Option Investor

Daily Newsletter, Monday, 8/31/2015

Table of Contents

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

Market Wrap

Still Waiting For The Fed

by Thomas Hughes

Click here to email Thomas Hughes
Lots of news impacted today's trading but the market is still just waiting on the Fed.


There were quite a few headlines to impact today's markets ranging from Chinese government support of financial markets to weak international economic data to declining earnings expectations to oil prices. Take your pick for which one moved markets more, in the end traders are still waiting on the Fed to see if and when they will actually raise interest rates.

Starting in Asia both Japan and China made headlines today. Japan released PMI data that was much weaker than expected. Official readings came in at -0.6%, a half percent below consensus. This, added to new announcements from the Chinese government, helped send most indices lower. The Nikkei lost -1.28%, the Hang Send fell -0.78% but the mainland Shang Hai index actually gained a little.

The news from China, per a report in the Financial Times, is that government will stop trying to support the market through equity purchases and focus instead on activities and people who are undermining it (the market). So far it looks like several hundred have already been arrested in connection to creating market rumors, adding to volatility and/or out-right fraud. Those arrested include bloggers, the media, accountants, investors and officials working in the financial system.

Market Statistics

European indices were pressured lower on the Asia news, although they had some of their own data to consider. New data shows that Eurozone inflation grew at only 0.2%, unchanged from last month, and raised talk of additional stimulus. EU economists largely agree that the ECB will not meet its inflation targets for the year, which could spur them into action. The ECB is meeting this week with an expected announcement and press conference on Thursday.

Futures trading here at home was a little volatile. The major indices were indicated to open about a half percent lower for most of the morning. There was one or two attempts to move the trade higher but these failed.

At the open the indices quickly lost a half percent and then continued to fall to the lows of the day, near a full percent below Friday's close. Bottom was hit shortly after 10, the market rallied from then until 11:42 at which time resistance was hit. The move higher was driven largely by the energy sector and the rebound in oil prices, resistance was slightly below last week's closing prices.

After hitting the days high the market traded sideways for an hour or so, until about 1:15. This was followed by a decline to the earlier lows that hit bottom mid afternoon. Another small bounce ensued but was not enough to recover today's losses, leaving the indices near the bottom of today's range.

Economic Calendar

The Economy

Only one piece of official economic data today, Chicago PMI. The index came in at 54.4, slightly below expectations and last months reading of 54.7. Analysts had been expecting it to hold steady. Despite the decline the number is expansionary and consistent with rebound following weakness seen earlier this year. Most of the decline is due to softness in New Orders and Production but a strong Inventories number helped to counter balance it. Employment rose to the highest level in 5 months but remains in contraction territory for this study.

Moody's Survey of Business Confidence gained 0.2% to reach 44.4. This is just below the 4 month high set two weeks ago and the fourth highest reading of all time. Moody's economist Mark Zandi says there is no indication recent market volatility is affecting business sentiment, that sentiment is steady at/near all time highs and that US businesses are reporting strong sales, investment and hiring, as they have been all year.

We got a new report from Factset this week, after two weeks without. As of last Friday 490 S&P 500 companies had reported earnings this season with 5 more expected this week. Of those who have reported 74% have beaten on earnings estimates, above average, and only 50% have beaten on revenue estimates, below average. The blended rate of earnings growth for the 2nd quarter now stands at -0.7%, up 0.3% from last report but unchanged from last week (there was no report last week). So far 9 of the 10 sectors are reporting growth better than expected, led by the healthcare sector which has more than doubled expectations.

Ex-energy the blended rate jumps to 5.8%, consistent with expectations. Looking out to the third quarter things are not beginning to look better. Expectations for the entire S&P earnings growth have now fallen to -4.1% due to downward revisions to 9 of the 10 sectors, including energy. However, based on trends and the low bar that analysts are setting, we can expect to see third quarter earnings growth come in closer to 0% and possibly even turn positive with ex-energy growth in the range of 2.6% to 6.6%. Analysts still expect to see strong earnings growth return in the 4th quarter, with revenue growth returning in the first quarter of 2016. 2016 full year growth expectations remain above 10.5%.

The Oil Index

Oil prices continue to bounce back. Prices had been under pressure in early trading but a combination of reports helped to spark a rally that took WTI more than 8% higher. WTI is now trading back above $49 but this move may be more short covering/near term reaction than a change in fundamentals. I say this because of three reasons, all found in today's headlines.

The first is that US production declined from its peak set earlier this year. The second is that OPEC said in its monthly newsletter it was ready to talk to other producers in an effort to stabilize prices. The third is that Russia/Putin is talking to Venezuela/Maduro about the same thing, what they can do to stabilize prices. OK, production did fall in July, but remains near all time high levels, with supply and storage at high levels. OPEC has said this same thing before, maybe they mean it more than before but at this time no other producer has stepped up to join them. Finally, what can Russia and Venezuela do to curb supply without hurting themselves? Needless to say I am wary of the bounce and expect to see a test of support sometime in the near future.

The Oil Index got a boost from the rise in oil but only about a tenth compared to what we saw in WTI prices. The index gained 0.83%, extending its bounce from recent lows and confirming near term support at 1100. The index is now moving higher after hitting a long term low and has now also regained the 61.8% retracement level. The indicators are rolling over into a possible bullish signal but have yet to confirm and still have significant resistance above. Strength in the recent bearish MACD peak could lead to a retest of the recent low despite higher oil prices, stochastic remains divergent from the low and consistent with a potential reversal from the recent down trend. Current target is near 1175, near the short term moving average and a near-term support level breached earlier this month.

The Gold Index

Gold prices were mostly flat, near $1130, in today's session. Price is stuck between rate hike or not with little sign of rising inflation and a fountain of fed speak to drive volatility. This week's data is likely to spur more speculation and that is before you consider the Beige Book release on Wednesday. On the one hand you have signs that the economy continues to improve, if slow and steady. On the other inflation is still largely absent. In between we have repeated, and conflicting, opinions being issued by the Fed governors.

The gold miners lost a little ground today but basically are flat from last week. The miners ETF GDX fell 1.1% but remain above support levels hit last Thursday. The ETF is bouncing from support with mixed indicators that could be setting up for a retest of the highs set two weeks ago. Bullish momentum is in decline but remains bullish, the most recent peak fairly strong compared to the last 8 months but not extreme. Stochastic %D is moving lower in the range but suggestive of support at these levels, near $13. The ETF is below the short term moving average, which could provide resistance on an upside move with additional resistance targets just above.

However,with the FOMC meeting just 3 weeks away and so much speculation on dollar value, rate hikes and the economy it is very possible for gold to remain in a range around $1130 and the GDX to range between $13 and $15.

In The News, Story Stocks and Earnings

Not too much in the way of actual business news today but there was some. The biggest headline this morning was a new $4.48 billion stake in Phillips 66 taken by Warren Buffet and Berkshire Hathaway. The move is seen as calling a possible bottom in oil by some and as merely a smart way to play oil while prices are down by others. Phillips is a refiner and as such benefiting from the lower cost of oil. According to FactSet, the refiners have seen a 45% increase in earnings growth in 2nd quarter while the energy sector as a whole saw earnings decline by 55.6%. Shares of Phillips 66 jumped on the news, gaining 2.38%, to trade above the short term moving average.

Netflix also made the news today. The online streaming service announced it was not renewing a deal with EPIX which would take some high profile content off of the site. The reason, according to company execs, is because those movies were already available on other services such as Amazon and therefore not exclusive to Netflix. The company is going to be focusing on exclusive content in its efforts to drive business.... but the move may yet have a negative impact on revenue. Shares of the stock responded by dropping 2.24% but was able to hold above the short term moving average.

There aren't a whole lot of earnings reports this week but there are one or two to take note of. One is Costco, reporting on Wednesday. The discount warehouse is expected to report in the range of $1.66, slightly better than last years $1.52. Based on monthly sales reports we can expect to see sales run in the range of +1% to +3% over last year at this time.

The Indices

The indices went on a wild ride today, not as wild as last week but still a little volatile. The day's range was greater than 1% and trading action left prices near the bottom of the range. Today's move was led by the NASDAQ Composite which closed with a loss of -1.07%. The tech heavy index wrestled with a resistance level reached with last week's bounce and was not able to hold it. Price action appears to have hit a near term top, or at least a place to pause, with a chance of moving lower to retest recent lows. The indicators are mixed at this time but suggest such a test is possible if not likely. MACD momentum is still bearish with the most recent peak an extreme for the year and convergent with lower prices. Stochastic is iffy in that it is making a bullish crossover at this time, but the crossover could be setting up for another move lower just as easily as it could be leading the index higher.

If this is the halfway point in the bounce we can expect to see the index move up as much as 500 points in the near term with a target above the long term up trend line and near the current all time high. If this is a near term top and we see a retest of support that target is roughly 500 points today's close, at or near the low set last week. Of course, a third possibility exists. The shift in momentum could take us up to retest resistance in the range between the trend line and the all time, and then take us back down to test support.

The next largest decline on the day was in the S&P 500. The broad market fell -0.84% in a move that confirms resistance at 1985. The indicators are bearish with momentum convergent with a retest of the recent low so a retest is looking very possible. Add in the latest estimates for 3rd quarter earnings and a retest appears even more likely. On the flipside, stochastic remains consistent with an underlying bull market and support with several targets for support between today's close and the recent low near 1960, 1920 and 1900.

The Dow Jones Transportation Average made the third largest decline today, 0.80%. The transports also appear to be cresting a near term peak, or entering a consolidation zone, with support targets near 7750. The indicators are mixed but are consistent with such a consolidation/test of support. MACD momentum is bearish and retreating from an extreme peak, suggesting lower prices are on the way. Stochastic is forming a weak/early bullish entry signal and is consistent with support at or near recent lows.

The Dow Jones Industrial Average made the smallest decline in today's session, only -0.69 at the close of the day. The blue chips created a small black candle with a small amount of lower wick, with price action centered around the 16,580 resistance line and bouncing off of the 16,500 level. The indicators are much the same as the other indices, consistent with a bounce but suggestive of a retest of support. The index appears to be positioned near the middle of a potential range with an upper target near 17,250 and lower target near the recent lows.

The bounce is on. The question today is, is the bounce only half over or has it already reached its first peak. The indices all appear to be in similar straits, roughly halfway from their recent low and halfway to potentially strong resistance levels with mixed indicators. If what we have seen is only a corrective action within a greater bull market then the indicators are consistent with a shift of momentum that is trend following and leading them indices higher. If the correction is a sign of underlying weakness in the economy then the indicators are set up for another bearish signal and retest of current lows or new lows.

I am still bullish on the economy. The recovery is ongoing and in its early phases. The data supports long term steady and continued growth. There are no troubling hot spots that lead me to think bubble and little reason to expect a crash, at least not domestically.

Aside from the day to day news and other near term factors, what I think is causing this turmoil is two things. First, earnings growth is poor. No doubt earnings are better than expected but earnings growth is poor, at least for now. Expectations for later this year and next year are quite good but we still have one more quarter of weak, tepid, lack luster earnings.

Second, the FOMC. The FOMC and their rate hike is causing the market and the globe a lot of stress. They can't be firm on when it's coming and that is making it hard for business and investors to make decisions. At the same time we are getting way too much Fed speak from the wings. The governors, in my humble opinion, should not be allowed to make the kinds of comments they do unless it is through one of their official channels, like the policy statement, the minutes or the Beige Book. All these random comments, interviews and speeches are doing nothing to calm the market and a lot to help roil it.

Not much in the way of earnings this week but there is a lot in the way of data. Tomorrow is auto sales, ISM and construction spending. Wednesday is the ADP employment report, and the Beige Book. Thursday is Challenger and jobless claims and then on Friday the all important jobs report. Each will add to FOMC speculation . . . if it leads to a September rate hike remember, its the first rate hike after years of 0% policy and a sign of economic stability, not the end of economic expansion.

Until then, remember the trend!

Thomas Hughes

New Plays

Growth Might Be Slowing Down

by James Brown

Click here to email James Brown


Lannett Co. - LCI - close: 47.95 change: -1.92

Stop Loss: 51.55
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 31, 2015
Time Frame: Exit 6 to 8 weeks (ahead of October option expiration)
Average Daily Volume = 858 thousand
New Positions: Yes, see below

Company Description

Trade Description:
LCI has seen tremendous earnings and revenue growth over the last few years but it looks like their growth rate might be slowing down.

LCI is in the healthcare sector. According to the company, "Founded in 1942, Lannett develops, manufactures and distributes generic prescription pharmaceutical products in tablet, capsule and oral liquid forms to customers throughout the United States. Lannett markets its products primarily to drug wholesalers, retail drug chains, distributors, and government agencies."

Looking at LCI's last four quarterly reports the company has beaten Wall Street's earnings estimates every time. The trend in revenue growth could be a warning. Their Q1 revenues (announced Nov. 3rd, 2014) were up +103.8%. Q2 revenues (Feb. 4th) rose +69.7%. Q3 revenues were only up +24.3%.

LCI's most recent earnings report was August 25th. The company delivered a profit of $0.91 per share. That was four cents above estimates and a +42% improvement from a year ago. Revenues grew +23% to $99.28 million, also above expectations. The market's problem with the results seems to be LCI's 2016 guidance, which was a little soft.

LCI's full-year 2015 earnings growth was an impressive +162%. Unfortunately the stock market is always looking forward, not backward. It appears that investors are growing cautious.

Technically the stock broke down back in May following its Q3 earnings report. Then during the June-through-early August time frame shares of LCI produced a bearish head-and-shoulders pattern. That pattern broke when LCI fell below short-term support at $55.00 and long-term technical support at the 200-dma.

Now it looks like the oversold bounce from last week's low is failing. Shares underperformed the market with a -3.8% decline today. LCI has also broken below a long-term trend line of support. I suspect that LCI could fall toward round-number support near $40.00.

Tonight we are suggesting a trigger to launch bearish positions at $47.25. However, I want to caution readers to limit their risk and use small positions. The most recent data listed short interest at 26% of the relatively small 26.74 million share float. That much short interest raises our risk of a short squeeze and could make LCI more volatile.

Trigger @ $47.25

- Suggested Positions -

Short LCI stock @ $47.25

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

Buy the OCT $45 PUT (LCI151016P45) current ask $2.55
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

August Ends On A Down Note

by James Brown

Click here to email James Brown

Editor's Note:
The last trading day of August ended with relatively widespread declines. After last week's big bounce from Monday's low it could be traders taking profits before the month closed.

GMCR and OSK both hit our bullish entry triggers today.

W has been removed.

Current Portfolio:

BULLISH Play Updates

Keurig Green Mountain, Inc. - GMCR - close: 56.60 change: +2.49

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: +2.7%
Entry on August 31 at $55.10
Listed on August 29, 2015
Time Frame: Exit prior to earnings in November
Average Daily Volume = 2.6 million
New Positions: see below

08/31/15: GMCR displayed relative strength on Monday with a +4.6% gain. The stock also broke through resistance in the $55-56 area. Our trigger to launch bullish positions was hit at $55.10.

Trade Description: August 29, 2015:
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.

*small positions to limit risk* - Suggested Positions -

Long GMCR stock @ $55.10

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

Long NOV $60 CALL (GMCR151120K60) entry $3.07

08/31/15 triggered @ $55.10
Option Format: symbol-year-month-day-call-strike

NuVasive, Inc. - NUVA - close: 52.72 change: -1.03

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

08/31/15: NUVA tried to rally this morning but failed at $54.15. The stock's -1.9% decline today erased Friday's rally. The good news is that today's move is an "inside day", which suggest indecision by traders and not necessarily a reversal lower.

Our plan has not changed. Our suggested entry point is $54.55.

Trade Description: August 29, 2015:
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)

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

Oshkosh Corp. - OSK - close: 42.05 change: +0.00

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -0.6%
Entry on August 31 at $42.30
Listed on August 27, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.1 million
New Positions: see below

08/31/15: OSK was slowly marching higher the first half of Monday's session. The stock peaked around lunchtime at $43.34, which was a new two-month high. Our trigger to launch bullish positions was hit at $42.30. Unfortunately the rally faded and OSK closed unchanged on the session.

After the closing bell tonight OSK announced they were adding 10 million shares to their stock buyback program. The company repurchased almost 2.6 million shares during their fourth quarter (ending August 31, 2015), which left about 300,000 shares in their buyback program.

The stock did not see much trading after hours but this news could give OSK a boost tomorrow morning.

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.

- Suggested Positions -

Long OSK stock @ $42.30

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

Long 2016 Jan $45 CALL (OSK160115C45) entry $3.30

08/31/15 triggered @ $42.30
Option Format: symbol-year-month-day-call-strike

Starbucks - SBUX - close: 54.71 change: -0.92

Stop Loss: 51.15
Target(s): To Be Determined
Current Gain/Loss: -0.8%
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

08/31/15: SBUX suffered some profit taking today with a -1.6% decline. I cautioned readers over the weekend to expect a dip into the $53-54 region.

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

BEARISH Play Updates

iPath S&P500 VIX Futures ETN - VXX - close: 28.48 change: +2.38

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -23.1%
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

08/31/15: The volatility index (VIX) rose 9% today. It seems that investors are still feeling nervous about the market. That's not too surprising with so much uncertainty around China and the Fed's next meeting in mid September.

The rise in the VIX fueled a +3.9% jump in the VXX. Nimble traders could use another big spike in the VIX to launch positions on the VXX but at this time I am not suggesting new positions.

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


Wayfair Inc. - W - close: 37.30 change: -4.92

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: see below

08/31/15: Shares of W just collapsed today with a -11.65% plunge. The stock broke down below support near $40.00 and its 50-dma and just kept falling.

Our trade did not open. We are removing W from the play list.

Trade did not open.

08/31/15 removed from the newsletter, suggested entry was $45.15