uuuge for the Dollar Index with three central bank meetings on the schedule. The BOJ may be a mover but without doubt the ECB and the FOMC will. The FOMC has a 0% expectation according to Fed Funds Futures to raise rates which should at least keep dollar values down if not weaken it further. Economic data next week could go a long way toward helping that move; Goldilocks data and in particular CPI and PPI will keep rate hikes off the table for the next couple of meetings at least. The real risk, in my opinion, is the ECB. They are expected to enact more QE this week. If the ECB meets or exceeds expectations the euro is likely to fall versus the dollar, if they don't the euro is likely to strengthen. Based on the past few years of watching the ECB I am leaning toward the idea they will do more QE, but it will not be what or as much as the market expects.

Today the Dollar Index fell back to the three week low near $97. The indicators are weakening and, for now, pointing to lower prices. Down side target are $96.50, $96 and $95.50 in the near term, all of course dependent on what the ECB does later this week.

BG Staffing is a micro-cap staffing service that I thought would be interesting to look at in light of economic conditions and the labor market. They released earnings this morning before the bell and, frankly, did pretty good last year. On a quarterly basis the company increased revenue by 55.3% from last year, net income by 207.7%, and adjusted EBITDA by 100.7%. The company operates in three segments had substantial gains in profits for each; Multifamily up 45.9%, Professional up 173% and Commercial up 25.2%. Full year 2015 net income is up 1346.9% and the company sees 2016 easily matching industry expectations of 6% growth. Today's market action was flat, the stock closed with little movement on average volume which is only about 3,000 shares daily.

Shares of Netflix fell -6% today as new research from ITG spooked investors. The new report says current market valuation and expectations for 2016 are high. They expect 1Q new subscribers to track below estimates and for full year subscriptions to fall -10% from last year. This comes as the new season of House Of Cards is released (we watch it but only subscribe each year long enough to do so). The company is expected to spend about $6 billion on original content this year alone.

Shake Shack reported after the bell and did not satisfy investors. The results were good, but only as expected and not good enough for the wannabe star of the growth restaurant scene. Quarterly revenue grew 46% from last year, reversing a loss in the comparable quarter, while sales rose 49% and same store sales increased by 11%. Guidance was also reaffirmed, but only in line with current consensus. Shares fell -7% in after hours trading.

The Indices

The indices tried to make gains today and some of them did. Today's action was led by the Dow Jones Transportation Index which made an advance of 0.45% and set a new two month closing high. The index created a small bodied candle with long lower shadow indicative of support but upside was contained by resistance at the 7,700 level. The index is bouncing and looks like it wants to move higher but this resistance level will need to be overcome. The indicators are both bullish and pointing to higher prices although momentum is waning and the near term is overbought. A little consolidation would be good for the longer term health of the rally and could come over the next week and half up to and until the FOMC meeting. If the index breaks above resistance next upside target is near 8,000 with a possible move up to 8,400. First target for support should the index pull back or enter consolidation is near 7,500.

The Dow Jones Industrial Average gained 0.40% in today's action and set a new 2 month intraday and closing high. The blue chips created a small bodied candle, but slightly larger than the previous three, and looks like it will continue to move higher. The indicators are both bullish and support rising prices although there is risk of consolidation or pull back; stochastic is overbought and momentum is declining. Today's move was halted by resistance near 17,100 and could easily enter a sideways range if no catalyst emerges to drive it higher. A break to the upside could carry 500 or 600 points higher to next resistance target near 17,750. First target for support should the index pull back or enter consolidation is near 16,750.

The S&P 500 made the third biggest gain in today's session, about 0.09%. The broad market tested support at the 2,000 level and it held. The broad market was also able to set a new 2 month closing high. The indicators are both bullish and rising, consistent with a rising market and higher prices. Momentum is not strengthening, but it is not waning either, although stochastic is indicating overbought conditions so it is not unlikely we see a consolidation in the near term. If support fails first target for support is near 1,950 and the long term up trend line. Next target for resistance is near 2,025 with the range between 2,000 and 2,025 as a possible consolidation zone. If 2,025 is broken next upside target is 2,075.

The NASDAQ Composite was the only index to post a loss in today's session although it was able to poke its head into positive territory on an intraday basis. Even with today's loss this index looks like it is moving higher, the indicators are both bullish and consistent with a market in rally. Today's action appears to be part of a consolidation above the 4,650 level, a consolidation that could help alleviate overbought near term conditions and set us up for another leg higher. For now resistance is at the 4,750 level, the tip of Friday's candlestick, with first support target near 4,650. The 4,880 is first upside target on a bullish break out, 4,490 is down side target on a bearish break with possible support at the short term moving average near 4,586.

Today's action is promising if a bit tame; the indices tested support levels and they held with many of them setting new closing highs. This action is welcome in mid rally as it will help the market to digest the news and changes of sentiment that drove it higher as well as to alleviate overbought conditions that are present in all four of the indices I regularly track. This week is a good week for such a move too, there is not much happening other than the ECB meeting giving us 6 full trading days before the FOMC meeting next week.

Final thought; don't forget about oil. Oil prices are one of the major if not the main reason we are in rally mode right now. While oil prices move higher and/or remain at these levels the market should respond favorably, if they reverse and fall back to retest support the market could fall with it. I don't think it's time to sell but a little profit taking, perhaps examining stop loss levels and/or a little protection for bullish positions would not be unwise.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Shack, Sizzles, Sinks

by Jim Brown

Click here to email Jim Brown

Editors Note:

Strong sales of new products has reenergized this brand. The company has produced some offerings that shake up the current fast food market place where hamburgers have been king for 50 years.

Shake Shack reported an earnings beat after the bell but guidance was soft because of the new offerings from competing restaurants like Burger King.


QSR - Restaurant Brands Inc -
Company Description

QSR is the new name for the Burger King and Tim Hortons brands. Both have been serving customers for more than 50 years. QSR currently operates more than 19,000 restaurants in 100 countries with more than $23 billion in sales. The name change and rebranding came a year ago when Burger King bought the Tim Hortons chain.

QSR has been flying under the radar for the last year with all the news about McDonalds all day breakfast and Starbucks expanded menu. They reported earnings of 35 cents that beat estimates of 31 cents.

Same store sales rose +5.6% at Tim Hortons and 5.4% at Burger King.

Burger King sales are accelerating because of a flood of new menu items. They have Chicken Fries, which are fries dipped in fried chicken batter and fried. They have Jalapeno Chicken Fries. On February 23rd they introduced the Whopper Hot Dog. This is a foot long hotdog flame grilled and served with whatever you want on them.

Burger King received tons of free press when the new hot dog was delivered. Some food aficionados are calling the hot dog a "culinary calamity." Others called is a "disgusting disgrace" but customers are waiting in line to order them.

Franchisees claim the demand has been "overwhelming" and while only a couple weeks old they are selling over 100 a day and rising rapidly as more customers realize they are available. Americans eat more than 20 billion hotdogs a year.

QSR will present at the UBS Global Consumer Conference on March 9th at 2:30 ET.

Earnings are May 27th.

QSR shares are currently $37.85 and a breakout over resistance at $37.65 is in progress. I am recommending we buy the April $39 call, currently $1.10, and plan on exiting at $41 if that higher level of resistance slows the rally.

With a QSR trade at $38.15

Buy April $39 call, currently $1.10, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

S&P Struggling

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P closed positive but just barely after making a lower high at 2,006. Friday's high was 2,009. The S&P continues to struggle with resistance at 1,999, which is the 61% Fib retracement level and the 100-day average.

If the S&P could punch through this level and close significantly higher it could trigger a new round of short covering to take us to resistance at 2,020. However, the Nasdaq began to weaken today and the Nasdaq 100 big caps lost -25 points. The fact the S&P has not sold off from the 1,999 level is encouraging and the morning dip was bought again.

The leader remains the Russell 2000 with a 12 point gain but that index is also fighting new resistance at 1,101 and 1,120 with a close today at 1,094.

I seriously debated closing the long position on the IWM ETF but with the strength in the Russell i decided to give it another day to see if the Russell can lift the S&P higher. Cautious investors may want to take some profits in that position.

We exited the Thor position with a +117% gain and were stopped out of the Dunkin Brands position with a 38% gain after a downgrade to neutral by an analyst. We were stopped out of Starbucks after a Listeria scare at 250 stores caused a support failure at $58. The FANG stocks all imploded today with the breakdown in the Nasdaq 100 and that stopped us out of Facebook at $105.65.

I raised a lot of stop losses just in case the choppy market we saw today turns weaker. The market has rallied for 15 days and it is very overbought. If you have profits in a position it never hurts to exit now and avoid the rush later on a gap down market open.

Current Portfolio

Current Position Changes

DNKN - Dunkin Brands

The long call play was stopped out today at $45.25 for a 78 cent gain.

SBUX - Starbucks

The long call play was stopped out today at $57.85 for a 55 cent loss.

FB - Facebook

The long call play was stopped out today at $105.65 for a $1.09 loss.

THO - Thor Industries

This position was closed at the open ahead of earnings for a $1.35 gain.

DLPH - Delphi Automotive

This position remains unopened until DLPH trades at $72.50.

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

AKAM - Akamai Technologies -
Company Description


Akamai is still stuck to that resistance at $55.50 even though there have been three prior closes over that level. Today saw a minor dip of -24 cents to close 17 cents under resistance.

Original Trade Description: February 26th.

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.

Position 3/2/16 after an AKAM trade at $55.75

Long April $57.50 call @ $1.63, See portfolio graphic for stop loss.

AOS - AO Smith - Company Description


Minor decline but the trend is still positive.

Target $77.65 for an exit.

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.

CAB - Cabellas - Company Description


Cabelas faded slightly after a big game on Thursday. A nickel is not a material loss. Shares need to move over $50 to trigger some short covering.

Original Trade Description: February 17th.

Cabelas is a specialty retailer and direct marketer of hunting, fishing, campiny and related outdoor merchandise. They operate more than 77 retail stores and a large e-commerce website along with direct mail catalogs. They also have a very profitable financial services segment offering a Cabelas Club Visa credit card.

The company has expanded profitability by moving most of its merchandise to its private label brand. Instead of being North Face, Coleman, Redwing, etc, everything is manufactured and sold using the Cabelas label.

Cabelas reported Q4 adjusted earnings of $1.26 that beat estimates for $1.22 per share. Revenue of $1.41 billion also beat estimates for $1.36 billion. Full year revenue was $4 billion and earnings of $2.67.

Merchandise sales rose +10.1% and retail store revenues rose +14.3%. same store sales comps rose only 4.9% because of the unusually warm weather that depressed the sale of cold weather clothing. Financial services revenue rose +15.7% with a 21.3% increase in interest collected. The number of active Visa accounts rose +14.4%.

The company guided for revenues to rise at a high single digit rate with earnings per share to grow in low double digits.

Cabelas shares from a low of $39 in the February dip to close at $48.40 today. I know that is a 25% jump in three weeks but I believe there is more to come. Shares are facing resistance at $48.75 but a breakout there could return to the March 2015 highs around $58. I recommend we position ourselves for the potential breakout.

Earnings are May 21st.

Position 3/3/16 after a CAB trade at $49.05

Long April $50 call, entry $2.07, see portfolio graphic for stop loss.

DLPH - Delphi Automotive - Company Description


Delphi gave back 94 cents from the $2.50 gained in the prior two days. This is not material.

The position remains unopened until DLPH trades at $72.50.

Original Trade Description: March 5th.

Delphi manufacturers vehicles components and provides electrical and electronic, powertrain and safety technology solutions to the automotive and commercial vehicle markets worldwide. Whether you are buying a new car or repairing an old one the odds are very good you are using Delphi parts.

Vehicle sales in February were 17.54 million units on an annualized basis. As we move farther into spring and summer those numbers are going to rise sharply. Cheap gas means consumers are going to buy more new cars and upgrade their rides to the SUV category when possible.

Delphi reported earnings of $1.39 and beat consensus estimates for $1.37. Revenue of $3.88 billion rose +11% and also beat estimates for $3.79 billion. The company guided for full year earnings of $5.80-$6.10 and revenue of $16.6 to $17.0 billion.

Shares rallied after earnings and broke through resistance at $68 last week to close at $71.53. The next significant resistance is $77.25. Earnings are April 28th.

I am recommending we buy the May $75 calls at $2.40 so there will still be some earnings expectation premium in them when we exit before earnings. April options expire on the 15th so premiums will deflate significantly before we ever get to the earnings event. I am recommending an entry point at $72.50 and just over Friday's high. If the market does take profits early in the week we can lower the strike price and entry target depending on what happens to Delphi shares.

With a DLPH trade at $72.50

Buy May $75 call, currently $2.40, initial stop loss $65.85.

DNKN - Dunkin Brands - Company Description


This was an extremely disappointing move by Dunkin. Guggenheim downgraded them from buy to neutral and shares gapped down at the open from $48.14 at Friday's close to $45.25 and exactly our stop loss. The $3 drop robbed us of a very nice gain of $2.25 at Friday's close to only a 78 cent gain at our exit this morning.

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

Stopped 3/7/16: Long June $45 call, entry $2.05, exit $2.83, +.78 gain.

EA - Electronic Arts - Company Description


EA skillfully evaded our stop loss at $62.45 for another day despite the 84-cent drop. Support at $63.50 is trying to hold but tomorrow will be critical.

Target $70.35 for an exit.

Original Trade Description: February 29th.

Electronic Arts develops, markets and distributes game software for online games, game consoles, internet connected devices, PCs, mobile phones and tablets worldwide.

Some of their major game brands are Madden NFL, The Sims, Battlefield, Dragon Age and Plants vs Zombies. In Q4 the company sold more than 13 million copies of Star Wars: Battlefront. That quantity was three months ahead of what they anticipated.

Piper Jaffray said last week that the current generation of game consoles has a long way to go to catch up with the prior generation. They view that as a positive for EA.

The current console cycle is in its third year and Piper said the uptake rate has been 40% to 50% faster than in prior cycles. However, only about 40% as many Xbox One and PS4 consoles have been shipped as the prior generation of Xbox 360 and PS3s. Sales of the older models reached 162 million units and the current generation has only sold about 60 million. Considering the newer versions have many more features the analyst believes the trade up rate will continue to grow for several years. At the end of 2015 EA had 8,400 employees.

The analyst also believes the shift towards digital delivery will also drive margins higher. Piper has an $87 price target on EA.

At the end of January EA reported earnings that beat estimates but revenue of $1.8 billion narrowly missed estimates for $1.81 billion. They raised their full year guidance to $4.52 billion and $3.04 per share. Analysts were expecting $3.10 and $4.56 billion. EA has a history of issuing very conservative guidance. They also said because they sold so many of the star Wars game in Q4 that sales estimates for Q1 were lower. Shares crashed on the news from $71 to $53. Shares rebounded quickly from that crash and closed at $64 on Monday.

Last week EA announced the sale of $600 million in notes and a $500 million stock buyback program that will be completed by the end of May. Rarely do companies announce buyback programs with only a 90-day window. This should continue to lift the shares in the weeks ahead.

EA will present at the Morgan Stanley Media conference at 6:25 PM ET on Tuesday.

I believe EA shares will recapture that $70 level if the market cooperates. I am recommending a short term April $67.50 call, currently $1.62. If the current rebound fades we will not have much at risk.

I am using an entry trigger just in case the afternoon fade today was the start of something bigger. The entry point will be $65.45 and just over the intraday high at $65.25.

Earnings may 5th.

With EA trade at $65.45

Buy April $67.50 call, currently $1.62, no initial stop loss.

EMR - Emerson Electric - Company Description


Emerson added to its string of gainsby +65 cents. We need a couple more days of gains to get us over the speed bump at $52.50.

Original Trade Description: March 3rd.

While you may not have heard about Emerson Electric they have 110,800 employees and are involved in many different aspects of the economy. They design and manufacture products and deliver services to industrial, commercial and consumer markets worldwide. They specialize in process management valves, meters, switches, regulators and digital plant applications.

A major segment is providing infrastructure, power, uninterruptible power systems, thermal management equipment and integrated solutions for large datacenters and cloud computing installations. They handle climate control, heating and cooling, electrical control monitoring and management.

They reported earnings for Q4 of 56 cents that beat estimates for 51 cents. Revenue of $4.713 billion beat estimates for $4.642 billion. However, revenue was down -16% because of the recession in the energy sector. The CEO said, "Lower oil prices continued to apply downward pressure on oil and gas spending, particularly upstream projects, as well as power generating alternators used in upstream applications."

Shares declined sharply but began to rebound almost immediately. The company plans to spin off its network power business later this year, which will downsize revenue by about $8 billion. They are restructuring to lower costs until the energy sector recovers and are selling noncore assets to reduce complexity. Investors liked the plans that were presented.

The company also declared a 47.5 cent quarterly dividend which produced a 4% yield at the time it was announced.

Their next earnings are May 3rd.

Emerson has resistance at $50.50 and it broke through that level on Thrusday. The next material resistance would be well above in the $60 range with a speedbump at $52.50. I am recommending we buy the June $52.50 call and plan to exit well before earnings. By purchasing the June call it will still have earnings expectations in the premium when we exit before earnings.

Emerson is somewhat of a slow mover so the options are cheap thereby limiting our risk.

Position 3/4/16

Long June $52.50 call, enrty $1.60, see portfolio graphic for stop loss.

FB - Facebook - Company Description


Facebook collapsed along with the rest of the FANG stocks and broke below the bottom of the uptrend channel to stop us out for loss of $1.09. Resistance at $110 was too strong and the market is running out of gas.

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

Stopped 3/7/16: Long April $110 call @ $3.30, exit $2.21, -1.09 loss.

HPQ - Hewlett Packard - Company Description


HPQ rallied to a new two-month high at $11.31 despite a weak tech sector. Resistance at $12 appears to be the next target. I am adding an exit target at $12.

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.

IWM - Russell 2000 ETF - ETF Description


The Russell sprinted past resistance at 1,078 with a 12 point gain to close at 1,094. The 100-day average is now 1,101.77 and the index has respected that level in the past. The next material resistance is 1,120 and the 50% retracement. The equivalent levels on the IWM would be 109.50 for the 100-day and 111.35 for the 50% retracement level. I would love to see the IWM continue higher to our target at $114.00 (new target) but the streak has been too strong. If it were not for the big gain on the Russell today, I would probably recommend closing the position. However, the Dow, S&P and Russell all closed positive after a big dip at the open so the rally is still intact despite the drop in the tech sector.

I am leaving the position with no stop loss for another day but cautious investors may want to take some profits now, exit completely or use their own stop.

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


JNJ recovered from a drop to $105.50 at the open to close positive for the day. Consumer staples stocks found buyers thinking that the tech rally may be over. No news.

I am recommending an exit target at $108.75.

Original Trade Description: February 24th

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, see portfolio graphic for stop loss.

KORS - Michael Kors - Company Description


Still holding its gains but the momentum has faded. I raised the stop loss to $56.25.

Target $59.85 for an exit.

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.

Target $59.85 for an exit.

N - NetSuite - Company Description


Gained a buck despite some choppy intraday movement. I raised the stop loss to $61.65.

Target $68.85 for an exit.

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


Excellent gain in a choppy market. I raised the potential exit target to $106.50. That would be a very nice profit and we would probably have to go through a couple bouts of profit taking to get there but at the current trajectory it is possible.

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


Nice gain in a weak tech market. Resistance at $53.50 is now the challenge. Over that level and we could run to $60.

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, see portfolio graphic for stop loss.

SBUX - Starbucks - Company Description


Support at $58 broke at the open and stopped us out for a 55 cent loss at $57.85. A Starbucks supplier discovered listeria in routine testing and had to recall its sausage, egg and cheese breakfast sandwiches. The product was shipped to 250 Starbucks stores in Arkansas, Texas and Oklahoma.

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:

Stopped 3/7/16: Long June $60 call @ $1.46, exit .91, -.55 loss.

THO - Thor Industries - Company Description


THO gave us a good run but we exited the position at the open ahead of earnings. We exited with a $1.35 gain on a $1.15 option. After the bell Thor reported earnings of 97 cents compared to estimates for 62 cents. Revenue of $975.1 million was short of estimates for $1.02 billion. Shares spiked $3 in afterhours.

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

Closed 3/7/16: Long March $55 call @ $1.15, exit $2.50, +$1.35 gain.

BEARISH Play Updates (Alpha by Symbol)

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


The VXX closed well off its highs but no movement for the day. The exit target is $20.

Because we are running out of time on the March put, I have an exit target at $20. That should give us a small gain. The volatility rebound in mid February sidetracked the original play and we need to take a gain if one is offered.

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 do not 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