Option Investor

Daily Newsletter, Tuesday, 10/27/2015

Table of Contents

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

Market Wrap

Earnings Excitement Fading

by Jim Brown

Click here to email Jim Brown

The excitement over earnings appears to be fading after several high profile companies disappointed. Even a sudden burst of merger mania could not lift the indexes back into positive territory ahead of Apple earnings.

Market Statistics

The morning started negative after UPS reported earnings that beat estimates but missed on revenue and said negative things about the U.S. economy. UPS reported earnings of $1.39 compared to estimates for $1.37. Revenue of $14.24 billion declined -0.4% and missed estimates for $14.41 billion. The company said full year earnings could be at the higher end of estimates from $5.05 to $5.30 per share. That would be a 6-12% increase over 2014. They will hire 95,000 temporary workers for the holiday season.

That would seem like a bullish report but the company said the U.S. economy had been "soft" over the last quarter and the strong dollar was impacting revenue. UPS said revenue would have been 1.8% higher without the dollar impact. UPS has had two consecutive fourth quarters that disappointed investors. The company said holiday shipments would rise 6-12% but FedEx said shipments would rise 12.4%. Using the midpoint on the UPS estimate suggests UPS growth is lagging FedEx. Shares were down -3% on the news.

JetBlue Airways (JBLU) warned it would make less money per mile in October than it did in 2014. The company said it expected to earn $80 million from bag fees, up from $65 million. However, passenger unit revenue will decline -2% in October before improving later in the year. JetBlue sees capacity rising 8.5% to 10.5% in Q4. The warning sparked fears of excess capacity in the sector. Shares fell -9% at the open on the profit warning but recovered to end down -3%.

Spirit Airlines (SAVE) added to the gloom when it warned of a "volatile pricing environment." Spirit posted earnings of $1.35 that beat estimates by 3 cents. Revenue rose +10.6% to $574.8 million and beating estimates for $571.8 million. Despite the good earnings, shares fell 9% on the pricing warning.

Helping to cause the volatile pricing environment was the announcement by American Airlines (AAL) that they would offer cheap airfares to match the discount carriers. American shares are breaking out of a four-month base on the news much to the dismay of the discount carriers.

The multiple hits to the transportation sector sent the Dow Transports ($TRAN) down -3% earlier in the day. With transports crashing it is hard to maintain a positive trend on the Dow Industrials. The comments from UPS about a soft U.S. economy and the rising capacity and volatile pricing in the airline sector knocked the transports to a three week low. Railroads were also weak with Union Pacific (UNP) dropping -5%, KSU -4.5% and CSX -4%. Even a decline in oil under $43 could not save the index.

The Dow crashed to a low of -80 intraday after IBM warned that they were being investigated by the SEC for revenue recognition for how it accounts for business transactions in the USA, UK and Ireland. The company said it learned of the investigation in August and they have been cooperating with the SEC on the matter. However, you have to wonder why they did not disclose the investigation when they reported earnings earlier this month. The investigation was already two-months old when they reported. Why wait until now? IBM shares fell -$6 on the news.

The economic reports did not start the morning off in a good mood. The Durable Goods report for September showed a decline of -1.2% after a -3.0% decline in August. There was a bit of good news. That -3.0% was revised higher to only -2.0% but that was a small consolation. Nondefense orders declined a whopping -7.6% suggesting the weakness was widespread. Backorders declined -0.6% suggesting October will also be weak.

Consumer Confidence for October declined from 102.6 to 97.6. Consumers are starting to worry about the economy after two months of declining jobs. The present conditions component declined from 120.3 to 112.1 and the expectations component declined from 90.8 to 88.0. Those respondents that believe jobs are plentiful declined from 24.8% to 22.2%. Respondents that believe business conditions are good declined from 28.1% to 26.5%.

Buying plans were mixed. Those planning on buying a car declined from 13.1% to 10.6% but prospective homebuyers rose from 48.8% to 49.3%.

Confidence is still high relative to the last several years but well off the 104 high back in January.

The Richmond Fed Manufacturing Survey for October rose slightly from -5 to -1 but remains in contraction territory. Counting the zero reading in August this is the third month without any manufacturing growth. New orders rose from -12 to zero or flat with last month. Backorders rose from -24 to -7 and a definite improvement. Inventories rose from 21 to 25 suggesting sales are slowing. However, this is the pre-holiday period so this could be normal stockpiling.

The separate services survey rose from 10 to 18. The wage component declined from 20 to 14 but the employment index rose from 12 to 17. Expected retail demand declined from 33 to 10 and that cannot be good ahead of the holidays. Retail employment rose from -19 to -12 suggesting employers are cautious on adding extra help for the holidays.

The calendar for Wednesday has only one important event and that is the FOMC announcement. While most analysts are now projecting hikes in 2016 there are still a few that believe December is a possibility. It will be interesting to see if the Fed leaves the "appropriate to hike in 2015" language in the statement.

The estimates for the Q3-GDP on Thursday ticked lower on the Atlanta Fed forecast to +0.8% growth. What the government bean counters say on Thursday could be materially different since they recently changed the way they calculate the number in order to "smooth" out the volatility. That means they do not like to see negative numbers so they are modifying their seasonal adjustments to average out the results. This report could be a market mover.

After the bell Apple reported earnings of $1.96 that rose +38% and beat estimates for $1.88. Revenue of $51.50 billion rose +22% and beat estimates for $51.11 billion. The beat came even after an -8% revenue hit on the strong dollar. Cash on hand rose +33% from the comparison quarter to $206 billion.

iPhone sales were 48.04 million compared to estimates for 48.6 million and 39.3 million in the Q3-2014 quarter. iPad sales were 9.88 million compared to estimates for 10.5 million and sales of 12.3 million in the year ago quarter. Mac sales rose +3% to 5.71 million but still the slowest growth rate since Q3-2013. However, that was the most Macs ever sold in a quarter. More than 62.2% of Apple's revenue came from the iPhone.

NOTE: The September quarter only had 2 business days when the 6s models were available for sale.

Apple did not disclose sales of the Watch. The "other products" segment, which includes the Watch, rose +61% to $3.04 billion.

Apple guided for revenue of $75.5-$77.5 billion in Q4 compared to analyst estimates for $77 billion. Since Apple usually guides low that suggests the possibility of an $80 billion quarter in Q4. Tim Cook said Apple's sales to businesses rose 40% this year to $25 billion. Cook said businesses/enterprises were a "major growth vector" for Apple. Chinese revenue doubled from $6.29 billion to $12.52 billion. The iPhone has become a premium brand in China similar to Prada and that allows them to maintain their premium pricing. iPhone shipments to China rose +70%.

Analysts are forecasting sales of 78 million phones in the current quarter. That would be more than the 74.46 million sold in Q4-2014 despite this being an upgrade cycle rather than a new product cycle. Cook said he expected unit volume to grow this quarter so the forecasting will be volatile as the holidays progress. More than 70% of existing iPhones currently in use are model 5s or older. That gives Apple a very large upgrade base for the holidays.

Apple shares closed at $114.55 and traded in a range from $110.81 to $118.33 after the report before closing slightly lower at $114.26.

Twitter (TWTR) shares imploded after reporting earnings of 10 cents compared to estimates for 5 cents. Revenue rose +57.6% to $569.2 million compared to estimates for $559.4 million. The problem came in the guidance and the user growth. The company projected revenue of $695-$710 million compared to analyst estimates for $739.7 million. Twitter had 320 million active monthly users, up from 316 million but missing expectations for 324 million. User growth was the slowest since the company went public in 2013.

There were some positive factors. Advertisers exceeded 100,000 for the first time and Twitter began making money from logged out users, or those without accounts that visit the website. Revenue did rise +57.6% and that was totally ignored.

The weak guidance knocked TWTR shares for an 11% loss of -$4.19 in afterhours.

Alibaba (BABA) shares rallied +4% after reporting earnings of 57 cents that beat estimates for 54 cents. Revenue rose +32% but mobile revenue rose +182% and accounted for 62% of total revenue. Gross merchandise volume rose +28% to $112 billion. Apparently, Asian shoppers are addicted to online spending.

Earnings due out on Wednesday include Amgen, GoPro, and Anthem. Thursday is the next big day with Linkedin, Mastercard, Starbucks and MGM Resorts.

Rite Aid Corp (RAD) saw its shares spike +42% after news broke that Walgreens Boots Alliance (WBA) was close to a deal to acquire the chain. After the bell Walgreens announced it would acquire RAD for $17.2 billion or $9 in cash.

Competing shares of CVS rose +2% on the expectations for WBA/RAD to be forced to divest some stores in order to get it approved by regulators. Walgreens has 13,200 stores and Rite Aid more than 5,000.

Express Scripts (ESRX) shares fell -$1.50 because they had always been expected to be an acquirer of Rite Aid.

McKesson (MCK) shares fell -4% because they have a pharmacy distribution deal with Rite Aid. Amerisource Bergen (ABC) shares rallied because they have a similar deal with Walgreens and that would probably be extended to the Rite Aid stores after the acquisition.

Fairchild Semiconductor was up +5% intraday on rumors they were in talks to be acquired by STMicroelectronics (STM). There were no confirmations and shares faded into the close.

GM shares declined slightly on news of a 1.4 million-vehicle recall. This is the second time for the same problem for some of these cars made between 1997-2004.

Ford (F) declined -5% after reporting earnings of 45 cents that missed estimates by a penny. The company cautioned that year-end sales promotions could cut into profit margins in the current quarter. Ford is launching a "Friends and Neighbors" discount program next week to boost sales in Q4.

Crude prices fell to $42.58 intraday and a two-month low but rebounded on the normal Tuesday afternoon short covering ahead of the inventory reports. The drop in crude prices caused a -3% decline in the production sector. This will continue to push gasoline prices lower, which are currently $2.19 but many states already have prices under $2.

Natural gas prices dipped under $2 to $1.95 intraday before rebounding to $2.09. Natural gas in storage has risen to 3,814 Bcf and will likely exceed 4,000 Bcf (4 Tcf) in the coming weeks. That will be a new record. Inventories are +434 Bcf over year ago levels. Gas prices are flirting with a decade low under $2. The decline in active rigs has not slowed the amount of gas being produced and projections for mild weather in the Northeast over the next month means continued weak demand.


Despite the fear over Apple earnings and tomorrow's Fed announcement, the markets held up relatively well. The Nasdaq 100 ($NDX) is only 40 points away from a new high. I would never have expected to say that just a couple weeks ago. The big cap tech stocks are leading the market higher thanks to aggressive window dressing by fund managers. Every fund manager wants to show those stocks in their portfolio when their fiscal year ends on Friday.

With Apple earnings out of the way with no apparent disaster this should allow funds to make their final buys of the week on Wednesday, assuming the Fed does not muddy the waters.

The biotech sector helped lift the Nasdaq with a +3.5% gain for the day. The winners and sinners list is heavily populated with biotech winners.

The Nasdaq Composite is lagging the Nasdaq big caps but still holding its gains at 5,030 and well above support at 5,008.

The S&P-500 is struggling somewhat thanks to the big drop in IBM -6, PCLN -11, CMI -10, AKAM -10, MCK -8 and UNP -5. Resistance at 2,075 has held for two days and we closed under light support at 2,068 today.

This appears to be simply consolidation after three weeks of big gains. This was helped by the losses above and the dozens of post earnings declines. The lack of a material bout of profit taking suggests fund managers are still involved. Unfortunately, they are not buying the small caps and that is still troubling.

The Dow was helped by UnitedHealth (UNH) and Boeing (BA) but their gains were offset by the losses in IBM. Pfizer and Merck were both fractionally positive after earnings and that help could be missing tomorrow.

As long as the Dow remains over 17,500 the rally will remain healthy. Should we fall under that level it could produce some selling that knocks us back to 17,000. We do not want to go there so keep your fingers cross the Fed announcement is neutral.

The Russell 2000 small caps lost -1.22% of -14 points to close at 1,141 and well under resistance at 1,165 and prior support at 1,150. This is not a good sign with major resistance having held and the index only 10 points from a four week low.

For whatever reason the small caps are being kicked to the curb in favor of the large cap tech stocks and that suggests fund managers are looking for liquidity in hopes of a quick exit if the market weakens.

Futures are flat in the overnight session and Apple has given investors no reason to run to the sidelines. They may not have given them a reason to jump into Apple shares as well but that could change once the analysts start revising their forecasts.

If you bought the dip this week I would tighten your stop losses and hope that Wednesday is positive and the Fed is neutral. I would not chase any prices higher after today. Keep what you are holding and look for window dressing to fade late in the week. I could be completely wrong but that is my bias and I am sticking with it.

Sometimes the best trade is the one you do not make.

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Enter passively, exit aggressively!

Jim Brown

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New Plays

The Sugar High Has Faded

by James Brown

Click here to email James Brown


Dunkin' Brands Group - DNKN - close: 40.54 change: -0.91

Stop Loss: 41.55
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on October -- at $---.--
Listed on October 27, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 1.6 million
New Positions: Yes, see below

Company Description

Trade Description:
Many of the restaurant stocks have been struggling in recent months. DNKN is a good example. Shares are down -4.9% year to date but DNKN is down -28% from its July 2015 highs.

DNKN is part of the services sector. According to the company, "With more than 19,000 points of distribution in nearly 60 countries worldwide, Dunkin' Brands Group, Inc. (DNKN) is one of the world's leading franchisors of quick service restaurants (QSR) serving hot and cold coffee and baked goods, as well as hard-serve ice cream. At the end of the third quarter 2015, Dunkin' Brands' nearly 100 percent franchised business model included more than 11,500 Dunkin' Donuts restaurants and more than 7,600 Baskin-Robbins restaurants. Dunkin' Brands Group, Inc. is headquartered in Canton, Mass."

With DNKN down almost -30% from its 52-week highs you might think earnings are terrible. However, the company has been beating estimates. Their last three quarterly reports all came in above expectations with DNKN beating on both the top and bottom line. I will point out that their most recent report, announced October 22nd, was after the company had lowered their guidance.

That big drop on the daily chart was the market's reaction to DNKN's analyst day, when the company lowered their full-year guidance. Earnings definitely seemed to slow down. Their Q3 earnings rose +6% from a year ago while revenues rose +9%. The company is struggling with slowing same-store sales. System wide DNKN said their comparable store sales rose +2.8% in Q3. That's down from +5.7% a year ago and from +5.2% the prior quarter.

Their domestic Baskin-Robbins business has been healthy but internationally their ice-cream sales have slowed. Meanwhile most of their business is the donut-based Dunkin franchise. DNKN is facing a very crowded field of intense competition in the breakfast category. It doesn't help that consumer trends are changing toward healthier options.

Technically DNKN is in a bear market. Adding to the down trend has been a couple of analyst downgrades in recent weeks. The oversold bounce from last week's lows just failed under a new trend of lower highs. More aggressive investors may want to launch bearish positions right here at current levels. We are suggesting a trigger at $39.25 as an entry point.

Trigger @ $39.25

- Suggested Positions -

Short DNKN stock @ $39.25

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

Buy the JAN $40 PUT (DNKN160115P40) current ask $1.85
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

Markets Melt Lower Ahead Of News

by James Brown

Click here to email James Brown

Editor's Note:
The major U.S. indices continued to sink on Tuesday ahead of several key events. There were high-profile earnings out tonight (like Apple Inc.). Tomorrow is the FOMC meeting and Thursday brings the Q3 GDP estimate.

We closed the IM trade today.

DSW hit our entry trigger.

Current Portfolio:

BULLISH Play Updates

Delta Air Lines - DAL - close: 50.87 change: -0.45

Stop Loss: 47.75
Target(s): To Be Determined
Current Gain/Loss: -0.7%
Entry on October 23 at $51.23
Listed on October 22, 2015
Time Frame: Exit prior to earnings in early January
Average Daily Volume = 9.8 million
New Positions: see below

10/27/15: Smaller rival JetBlue (JBLU) reported earnings this morning. JBLU's results were mostly in-line with expectations. Their Q3 profit doubled. Yet JBLU's management issued cautious comments on its business in October. This sparked a sharp sell-off in JBLU, which weighed on the airline industry this morning.

DAL dipped to $50.39 before paring its losses. Shares underperformed the broader market with a -0.8% decline thanks to the JBLU news. Overall the trend for DAL hasn't changed. I don't see any changes from my recent comments. More conservative investors may want to start raising their stop loss.

Trade Description: October 22, 2015:
Depressed crude oil prices have kept jet fuel prices low. This has provided a big cushion for the major airlines. The recent strength in DAL has boosted shares to an all-time closing high.

DAL is in the services sector. According to the company, "Delta Air Lines serves more than 170 million customers each year. Delta was named to FORTUNE magazine's top 50 World's Most Admired Companies in addition to being named the most admired airline for the fourth time in five years. Additionally, Delta has ranked No.1 in the Business Travel News Annual Airline survey for four consecutive years, a first for any airline. With an industry-leading global network, Delta and the Delta Connection carriers offer service to 318 destinations in 58 countries on six continents.

Headquartered in Atlanta, Delta employs nearly 80,000 employees worldwide and operates a mainline fleet of more than 700 aircraft. The airline is a founding member of the SkyTeam global alliance and participates in the industry's leading trans-Atlantic joint venture with Air France-KLM and Alitalia as well as a joint venture with Virgin Atlantic. Including its worldwide alliance partners, Delta offers customers more than 15,000 daily flights, with key hubs and markets including Amsterdam, Atlanta, Boston, Detroit, Los Angeles, Minneapolis/St. Paul, New York-JFK, New York-LaGuardia, Paris-Charles de Gaulle, Salt Lake City, Seattle and Tokyo-Narita. Delta has invested billions of dollars in airport facilities, global products and services, and technology to enhance the customer experience in the air and on the ground."

DAL's most recent earnings report was October 14th. Wall Street was expecting a profit of $1.72 per share on revenues of $11.1 billion. DAL beat estimates with a profit of $1.74 a share. Revenues fell -0.6% to $11.11 billion, essentially in-line with estimates. At $1.74 a share DAL's earnings were up +45% from a year ago. That's thanks to the low cost of jet fuel.

Oil prices have been depressed long enough that airlines have started lowering air fares. This drop in air fares is hurting PRASM (passenger revenue per available seat mile). Fortunately DAL's fuel expense, plunged -40% from a year ago.

DAL management is forecasting Q4 PRASM to fall -2.5% to -4.5% but they are still guiding for strong operating margins (16-18%). Plus they see Q4 earnings growth of +40% or more. Think about that. How many other companies are forecasting +40% profit growth for Q4?

DAL's CEO made headlines following their Q3 earnings when he said there is a bubble in wide-body jets. What does he mean? There are a lot of wide-body jets that are being leased by other airlines. Once their lease expires there could be a flood of used jets for sale. DAL believes the price of wide-body jets (and possibly narrow-body jets) will decline and allow the company to purchase additional planes at a discount.

Oil prices are expected to remain low for the foreseeable future. Meanwhile we are approaching the busy holiday season, which means more travel by consumers. Technically shares of DAL appear to be breaking out from a multi-month consolidation pattern. The point & figure chart is bullish and forecasting at $62.00 target.

The January 2015 highs are in the $50.80-51.06 area. Tonight we are suggesting a trigger to launch bullish positions at $51.15. This is a multi-week trade.

- Suggested Positions -

Long DAL stock @ $51.23

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

Long 2016 JAN $55 CALL (DAL160115C55) entry $1.25

10/23/15 triggered on gap open at $51.23, suggested entry was $51.15
Option Format: symbol-year-month-day-call-strike

Lennar Corp. - LEN - close: 50.54 change: -1.10

Stop Loss: 49.75
Target(s): To Be Determined
Current Gain/Loss: -3.3%
Entry on October 21 at $52.25
Listed on October 20, 2015
Time Frame: Exit prior to earnings in January
Average Daily Volume = 2.8 million
New Positions: see below

10/27/15: Homebuilding stocks encountered more profit taking today. LEN underperformed the broader market with a -2.1% decline. Shares are still hovering around short-term support in the $50.00-50.50 zone. I expect LEN to bounce from here. However, just in case it doesn't bounce, we are going to try and reduce our risk by raising the stop loss up to $49.75.

No new positions at this time.

Trade Description: October 20, 2015:
Rents are soaring. Mortgage rates are low. The labor market is relatively healthy. This has been fueling a stable environment for the homebuilders. The latest National Association of Homebuilders sentiment index hit ten-year highs. The September reading for the NAHB index was 64. That was above the 62 estimate and a level not seen since October 2005.

David Crowe is the NAHB Chief Economist. According to Crowe, "This upward momentum shows that our industry is strengthening at a gradual but consistent pace. With firm job creation, economic growth and the release of pent-up demand, we expect housing to keep moving forward as we start to close out 2015."

LEN is in the industrial goods sector. According to the company, "Lennar Corporation, founded in 1954, is one of the nation's largest builders of quality homes for all generations. The Company builds affordable, move-up and retirement homes primarily under the Lennar brand name. Lennar's Financial Services segment provides mortgage financing, title insurance and closing services for both buyers of the Company's homes and others. Lennar's Rialto segment is a vertically integrated asset management platform focused on investing throughout the commercial real estate capital structure. Lennar's Multifamily segment is a nationwide developer of high-quality multifamily rental properties."

Earnings have been improving. LEN reported their Q2 results on June 24th. Results were $0.79 a share, which was 15 above estimates. Revenues soared +31.6% to $2.39 billion, above estimates. Home deliveries were up +21%. New orders were up +18%. Their backlog of homes rose +18%.

These bullish trends continued in LEN's fiscal third quarter. The company reported on September 21st. Earnings were $0.96 per share, which was 17 cents above estimates. Revenues were up +23.7% to $2.49 billion, also better than expected. Deliveries rose +16%. New orders were up +10%. The number of homes in the backlog rose +13% (to 8,250) while the value of their backlog surged +22%.

The stock has been consolidating sideways the last few months but LEN appears to be bouncing off its long-term up trend. The current bounce is testing short-term resistance at $52.00. Tonight we are suggesting a trigger to open bullish positions at $52.25. This is a multi-week trade that could last the rest of the year.

- Suggested Positions -

Long LEN stock @ $52.25

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

Long 2016 JAN $55 CALL (LEN160115C55) entry $1.88

10/27/15 new stop @ 49.75
10/21/15 triggered @ $52.25
Option Format: symbol-year-month-day-call-strike

Wayfair Inc. - W - close: 41.65 change: +0.86

Stop Loss: 39.85
Target(s): To Be Determined
Current Gain/Loss: +1.2%
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

10/27/15: Bingo! Right on cue W has started to bounce from support. I would be tempted to launch new bullish positions on a rally above today's high ($41.79). Just keep in mind our time frame. W has earnings coming up on November 10th. We plan to exit prior to the announcement.

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

10/20/15 new stop @ 39.85
10/16/15 triggered @ $41.15
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

DSW Inc. - DSW - close: 24.20 change: -0.23

Stop Loss: 25.75
Target(s): To Be Determined
Current Gain/Loss: -1.3%
Entry on October 27 at $23.90
Listed on October 26, 2015
Time Frame: Exit prior to earnings in late November
Average Daily Volume = 1.5 million
New Positions: see below

10/27/15: DSW was downgraded again this morning. That's the second downgrade in two days. The stock opened lower at $24.10, dipped to $23.61, and then bounced. Shares ended the session with a -0.9% decline. Our trigger to launch bearish positions was hit at $23.90.

The intraday bounce is a bit worrisome. DSW should find new resistance in the $24.50-25.00 area. Nimble traders may want to wait and watch for DSW to fail near $24.50 before initiating new positions.

Trade Description: October 26, 2015:
Investor sentiment regarding footwear retailers has soured dramatically. Recent earnings reports have not helped. Skechers (SKX) reported earnings last Wednesday (night). They missed estimates on both the top and bottom line. This report from SKX sent shockwaves through the footwear industry. Nike (NKE) seems to be the only one that was unaffected. The rest of the group has turned bearish.

DSW falls in that category. Officially DSW is in the services sector. According to the company, "DSW Inc. is a leading branded footwear and accessories retailer that offers a wide selection of brand name and designer dress, casual and athletic footwear and accessories for women, men and kids. DSW operates 469 stores in 42 states, the District of Columbia and Puerto Rico, as well as 370 leased departments for other retailers in the United States under the Affiliated Business Group. We also operate an e-commerce site, http://www.dsw.com, and a mobile site, http://m.dsw.com. Through its partnership with Town Shoes of Canada, the company operates two stores in Canada as well as the e-commerce site http://www.dswcanada.ca."

DSW's most recent earnings report was August 25th. Their earnings of $0.42 a share was in-line with estimates. Unfortunately revenues missed expectations. DSW's management provided soft guidance that was below Wall Street estimates. Traders sold the stock and DSW fell to new 2015 lows at the time. Since then shares have continued to melt.

Today DSW underperformed the market with a -1.9% drop. Shares got some help with a downgrade by Canaccord Genuity. Canaccord reduced DSW from a "buy" to a "hold" and slashed their price target. The analyst is concerned that DSW will not be able to maintain their comparable store sales. Traditional retailers do face a challenge this year. Foot traffic during the holiday season is expected to decline as more consumers shop online.

Technically DSW has broken down to new 18-month lows with today's drop. The point & figure chart is bearish and forecasting a very bearish $11.00 price target. There is a chance that DSW bounces near the 2014 low near $23.50 but we think its momentum will carry it past this level. I am suggesting investors start with small positions to limit risk. Yesterday's intraday low was $24.11. We'll use a trigger at $23.90.

*small positions to limit risk* - Suggested Positions -

Short DSW stock at $23.90

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

Long DEC $22.50 PUT (DSW151218P22.5) entry $0.90

10/27/15 triggered @ $23.90
10/27/15 DSW downgraded a 2nd time in as many days
Option Format: symbol-year-month-day-call-strike

iPath S&P500 VIX Futures ETN - VXX - close: 18.88 change: -0.41

Stop Loss: None, no stop at this time.
Target(s): $16.25
Current Gain/Loss: +13.5%
2nd position Gain/Loss: +34.9%
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

10/27/15: Today produced some interesting moves in the VXX. The market declined. The volatility index (VIX) rose. Yet the VXX fell -2.1%. I'm not complaining but that is a little bit odd.

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

10/19/15 add an exit target at $16.25
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


Ingram Micro Inc. - IM - close: 28.89 change: -0.50

Stop Loss: 28.75
Target(s): To Be Determined
Current Gain/Loss: +3.7%
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

10/27/15: IM suffered some profit taking on Tuesday with a -1.7% decline. Shares hit an intraday low of $28.76. Our stop loss was at $28.75. We had already planned to exit the trade today at the closing bell to avoid IM's earnings report on October 29th.

- Suggested Positions -

Long IM stock @ $27.85 exit $28.89 (+3.7%)

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

DEC $30 CALL (IM151218C30) entry $1.15 exit $0.65 (-43.5%)

10/27/15 planned exit
10/26/15 prepare to exit tomorrow at the closing bell
10/24/15 new stop @ 28.75
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