Option Investor

Daily Newsletter, Saturday, 11/14/2015

Table of Contents

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

Market Wrap

No Black Cats or Broken Mirrors

by Jim Brown

Click here to email Jim Brown

Friday the 13th bought a continued market decline and bad luck for investors. Was it really bad luck or do fundamentals suddenly matter?

Market Statistics

With economics and earnings turning progressively lower I suspect the market decline was the return of fundamental worries. I wrote an article on Thursday questioning whether the U.S. was entering into a recession. I will summarize that again later in this commentary.

Friday's continued decline came after some ugly earnings in the retail sector, weak guidance from Cisco Systems and some negative economic reports. The snowball of negative headlines appears to be gaining speed as it moves down hill.

The Retail Sales report for October came in at +0.1% compared to estimates for a +0.3% rise. Revisions to prior months were mostly negative. Building supply stores saw a +0.9% rise and nonstore retailers (led by drug stores) rose +1.4%. General merchandise stores, gasoline stations, food and beverages, electronics and appliances and motor vehicles & parts all posted declines.

Year over year sales were down -1.7% over October 2014 levels. Sales in the prior two months were revised down to zero gain. Analysts remain confident that the strong housing sector will continue to power consumer spending as they furnish those new homes. Auto sales are also above trend and are providing significant support for the overall retail sales or the numbers would be much worse.

The last two times retail sales have been this bad we were already in a recession. Analysis

The Producer Price Index for October declined -0.4% compared to estimates for a +0.2% gain. There is no inflation at the producer level and after the -0.5% decline the prior month, there is some significant deflation at work.

It was not all related to energy, which was unchanged for the month. Food prices declined -0.8% for the second consecutive month. Core prices fell -0.3% and services prices fell -0.3%.

Prices have declined -1.7% since October 2014. Over the last three months alone prices have declined -3.6% on an annualized basis. Intermediate processed goods have declined -7.6% and unprocessed goods have declined -23.6%.

This is going to make it very hard for the Fed to make a "data dependent" case for hiking rates in December. They may hike anyway to rescue their credibility after targeting December in their last statement but it will not be because the data is supporting the decision. They may hike 25 basis points but then reduce their guidance for anticipated hikes in 2016 to end the year at 1.0%.

Hedgeye Cartoon

Business inventories for September rose 0.3% compared to estimates for no gain. That suggests either the pace of sales has slowed or there was some build in inventories ahead of the holiday season. Manufacturing inventories declined -0.37%, retail inventories rose +0.79% and wholesale inventories rose +0.50%. The largest subsector gain came from vehicles & auto parts with a +1.4% gain. Total sales growth was nearly unchanged for the second month. The inventory to sales ration has returned to 1.38 and the highest level since the recession.

While economic reports are printing new lows, the Consumer Sentiment report for November rose +3.1 to 93.1, up from 90.0 in October. The present conditions component rose from 102.3 to 104.8 and the expectations component rose from 82.1 to 85.6. Falling gasoline prices were credited with the gain in sentiment.

The economic calendar for next week has a lot of reports but only two are potential market movers. The FOMC minutes on Wednesday are always a problem for the market because we do not really know what the FOMC members were thinking at the last meeting. There is always a surprise of some sort. This is the last Fed update before the December Fed meeting in four weeks.

The Philly Fed Manufacturing Survey on Thursday is the most important regional report for the month. Analysts pay the most attention to it as a proxy for the ISM Manufacturing two weeks later.

On Thursday, I wrote an article on the potential for a U.S. recession. I got a lot of feedback on it and apparently, many readers feel the same way. Link to full article

The basic points are as follows:

First, the Fastenal CFO, Daniel Florness, warned "The industrial environment is already in a recession. I do not care what anybody says, because nobody knows the market better than we do." Fastenal (Nasdaq:FAST) sells wholesale industrial and construction supplies like bolts, nuts, screws, etc, which are used in manufactured products in the U.S. and internationally. They should know if manufacturing is slowing because demand for components is slowing.

Secondly, the Railway Supply Institute (Rsiweb.org) said third quarter railcar orders declined -83% to hit their lowest level in 27 years.

Third, FBR reported that orders for class A trucks declined -45% in October. In addition, BB&T reported that production of railcars, trucks and trailers would likely fall -20% to -35% in 2016 according to preliminary estimates.

That brings us to a warning from Wells Fargo. After the order data was released the bank said over the last 45 years ANYTIME orders for machinery and transportation equipment declined, as is happening today, a recession followed. The bank said the risk of a recession was accelerating as we head into 2016.

We had another confirmation today when the US Steel (X) CEO, Mario Longhi, said we are definitely in a recession, "it is happening now and it is more than just a recession."

Industrial production has fallen in 7 of the last 9 months. The ISM Manufacturing PMI for October was 50.1 and a 30-month low.

Joe LaVorgna, Chief Economist at Deutsche Bank, said a confirmed downturn was in progress and the dollar strength was becoming critical. As the Fed gets closer to hiking rates, the dollar is only going to get stronger and the impact on the U.S. economy even worse. The dollar index is hovering at six-month highs.

Add in the drop in commodity prices as a result of low demand and the recession or even deflation picture is pretty convincing.

Commodity Index

Analysts are blaming the Thr/Fri market decline on the implosion in the retail sector. They are worried that consumers are not spending money. The S&P Retail ETF (XRT) declined -8.5% last week alone. Macy's (M) declined -20%, Kohls (KSS) -8%, Nordstrom (JWN) -20%, Fossil (FOSL) -40% and JC Penny (JCP) -15% for just a few examples.

On the earnings front Nordstrom reported earnings of 57 cents compared to estimates for 72 cents. Same store sales rose only 0.9% compared to year ago levels of +3.9%. The company projected revenue growth of 7.5% to 8.0% and $3.40-$3.50 for earnings. Prior expectations were for 8.5% to 9.5% growth and $3.70-$3.80 on earnings. Shares were crushed for a -15% decline on Friday.

JC Penny's (JCP) reported a loss of -47 cents that was better than analysts expected at -58 cents. Revenue of $2.9 billion also beat estimates for $2.86 billion. Same store sales rose +6.4%. However, despite the earnings beat the company kept its lowered forecast for full year sales of 4-5%. Analysts were quick to caution that by not raising estimates they were actually warning that they expected additional weakness. Shares fell -15% on the news.

Fire protection and security company Tyco International (TYC) reported earnings of 61 cents and revenue of $2.51 billion. Earnings were in line with estimates but revenue missed estimates of $2.54 billion. Tyco failed to impress on its conference call and shares declined -3%.

Eagle Bulk Shipping was listed as an earnings reporter on Friday but there was no release. Shares crashed -10% on no news. Eagle is a dry bulk shipper. With the Baltic Dry Index of shipping rates nearing a post recession low the sector has declined sharply over the last week.

Fossil (FOSL) reported earnings of $1.19 compared to estimates for $1.13. Revenue of $771.3 million missed estimates for $784.8 million. The earnings were not the big problem. The company lowered its full year forecast suggesting it was preparing for a weak Q4. Fossil cut its full year outlook from $4.80-$5.60 to $4.15-$4.75 per share. Analysts were expecting $5.14. They projected earnings for Q4 of $1.40-$2.00 and analysts were expecting $2.15. They also projected sales to decline up to -11%. Shares fell -36% on the news.

Cisco Systems reported earnings on Thursday after the close. The company beat expectations but provided weak guidance for the current quarter. Cisco said it expected a +2% rise in revenue in Q4. However, they said macroeconomic conditions were challenging and overseas orders were slowing. Shares declined -6% on the report.

Late Friday news broke that Cisco was going to buy Ericsson (ERIC) and shares of ERIC spiked from $9 to $10.15. Within minutes, Cisco denied the report saying they were only in partnership with Ericsson and there were no plans to buy the company. They had announced the production partnership earlier in the week.

The Nasdaq big caps were down hard on Friday. Priceline continued its post earnings plunge with a $16 drop to a five-week low. Amazon (AMZN) gave back -$23 on no news. Alphabet (GOOGL) lost -$19.

Oil prices fell to $40.73 for a loss of -8.5% for the week. U.S. inventories rose +4.2 million barrels to 487.0 million. That is only 3.9 million barrels below the historic 80-year high of 490.9 million.

The IEA released its monthly report (Link) saying global oil inventories were near 3 billion barrels and at record highs. Those inventories were rising at +1.6 million barrels per day and would accelerate when Iran and Iraq increase production in early 2016. Iran is expected to add 500,000 bpd to start and raise that to 1.0 million bpd by July. Iraq is pumping the most oil since 1962 and expected to increase production further in Q1.

Furthermore the IEA said global demand growth was slowing. The IEA said demand growth would slow to 1.2 mbpd for all of 2016 compared to the 1.8 mbpd growth in 2015. Global production rose to 97 mbpd in October. OPEC supplied 31.76 mbpd despite temporary declines in Iraq and Kuwait. Libya, Saudi Arabia and Nigeria produced more than the prior month.

There are currently 19 million barrels of oil headed from Iraq to the USA. Ten tankers are currently headed for U.S. ports carrying Iraqi oil. That is the most in one month since June 2012. Iraq sold its heavy crude to the U.S. at a -$5.85 per barrel discount to the benchmark compared to the Saudi price of -$1.25 off the benchmark. This means we are going to see some big inventory gains in the weeks ahead.

Bloomberg Chart

There is a record tanker backlog in Houston of 39 tankers waiting to unload. In the fall when cold air hits the warm water Gulf they have a serious problem with fog, which shuts down tanker movement until it clears, sometimes for days.

China has filled up all available storage. Tankers have been sitting at terminals for weeks waiting to unload. In addition, there is now more than 100 million barrels of oil in storage on tankers with no place to go.

U.S. production rose again last week with a +25,000 bpd gain. Production of 9.185 mbpd was a nine-week high while active rigs continue to decline. Technology is winning the battle over reduced drilling but the rise helped push prices lower. There is a good chance we will see prices under $40 next week.

Active rigs declined -4 to 767 and another decade low. Oil rigs rose +2 to 574 and gas rigs declined -6 to 193. The number of active rigs is down -1,164 from the peak of 1,928 in September 2014. Oil rigs alone have declined -1,035.

Copper was in the news a lot last week as prices plunged to a post recession low at $2.16 per pound. Slowing demand and the rising dollar along with dumping due to margin calls is powering the decline. Copper is seen as a primary indicator of global economic activity. Copper goes into anything electrical as well as wires in homes, buildings, cars, planes, etc. There is about 55 pounds of copper in a new car and 400 pounds in a new home. With all the uses for copper and the falling demand, it is easy to deduce that global manufacturing and construction activity is slowing.


It was the second worst week of the year for the equity markets. The attacks in Paris was not initially reported until after the markets had closed or the decline would have been a lot worse.

The Dow lost -665 for the week, NYSE -358, Nasdaq -219, S&P -76, Russell 2000 -53, Dow Transports -231. There were no bright spots but the biotech sector tried to rally more than once to post a six-week high on Wednesday and managed a 35 point gain on the $BTK on Friday. However, it still lost -1.3% for the week to post the smallest loss of all the indexes.

Whenever we get a significant decline, we always try to look for any good news. Sometimes that search ends up grasping at straws but we still need to look. The Friday close on the S&P at 2,023 was exactly on the 38.2% Fib retracement. It was also only 2 points above the reaction high of 2,021 on September 13th and the 2,019 resistance on Oct 12th. If there were a logical rebound point, this would be it. Unfortunately, logic is rarely found in the equity market.

Support for Monday would be 2,020 followed by 1,985. Resistance is 2,060, 2,085 and 2,115.

The percentage of S&P stocks over their 200-day average declined from 56% to 39.2% in just a week.

I showed this chart last week and warned that the MACD and RSI were about to turn negative. That turn is complete and it would appear there is no relief in sight.

The Dow only had four components in positive territory and 12 that lost more than $1. The Dow is still well above strong support around 17,130. There is a support band from about 17,050 to 17,200 but I doubt it will be strong enough to stop the Dow's decline if the selling is as pronounced as it was on Thr/Fri.

The carnage in the Dow stocks was extreme. For instance Home Depot (HD) fell -3% on no news. The building materials sector was one of the strongest in the Retail Sales report. There was no reason for HD to crash.

IBM is in plunge mode with a -$20 decline since it posted earnings on October 19th. This is a major impact on the Dow because of its weighting in the index.

Even the banks were declining over the last two days despite the chance of a Fed rate hike in four weeks. I scanned the charts of the Dow 30 and it does not look good. It would take a major market reversal to turn the Dow around.

The Nasdaq Composite has reached decent support in the 4890-4925 range. This was a challenge to break through when it was a resistance and hopefully it will be decent support on the way back down.

Apple (AAPL) was a major drag on the Nasdaq with a -$9 drop for the week. However, on Friday Amazon, Cisco and Facebook were the biggest weight on the Nasdaq. The graphic below shows the point impact on the Nasdaq 100 from the 10 losers on Friday. Link to complete list

Point losses on the losers are far larger than the gains on the winners.

The Russell 2000 small caps were hammered but no worse than the rest of the indexes. That is small consolation. The -4.4% loss for the week was right in line with the Nasdaq and only slightly higher than the Dow and S&P at -3.7%. The Russell came to a stop on support at 1,145 that held in late October but it may be wishful thinking that it will hold again.

A continued decline would target 1,102 after a possible pause at 1,136. In theory, the small caps should be in favor over the next four weeks but theory has had some problems with reality in the recent past.

Historically the first week of November is normally the strongest week in the fourth quarter. That trend failed this year. Normally, the second week of November is bearish as fund managers undress those positions they added for window dressing at the end of October. I think we can safely assume the amount of selling was heavier than simple window undressing BUT the volume on Thursday was only 7.0 billion shares and Friday was 7.6 billion. That is moderately strong but the average over the last three weeks has been about 7.1 billion so there was no panic selling last week.

In the five minute chart of the S&P there was an initial drop at the open on the Cisco earnings, retail earnings from several companies and negative economic reports. About noon, there was a concerted buying spree in the energy stocks with several up more than $2 intraday. At 12:30 that buy program ended and the index began to trend lower. However, note that the trend was slow and there was solid support at that Fib retracement level at 2,023. The lack of heavy volume and the slow pattern of selling suggests we could see a bounce next week. However, the S&P did close right on the support lows.

I wrote last week that I was in buy the dip mode. I wrote midweek that I would buy the dip down to support at S&P 2,060. That support broke at the open on Thursday. Now I am in a quandary. The individual Dow charts are ugly and do not suggest a rebound is near. There may be a short squeeze in our immediate future and I would welcome one on Monday just to relieve the selling pressure. However, at this point I would be cautious about adding to existing longs. If that 2,023 level on the S&P holds and we rebound back over 2,040 then I would feel better about adding to long positions with that 2,023 level my exit point. If 2,023 fails I would be flat or short.

Strong Octobers tend to produce weak Novembers and that is one historical trend that has come true so far. The last 12 November Friday the 13ths have been down 8 times and up 4 times. Out of the last 144 Friday the 13ths November is the worst in terms of performance.

The third week of November has been up in 16 of the last 21 years. It is also option expiration week and after the big market decline that should have a bullish bias.

Random Thoughts

The terrorist attack in Paris is a tragedy but unfortunately one they are likely to relive multiple times in the years ahead. The influx of a million refugees, 85% of which are young men, has allowed an untold number of terrorists to infiltrate into Europe.

Personally, I am surprised we have not experienced the same type of attacks in the USA. The FBI currently has more than 1,000 active investigations into ISIS activities in the USA. We know there are sleeper cells in the U.S. and even with 1,000 active investigations, we know there are active individuals we do not know about. The border patrol finds Korans and prayer rugs along the border trails all the time. They are here whether the government wants to admit it or not.

America is a free society. We go to sports stadiums, movie theaters, malls, etc, completely unaware of our surroundings. We have never had to be threat aware. Eventually, terrorists are going to take out some theaters or shopping malls and the American lifestyle is going to change forever.

ISIS said last week, "American blood tastes the best and we will taste it soon."

Rogers Kiffen Worldwide warned that online retailers were stealing the business from brick and mortar retailers. Previously when you went to the mall you visited 5-6 stores and "shopped." Today a consumer may visit 3 and just buy. They already shopped online and they know what they want. They just go in the store, find the right size, buy and leave.

Steve Odland, former Office Depot CEO and now CEO of the Committee of Economic Development, said this holiday season is going to be a bloodbath. "Inventories are up, sales are down and that is causing a big problem for margins." The holiday sales are going to start out as clearance sales rather than holiday discounting. The lower price retailers are the only ones succeeding in this environment.

Mario Draghi went from super dovish to extremely dovish last week in what appears to be plans to add stimulus in December at the same time the Fed is likely to hike interest rates. The Fed has not hiked at the same time Europe was easing since May 1994. Nelson Mandela was the first black president of South Africa and Beverly Hills Cop 3 was showing at the movies. The Euro and the ECB did not exist.

Greenspan raised the rate from 3.75% to 4.25% and the Bundesbank cut rates from 5.0% to 4.5% to spur expansion in Germany. Full Bloomberg Article

Why Europe will Cut Rates

The World Gold Council said U.S. demand for gold bars and coins surged +207% in Q3. The interest in gold is at levels not seen since the financial crisis. Gold Eagle sales at the U.S. Mint surged to nearly 400,000 ounces last quarter, the highest level in five years. The -1,000 point drop in the Dow in August caused a flurry of buying in precious metals. The stronger dollar makes gold and silver cheaper and consumers are taking advantage of the trend. Americans Buying Gold

I would not want to be on a U.S. carrier in a war with China or Russia. China has a new supersonic carrier blaster that can be launched from hundreds of miles away, travels above the atmosphere and then comes straight down at 3 times the speed of sound from directly above the carrier. It can also be nuclear armed.

Last week Russia aired on TV plans for a long-range nuclear torpedo that can destroy ships, harbors or important economic installations. The torpedo's range could be up to 6,000 miles. The airing was accidental when a news crew was filming a meeting between Putin and his generals in Sochi. Putin said he was taking steps to prevent future accidents that release secret data. I would not put it past Putin to stage the entire event just to cause the U.S. to worry about what he might be doing. The government newspaper Rossiskaya Gazeta called the torpedo a mini robotic submarine. Nuclear Torpedo, OOPS!


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


Veteran's Day Reflections:

"Semper Fidelis" - Always Faithful - U.S. Marine Corp
"Semper Paratus" - Always Ready - U.S. Coast Guard
"Non sibi sed patriae" - Not for Self but Country - U.S. Navy
"Aim High, Fly, Fight, Win" - U.S. Air Force
"This we will defend" - U.S. Army


New Plays

Earnings And Revenue Growth Are Soaring

by James Brown

Click here to email James Brown


U.S. Concrete, Inc. - USCR - close: 59.84 change: -0.23

Stop Loss: 55.65
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 14, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 220 thousand
New Positions: Yes, see below

Company Description

Trade Description:
USCR looks like a very impressive relative strength trade. This is a small cap stock. The small cap Russell 2000 index is down -4.6% year to date. Shares of USCR are up +110%.

They are part of the industrial goods sector. USCR is in the building materials business. According to the company, "U.S. Concrete serves the construction industry in several major markets in the United States through two business segments: ready-mixed concrete and aggregate products. The Company has 139 standard ready-mixed concrete plants, 16 volumetric ready-mixed concrete facilities, and 12 producing aggregates facilities. During 2014, U.S. Concrete sold approximately 5.7 million cubic yards of ready-mixed concrete and approximately 4.7 million tons of aggregates."

The U.S. economy is only growing around +2% yet construction spending has rebounded to multi-year highs. A recent interview with the CEO of USCR revealed that they are benefitting from the building boom in several U.S. markets. According to the CEO their outlook is very healthy for the next two years. If President Obama signs the current highway spending bill it could provide an additional boost with multi-year funding for USCR.

Another bonus to being a U.S. based and domestically focused small cap company is how the rising dollar should not be a currency headwind for the company.

Earnings growth for USCR has been significant. Their Q1 report came out in May this year. The company blew away the estimates with revenues up +17%. Their Q2 numbers were even better. USCR crushed the numbers again with revenues up +35.7%.

USCR's most recent earnings report was November 5th. The company announced their Q3 results. Wall Street was looking for a profit of $1.10 a share on revenues of $282.3 million. USCR said earnings surged +85% from a year ago. Gross margins were up +310 basis points to 16.7%. Their revenues roared +49.4% to $295.11 million.

William J. Sandbrook, President and Chief Executive Officer of U.S. Concrete, stated,

"The third quarter marked another quarter of significant improvement in revenue, adjusted EBITDA and earnings per share reflecting solid execution on our core growth objectives. This sustained improvement is a strong validation of our entire operating strategy across our attractive construction material categories. During the quarter we grew our organic operations in all of our key regions, including Texas. Our ongoing consolidation efforts, established leadership positions, and focus on high barrier-to-entry projects allowed us to remain disciplined with our price, as evidenced by ready-mixed concrete prices increasing year-over-year for the 18th straight quarter. This pricing success, combined with our increasingly vertically integrated positions, delivered higher material spreads and very favorable incremental margins on our scalable platform. Additionally, during the quarter we further strengthened our vertically integrated capabilities with the addition of three strategic aggregate operations within key markets. As we look forward, we are encouraged by our prospects for further improvement as we continue to advance our long-term growth strategy."
Technically the stock is in a bullish up trend. Traders have been consistently buying the dips. The broader market retreated this past week while USCR managed to close nearly unchanged for the week (-20 cents). The point & figure chart is bullish and forecasting at $72.00 target. USCR appears to have short-term resistance at $60.50. Tonight we are suggesting a trigger to launch bullish positions at $60.75.

Trigger @ $60.75

- Suggested Positions -

Buy USCR stock @ $60.75

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.

Daily Chart:

Weekly Chart:

In Play Updates and Reviews

Markets March Lower On Friday

by James Brown

Click here to email James Brown

Editor's Note:
The S&P 500 marked its third loss in a row. It was the seventh decline out of the last eight sessions. This move was sharp enough to erase the prior three week's worth of gains.

Double check your stop loss placement. We have updated a few stop losses tonight.

Current Portfolio:

BULLISH Play Updates

Microsoft Inc. - MSFT - close: 52.84 change: -0.48

Stop Loss: 52.15
Target(s): To Be Determined
Current Gain/Loss: -3.2%
Entry on November 04 at $54.60
Listed on November 03, 2015
Time Frame: 6 to 8 weeks.
Average Daily Volume = 35.4 million
New Positions: see below

11/14/15: Big cap giant MSFT was not immune to the market's decline on Friday. Shares fell -0.9% but they did start to bounce from short-term support near $52.50.

I am not suggesting new positions at this time but a rebound from current levels could set up for another entry point.

Trade Description: November 3, 2015:
MSFT is more than just a software company. MSFT is in the technology sector. It is considered part of the business software industry. According to the company, "Microsoft is the leading platform and productivity company for the mobile-first, cloud-first world, and its mission is to empower every person and every organization on the planet to achieve more."

The company is run under three segments. They have their productivity and business processes segment. This includes commercial office software, personal office software, and more. One of their fastest growing segments is MSFT's Intelligent Cloud business, which includes their server software and enterprise services. Then they have their "More Personal Computing" segment. This includes their Windows operating software, MSN display advertising, Windows phones, smartphones, tablets, PC accessories, Internet search, and their Xbox platform.

The stock has been dead money for almost a year. MSFT peaked near round-number resistance at $50.00 back in November 2014. Shares channeled sideways between support at $40 and resistance at $50 for months. That changed last month.

MSFT reported its 2016 Q1 results on October 22nd. Analysts were expecting a profit of $0.59 a share on revenues of $21.04 billion. MSFT beat both estimates with a profit of $0.67 a share. Revenues came in at $21.66 billion. Their Intelligent Cloud segment saw sales rise +8% but it was actually +14% on a constant currency basis.

Shares of MSFT soared the next day with a surge to 15-year highs. The big rally is based on investors' belief that MSFT and its relatively new management is successfully transitioning away from declining PC sales and moving quickly towards the cloud (and mobile).

Normally I would hesitate to buy a stock like MSFT after a big gap higher. Too often stocks tend to fill the gap. However, shares of MSFT have been able to levitate sideways in the $52.50-54.50 zone as traders keep buying the dips. Odds are growing we could see MSFT rally toward its all-time highs near $60.00 a share from December 1999. The big gain in October produced a buy signal on the point & figure chart, which is now forecasting a long-term target of $82.00. Tonight we are suggesting a trigger to launch bullish positions at $54.60.

- Suggested Positions -

Long MSFT stock @ $54.60

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

Long 2016 JAN $55 CALL (MSFT160115C55) entry $1.54

11/04/15 triggered @ $54.60
Option Format: symbol-year-month-day-call-strike


Paychex, Inc. - PAYX - close: 52.36 change: -0.49

Stop Loss: 51.25
Target(s): To Be Determined
Current Gain/Loss: -1.5%
Entry on November 11 at $53.15
Listed on November 09, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 2.3 million
New Positions: see below

11/14/15: I cautioned readers in the Thursday night newsletter that we might see PAYX dip toward $52.50 or potentially $52.00. Thanks to the market's widespread declines on Friday that is where PAYX seems to be heading.

Depending on your trading style you can buy a dip at $52.00 or wait for PAYX to bounce near $52.00 before considering new bullish positions.

Trade Description: November 9, 2015:
Last week the Bureau of Labor Statistics announced that the nonfarm payroll (jobs) report for October showed a gain of +271,000. That was way above expectations. The separate household survey showed a gain of +320,000 jobs. This pushed the unemployment rate down to 5.0%, the lowest reading since early 2008. Many believe that the U.S. has now reached full employment. Do you know what that means? It means more Americans working. That means more paychecks to be delivered and more HR services to be handled.

PAYX is in the services sector. According to the company, "Paychex, Inc. (PAYX) is a leading provider of integrated human capital management solutions for payroll, HR, retirement, and insurance services. By combining its innovative software-as-a-service technology and mobility platform with dedicated, personal service, Paychex empowers small- and medium-sized business owners to focus on the growth and management of their business. Backed by more than 40 years of industry expertise, Paychex serves approximately 590,000 payroll clients across 100 locations and pays one out of every 15 American private sector employees."

PAYX earnings have been slowly and consistently creeping higher. Revenues have been rising about 8% the last couple of quarters. This company's most recent earnings report was September 30th. They beat estimates on both the top and bottom line, which helped fuel another rally in the stock.

PAYX management has been very consistent about paying a dividend. PAYX now sports a dividend yield of 3.7%. That could draw more and more income investors looking for a safe company to buy.

A recent article on Forbes.com, by Brett Owens, noted that "demand for payroll outsourcing (60% of Paychex's latest quarterly revenue) will grow at a 3.9% compound annual rate between 2013 and 2018. HR outsourcing (40% of revenue) is on a stronger tear, with a projected 12.3% yearly gain in the same period" (source)

We like PAYX's relative strength. Shares are up +14.2% year to date. That compares to a +1.0% gain in the S&P 500 and a +7.6% rally in the NASDAQ. The NASDAQ composite is up +18% from its August low but PAYX is up +26.7%. The rally in PAYX has produced a buy signal on the point & figure chart, which is also forecasting a long-term target at $72.00.

On Friday PAYX found short-term support near $53.00. Tonight we are suggesting a trigger to launch bullish positions at $53.15.

- Suggested Positions -

Long PAYX stock @ $53.15

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

Long JAN $55 CALL (PAYX160115C55) entry $0.80

11/11/15 triggered @ $53.15
Option Format: symbol-year-month-day-call-strike


BEARISH Play Updates

Denny's Corp. - DENN - close: 9.65 change: -0.22

Stop Loss: 10.25
Target(s): To Be Determined
Current Gain/Loss: +2.5%
Entry on November 10 at $9.90
Listed on November 05, 2015
Time Frame: 4 to 8 weeks
Average Daily Volume = 527 thousand
New Positions: see below

11/14/15: Restaurant stocks continued to underperform the market on Friday. Shares of DENN lost -2.2% and closed at new multi-month lows. Tonight we are adjusting our stop loss down to $10.25.

Trade Description: November 5, 2015:
Wall Street seems to have soured on restaurant stocks. The group has been underperforming and this stock is accelerating lower.

DENN is in the services sector. According to the company, "Denny's is the franchisor and operator of one of America's largest franchised full-service restaurant chains, based on the number of restaurants. As of July 1, 2015, Denny's had 1,696 franchised, licensed, and company restaurants around the world with combined sales of $2.7 billion including 108 restaurants in Canada, Costa Rica, Mexico, Honduras, Guam, Curacao, Puerto Rico, Dominican Republic, El Salvador, Chile and New Zealand, and 160 company operated restaurants in the United States."

The stock rallied in early August on its earnings report but that proved to be a bull-trap. The breakout past resistance near $12.00 didn't last. When the market corrected lower in August, shares of DENN plunged toward its 200-dma and the $11.00 level. Shares spent the next eight weeks churning sideways with investors selling the rallies near resistance.

This week DENN reported their Q3 earnings report. The company delivered a profit of $0.11 a share. Revenues were up +5.8% to $123.8 million. These were in-line with estimates. Actually revenues were just slightly above expectations. The company's guidance was in-line with analysts' estimates. Evidently these results were not good enough as shares of DENN plunged on the news.

The stock has broken down below multiple layers of support. Now shares are on the verge of breaking through round-number support at $10.00. If shares to trade below $10.00 it should generate a new sell signal on the point & figure chart. Tonight we are suggesting a trigger to launch bearish positions at $9.90.

- Suggested Positions -

Short DENN stock @ $9.90

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

Long DEC $10 PUT (DENN151218P10) entry $0.55

11/14/15 new stop @ 10.25
11/10/15 triggered @ $9.90
Option Format: symbol-year-month-day-call-strike


CarMax Inc. - KMX - close: 53.98 change: -1.47

Stop Loss: 57.25
Target(s): To Be Determined
Current Gain/Loss: +1.4%
Entry on November 13 at $54.75
Listed on November 12, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 1.8 million
New Positions: see below

11/14/15: Our brand new bearish trade on KMX is off to a good start. The market is starting to see clues that the surge in car buying might have peaked. Combine that with worries about consumer spending and you can see why KMX might be underperforming the market.

On Friday the stock broke down below support near $55.00 and hit our suggested entry point at $54.75.

Trade Description: November 12, 2015:
The labor market in the U.S. is healthy. The October jobs report came in above estimates at +271,000 jobs. Wages are actually rising. You would think this would be bullish for consumer spending. Unfortunately the demand for used cars seems to be slowing down.

KMX is in the services sector. According to the company, "CarMax, a member of the FORTUNE 500 and the S&P 500, is the nation's largest retailer of used cars. Headquartered in Richmond, Va., we currently operate 151 used car stores in 76 markets. The unique CarMax consumer offer allows customers to shop for vehicles the same way they shop for items at other 'big-box' retailers. We provide low, no-haggle prices; a broad selection of CarMax Quality Certified vehicles; and superior customer service. During the fiscal year ended February 28, 2015, we retailed 582,282 used vehicles and we sold 376,186 wholesale vehicles at our in-store auctions."

It looks like low interest rates has fueled huge demand for new cars. Last month the number of new cars sold in the U.S. hit ten-year highs with an annual pace of 18.24 million units. This is probably stealing market share from the used car market. Looking at KMX's last couple of earnings reports both their comparable store unit sales and their quarterly revenues have come in below estimates. Keep in mind that used car sales are still seeing growth but growth is slowing. That's hurting KMX's stock price since they are the largest retailer of used cars.

This stock peaked in April this year. KMX set a lower high in June. Since then shares have been stuck in a bearish trend of lower highs and lower lows. KMX is now in a bear market (down -26% from its 2015 high) and currently testing support near $55.00.

If KMX breaks key support at $55.00 it could signal the next major leg down. I wouldn't be surprised to see a drop toward $50 or even the late 2014 lows in the $44 region. Tonight we are suggesting a trigger to launch bearish positions at $54.75. Please note this is going to be a relatively short-term trade. KMX has earnings coming up in mid December. We will plan to exit prior to their announcement.

- Suggested Positions -

Short KMX stock @ $54.75

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

Long JAN $52.50 PUT (KMX160115P52.5) entry $2.00

11/13/15 triggered @ $54.75
Option Format: symbol-year-month-day-call-strike


Lululemon Athletica - LULU - close: 45.05 change: -3.11

Stop Loss: 48.25
Target(s): To Be Determined
Current Gain/Loss: +4.7%
Entry on November 12 at $47.25
Listed on November 11, 2015
Time Frame: Exit PRIOR to earnings in mid December
Average Daily Volume = 2.9 million
New Positions: see below

11/14/15: Retail-related stocks had a rough week. The market did not react well to earnings and guidance from Macy's (M) and Nordstrom (JWN). The disappointing retail sales numbers from the U.S. Commerce Department on Friday didn't help either.

Shares of LULU accelerated lower on Friday with a -6.4% plunge to new 2015 lows. Tonight we are adjusting the stop loss down to $48.25. No new positions at this time.

Trade Description: November 11, 2015:
Disappointing earnings guidance and rising competition have been tough on shares of LULU. It doesn't help that expectations for this holiday season are falling.

LULU is in the consumer goods sector. According to the company, "lululemon athletica inc. (LULU) is a yoga-inspired athletic apparel company with products that create transformational experiences for people to live happy, healthy, fun lives. Setting the bar in technical fabrics and functional designs, lululemon works with yogis and athletes in local communities for continuous research and product feedback."

LULU's most recent earnings report was September 10, 2015. The company beat the bottom line estimate by a penny. Revenues were up +16% from a year ago and came in above estimates. Comps showed strength with a +11% improvement on a constant dollar basis. However, management spoiled the news by drastically lowering their Q3 estimates below Wall Street expectations. The stock was crushed on this outlook.

LULU is facing a few challenges. The biggest challenge is rising competition. The athleisure trend in apparel has been around for a while now but everyone is trying to cash in on it. That includes heavyweights like Under Armour and Nike. Nike plans to almost double its sales in women's apparel by 2020. You can bet they plan on stealing some market share from its smaller rivals like LULU. LULU also has competition from other apparel stores like the Gap (with all of its various labels) and Victoria's Secret. If rising competition wasn't enough LULU has also raised their prices, which could further drive consumers toward lower cost alternatives.

Bigger picture the outlook for holiday spending this year is wilting. In the last couple of weeks multiple analyst firms have released reports that consumers will spend less time in stores (lower traffic). Plus, retail sales growth is expected to fall from last year, especially on apparel.

Technically LULU is in another bear market. The stock is down -32% from its 2015 highs. Shares have a bearish trend of lower highs as investors keep selling the rallies. Now LULU has fallen to short-term support in the $47.40-47.50 area.

My biggest concern is the elevated short interest. The most recent data listed short interest at 27% of the 110 million share float. That many shorts can make this stock volatile as weak hands could panic on any bounce. Of course longer-term the bears are probably right on LULU until the story changes. Readers may want to trade the put options to limit their risk. Tonight we are suggesting a trigger to launch bearish positions at $47.25. Plan on exiting prior to LULU's earnings report in mid December.

- Suggested Positions -

Short LULU stock @ $47.25

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

Long DEC $45 PUT (LULU151218P45) entry $2.40

11/14/15 new stop @ 48.25
11/12/15 triggered @ $47.25
Option Format: symbol-year-month-day-call-strike


Skechers U.S.A. Inc. - SKX - close: 25.40 change: -1.20

Stop Loss: 27.65
Target(s): To Be Determined
Current Gain/Loss: +13.6%
Entry on November 05 at $29.40
Listed on November 04, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.1 million
New Positions: see below

11/14/15: The sell-off in SKX continued on Friday with a -4.5% drop. Shares are now down seven out of the last eight sessions. The stock is testing what could be round-number, psychological support at the $25.00 level. We shouldn't be surprised if SKX bounces from here.

More conservative investors may want to take some money off the table now at current levels. Tonight we are adjusting the stop loss down to $27.65. No new positions at this time.

Trade Description: November 4, 2015:
Sometimes investors can get spoiled when a company is executing really well. When that company suddenly stumbles the reaction can be extremely painful. SKX definitely stumbled when they reported their Q3 results on October 22nd.

SKX is in the consumer goods sector. According to the company, "SKECHERS USA, Inc., based in Manhattan Beach, California, designs, develops and markets a diverse range of lifestyle footwear for men, women and children, as well as performance footwear for men and women. SKECHERS footwear is available in the United States and over 120 countries and territories worldwide via department and specialty stores, more than 1,200 SKECHERS retail stores, and the Company's e-commerce website. The Company manages its international business through a network of global distributors, joint venture partners in Asia, and 13 wholly-owned subsidiaries in Brazil, Canada, Chile, Japan, Latin America and throughout Europe."

SKX has turned in some impressive numbers this year. Back in April they reported their Q1 results, which beat estimates on both the top and bottom line. Revenues were up +40% from a year ago and hit a company record for quarterly sales. Three months later SKX did it again. They reported their Q2 results on July 29th. SKX beat estimates on both the top and bottom line. Revenues were up +36% from a year ago and another new record.

You can imagine the market's surprise when SKX reported their Q3 results on October 22nd and missed estimates on both the top and bottom line. Analysts were expecting a profit of $0.55 a share on revenues of $876 million. SKX only delivered $0.43 a share. Revenues were up +27% to $856 million. It was another record quarter for sales - their highest ever. Yet investors were suddenly worried about a slowdown in growth. There does seem to be a trend developing. Q1 revenues were +40%. Q2 was up +36%. Q3 +27%.

Prior to SKX's Q3 report the stock was up +150% year to date. The stock was up +400% from its 2014 lows. You could say the stock had gotten ahead of itself and suddenly investors hit the expectations reset button. Shares of SKX plunged -31% in one day (Oct. 23rd). Management said that negative foreign currency exchange rates in Brazil, Canada and Chile, combined with a slow domestic retail environment hurt results.

In SKX's Q3 press release they provided more details:

The Company's diluted earnings per share for the third quarter of 2015 was negatively impacted by several factors including foreign currency translation and exchange losses of $13.5 million, and increased deferred rent expenses of $3.5 million related to the new Fifth Avenue Skechers retail store, which opened during the third quarter, and a second Skechers location in Times Square, which just opened. Additionally, during the third quarter of 2015 diluted earnings per share were impacted by increased legal expenses of $5.0 million related to the settlement of personal injury lawsuits from the Company's toning footwear business; and $5.9 million in higher legal fees and associated costs primarily related to intellectual property litigation, which included the matter of Converse, Inc. v. Skechers U.S.A., Inc., which went to trial before the International Trade Commission in August of this year. The Company believes that most, if not all, of these legal matters will come to a conclusion by early next year. During the third quarter of 2015, these additional expenses reduced diluted earnings per share by $0.15.
Technically the big drop in shares of SKX has done a ton of damage. The point & figure chart is now forecasting a long-term target of $11.00 (I doubt SKX will get that low). It is significant that there has been almost no oversold bounce. SKX tried to bounce but it failed at its 200-dma. Now after consolidating sideways the last several days SKX is starting to breakdown again. Shares underperformed the market today with a -4.9% decline.

The intraday low on October 23rd was $29.55. Tonight we are suggesting a trigger to launch bearish positions at $29.40. I suspect the $25.00 level is potential round-number support and could make a good short-term target for the bears.

FYI: SKX had a 3-for-1 stock split on October 15, 2015.

- Suggested Positions -

Short SKX @ $29.40

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

Long 2016 JAN $25 PUT (SKX160115P25) entry $1.00

11/14/15 new stop @ 27.65
11/11/15 new stop @ 29.05
11/05/15 triggered @ $29.40
Option Format: symbol-year-month-day-call-strike


Seagate Technology - STX - close: 33.07 change: -1.01

Stop Loss: 36.25
Target(s): To Be Determined
Current Gain/Loss: +7.8%
Entry on November 11 at $35.85
Listed on November 10, 2015
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.9 million
New Positions: see below

11/14/15: Technology stocks underperformed on Friday and STX fared worse than its peers. Shares lost another -2.9% by the closing bell and that's after a bounce off its Friday morning lows.

STX is looking short-term oversold with the stock down six days in a row. Tonight we are adjusting our stop loss down to $36.25. No new positions at this time.

Trade Description: November 10, 2015:
A slowdown in PC sales is killing STX's performance. Share are significantly underperforming the broader market. The company's stock is down -45% year to date.

STX is part of the technology sector. According to the company, "Seagate creates space for the human experience by innovating how data is stored, shared and used." That doesn't tell us much. Visiting their website you can learn that "Seagate is the global leader in data storage solutions, developing amazing products that enable people and businesses around the world to create, share and preserve their most critical memories and business data." Essentially STX makes hard drives and data storage for both personal and business use. This includes desktop storage, laptop storage, backup solutions, data recovery, cloud computing storage, and a lot more.

Unfortunately for investors the earnings picture has been disappointing. STX management issued an earnings warning on October 15th as they reduced their guidance for Q1 earnings and revenues. You can see the drop in their stock price on the 15th.

STX reported their 2016 Q1 earnings on October 30th. Net income fell -63.6% from a year ago. Earnings came in at $0.54 a share, which was three cents below estimates. Revenues plunged -22.7% to $2.92 billion, which matches the levels they warned about two weeks prior. STX said their gross margins contracted from 28.1% to 24.2%.

Management knew the quarter was going to be bad so they tried to soften the bad news by announcing a +17% jump in their dividend just prior to their earnings announcement. The news didn't seem to help. Their 2016 Q2 guidance did not help either as management lowered their revenue forecast below analysts' estimates. Wall Street has been reducing their ratings and their price target on the stock in reaction to the company's lowered forecast.

I could see dividend investors looking a STX as a potential buy. The plunge in the stock price has driven the dividend yield up to 6.9%. Yet who wants to buy a stock for their dividend and watch your capital evaporate?

Technically STX is in a bear market. Shares displayed relative weakness today with a -4.5% decline and a drop to new multi-year lows. The point & figure chart is already bearish and forecasting at $26.00 target. If STX trades below $36.00 it will produce a new triple-bottom breakdown sell signal on its P&F chart. Tonight we are suggesting a trigger to launch bearish positions at $35.85.

- Suggested Positions -

Short STX stock @ $35.85

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

Long JAN $35 PUT (STX160115P35) entry $1.93

11/14/15 new stop @ 36.25
11/11/15 new stop @ 37.25
11/11/15 triggered @ $35.85
Option Format: symbol-year-month-day-call-strike


iPath S&P500 VIX Futures ETN - VXX - close: 21.96 change: +1.40

Stop Loss: None, no stop at this time.
Target(s): $16.65
Current Gain/Loss: -0.6%
2nd position Gain/Loss: +24.3%
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

11/14/15: The stock market has been retreating lower all week. Unfortunately the pullback started to gain some momentum in the last couple of days. Friday's drop fueled a big bounce in the volatility indices.

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

11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
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