Option Investor

Daily Newsletter, Tuesday, 9/8/2015

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

China Moves The Market Again

by James Brown

Click here to email James Brown

Stocks are enjoying a widespread relief rally on Tuesday after last week's sell-off. Disappointing economic data out of China has ignited new hopes that the Chinese government will continue to add to their stimulus measures to rejuvenate their economy. The Chinese market dropped sharply on Monday and continued to fall this morning. Earlier today the Shanghai index was down -2.3%. Then suddenly it reversed higher and delivered a huge bounce to close up +2.9% on the session. This fueled gains around the globe. Most of Europe's stock markets were up +1.0-1.5%. As of Tuesday afternoon the major U.S. indices were all up +2.0% or more.

It is a nice change of pace after last week's stock market sell-off. It was the second worst weekly performance of the year. The Chinese market was closed on Thursday and Friday last week for holiday and the U.S. market was closed yesterday. Traders were selling ahead of the long weekend for fear the market would collapse on Tuesday morning. Most of the U.S. indices fell -2% to -3% last week with a few dropping closer to -4%. Thus far today's market rally has erased a good chunk of last week's decline.

Economic Data

Looking back at last week's economic data, most of it was weaker than expected. Construction spending seemed to be the exception with a +0.7% rise in July while June was revised higher from +0.1% to +0.7%. The Chicago Purchasing Managers Index (PMI) for August slipped from 54.7 in July down to 54.4 in August. It was not a big move and still above the key 50.0 level.

Factory orders for July were only up +0.4% after June's was revised higher from +1.8% to +2.2%. The ISM manufacturing index slipped from 52.7 to 51.1 in August. The ISM non-manufacturing (services) index fell from 60.3 to 59.0 in August. Numbers above 50.0 suggest economic growth.

Employment data came in below expectations. The ADP National Employment Report said private businesses added 190,000 new jobs. Meanwhile the government's BLS announced that nonfarm payrolls for August rose +173,000. The average nonfarm payroll estimate was +215,000. Bloomberg's economist poll had a range of +130K to +253K.

The August jobs report was disappointing but everyone noted how August results tend to be revised higher. In the last 27 years the August jobs report was revised higher 21 times. Thus while the initial headline was discouraging the market expects a revision and this only increased uncertainty over the Fed's decision on a rate hike next week.

Another disappointing fact was another 261,000 workers dropped out of the U.S. workforce. The labor force participation rate has fallen to 62.6%, the lowest level since 1977. Over 94 million Americans are no longer in the workforce (FYI: current estimates put the U.S. population at 319 million).

Overseas Economic Data

China has been a major market influence lately as analysts worry over the country's slowing economy. Last week saw the official manufacturing PMI reading fall from 50.0 to 49.7. The Caixin manufacturing PMI inched higher from 47.2 to 47.3. Unfortunately, both of these readings are under 50.0 and suggest economic contraction. Analysts have been reducing their forecasts on Chinese growth and last week Goldman Sachs added their two cents. Goldman downgraded their outlook on Chinese growth for 2016, 2017, and 2018 with expectations for growth to slow to +6.4%, +6.1%, and +5.8%, respectively.

Economic data out of Japan was mixed. Their NIKKEI services PMI for August did improve from 51.2 to 53.7 but their manufacturing PMI slipped from 51.9 to 51.7. Japan's industrial production for July fell -0.6%.

Looking to Europe the area is still struggling with deflation. The European Central Bank left their monetary policy unchanged. The ECB suggested they were ready to increase their QE program if necessary. Unfortunately inflation continues to sink. The July PPI for the Eurozone fell -0.1% for the month and is down -2.1% for the year. Eurozone manufacturing PMI for August was down slightly to 52.3. Services PMI inched higher to 54.4. The region's unemployment rate improved from 11.1% to 10.9% while their retail sales in July improved +0.4% for the month.

Major Indices:

It was an ugly week for the S&P 500 index. Looking at last week's performance, the index plunged on Tuesday, September 1st. The midweek bounce failed with stocks sinking again into the weekend. All told the S&P 500 lost -3.4% for the week and as of Friday's closing bell it was down -6.7% year to date.

The short-term levels to watch are support near 1,900 and 1,865. The 2,000 level is overhead resistance.

Daily chart of the S&P 500 index:

Intraday chart of the S&P 500 index:

The NASDAQ fared a little bit better with a -3% decline last week. The key levels to watch for support appears to be 4,600 and 4,500. Overhead resistance looks like 4,800 and 4,900, which will be bolstered by the simple 200-dma. As of Friday's closing bell the NASDAQ was down -1.1% year to date.

chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index:

The small cap Russell 2000 index held up better than its big cap rivals. Last week the $RUT only lost -2.3% thanks to a big bounce on Wednesday. As of Friday's close the $RUT was down -5.6% year to date.

The 1,100 and 1,120 levels look like short-term support. I'd watch 1,160 and 1,180 as short-term resistance.

chart of the Russell 2000 index

Intraday chart of the Russell 2000 index

Economic Data & Event Calendar

It's a relatively quiet week for economic data. The U.S. markets were closed on Monday for the Labor Day holiday. There is nothing on the schedule that looks like a market-moving event.

Apple Inc. (AAPL) will make headlines with its special event on Wednesday. The company is expected to unveil its newest iPhones the 6S and 6S plus in addition to a new iPad and possibly a new Apple TV set-top box.

The Bank of England will likely leave rates unchanged at 0.5% and its QE program at 375 billion pounds.

Meanwhile the U.S. Senate and House of Representatives return to Washington following a summer recess. On Wednesday, European Commission President Jean-Claude Juncker gives his first State of the Union speech to the European Parliament. Chancellor Angela Merkel speaks to the German parliament and could talk about the Greek situation and the immigrant crisis in Europe.

- Monday, September 07 -
U.S. Markets closed for Labor Day holiday

- Tuesday, September 08 -
...nothing significant...

- Wednesday, September 09 -
Apple Inc. (AAPL) holding a special event

- Thursday, September 10 -
Chinese auto sales numbers for August
Bank of England interest rate decision
Import/Export data
Wholesale inventory data

- Friday, September 11 -
Producer Price Index (PPI) for August
University of Michigan Consumer Sentiment
14th anniversary of the Sept. 11th attacks

Additional dates to be aware of:

Sept. 17th - FOMC meeting, policy update, economic forecasts
Sept. 17th - Fed Chairman Yellen press conference
Oct. 28th - FOMC meeting

Looking Ahead:

The market's correction has been sharp enough that stocks might be (I repeat, might be) near a bottom if the recent IIS survey is any indication.

The Investor Intelligence Survey polls stock market newsletter editors for their opinion of the market. After last week's market drop the survey showed editors were very pessimistic. The number of bullish replies hit lows not seen since March 2009, which was the bear-market low. Contrarian investors see this data point as a bullish signal.

On the Investors Intelligence website, "The Advisors' Sentiment Report... heralding major market moves since 1963 - This survey has been widely adopted by the investment community as a contrarian indicator and is followed closely by the financial media. Since its inception in 1963, our indicator has a consistent record for predicting the major market turning points."

Earlier this week analysts at Deutsche Bank commented on the market and the possibility of a fed hike. In a note they said, "The post-Labor Day outlook, with nine days to the September FOMC, remains remarkably uncertain. Volatility levels, ISM momentum and inflation expectations would point toward easing, not tightening." It would seem that Deutsche Bank has joined the camp of no rate hike in September.

At the moment investors should probably stay neutral on the market. Obviously today's big bounce is encouraging but it's just a bounce. Stocks are likely to remain volatile until the Fed's FOMC meeting next week on Sept. 16-17th. The Fed's decision and their commentary on why they made their decision, Thursday, the 17th, will have a huge impact on market direction. It could spark a big move higher or lower.

~ James

Fun fact:
This week, Queen Elizabeth II, on the throne since 1952, becomes the longest-serving monarch in British history, passing the record set by Queen Victoria, who reigned from 1837 to 1901. (source: Bloomberg)


Portfolio Update

by James Brown

Click here to email James Brown

Current Portfolio

Portfolio Comments:

Our portfolio of active plays should grow pretty quickly if the market cooperates. Lets hope stocks see some follow through on Tuesday's bounce.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a play or option position exited or closed this week.

New Plays

Seeing New Opportunities

by James Brown

Click here to email James Brown

- New Trades -

Editor's Note:

(September 8, 2015)

The market volatility continues. Stocks suffered big swings last week and posted its second worst weekly performance of the year. The big moves continued today with a widespread +2.5% surge.

The market continues to move on central bank moves and expectations. Today stocks were bouncing on hopes the Chinese government would boost their stimulus measures after another round of disappointing economic data.

Soon the U.S. market will face the biggest FOMC meeting in years. The Federal Reserve refuses to give up on the possibility of raising rates at the September meeting. For every pundit and analyst who says they will raise rates there is another that says they won't.

I am not adding any new trades today. Odds are good that stocks will remain volatile the rest of September. The Fed decision on September 17th could impact trading the rest of this year.

That doesn't mean we don't see opportunities. Tonight we have refreshed the watch list with several candidates: AMBA, CLX, FIS, LGF, and OA.

I would be cautious on launching new trades. Consider starting small and then adding to positions as time passes.

Play Updates

Churning Near Support

by James Brown

Click here to email James Brown

Editor's Note:

Our current LEAPStrader play list is sparse after the market's extreme volatility over the last few weeks.

Focus on the watch list for new play ideas.

Closed Plays

None. No closed plays this week.

Play Updates

Visa Inc. - V - close: 70.53

09/08/15: Last Tuesday's market plunge sent shares of V toward $68.50 and its 150-dma. The stock has been churning along this level since then. Today V managed a +1.9% gain but remains under short-term resistance in the $71-72 area.

Investors might want to wait for V to close above $72.00 before considering new bullish positions. The stock did lag behind the broader market today so I'd like to see some follow through higher and see V breakout of this short-term trading range.

Trade Description: August 9, 2015:
The world is moving closer and closer to a cash-less society. Big payment processing companies like Visa and MasterCard will benefit from this transition.

According to the company, "Visa Inc. (NYSE:V) is a global payments technology company that connects consumers, businesses, financial institutions, and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. We operate one of the world's most advanced processing networks - VisaNet - that is capable of handling more than 56,000 transaction messages a second, with fraud protection for consumers and assured payment for merchants. Visa is not a bank and does not issue cards, extend credit or set rates and fees for consumers. Visa's innovations, however, enable its financial institution customers to offer consumers more choices: pay now with debit, pay ahead of time with prepaid or pay later with credit products."

It's important to note that V does not extend credit to consumers. There's no credit risk for bad loans here. V makes money on transactions. That business is booming.

On July 23rd V report its Q3 results, which were $0.74 per share. That beat estimates by 16 cents. Revenues were also higher than expected at $3.52 billion, up +11.5%. Management offered strong guidance and upped their EPS estimates into the mid teen percentage range. Long-term V is expected to grow earnings at almost 15%.

One of the big stories to come out of V's recent earnings report was news of a merger brewing. Visa is talking to former subsidiary Visa Europe. Estimates suggest the price target could be in the $15-20 billion range. Wall Street is positive on the deal and Visa expects it would add to earnings in fiscal 2017.

Another reason to be bullish on Visa is the fact that China recently opened its market to foreign companies to participate in clearing domestic bank card transactions. Previously only Chinese companies could do this. Now giants like V and MasterCard can compete in a market valued at more than $6.8 trillion. Considering V's expertise in this field we should expect them to grab a healthy chunk of the market.

Shares of V recently surged to new all-time highs and traded above $76 per share. After four up weeks in a row V posted a loss last week. Technically it produced a bearish engulfing candlestick reversal pattern on its weekly chart. If shares do correct lower we want to take advantage of the pullback. Broken support near $70.00 should be support. Tonight we are suggesting a buy-the-dip trigger at $70.50.

- Suggested Positions -
AUG 24, 2015 - entry price on V @ 64.16, option @ 2.76
symbol: V170120C80 2017 JAN $80 call - current bid/ask $4.80/5.05

08/30/15 Remove the stop loss
08/24/15 triggered on gap down at $64.16, suggested entry was a buy-the-dip trigger at $70.50.
Option Format: symbol-year-month-day-call-strike

Current Target: To Be Determined
Current Stop loss: n/a
Play Entered on: 08/24/15
Originally listed on the Watch List: 08/09/15


A Fresh Crop of Candidates

by James Brown

Click here to email James Brown

New Watch List Entries

AMBA - Ambarella Inc.

CLX - Clorox

FIS - Fidelity National Info. Services

LGF - Lions Gate Entertainment

OA - Orbital ATK Inc.

New Watch List Candidates:

Ambarella, Inc. - AMBA - close: $72.87

Company Info

Shares of AMBA have come a long way from its IPO in October 2012 when the stock priced at $6.00 a share, below expectations. Even now, after a minus $55 drop from its 2015 highs the stock is still up +41% for the year.

AMBA is in the technology sector. They're considered part of the semiconductor and semiconductor equipment makers. The company was founded in 2004 and went public in 2012. That price was significantly below where AMBA was expected to price in the $9-11 range. Investor sentiment has definitely changed since then.

The company has grown from making broadcast-class encoders to making consumer and sports cameras, security cameras, and now automotive cameras. Their high-definition chips are being integrated into security IP cameras and wearable cameras. AMBA is also capturing part of a new market - cameras on consumer-level remote control drones.

The last two plus years have seen a strong performance in AMBA with the stock up more than +600% from its IPO price. AMBA has GoPro, Inc. (GPRO) to thank for part of that rally. When GPRO held its IPO last year (2014) it drew attention to AMBA who makes the chips for the video processing in GPRO's cameras. Shares of GPRO saw a huge decline 2014 highs but shares of AMBA have continued to rally.

Part of GPRO's trouble is competition from a large Chinese rival - Xiaomi. GPRO is currently seen as best of breed in the action camera market but it may not hold that spot forever. Xiaomi is selling similar cameras at a significant discount to GPRO and both cameras use AMBA's technology. Both camera makers have different models. GPRO's top of the line still has better components than Xiaomi's - at least for now. The real winner is AMBA since they supply to both companies. Multiple analysts have commented on AMBA's relationship with Xiaomi and believe it will bear significant fruit in the future.

The company has seen tremendous earnings and revenue growth over the last couple of years. Their most recent earnings report was September 1st, 2015. Revenues were up +79% from a year ago to $84.2 million, which was above expectations. The stock sank because management offered soft guidance. When a high-flying, high-valuation stock like AMBA starts to see revenues slow down their valuations collapse.

After a -42% decline from its highs AMBA is probably still has a rich valuation and that's the biggest complaint about the stock price. Shares will likely maintain a high P/E for a long-time as growth will continue. The pullback is most likely a temporary slowdown.

While we are longer-term bullish on AMBA I suspect the sell-off isn't over yet. We want to take advantage of any volatility.

Momentum stocks like AMBA climb and climb and climb and then suddenly reverse. When momentum stocks reverse lower they often fall farther and further than we might normally expect. Today (Sept. 8th) the broader market delivered a widespread rally with the major indices up +2.5%. Yet AMBA lost ground, losing -0.5%. If shares breakdown under short-term support at $70.00 the next support level is probably $60.00.

Tonight I am listing AMBA as an aggressive, higher-risk trade. We want to use a buy-the-dip trigger at $62.00. Options are expensive because AMBA is so volatile. I suggest small positions to limit risk. We are not listing a stop loss at this time and will and one as the trade progresses.

I am listing the 2016 January calls. I'd like to buy the 2017 Januarys but they are very expensive.

Buy-the-dip at $62.00 *small positions*

BUY the 2016 January $70 call (AMBA160115C70)

Option Format: symbol-year-month-day-call-strike

Chart of AMBA:

Originally listed on the Watch List: 09/08/15

The Clorox Co. - CLX - close: $111.61

Company Info

Clorox is not just a bleach and cleaners company. They also make food and personal care items. Actually they make a lot more.

CLX is in the consumer goods sector. According to the company, "The Clorox Company is a leading multinational manufacturer and marketer of consumer and professional products with about 7,700 employees worldwide and fiscal year 2014 sales of $5.5 billion. Clorox markets some of the most trusted and recognized consumer brand names, including its namesake bleach and cleaning products; Pine-Sol cleaners; Liquid Plumr clog removers; Poett home care products; Fresh Step cat litter; Glad bags, wraps and containers; Kingsford charcoal; Hidden Valley and KC Masterpiece dressings and sauces; Brita water-filtration products and Burt's Bees natural personal care products. The company also markets brands for professional services, including Clorox Healthcare, HealthLink, Aplicare and Dispatch infection control products for the healthcare industry. More than 80 percent of the company's brands hold the No. 1 or No. 2 market share positions in their categories."

Earnings have been pretty strong when you consider the negative impact of currency fluctuations on a big multi-national like CLX. On February 4th CLX announced its Q2 report and beat Wall Street estimates on both the top and bottom line. Management raised their 2015 guidance and their revenue guidance.

Their Q3 report, on May 1st, was a little bit softer. Earnings of $1.08 per share missed estimates by 2 cents. Revenues were up +2.6% to $1.4 billion but that was above expectations. Management raised their outlook again for their full year 2015 guidance.

Their most recent report was CLX's Q4 results on August 3rd. Earnings of $1.44 per share was seven cents above estimates. Revenues were up +4.0% to $1.56 billion, also better than expected. Management issued soft guidance, below Wall Street estimates, but the stock rallied anyway.

CLX has a strong, long-term up trend. Investors could seek safety in stocks like CLX if the global economy continues to struggle.

The stock market's correction saw CLX plunged back toward technical support near its 200-dma. Now the stock has been consolidating sideways in the $108-112 zone. I'd like to see CLX fill the gap ($112-114) before we launch positions. Therefore the plan is to wait for CLX to close above $114.25 and then buy calls the next morning.

This is a long-term trade. We're using the 2017 calls.

Breakout trigger: Wait for a close above $114.25
Then buy calls the next morning.

BUY the 2017 Jan. $125 call (CLX170120C125)

Option Format: symbol-year-month-day-call-strike

Chart of CLX:

Originally listed on the Watch List: 09/08/15

Fidelity National Info. Svcs. - FIS - close: $69.36

Company Info

We are adding FIS as a relative strength trade. The stock has been marching higher for years. Shares are outpacing the broader market this year with a +9.0% gain year to date.

FIS is in the technology sector. According to the company, "FIS is a global leader in banking and payments technology as well as consulting and outsourcing solutions. With a long history deeply rooted in the financial services sector, FIS serves more than 14,000 institutions in over 130 countries. Headquartered in Jacksonville, Fla., FIS employs more than 42,000 people worldwide and holds leadership positions in payment processing and banking solutions. Providing software, services and outsourcing of the technology that empowers the financial industry, FIS is a Fortune 500 company and is a member of Standard & Poor’s 500 Index."

FIS just recently announced it was acquiring financial software maker SunGard Data Systems for $9.1 billion in cash and stock. SunGard was about to go public and FIS gobbled them up. The combined company will have $9.2 billion in annual revenues and over 55,000 employees.

The big spike higher on FIS' daily chart was the market's reaction to this acquisition news. Shares of FIS filled the gap during the market's correction lower. Now traders are back to buying FIS. The point & figure chart is bullish and forecasting at $92.00 target.

Tonight I am suggesting we wait for FIS to close above $71.00 and then buy calls the next morning. We will start with a stop loss at $64.75.

Breakout trigger: Wait for a close above $71.00
Then buy calls the next morning with a stop loss at $64.75

BUY the 2016 Jan. $75 call (FIS160115C75)

Option Format: symbol-year-month-day-call-strike

Chart of FIS:

Weekly Chart of FIS:

Originally listed on the Watch List: 09/08/15

Lions Gate Entertainment - LGF - close: $38.90

Company Info

If at first you don't succeed, try, try, try again. We tried trading LGF recently but we were shaken out thanks to the market's late August crash and LGF's spike to 2015 lows. Naturally the stock has recovered and is on the verge of a major breakout past resistance near $39-40.

What follows is an updated version of my original play description:

Have you ever wanted to trade the hype on a particular movie release? We might be able to do just that with LGF.

LGF is in the services sector. According to the company, "Lionsgate is a premier next generation global content leader with a strong and diversified presence in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution, new channel platforms, video games and international distribution and sales. Lionsgate currently has more than 30 television shows on over 20 different networks spanning its primetime production, distribution and syndication businesses, including such critically-acclaimed hits as the multiple Emmy Award-winning Mad Men and Nurse Jackie, the broadcast network series Nashville, the syndication success The Wendy Williams Show, the hit series Orange is the New Black, the critically-acclaimed drama Manhattan and the breakout series The Royals."

What that company description neglects to mention is the Hunger Games franchise. LGF makes the movies for the extremely popular franchise and the fourth and final movie is due to hit the U.S. market in November this year. Shares of LGF will likely rally into November as hype builds for the "Hunger Games: Mockingjay - Part 2" movie.

LGF is also considered a takeover target. Everyone is scrambling for quality TV programming and LGF has the awards to prove it can deliver. Potential suitors include any of the major media companies. There are rumors that LGF could be a target by someone like AAPL who wants to jump into media creation or possibly NFLX, who just lost LGF's content when they failed to renew their contract with EPIX.

I am suggesting we wait for LGF to close in the $40.00-41.00 range. If shares close in this range then buy calls the next morning. No initial stop loss.

Breakout trigger: Wait for LGF to close in the $40.00-41.00 range,
Then buy calls the next morning.

BUY the 2017 Jan. $45 call (LGF170120C45)

Option Format: symbol-year-month-day-call-strike

Chart of LGF:

Originally listed on the Watch List: 09/08/15

Orbital ATK, Inc. - OA - close: $77.75

Company Info

If you read the news it seems like the world is an increasingly dangerous place to live. Defense companies like OA are seeing their business strengthen.

OA is part of the industrial goods sector. According to the company, "Orbital ATK is a global leader in aerospace and defense technologies. The company designs, builds and delivers space, defense and aviation systems for customers around the world, both as a prime contractor and merchant supplier. Its main products include launch vehicles and related propulsion systems; missile products, subsystems and defense electronics; precision weapons, armament systems and ammunition; satellites and associated space components and services; and advanced aerospace structures. Headquartered in Dulles, Virginia, Orbital ATK employs more than 12,000 people in 18 states across the United States and in several international locations."

Their most recent earnings report was August 6th. OA reported its Q2 results of $1.28 per share. That is +16% improvement from a year ago and 26 cents above estimates. Revenues were up +7% to $1.13 billion, also better than expected.

David W. Thompson, Orbital ATK's President and Chief Executive Officer, commented on his company's results, "Orbital ATK reported excellent second quarter financial results characterized by better-than-expected revenue and very strong earnings. These results benefited from outstanding new orders, as well as continued solid operational execution on our major programs. As a result, we are increasing the company's outlook for sales and earnings this year and expanding our previously-announced capital deployment program as well.

Management raised their full year 2016 earnings to $4.60-4.80 a share and forecasted revenues in the $4.425-4.50 billion range. This is above Wall Street estimates of $4.51 a share on revenues of $4.41 billion.

Argus upgraded the stock and boosted their OA price target to $95.00. A Goldman Sachs analyst also upgraded the stock. Goldman said OA has "multiple unique exposures to drive faster than average 3-year growth."

The sell-off during the market's crash on August 24th was ridiculous. OA plunged from $75 to $56 in the blink of an eye and has since recovered. Moves like that are more than a little unnerving. Investors may want to use small positions to limit risk. The August peak was about $81.00. I am suggesting we wait for OA to close in the $81.00-83.00 range and then buy calls the next morning. No initial stop on this trade.

Technically this isn't a LEAPS trade. OA doesn't have LEAPS. The farthest options available is the 2016 Februarys.

Breakout trigger: Wait for OA to close in the $81.00-83.00 range
Then buy calls.

BUY the 2016 Feb. $85 call (OA160219C85)

Option Format: symbol-year-month-day-call-strike

Chart of OA

Originally listed on the Watch List: 09/08/15