Option Investor

Daily Newsletter, Saturday, 10/17/2015

Table of Contents

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

Market Wrap

One Down, Three to Go

by Jim Brown

Click here to email Jim Brown

The first week of earnings is over but there are three more just ahead. The Dow managed to post three consecutive weeks of gains for the first time since February but weak earnings could derail future rallies.

Market Statistics

The first week of earnings is behind us with 58 S&P companies now reported. Expectations going into last week were for earnings to decline -5.6% and revenue -1.3%. The actual results have changed the forecast. At the close on Friday, the S&P is now expected to see earnings decline -4.6% and revenue drop -3.2%. Clearly, the revenue side has changed significantly. That is due to the almost constant excuse that the strong dollar ate our sales. If this continues to play out it will be the third consecutive quarter of revenue declines and the first time since the financial crisis.

Honeywell (HON) is a prime example. They said revenue for their automation business rose +3% on a constant currency basis but declined -3% as a result of currency translation. Companies are growing revenue overall but the strong dollar is causing a decline in the accounting process. Even Netflix said the strong dollar reduced its revenue by -$96 million. Without that strong dollar impact, the company would have beaten on revenue. They posted $1.740 billion and analysts expected $1.759 billion. Without that impact revenue would have been $1.836 billion.

Despite a lot of high profile earnings misses the actual S&P earnings to date looks like this. With 58 companies reporting, about 71% beat on earnings, 10% met estimates and 19% missed earnings. Only 50% actually beat on revenue according to FactSet.com. The average earnings beat has been +6.6%, which is above the one-year average of +4.4% and five-year average of +4.8%.

The majority of the improvement in the blended earnings results came from GE. Earnings of 32 cents beat analyst estimates for 26 cents. On a weighted basis that is huge. GE also posted revenue of $31.68 billion that easily beat expectations for $28.67 billion. GE is well into its restructuring process to sell $200 billion in financial assets and remove itself as a SIFI (systemically important financial institution) company and all the regulation that entails. GE has sold $126 billion in assets to date. GE is planning on returning $30 billion to investors in stock buybacks, dividends and share swaps for Synchrony (SYF) in 2015. GE still owns 85% of SYF and will be spinning those shares in a swap to shareholders. GE closed at a seven-year high.

Honeywell (HON) posted earnings of $1.60 compared to estimates for $1.55. Revenue of $9.61 billion missed estimates for $9.85 billion because of the strong dollar problem and dramatically declining sales to the oil and gas sector. Shares fell slightly on the news.

There were several economic reports on Friday and the best one was Consumer Sentiment. The headline number rose from 87.2 to 92.1 for October. This was significantly better than expected at 88.7 and the September reading at 87.2. The present conditions component rose from 101.2 to 106.7 and the expectations component rose from 78.2 to 82.7. A rising stock market and falling gasoline prices were credited with the improvement.

Industrial Production for September rose slightly from the -0.4% reading in August to -0.2%. That is hardly a reason to cheer but it was an improvement.

The Job Openings report for August declined from a +3.9% rate to +3.6% but this is old news since we already saw the decline in the August and September payroll reports.

The worst report for the day was the ECRI Weekly Leading Index. I do not discuss this report much because it is a long-term indicator that uses other reports for input. However, the ECRI WLI declined sharply from 132.5 to 128.7 for the week ended October 9th. This was a two-year low and suggests the number of negative economic events are starting to turn into a wave. The economic rebound in early 2015 has been erased and the trend is definitely negative.

This is important. Sometimes the individual economic reports are glossed over or analysts make excuses for individual events. The WLI summarizes all those events and this should make investors cautious about the future.

The Atlanta Fed real time GDP Now forecast is predicting GDP growth of only +0.9% for Q3 compared to the analyst average of +3.2% back in July. That analyst average has now declined to just over +2.0% and dropping fast.

In retrospect, the Fed did the right thing by not hiking rates in September and they are not likely to hike at the October meeting in two weeks. There is only a 17% chance they will hike according to the Fed Funds Futures.

The graphic below shows a summary of the important economic reports for last week. Those in yellow were either lower than last month or less than analyst consensus. Those in green were higher than expected.

On the positive front the weekly jobless claims at 255,000 was a 40-year low and completely unexpected.

Obviously, the weak results greatly overpowered the positive results and this is what we have been seeing for quite a while. It is not an environment where the Fed should be looking to raise rates. In my opinion, we should be more concerned about rising recession risks than hiking rates.

Three of the reports for next week are housing related and they are still expected to show a sector that is growing modestly. The Chicago and Kansas manufacturing surveys on Thursday are likely to show further weakness. Both areas are already in contraction.

The big reports for the week could be from China on Sunday. Because of their recent holiday week, they will announce GDP, Industrial Production and Retail Sales all at the same time on Sunday night. This could definitely set the tone for the markets on Monday.

The Yellen speech on Tuesday is not expected to be a market mover although all of her recent speeches have tended to cause a market bounce.

Watch for another decline on the Weekly Leading Indicators on Friday. Now that the index is at two-year lows, it will receive a lot more attention from investors.

The only split announced last week was actually a spinoff and I did not add it to the calendar. NorthStar Realty Finance (NRF) is going to spin off NorthStar Realty Europe (NRE) on the 31st. Existing shareholders of NRF will receive one share of NRE for every 6 shares of NRF they own. Immediately following the distribution NRF will do a reverse split of 1:2 and reduce the number of shares outstanding from 382 million to 191 million. The implication here is that the removal of the NRE assets from NRF will reduce the share value to single digit levels and the board is planning ahead to keep the share price higher. Since this is not a normal split I did not include it on the calendar.

Skechers (SKX) split 3:1 after the close on Thursday.

Full Stock Split Calendar

Twitter (TWTR) spiked another +5% after former Microsoft CEO, Steve Ballmer, tweeted that he had acquired a 4% stake over the last several months. He praised Jack Dorsey for his efforts to make the company leaner and more focused. On Tuesday, Twitter said it was laying off 336 workers to streamline operations. On Wednesday, Twitter appointed Omid Kordestani, former Google chief business officer, as the executive chairman of Twitter.

Ballmer is now Twitter's third largest shareholder surpassing Jack Dorsey at 3.2%. Saudi billionaire Prince Alwaleed Bin Talal recently increased his position to 5%. Billionaire co-founder Evan Williams is the largest shareholder at 6.9%.

Nike (NKE) surged to a new high two days after raising future revenue targets. The company posted $30.6 billion in revenues in fiscal 2015 and expects to reach $50 billion by 2020. Nike expects sales to China, the emerging markets, central and eastern Europe to grow by low double digits annually through 2020. The company said it expects its ecommerce division to grow from the $1.2 billion in 2015 to $7 billion by 2020. Earnings per share are expected to grow in the mid-teens annually.

Youku Tudou (YOKU) shares rallied +22% after Alibaba (BABA) made an offer to buy them. Youku is the YouTube of China. Alibaba offered $3.6 billion for the 81.5% of Youku that it does not already own. This values YOKU at roughly $26.60 per share or roughly a 30% premium over Thursday's closing price of $20.42. The key shareholders of YOKU already agreed to tender their shares into the deal. That means Alibaba already has 59.3% of the voting rights with Jack Ma already having an 18.5% stake in YOKU. Alibaba will fund the acquisition with cash on hand.

Yum Brands (YUM) shares rebounded +4% after the company said activist investor Keith Meister had been given a seat on the board. Why is this important? Meister has been pressuring Yum to spin off the Asian assets that have been giving them so much trouble. Yum said they were still reviewing the potential spinoff but with Meister added to the board, I would think the odds of a split are very strong. Other investors must have felt the same way and shares rose sharply.

China represents 57.5% of Yum's revenue and 54.2% of the company's profit. Splitting the Asian assets from the U.S. assets would allow each group to manage the businesses differently with a local perspective. KFC, Pizza Hut and Taco Bell are solid businesses in the U.S. and would benefit from a locally focused management. The fast growing KFC and Pizza Hut business in China could be managed better from a Chinese run entity. YUM currently has a 2.66% dividend and a spinoff would generate another profit opportunity along with the potential for a special dividend the parent company receives from Yum China. I think YUM is a buy here with a short fuse into a spinoff announcement.

Wynn Resorts (WYNN) has been crushed by the decline in gaming at the Macau casinos. In their earnings call, Steve Wynn blasted Chinese regulators for irrational gambling rules. The $4 billion Wynn Macau is scheduled to open in early 2016 and they still do not know how many gambling tables regulators are going to allow. This makes it difficult to hire and train employees ahead of the open. China is cutting down on corruption and that means high rollers have been staying away from Macau in order to avoid showing up on a list of visitors that could trigger investigations into their finances.

Regulators have come up with a "table cap" and "employee quota." Half of the VIP market is gone and the Junket operators have gone out of business. The outlook for Wynn is grim. Credit Suisse cut their price target on WYNN by -28% to $76. Shares dipped from $75 on the earnings miss. I would look to short WYNN on the next trade under $70.

McDonalds (MCD) closed at a new high as rumors circulate about a McReit. A board member told the Wall Street Journal that McDonalds has done a lot of due diligence but has not yet made a decision. MGM (MGM) and Macy's (M) are reportedly considering a REIT structure as well.

However, all is not well at McDonalds despite the new highs. According to an article in Business Insider, the McDonald's franchisees believe the brand is in a "deep depression" and could be facing its "final days" according to a recent survey. One franchisee wrote in the Nomura survey that "We are in the throes of a deep depression and nothing is changing. Probably 20% of the operators are insolvent." Another said, "The CEO is sowing the seeds of our demise. We are a quick-serve fast-food restaurant and not a fast casual like Five Guys or Chipotle. The chain may be facing its final days." Management's reaction to the negative comments is for operators to "get out of the system" and quit the business. Several franchisees complained about the all day breakfast saying it has complicated kitchen operations and goes against management promises to simplify the menu.

Another wrote, "The system is very lost at the moment. Our menu boards are still bloated and we are trying to be too many things to too many people. Things are broken from a franchise perspective."

Nomura interviewed franchisees that owned 226 restaurants. McDonalds has more than 14,000 stores and has experienced seven consecutive quarters of declining same store sales.

Crude oil prices declined -$2 for the week but remain stubbornly near $50. There is no fundamental reason for the prices to be moving higher. This is mostly due to the tensions with Russia, Syria, Israel and the Middle East oil producers. With Russia siding with Iran there are worries a conflict with archenemy Saudi Arabia could eventually appear. Bomber videos of an Iraqi oil refinery being bombed on Friday did not help. The refinery was controlled by ISIS but the headline "refinery bombed" was all investors heard.

Oil inventories in the U.S. rose +7.8 million barrels to 468.6 million last week. That is only 22 million barrels below the 40-year high that was set last year at 490.9 million. Between the end of September 2014 and the beginning of the spring demand season on April 24th we added +134 million barrels to inventory. Since that April high inventories have only declined by -45 million barrels. That means we used ONLY ONE THIRD of the inventory buildup from 2014 and there are seven months of inventory builds ahead of us. There is no scenario where we do not exceed the record high at 490.9 million and exceed it by a lot. That buildup caused prices to decline from $92 at the end of September to $42 in March. Why would this year be different except that we are starting from a much higher inventory level and a much lower price level?

Goldman Sachs did say last week that their worst case forecast for oil in the $20s now had a less than 50% chance of coming true. Their rationale was that U.S. production was declining and producers were in crash mode and halting any drilling expenses.

Production declined to 9.096 million barrels per day (mbpd) and a six-month low. That is -514,000 bpd off the peak reached in April. Analysts are calling for production to decline under 9.0 mbpd by the end of December. That seems to be a sure bet but we still added 7.8 million barrels to inventory last week. We would have to see production decline below 8.0 mbpd to really slow the inventory build.

Energy equities are still in rally mode as well. With earnings ahead and the forced restatement of reserves because of the price drop there are going to be some ugly surprises for investors in the earnings reports. I would rather wait for a post earnings decline before adding a bunch of energy stocks to my portfolio.

The Baker Hughes active rig count declined -8 rigs to 787. Oil rigs declined -10 to 595 and gas rigs rose +3 to 192. Offshore rigs rose +1 to 33. To put this in perspective in 1981 there were roughly 4,500 active rigs in the U.S. and that declined to less than 500 in 1999 after Saudi Arabia pushed oil prices to less than $10 in 1998. While oil prices are not going to $10 again the active rig count for oil wells could easily decline back to 500.

With rigs counts in free fall we are going to see some dramatic declines in production in the months ahead. Without the strong flows from new wells the rapid decline rates from existing shale wells is going to be dramatic. The CEO of Core Labs said it could be as much as 10% per month.


The major indexes closed above recent resistance and appear to be poised to move higher. Investors, or maybe I should say portfolio managers, shrugged off negative economics and crummy earnings and every dip was bought. I have stated over the last couple weeks that fund managers are fully engaged in window dressing for their fiscal year end on October 31st. This is their last chance to grab some performance and put some well-known names into their portfolios before time runs out.

The S&P moved comfortably over resistance at 2,020 and the Dow extended its gains to close at 17,251. The Nasdaq pulled ever closer to 5,000 with a close at 4,886. However, the Dow Transports, Russell 2000 small caps and the biotech index were still weighing on the market.

Monday will be a critical day for market direction with the three major economic reports from China. If the reports are less than dire then the U.S markets have a good chance to extend their gains.

The S&P has resistance at 2,040 and then enters into a solid congestion range from 2050-2130. We spent six months in that range from February through early August and I seriously doubt we are just going to punch through it to a new high without a struggle.

Support is now 2,020 and 1,990, which were both resistance on the way up.

The Dow got some help on Friday from a broad range of companies. Caterpillar and Apple were the only major losers. Nike and McDonalds led the charge with JNJ and GE getting a positive bounce from their earnings reports.

Dow components reporting next week include IBM, UTX, AXP, BA, CAT, MCD, MMM, KO, VZ and MSFT. The risk for Monday is IBM. They have had a tough time over the last several years with international revenue trending lower. China has recommended companies not use their systems on fears of hooks in the hardware to allow the NSA to spy on China. I would be very surprised if IBM was up after earnings.

The Dow edged over resistance at 17,130 to close at 17,215. Starting at 17,500 the Dow has the same wide band of congestion as the S&P up to 18,165. This could be a struggle. Support is now 16,700.

The Nasdaq was helped by Amazon, Priceline and a cluster of biotech stocks to gain a minimal 16 points on Friday. The Nasdaq still has some near term resistance at 4888-4900 before dealing with psychological resistance at 5,000 and the beginning of congestion from 5000-5175. Assuming the biotech sector does not implode again I think the Nasdaq will retest that 5,000 level and above. Apple does not report until the following Tuesday so it should not be a negative influence this week. Netflix is due to rebound next week and the big caps of Amazon, Google/Alphabet and Microsoft do not report until Thursday.

The 4,775 level is now support and it would take a severe direction change to test that level again.

The Dow Transports slammed into resistance at 8,260 again and it was a dead stop. Despite weak oil prices, they cannot seem to mount a credible rally and with the U.S. economics weakening, we could see a decline back below 8,000.

The Russell 2000 small caps also came to a dead stop at resistance at 1,165. However, at least they appear to be trying to chip away at that level. Small caps are normally favored in Q4 but the weak economics may be causing fund managers to go to big caps instead for their window dressing. If the market rally does fail, they would be able to exit quicker and with smaller losses.

This week I would watch the Russell for market direction. If it cannot move convincingly over that 1,165 level then sentiment will remain weak and the big cap rally could fail. However, window dressing into month end could support the market somewhat but look for trouble in early November.

Any tax loss selling should be over and managers should be concentrated on putting extra cash to work rather than saving it for the next dip.

We are well over that solid resistance at 2,020 and that was a critical level. Watch the Russell 2000 for market sentiment and buy the dips until proven wrong.

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Random Thoughts

Bearish sentiment sank to a three-month low at 27.1% but strangely, bullish sentiment declined -3.4% to 34.1% after three weeks of gains. Neutral sentiment is rising again so it appears investors are skeptical of this rally continuing.

Hedge funds are disappearing almost weekly. Fortress Investment Group (FIG) said it was closing its flagship hedge fund following heavy losses and investor withdrawals. The fund had more than $8 billion in assets in 2007 but they declined to $3.2 billion by the start of 2015 and only $1.6 billion last week. The fund bet on macroeconomic trends and lost more than 17% through September.

Bain Capital said it was closing its multibillion dollar Absolute Return Capital fund that also bet on macroeconomic trends after three consecutive years of losses. The fund was down -14% though August.

In 2014, the hedge fund attrition rate was an unprecedented 26%. A survey found that 30% of new funds do not make it past 36 months. Almost half never reach their fifth anniversary and only about 40% survive for 7 years or longer. Hedge Funds Disappearing

I wrote in my Tuesday commentary about the potential for a black swan event because of the rapid buildup of out of the money puts on the S&P. On Thursday somebody bought 70,000 out of the money puts on the Russian ETF (RSX) and almost immediately another 30,000 put contracts appeared at various other OTM strikes for November.

This could be somebody protecting a position in Russian stocks or somebody speculating that a Russian plane will take a shot at a U.S. plane in Syria. We never know why these big positions appear but it is not likely because somebody knows something we do not. They just fear something that might happen.

On Friday, NATO forces shot down a Russian Orian-10 surveillance drone flying over Turkey. In typical Russian fashion, the Russian military replied "what drone." "All of the airplanes in the Russian aviation group have returned to their bases." The more important fact is that NATO forces actually shot it down. That suggests a greater threat of a bigger event in the future.

Iran tested a ballistic missile on October 10th that was "inherently capable of delivering a nuclear weapon" and therefore in direct violation of a UN Security Council resolution. There are resolutions banning Iran from "any activity related to ballistic missiles capable of delivering nuclear weapons, including launches using ballistic missile technology." The U.S. is preparing a position paper to submit to the Security Council on the event.

The real question here is about Iran's clear violations of EVERY UN resolution ever levied regarding its nuclear activities. If Iran will launch an "in your face" missile test that is clearly a violation, why would we expect them to honor the recent nuclear agreement? The answer is that they will not honor the agreement and to believe otherwise is complete stupidity. They are testing the waters to see what they can get away with ahead of the implementation of the new agreement. Iranian Missile Test

What is the big deal about China? Why is every analyst projecting gloom and doom over the decline in China's economy? The decline in China has created a flood of money out of emerging markets. Something close to $500 billion will leave China and the other markets in 2015. Here is a great article on what is happening to China's economy and why we should worry. 30 Years of Chinese History

Leon Cooperman is bullish. On Bloomberg, he gave five reasons why he expects the market to continue higher.

1. This would be the first time the market has peaked before a Fed tightening since 1950.

2. Bear markets are usually caused by recession, overvaluation, hostile Fed or geopolitical event. The risks for all of those are overblown.

3. Individual investors are not bullish enough. There is not enough euphoria.

4. We just had a correction with the "average" common stock down -20% over the last 52-weeks.

5. There are no good alternative investment options relative to stocks.

Bank repossessions spiked 66% in Q3. Apparently, the financial crisis is not yet over. That is the largest spike ever recorded by RealtyTrac. Couple that with rising requirements to get a conventional loan and the housing sector could be headed for a decline. Bank Repos up 66%

Reuters built a computer model to predict the outcome of the presidential election. The answer, a republican will win. Taking in all the historical factors it is three times harder for a candidate to win if they are in the same party as an exiting two-term president. The computer did not pick a specific candidate. Next Presidential Winner

With inflation falling to the lowest rate since 2009 the Fed is not likely to hike rates. If we get another month of economic declines there is a far better chance that they will be forced to take further stimulative action in the months ahead. The current economic cycle is 77 months old and the median economic cycle is 50 months. We are actually closer to a normal recession than we are to some surge in growth that gives the Fed a reason to hike. Inflation at 2009 Lows


Enter passively and exit aggressively!

Jim Brown

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"Women will forgive anything. Otherwise, the human race would have died out long ago."

Robert A. Heinlein


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New Plays

Failing To Keep Up

by James Brown

Click here to email James Brown


CarMax Inc. - KMX - close: 56.18 change: -0.80

Stop Loss: 57.55
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 17, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.8 million
New Positions: Yes, see below

Company Description

Trade Description:
Auto sales in the United States are surging and hit 10-year highs. So why are shares of KMX, a huge auto dealer, down -25% from its 52-week high?

KMX is in the services sector. According to the company, "CarMax, a member of the Fortune 500 and the S&P 500 and one of the Fortune '100 Best Companies to Work For' for 11 consecutive years, is the nation's largest retailer of used cars. Headquartered in Richmond, Va., CarMax currently operates 153 used car stores in 76 markets. The CarMax consumer offer features low, no-haggle prices, a broad selection of CarMax Quality Certified used vehicles and superior customer service. During the fiscal year ended February 28, 2015, the company retailed 582,282 used vehicles and sold 376,186 wholesale vehicles at its in-store auctions."

The major auto manufacturers report their vehicle sales every month. In early October they reported their September car sales and for the industry September sales were up a whopping +16% from a year ago. This has boosted the seasonally adjust annual rate (SAAR) for U.S. auto sales to 18.2 million, a ten-year high.

The Federal Reserve has kept their main interest near zero for years. Low interest rates have generated a boom in auto loans. Depressed oil prices have kept gasoline prices low. The combination has fueled huge consumer demand. Now that the Fed is looking to raise rates we could be near a potential peak in U.S. car sales. Analysts are starting to worry about consumer credit contraction in the auto space. As rates go up consumers can afford less car for the money and dealers make fewer sales.

Shares of KMX peaked in early April after Wall Street reacted to the company's 2014 Q4 earnings report. KMX beat estimates by five cents and revenues were up +14% to $3.51 billion, which was essentially in-line with estimates. Since that report KMX's sales have actually struggled to keep up with expectations.

Their 2015 Q1 report, announced in June, saw KMX beat the EPS estimate by one cent while revenues only rose +7% and missed expectations. Their Q2 report, announced September 22nd, beat the bottom line by three cents. Revenues rose +7.9% but again missed analysts' estimates.

Oppenheimer recently downgraded the stock. They see short-term headwinds for KMX. Plus the company is facing really tough comparisons to the second half of their fiscal 2014, which will be hard to beat.

Technically KMX is in a bearish trend of lower highs and lower lows. Investors have been selling the rallies. Now the stock is testing support in the $55.00-56.00 zone. Tonight we are suggesting a trigger to launch bearish positions at $54.75.

Trigger @ $54.75

- Suggested Positions -

Short KMX stock @ $54.75

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

Buy the 2016 Jan $50 PUT (KMX160115P50) current ask $1.40
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

Friday's Rally Marks Three-Week Surge Higher

by James Brown

Click here to email James Brown

Editor's Note:
Bulls remained in control on Friday with stocks up again. Big cap stocks led the way with the S&P 500 closing at multi-week highs.

W hit our bullish entry trigger on Friday.

Current Portfolio:

BULLISH Play Updates

Bitauto Holdings - BITA - close: 33.74 change: +0.55

Stop Loss: 29.90
Target(s): To Be Determined
Current Gain/Loss: +0.0%
Entry on October 13 at $33.75
Listed on October 07, 2015
Time Frame: Exit prior to earnings in mid November
Average Daily Volume = 946 thousand
New Positions: see below

10/17/15: The momentum from Thursday's bullish reversal higher in BITA carried over into Friday. The stock added +1.65% and closed at new six-week highs.

The intraday high on Friday was $34.26. I'd wait for a rally past this level before considering new bullish positions.

Trade Description: October 7, 2015:
After a -75% plunge in BITA's stock price is all the bad news baked in? The stock hit a high of $95.00 in January 2015. When the U.S. stock market corrected in late August and spiked lower on August 24th, shares of BITA hit a low of $22.00. That's a -76% drop. Since then BITA appears to have found a bottom.

If you're not familiar with BITA they are a Chinese company. BITA is considered part of the technology sector. According to the company, "Bitauto Holdings Limited (BITA) is a leading provider of internet content and marketing services for China's fast-growing automotive industry. Bitauto manages its businesses in three segments: its advertising business, EP platform business, and digital marketing solutions business.

The Company's bitauto.com advertising business offers automakers and dealers a variety of advertising services through its bitauto.com website, which provides consumers with up-to-date new automobile pricing and promotional information, specifications, reviews and consumer feedback.

The Company's EP platform business provides web-based integrated digital marketing and customer relationship management (CRM) applications to new automobile dealers in China. The platform enables dealer subscribers to create their own online showrooms, list pricing and promotional information, provide dealer contact information, place advertisements and manage customer relationships to help them effectively market their automobiles to consumers.

The Company's taoche.com business provides listing services to used automobile dealers that enable them to display used automobile inventory information on the taoche.com website and partner websites. The Company provides advertising services to used automobile dealers and automakers with certified pre-owned automobile programs on its taoche.com website. The Company's digital marketing solutions business provides automakers with one-stop digital marketing solutions, including website creation and maintenance, online public relations, online marketing campaigns and advertising agent services."

The economic slowdown in China is major news and has been a market-moving headline for months. What investors might forget is that China is still growing. It's just the pace of growth is slowing down. That slowdown is very evident in the auto market. According to McKinsey & Company the Chinese auto market grew +24% between 2005 and 2011. Last year (2014) Chinese consumers bought 19.7 million cars. That looks like a short-term peak. After years of consistent growth the Chinese auto market will be lucky to hit low single-digit growth and might actually post a decline in sales.

Through August 2015 the Chinese auto market has only sold 12.78 million vehicles. September's numbers continued to sink with sales down -3.4% from a year ago. The full-year 2015 sales are on pace for a -2.6% decline. However, analysts are expecting growth in the Chinese auto market to slow down to +8% annually between now and 2020. That's still healthy, just slower than previous years.

Consumers are feeling the pinch with China's slowdown. Unfortunately an extremely volatile Chinese stock market this year has not helped consumer confidence. The good news is that the Chinese government is trying to stimulate their economy. Last month the government slashed their purchase tax on cars by 50% down to 5%. This new discount applies to cars with engines 1.6 liters or smaller. According to Bank of America that accounts for almost 70% of cars sold in China. Credit Suisse analysts believe this tax cut by the government could boost sales by three million units a year. The tax cut started on October 1st and lasts through the end of 2016.

Bearish investors on BITA could argue the stock is expensive. BITA does have a trailing P/E of 40. Yet bullish investors could argue that BITA is cheap with a forward P/E of 2.6. The company continues to see strong revenue growth.

BITA's last couple of quarters saw revenues surge +99.5% in Q1 and +92.5% in Q2. Management has been beating estimates on both the top and bottom line the last three quarters. The company is growing but they are trying to adjust to the economic slowdown. Management has lowered their guidance in two out of the last three quarters. Part of the problem is that last year was so good for the auto market the company faces really tough comparisons.

Their most recent earnings report was August 6th and BITA management lowered their earnings and revenue guidance. The company expects earnings per share to decline -25% to -32% from a year ago. They also expect sales growth to slow from the +92-95% range down to the +64-73% range. Yes, that's a big drop but it's still strong growth. Shares have already been punished for the lowered guidance. BITA fell -18% the very next day (August 7th).

The question I asked earlier was if all the bad news had already been priced into BITA's stock price? After spiking down to $22 in late August shares spent weeks consolidating sideways in the $25.00-28.00 region. This appears to have built a base which the stock is now bouncing from. The last several days has seen a change in the tone of trading with traders buying the dips. The point & figure chart is now bullish and forecasting at $49.00 target.

Today's intraday high was $33.59. Tonight we are suggesting a trigger to launch bullish positions at $33.75. Make no mistake, this is a higher-risk, more aggressive trade. Chinese stocks can be volatile. If this rally continues BITA could see some short covering. The most recent data listed short interest at nearly 10% of the small 20.3 million share float. I am suggesting small positions to limit risk or use the call option to limit risk.

*small positions to limit risk*- Suggested Positions -

Long BITA stock @ $33.75

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

Long NOV $35 CALL (BITA151120C35) entry $2.50

10/13/15 triggered @ $33.75
Option Format: symbol-year-month-day-call-strike


Ingram Micro Inc. - IM - close: 28.81 change: +0.10

Stop Loss: 27.85
Target(s): To Be Determined
Current Gain/Loss: +3.4%
Entry on September 09 at $27.85
Listed on September 8, 2015
Time Frame: Exit prior to earnings on October 29th
Average Daily Volume = 1.0 million
New Positions: see below

10/17/15: IM's lack of follow through lower after Thursday's potential reversal is good news. However, shares still look vulnerable. The stock's early Friday rally faded.

The $28.50 area looks like short-term support. Below that the $28.00 level should be additional support. More conservative investors may want to take some money off the table now or raise their stop loss.

No new positions at this time.

Trade Description: September 8, 2015:
IM looks like it is about to break out from a huge consolidation pattern.

The company operates in the services sector. According to the company, "Ingram Micro helps businesses fully realize the promise of technology® - helping them maximize the value of the technology that they make, sell or use. With its vast global infrastructure and focus on cloud, mobility, supply chain and technology solutions, Ingram Micro enables business partners to operate more efficiently and successfully in the markets they serve.

No other company delivers as broad and deep a spectrum of technology and supply chain services to businesses around the world. Founded in 1979, Ingram Micro's role as a leader and innovator in technology and supply chain services has fueled its rise to the 69th ranked corporation in the FORTUNE 500.

Ingram Micro amplifies the value of its position at the intersection of thousands of vendor, reseller and retailer partners by customizing and delivering highly targeted applications for industry verticals, business to business customers and commercial needs. From provisioning solutions for system integrators working at the heart of the network to offerings through the full lifecycle of mobile devices, SMB to global enterprise software and computing, point of sale to cloud services, professional AV to physical security-Ingram Micro is trusted by customers to have the expertise and resources to help them define and push the boundaries of what's possible.

The company supports global operations by way of an extensive sales and distribution network throughout North America, Europe, Middle East and Africa, Latin America and Asia Pacific."

The company's most recent earnings report was July 30th. Wall Street was expecting a profit of $0.54 per share on revenues of $10.9 billion. IM delivered $0.55 cents. Revenues were down -3.3% to $10.55 billion. However, if you back out the impact of currency headwinds then IM's results look a lot better. Negative currency translations shaved off -8% from their revenues.

IM management's guidance was a little soft but they announced the initiation of a $0.10 per share dividend and that they were boosting their stock buyback program by $300 million. The stock soared on this news. Shares rallied from $24.50 to $27.25 the next day.

IM was not immune to the market's late-August crash but investors bought the dip at support near its July lows. Shares have since erased the sell-off. Now IM is poised to breakout past resistance and what looks like a consolidation that started in early 2014.

A rally past $28.00 would generate a new buy signal on the point & figure chart. We want to jump in a little earlier. Tonight we are suggesting a trigger to open bullish positions at $27.85.

NOTE: I want to caution readers about the options. The spreads on most of IM's options are a little bit wide. Actually some of them are probably too wide. Be careful with the options.

- Suggested Positions -

Long IM stock @ $27.85

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

Long DEC $30 CALL (IM151218C30) entry $1.15

10/15/15 new stop @ 27.85
10/07/15 new stop @ 27.45
09/15/15 Caution - IM did not participate in the market's rally today
09/09/15 triggered @ $27.85
Option Format: symbol-year-month-day-call-strike


Intra-Cellular Therapies, Inc. - ITCI - close: 43.45 change: +0.47

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: -3.7%
Entry on October 12 at $45.10
Listed on October 10, 2015
Time Frame: Exit prior to earnings in November
Average Daily Volume = 850 thousand
New Positions: see below

10/17/15: ITCI managed to outperform its peers in the biotech industry on Friday. Traders bought the dip Friday morning at $41.69 and the stock rebounded to a +1.0% gain.

This is a higher-risk trade. If you can handle the volatility then Friday's bounce looks like another entry point.

Trade Description: October 10, 2015:
Biotech stocks had a terrible third quarter with the group down almost -18%. ITCI was an exception with shares up +25% and that's after some serious profit taking from its mid-September highs. The story for ITCI might be strong enough that shares could ignore further weakness in the group.

You may not be familiar with ITCI since they have been a public company for less than two years. Here's a brief description of the company, "Intra-Cellular Therapies is developing novel drugs for the treatment of neuropsychiatric and neurodegenerative diseases and diseases of the elderly, including Parkinson's and Alzheimer's disease. The Company is developing its lead drug candidate, ITI-007, for the treatment of schizophrenia, bipolar disorder, behavioral disturbances in dementia, depression, and other neuropsychiatric and neurological disorders. ITI-007, a first-in-class molecule, is in Phase 3 clinical development for the treatment of schizophrenia. The Company is also utilizing its phosphodiesterase platform and other proprietary chemistry platforms to develop drugs for the treatment of Central Nervous System (CNS) disorders and other disorders."

It is their lead drug candidate, ITI-007, that fueled huge gains in the stock last month. Here's an excerpt from ITCI's website, "ITI-007 is in Phase 3 clinical trials as a first-in-class treatment for schizophrenia. Current medications available for the treatment of schizophrenia do not adequately address the broad array of symptoms associated with this CNS disorder. In addition, use of these current medications is limited by their substantial side effects. ITI-007 is designed to be effective across a wider range of symptoms, treating both the acute and residual phases of schizophrenia, with improved safety and tolerability." (If you would like more details check out their press release here.

Schizophrenia is a serious mental illness that affects more than 70 million people worldwide. The stock more than doubled on news of its successful Phase 3 clinical trial with shares surging from $26 to almost $60 in two days. That's because ITI-007 would be the first treatment for schizophrenia without significant side effects. Analysts are estimating that potential sales for ITI-007 could reach $6 billion a year in the U.S. and EU if approved by the FDA (and its European counterpart).

ITCI is also investigating if the treatment could help other mental illnesses like dementia, depression, and bipolar disorders.

The company's management was quick to capitalize on the good news. They issued a secondary offering of 6.9 million shares at $43.50 a share (about $300 million). Demand was strong enough that they sold 7.93 million shares and raised $345 million. They already had $204 million in cash. Together that bumps their war chest up to more than $500 million.

Gravity eventually took over and shares of ITCI retreated from $60 to $35 but investors have started buying the dips. Now ITCI is building on a bullish trend of higher lows. Shares appear to have short-term resistance at the $45.00 level. A breakout above $45.00 could be our entry point to hop on board the next leg higher.

Regular readers know that we consider biotech stocks aggressive, higher-risk trades. The right or wrong headline can send a stock soaring. ITCI is a great example with shares exploding higher on positive headlines in September. Tonight we are suggesting small bullish positions if ITCI can trade at $45.10. We will tentatively plan on exiting prior to ITCI's earnings report in early November.

(small positions to limit risk) - Suggested Positions -

Long ITCI stock @ $45.10

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

Long NOV $50 CALL (ITCI151120C50) entry $3.80

10/12/15 triggered @ $45.10
Option Format: symbol-year-month-day-call-strike


Mobileye N.V. - MBLY - close: 49.91 change: +0.05

Stop Loss: $46.45
Target(s): To Be Determined
Current Gain/Loss: +0.3%
Entry on October 05 at $49.75
Listed on October 03, 2015
Time Frame: Exit prior to earnings in mid November
Average Daily Volume = 4.6 million
New Positions: see below

10/17/15: MBLY is having a very hard time getting past resistance at $50.00. Shares actually surged to new multi-week highs on Friday. MBLY hit $52.00 (a +4.2% intraday gain) and then reversed. The stock dipped toward its 10-dma near $49.00 before bouncing back to close almost unchanged on the day (and still under $50.00).

At this time I would wait for a new rally past $50.25 before considering new bullish positions. Remember, this is a higher-risk trade. More conservative traders may want to raise their stop loss toward $48.00 or possibly near the 10-dma.

Trade Description: October 3, 2015:
The future of hands free driving is a lot closer than you might think. MBLY is leading the charge. Their technology is already in more than three million cars made by companies like BMW, General Motors, and Tesla.

What exactly does this technology do? DAS stands for driver assistance systems. Sometimes you might see it called ADAS for advanced driver assistance systems. This new technology helps drivers avoid collisions with other vehicles, pedestrians, bicyclists, and more while also alerting the driver to road signs and traffic lights.

The company website describes Mobileye as "a technological leader in the area of software algorithms, system-on-chips and customer applications that are based on processing visual information for the market of driver assistance systems (DAS). Mobileye's technology keeps passengers safer on the roads, reduces the risks of traffic accidents, saves lives and has the potential to revolutionize the driving experience by enabling autonomous driving."

MBLY said their technology will be available in 160 car models from 18 car manufacturers (OEMs). Further, Mobileye's technology has been selected for implementation in serial production of 237 car models from 20 OEMs by 2016.

The company is already developing a system for autonomous driving or hands free driving. They currently plan to launch an autonomous system in 2016 that will work at highway speeds and in congested traffic situations.

MBLY stock came to market in August 2014. Demand was strong enough that they upped the number of shares available from around 27 million to 35.6 million shares. They raised the IPO price from the $22 range to $25. This valued MBLY at $5.3 billion. The first day of trading saw MBLY opened at $36.00. Two months later MBLY traded at $60.00.

It's easy to see why investors are optimistic on MBLY. Annual revenues have soared from $19.2 million in 2011 to $143.6 million in 2014. Their revenues last year rose +77% from 2013. Currently a poll of analysts by Thomson Reuters is forecasting sales to rise +50% in 2015 to $218.3 million. Earnings are forecasted to surge +95%.

MBLY's Q1 report was announced in May. Their Q1 earnings were $0.08 per share, which was a penny above estimates. Revenues were up +28% to $45.6 million, also above estimates.

Q2 results, announced August 6th, were better. Earnings were $0.10 a share, which was two cents better than expected. Revenues were up +56.7% to $52.8 million, above expectations.

Last year the New York Post ran an article discussing how the White House might generate a bullish tailwind for MBLY. The National Highway Traffic Safety Administration issued a research report that estimated ADAS type of technology could eliminate almost 600,000 left-turn and intersection crashes a year. They report also suggested that adding FCAM and lane departure technology on big vehicles like over the road trucks could reduce accidents with these huge vehicles by up to 25%. Following this report the White House said they would draft new rules that required this sort of tech in new vehicles.

A couple of weeks ago the U.S. Department of Transportation and IIHS announced that ten auto manufacturers had agreed to add autonomous emergency breaking to all new U.S. models as a standard feature. This should be a huge bonus for MBLY. The basic autonomous breaking system ranges from $120 to $350 per vehicle (FYI: the U.S. auto market is on pace to sell more than 18 million vehicles this year). MBLY has a history of winning 80 to 90 percent of ADAS contracts so this new push by the government and the auto industry's acceptance could mean billions to MBLY's bottom line going forward.

Naturally, with a high-profile, high-growth stock like MBLY there are critics. Bears point out that MBLY's valuations are sky high and they would be right. MBLY's trailing P/E is over 1,000 while it's forward P/E is about 65. Most of Wall Street seems bullish on MBLY as they can see the long-term growth outlook for MBLY. If this rally continues some of those shorts could panic and fuel a short squeeze. The most recent data listed short interest at 18% of the 163 million share float.

The stock looks ready to sprint higher after a healthy bounce off support. Tonight we are suggesting a trigger to launch bullish positions at $49.75. If triggered I would target a run into the $58-62 region. I am suggesting small positions as this is an aggressive, higher-risk trade. MBLY is a volatile stock. You may want to use the call options to limit your risk. More conservative traders may want to wait for MBLY to rally past $50.00 before initiating positions. Normally the $50.00 level would be round-number, psychological resistance. We're suggesting a trigger just below it since MBLY could move fast once it breaks out. It's worth noting that a rally past $50.00 will generate a new buy signal on the point & figure chart.

*small positions to limit risk* - Suggested Positions -

Long MBLY stock @ $49.75

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

Long NOV $55 CALL (MBLY151120C55) entry $2.30

10/15/15 MBLY looks ready to breakout past resistance at $50.00
10/12/15 new stop @ 46.45
10/05/15 triggered @ $49.75
Option Format: symbol-year-month-day-call-strike


Matrix Service Company - MTRX - close: 23.49 change: -1.49

Stop Loss: 22.80
Target(s): To Be Determined
Current Gain/Loss: -6.4%
Entry on October 09 at $25.10
Listed on October 08, 2015
Time Frame: Exit PRIOR to earnings in early November
Average Daily Volume = 272 thousand
New Positions: see below

10/17/15: Ouch! MTRX just got crushed on Friday. The stock opened higher and traded above $25.00. Then the floor just fell away and MTRX plunged to a -5.9% decline on the session. I could not find any company-specific news to explain this relative weakness.

More conservative traders may want to abandon ship right now. We are moving the stop loss up to $22.80. No new positions at this time.

Trade Description: October 8, 2015:
After years of double-digit earnings and revenue growth MTRX ran into trouble last year. The stock peaked in June 2014 and plunged from $38 down to $17. It looks like MTRX's earnings trouble and stock price declines may have turned the corner.

MTRX is in the basic materials sector. According to the company, "Ranked as a Top 100 Contractor by Engineering News-Record, Matrix Service Company provides sophisticated design, engineering, and construction services to a diverse client base throughout North America. We offer a comprehensive EPC solution to a variety of end-markets with a focus on safety and superior service and quality." They service the "Electrical Infrastructure, Oil Gas & Chemical, Storage Solutions and Industrial markets." The Company is headquartered in Tulsa, Oklahoma, with regional operating facilities in the United States and Canada.

MTRX's earnings results have struggled. They missed Wall Street estimates with their Q2 results (announced April 4th) and their Q3 results (May 7th). Management lowered their guidance with both reports. Fortunately the outlook improved in July.

On July 13th MTRX updated their guidance with numbers slightly above expectations. The stock soared on this news. Yet the stock did not see a lot of follow through higher. It wasn't until MTRX reported earnings on August 31st that the stock began to see any serious improvement.

MTRX's Q4 2015 results, announced August 31st, were $0.40 a share. That was 13 cents above estimates. Revenues were up +7.6% to $370.5 million. Guidance was good enough that the stock rallied past resistance. Shares spent the rest of September consolidating these gains.

Today it looks like the consolidation is over. After months of building a base in the $16-23 range MTRX is finally breaking out. Technically shares look better with the 50-dma and 200-dma beginning to curve upward as well. The point & figure chart is bullish and forecasting at $36.00 target.

MTRX just broke through resistance at the $24.00 level this week on above average volume. The $25.00 level is potential round-number resistance. Therefore we are suggesting a trigger to launch bullish positions at $25.10. Plan on exiting prior to MTRX earnings report in early November.

- Suggested Positions -

Long MTRX stock @ $25.10

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

Long NOV $25 CALL (MTRX151120C25) entry $2.05

10/17/15 new stop @ 22.80, MTRX falls -6% on no news
10/12/15 MTRX plunges -7% on no news
10/09/15 triggered @ $25.10
Option Format: symbol-year-month-day-call-strike


Starbucks Corp. - SBUX - close: 59.93 change: +0.24

Stop Loss: 54.75
Target(s): To Be Determined
Current Gain/Loss: +0.6%
Entry on October 08 at $59.55
Listed on October 05, 2015
Time Frame: Exit prior to earnings on October 29th
Average Daily Volume = 8.5 million
New Positions: see below

10/17/15: We have less than two weeks left on our SBUX trade. Shares gapped open higher on Friday morning but they didn't make much progress after that. I would still be tempted to launch new positions here but plan on exiting prior to earnings on October 29th.

Trade Description: October 5, 2015:
SBUX has delivered a strong rebound off last week's lows. Once again the stock looks like a bullish candidate.

We recently traded SBUX as a bullish candidate. What follows is an updated play description:

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.

Technical Set Up

Traders bought the dip in SBUX at its rising 100-dma last week. The rebound has lifted SBUX to major resistance in the $59.00-59.30 area. A breakout here would mark new all-time highs. Tonight we are suggesting a trigger to launch bullish positions at $59.55. It is possible that the $60.00 level is round-number resistance so more conservative traders may want to wait for SBUX to close above $60.00 before initiating bullish positions.

We plan to exit prior to SBUX's earnings report in very late October. More aggressive investors might want to consider holding over the announcement.

- Suggested Positions -

Long SBUX stock @ $59.55

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

Long NOV $60 CALL (SBUX151120C60) entry $1.96

10/08/15 triggered @ $59.55
Option Format: symbol-year-month-day-call-strike


Wayfair Inc. - W - close: 42.48 change: +1.69

Stop Loss: 37.40
Target(s): To Be Determined
Current Gain/Loss: +3.2%
Entry on October 16 at $41.15
Listed on October 15, 2015
Time Frame: Exit PRIOR to earnings on November 10th
Average Daily Volume = 1.1 million
New Positions: see below

10/17/15: Our new bullish play on W is off to a great start. Shares opened at $41.02 and then surged to a +4.1% gain on Friday. Our trigger to launch positions was hit at $41.15.

Trade Description: October 15, 2015
W displayed relative strength today and just closed above resistance. Shares could be poised for some serious short covering.

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 about W's valuation. 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 30.2 million shares, which is relatively small. The most recent data listed short interest at 79% of the float.

Shares of W have been consolidating sideways beneath resistance at the $40.00 level for about two weeks. Today shares displayed relative strength with a +3.0% gain and a close above resistance. Tonight we are suggesting a trigger to launch bullish positions at $41.15 (hopefully W does not gap too far past our trigger tomorrow). We will plan on exiting prior to W's earnings report on November 10th.

- Suggested Positions -

Long W stock @ $41.15

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

Long NOV $45 CALL (W151120C45) entry $2.80

10/16/15 triggered @ $41.15
Option Format: symbol-year-month-day-call-strike


BEARISH Play Updates

AMAG Pharmaceuticals - AMAG - close: 39.35 change: +0.50

Stop Loss: 41.05
Target(s): To Be Determined
Current Gain/Loss: -5.2%
Entry on October 08 at $37.40
Listed on October 06, 2015
Time Frame: Exit PRIOR to earnings in late October
Average Daily Volume = 946 thousand
New Positions: see below

10/17/15: AMAG popped higher on Friday morning. The rally failed at technical resistance at AMAG's simple 20-dma. Shares closed back beneath the $40.00 level. The action on Friday suggests AMAG might actually breakout higher from its recent sideways consolidation. That's not good news. The high on Friday was $40.91. We are moving the stop loss down to $41.05. No new positions at this time.

Trade Description: October 6, 2015:
If you're looking for excitement then check out the biotech stocks. It has been a rough few months for the group. The IBB biotech ETF is down -25% from its July 2015 highs. AMAG has sprinted past its peers with a -49% plunge from its July peak. It is worth noting that the prior year (July 2014-July 2015) the stock was up more than +300%.

Here's a brief description of the company, "As a high-growth specialty pharmaceuticals company, AMAG Pharmaceuticals uses its business and clinical expertise to bring therapeutics to market that provide clear benefits and improve people's lives. Based in Waltham, Mass., AMAG has a diverse portfolio of products in the areas of maternal health, anemia management and cancer supportive care. AMAG continues to work to expand the impact of these and future products for patients by delivering on its aggressive growth strategy, which includes organic growth, as well as the pursuit of products and companies that align with AMAG's existing therapeutic areas or those that could benefit from its proven core competencies."

What makes AMAG different from most small biotech firms is that the company actually has sales. AMAG has seen strong revenue and margin growth. At the moment traders don't seem to care. Investors might be worried about competition. The FDA recently approved a generic version of AMAG's Makena treatment. Previously Makena (hydroxyprogesterone caproate) was the only drug approved by the FDA to reduce the risk of pre-term birth. This is bad news for AMAG since Makena represents 75% of its Q2 sales.

Now add more bad news with the biotech sell-off thanks to presidential hopeful Hillary Clinton tweeting about controlling drug prices to prevent price gouging. Plus there are new headlines about the Transpacific partnership (TPP) which is potentially bearish since it limits the exclusivity for new drugs on the market.

The biotech industry is under a lot of pressure and AMAG is underperforming its peers as investors sell the group. Technically AMAG has found short-term support in the $37.50-38.00 region the last few days. It looks like the stock is about to break down to new lows. Tonight we are suggesting a trigger to launch bearish positions at $37.40.

Please note that we want to use small positions to limit our risk. Trading biotech stocks is a risky business. The right or wrong headline can send an individual biotech stock gapping higher or lower. AMAG is definitely a higher-risk, more aggressive trade. There are already a lot of bears in the name. The most recent data listed short interest a 24.4% of the small 28.7 million share float. Investors could use AMAG options but the spreads are so wide the options are untradeable.

*small positions to limit risk* - Suggested Positions -

Short AMAG stock @ $37.40

10/17/15 new stop @ 41.05
10/10/15 new stop @ 42.05
10/08/15 triggered @ $37.40


GNC Holdings - GNC - close: 40.75 change: +0.05

Stop Loss: 42.55
Target(s): To Be Determined
Current Gain/Loss: -2.1%
Entry on October 14 at $39.90
Listed on October 13, 2015
Time Frame: Exit prior to earnings at the very end of October
Average Daily Volume = 1.2 million
New Positions: see below

10/17/15: GNC did not participate in the market's rally on Friday. Shares simply drifted sideways and closed virtually flat for the session. The top of the bearish channel (near $41.50-42.00) should be resistance.

Trade Description: October 13, 2015:
We want to take another swing at GNC. The bearish story for the stock has not changed and the oversold bounce has reversed.

Here's an updated trade description:
Tougher competition, increased government scrutiny, and changing consumer habits have not been a good recipe for shares of GNC. The stock is down -13.1% in 2015 and poised to hit new lows.

GNC is in the services sector. According to the company, "GNC Holdings, Inc. - headquartered in Pittsburgh, PA - is a leading global specialty health, wellness and performance retailer. The Company's foundation is built on 80 years of superior product quality and innovation. GNC connects customers to their best by offering a premium assortment of vitamins, minerals, herbal supplements, diet, sports nutrition and protein products. This assortment features proprietary GNC - including Mega Men®, Ultra Mega®, Total Lean®, Pro Performance®, Pro Performance® AMP, Beyond Raw®, GNC Puredge®, GNC GenetixHD®, Herbal Plus® - and nationally recognized third party brands.

GNC's diversified, multi-channel business model generates revenue from product sales through company-owned retail stores, domestic and international franchise activities, third party contract manufacturing, e-commerce and corporate partnerships. As of June 30, 2015, GNC had more than 9,000 locations, of which more than 6,700 retail locations are in the United States (including 1,067 franchise and 2,304 Rite Aid franchise store-within-a-store locations) and franchise operations in more than 50 countries."

GNC faces multiple issues. This year there have been negative headlines for the supplement industry. Testing showed that multiple supplements at various retailers were filled with bogus ingredients. Companies like Wal-mart, Target, Walgreens, and GNC have all come under fire for selling the fraudulent products. This will likely increase government scrutiny for supplements in general.

GNC also faces an issue with changing consumer habits. While most of Americans are overweight and out of shape there is a growing trend of healthier eating. Consumers want to know what they are putting in their bodies. That means less pills and more raw fruits and veggies, especially organic ones.

The biggest challenge could be tough competition. Online rivals can provide supplements at cheaper prices than GNC's retail stores. Best Buy (BBY), the consumer electronics store, has faced this issue for years with consumers coming into a Best Buy store, shopping around, and then going home and buying the product online from Amazon.com for less money and getting it delivered. GNC faces the same issue.

GNC's earnings have struggled. Their Q1 report, announced April 30th, missed estimates. GNC missed on both the bottom line profit estimates and the revenue estimate. Revenues were down -0.6% and same-store sales plunged -4.1%. Management lowered their 2015 guidance following this report.

GNC's Q2 results were not much better. They missed on both the top and bottom line again. Earnings only grew +2.6% from a year ago. Revenues were virtually flat with a +0.5% gain. Same-store sales fell -2.8%.

The stock rallied anyway because management said they would focus on more franchised stores. This news seemed to have sparked some short covering. Shares of GNC soared from $42 to $50 in just a few days but the rally reversed. Now the stock is trading at new 2015 lows. The company's announcement on August 4th to boost their stock buyback program by an additional $500 million did not help the stock very much.

GNC is in a bear market and the oversold bounce just failed near resistance in the $43.00 area. The point & figure chart is bearish and forecasting at $33.00 target. Tonight I am suggesting a trigger to launch bearish positions at $39.90.

This is a short-term trade. GNC has earnings coming up at the very end of October or early November. We plan to exit prior to the announcement.

- Suggested Positions -

Short GNC stock @ $39.90

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

Long NOV $40 PUT (GNC151120P40) entry $2.10

10/14/15 triggered @ $39.90
Option Format: symbol-year-month-day-call-strike


iPath S&P500 VIX Futures ETN - VXX - close: 19.69 change: -0.21

Stop Loss: None, no stop at this time.
Target(s): To Be Determined
Current Gain/Loss: +9.8%
2nd position Gain/Loss: +32.1%
Entry on August 25 at $21.82
2nd position: September 2nd at $29.01
Listed on August 24, 2015
Time Frame: Exit prior to October option expiration
Average Daily Volume = 50 million
New Positions: see below

10/17/15: The VXX lost another -1.0% and closed at new multi-week lows on Friday. Traders may want to consider exiting on a drop into the $18-16 range.

No new positions 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

Sept. 2nd - 2nd position (Double Down On The September 1st Spike)

Short the VXX @ $29.01

10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82
Option Format: symbol-year-month-day-call-strike



Tenet Healthcare Corp. - THC - close: 35.87 change: +0.87

Stop Loss: 36.75
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 14, 2015
Time Frame: Exit prior to earnings on November 2nd
Average Daily Volume = 2.1 million
New Positions: see below

10/17/15: THC continued to bounce on Friday and shares outperformed the major indices with a +2.4% gain. Our trade is not open yet. Considering the recent movement in THC we are choosing to drop it as a candidate.

Trade did not open.

10/17/15 removed from the newsletter, the most recent entry trigger was $34.45
10/15/15 entry strategy adjustment - This morning THC gapped down more than $1.00 past our suggested entry trigger (of $34.75). This violated our entry strategy. Tonight we are adjusting our plan. Use a new decline at $34.45 as an entry point to launch bearish positions. Adjust the stop loss to $36.75.
Option Format: symbol-year-month-day-call-strike