Option Investor

Daily Newsletter, Saturday, 8/29/2015

Table of Contents

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

Market Wrap

What Correction?

by Jim Brown

Click here to email Jim Brown

After declining -1,089 points intraday on Monday and suffering through a very volatile week, the Dow rebounded to actually gain +183 points. The Nasdaq gained +122 to 4,827 despite crashing below 4,300 on Monday. That was a +535 point rebound or +12.5% from the Monday lows.

Market Statistics

Analysts are calling last week a "flash correction." If you blinked or hesitated, you missed it. However, as I warned about in my earlier commentary, corrections are very rarely "V" shaped and that is especially true in the August/September period. Historically the vast majority of late summer corrections last for weeks. They begin with a high intensity bottom and are followed by an oversold bounce. Once the bounce fades the sellers come back and new lows are created but with a lot less volatility.

I would also like to remind everyone that historical norms are just historical long-term averages. Past performance is no guarantee of future results. Anything is possible we could still go either way in the coming weeks.

The Dow had just broken into positive territory on Friday when Fed Vice Chair Stanley Fischer was interviewed on CNBC. That interview prompted a -105 point decline from the high as Fischer put September back on the calendar for a potential rate hike.

While he did not say the Fed would hike rates he was positive on the economy and data dependent but the data was improving to the point where the Fed could make a decision. Fed heads are masters at talking around the subject and leaving all their options open but Fischer seemed to suggest the Fed was closer to hiking rates than the market expected. He said the China situation and the market volatility was a challenge but the Fed would not let volatility deter them from making a decision.

Fischer said the Fed officials realize that they need to act before the data requires them to hike rates to alleviate inflation. He said, "When the case is overwhelming, if you wait that long, you will be waiting too long. There is always uncertainty and we will just have to recognize that." When we do hike, "We will be adjusting the knob slightly." Before the recent market volatility, "there was a pretty strong case" for a rate hike at the September meeting. Today his "confidence is pretty high" that inflation will head toward the Fed's target of 2%.

The key will be his comments in the Jackson Hole keynote speech on inflation on Saturday. How he phrases his comments will be important for market direction next week.

One of the factors in the Fed's decision is inflation. The PCE Deflator released on Friday showed that inflation rose +0.1% in July. The cost of durable goods declined -0.2% while nondurable goods rose +0.1%. Housing rose +0.2% as a result of higher rents. The Core PCE excluding food and energy rose +0.1%. These numbers indicate the Fed is a long way from their 2% target.

The trailing 12-month PCE is only +0.3% and the Core PCE only +1.2% compared to a +1.3% rate in January. Now eight months later the Fed may be confident that inflation is rising but the gains are at a snail's pace and it could be another year before that 2% level is reached. Inflation is hardly rising at a rate that the Fed should be worried. With low commodity prices, I would be more worried about deflation.

Personal income rose +0.4% in July and the same pace as the prior three months. This was also led by a rise in rental income and proprietor's income rather than from wages.

Personal spending rose +0.2% driven by a +2.6% rise in motor vehicles and parts, +1.0% in household furnishings and +1.3% in recreational equipment. Summer is a big spending period on boats, jet skis, motorcycles, campers, etc. Spending in August will likely decline as the impact of China on the equity markets makes consumers less confident about their net worth if they own stocks.

The revision in Consumer Sentiment for the last half of August saw the headline number decline -1 point from the initial estimate to 91.9. That is down from 93.1 in July and a three-month low. Present conditions declined from 107.2 to 105.1 and the expectations component declined from 84.1 to 83.4.

We have a full calendar for next week with the ISM reports and the employment reports. The Fed Beige Book with the economic conditions in all 12 Fed regions will also be released. That is just in time to let us see what the Fed knows about U.S. economic growth. This will be a foundation to whatever decision they make at the September FOMC meeting.

The forecasts for the nonfarm payroll report on Friday are relatively flat with only a +4,000 job increase. However, the ADP forecast is for an increase of +20,000 jobs to +205,000. For the nonfarm report, a 225,000 job gain would be the Goldilocks number. If the report did come in hot at 275,000 it would almost certainly guarantee a rate hike in September. This makes Friday's report critical for Fed forecasting.

The ISM Manufacturing report is expected to be flat at 53.0 and that may be optimistic after several regional reports declined sharply. With 50 the dividing line between expansion and contraction the pace of growth is very weak and should give the Fed some cause for concern. The Kansas Manufacturing Survey last Thursday fell deeper into contraction territory at -9, down from -4 in July. The Kansas region has been in contraction since March. The prior week the New York Empire survey declined from 3.9 to -14.9 and deep into contraction.

There were no stock splits announced last week. However, Under Armour (UA) approved their 2:1 split. Unfortunately, the board elected to postpone the split until 10 days after the class action suit filed by shareholders complaining about the new share structure. The suit was filed in June and it could be a very long time before there is a ruling. Google was also sued when they created their new share class.

The 2:1 split will be one share of Class C nonvoting stock for every share of Class A or B stock currently held. The Class B stock has ten times the votes as a Class A share. Founder and CEO Kevin Plank owns 16.8% of all shares outstanding and 67% of voting shares. By creating a new class of stock, it allows the company to expand stock based compensation and make acquisitions with a stock that does not dilute Plank's voting rights. Any shareholder with voting rights today will retain those rights regardless of the outcome of the suit. Only new shareholders of Class C shares will have no rights.

Because of the delay until the suit is settled I have removed the Under Armour split from the calendar.

The Skechers 3:1 split on October 15th has the best chance for a pre-split run because of its positive trend. Medivation (MDVN) is in a downtrend so that would have to reverse before there is any chance of a split run.

Reynolds American (RAI) splits 2:1 on Monday.

Friday was really light on stock news. I think everyone was still shell shocked from the volatility and were happy to just get out of the week alive. Next week should be even lighter since the vast majority of traders, portfolio managers and corporate executives will be on vacation. This is the last weekend of summer and nearly everyone takes advantage of it.

Shares of Autodesk (ADSK) lost 5% after reporting earnings of 19 cents that beat estimates by 2 cents. Revenue fell -4.3% to $609.6 million and missed estimates for $612.4 million. The company cut the full year forecast for the second time. The new forecast for 60-72 cents was well below the analyst forecast of $1.04. They cut the revenue forecast from $2.56-$2.61 billion to $2.47-$2.50 billion. Analysts were expecting $2.59 billion.

The company is struggling through its conversion to a subscription model rather than upfront pricing. While that produces a steady revenue stream over time, they give up the current model where large upfront payments are received for sales. Licensing and subscription revenue declined -17% in the quarter.

Big Lots (BIG) reported earnings of 40 cents compared to estimates for 34 cents. Revenue of $1.21 billion also beat estimates for $1.19 billion. The company forecast full year earnings in the range of $2.90-$3.00 per share. Same store sales rose +2.8% and the sixth quarter of sales growth. Shares spiked +16% on the news suggesting there were a lot of shorts that lost a lot.

Smith & Wesson (SWHC) reported earnings of 32 cents that easily beat estimates of 22 cents. Sales rose +12% to $147.8 million after a +6% rise in the prior quarter. Profits rose +23%. The company said firearms demand was strong but accessories sales were stronger with a 29% increase. The company raised guidance for the current quarter to 19-21 cents on revenue of $135-$140 million. Full year guidance was raised from $1.02-$1.07 to $1.14-$1.19 per share.

Gamestop (GME) shares fell -8% after the company reported earnings of 31 cents that beat estimates for 24 cents. Revenue of $1.76 billion also beat estimates for $1.73 billion. Same store sales rose +8.1%.

Gamestop guided for current quarter earnings in the range of 53-60 cents on revenue of $2.09-$2.18 billion with same store sales (SSS) up 1-4%. Analysts were expecting 59 cents on revenue of $2.16 billion and SSS of 4.5%. Analysts called the targets conservative and felt the company would exceed them. Investors thought otherwise and shares declined. Benchmark cut their rating from hold to sell and that accelerated the decline. The analyst said the company's core business is being displaced by digital games with streaming capability rather than console games.

Aeropostale (ARO) shares fell -27% after the company reported its 11th consecutive quarterly loss. The company reported a loss of 56 cents on a -17.5% decline in revenue to $326.9 million. The loss matched Wall Street estimates. For Q3 the company expects to lose 30 cents. I would recommend shorting them except that they are already under $1.

Activision Blizzard (ATVI) gained +5% after S&P announced they were replacing Pall Corporation (PLL) in the S&P-500 at Friday's close. Pall is being acquired by Danaher.

United Continental (UAL) is also joining the S&P-500 after the close on Wednesday when it replaces Hospira (HSP), which was bought by Pfizer.

Facebook (FB) said it hit a new milestone. More than one billion people logged in on a single day on Monday. That is the equivalent of one-seventh of the world's population. Facebook now has nearly 1.5 billion members that log in at least once a month. While that is a lot of users Google services more than 100 billion searches every day and that means more than one billion people use Google every day.

Most of the one billion that logged into Facebook on Monday reside outside the USA. More than 83% of Facebook users are outside the USA. Since China blocks Facebook, the majority of users come from Europe, India and South America. The company is planning on expanding to 200 more countries in 2016. Japan will launch on September 2nd.

The number is even more amazing when you realize that about 5 billion people do not have access to the Internet.

It would be hard to bet against Facebook because they are increasing their ad reach on a daily basis and they have not even started to monetize WhatsAp yet and Instagram is just in the beginning stages. Facebook bought Instagram for $1 billion in 2012. Instagram now has more than 350 million users and WhatsAp has more than 800 million. As Facebook completes the advertising integration into those services, their revenue is going to explode. Facebook had $12 billion in revenue in 2014 and revenue rose +43% in Q2 to $3.8 billion. It will continue to soar for years to come. There are currently more than 2 million active advertisers on Facebook. Facebook shares are going well into the triple digits. It is only a question of when. Twenty-two analysts raised their price targets on Facebook after Q2 earnings. Piper Jaffray has the highest target at $146.

Freeport McMoran (FCX) rallied +29% from the Wednesday lows of $7.76 after Carl Icahn announced he had taken an 8.5% stake in the company worth $900 million. Icahn said he planned to hold talks with the company about cost cutting and capital expenditures and may seek board representation. The company had already announced plans for a 25% cut in capex from $5.6 billion to $4 billion and would cut production at some mining operations.

Icahn filed a notice with the SEC that he intended to buy as much as 25% of the company. Shares of Freeport had declined -66% year to date on the decline in copper prices and the drop in oil. Freeport has a significant investment in the energy sector through the acquisition of McMoran Exploration and Plains Exploration. Freeport planned on spinning off the oil assets but the drop in oil prices killed that idea. I think Icahn picked the bottom perfectly on Freeport given their recent announcements.

Mylan (MYL) shareholders approved the hostile pursuit of Perrigo (PRGO). Mylan raised its offer in April to $232.23 in cash and stock or about $34.1 billion for Perrigo but was rejected. Since April, Mylan's stock has declined and the offer is worth about $190 today. After the shareholder approval, Mylan said it would launch a formal offer for Perrigo in the coming weeks. Analysts believe Mylan was pursuing Perrigo in order to avoid being acquired by Teva Pharmaceuticals (TEVA). However, Teva broke off its pursuit and bought the generics business from Allergan for $40.5 billion. On Friday, Perrigo completed a $200 million acquisition of GlaxoSmithKline's over-the-counter brands business. Most analysts believe there is little chance of Mylan acquiring Perrigo.

Investors are running for cover. According to Bank of America Merrill Lynch investors pulled out $29.5 billion from equity funds over the last week. On Tuesday alone, they withdrew $19 billion. That was the second largest one-day withdrawal since 2007. Equity funds have about $10.5 trillion under management. Bond funds saw $11.7 billion in outflows and the most in two years. However, treasury funds saw inflows of $1.7 billion. Money market funds saw inflows of $22 billion to bring their total cash hoard to $2.7 trillion according to ICI. Precious metal funds gained +$1.1 billion. July and August could mark the first consecutive monthly outflows since late 2008.

Through July equity funds had outflows of more than $78.7 billion. That is worse than during the financial crisis. In fact, that number is more than any full year dating back to 1993. Outflows in July were $20.3 billion. Over the 12 months ended on July 31st more than $158.6 billion flowed out of funds. That is even more confusing because the market traded at historic highs in May, June and July.

Several days last week, the market sold off hard at the close. Jack Bouroudjian, CEO of Index Futures Group, said the billions in market on close sell orders were likely from sovereign wealth funds. Nine of the top ten countries with sovereign wealth funds are oil producers. With oil hitting a six-year low at $37.75 on Monday and the market in a dive, he believes the massive selling was from those funds. They have lost their oil revenue and need to raise cash. Jack used to handle trades for several of those funds and he recognized the pattern. While he cannot prove it, he was pretty sure they were liquidating.

Crude prices exploded higher on Thursday and Friday for multiple reasons. News reports of Saudi Arabian ground troops entering Yemen and seizing control of multiple areas in Saada province caused massive buying in crude. Pictures of long lines of Saudi tanks moving into Yemen caused oil traders to immediately begin covering shorts and there were a lot of shorts. By invading with ground troops, it is likely to make the Houthi rebels desperate and they could strike back at Saudi oil installations. Whenever there is a ground conflict in the Middle East the price of oil soars.

Add in the approach of Hurricane Erika towards the Gulf of Mexico and there was a monster short squeeze. Oil prices soared from the $37.75 low on Monday to close at $45.33 on Friday for a +20% gain. On Wednesday the weekly inventory numbers showed an unexpected decline of -5.5 million barrels.

Sometimes you just cannot get a break when you are on the wrong side in a market. Oil shorts were definitely on the wrong side for good reason. The fundamentals support declining oil prices for the next couple months so once the Yemen news fades this should be another shorting opportunity.

Active rigs declined -8 last week but they were all gas rigs. Active oil rigs rose +1 to 675 and gas rigs declined -9 to 2002. That is a new 18 year low on gas rigs. Offshore rigs declined -2 to 30 and the lowest level since July 3rd. That is 36 below year ago levels.


What can I say except, wow! More than 55 billion shares traded hands over the last five days. Monday was the largest at 14 billion with Tuesday, Wednesday and Thursday at 10 billion each. Friday, normally a very slow end of summer Friday with barely 5 billion shares saw almost 8 billion traded. Where Monday appeared to be a capitulation day to the downside, Thursday appeared to be a strong reverse to the upside with strong conviction. Advancers were 5:1 over decliners and advancing volume was 12:1 over declining. Traders worried over the nearly -300 point decline from the highs in the afternoon but another surge of buyers erased that decline to close at the high of the day. Life was good or so many thought.

Friday rekindled doubts in many minds. The internals were still positive but the gains minimal. The Dow closed down -11 after a week of monster moves. The S&P gained only 1 point and the Nasdaq +15, thanks mostly to biotech stocks.

While every investor is hoping the rally will continue next week, I would not hold my breath. The rebound stopped right on decent resistance at 1,985 and the intraday range was very narrow compared to the big swings over the past week.

There is a resistance range from 1985-2005 that could easily halt this rally in its tracks. The Fed is back in play for September and while China posted gains on Friday, their market is far from healed. Their manufacturing PMI to be released on Monday night could be another nail in their coffin.

I do not want to curse this rebound but there is a very good possibility we could see further declines. That is the normal series of events for an August/September correction. With equity outflows occurring at a record pace there may be something under the surface we don't know about. If sovereign funds are indeed liquidating to raise cash then there could be tens of billions of additional repatriation.

The bull case starts with the high intensity plunge on Monday followed by two days with Dow declines intraday of -650 points each without that Monday low being broken. That is a strong case but it only covers the reaction period. That is the period where panicked investors dumped stocks and then bought stocks without applying too much thought. Dang it everything is crashing, sell everything. Dang it, I sold at the bottom, buy it all back quick. Now that the smoke has cleared we hope that calmer minds will prevail next week. However, a calm mind may start to worry about the historical pattern of August/September corrections and begin to take profits from the rebound.

You could make up a hundred potential scenarios and they could all be wrong. We are always at the market's mercy and we need to trade what we see rather than what we hope to see. We want to see a continued rebound but we need to be ready for the alternative as well.

I looked at the chart for each of the Dow components and there were some really ugly charts. Unfortunately, there was not a single one I would buy today. That may be the overriding worry for trading next week. Every single chart had either rebounded from the panic low to close right at resistance OR they failed to even reach resistance. It was a depressing exercise.

Here are three examples. Would you buy these charts?

The 20% rally in oil prices helped to lift the Dow thanks to Chevron and Exxon. Unfortunately, the rest of the group remains lackluster. There are no momentum stocks like Netflix or Amazon. Apple was the leader for a while but even that company has lost its luster. If the Fed does hike rates we could see gains in the financials but that may not erase the potential declines ahead of the FOMC meeting on the 17th.

My historical bias may be getting in the way of my analysis this weekend but I am not hopeful that the Dow is suddenly going to soar for another 1,000 points. The rebound cured the seriously oversold conditions and now we have to depend on fundamentals for motive power.

The Nasdaq is showing a little more encouragement. The lows were not as low as those on the Dow and the rebound brought us back to within 400 points of the recent highs. We saw a range of more than 500 points last week alone. While I do not expect to just race back the recent highs there were a lot of gainers in the Nasdaq Composite on Friday. Biotechs are back and the Biotech Index ($BTK) gained +136 points for the week to close at 3,909 after hitting 3,412 at the Monday low. That is a +15% rebound!!

There is plenty of overhead resistance and the 4,900 level on the Nasdaq could be a problem. If the tech stocks continue to move higher, it might trigger some buying in the broader market.

The Russell Microcap Index ($RUMIC) was the biggest gainer on Friday with +1.33% followed by the Russell 2000 at +0.8%. If funds are buying small caps, they are not afraid of a future market decline. However, this could still be short covering since the small caps were heavily shorted.

The R2K did manage to close well above decent support at 1,150 and that could give us a cushion on any further market weakness.

After looking at all the individual stocks on the Dow, I have a negative bias for next week. Obviously, that bias and $5 will only buy you a cup of strong coffee at Starbucks. I would be careful about loading up on too many long positions. I recommended buying "decent" dips last week. We definitely had several. I would continue to recommend buying decent dips to obvious support levels. While we could see lower lows ahead, I do expect to see higher highs as well once we are out of September.

If you missed the correction and did not buy anything on the quick drop, be patient. You may still get your chance. Build your shopping list and put in some buy orders at ridiculous prices. You may actually get filled in the weeks ahead.

If you did not get the posts I made to the Option Investor Facebook page last week, please like our page so you will receive the posts on specific stock events this coming week.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

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Random Thoughts

Marketwatch put together a really good summary of recent comments by all the Fed heads. This should give you a much better idea about the outcome of the September meeting. Fed Member Positions on Rates

Fortune ran an article this weekend on the 5 reasons the Fed will not raise rates in 2015. I am going to list the reasons but the entire article is worth reading. Five Reasons

Recent stock market volatility
Slowing global growth
China's economic wildcard
Strong U.S. dollar
Very low inflation

Bespoke said the volatility last week was the worst in 75 years. The S&P closed more than four standard deviations below its 50-day average for three consecutive sessions. This is only the second time ever that this has happened. The other one was May 15th, 1940. The crash of 1987 was not as bad as the crash last week. Worst in 75 Years

Since 1950 September has been the worst performing month of the year for the Dow, S&P and the Nasdaq since 1971. Fund managers coming back from vacation after Labor Day tend to clean house as Q3 comes to a close. They are preparing on taking advantage of any buying opportunity in October. The first half of September has a positive bias but the last half of the month is normally negative as the quarter ends. Remember September

Monday could be called the Great ETF Crash of 2015. Large portions of the ETF market saw declines of 30% to 43% on sketchy volume. When some individual stocks failed to open on time on Monday the pricing algorithms for the ETFs went awry. The S&P Smallcap 600 (IJR) fell -30% while the Smallcap 600 Growth (IJT) declined -34%. The Nasdaq 100 (QQQ) declined -17.25% at its lows when the underlying index only declined -9% intraday. The S&P 500 equal weighted ETF (RSP) fell -43% and took more than 30 minutes to recover. The moral to this story is to not use stop losses on ETFs because in fast markets they can be significantly mispriced. Great ETF Crash

Understanding the ETF Crash

With the bankruptcy and shutdown of the Molycorp Mountain Pass rare earth mine, China now controls more than 95% of the supply of rate earth minerals. It takes 920 pounds of rare earths to build an F-35 fighter and 9,200 pounds to build a Virginia class nuclear submarine. Without rare earths, guided missiles are unguided. China in Control

Moody's reduced its growth forecast for the global economy to 2.8% for 2015, down -0.3% from the prior forecast just two weeks ago. The company said China's problems are going to make a bigger dent in the global economy than previously expected. They are projecting only 6.3% growth for China in 2015 compared to the official government projections for 7.0%.

Citigroup cut world growth estimates for 2016 from 3.3% to 3.1% and that was the third time the bank has cut the forecast this year. Citigroup said the greatest risks to the growth forecast were to the downside.

Fitch Ratings warned that China will likely grow well below 7% for a "prolonged period of time."

Add in the severe recession in Russia and Brazil and the rapid decline in emerging market currencies and global growth is in a downward spiral.


Global Growth Declines

Trading curbs on individual stocks halted trading more than 1,200 times last week on the NYSE. More than $2 trillion in market cap was erased since the end of July to the lows on Monday. Unless the market soars over the next 5 weeks, the correction will knock most equity funds into losses for the quarter and possibly for the year. The Investment Company Institute said more than $94 billion had been pulled out of equity funds in the month of August. Rout Ruins August

David Woo, BAML head of global rates and currency research, said the rise in yields in U.S. Treasuries during a period of equity market volatility was contrary to historical norms. Yields normally decline as investors flee to treasuries. He said the reason treasuries sold off was redemptions from China. In order for China to support its currency and its equity market it was forced to sell treasuries and convert those proceeds from dollars to yuan. In a period when investors flee to the safety of bonds, the biggest holder of U.S. treasuries was selling. China Selling Treasuries

China Sells $100 Billion in Treasuries - Bill Gross

Apple finally announced the date for their next product announcement. On September 9th, the event will be held at the Bill Graham Civic Auditorium. Analysts are expecting a major revamp for the iPhone 6S camera system to 12 megapixels and 4K video recording, stepping up from the 1080p in the iPhone 6. The new phone will also have front flash support for the camera. There will also be a faster A9 processor. The next generation Apple TV could also be announced.

The AAII Investor Sentiment Survey for the week ended on Wednesday showed a very surprising gain of +5.7% to push bullish sentiment to 32.5%. Yes, bullish sentiment rose in an ugly week. Apparently, investors felt the bad news was over. However, bearish sentiment also rose +4.9% to 38.3%. I guess that is a sentiment battle between the daredevils and the scaredy cats.


Enter passively and exit aggressively!

Jim Brown

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"Everything possible today was at one time impossible. Everything impossible today may at some time in the future be possible."

Edward Lindaman


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New Plays

Consumer Goods & Medical Devices

by James Brown

Click here to email James Brown


Keurig Green Mountain, Inc. - GMCR - close: 54.11 change: +0.12

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 29, 2015
Time Frame: Exit
Average Daily Volume = 2.6 million
New Positions: Yes, see below

Company Description

Trade Description:
When everyone has the same opinion on a stock sometimes shares will move the opposite direction.

It has not been a good year for GMCR. Shares are down -59% year to date and off -65% from its all-time high set on November 18, 2014 ($157.10). After months and months of declines GMCR could be poised for a big bounce.

If you're not familiar with GMCR they are in the consumer goods sector. When they launched their single-serving coffee brewer it changed the coffee world forever.

According to the company, "As a leader in specialty coffee, coffee makers, teas and other beverages, Keurig Green Mountain (Keurig) (GMCR), is recognized for its award-winning beverages, innovative brewing technology, and socially responsible business practices. The Company has inspired consumer passion for its products by revolutionizing beverage preparation at home and in the workplace. Keurig supports local and global communities by investing in sustainably-grown coffee and by its active involvement in a variety of social and environmental projects. By helping consumers drink for themselves, we believe we can brew a better world."

The company is suffering from heavy competition in the single-serving coffee/hot beverage pod business. The consumer market did not react well when GMCR introduced their Keurig 2.0 brewer, which was designed to only work with company-specific pods. They have also suffered multiple delays on introducing their Keurig Kold machine, which is a cold beverage machine similar to Sodastream.

The stock peaked in November 2014 right before its quarterly earnings report. They beat earnings and revenue estimates but management guided lower. GMCR has guided lower every quarter since then.

In February 2015 they reported earnings and revenues that missed estimates (and guided lower). In early May they reported earnings and revenues that missed estimates (and guided lower). On May 15th the stock sank after the company's presentation on its new Keurig Kold machine. Wall Street is worried that GMCR is pricing their Kold machine too high (around $300) when rival Sodastream's cold beverage maker is only $99.

GMCR's most recent earnings report was August 5th. They reported Q3 earnings of $0.80 per share, which actually beat estimates by a penny but revenues were down -5.2% to $970 million, which was a miss. Management lowered their Q4 guidance. The company said brewer machine sales were down -26%.

Management tried to soften the blow of this disappointing quarterly report and lowered guidance by announcing a $1 billion stock buyback program. The stock collapsed anyway with a plunge from $75 to $52.65.

Everything looks bearish for GMCR. So why are we suggesting a bullish trade? Basically GMCR's stock is so oversold that when it bounces it could see a big bounce. Wall Street analysts have been downgrading GMCR's stock and lowering price targets for the last several months. Everyone is so bearish that an unexpected rally could spark some serious short covering.

When the market collapsed on Monday, August 24th, GMCR fell from $50 to $45.25 but ended the day at $$51.30. That's right. GMCR actually ended Monday with a gain. Shares are now up five days in a row. The $55.00-56.00 area is resistance but a breakout could spark a rally toward $60-65 or its simple 50-dma (currently near $66.50). Technically, last week's bounce, has produced a bullish engulfing candlestick reversal pattern on GMCR's weekly chart. This pattern needs to see confirmation and we want to be ready if this rebound continues.

Friday's high was $54.46. Thursday's high was $54.61. Tonight we are suggesting a trigger to launch bullish positions at $55.10. More aggressive traders might want to consider jumping in early around the $54.75 area. GMCR can be very volatile. I do consider this an aggressive, higher-risk trade.

Trigger @ $55.10 *small positions to limit risk*

- Suggested Positions -

Buy GMCR stock @ $55.10

- (or for more adventurous traders, try this option) -

Buy the NOV $60 CALL (GMCR151120K60) current ask $3.05
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:

Weekly Chart:

NuVasive, Inc. - NUVA - close: 53.75 change: +1.00

Stop Loss: 49.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 29, 2015
Time Frame: Exit 6 to 8 weeks (option traders exit prior to expiration)
Average Daily Volume = 592 thousand
New Positions: Yes, see below

Company Description

Trade Description:
Investors want to see earnings growth and NUVA has delivered. The company's bullish results have helped fuel a +14% gain year to date. The NASDAQ composite is only up +1.9%. Traders were quick to buy the dip when the market crashed a few days ago and shares look poised to run.

NUVA is in the healthcare sector. They're part of the medical device industry. According to the company, "NuVasive is an innovative global medical device company that is changing spine surgery with minimally disruptive surgical products and procedurally-integrated solutions for the spine. The Company is the third largest player in the $9.0 billion global spine market. NuVasive offers a comprehensive spine portfolio of more than 90 unique products developed to improve spine surgery and patient outcomes. The Company's principal procedural solution is its Maximum Access Surgery, or MAS®, platform for lateral spine fusion. MAS was designed to provide safer, reproducible, and clinically proven outcomes, and is a highly differentiated solution with fully integrated neuromonitoring, customizable exposure, and a broad offering of application-specific implants and fixation devices designed to address a variety of pathologies."

NUVA has reported strong growth and offered a bullish outlook this year. Starting in January 2015 NUVA raised its full year guidance. They reported earnings on February 24th and beat estimates. They guided higher again on April 1st. Their earnings report on May 4th beat estimates on both the top and bottom line and management raised their 2015 guidance. That pattern repeated with their July 28th earnings report. NUVA beat estimates on both the top and bottom line. The company raised their 2015 estimates above Wall Street expectations. The stock soared to new multi-year highs on this news.

NUVA started to see some profit taking in early August. When the market collapsed a few days ago shares spiked down to $48.00. This was a -14% correction from its early August high. Traders bought the dip and NUVA is up four days in a row. The point & figure chart is bullish and forecasting at $63.00 target.

Tonight we are suggesting a trigger to open bullish positions at $54.55. This would be a new two-week high. We will start this play with a stop loss at $49.85.

Trigger @ $54.55

- Suggested Positions -

Buy NUVA stock @ $54.55

- (or for more adventurous traders, try this option) -

Buy the OCT $55 CALL (NUVA151016C55) current ask $2.60
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Stocks End Volatile Week On A Quiet Note

by James Brown

Click here to email James Brown

Editor's Note:
It was an extremely volatile week for stocks but Friday's session was relatively calm. The major indices drifted sideways in a narrow range.

Current Portfolio:

BULLISH Play Updates

Oshkosh Corp. - OSK - close: 42.05 change: +0.54

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 27, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.1 million
New Positions: Yes, see below

08/29/15: OSK displayed some relative strength on Friday with a +1.3% gain. Yet shares did not hit our suggested entry point at $42.30. If the rally continues on Monday we could see this trade triggered.

Trade Description: August 27, 2015:
The future looks a little brighter for OSK after a big contract win from the U.S. military. OSK has been making vehicles for the military for over 90 years. Earlier this year (January) the military tested new prototypes for a new Humvee design from the likes of Lockheed Martin, AM General, and OSK. This week the Wall Street Journal reported that OSK had won the contract.

OSK is in the consumer goods sector. According to the company, "Oshkosh Corporation is a leading designer, manufacturer and marketer of a broad range of specialty access equipment, commercial, fire & emergency and military vehicles and vehicle bodies. Oshkosh Corporation manufactures, distributes and services products under the brands of Oshkosh®, JLG®, Pierce®, McNeilus®, Jerr-Dan®, Frontline®, CON-E-CO®, London® and IMT®. Oshkosh products are valued worldwide in businesses where high quality, superior performance, rugged reliability and long-term value are paramount."

The new Humvee contract is a big deal. The Pentagon has been cutting back on spending the last few years. This new contract could last 25 years. OSK won with its design that is lighter in weight, providers greater range, and better protection against mines and roadside bombs. Officially the vehicle is called a Joint Light Tactical Vehicle (JLTV).

The initial contract is valued at $6.75 billion for 17,000 vehicles. It could be extended out to year 2040 since the U.S. army wants to buy almost 50,000 new JLTVs for itself and about 5,500 for the Marines. The overall program could be worth $30 billion over 25 years.

OSK's revenues last year were only $6.2 billion so this is a nice boost.

Technically shares of OSK appear to have produced a bullish double bottom. The stock market's spike lower on Monday morning pushed OSK toward its late July lows. This week's rebound in the market has seen OSK breakout past resistance near $40.00 and its 50-dma. This reversal higher has produced a new buy signal on the point & figure chart, which is forecasting a long-term $63.00 target.

Today's high was $42.21. Tonight we are suggesting a trigger to launch bullish positions at $42.30.

Trigger @ $42.30

- Suggested Positions -

Buy OSK stock @ $42.30

- (or for more adventurous traders, try this option) -

Buy the 2016 Jan $45 CALL (OSK160115C45)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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


Starbucks - SBUX - close: 55.63 change: -0.32

Stop Loss: 51.15
Target(s): To Be Determined
Current Gain/Loss: +0.9%
Entry on August 27 at $55.15
Listed on August 25, 2015
Time Frame: Exit prior to earnings in October
Average Daily Volume = 8.0 million
New Positions: see below

08/29/15: The U.S. stock market's rally stalled on Friday and SBUX followed suit. Shares briefly tagged a new high for the week at $56.31, just above its 20-dma, but the rally faded. SBUX ended Friday's session with a -0.5% decline. I would not be surprised to see a dip into the $53.00-54.00 region if the market slips this week (this would probably be our next entry point).j

Please note we are adding a stop loss at $51.15.

No new positions at this time.

Trade Description: August 25, 2015:
The sell-off in shares of SBUX is a bit ridiculous. The Thursday-Friday-Monday sell-off in the market saw SBUX fall from $57.59 to $42.05. That was a -27% drop in less than three days. The company's fundamentals didn't deteriorate -27%. The recent market turmoil presents an opportunity to buy SBUX. Jump to the bottom of this play description for details.

Here's a little bit about SBUX and the company's performance:

The world seems to have an insatiable appetite for coffee. Starbucks is more than happy to help fill that need. The first Starbucks opened in Seattle back in 1971. Today they are a global brand with locations in 66 countries. SBUX operates more than 21,000 retail stores with more than 300,000 workers.

A few years ago Business Insider published some facts on SBUX. The average SBUX customer stops by six times a month. The really loyal, top 20% of customers, come in 16 times a month. There are nearly 90,000 potential drink combinations at your local Starbucks. The company spends more money on healthcare for its employees than it does on coffee beans.

The company's earnings results were only mediocre most of 2014 year. You can see the results in SBUX's long-term chart below. After incredible gains in 2013 SBUX has essentially consolidated sideways in 2014. SBUX broke out of that sideways funk after it reported earnings in January 2015.

Five-Year Plan

In late 2014 SBUX announced their five-year plan to increase profitability. Here's an excerpt from a company press release:

"The seismic shift in consumer behavior underway presents tremendous opportunity for businesses the world over that are prepared and positioned to seize it," Schultz said (Howard Schultz is the Founder, Chairman, President, and CEO of Starbucks). "Over the next five years, Starbucks will continue to lean into this new era by innovating in transformational ways across coffee, tea and retail, elevating our customer and partner experiences, continuing to extend our leadership position in digital and mobile technologies, and unlocking new markets, channels and formats around the world. Investing in our coffee, our people and the communities we serve will remain at our core as we continue to redefine the role and responsibility of a public company in today's disruptive global consumer, economic and retail environments."

"Starbucks business, operations and growth trajectory around the world have never been stronger, and we are more confident than ever in our ability to continue to drive significant growth and meet our long term financial targets," said Troy Alstead, Starbucks chief operating officer. "We have more customers visiting more stores more frequently, both in the U.S. and around the world, than at any time in our history. And we expect both the number of customers visiting our stores and the amount they spend with us to accelerate in the years ahead. With a robust pipeline of mobile commerce innovations that will drive transactions and unprecedented speed of service, Starbucks is ushering in a new era of customer convenience. We believe the runway of opportunity for Starbucks inside and outside of our stores is both vast and unmatched by any other retailer on the planet."

The company believes they can grow revenues from $16 billion in FY2014 to almost $30 billion by FY2019. To do that they will expand deeper into regions like China, Japan, India, and Brazil. SBUX expects to nearly double its stores in China to over 3,000 locations in the next five years

They're also working hard on their mobile ordering technology to speed up the experience so customers don't have to wait in line so long at their busiest locations. This will also include a delivery service.

Part of the five-year plan is a new marketing campaign called Starbucks Evening experience. The company wants to be the "third place" between home and work. After 4:00 p.m. they will start offering alcohol, mainly wine and beer, in addition to new tapas-like smaller plates.

The company recently launched its first ever Starbucks Reserve Roastery and Tasting Room in Seattle, near their iconic first retail store. The new roastery is supposed to be the ultimate coffee lovers experience. CEO Schultz said they will eventually open up about 100 of these Starbucks Reserve locations.

Earnings results:

It was a very strong holiday period for SBUX thanks in part to astonishing gift card sales. The amount of money loaded onto SBUX gift cards during the holidays surged +17% to a record $1.6 billion. One out of every seven Americans received a SBUX gift card. The company also saw significant growth overseas with its China and Asia-Pacific business soaring +85% to sales of $495 million. Their mobile transactions have reached seven million transactions a week.

SBUX reported its Q2 (2015) on April 23rd. Earnings of $0.33 a share were in-line with estimates. Revenues were up +17.8% to $4.56 billion, slightly above expectations. It was their strongest growth in four years. Customers are responding well to new drink options and an updated food menu. They're also developing new delivery options, mobile pay options, and alcoholic drinks available at select locations.

Worldwide same-store sales grew +7%. This was significantly above estimates. It also marked the 21st consecutive quarter where SBUX's comparable store sales were +5% or more.

The company issued mixed guidance. The stronger dollar is having an impact. They see fiscal 2015 results in the $1.55-1.57 range. That compares to Wall Street estimates for $1.57 per share. However, the company's revenue estimates are more optimistic. They're forecasting +16-18% sales growth into the $19.1-19.4 billion zone compares to analysts' estimates of $19.1 billion.

The trend of earnings pops continued in July with shares gapping up to new all-time highs following its Q2 report on July 23rd. Earnings were $0.42 per share, a penny above estimates. Revenues were up +17.5% to $4.88 billion, just a hair above expectations. Global same-store sales were up +7% and their non-GAAP operating margin improved 100 basis points to 19.5%. Management is still guiding 2015 revenues to rise +17% in the $19.1-19.4 billion range.

Recent Sell-off & Entry Point

The recent stock market bloodletting saw SBUX breakdown below a multitude of support levels. The weakness on Monday morning was just ridiculous. SBUX opened on Monday, August 24th near technical support at its 200-dma and then it plunged to $42.05. The stock bounced back to $50 by the closing bell. The rebound struggled today but SBUX displayed relative strength with a +1.48% gain versus a -1.35% drop in the S&P 500 and a -0.4% decline in the NASDAQ.

If the stock market continues to sink we want to take advantage of the weakness in SBUX and launch bullish positions on a dip near its 200-dma. Today the simple 200-dma is at $48.04. We will set our entry trigger at $48.00. We are starting this play without a stop loss. More conservative investors might want to wait on launching positions since the next few days could be volatile for the broader market (SBUX included).

- Suggested Positions -

Long shares of SBUX @ $55.15

- (or for more adventurous traders, try this option) -

Long NOV $57.50 CALL (SBUX151120C57.5) entry $2.00

08/29/15 new stop at $51.15
08/27/15 Triggered @ $55.15
08/26/15 Entry point adjustment - move the buy-the-dip trigger from $48.00 to $50.00. Plus, add a secondary trigger to open bullish positions at $55.15.
Option Format: symbol-year-month-day-call-strike


Wayfair Inc. - W - close: 42.22 change: +0.48

Stop Loss: None. No stop at this time.
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 26, 2015
Time Frame: Exit
Average Daily Volume = 1.0 million
New Positions: Yes, see below

08/29/15: Shares of W managed to recover a little bit from Thursday's relative weakness. The stock bounced +1.1% on Friday, which was enough to outperform the major indices. However, W remains stuck in the middle of its $40-45 range. We have decided to give W another day before removing it. If shares don't improve on Monday we'll likely cut it as a candidate. Our suggested entry point is $45.15.

Trade Description: August 26, 2015:
Tonight's new candidate has been outperforming the market and could see a short squeeze. Year to date W is up +116% and shows no signs of slowing down.

According to the company, "Wayfair Inc. offers an extensive selection of home furnishings and decor across all styles and price points. The Wayfair family of brands includes:

Wayfair.com, an online destination for all things home
Joss & Main, an online flash sales site offering inspiring home design daily
AllModern, a go-to online source for modern design
DwellStudio, a design house for fashion-forward modern furnishings
Birch Lane, a collection of classic furnishings and timeless home decor
Wayfair is headquartered in Boston, Massachusetts, with additional locations in New York, Ogden, Utah, Hebron, Kentucky, Galway, Ireland, London, Berlin and Sydney."

Shares of W came to market with an IPO in October 2014 and priced at $29.00. They opened at $36.00 and spiked up to $39.43 on the first day of trading. The IPO excitement faded and shares didn't find a bottom until about $17.00 in December 2014.

Revenue Growth

The company seems to be growing at a tremendous pace. Their first earnings report as a public company was November 10th, 2014. Revenues soared +41.7% to $336.2 million. Their direct retail business surged +57%. W said their gross profit was $79.0 million versus $58.6 million a year ago.

Additional 2014 Q3 highlights included the number of active customers for their direct retail business rose +61% to $2.9 million year over year. Their LTM Net revenue per active customer increase $342 or +8.6% year over year and +3.0% from the second quarter of 2014.

W reported their Q4 results on March 4, 2015. The company delivered a loss of ($0.18) per share, which was 10 cents better than expected. Revenues were up +38.4% to $408.6 million, above expectations. Management raised their Q1 guidance significantly above Wall Street estimates.

The company beat expectations again with their Q1 report on May 11th. Results were a loss of ($0.23) per share. Revenues accelerated with a +52% gain to $424.4 million.

The earnings beats kept coming when W reported its Q2 results on August 12th. Analysts were forecasting a loss of ($0.29) per share on revenues of $438.4 million. Wayfair delivered a loss of ($0.15) per share. Revenues roared +66.5% to $491.8 million. Management said their number of active customers was up +53.5% from a year ago to four million. Repeat customer orders hit 56%. Orders delivered shot up +80%.

Big Potential

Following their Q1 results back in May the company's CEO talked about their future. On their Q1 conference call the CEO noted that their potential markets are huge. Estimates suggest that spending in their industry will hit $264 billion in the U.S. and $308 billion in Europe by 2018 (a combined total of $572 billion market).

Bears will argue that W's valuations are outrageous. They're probably right. The recent rally in the stock has bumped the company's market cap to $3.6 billion. At the same time analysts are expecting W to operate at a loss for the next two fiscal years. On a short-term basis the market doesn't seem to care. If this rally continues W could see a short squeeze.

A few months ago in an interview one of the co-founders said that together the two co-founders own between 40% and 50% of the stock. The current float is only 30.1 million shares, which is relatively small. The most recent data listed short interest at 57% of the float.

Recent Strength

Shares of W soared to all-time highs in mid-August following its better than expected earnings and revenues. The stock market's recent crash bought the stock back to earth but investors bought the dip near support in the $40 area and its rising 50-dma. The recent bounce near $40.00 looks like a bullish entry point. However, the market remains volatile. We would like to see some follow through higher in shares of Wayfair. Therefore tonight we are listing a trigger to open bullish positions at $45.15. I do consider this a more aggressive, higher-risk trade due to W's volatility.

Trigger @ $45.15

- Suggested Positions -

Buy shares of W @ $45.15

- (or for more adventurous traders, try this option) -

Buy the NOV $50 CALL (W151120C50)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

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


BEARISH Play Updates

iPath S&P500 VIX Futures ETN - VXX - close: 25.84 change: +1.13

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -18.4%
Entry on August 25 at $21.82
Listed on August 24, 2015
Time Frame: 2 or 3 weeks
Average Daily Volume = 50 million
New Positions: see below

08/29/15: The stock market has produced a huge bounce off last Monday's lows. Yet investors remain worried. The VIX has receded but it is still elevated near 26. Readings above 20 tend to indicate higher levels of fear among traders. Meanwhile the VXX rallied again and tested its Wednesday highs before trimming some of its gains on Friday.

We are not suggesting new positions in the VXX at this time.

Trade Description: August 24, 2015
The U.S. stock market's sell-off in the last three days has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on this long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

(see VIX chart from the August 24th play description)

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet. Our time frame is two or three weeks (or less).

- Suggested Positions -

Short the VXX @ $21.82

- (or for more adventurous traders, try this option) -

Long OCT $20 PUT (VXX151016P20) entry $2.93

08/25/15 trade begins. VXX gaps down at $21.82
Option Format: symbol-year-month-day-call-strike