Option Investor

Daily Newsletter, Saturday, 3/19/2016

Table of Contents

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

Market Wrap

Market Nearing a Top

by Jim Brown

Click here to email Jim Brown

The Dow has rebounded 2,152 points from the 15,450 low on January 20th and is nearing massive resistance.

Market Statistics

Friday Statistics

If you measure the Dow rebound from the February 11th low at 15,503 that is 2,099 points or +13.5% compared to the 2,152 points and +13.9% from the January low. Regardless of which dip you use the rebound is severely over extended and has reached a level of significant resistance. The odds of the Dow moving through this resistance band without a significant problem are almost zero. It can be done but it would be a huge feat.

The S&P has a similar gauntlet of resistance from the Friday close at 2,050 to the May high at 2,132. Each level is likely to draw more sellers than the last and it becomes a cumulative effect.

We are six weeks from the start of the Sell in May cycle and I would be very surprised if the markets made it through those resistance bands before May. However, I have been surprised before. The biggest challenge this time is the extremely over extended Dow. Being very overbought already makes it even harder to continue climbing that wall of resistance worry.

More on this in the market section below.

There was only one economic report of note on Friday and that was the Consumer Sentiment for March. Sentiment fell from 91.7 to 90.0 and the lowest level since September. Analysts were expecting a rise to 92.1. This is the third consecutive monthly decline since the recent high at 92.6 in December when holiday cheer infected the survey.

The present conditions component fell from 106.8 to 105.6 and the expectations component declined from 81.9 to 80.0. Analysts said consumers were already complaining about rising gasoline prices and the potential for additional price hikes. How quickly consumers are spoiled by a few months of good fortune.

The calendar for next week is headlined by home sales and three Fed surveys from Chicago, Richmond and Kansas. The GDP revision will close the week and there are no expectations for a material change from the 1.0% growth in Q4. This is the last revision for Q4. The next report at the end of April will be for Q1 and expectations are for 1.9% growth. For the first time in a long time, the Atlanta Fed GDPNow forecast is roughly in line with the analyst average at 2.0% growth.

Starwood Hotels (HOT) cancelled a deal to sell itself to Marriott (MAR) after China-based Anbang Insurance, U.S. PE firm J.C. Flowers and China-based investors Primavera Capital, offered $78 or $13.2 billion for Starwood. The prior deal with Marriott was for $65.33 per share. The Chinese deal turned out to be an offer Starwood could not refuse.

Starwood operates the Westin, St Regis, Aloft and W Hotels among others. Some analysts believe the hiked offer could still be topped by Marriott because the prize is too big. If Marriott could complete the deal, they would become the largest hotel company in the world and offer many of the top lodging destinations.

Marriott signaled there might be a new offer saying, "it continues to believe that a combination of Marriott and Starwood is the best course for both companies" and "is carefully considering its alternatives." If Starwood actually accepts the Anbang offer the hotel chain will have to pay Marriott a $400 million breakup fee. Anbang is also close to acquiring another chain of hotels from the Blackstone Group for $6.5 billion. The Treasury Dept would be highly critical of a deal with Anbang and the department would have to approve that transaction. CIFUS would also have to approve the deal. Anbang has $129 billion in assets according to the Chinese state media.

According to S&P there has been $250 billion in M&A deals in 2016 and $116 billion involved foreign buyers. Dealogic claims $102.5 billion from foreigners with the record of $107.5 billion in all of 2015, which was twice the amount in 2014. Chinese buyers are racing to spend their yuan before it is devalued significantly later in 2016.

How do you know a company is really in trouble? The CEO sends out a press release saying, "Don't worry we are not going bankrupt." That is usually the kiss of death. Just having to say those words to assure people actually convinces more investors that it is a real possibility.

The Valeant (VRX) CEO, Mike Pearson, told his employees in a Wednesday memo that went public on Friday that "it expected to default on its $30 billion in debt because it had delayed its annual report beyond creditor deadlines." "I can assure you we are not going bankrupt." After the memo went public, the price of Valeant bonds fell 13% to 76 cents on the dollar. That suggests some of the holders suddenly considered the chance of a credit default.

Late last year the company started offering retention bonuses of $100,000 to employees who stayed with the company. They justified it saying working at Valeant was equivalent to working in "an emerging market or a dangerous place" where firms typically offer additional compensation. Some have compared Valeant to a "pharmaceutical Enron." Valeant has $17 billion in good will on its books and you can bet that is going to be written off soon and that will deflate the balance sheet even further. With more than $30 billion in net debt, it is going to be a tough uphill battle to recover without filing bankruptcy. Shares declined another 9% on Friday.

JP Morgan (JPM) authorized another $1.88 billion in stock buybacks in addition to the $6.4 billion authorized in 2015. Shares rose +3% on the news. Bank of America (BAC) authorized the purchase of another $800 million in stock in addition to the $4 billion authorized in 2015. BAC also gained +3% on the news. The price target on BAC is $18 and $69.50 on JPM.

Friday was quadruple option expiration and volume rose to 10.86 billion shares. That made it the third highest volume day of the year. Monday traded 6.31 billion shares for the lowest volume day of the year. The S&P rebalanced the weightings of some stocks as a result of their high level of share buybacks. The weightings for PG, PFE, GE, AAPL and MCD were all reduced at the close and all saw very minor declines in prices right at the close. For instance, PG lost -29 cents to $83.21 in the last 15 minutes of trading. Facebook (FB) was actually weighted higher and shares rose 46 cents at the bell. The impact of the reweighting was negligible.

Affymetrix (AFFX) spiked 14% at 11:30 after former executives offered to buy the company for $16.10 in cash. This beat out a bid by Thermo Fisher Scientific (TMO) that had offered $14 per share in cash in January. AFFX had previously accepted that $14 bid because it was a 50% premium at the time. The executives formed a new company called Origin. Origin's president, Wei Zhou, also founded a genomics company called Centrillion Technology in 2009. He said once Origin acquired Affymetrix that Origin had the option of combining with Centrillion to offer an unparalleled range of microarray and DNA sequencing technology products.

Western Digital (WDC) shares rose after they announced a debt offering for the acquisition of SanDisk (SNDK) after shareholders approved the $17 billion merger. Under the revised deal WDC will pay $67.50 in cash and 0.24 shares of WDC for every share of SNDK or roughly $80 with SNDK shares currently $76.57.

WDC is offering $1.5 billion of senior secured notes and $4.1 billion of senior unsecured notes due in 2023 and 2024 respectively. These are just part of a total package of loans and debt that could total $18 billion.

I believe the WDC acquisition of SNDK is a strong positive. They are expected to see synergy savings of up to $500 billion in the first two years and another $500 billion by 2020. They are also expected to see synergies of another $500 billion from their acquisition of Hitachi for $4.5 billion in 2012. The actual implementation of the acquisition was held up by Chinese authorities until approved last October. WDC has acquired four flash memory companies in the last two years and the acquisition of SanDisk will put them well ahead of Seagate (STX). Seagate acquired Samsung two years ago, which means there are only two major disk drive manufacturers today, WDC and STX.

Apple (AAPL) is holding a product event on Monday where it is expected to announce a new 4-inch iPhone and a 9.7-inch iPad along with some new watchbands. The phone is expected to be called a 5SE and is targeting the Asian market and lower budget consumers in the USA. The 5SE is expected to look like the 6 and 6S models with a metal casing, multiple colors and a 12-megapixel camera. The phone is also expected to have the A9 processor along with Apple Pay. RBC Capital expects sales of about $5 billion on the 5SE compared to total Apple revenue of about $230 billion in 2016.

RBC estimates there are about 35 million iPhones in the market with 4-inch screens that are at least 3 years old. These users actually prefer a smaller screen/phone and Apple needs to give them an upgrade path or risk losing them to an Android device. The current iPhone replacement cycle has expanded from 23 months to 27 months because the new phones have not had those new killer features that make users want to switch. Analysts believe the pricing for the phone could start in the $350 range up to $450.

If Apple could just make a new phone with a battery that lasts more than a few hours they could sell millions. My Motorola Android last 2-3 days without charging.

The new iPad is expected to have some of the features of the iPad Pro including a Smart Keyboard and stylus. There are no announcements expected on the watch other than some new bands. Apple is expected to sell about 10 million watches in 2016.

Amazon Kindle owners are going to be disappointed on Wednesday if they have not updated their Kindle software by Tuesday night. This is a mandatory update. You can go here Amazon Update to determine your device model and update methods.

Amazon also followed through on the agreement with Air Transport Services Group (ATSG) and acquired a 9.9% stake in the company. Amazon has the rights to acquire another 10% at $9.73 per share and a five-year time frame to complete the acquisition. This is part of the deal to lease 20 Boeing 767 wide body freighters from ATSG.

Shares of Office Depot (ODP) spiked earlier in the week when the New York Post said Amazon might be interested in acquiring the corporate business from Office Depot. Currently ODP is involved in a proposed merger with Staples (SPLS) but faces major regulatory problems. The two firms have a duopoly on large corporate contracts for business supplies and the Feds are against the deal. If Amazon were to acquire the corporate business from ODP then the merger might go through.

Lastly, Google (Alphabet) is reportedly trying to sell their robotics business. They purchased Boston Dynamics in 2013 in hopes of creating a viable robotics business unit. Their human-like robots were tailored for military purposes. While the company has scored a lot of money from the military for research, they have not found a way to produce them for civilian use. Amazon was rumored as a possible buyer since the company is making a big move into robots for commercial use. Amazon bought Kiva in 2012 to utilize their robots in warehouse and shipping. There was no comment from Amazon on the Google rumors.

Crude prices continued to inexplicably rise to a three-month high of $41.20 on Friday. Presumably, the rally was on news OPEC and non-OPEC producers led by Russia will meet on April 17th in Doha, Qatar. The very remote possibility that any actual agreement will come from this meeting was enough to cause yet another short squeeze in crude prices. After stalling at $38.50 for four days enough new shorts accumulated that the meeting announcement caused the squeeze to the highest level since December 9th.

The only way there will be an agreement in Doha is if they decide to go along with Iran's demand for a production cap of 4.0 mbpd compared to their current production of 2.6 mbpd. If they do agree to this then they are agreeing, not to a freeze, but to an increase in production of 1.4 mbpd over the next year.

However, the headlines will say "producers agree to an output freeze" and they will have been successful in talking up prices again despite any material decline in existing production. This is a propaganda war being waged by those OPEC members that could not raise production above January levels if their lives depended on it. Their only hope for rescuing their budgets is to talk up the price of oil rather than pump more.

WTI futures expire on Monday so we could see some extreme volatility to start the week.

Active rigs declined -4 to 476 and another 67-year low. There was a decline of 5 gas rigs and a gain of 1 oil rig. That new oil rig may have simply been a reclassification of a gas rig or a rig that had been moved from one field to another and reactivated. However, at our current rig levels and the current price of oil we could begin to see some rigs reactivated in the coming weeks. At $40 oil, a well can still be drilled in the Permian and make a profit. If oil prices rise any further I would expect to see the bottom in active rig counts. Oil prices typically rise in the summer as the driving season consumes more oil and inventories decline.


We may be approaching the end of the current rally. If you compare it to the August/September decline, the double bottoms are almost identical. The S&P rebounded +245 points from the September low at 1,871 to the November high of 2,116 or roughly a 13.1% rebound. Since the February low of 1,810 the S&P has rebounded +239 points or +13.2%. The September rebound took 36 days. The current rebound has taken 37 days.

Obviously, there is no rule that says one rebound has to follow the same script as a prior rebound but the S&P is only one good day away from downtrend resistance at 2,065 and then a steady stream of strong horizontal resistance at 2080, 2105, 2115, 2132, etc.

The identical patterns of the two rebounds are so easy to see that even a novice investor should recognize the similarity and become cautious. This is how tops are formed. It also becomes self-defeating in some cases because investors do not realize that conditions have changed.

In our current situation, the economic reports have improved. Recession fears have lessened and the Fed has backed off their original guidance for 3-4 hikes in 2016. Some analysts believe there may not be any hikes in 2016. The ECB is pouring stimulus on the fire and China cut reserve rates for the 5th time. Negative interest rates are more common than positive rates in Europe. While economists have not begun to upgrade economic expectations that could happen at any time.

The dollar is actually falling and closed at a five-month low last week after the Fed backed off their rate hike pledge. A weaker dollar helps U.S. international corporations and lifts commodity prices like oil, copper and gold higher. That lifts prices for energy companies and miners and puts a bid under the broader market. If the biotechs could find a bottom, we might be able to extend the rally.

Here is the key. As we approach those resistance levels, the natural tendency is for investors to take profits and shorts to back up the truck in expectations of another decline. If the dollar continues to fall and the biotechs behave, we could see those shorts get squeezed and the markets begin to rise again. Portfolio managers that thought they were being smart by lightening up on equities could suddenly find themselves underinvested as the market rose and they would be forced to chase stocks higher.

Personally, I believe we will fail as the S&P becomes stuck in those various resistance ranges. This is an election year and uncertainty is rampant. Earnings are getting worse not better. On Friday, FactSet predicted Q1 S&P earnings will decline -8.4% and it will be the first time since 2008/2009 that earnings have declined for four consecutive quarters. On December 31st, the estimate for Q1 was for earnings growth of +0.3%. So far of the 118 S&P companies that have issued guidance for Q1, 78% or 92 companies have lowered guidance. Only 26 companies have issued positive guidance. For Q4, with 99% of companies reporting, 69% beaten earnings estimates and only 48% beat revenue estimates. Revenue growth estimates for Q1 have fallen from +2.6% to a decline of -0.8% since January 1st.

Q1 profit margins are expected to drop to 9.3% and the lowest since the 8.9% margin in Q4-2012. Analysts have cut earnings estimates by an average of 9% since December 31st. That is almost double the ten-year average of -5.3%. Estimated earnings from the financial sector have fallen from growth of +1.6% to -6.7% decline. The technology sector estimates have fallen from +0.4% growth to a -7.2% decline. Earnings are declining at the fastest rate since 2009.

FactSet Chart

Given the negative expectations for earnings there is always the possibility for a string of positive surprises that overcome the negative expectations. However, I believe the negative implications from the political process will weigh on the market and the Sell in May cycle could be stronger than normal this year.

Regardless of what I believe, we need to monitor the S&P closely as it reaches the various resistance levels and trade what we see rather than what we expect to see.

The Dow is no different than the S&P. The index is a little more overextended and will be hitting that strong resistance at about 150 points over Friday's close. Because it is a narrow index, it has not been hit as badly from the biotech crash and was helped by the energy recovery and the firming in the financials. It still has the same resistance problems as the S&P and weakness could appear at any time.

If this were a stock, would you buy this chart?

The Nasdaq halted its gains on Friday almost exactly at major resistance at 4,806, which is the 61.8% Fibonacci retracement level. It is also the confluence of the 100-day average at 4,807 and the 150-day average at 4,803. This could be a very difficult level to cross unless there is some weekend catalyst that causes a blowout at the open on Monday.

The biotech sector is really weighing on the Nasdaq and the minor rebound in the $BTK on Friday was a breath of fresh air. Unfortunately, that only allowed the Nasdaq to gain 20 points. The BTK will have to rebound a lot further for the Nasdaq to have any hope of crossing that 4,806 resistance.

The Nasdaq oscillators (MACD, RSI) are still positive despite being at the upper end of their ranges. The RSI is showing no weakness yet.

The Russell was the strongest broad market index on Friday with a 1% gain. The Russell closed at a two-month high at 1,101 thanks to the strength in the biotechs and some energy stocks. The high close suggests market sentiment is improving. However, that can turn negative very quickly when the big cap indexes hit those resistance levels.

The Russell 1000, the top 1000 stocks by market capitalization, is also facing some serious resistance at 1,150 that confirms the outlook for the Dow and S&P.

My personal opinion is that the S&P will slow dramatically and more than likely stall somewhere around the 2,075 level. That could give us 2-3 more days of gains before the weakness appears. I would love to be wrong and for the S&P to charge right past 2,100 and attempt a new high before the summer doldrums appear. Since nobody can accurately predict market action at any given time, we must trade what we see rather than what we expect to see.

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Random Thoughts

Saudi Arabia wants to expand its market share for crude oil. Other than constantly cutting prices, how can they do that? One way is to buy up a lot of coastal refineries so they can refine their own oil. This not only gives them a locked in market share for decades to come but will also give them a retail price for their products.

It is one thing to sell a refinery oil for $35 a barrel. Oil is one of the most commonly sold commodities on the planet and prices do not vary much from one area to the next. That refinery processes the oil and turns it into gasoline, diesel, jet fuel and fuel oil and many other products. They earn a "crack spread" between the cost of the raw oil and the price of the refined products. This spread can be $10-$20 a barrel depending on seasons, competition and price fluctuation in crude.

If Saudi Aramco buys a refinery and processes its own oil then they also earn the crack spread on top of their cost per barrel of oil. Basically they gain an extra $10 or more on each barrel they sell.

Aramco had a 20 year partnership deal with Shell that was Motiva Enterprises. Last Wednesday Shell announced it was breaking up with Aramco after two decades. They are dividing the assets and leaving Aramco with only one refinery in the US. That is the nation's largest 603,000 bpd refinery in Port Arthur Texas. Shell will end up with two smaller plants in Louisiana with a combined capacity of 473,000 bpd. Aramco wanted all three plants but Shell refused to give in.

Aramco already has 5.5 mbpd of refinery capacity either owned outright or through partnerships all around the world. According to multiple people Aramco is going shopping for additional refineries and they would love to have them in the US since we are the largest consumer of oil and refined products.

Saudi has about 11.0 mbpd of crude production. If they bought up another 5.5 mbpd of refining capacity that would give them an extra $10 or more per barrel every day for decades to come. That appears to be a great strategy for Aramco.

The key now is to find out which U.S. refineries they might be targeting. I doubt Valero (VLO) is going to sell any of theirs and I would expect VLO to also be a bidder on any refineries Aramco might be targeting in order to preserve Valero's market share in the USA. They will not want Aramco to begin discounting refined products in the US. I will research this and report on the potential candidates in the coming weeks. There are 12 major refiners in the USA.

TransCanada Corp (TRP) the parent of the Keystone XL pipeline announced it was buying Columbia Pipeline Group (CPGX) for $13 billion. TRP is paying $25.50 per share for Columbia. The deal will give TRP another 15,000 miles of natural gas pipelines and link to TransCanada's existing 5,700-mile network. This will make TransCanada one of the largest pipeline operators in North America. This will become even more important once the multiple LNG export facilities on the Gulf are fully operational. If all the proposed trains are completed it would create as much as 20 Bcf per day of new demand. That gas would have to be piped from as far away as the Marcellus and the various shale fields in the Midwest. This will be a bonanza for TransCanada since they get paid for every cubic foot that moves through their pipelines. If a republican is elected as president the Keystone XL pipeline will also be approved and add to their volumes. TRP shares move very slow so I would not recommend buying on this news.

I was shocked when I looked at the AAII sentiment survey for this week. This was the fifth week of market gains but bullish sentiment actually declined sharply by -7.4%. I am guessing everyone is looking at the same charts we are and seeing that massive overhead resistance. I am surprised it registered to strongly on this survey. However, you may remember the first two days of the week were very choppy ahead of the Fed meeting. This survey closes on Wednesday and the real rally for the week had not yet begun. Next week's survey will be interesting

A week ago sophisticated computer hackers almost pulled off a $1 billion robbery from the New York Fed. The hackers infiltrated the Bangladesh central bank and for two weeks they planned their attack putting hooks in various places and deleting logs to erase their tracks. They submitted transactions over the SWIFT network to transfer $1 billion in total in a series of transfers to multiple banks. They extracted $101 million before a spelling error in the name of a destination foundation caused a human to question a specific transaction and raise flags on the other transactions in progress. They sent $81 million from the Bangladesh Bank's account at the Fed to four accounts in the Philippines and another $20 million to Sri Lanka. A bank in Sri Lanka caught the $20 transfer and returned the money. The money to the Philippines is still missing. It was transferred again to unknown destinations as soon as it was received.

The SWIFT network was not breached and continues to operate. The hackers infiltrated the Bangladesh computer network, captured logins and then simulated transactions as if a human was operating one of the three SWIFT terminals in the building. Security firm FireEye (FEYE) is doing a sweep of the Bangladesh Bank's systems and has found at least "32 compromised assets" that were used for reconnaissance and to gain control of the banks servers.

While $850 of the $1 billion theft was halted by a sharp eyed human, it is only a matter of time before even bigger thefts are completed. In a global banking system with tens of thousands of banks and networks there are far too many weak spots that hackers will find and compromise. Hackers are the Bonnie and Clyde of this generation. Knowing that somebody got away with $80 million will only encourage tens of thousands of other hackers around the world and it is only a matter of time before they succeed. In reality, they have already succeeded a lot more than we know because many banks will not report the thefts in order to save their reputation.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The main purpose of the market is to make fools of as many men as possible."

Bernard Baruch


Index Wrap

Another Bullish Opex Week

by Keene Little

Click here to email Keene Little
The decline into the Thursday, March 10th low turned into another head-fake move in front of opex week and the market ripped to the upside to give us another bullish opex week. It has become a very familiar pattern and now we wait to see if the bulls can follow through in the coming week.

Week's Indexes

Review of Major Stock Indexes

The good news for the bulls is that this past week's rally brought the Dow and SPX back into the green for the year, as you can see in the table above. The transports have recovered strong, up +7.6% for the year, and the utility index has done even better (it's a defensive sector), up +13.4%. The stars of the year are the metals -- silver is +15.5% and gold is +18.3%. The metals have rallied strong off their December lows as worries about inflation build and by those who feel it's the better investment in the lands of negative interest rates.

This past week's economic reports were OK with nothing to write home about and nothing to point one way or the other about how the economy is doing. The big impact on the market, like the previous week with the ECB announcement, was Wednesday's FOMC announcement and the surprisingly dovish response by the Fed heads. Taking four to five rate increases for the year down to two was a clear sign the Fed has switched directions. It just takes time to turn the Titanic around and it's very likely they'll work it down to no more rate increases on their way to negative rates.

Even as signs of inflation start to show up (helped by higher commodity prices) and wage growth remains steady, the Fed has clearly made a shift in their focus and the stock market liked it. The week's rally came post-FOMC and it might have been due to a lot of short covering considering the volume was not as high as previous selling days.

The rally off the February low has now duplicated the rally off last September's low, in price, time and sentiment. The strong rally into the November 2015 high turned out to be mostly short covering and the November 3rd high was followed by another leg down into January. The question for us to figure out is whether or not the same kind of rally into Friday's high will have better luck getting some follow through to the upside. I'll review the price pattern for what to watch for and the kind of evidence we want to see for each side.

A Look At the Charts

Dow Industrials, INDU, Weekly chart

The strong rally in the stock market since the January-February lows has the Dow within a stone's throw of its downtrend line from May-November 2015, currently near 17665. It would be more bullish above that line of resistance but at the moment it's looking like it could finish with another lower high. There are a number of similarities between the August-September and January-February declines and the September-November and February-March rallies. The September 2015 low was a higher low than the August low, as was the February 2016 low vs. the January low. Each of those higher lows led to a strong rally and the September-November rally lasted 25 trading days and retraced 87.5% of the May-August decline. The February-March rally, through Friday, is 25 trading days and it would retrace 87.5% of the November-January decline at 17662, which coincides with the downtrend line from May-November. One more small pop up on Monday would accomplish both.

There are two ways to interpret the price pattern, both of which are short-term bearish but one is longer-term bullish following a pullback. The bearish pattern, depicted in red on the weekly chart below, calls for a powerful move down over the next few months, one which would knock the Dow well below its January low into the summer. The bullish pattern calls for a pullback to complete a sideways triangle that started off the May 2015 high.

The year-long triangle pattern could finish as early as April or May and as a bullish continuation pattern it calls for a renewed rally, one which will take the Dow to new all-time highs into the end of the year.

As I said above, both scenarios call for at least a pullback and if that pullback is choppy I'll start to become more bullish. But if the decline becomes strong and especially if it breaks below the January low (15450) it would be a time to get aggressively bearish. We can't know which scenario will come to pass until we see what kind of pullback/decline follows this rally.

Dow Industrials, INDU, Daily chart

The daily chart below shows how close the Dow is to its downtrend line from May-November and it would only take a minor pop higher on Monday to reach it. But following a bullish opex week it's been very common to see the following Monday/Tuesday to be negative. The first sign of trouble for bulls would be a retracement of this past week's rally and a drop below price-level S/R at 17140. Bulls would be in a strong position above 17670, especially if the downtrend line is used as support on a back-test. With RSI more overbought than any time since the December 2014 high, it's clearly risky to be betting on the long side as price approaches its downtrend line. Sentiment (Daily Sentiment Index from trade-futures.com and CNN's Fear & Greed index) is now more bullish than it was at the November 2015 high, which is another reason why it's risky thinking long here.

Key Levels for INDU:
-- bullish above 17,670
-- bearish below 17,140

S&P 500, SPX, Daily chart

SPX closed above its 78.6% retracement of its December-January decline, at 2041.32, which typically means it will continue to rally and completely retrace the prior move. But the September-November rally retraced 93.5% of the May-August decline so obviously a high retracement is not a guarantee of a complete retracement. Friday's candle is a small star doji and it's possible it will turn into a reversal candlestick, which would not be confirmed until it's followed by a red candle on Monday. A drop below last Tuesday's low at 2008 would confirm a top is in for now but it remains bullish above 2041. As with the Dow, we won't know if the setup here is for a strong decline to much lower lows or if instead we'll get just a deep pullback before rallying to new all-time highs this year. In the coming week, assuming we'll start a pullback, the form of the decline will provide clues for what will follow.

Key Levels for SPX:
-- bullish above 2042
-- bearish below 2008

S&P 100, OEX, Daily chart

Depending on how a downtrend line from November/December highs is drawn on the OEX chart determines whether it is slightly under it or slightly over. Essentially it's at the line and as with the other indexes, this past week's high is showing bearish divergence against the first week of March. If I look at the bounce off the January low as an a-b-c bounce pattern, the 2nd leg of the bounce achieved 162% of the 1st leg at 908.95 with Friday's high at 909.47 (followed by the close at 907.88). It's a good setup for a reversal at resistance but the bears will need to take advantage of the setup on Monday. The rally will stay bullish above 910.

Key Levels for OEX:
-- bullish above 910
-- bearish below 895

Nasdaq-100, NDX, Daily chart

NDX made it back up to its broken 200-dma, at 4420, and retraced 62% of its December-January decline, near 4415. It would be more bullish above 4420, especially if it uses its 200-dma as support on a pullback. The bearish pattern that I see for the tech indexes is an impulsive (5-wave) decline from December followed by a corrective (overlapping highs and lows) bounce. This suggests we'll see another leg down at least equal to the December-January decline. From here that points to 3570 for a downside target. That's all speculation at the moment but with the pattern for the blue chips a toss-up between the bulls and the bears, the techs tilt the favor toward the bears.

Key Levels for NDX:
-- bullish above 4420
-- bearish below 4220

Nasdaq Composite, COMPQ, Daily chart

The Nasdaq looks the same as NDX as it rallied up to its 62% retracement of its December-February decline, at 4807 (Friday's high stopped about 3 points shy), but it has a little more upside potential to its broken 200-dma at 4871. Its short-term pattern supports the idea we'll see the rally continue in the coming week so watch the 4870 area for potential resistance if reached. The next level of resistance above that is price-level S/R at 4920. The first sign of trouble for the bulls would be a drop below Tuesday's low at 4712, which would be a confirmed break of its uptrend line from February.

Key Levels for COMPQ:
-- bullish above 4810
-- bearish below 4607

Russell-2000, RUT, Daily chart

Friday's rally had the RUT closing slightly above the uptrend line along the lows from October 2014 - September 2015, which fits as the neckline of a possible H&S topping pattern. Bouncing back up to the line leaves the potential for a back-test and then bearish kiss goodbye. But a close above the line, near 1100, is bullish, especially if the line is used as support on a pullback. The 62% retracement of the December-January decline is at 1104.87 and Friday's high was 1102.98. If the buyers keep up the buying we could see the RUT make it up to the downtrend line from June-December 2015, currently near its 200-dma at 1147.

Key Levels for RUT:
-- bullish above 1105
-- bearish below 1040

SPDR S&P 500 Trust, SPY, Daily chart

Trading volume was at least building as the week progressed, which for opex week is not surprising, but it was still less than what was seen during the down days. MFI has made it into overbought and it's flattening as price pushes up against the top of its BB. It's also approaching an area of lots of price chop in November-December with high VAP, all of which means tough resistance. Further gains could be very difficult in an overbought/overloved market and that makes the downside potentially the direction of least resistance in the coming week.

Powershares QQQ Trust, QQQ, Daily chart

The QQQ also made it up to the top of its BB this past week and Williams %R is showing signs of bearish divergence and curling over. It could certainly press higher but there's lots of resistance holding back a lower-volume rally with waning momentum, none of which is a good recipe for the bulls in the coming week. But if the sellers stay away and the market works its way higher we could see QQQ head up to price-level resistance near 110.


It was a good week for bulls during opex week and I found it interesting that SPX settled at 2050.07 Friday morning -- the computers could not have nailed it much closer to the big 2050 settlement number if they had tried. Important retracement levels, 200-day moving averages and trend lines were all achieved (or nearly so) by Friday's close and the weekend papers will be able to hoot and holler about how the stock market (the Dow and SPX) has recovered all of the year's losses. All in all, it was a great job by the bulls and it completed another bullish opex week.

But now is a time for caution by the bulls. It's still arguable as to whether or not the primary source of the rally was short covering, like it was back in October 2015, and the declining volume in the rally supports that argument. The strongest rallies tend to be seen in bear markets rather than bull markets and the strong September-November 2015 rally has now been duplicated in both time and price with the February-March rally. I know the bulls were feeling pretty feisty at the November high (very high bullish sentiment) but it was not a good time to hold onto long positions as the entire rally was given up into the January low. We have the same sentiment readings today and we must think about the possibility that it too will turn into a bull trap if stops are not honored.

On the daily and intraday charts we now see bearish divergence and that's a warning sign. If we see the typical selling on Monday-Tuesday following a bullish opex week we'll probably see the oscillators turn down from overbought and from resistance, leaving a bearish divergence in place. That's what the bears want to see but obviously the bulls want to see the bears thwarted with a continuation higher on Monday. Eventually of course we'll get a pullback correction, which could turn into something more bearish.

The charts reflect two longer-term possibilities for the next few months and in the short term both expect at least a deeper pullback to begin at any time, which is the reason I think traders should be defensive if not looking for opportunities to play the short side. After the deeper pullback gets started we'll have an opportunity to analyze the price pattern to see if it will be a dip to buy or if instead we'll want to sell bounces.

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

Flying High

by Jim Brown

Click here to email Jim Brown

Editors Note:

Did you know the U.S. buys rockets from Russia to launch our satellites? Whoever decided that was a good idea? Orbital ATK and several other companies are in partnership to develop a new rocket and rush it into production to limit our dependency on Russia to launch our satellites.


OA - Orbital ATK -
Company Description

Orbital ATK was created in 2015 by the merger of Orbital Sciences and Alliant Techsystems. The company develops and produces aerospace, defense and aviation related products for the U.S. Government, allied nations, prime contractors and other customers in the U.S. and internationally.

The currently have a contract to convert the four segment Space Shuttle Solid Rocket Booster into a five segment booster for the new Space Launch System that will carry astronauts back into space. They are working on a new rocket booster to replace the boosters the U.S. is currently buying from Russia. They also develop satellites for commercial, scientific and security applications. They also produce the Cygnus spacecraft that delivers cargo to the International Space Station and returns with completed experiments.

The Defense Systems Group provides tactical missiles, defense electronics and medium to large caliber ammunition, fuzed warheads, etc. The Flight Systems Group produces the Pegasus, Minotaur and Antares launch vehicles.

One of their newest projects is the Mission Extension Vehicle or "space tug." When an existing satellite develops a problem and engineers believe it can be repaired, the space tug would go get the satellite and push it towards the International Space Station where it can be repaired and the tug would then push it back into orbit where it belongs. Since these satellites cost from hundreds of millions to billions of dollars each, having the capability to repair them would save a lot of money.

Sometimes the satellite has simply been active for so long that its orbit has degraded. The space tug would attach itself to the satellite and then lift it back into an orbit that would give the old satellite several more years of useful life. Then the tug would disconnect and repeat the process with a different satellite. The tug could also push dead satellites into a descending orbit where they will burn up reentering the atmosphere. That would essentially remove the trash from what is becoming an increasingly crowded orbital space. The first space tug is expected to have enough fuel to keep it active for up to 15 years. They plan to launch 5 by 2020 and with dozens of very expensive communication satellites running low on fuel every year, it will be a very profitable venture. Clients are already entering into discussions on how the tug can help their satellites.

These are just some of the hundreds of thing Orbital ATK has in the works. They were also named a subcontractor on Northrop's new $120 billion B-21 stealth bomber program.

In early March Orbital reported earnings of $1.45 that beat estimates for $1.09. Revenue of $1.137 billion beat estimates for $1.11 billion. Order backlogs were over $13.5 billion. They guided for the full year to earnings of $5.25-$5.50. Shares crashed from $87 to $74 the next day after they filed a statement with the SEC saying the financial statements covering the Q2-Q3 in 2015 were not accurate due to an accounting error that occurred when the two companies merged. It was a non-cash error covering long-term contracts that were accounted for using different accounting methods in each company. There was no material impact from the restatement but shares always crash when an "accounting error" is disclosed.

After two weeks, shares began to rise again one the smoke cleared. Shares hit resistance at $82.60 on Friday and pulled back only slightly. I am recommending we buy a breakout over that resistance with a target at $88-$90.

Earnings May 30th.

With an AO trade at $82.80

Buy May $85 call, currently $2.90, initial stop loss $76.15.


No New Bearish Plays

Despite my somewhat bearish outlook for the market over the next month, I am finding it very hard to locate bearish candidates. When the market is in rally mode, you have to go with the flow until that trend slows.

In Play Updates and Reviews

Five Weeks

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets have been up for five consecutive weeks. Can they make it six? Friday's quadruple witching option expiration provided plenty of volume and an upside bias. The Fed's blessing from Wednesday also helped. Next week we are lacking any obvious catalyst and it will be interesting to see if the rally can last another week.

We need the S&P to gain a few more points to trigger our bearish SPY put play. The S&P gained 9 points on Friday but the SPY closed well below Thursday's high at $205.33. We need about 3 more SPY points or roughly 30 S&P points to trigger our short position.

Current Portfolio

Current Position Changes

JNJ - Johnson & Johnson

The long call position was closed at the open on Friday.

JWN - Nordstrom

This long position was triggered when JWN traded at $58.75 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

AKAM - Akamai Technologies -
Company Description


Still stuck to the $55 resistance. Eventually this very tight range is going to break either up or down and when it does it could be explosive. CEO F. Thomson Leighton bought 18,126 shares at $55.16 on Wednesday. People sell shares for multiple reasons but they buy shares only when they expect them to go higher.

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


Another nice gain after a big spike on Thursday. We are only $2 away from the exit target.

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.

CRM - SalesForce.com - Company Description


CRM cannot free itself from resistance at $72. There could be a short squeeze breakout in the future because lows are rising. No news.

Original Trade Description: March 14th.

Salesforce.com provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide. They provide an entire menu of applications tailored to various industries with an emphasis on sales force automation and customer resource management.

The last six analysts ratings changes have been upgrades with four new analysts initiating coverage with a buy. Salesforce is growing quickly with revenues growing 24% in 2015 to $6.67 billion. Subscription and support revenues rose to $6.21 billion and accounted for 93% of all revenue. These fees continue from quarter to quarter and should continue growing.

Morgan Stanley said customer demand for applications software was expected to remain quite strong and Salesforce.com was positioned to make the most of this development.

The Salesforce.com CEO said sales efforts to enterprise customers were becoming more time consuming because of the greater complexity of the large enterprises but once sold they became very profitable long term assets. Once a large enterprise invests in Salesforce.com and trains its thousands of employees there is a huge inertia factor that prevents them from leaving. That subscription revenue becomes repeatable for a long time.

These longer sales and implementation cycle means that Salesforce.com has a lot of delayed revenue that it will recognize in future quarters in addition to the current revenue for those quarters. This is the equivalent of a snowball rolling down hill. Future revenue is growing even though it is not readily apparent. In Q4, the company reported deferred revenue of $4.29 billion and its unbilled deferred revenue was $7.1 billion.

For Q4 Salesforce reported earnings of 19 cents that matched estimates but revenue of $1.81 billion beat estimates for $1.79 billion. The company guided higher for 2016 and shares rose 8% on the news.

The next earnings are May 18th.

Shares moved sideways from the earnings spike for three weeks and are just now starting to move higher. Given a positive market, I think they will retest the highs in the weeks ahead.

I am recommending the May $75.00 call even though it is a little farther away from the money and slightly more expensive than the April $72.50 call. With only 32 days left in the April cycle we are reaching the point where premium decay will accelerate. If we hit a soft patch in the market the April premiums may not have time to recover. The May premium will cover the earnings on May 18th so when we exit before earnings there will still be some expectation built into the premium.

Position 3/14/16

Long May $75 call @ $2.75. See portfolio graphic for stop loss.

DLPH - Delphi Automotive - Company Description


Delphi declined slightly after the big gain the prior two days.

On Wednesday Wells Fargo named it one of three winners in the move to autonomous emergency braking by all the major auto makers. The other two were Mobileye (MBLY) and Autoliv (LIV).

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.

Position 3/17/16 with a DLPH trade at $72.50

Long May $75 call @ $2.50. See portfolio graphic for stop loss.

EMR - Emerson Electric - Company Description


I am encouraged that EMR did not give back a lot of its gains from the +$3.29 on Thursday. Only giving back -10 cents today was nothing. I am not going to raise the stop loss yet. I think the stock has some more to run and while we are up a lot, I think we can gain more.

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, entry $1.60, see portfolio graphic for stop loss.

JNJ - Johnson & Johnson - Company Description


JNJ failed to rally in a bullish market over the last week and I recommended we close the position at the open on Friday. We exited for $1.12 and a loss of 18 cents.

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:

Closed 3/18/16: Long May $110 call @ $1.30, exit $1.12, -.18 loss.

JWN - Nordstrom - Company Description


Nordstrom spiked to $59.37 at the open to trigger the position and then faded to a minor gain fo 30 cents at the close. Even though it was a small gain it was still a continued breakout over resistance at $57.75.

Original Trade Description: March 17th.

Nordstrom is a fashion specialty retailer offering apparel, shoes, cosmetics and accessories for men, women and children in the U.S. and Canada. They have a growing online presence as well as the Nordstrom Rack discount stores. They have a private label credit card through Nordstrom FSB, a federal savings bank and two Nordstrom Visa car offerings. As of February they operated 323 stores in 39 states in addition to Canada and Puerto Rico. The company was founded in 1901.

This is a really strange bullish recommendation since 61% of analysts (19 out of 31) have a hold rating and three have a sell rating as of February 22nd. So far in March two new analysts have initiated coverage with a sell rating. The consensus price target is $52.75 and shares closed today at $58.22.

Apparently investors are ignoring the analysts ratings because they think they have it wrong. With all of those negative ratings there are probably a lot of shorts that are cussing as each day goes by with another gain.

The analysts with buy ratings claim Nordstrom's mix of brick and mortar stores and online websites as well as their chain of discount and clearance stores will power the earnings higher in the months to come. Cowen & Company said "Going forward, we believe leveraging Nordstrom's unique multi-channel approach should benefit the top-line given that multi-channel customers spend three-to-four times more than other customers." Stifel wrote, "We do believe that Nordstrom is a market share gainer in what will likely prove to be a contracting market for apparel sales. With its best-in-class omnichannel experience, outstanding customer service and compelling merchandise assortments, both broad and deep, we believe Nordstrom can be a winner despite the more challenging environment.

In late February the company reported earnings of $1.17 and revenue of $4.19 billion that missed estimates for $1.22 and revenue of $4.22 billion. However, revenue did increase 5.2% and same store sales rose +1%. They guided for full year 2016 for revenue to rose 3.5% to 5.5% and earnings in the range of $3.10 to $3.35. Analysts were expecting $3.37. Nordstrom said the weak sales were the result of acquisition expenses, the strong dollar deterring tourist sales and the weak holiday season.

Shares fell to $46 on the news. However, that was the bottom and shares have only been down four days since those earnings. The close today at $58.22 was above strong resistance at $57.75. Since then they have declared a quarterly dividend of 37 cents payable on March 22nd to holders on March 7th.

Earnings May 12th.

I am recommending this as a breakout play with today's close over resistance at $57.75 and the next material resistance at $67. However, just to be cautious I am putting an entry trigger on the play at $58.75. I have been burned several times lately by one day wonders that spike slightly over resistance only to fall back again for a week or two.

Position 3/18/16 with a JWN trade at $58.75

Long July $62.50 call @ $1.83, initial stop loss $55.25.

KR - Kroger - Company Description


Minor gain with resistance at $38.50 holding for the last five days. No reason to exit yet. We have a July option.

Original Trade Description: March 11th.

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 Feb-11th crash. This is long-term support and shares were very oversold. In a previous play we bought the dip in February and rode the stock back up to $40.35 and exited before earnings in early March.

In the March earnings Kroger reported earnings of 57 cents compared to estimates for 54 cents. Revenue rose +4% to $26.2 billion and narrowly missed estimates for $26.3 billion. Sales excluding fuel rose +7%. Same store sales rose +3.9% but that was less than the 4.0-4.5% they had predicted in January. Kroger said shifting the Super Bowl into February hurt sales for the quarter ended January 31st. Warmer weather and fewer snow storms also hurt because people stock up on food ahead of storms but shop as normal in regular weather.

The retailer said they expect earnings to rise 6-11% in 2016 to $2.19-$2.28 per share. Same store sales are expected to rise 2.5-3.5%. This is lower than 2015 because of lower inflation.

Investors were not happy with the earnings because most never look at the details and only read the one sentence headline to make their decisions. Shares declined from $40.50 to $36.50 to give us another entry point at support.

I believe Kroger will make a new high this time. Earnings are well out in the distance on June 16th and that will allow us to buy a longer dated option and give it time to mature. Kroger is a slow mover so we need time for it to grow. With support at $36 dating back to the August crash it should be a relatively safe position.

Position 3/14/16:

Long July $40 call @ $1.55, no initial stop loss

N - NetSuite - Company Description


Yahoo! The resistance at $64.50 finally broke with a very nice $1.85 gain. Now only $2 from our exit target. No news.

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

NTAP - NetApp - Company Description


Another minor gain but easing over resistance. We need that short squeeze breakout.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Long May $28 call @ 99 cents, no initial stop loss.

PII - Polaris Industries - Company Description


Back to a new 3 month high but we still need to move over $100 soon to stimulate new buying.

Target $105.85 for an exit.

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.

PKG - Packaging Corporation of America - Company Description


No material retracement of the big gain from Thursday.

Original Trade Description: March 7th.

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 25th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Position 3/11/16:

Long April $55 call @ $2.20, no initial stop loss.

QSR - Restaurant Brands Inc - Company Description


Shares rebounded to a new 5 month closing high but only managed a minor gain. Now less than $2 from the exit target. No news.

Original Trade Description: March 7th.

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.

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.

Position 3/9/16 with a QSR trade at $38.15

Long April $39 call @ $1.15. See portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

SPY - S&P 500 ETF - ETF Description


No daily news until we get closer to the launch point.

Original Trade Description: March 16th.

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

With a SPY trade at $207

Buy June $200 put, estimated premium $4.50, initial stop loss $213.

If the market continues higher I plan on adding to that position at $210.

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