Another gap open on sharply rising oil prices but is this a change in trend or a temporary rebound?
A major short squeeze in WTI plus sharply positive markets overseas pushed the futures higher before the open. The markets gapped up and then faded slightly until noon. Traders decided they were not going lower and began covering their positions ahead of the weekend. In recent markets holding profits over a weekend have proven dangerous.
Typically in down trending markets we will see a decent rebound about every 5-7 days. We were over due for a decent bounce. Now that we had one the focus will be on earnings and economics for next week.
We don't need a +200 point rally every day to create bullish sentiment. We just need the markets to be positive more often than negative. That would be a trend change for 2016.
The markets opened strong after Draghi talked about QE but the +271 point Dow rebound faded to only +115 at the close. Where is that real rally?
There was volatility in the market today but nowhere near the volume we had on Wednesday. Crude prices rallied as the front month contract moved to March and that boosted the energy sector and the Dow stocks Exxon and Chevron. The big gainer was Home Depot (HD) as traders bought the stock ahead of the blizzard in the Northeast.
The Dow dipped to only +40 in late afternoon but buyers appeared to lift it back to +115 at the close. The Nasdaq and S&P traded in negative territory midday but rebounded back into the green at the close.
The Russell posted a miraculous rebound yesterday but was flat for most of the day today. The one spike at noon was quickly sold.
The biotech sector was a big driver for the market rebound on Wednesday but the $BTK gave back -92 points today.
I am not excited about the market outlook. The fade in the afternoon suggests there are still some sellers and this may have been just a bear trap rebound from severely oversold conditions.
We are changing the format slightly this week. The entry date, earnings date, current price, change for the day and stop loss are all in the portfolio graphic. They will no longer be listed in the individual play descriptions. Everything you need is now available in a single location.
Current Position Changes
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.
DVN - Devon Energy
I raised the entry trigger and changed the option strike on Devon. See the play description for details.
Original Call Recommendations (Alpha by Symbol)
IWM - Russell 2000 ETF
Nice market bounce added +2.42 to the IWM but we really need the rally to continue to actually make any money here. I would love to see the small caps begin to outperform because that would lead the broader market higher.
Original Trade Description: January 20th
The IWM is the Russell 2000 ETF and the Russell was the only major index to close positive for the day other than the Biotech sector index. The Russell is in a bear market with a -24% drop from its highs. The Russell declined -47 points intraday and rebounded to gain +4.4 at the end of the day. The 960 level where it bounced was support from early 2013 and it was the 300-week average.
Typically, the small caps are the strongest index in December and January. That was not the case this year and there is a good possibility fund managers will bargain hunt there first when the buying begins.
Resistance from Tuesday's gap higher open is $101.20. I was going to recommend an entry trigger at $101.50 to get us past that level. The IWM closed at $99.18. However, by waiting to get past that resistance the option premiums could rise by more than $1. I would rather just buy the open and we will take what the market gives us.
Long March $102 call @ $2.76, no initial stop loss.
PCRX - Pacira Pharmaceuticals
Pacira shook off the loss from Thursday and posted a gain but we need to see it recover the $70 level. I never complain about a gain but it could have been better with the market rebound.
Original Trade Description: January 16th
PCRX delivered a very bumpy ride for investors in 2015. The stock outperformed the year before with +54% gain in 2014. Then sentiment changed last year and by October 2015 shares of PCRX were down -58% for the year and down -70% from its February 2015 highs. Fortunately some strong earnings news and a legal win helped PCRX pare its 2015 loss to -13%. Today PCRX is bouncing from support and looks poised to continue its late 2015 rebound.
PCRX is in the healthcare sector. According to the company,
"Pacira Pharmaceuticals, Inc. is a specialty pharmaceutical company focused on the clinical and commercial development of new products that meet the needs of acute care practitioners and their patients. The company's flagship product, EXPAREL® (bupivacaine liposome injectable suspension), indicated for single-dose infiltration into the surgical site to produce postsurgical analgesia, was commercially launched in the United States in April 2012. EXPAREL and two other products have successfully utilized DepoFoam, a unique and proprietary product delivery technology that encapsulates drugs without altering their molecular structure, and releases them over a desired period of time."
The legal win I mentioned above was a fight between PCRX and the F.D.A. There was a disagreement over how PCRX was marketing its Exparel drug. The FDA argued the treatment was only approved for a couple different types of surgery. The company filed a lawsuit against the FDA in September last year. On December 15th they announced a resolution with the FDA. The lawsuit was dropped and the FDA officially rescinded its warning letter about how PCRX was marketing Exparel. Shares of PCRX soared about 15% on the news.
Some of the volatility last year was likely due to PCRX earnings. The company has beaten Wall Street's earnings estimates in three of the last four quarters. Yet they have missed the revenue estimate twice. At the same time Revenue growth has slowed from +84% to +59% to +25% to +19.6% in the most recent quarterly report.
PCRX did offer some good news this year. On January 7th they pre-warned that Q4 revenues would be better than expected. Wall Street was estimating $67.4 million for the quarter. PCRX is now forecasting +12.2% improvement from a year ago to $69.4 million. They also raised their full-year 2015 guidance.
The stock market's sell-off in 2016 pulled PCRX down toward support in the $60 area but traders started buying the dip in a big way on Thursday. PCRX has outperformed the market the last two days in a row. If this bounce continues it could spark some short covering. The most recent data listed short interest at 23% of the relatively small 33.7 million share float. Another positive is PCRX's point & figure chart shows the bounce off support and is currently forecasting an $83.00 target.
Earnings: Feb 26th, before the open.
Long Feb $75 Call @ $2.75, initial stop loss $61.45
QQQ - Nasdaq 100 ETF
The Nasdaq 100 gained +117 points causing the QQQ to rise nearly $3 to $103.66. The next resistance is $106 and I would love to see that broken next week on strong moves by Apple and Amazon. Unfortunately, Apple is not likely to move sharply higher if they report slowing iPhone sales. There is a lot of bad news already priced into Apple shares so there is hope for a better than expected report.
Original Trade Description: January 20th
The Nasdaq fell -163 points intraday and rebounded to positive territory just before the close. Some late selling in the last few minutes knocked it back to -5 for the day. From -163 to -5 is a monster rebound. The biotech stocks led the way but solar stocks, semiconductors and even Apple and Netflix got into the act and rebounded strongly.
Netflix declined from its afterhours high of $123 to a low of $97 intraday before rebounding to close at $108. I would have loved to buy Netflix at $97. What a bargain.
Obviously, a lot of that rebound was short covering and we do not know if it will last. However, the intraday low on the Nasdaq Composite was 4,319 and very close to the flash crash low of 4,292 from August. While it was not a perfect retest, it was close enough that a lot of traders closed shorts and bought stocks.
The Nasdaq 100 ($NDX) and the index the QQQ tracks, failed to decline anywhere close to the same distance as the Composite. The NDX dropped to 3,992 with major support at 4,000. The rebound there was very strong and from the right support level.
After the bell FireEye (FEYE) raised guidance and F5 networks (FFIV) beat on earnings. That could help with sentiment on Thursday. Nasdaq futures are up +6 in afterhours.
I am recommending the March $104 call with no entry trigger. If the market is going to open up I want to be there on the opening bell. These short squeezes can run for days and most lasting rallies begin with short squeezes.
Long March $104 call @ $2.63, no initial stop loss.
STZ - Constellation Brands
Outstanding gain by STZ and nearing the prior highs. We could actually see a breakout if the market cooperates.
Original Trade Description: January 14, 2016:
STZ was one of last year's best performing stocks with +45% gains in 2015. Consistently raising earnings and revenue guidance can do that for a stock. The company is seeing so much demand for their beer products that STZ just announced they're building a huge new brewery in Mexico. Meanwhile their wine and spirits business is seeing stronger margins due to recent acquisitions. Overall STZ is moving into 2016 with the wind at its back.
STZ is in the consumer goods sector. According to the company,
"Constellation Brands is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2014, Constellation was one of the top performing stocks in the S&P 500 Consumer Staples Index. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico. Constellation is also the world's leader in premium wine, selling great brands that people love including Robert Mondavi, Clos du Bois, Kim Crawford, Rex Goliath, Mark West, Franciscan Estate, Ruffino and Jackson-Triggs. The company's premium spirits brands include SVEDKA Vodka and Black Velvet Canadian Whisky... Based in Victor, N.Y., the company believes that industry leadership involves a commitment to brand-building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones. Founded in 1945, Constellation has grown to become a significant player in the beverage alcohol industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 7,700 talented employees."
STZ has been killing it on the earnings front. They have beaten earnings the last three quarters in a row. Management has raised their guidance the last three quarters in a row. Their most recent earnings report was last week on January 7th. Analysts were expecting a profit of $1.30 a share on revenues of $1.62 billion. STZ beat estimates with a profit of $1.42 a shares. Revenues were up +6.4% to $1.64 billion. Strong beer sales has helped fuel double-digit shipment increases. The company announced they were building another brewery and raised their guidance again.
This bullish outlook sparked a couple of new price target upgrades ($172, $174 and $185). The stock soared to new highs and broke through key resistance near the $145.00 level on its earnings news and guidance.
Shares have seen some profit taking since its spike to new highs. Now STZ is near support at one of its long-term trend lines of higher lows. The simple 50-dma should offer technical support at $140.40. Meanwhile the $140.00 level could offer some round-number, psychological support. Both of these are converging near its trend line of higher highs.
STZ underperformed the market today, which may mean more profit taking ahead. We want to buy calls on STZ as it nears support in the $140.00-140.50 area. Tonight we are listing a buy-the-dip trigger at $140.50 with a stop loss $138.25, just under its early January low.
Long April $150 Call @ $4.70, initial stop loss $138.25
Original Put Recommendations (Alpha by Symbol)
DVN - Devon Energy
Devon was not triggered because the sharp spike in oil prices caused all the energy shares to move higher. This is great for us because it will give us an opportunity to get short with the put from a higher level.
I raised the entry trigger to $24.75 and raised the strike to the March $23 put.
Original Trade Description: January 21st
Devon Energy primarily engages in the exploration and production of oil and gas. The majority of their production is natural gas from more than 19,000 wells but they are making a concentrated effort to expand oil production. At year-end they had 689 million barrels of oil equivalent reserves. Company Description
In Q3 they produced 282,000 barrels of oil per day. That was a 31% increase over Q3-2014. That was the 5th quarter they exceeded guidance on oil production growth. That compares to their 680,000 Boepd of total gas and liquids production showing that oil was only about 41% of their total production. However, in Q3 oil accounted for 74% of total upstream revenue.
Devon is a well run company and highly regarded but the price of oil is killing them. They do have significant midstream assets including pipelines and processing facilities in the EnLink Midstream business. They own 70% of ENLC and 29% in ENLK. Those midstream companies generated $270 million in cash distributions in 2015.
The EnLink revenue is supporting Devon through this down cycle in the energy sector. Devon is also acquiring Access Pipeline in the first half of 2016 and that will add to their midstream assets.
If crude prices were to rally long term Devon would be a great company to own. However, in this period of falling oil prices from now until April the company is at the mercy of the declining sector.
On Thursday Devon shares rebounded with oil prices to resistance at $24.50 and then faded. When the switch to the March contract fades and crude prices begin to fall again I expect Devon to revisit the lows under $20 from Wednesday.
Earnings are February 16th so this will be a short-term play.
With a trade at $24.75:
NEW STRIKE!! Buy March $23 put, currently $1.95, stop loss $26.65
VXX - iPath S&P 500 VIX Futures ETN
Big market rally knocked -8% off the VXX pushing it back to $25 from the early $30 high on Wednesday. We do not need 200-point rallies every day for the VXX to drop. Several days of simply positive markets would do wonders.
Original Trade Description: January 16th
At the risk of stating the obvious, the last two weeks in stocks have been brutal. Investors have taken a risk-off attitude and sold just about everything. The small cap Russell 2000 index is already down -11% in the first ten trading days of 2016. The NASDAQ composite is off -10%. The S&P 500 has declined -8%.
The New Year has suffered a parade of negative headlines from disappointing economic data both in the U.S. and China. China devaluating its currency. N. Korea claiming to have hydrogen bombs (several times worse than normal nukes). Crude oil crashing into multi-year lows. Plus falling sentiment for corporate earnings, which are expected to be negative two quarters in a row.
No one wanted to be long over the three-day weekend, which helped drive stocks even lower on Friday. The S&P 500 dipped to 15-month lows before paring its losses on Friday. The fact that Friday was also options expiration just added to the volatility.
Stocks normally don't move that fast in a straight line for very long. Markets a very oversold and way overdue for a bounce. The rebound could show up this week. One way to play it is the volatility indices. The VXX follows the iPath S&P 500 VIX Short-Term Futures Index. When investors panic volatility spikes but these are almost always short-term events. You can see on the long-term weekly chart below these spikes always fade.
Tonight we are suggesting put options on the VXX to capture the decline as volatility fades again and it will sooner or later. We are betting on sooner. We want to buy the March $23 puts at the opening bell on Tuesday.
Long March $23 Put @ $2.41, no stop loss
XLE - Energy Select SPDR ETF
The shift to the March crude contract caused two days of short covering that pushed WTI and the XLE right to resistance. Fundamentals did not change. There is still a glut of oil that is rising every day. This short squeeze will pass.
Original Trade Description: January 19, 2016
The XLE is an ETF that represents the majority of the stocks in the energy sector. With the price of crude oil plunging and analysts predicting bankruptcy for 30-50% of the U.S. producers there is nothing to provide support for this ETF.
The few stocks that have dividends including Exxon, Chevron, Conoco and a few others, cannot support the sector. There are 45 stocks in the ETF with Exxon, Chevron and Schlumberger the largest weightings. That leaves about 40 stocks to drag the sector down as oil prices continue to fall.
This play does not need a lot of explanation. We are betting the energy sector will continue to decline as oil prices head for the low $20s.
This is the period of the year when oil inventories build. Demand is low and refineries will begin to shut down for spring maintenance in February and that will continue into March. Last year from the second week in January to the fourth week in April, U.S. inventories rose nearly 112 million barrels to record levels. They cannot repeat that this year because there is not enough available storage. This will drive prices even lower when producers run out of locations to store the oil.
We will plan on exiting this position the first week of March. I am not putting a stop loss on it initially because we could see some volatility whenever the shorts get squeezed. Once we are in the position for 3-4 days I will assign a stop loss
Long March $50 Put @ $2.62, no initial stop loss.
If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.