New Watch List Entries

ALK - Alaska Air Group

BA - The Boeing Company

HEDJ - WisdomTree Europe Hedged ETF

Active Watch List Candidates

RTN - Raytheon Company

SWHC - Smith & Wesson

Dropped Watch List Entries

EA has graduated to our active play list.

NKE has been removed. RTN has been suspended for one week.

New Watch List Candidates:

Alaska Air Group - ALK - close: 81.86

Company Info

Depressed oil prices have been great for airline industry profits. Yet airline stocks, as a group, have struggled this year. The XAL airline index is down about -10% year to date. ALK is an exception. The stock has shown significant relative strength and is up +37% in 2015.

ALK is part of the services sector. According to the company, "Alaska Airlines, a subsidiary of Alaska Air Group (ALK), together with its partner regional airlines, serves more than 100 cities through an expansive network in the United States, Canada and Mexico. Alaska Airlines ranked 'Highest in Customer Satisfaction Among Traditional Carriers in North America' in the J.D. Power North America Airline Satisfaction Study for eight consecutive years from 2008 to 2015. Alaska Airlines' Mileage Plan also ranked 'Highest in Customer Satisfaction with Airline Loyalty Rewards Programs' in the J.D. Power 2014 and 2015 Airline Loyalty/Rewards Program Satisfaction Report."

ALK has beaten Wall Street's bottom line earnings estimates the last four quarters in a row. Their most recent report was October 22nd. The company raised its outlook. The past 12 months have seen ALK's revenues rise +4.8%. Net income and earnings have both grown more than +50%. Back in August the company announced at $1 billion stock buyback program (current market cap is about $10 billion).

Crude oil is expected to remain cheap and likely get cheaper in 2016. That should provide a strong tailwind for ALK's business. Currently the stock has been consolidating sideways the last few months. Yet the rally this past week has pushed ALK toward major resistance and shares could see a breakout. We want to hop on board if that occurs. Tonight I am suggesting we wait for ALK to close in the $83.00-84.00 zone and then buy calls the next morning with a stop loss at $74.75.

Breakout trigger: Wait for ALK to close in the $83.00-84.00 zone
Then buy calls the next morning

BUY the 2017 JAN $90 call (ALK170120C90) current ask $8.40

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

Chart of ALK:

Originally listed on the Watch List: 11/22/15

The Boeing Company - BA - close: 149.40

Company Info

The global economy might be facing a slowdown but longer-term demand for air travel is growing. The combination of demand for commercial aircraft and rising defense budgets around the world is powerful recipe for BA's business.

BA is in the industrial goods sector. According to the company, "Boeing is the world's largest aerospace company and leading manufacturer of commercial jetliners and defense, space and security systems. A top U.S. exporter, the company supports airlines and U.S. and allied government customers in 150 countries. Boeing products and tailored services include commercial and military aircraft, satellites, weapons, electronic and defense systems, launch systems, advanced information and communication systems, and performance-based logistics and training."

BA's most recent earnings report was October 21st. Wall Street was expecting a profit of $2.20 a share on revenues of $24.78 billion. BA beat estimates on both fronts. Earnings were $2.52 a share. Revenues were up +8.7% to $25.85 billion. The company raised their guidance on both EPS and revenues. Their backlog is almost 5,700 planes valued at more than $425 billion.

The company sees strong demand for the airplane market. On November 4th BA issued a press release stating, "Boeing forecasts airlines in the Middle East will require 3,180 new airplanes over the next 20 years, valued at an estimated $730 billion. 70 percent of the demand is expected to be driven by rapid fleet expansion in the region." Then on November 16th, "Boeing projects the Latin American commercial aviation market will grow at one of the highest rates in the world over the next 20 years. As a result, Boeing forecasts the region's airlines will need 3,050 new airplanes valued at $350 billion."

A couple of days ago two analysts with Canaccord Genuity issued a note suggesting rising interest rates are bullish for BA. Here's what they had to say, "While it is difficult for us to determine exactly when the U.S. will raise its target federal funds rate, we wanted to review again the impact of rising rates has historically had on Boeing and the commercial aerospace cycle. Historically, rising rates have corresponded with strengthening commercial orders and outperformance by both Boeing stock and the broader Aerospace & Defense sector. For example, over the past three significant tightening cycles, commercial transport orders increased by an average of 7% and 140% in the 12 and 24 month time periods after rates started to increase. Similarly, the total commercial backlog also increased over these same periods by an average of 3% and 43%... Not surprising as well, over the past two tightening cycles, BA stock has outperformed the broader market by an average of 19%-20% annually while rates are rising. We agree that with the more diverse backlog today, the health of U.S. airlines is less impactful for the cycle. However, we believe in the aggregate, rising rates in the U.S. are generally a bullish signal for both Boeing and the A&D sector. Note that since 1991, BA stock has outperformed the S&P in 15 of the 24 years, and is on pace to do so again in 2015." (source)

News in late October that BA and project partner Lockheed Martin (LMT) had lost their bid on the Pentagon's long-range strike bomber project to rival Northrop Grumman (NOC) did not seem to have much impact on BA's share price.

On the subject of defense, the terrible attacks in Paris last week have generated new support for additional defense spending to focus on ISIS/ISIL. BA could see additional defense spending contracts from multiple governments as governments bulk up for more action.

Meanwhile shares of BA have been building on a bullish trend of higher lows since the market's correction in August. The bounce off its trend line of support has lifted BA toward major resistance at $150.00. We want to see a convincing breakout past resistance at $150. Wait for BA to close inside the $150.00-152.00 zone. Then buy calls the next morning with an initial stop loss at $144.00.

Breakout trigger: Wait for BA to close in the $150.00-152.00 zone
Then buy calls the next morning with a stop at $144.00

BUY the 2017 JAN $170 call (BA170120C170) current ask $5.65

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

Chart of BA:

Originally listed on the Watch List: 11/22/15

WisdomTree Europe Hedged ETF - HEDJ - close: 62.15

Company Info

The Federal Reserve spent multiple years and multiple QE programs to help prop up the U.S. economy. Many believe these stimulus programs were a rising tide that lifted the major U.S. stock market indices. Now Europe has started their own QE journey. One way to play it is the HEDJ.

This is an ETF that follows the WisdomTree Europe Hedged Equity Index. Here's a brief description from the company, "The WisdomTree Europe Hedged Equity Index is designed to provide exposure to European equities while at the same time neutralizing exposure to fluctuations between the Euro and the U.S. dollar. In this sense, the Index 'hedges' against fluctuations in the relative value of the Euro against the U.S. dollar. The Index is based on dividend paying companies in the WisdomTree International Equity Index that are domiciled in Europe and are traded in Euros, have at least $1 billion market capitalization, and derive at least 50% of their revenue in the latest fiscal year from countries outside of Europe. The component securities are weighted in the Index based on annual cash dividends paid with the following caps: maximum individual position capped at 5%, maximum sector weight capped at 25%, and maximum country weight capped at 25%." (more info)

The European Central Bank has already launched a one trillion euro QE program. Now ECB President Mario Draghi has strongly hinted that the central bank will boost its QE program this coming December. The initial program was due to last until September 2016. Odds are the ECB's stimulus will be extended a lot longer than that.

Bears can argue that Europe's economy is slowing. Why would we want to own European stocks. This is a bet that European markets will react similarly to American markets. U.S. stocks ignored disappointing economic data for years in favor of constant QE from the Fed. Now it's Europe's turn.

My biggest worry is this Syrian refugee crisis and new terrorist threat. Housing, feeding, and taking care of hundreds of thousands of new refugees will not be cheap. It will also cost more to protect Europe's cities and populations from growing terror threats. If the terrorists are successful with several more attacks it could seriously dent the EU economy as people stay indoors and tourism slows down. Today's trade on the HEDJ is an optimistic bet that the terrorists do not win.

Currently the HEDJ has rebounded from its September lows to technical resistance at its simple 200-dma. It's also testing resistance at the ETF's multi-month down trend from its 2015 highs. A breakout here could be very bullish. Tonight I am suggesting we wait for the HEDJ to close above $63.00 and then buy calls the next morning.

Breakout trigger: Wait for HEDJ to close above $63.00
Then buy calls the next morning with a stop at $57.40

BUY the 2017 JAN $70 call (HEDJ170120C70) current ask $2.45

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

Chart of HEDJ:

Originally listed on the Watch List: 11/22/15

Active Watch List Candidates:

Nike, Inc. - NKE - close: 132.65

11/22/15: We had the right idea to buy NKE on a dip. Unfortunately it looks like we were a little too aggressive with our buy-the-dip entry trigger. NKE fell to $120.42 on November 17th. That was the low for the week.

On Thursday night, after the closing bell, NKE announced at dividend increase, a $12 billion stock buyback program, and a 2-for-1 stock split. The stock soared +5.4% on Friday toward its 2015 highs in the $133 area. It seems unlikely that NKE will hit our buy-the-dip entry trigger at $117.50 any time soon and I do not want to chase it after at $12.00 rally right to resistance.

Tonight we are removing NKE as a watch list candidate. The 2-for-1 split will occur in late December (around Christmas). We can revisit NKE again as a candidate after its stock split.

Trade did not open.

11/22/15 removed from the watch list, suggested entry was $117.50

Originally listed on the Watch List: 11/15/15

Raytheon Company - RTN - close: 127.04

11/22/15: Wow! RTN has gotten away from us. The market's reaction to the terrorist attacks in Paris was to buy defense stocks. Shares of RTN surged on Monday and never looked back. The stock gained $10 for the week.

Our buy-the-dip trigger at $111.50 is not going to work. We need to re-evaluate an entry strategy. I am suggesting we put RTN aside for one week. We'll revisit it next weekend and devise a new entry strategy or remove it as a watch list candidate.

Trade Description: November 15, 2015:
The world seems to be growing more dangerous by the week. The war in Syria, the violent Islamic State (ISIS), and other hot spots around the world continue to fuel geopolitical tensions. If that wasn't enough we also have a belligerent Russia looming over eastern Europe and a China that is rapidly upgrading its military. The terrorist attack in Paris this past weekend drives the point home that governments need to spend more money on intelligence and anti-terror efforts.

Defense stocks is one way to play this growing need for defense systems. RTN is in the industrial goods sector. They are part of the defense/aerospace industry with big businesses in missile defense, electronic warfare, and cybersecurity. According to the company, "Raytheon Company, with 2014 sales of $23 billion and 61,000 employees worldwide, is a technology and innovation leader specializing in defense, civil government and cybersecurity markets throughout the world. With a history of innovation spanning 93 years, Raytheon provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of sensing; effects; and command, control, communications and intelligence systems, as well as cybersecurity and a broad range of mission support services."

The company has beaten Wall Street's earnings estimates the last four quarters in a row. Management has raised their revenue guidance the last three quarters in a row. The U.S. now has a Republican controlled House and Senate, which should be defense-spending friendly. Plus, American defense companies have been developing foreign customers over the last few years to diversify their business should the U.S. see future spending cuts.

Wall Street is bullish on RTN with analysts raising their forecasts and price targets. The recent rally in RTN has produced a buy signal on the point & figure chart, which is forecasting at $136.00 target.

The last three weeks have seen the rally in RTN stall. Shares have been consolidating sideways in the $117-120 zone. I suspect RTN is poised to dip toward prior resistance and what should be support in the $110-112 area. Tonight I am suggesting a buy-the-dip trigger at $111.50.

11/22/15 RTN has rallied too fast.
We are temporarily removing our entry trigger for RTN.
We'll come back in a week and re-evaluate how (or if) we want to trade RTN.

Originally listed on the Watch List: 11/15/15

Smith & Wesson Holding - SWHC - close: 17.97

11/22/15: SWHC spent the week consolidating sideways in the $17.00-18.00 zone. Shares look ready to breakout from this range soon. Currently the plan is to wait for SWHC to close above $18.40, then buy calls the next morning.

Trade Description: November 8, 2015:
Shares of SWHC have been shooting higher all year long. The stock is showing massive relative strength with a +91% gain year to date. That dwarfs the +8.5% gain in the NASDAQ composite and +1.8% gain in the S&P 500 this year.

SWHC is considered part of the industrial goods sector. According to the company, "Smith & Wesson Holding Corporation (SWHC) is a U.S.-based leader in firearm manufacturing and design, delivering a broad portfolio of quality firearms, related products, and training to the global military, law enforcement, and consumer markets. The company's firearms division brands include Smith & Wesson®, M&P®, and Thompson/Center Arms®. As a leading provider of shooting, reloading, gunsmithing, and gun cleaning supplies, the company's accessories division produces innovative, high-quality products under several brands, including Caldwell® Shooting Supplies, Wheeler® Engineering, Tipton® Gun Cleaning Supplies, Frankford Arsenal® Reloading Tools, Lockdown® Vault Accessories, and Hooyman® Premium Tree Saws. Smith & Wesson facilities are located in Massachusetts, Maine, Connecticut, and Missouri."

The earnings picture for SWHC has been pretty strong. They have beaten Wall Street's earnings estimates the last four quarters in a row. Management has raised guidance three of the last four quarters.

Their most recent earnings report as August 27th. SWHC announced their 2016 Q1 results with earnings of $0.32 a share. That beat estimates of $0.23. Revenues surged +12% to $147.8 million, above expectations. Management raised their Q2 guidance and raised their fiscal year 2016 guidance.

The company benefits from strong retail trends. According to the FBI, gun sales in the U.S. have set a record for the last six months in a row. Now we are moving into the holiday shopping season and this trend should continue for the next two month (at least). Another benefit for SWHC is the current election cycle. Every time one of the democrat candidates says something about increasing gun control laws the sale of guns goes up. The closer we get to the 2016 election the louder these campaign promises about gun control could get.

Technically the trend in SWHC is bullish. The point & figure chart is forecasting at $26.50 target. The stock has been rising inside a big bullish channel (see chart). Rival Ruger (RGR) reported earnings a few days ago and their stock plummeted on a disappointing quarter. Yet shares of SWHC barely budged on the news. Today we see SWHC bouncing from support near the bottom of its bullish channel and its 100-dma. More aggressive investors may want to buy calls now. I am suggesting we wait for SWHC to close above $18.40 and then buy calls the next day.

Breakout trigger: Wait for SWHC to close above $18.40
Then buy calls the next morning with a stop loss at $16.25

BUY the 2017 JAN $20 call (SWHC170120C20)

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

Originally listed on the Watch List: 11/08/15