Option Investor
Newsletter

Daily Newsletter, Saturday, 5/30/2015

Table of Contents

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

Market Wrap

Economic Reality Hits Equities

by Jim Brown

Click here to email Jim Brown

Volatility returned after Friday's economic reports suggested a weakening economy. The economy contracted in Q1 and Consumer Sentiment fell to a six-month low. The Fed may want us to believe that the economy is rebounding but reality has a nasty habit of spoiling best laid plans.

Market Statistics

The U.S. markets were already poised for a decline following market drops in Europe and the weak economic reports just added weight to an already heavy futures session.


The Chicago Purchasing Managers Index (PMI) for May fell from 52.3 to 46.2 and well under consensus for a rise to 53.1. The Chicago PMI has now been in contraction territory under 50 for three of the last four months. All five components dropped into contraction territory with employment falling to the lowest level since April 2013. The February drop to 45.8 was a five year low and May was only slightly higher at 46.2. This is for May so analysts can't blame it on the weather.

New orders declined -13.8% to 47.5 while prices paid spiked to the highest level since December. Orders falling and prices rising are never a good combination. More than 42% of companies said their inventory levels were too high compared to only 12% several months ago.


On top of the lousy Chicago numbers the GDP revision for Q1 declined from +0.25% growth to a -0.75% contraction. This was widely expected by knowledgeable analysts but the investing public was apparently out of the loop as futures plunged on the news. Weak exports, government spending and consumer spending were a drag on the headline number. Corporate profits declined -5.9% after declining -1.4% in Q4. Consumer spending rose only +1.23% in Q1 after a +2.98% rise in Q4. Gross domestic income rose only +1.43% after a +3.71 rise in Q4. Exports declined -1.9%.

Analysts continue to blame winter weather in Q1 for the slowdown but that had nothing to do with the drop in exports and fall in corporate profits. They also correctly put some of the blame on the decline in the energy sector since a 55% drop in drilling activity is a major drop in capex spending.


The Atlanta Fed real-time GDPNow is still only forecasting +0.8% GDP growth in Q2. All we need is a few weak economic reports in June and it could go negative as well. The textbook definition of a recession is two consecutive quarters of GDP contraction. You can bet the pencil pushers will be doing everything they can to keep the Q2 number positive.


It was not only the U.S. GDP that contracted. Canada reported a -0.6% contraction in Q1 after +2.2% growth in Q4. This was the first quarterly contraction in Canada since Q2-2011. It was also the third consecutive quarter of declines from a high of +3.4% growth in Q2-2014. Analysts said "the decline in Q1 was attributable to a reduction in domestic demand due to lower business investment and private consumption of goods." They did NOT say it was due to winter weather.

Final domestic demand (consumer spending) declined -1.6% after a +1.6% rise in Q4. Household consumption rose only +0.4% in Q1. Goods production (manufacturing) declined -5.5%. Spending on structures fell -19.7%, machinery and equipment -7.4% and investment in intellectual property fell -21.2%.

I think we can safely say the economic decline was not specifically a U.S. problem but a North American problem and that makes it more difficult for the Fed to stimulate. It also suggests the Fed is not going to be raising rates in the near future.

Moody's Canadian GDP Chart

Consumer sentiment for May declined -5.2 points to 90.7 but that was much better than the initial release at 88.6. It is still a six month low and that does not bode well for consumer spending in the months ahead. The present conditions component declined from 107.0 to 100.8 and the expectations component declined from 88.8 to 84.2.

With gasoline prices rising and consumer sentiment declining the retail sales numbers for the next couple of months could be disappointing.


In Yellen's speech last week she said "growth in many other parts of the global economy, including China and some other emerging market economies, has slowed. Weak growth abroad and the strong dollar has dented U.S. exports and weighed on our economy." I think that is a safe bet that is broadly evident today.

Yellen also said, "If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise." I think Yellen is on to something. Despite the Fed's desire to raise rates they are struggling with the fact that the economic reality is not cooperating. Investors are also catching on to the fact that the economy is not recovering as fast as the Fed has promised and equities may suffer as a result.

Economists had fallen into the trap of expecting cheap oil to power a sharp uptick in consumer spending and a period of economic acceleration. What we are seeing is the reverse. Companies have announced capex reductions or postponements of roughly $800 billion in the form of reduced drilling, cancelled or postponed projects. This has caused the loss of roughly 100,000 high paying jobs in industries directly related to energy and tens of thousands more in industries that depend on the spending from energy companies and their employees.

Consumers are not spending their gasoline windfall and instead using the money to pay down credit cards or pay bills. With drilling activity still declining the economic weakness spreading out from the energy sector could continue to weigh on the U.S. economy all year.

The economic calendar for next week could go a long way towards changing the economic view. If the payroll reports come in lower than expected the Fed is going to have to temper its rate hike posture. Whether that has any impact on the markets at this point is unknown. They have warned of their plan to hike rates for so long that easing off that warning could be more of a problem. They may be forced to keep their pro hike posture just to prevent having to start all over from square one when/if the economy begins to grow again.

The ISM Manufacturing report on Monday could be disappointing given the recent weakness in the regional reports. The Fed Beige Book on Wednesday will try to keep up the economic cheerleading even if conditions have deteriorated. Conditions would have to be bleak before the Fed economists that prepare that report would actually say anything negative. Going from "moderate growth" to "modest growth" and back again every other month is hardly a real analysis of regional conditions.

The weekly jobless claims have been rising for the last four weeks and that suggests trouble in the employment reports. However, analysts are expecting a big jump in the ADP numbers from 169,000 last month to 192,500 for May. I wish them luck.

The Nonfarm payrolls surprised to the upside last month and analysts are expecting a gain of +220,000 for May. With all the regional reports showing declines in their employment components I would not be surprised to see a number under 200,000.

Lastly the OPEC meeting begins on Friday and nobody expects them to change their current stance of "produce everything possible" but there are some really irate countries in the cartel. These are the ones that can't produce any more and depend on oil for the majority of their national budget. I would not be completely surprised if there are not some kind of concession to those minorities. Meanwhile Saudi Arabia and Iraq are producing at record levels and promising more to come. You never know how much of the headlines ahead of the meetings are posturing rather than reality.


The split calendar gained another entry with Nippon Telegraph (NTT) announcing a 2:1 split. This should have no impact on the stock and should be ignored. The Exponent 2:1 split was approved by shareholders and the split date will be June 4th. Shares are testing a four-month low so I doubt there will be any impact on the stock.


Shares of Humana (HUM) spiked +20% late Friday after the company said it was approached by Cigna (CI) about a potential takeover. Humana said it had hired Goldman Sachs (GS) to advise them on the process. The Wall Street Journal said Aetna had also expressed interest in Humana. The company has almost 14 million members. A Morningstar analyst said Humana was interested in selling itself because it was very dependent on Medicare and the government is trying to impose additional cost cutting measures. Humana needs to be part of another company that has a broader customer base.

The rest of the insurance sector also spiked higher because nobody knows who will step up to try and capture Humana or be acquisition bait themselves. Aetna (AET) gained +1.4%, Anthem +2.2%, Wellcare (WCG) +4%, Healthnet (HNT) +1.5%, Centene (CNC) +4%, Molina (MOH) +1.4%, Anthem (ANTM) +2.2% and Cigna +3.7%.


Bristol Myers Squibb (BMY) declined -7% after the company reported some trial results at the American Society of Clinical Oncology (ASCO) conference. A lung cancer drug approved by the FDA in December showed a doubling of life expectancy in one class of patient but there was no benefit in other classes. After the report analysts said this could open the door for Merck (MRK) and Roche when they release their own drugs targeting the same cancers in the coming months.


Gamestop (GME) rallied +6% after reporting earnings of 68 cents that easily beat estimates for 59 cents. Revenue of $2.061 billion also beat estimates for $2.01 billion. The company also raised its full year guidance. Gamestop is the most shorted stock in the S&P at 47% and those shorts paid the price today.


ITT Educational Services (ESI) reported the results of an audit of their 2014 financials and the stock soared +81%. Yes, +81%. The key point here is that the company now believes the Department of Education composite score for measuring an institution's financial stability rose to 2.0 and the score must be above 1.5 to be deemed financially stable and not require governmental oversight.

Shares had fallen from $10 to $2 after the SEC filed fraud charges claiming the company hid financial information from investors relating to student loan programs that were deemed risky. The company rebutted the charges and filed the audited financial to prove their case. I think the gain today is simply another short squeeze since many traders expected them to fail.


Rosetta Stone (RST) rallied 18% after it received an "expression of interest" from RDG Capital Fund Management. The company said the board will carefully evaluate the expression if interest and declined further comment. Rosetta offers language learning courses in 30 different languages. Shares had declined -22% year to date.


EPlus (PLUS) reported earnings of $1.22 per share on revenue of $267.3 million. The company is a computer products reseller. Apparently that was not good enough for investors and the stock fell -8% on the news.


Heron Therapeutics (HRTX) reported their drug Sustol significantly reduced chemo symptoms in patients in late stage trials. The drug eliminates nausea and vomiting, which are common side effects of chemotherapy. Nearly 8 out of 10 people experience these symptoms while taking chemo. The drug Sustol is injected about 30 minutes before the chemo and is "remarkably effective." The company said it will file an application with the FDA in a "couple of months" and approval should take as little as 6 months. The drug will be ready to market two months later and could bring $850 million a year to Heron.


Prothena (PRTA) shares were initiated with a buy rating by UBS and the stock rallied +14% on the news. UBS said early data on the drug NEOD001 are clearly suggestive of an active therapy in a high unmet need indication. Near term data is positioned to increase investor confidence on the outcome of the phase-3 trial. The drug treats AL Amyliodosis. A second drug, PRX002 in the treatment of Parkinsons is also under appreciated. UBS said for multiple reasons we see Prothena as a "top M&A target" in biotech. Shares rallied +14%.


The Chinese markets crashed over the last two days after brokers tightened margin requirements in the overheated market. On Thursday the Chinese markets declined -6.5% on record volume. That was the biggest one day decline since the financial crisis. The Shanghai Stock Exchange traded a record $193.57 billion in shares on Thursday. The Chinese market has risen +140% over the last 12 months despite a slowing economy. The market rules change several months ago opened the door for anyone to own stocks and brokerage accounts were being created at the rate more than one million a week. Stocks bought on margin hit a record 2 trillion yuan on Tuesday. On Thursday morning three brokerages hiked margin requirements ahead of what is expected to be a similar move by regulators. Two other brokerages hiked requirements earlier in the week.


Crude oil had a rough week. After dropping to the low for the month at $56.51 on Thursday the futures rebounded to nearly $61 on Friday. The movement on Friday came from the falling dollar and news that active oil rigs declined -13 for the week. Investors had been expecting a positive gain in the rigs after only a minimal decline the prior two weeks. This suggests the bleeding may not have stopped.

Earlier in the week Iraq said it was going to ship 26% more oil in June or roughly an additional 800,000 bpd to 3.75 mbpd. This may be posturing ahead of next Friday's OPEC meeting because the oil minister said export capability is capped at 3.1 mbpd. The headlines still weighed on oil. Also, a sudden surge in the demand for supertankers caused a spike in rates from $52,987 per day on May 6th to $83,412 per day on May 20th. That is the highest rate since 2008.

At the start of June OPEC members will have nearly 485 million barrels in transit to buyers and the most at any time so far this year. Another 20 million barrels are stored on ships at sea. OPEC produced 31.3 million barrels per day in April and probably more than that for May. Their official quota is for 30 mbpd but they threw that out at their last meeting when they decided to punish high cost producers and try to grab as much market share as possible at lower prices. That is not expected to change.

However, since the November OPEC meeting Saudi Arabia has a new king and a new oil minister. They burned through $36 billion in forex reserves in March/April. That is the budget for the entire year. The new king may have a different outlook on low oil prices. In order for Saudi Arabia to agree to production cuts Russia would also have to agree. Assuming Russia did agree how would anyone police their production since Putin lies about everything?


For the week ended on the 29th the active rig count in the U.S. declined -10 to 875, down from a high of 1,931 in December. Oil rigs declined -13 to 646, down from 1,609 at their high. That is a drop of -963 oil rigs or -59.8%. Gas rigs gained +3 to 225. Offshore rigs were unchanged at 29, down from 60 in January.

If Iraq really ships that additional oil and OPEC continues flooding the market with crude the rig count could go a lot lower. Investors were expecting oil prices to rebound over the summer and producers to begin putting rigs back to work in July. Depending on the OPEC news next week that may not happen and crude prices could move lower.


Markets

Tuesday's drop was erased by Wednesday's M&A generated short squeeze but sellers returned in volume on Friday. The economics were blamed but it may have been simply end of month profit taking. The first trading day of June has the worst record of any month in four of the last seven years. Since 1998 the Dow has averaged a loss of -87 points on the first day of June. Source

I don't know what causes that June swoon but it is regular enough that traders could profit from exiting in advance and then buying the dip.

June has not been kind to the major indexes over the last ten years. The Dow has posted losses in 8 of the last 10 years with an average -1.6% decline. The S&P lost 6 out of 10 with an average decline of -1.3%. That is the worst month of the year for the S&P over the last ten years. The Nasdaq lost in 7 of 10 with an average decline of -0.9%.

Another factor impacting the last day of May and first trading day of June is the Russell index rebalance. On Friday Russell re-ranks their stock universe for the Russell 3000. That is the Russell 1000 and Russell 2000 combined in one index. The ranking sets up for the actual rebalance that happens after the market close on June 26th.

There is roughly $4.4 trillion indexed to the Russell 3000 index. The R3K includes more than 95% of the U.S. market cap. That means whenever Russell changes the ranking some stocks leave, some are added and some move from the Russell 2000 to the 1000 and others move backwards.

The Russell 3000 is the top 3,000 stocks by market cap in the USA markets. The Russell 1000 is the largest of those 3,000 stocks and the Russell 2000 is the bottom 2,000 stocks in the index. As stocks grow they move into the top 1,000 and if they shrink they move from the 1,000 back down to the 2,000. Quite a few other stocks fall out of the index altogether because their market cap declined and other stocks not currently in the index take their place. Analysts expect more than $43 billion in rebalance related trades over the next three weeks.

Now that you have the ground rules you are free to game the system. Numerous hedge funds have developed this to an art. Large organizations like Deutsche Bank have an entire group of certified strategists that attempt to predict the ranking and therefore predict which stocks are moving in or out of the indexes. Knowing this in advance is very advantageous because those leaving will decline and those being added or upgraded will rise.

The formulas are complex and it takes a serious amount of effort by a lot of people to come even close to the same results as the Russell analysts. Some stocks are easy. For instance Shake Shack (SHAK) will be added because it did not exist in the 2014 rankings. Stocks that have IPOed recently and have a significant market cap are definitely going to be included. Each one that is added means somebody gets ejected. Another addition would be Vista Outdoor (VSTO), they were spun off from Orbital ATK several months back.

Other new stocks would include Cyberark (CYBR), Box Inc (BOX) and Radius Health (RDUS). Any company that was acquired or merged with another like Forest Labs (FRX) or Fresh Del Monte (FDP) will be removed from the indexes and the surviving entity will have a larger weighting.

Here is a complete list of stocks expected to be added and deleted from the Russell 3000 as composed by H.C. Wainwright. Russell Addition/Deletion List

The speculation over who will be deleted and added could easily account for the unusual string of negative trading days on the first day of June.

For those of us without access to super computers and unlimited download capability of all the data on each individual stock we get to sit on the sidelines and watch the big boys make the trades. Fortunately Russell does publish the actual list of proposed additions and deletions on June 12th and a revised list on June 19th. Anyone that wants to game the actual rebalance on the 26th can do so with a couple weeks left in the process.

Volume on Friday rose to 7.16 billion shares and the most since May 6th. However, much of that gain was rebalance related with 40% of the volume coming at the close. Thursday's volume was 5.68 billion shares.

Last week we saw a continued decline in the Dow Transports, which are now down about 10% from their highs in 2015. The Dow Industrials are up +1% over the same period. This divergence is becoming more extreme as each day passes and has the potential to drag the industrials significantly lower.

This could be one of the reasons the Dow weakened over the last couple of days. Eventually divergences matter and we may have reached that point on the transports.


The S&P posted four consecutive lower highs and missed out on five only because Monday was a holiday. This is not bullish. However, the low from Tuesday at 2099 was not repeated the rest of the week. Friday's -13 point decline came despite the $2.50 gain in oil prices or maybe I should say as a result of the rise in oil prices. Energy stocks did not rise with oil.

Bond yields declined sharply all week with the yield on the ten-year closing at a five-week low of 2.095%. Stocks declining and treasuries rising sounds an awfully lot like investors are starting to decide the economy is actually weakening and it is time to move to safety.


Since the primary uptrend on the S&P has not failed and the index is just slightly more than -1% (-23 points) from a new high it is hard to paint a bearish scenario just from the charts. Dips happen and this one has been very minor so far. Stocks do tend to retrace their moves when they fail at new high levels. They drop back to consolidate and then make another run at the highs. If that happens and those highs are not broken then we really do have something to worry about. So far this has been just some weak profit taking.

If the S&P declines below that 2099 low from Tuesday then the 2075-2080 level becomes the target. The 100-day average is 2080.


The Dow did make a new low for the week on Friday at 17,967. In round numbers the 18,000 level held as support but the lower low suggests there may be trouble ahead. The financial sector is declining since the odds of a rate hikes are slipping farther into future as each day passes. The industrials are fighting lower demand and the high dollar and it appears to be a losing battle.

The key support level IF this is going to be just a garden variety dip is 17,800 or possible 17,600 but that lower level is critical. Initial resistance remains 18,200 and despite Wednesday's short squeeze that level was not tested.



On the bullish side the Nasdaq refuses to drop. The -28 points on Friday was just a haircut and not even a decent trim. Wednesday's new high close at 5106 is only 36 points away and the Nasdaq is showing no signs of collapsing. However, a lot of that strength is due to the biotechs and the merger activity in the chip sector.

The biotechs are up +21% for the year and they are holding at their highs. The chip sector was lifted to a new high by the Broadcom acquisition and speculation that Intel will buy Altera (ALTR) next week.



The Nasdaq could vault to a new high at any time as long as it continues to hold at that 5100 resistance. This is the most bullish of all the indexes but there is a lot of drag from those others. Rarely does one index breakout to new highs while the other indexes are setting new monthly lows. There is solid support at the 5000 level so a protracted decline would be a major change in market sentiment.



The AAII sentiment saw a slight adjustment from neutral to bullish because of the Wednesday rebound that saw the Nasdaq close at a new high. That lured about 1.8% of the survey respondents away from neutral and into the bullish camp but by far the neutral category is still the winner.


The Russell 2000 only declined -0.45% last week and was the second best performing index behind the Nasdaq 100 ($NDX) at -0.41%. The R2K did post a lower high but there was no real weakness. Monday will be the day for the Russell as the rebalancers begin selling those stocks they believe will be ejected from the R3K. Russell futures dropped -3 at the close on Friday. The Russell is not showing us any direction despite the lower high. It is still in an uptrend and still holding above that 1230 support. If we do see the Russell begin to decline next week it could provide additional drag on the large cap indexes. Likewise a rebound over resistance at 1260 would be very bullish.


Last week I suggested we could see some fund managers begin to put some of their extra cash to work in June as they window dress the midyear statements. A decent dip this week would give them a buying opportunity and we will see if that window dressing theory plays out. Just remember, I am expecting June to finish higher rather than go higher in the next week or two.

I remain in the cautiously long until proven wrong mode. I would be a dip buyer at any of the clear support levels like 17,800 or 17,600 on the Dow. Watch for a bottom to form rather than just jump in if those levels are touched. That would be 2075-2080 on the S&P and 5000 on the Nasdaq. If we dip below those levels I would wait for a rebound back above them before testing the water.

If you like the market commentary 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.

subscribe now

Random Thoughts

The U.S. GDP fell into contraction in Q1 and the third time in contraction since the financial crisis. The last time that has happened was in the mid 1950s. The recovery is so lackluster and erratic that the Fed has not hiked rates since 2006. I reported last week that the U.S. government is going to change the way they calculate GDP in order to erase the negative numbers for the last two first quarters. If you don't like the numbers just change the way they are calculated. The general public will never know and everybody can be happy. Unfortunately in deciding what calculations to change they found out that by changing the parameters for Q1 to raise the growth the same calculations would probably lower growth for Q2 and Q3 so the bottom line would remain nearly the same. I guess 2+2 = 4 regardless of how you try to change it.

Since 2010 the U.S. has averaged +2.2% growth. That is only 65% as fast as the national average since the 1930s. A slow growth economy is at risk for all kinds of shocks that can push it back into contraction. Weather, dock strike, strong dollar, etc can all significantly impact growth. In the last three major expansions the economy never had a negative quarter. You have to go back to 1973-1975 to find a negative quarter in an expansion period.


The Greek tragedy continues to play out despite several deadlines that have come and gone. Greece has a flurry of payments due to the IMF in June and they claim they can only pay the first one.

Payments due to the IMF

June-5th 300M euros
June-12th 300M euros
June-16th 558M euros
June 19th 335M euros

Not making those payments when due does not constitute an immediate default. They have until the end of June to make the payments without defaulting. If they do fail to make the payments to the IMF it does not trigger default clauses in other debt classes. The odds are about 100% that Greece will not make all these payments without a bailout from the Troika.

The bigger problem is the 7 billion in euros due to the ECB in July and August.

Greek citizens continue to withdraw money from banks at a record rate. Banks have received more than 80 billion euros from the Emergency Liquidity Assistance program extended to the Bank of Greece in order to offset the withdrawals and prevent bank failures. Deposits have fallen from 240 billion euros to 142.8 billion since the Greek economic problems began. Bloomberg Article

Bloomberg Chart

Treasury Secretary Jack Lew warned the G7 last week there was the potential for an accident in the global economy if Greece and its creditors did not reach a deal before the existing bailout expires on June 30th. Lew said, "There is great uncertainty in there at a time when the world needs greater stability and certainty" Source


The NYSE said margin debt hit a new record high at $507 billion as of the end of April and $30 billion more than March. It is now about 50% higher than it was in 2007 just before the market crash. Despite more than $100 billion in funds flowing out of the market so far in 2015 the market is still making new highs. If we ever do have a decent dip that monster margin debt could accelerate any decline. Source


Adjusted pretax corporate profits fell -5.9% in Q1 and the second consecutive quarter of declines. Profits declined -$125.5 billion in Q1 for the biggest decline in seven years. In Q4 profits declined -1.4% or a drop of -$30.4 billion. This is not the same profit numbers you are used to seeing in a company's quarterly reports. These figures are adjusted for depreciation and the value of inventories. How much longer can corporations continue to post slowing profits before the equity market figures it out? Source


Amazon (AMZN) is planning on producing and marketing its own brand of foods under the Elements brand. Earlier in May Amazon filed for trademark protection for more than two dozen categories under the Elements brand. Amazon has been selling diapers and baby wipes under the brand and is going to greatly expand its offerings to include coffee, soup, pasta, water, milk, cereal, baby food, vitamins, dog food and assorted household items. Amazon has approached private-label food manufacturers like TreeHouse Foods over a partnership. The company also has other product lines marketed under the Basics, Strathwood and Pinzon brands. Market research firm Information Resources said private label goods were a $120 billion market in 2014. Source


Costco (COST) loses $40 million a year selling $4.95 rotisserie chickens. The company sold 76 million of those chickens in 2014 because customers love them and like the $1.50 hotdog at the snack bar they come into the store because of the cheap snacks and then purchase a cart of regular products. Most other stores have raised their prices to $5.99 because the price of chickens had been rising. With the ban on exports to some countries because of the bird flu epidemic the cost of chickens could actually decline in 2015. Source


May set a record for M&A with $241.6 billion of deals already announced. That tops the prior record of $225.8 billion in May 2007 according to Dealogic. January 2000 is in third place at $212.7 billion. PricewaterhouseCoopers (PWC) said the deal train is showing no signs of slowing. They believe 2015 could be a record year and that will not be a small feat since 2014 is the current record holder.

June may rocket off to a fast start if the rumored Intel/Altera (ALTR) acquisition is announced next week. Add in the potential deal for Humana (HUM) and we could be off to a fast start.

Notable deals in May included Verizon buying AOL, Charter buying Time Warner Cable and Bright House Networks. Ann Inc (ANN) being acquired by Ascena Retail (ASNA). Avago (AVGO) buying Broadcom (BRCM).


Michael Feroli of JP Morgan said the Fed is in such a hurry to hike rates that the economic bar has been lowered dramatically. According to Feroli the Fed will hike rates in September if the economy is on pace for annual growth of at least 2% and nonfarm payrolls rise by at least 175,000 per month. Krishna Guha, vice chairman of Evercore ISI said GDP growth could average as little as 2.25% to allow the Fed to hike in September as long as payrolls averaged about 200,000 per month. Payrolls in 2015 have averaged +194,000 compared to +260,000 in 2014.

Yellen continues to remind us that a rate hike "will be appropriate at some point this year." The fed funds rate has been at zero since December 2008. Vice Chair Stanley Fischer did express some caution last week when he said "If the economy is growing very, very slowly we will wait" to hike rates. With -0.8% in Q1 and the Atlanta Fed GDPNow showing only +0.8% growth in Q2 or zero for the first six months that should qualify as "very, very slowly."


Google announced ten new products and innovations at its developer's conference last week. Read about all of them Here


The growing number of Russian military soldiers captured in the Ukraine makes it nearly impossible for Putin to continue claiming Russia was not involved in the conflict. Despite the growing number of soldiers injured and/or captured claiming they were there under orders with their units, Putin claims they deserted and went to the Ukraine on their own or were there helping out while on vacation. Obviously anybody with a fifth grade education can see through that BS but Russian citizens still believe Putin. Family members of the captured soldiers are being forced to say on Russian television that the men had deserted and left their families to go fight for Ukraine in order for Putin to keep the ruse alive. Source

Meanwhile Russia is massing heavy firepower consisting of tanks, artillery and hundreds of mobile rocket launchers on the Ukrainian border. All identifying number plates and marks have been removed as well as the insignias on the soldier's uniforms. The amount of weaponry is three times the buildup in March that eventually moved into Ukraine and joined the fight. Reuters article


Global central banks have printed the equivalent of $5.7 trillion to stimulate markets. That is enough cash to pave a six-lane highway circling the world TWICE with $100 bills according to Mark Haefele of UBS. Betting against that infusion of cash has been suicidal. Even worse, because of the very low interest rates everyone under the sun has been selling debt. Since 2010 global banks have added $22 trillion in bonds to their balance sheets.

Anyone that does not believe there will be a selling panic in the bond market once the Fed begins to normalize rates is living in a fairytale world. Source


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"It is better to be out of the market and wishing you were in, than in and wishing you were out."

Albert W. Thomas

 

subscribe now

 


Index Wrap

One Step Forward, Two Steps Back

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The apparent breakout moves in the major indices were quickly reversed. All that's happened amid the sound and fury is that the trading range got extended a bit above the prior 4-month price range: e.g., to between 2050 and 2125 in the S&P 500 (SPX), between Dow 30 (INDU) 17650 - 18300 and a 4850 - 5100 range in the Nasdaq Composite (COMP). Given the Market up until 'Fed Dread' these are relatively tight price ranges. Nevertheless, the indices remain in long-term uptrends.

The Nasdaq is up against some technical price resistance and COMP and the entire Market is overbought. A sideways bull market trend tends to relieve or 'throw off' such longer-term extremes by either a sharp downturn, seemingly not likely currently, OR by a prolonged sideways move such as over months as we've been seeing and could see for a few more. Such movements tend to restore equilibrium in the Market. A bubble is precisely a period when there is NO equilibrium in valuations and pricing becomes manic. I've been through stock, precious metals and real estate bubbles and know something here.

The low volatility environment has meant that price ranges as a percentage above/below the 21-day moving average have contracted as you'll see on my charts. Whereas previously the S&P would trade in a 3 percent range above or below its 21-day average, sometimes hitting 3.5-4% above, SPX is trading with price swings not even out to TWO percent above/below the 'centered' (21-day) moving average.

The more typically volatile Nas Composite (COMP) is also not seeing price swings of much GREATER than 2 percent; COMP could hit 3% (above its centered average) on an upswing but doesn't look capable of it currently. When volatility increases or jumps, we'll most likely see moving average envelope lines EXPAND out to 3-4 percent above/below current market in the S&P and 4-5% in Nasdaq. Price moves to and above these envelope lines will then help define a 'new' overbought extreme. It's good to know the likely 'extremes' when trading the indexes!

The S&P 500 Volatility Index (VIX):

The S&P 500 (VIX) volatility index has popped up a bit recently from support in the 12 area in VIX, approaching 14 now on a daily chart Closing basis. There were intraday moves to 14.5 this past week. 14.5 to 15 is what I see as a 'maximum' near-term upside.

The trading range market of the past 3-4 months has not generated VIX readings above 16, at least not for long. I don't see prices starting big swings to the downside and can mostly suggest hedging portfolio risk at VIX levels in the 13-13.5 zone. As a speculative play, upside doesn’t look higher than the 15 area in the near to intermediate-term; i.e., 2-3 days to 2-3 weeks.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

The S&P 500 (SPX) failed to sustain its move to new highs above 2120 as SPX again gets pulled toward 2100. SPX is most recently stuck in narrow range between 2080 to 2130; looking out over the entire past 4-month period, the spread between lows and highs remains a relatively narrow 2050-2125 range.

When volatility (VIX) jumps, so will prices, up OR down. I anticipate 'up' but a decisive and sustained advance, above the multimonth trading range may be some time off. We've had 4 months of range bound trading, we could get 3 months more.

I've 'pulled in' or reduced anticipated trading 'bands' (moving average envelopes) for SPX in this low volatility period to 2 percent below and 2 percent above the 21-day moving average as seen below. This suggests no sustained dip to below 2060 or above 2160.

Support comes in initially at 2100, extending to 2080. Resistance is suggested in the 2130-2133 area, then at 2145, extending to fairly major technical resistance around 2160.

Trader sentiment readings tend to be mostly in bullish territory. The bulls don't see the bears as able to 'break' the Market and tend to think it's only a matter of time before higher levels are seen across the board. But bullish fever is NOT raging due to Euroland and Fed uncertainties; amid other worries!

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) remains in an uptrend as seen visually in the pattern of higher highs and higher (downswing) lows seen by drawing OEX's up trendline. Trendline support is suggested at 922 initially, with next chart support showing up around 910. A break below the 21-day average and the up trendline would be bearish for a move to new highs in the short-term.

The intermediate trend in the big cap S&P 100 is neutral per the 4-month trading range and remains long-term bullish.

Near resistance is seen in the 932 area, extending to 938. Above 938 projected next resistance is to 945, perhaps extending to 950.

A sustained breakout above 930-932 could carry to 960 or higher but I don't see prices headed that way soon. Downside risk is to 895-900 again if the Market took a bigger dip which also doesn't look to be 'high' risk. Downside vulnerability is seen in the charts and keeping with fundamentals involving China/Europe and Fed thinking here at home. This keeps many investors on the sidelines, especially notable in some years as over summer.

THE DOW 30 INDUSTRIAL AVERAGE (INDU); DAILY CHART:

The Dow 30 (INDU) has seen a quick Fibonacci 62 percent retracement of its prior run up. The Dow might dip a bit more and my first expected near support is highlighted below at 17950, extending in a 'worst-case' scenario to 17800. I'm not looking for that but I'm also not looking for a quick rebound to 18200 resistance or back up to the recent 18350 high.

A general background note is to also suggest that the longer the Dow trades below its 21-day moving average the more downside potential appears. Yet to happen is a 2-day back to back consecutive Close below this key trading average. 2-3 days below the 21-day and intermediate momentum is definitely down.

I noted already resistance seen at 18200, then the prior recent highs at 18350, extending to 18500. Long-term charts would suggest long-term resistance doesn't come into play until well above current levels; e.g., to the 18700 area. 17650 is the low end of the past 4-month trading range and 18300 looks to be the high end of the trading range anytime soon.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) is mixed in its chart pattern as long as prices 'stall' in the 5100 area suggesting a potential double top. Conversely, a sustained move above 5100 would suggest a rise to the 5150 area and perhaps to near 5200. Conversely, a sustained dip to below 5025-5000 in COMP would suggest a possible test of trendline support around 4950. 4850 is major support suggested by the low end of the past 4-month price range.

I've no strong conviction of the Composite getting and holding, above 5100 in the coming week on out to 2-3 weeks. COMP has major resistance showing on weekly charts (not shown) at 5160, not far above the line of recent highs. The Nasdaq Market may have reached at least an interim limit to how high for tech stocks for now.

NASDAQ 100 (NDX); DAILY CHART:

The big cap Nasdaq 100 (NDX) shows the same potential double top as the broad Nas Composite. Since I analyze 4600 as long-term chart resistance and that's not far overhead I see potential for 4550 at most short-term, maybe to 4600 suggesting a near-term top in the big cap NDX.

The foregoing bearish possibilities are set against the Index remaining in an uptrend. No uptrend, no up trendline, so I'm watching for breaches of this line of support that are not short lived 1-day affairs. See the chart.

Near support is suggested at the 21-day moving average, currently at 4473, with support extending to the 4450 area. Fairly strong technical support is seen at NDX's up trendline currently intersecting in the 4400 area. 4320 is support suggested at the outer envelope line.

My most 'bearish' view of NDX current is more a neutral take on the charts which is the likelihood of NDX being 'locked' into the same trading range ahead (e.g., next 2-3 months) as has been the case for the past 3 months: 4315 on the downside to approximately 4555-4560. If we look at past 6-7 months, NDX's price range over that period was 4100-4560.

The NASDAQ 100 ETF STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) reflects the same potential 'lid' on the stock (at the prior high in the 111-111.1 area) as seen of course in the NDX. The potential projected 'maximum' price range of the stock has narrowed to levels around 3%-3.5% below and the key 21-day moving average. Selling picked up when QQQ stalled again in the same area as late-April. No surprise!

QQQ is in the approximate middle of its uptrend price channel but some further downside for the Q's looks more likely than a decisive (and sustained) upside breakout above 111. 'Some' downside potential is potentially to the 109-108 zone. 108 is at current suggested trendline support.

The On Balance Volume (OBV) line is pointed down/bearish. In the event that 108 trendline support is pierced, fairly major support next comes in around 106.

Buying any dips to 108 area if seen, with trade exit at 107, with a target back to 111 and higher offers favorable risk to reward potential. Stay tuned.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) has gone from front runner bull status to lag behind in the Nasdaq at least. Resistance is seen at 1260, then at the prior highs in the 1273-1275 area.

Support is noted at 1233 on the chart, extending to 1220.

With less than wild enthusiasm to be in RUT options currently I favor bullish strategies in the 1220 area, bearish plays around 1270.


GOOD TRADING SUCCESS!




New Option Plays

Demand Is Booming, Results Are Not

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Zillow Group - Z - close: 91.39 change: -1.66

Stop Loss: 95.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.0 million
Entry on May -- at $---.--
Listed on May 30, 2015
Time Frame: exit prior to July expiration
New Positions: Yes, see below

Company Description

Trade Description:
The National Association of Realtors just announced on May 28th that pending home sales surged to nine-year highs in April. The U.S. real estate market is booming and yet shares of Z are down -31% from their 2015 closing highs. What's wrong with this picture?

Zillow is considered part of the financial sector. They are a free online service for consumers that provides home values, listings, and mortgages. According to the company, "Zillow Group (Nasdaq:Z) houses a portfolio of the largest real estate and home-related brands on mobile and Web. The company's brands focus on all stages of the home lifecycle: renting, buying, selling, financing and home improvement. Zillow Group is committed to empowering consumers with unparalleled data, inspiration and knowledge around homes, and connecting them with the right local professionals to help. The Zillow Group portfolio of consumer brands includes real estate and rental marketplaces Zillow(R), Trulia(R), StreetEasy(R) and HotPads(R). In addition, Zillow Group works with tens of thousands of real estate agents, lenders and rental professionals, helping maximize business opportunities and connect to millions of consumers. The company operates a number of business brands for real estate, rental and mortgage professionals, including Postlets(R), Mortech(R), Diverse Solutions(R), Market Leader(R) and Retsly(TM). The company is headquartered in Seattle."

The last year has been a rocky one for Zillow investors. The stock rallied from $130 to $160 in about three days back in July 2014 when the company announced a $2.5 billion stock for stock deal to buy its rival Trulia. By January 2015 the stock was bouncing along the $93.00 area.

Shares of Z did spike in February 2015 when they finally announced the completion of the merger. Shares surged more than 15% in one day on the news it had closed the acquisition. Zillow changed their name to Zillow Group. The combined company accounts for about 60% of the online real estate advertising market. It's the biggest U.S. real estate and home-related branding company on the Internet and mobile.

After the February spike higher shares of Zillow did nothing but fall. This culminated into a huge spike down on April 14th. The company issued an earnings warning. Z's management said that 2015 would be a "transition year", which on Wall Street means our quarterly results will stink. The company cut their 2015 revenue estimate down to $690 million. At the time Wall Street analysts were estimating $722-753 million in revenues. Z slashed their EBITDA estimate to $80 million when analysts were expecting $141 million. Zillow blamed the length review process by the FTC over potential anti-trust issues. Z's management was expecting a three-month review. It took nine months. No worries though, Z's management says that 2016 and 2017 will be awesome.

Z's most recent earnings report was May 12th. It was the first report with the combined company's results. Z posted a loss of $1.19 per share versus a 16-cent loss a year ago. Backing out their restructuring costs and stock option expenses their adjusted earnings was a profit of $0.05 per shares. That was 17 cents better than analysts were expecting. Revenues soared +92% to $127.3 million. Yet that wasn't good enough. Wall Street had been forecasting revenues in the $135-141 million range.

Shares of Z popped on its earnings news but they have done nothing but sink since then. Now the stock is poised to breakdown below round-number support at $90.00. The point & figure chart is bearish and forecasting an $86.00 target (which could get worse as Z continues to sink).

Bears point out that Zillow's valuation is very rich at more than 60 times forward earnings. The company also faces competition from the likes of Move.com and Realtor.com, both run by News Corp. My only concern is that there are a lot of bears shooting against this stock. The most recent data listed short interest at 37% of the 46.3 million share float. That's why Z can see huge one-day spikes as shorts panic. Yet overall they have been correct with Z underperforming the market.

Tonight I am suggesting a trigger to launch small bearish positions at $89.85. Odds are pretty good we could see Z retest its lows in the $80-81 area.

Trigger @ $89.85

- Suggested Positions -

Buy the JUL $85 PUT (Z150717P85) current ask $2.40
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Disappointing Data & Greek Worries Sink Stocks

by James Brown

Click here to email James Brown

Editor's Note:

Worse than expected economic numbers in the Chicago PMI and the Q1 GDP estimate did not paint a rosy picture for U.S. growth. Meanwhile concerns over the Greece situation sunk stocks in Europe with the major indices down more than -2%.

The combination produced a widespread decline for the U.S. market on the last trading day of May.

We have removed ADBE as a candidate. On Monday we want to exit our ETN, NTRS, and SNA trades.


Current Portfolio:


CALL Play Updates

Anthem, Inc. - ANTM - close: 167.85 change: +3.63

Stop Loss: 161.85
Target(s): To Be Determined
Current Option Gain/Loss: +37.5%
Average Daily Volume = 1.8 million
Entry on May 18 at $162.00
Listed on May 16, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/30/15: The big healthcare names surged on Friday after Humana (HUM) announced it was putting itself up for sale. Aetna (AET) and Cigna (CI) are potential suitors for HUM. Shares of HUM soared +20%.

ANTM rallied with its peers and shares were up +$6.76 or +4.1% at its best levels of the day. ANTM settled with a +2.2% gain. Tonight we are raising our stop loss to $161.85. I would not launch new positions at this time.

Trade Description: May 16, 2015:
One in nine Americans is covered through one of Anthem's affiliated medical plans. The company is only getting bigger. Previously known as Wellpoint (WLP) they officially changed their name to Anthem (ANTM) in December 2014.

Initially both Wall Street and the healthcare industry were worried about Obamacare. Yet the Affordable Care Act has been a strong tailwind for many of the large healthcare insurers adding millions of new customers. Now that the major players have ironed out a lot of the wrinkles any negative impact from the ACA seems to be fading.

If you're not familiar with ANTM they are in the healthcare sector. According to the company, "Anthem is working to transform health care with trusted and caring solutions. Our health plan companies deliver quality products and services that give their members access to the care they need. With nearly 71 million people served by its affiliated companies, including more than 38 million enrolled in its family of health plans, Anthem is one of the nation’s leading health benefits companies."

Looking ANTM's earnings over the past year the company's results have been a little hit or miss. Yet one thing they have consistently done is raise guidance. Since the stock market is always looking forward this bullish outlook from ANTM has helped drive the stock to new all-time highs.

Their most recent earnings report was April 29th. ANTM reported their 2015 Q1 results. Wall Street was looking for $2.69 per share on revenues of $19.28 billion. The company delivered $3.14 per share, which is a +29.8% improvement from a year ago. Revenues were up +6.8% to $18.85 billion (a miss). Management raised their guidance above analysts' estimates for the fourth quarter in a row.

The company has an active stock buyback program. In the first quarter they spent $774 million buying back 5.7 million shares. As of March 31st, 2015 they still had about $4.9 billion left on their board-approved share repurchase program.

Technically the stock has been churning sideways in the $150-160 zone for the last several weeks. ANTM threatened to breakdown under support near its 50-dma and the $150 level in late April but managed to reverse course and now it's breaking out past resistance in the $160 area. Tonight we are suggesting a trigger to buy calls at $161.65.

- Suggested Positions -

Long SEP $170 CALL (ANTM150918C170) entry $4.40

05/30/15 new stop @ 161.85
05/26/15 new stop @ 159.85
05/18/15 triggered on gap open at $162.00, trigger was $161.65
Option Format: symbol-year-month-day-call-strike

chart:


Cognizant Technology - CTSH - close: 64.72 change: -0.12

Stop Loss: 63.45
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 3.6 million
Entry on May -- at $---.--
Listed on May 28, 2015
Time Frame: Exit PRIOR to July option expiration
New Positions: Yes, see below

Comments:
05/30/15: CTSH spent Friday's session ricocheting up and down inside a 90-cent range. Shares eventually settled nearly unchanged. There is no change from the Thursday night new play description. Our suggested entry point is $65.65.

Trade Description: May 28, 2015:
Shares of CTSH are pushing toward new all-time highs as the company continues to deliver better than expected earnings and revenue numbers. The company is in the technology sector. They provide business and technology services.

According to the company, "Cognizant (CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world's leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 100 development and delivery centers worldwide and approximately 217,700 employees as of March 31, 2015, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world."

CTSH popped to new highs back in February after reporting their Q4 results, which beat estimates on both the top and bottom line. Revenues were up +16%. Management raised their Q1 and 2015 estimates.

The stock rallied again when they reported their 2015 Q1 results on May 4th. Earnings rose +14.5% to $0.71 per share, which was a penny above estimates. Revenues soared +23.5% to $2.99 billion, above estimates.

Management raised their 2015 earnings and revenue guidance. They expect earnings growth of +9% and revenues to rise +19% above 2014 levels. Multiple analyst firms raised their price target on CTSH stock into the $70-76 range. Coincidentally the point & figure chart for CTSH is bullish and forecasting at $76.00 target.

At the moment CTSH is hovering just below resistance in the $65.50 area. We are suggesting a trigger to buy calls at $65.65.

Trigger @ $65.65

- Suggested Positions -

Buy the JUL $65 CALL (CTSH150717C65)

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

chart:


Tableau Software, Inc. - DATA - close: 113.21 change: -0.02

Stop Loss: 109.85
Target(s): To Be Determined
Current Option Gain/Loss: -30.6%
Average Daily Volume = 1.0 million
Entry on May 28 at $115.25
Listed on May 27, 2015
Time Frame: Exit prior to July option expiration
New Positions: see below

Comments:
05/30/15: DATA spent Friday's session consolidating sideways. Shares closed virtually unchanged on the day. I am still suggesting that readers wait for DATA to rally above $115.50 before initiating new positions.

Trade Description: May 27, 2015:
The market for analyzing big business data is growing fast. DATA is leading the charge. According to the company, "Tableau Software (NYSE: DATA) helps people see and understand data. Tableau helps anyone quickly analyze, visualize and share information. More than 26,000 customer accounts get rapid results with Tableau in the office and on-the-go. And tens of thousands of people use Tableau Public to share data in their blogs and websites."

The last few earnings reports have been very impressive. DATA released their Q3 results on November 5, 2014. Results were 12 cents above estimates with revenues up +71% to $104.5 million, also above estimates.

Their Q4 results came out in early February. Analysts were expecting a profit of $0.11 a share on revenues of $122.58 million. DATA delivered $0.42 a share with revenues up +75% to $142.9 million. In the fourth quarter they added 2,600 new customers. They closed 304 transactions worth more than $100,000, a +70% improvement from a year ago.

Christian Chabot, Chief Executive Officer of Tableau. "In 2014, we experienced the strongest demand we've seen in our history, as the move to agile analytics grows faster than ever."

DATA reported their 2015 Q1 results on May 7th. Analysts were looking for a loss of $0.03 per share on revenues of $115.29 million. The company blew away these numbers with a profit of $0.08 per share (11 cents above estimates). The pattern of big revenue growth continued with Q1 revenues up +74.4% to $130.1 million. They added 2,600 new customers putting their total above 29,000. The number of deals above $100,000 hit 249 in the first quarter.

Management provided bullish guidance with estimates for Q2 revenues in the $135-140 million range. That's above Wall Street's estimate of $130.9 million. They also upped their fiscal year 2015 earnings picture and see $600-615 million, which is better than analysts' estimates of $587 million.

Shares of DATA surged on its results and optimistic guidance. Since then traders have been buying the dips pretty quickly. Today's display of relative strength (+1.99%) is also a new all-time closing high for DATA. It's also worth noting that DATA has been talked about as a potential takeover target.

The $115.00 level looks like short-term resistance. We will use a trigger at $115.25 as our entry point to buy calls.

- Suggested Positions -

Long JUL $120 CALL (DATA150717C120) entry $3.82

05/28/15 triggered @ $115.25
Option Format: symbol-year-month-day-call-strike

chart:


Electronic Arts - EA - close: 62.76 change: -0.52

Stop Loss: 59.85
Target(s): To Be Determined
Current Option Gain/Loss: -18.7%
Average Daily Volume = 3.5 million
Entry on May 27 at $63.65
Listed on May 18, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/30/15: In the video game industry GameStop (GME) was making headlines on Friday. The company delivered better than expected earnings and revenues on Thursday. Shares of GME gapped open higher on Friday and ended the day with a +6.0% gain. This news didn't really do much for shares of EA though.

EA saw a brief spike higher on Friday morning but never made it past Thursday's high. Odds are growing that we will see EA test $62.00 and its 20-dma as short-term support soon.

Trade Description: May 18, 2015:
Video game stocks are hitting high scores this year. The two biggest players in this industry are ATVI and EA. Shares of ATVI are at all-time highs while EA is nearing a new 10-year high.

EA is considered part of the technology sector. According to the company, "Electronic Arts ( EA ) is a global leader in digital interactive entertainment. The Company delivers games, content and online services for Internet-connected consoles, personal computers, mobile phones and tablets. EA has more than 300 million registered players around the world. In fiscal year 2015, EA posted GAAP net revenue of $4.5 billion. Headquartered in Redwood City, California, EA is recognized for a portfolio of critically acclaimed, high-quality blockbuster brands such as The Sims, Madden NFL, EA SPORTS FIFA, Battlefield, Dragon Age and Plants vs. Zombies."

Shares of EA popped above major resistance near the $60.00 level earlier this month after reporting better than expected Q4 2015 results. Wall Street was looking for EA to deliver a profit of $0.26 a share on revenues of $852.9 million. EA announced a profit of $0.39 a share. Revenues were down -2.0% from a year ago but came in at $896 million, well above estimates.

Their full year results were impressive. EA's net revenues were up almost $1 billion to $4.5 billion. The company's net income soared from $8 million in 2014 to $875 million in 2015. Shares of EA have benefitted from the company's turnaround. The stock is up more than +100% in the last 12 months.

EA's guidance was mixed. They issued bearish guidance for their Q1 2016 (current quarter) and see EPS about flat ($0.00) when Wall Street was expecting $0.19 per share. EA is forecasting Q1 revenues significantly below expectations. However, they raised their fiscal year 2016 profit estimate to $2.75 per share when analysts were only expecting $2.63.

Last quarter EA spent $95 million buying back 1.8 million shares of their stock. When they reported earnings on May 5th they also announced a new $1 billion stock buyback program that expires on May 31, 2017.

EA management sounds pretty optimistic. Here's an excerpt from their earnings press release:

With a clear focus on putting our players first, FY15 was an exceptional year for Electronic Arts. We introduced award-winning games, delivered enduring entertainment in our live services, and forged deeper relationships with a growing global audience across consoles, mobile devices and PC, said Chief Executive Officer Andrew Wilson. EA continues to sharpen our focus and speed, and in the year ahead we will engage more players on more platforms with new experiences like Star Wars Battlefront, FIFA 16, Minions Paradise and more.

Two years ago, we discussed a three-year plan to double non-GAAP operating margins to 20%, said Chief Financial Officer Blake Jorgensen. Today, Im happy to announce that we exceeded our goal a full year ahead of schedule. Looking forward, we anticipate continued earnings growth driven by our strong portfolio, investment in new IP, the market shift to digital, and on-going cost discipline.

Wall Street's analyst community seems bullish on EA as well. Several firms reiterated their bullish ratings and raised price targets.

Shares of EA have been building on a bullish trend of higher lows. The current rally has produced a buy signal on the point & figure chart that is forecasting a long-term target of $110.00. On a short-term basis EA seems to be coiling for a breakout past resistance near $63.50. Tonight we're suggesting a trigger to buy calls at $63.65.

- Suggested Positions -

Long SEP $70 CALL (EA150918C70) entry $1.66

05/27/15 triggered @ 63.65
Option Format: symbol-year-month-day-call-strike

chart:


Eaton Corp. - ETN - close: 71.59 change: -1.19

Stop Loss: 70.65
Target(s): To Be Determined
Current Option Gain/Loss: -50.0%
Average Daily Volume = 2.6 million
Entry on May 13 at $72.75
Listed on May 09, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/30/15: ETN displayed relative weakness on Friday with a -1.6% decline. Shares ended Friday at new two-week lows. Ware are pulling the plug on this trade and suggesting an immediate exit on Monday morning. The nearest support could be the $70.00 mark.

- Suggested Positions -

Long JUL $75 CALL (ETN150717C75) entry $1.10

05/30/15 prepare to exit on Monday morning
05/26/15 new stop @ 70.65
05/13/15 triggered @ 72.75
Option Format: symbol-year-month-day-call-strike

chart:


FactSet Research - FDS - close: 165.17 change: -0.79

Stop Loss: 163.85
Target(s): To Be Determined
Current Option Gain/Loss: +10.5%
Average Daily Volume = 302 thousand
Entry on May 13 at $162.25
Listed on May 11, 2015
Time Frame: Exit PRIOR to FDS earnings in late June or plan on exiting prior to JUNE option expiration on June 19th
New Positions: see below

Comments:
05/30/15: FDS saw an early morning spike higher that failed within the first minute on Friday. This is a potential warning sign for bullish as investors as Friday's move looks like a bearish reversal near Wednesday's intraday high around $167.50. Odds are we will see FDS test last week's lows in the $164.25 area. If shares do not bounce there the stock will likely hit our stop loss at $163.85.

I am not suggesting new positions at this time.

Trade Description: May 11, 2015:
FDS has provided data, analytics and research to the Wall Street crowd for more than 35 years. Today their software provides a host of services for investment managers, hedge funds, bankers, wealth managers, private equity, buy-side traders, sell-side traders, and more.

FDS is considered part of the technology sector. According to the company, "FactSet, a leading provider of financial information and analytics, helps the world's best investment professionals outperform. More than 50,000 users stay ahead of global market trends, access extensive company and industry intelligence, and monitor performance with FactSet's desktop analytics, mobile applications, and comprehensive data feeds."

The company has been delivering pretty consistent sales growth around +9% every quarter. They raised guidance back in December with their Q1 report. FDS' most recent earnings report was March 17th. The company announced their Q2 results of $1.39 per share, which was up +13.9% from a year ago. Unfortunately that missed analysts' estimates by two cents. Revenues grew +9.2% and kept the trend alive of FDS delivering revenues just above expectations.

The company has an active stock buyback program. Management boosted their repurchase program back in December by $300 million. At the time that meant their buyback program was almost $339 million. Keep in mind that FDS only has 41.7 million shares outstanding.

Following FDS' March 17th Q2 report the company raised their guidance for Q3. They now estimate earnings will grow +12.8% into the $1.40-1.42 per share range. This is above Wall Street estimates. Shares of FDS rallied on this report but they've spent the last several weeks consolidating sideways on either side of $160.00. The good news is that FDS is building a bullish trend of higher lows. Today the stock is poised to breakout past resistance and hit new record highs. We are suggesting a trigger to buy calls at $162.25.

- Suggested Positions -

Long JUN $165 CALL (FDS150619C165) entry $3.80

05/19/15 new stop @ 163.85
05/13/15 triggered @ 162.25
Option Format: symbol-year-month-day-call-strike

chart:


F5 Networks - FFIV - close: 125.69 change: -1.14

Stop Loss: 123.85
Target(s): To Be Determined
Current Option Gain/Loss: -32.0%
Average Daily Volume = 1.2 million
Entry on May 08 at $125.15
Listed on May 07, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/30/15: I'm still concerned about our FFIV trade. After a six-week surge to four-month highs the stock is now down two weeks in a row. Fortunately shares are still holding support near the $125.00 level. Yet FFIV can't seem to build on any of its bounces from support.

I am not suggesting new positions at this time. More conservative traders may want to move their stop closer to last week's intraday low at $124.79.

Trade Description: May 7, 2015:
It has become a hostile world for corporations and their biggest weakness is online security. It feels like every day we hear about another company getting hacked. In recent years there have been a number of high-profile hacking attacks like Target (TGT), Home Depot (HD), and Sony (SNE). Fortunately for FFIV all of this plays to their strength as more corporations seek to beef up their cyber security.

According to company marketing, "F5 provides solutions for an application world. F5 helps organizations seamlessly scale cloud, data center, and software defined networking (SDN) deployments to successfully deliver applications to anyone, anywhere, at any time. F5 solutions broaden the reach of IT through an open, extensible framework and a rich partner ecosystem of leading technology and data center orchestration vendors. This approach lets customers pursue the infrastructure model that best fits their needs over time. The world's largest businesses, service providers, government entities, and consumer brands rely on F5 to stay ahead of cloud, security, and mobility trends."

After strong earnings and sales growth in 2014 the company hiccupped in Q1 2015 (which was the last quarter of 2014). FFIV beat estimates on the bottom line but management guided lower for Q2. You can see how the market reacted to this news with the big gap down in mid January.

Their most recent earnings report was April 22nd. FFIV reported their 2015 Q2 results of $1.59 per share. That was nine cents better than expected. Revenues were up +12.4% to $472.1 million, just above estimates. Wall Street's biggest concerns following these results are the impact of currency headwinds (thanks to the strong dollar) and FFIV's falling revenue growth. They're still growing but momentum seems to be slowing a bit.

The stock rallied on its earnings news and burst through major resistance near $120 and several key moving averages. The last couple of weeks have looked like a consolidation period where FFIV digested its post-earnings pop. Now FFIV is poised for the next leg higher. The point & figure chart is very bullish and forecasting a long-term target of $193.00. Tonight we're suggesting a trigger to buy calls at $125.15.

- Suggested Positions -

Long JUL $130 CALL (FFIV150717C130) entry $3.25

05/26/15 new stop @ 123.85
05/08/15 triggered @ 125.15
Option Format: symbol-year-month-day-call-strike

chart:


Northern Trust Corp. - NTRS - close: 74.55 change: -1.10

Stop Loss: 73.85
Target(s): To Be Determined
Current Option Gain/Loss: -37.2%
Average Daily Volume = 1.1 million
Entry on May 05 at $75.05
Listed on May 04, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/30/15: It looks like the bounce in NTRS is over. Shares underperformed on Friday with a -1.45% decline. We are throwing in the towel on this trade and suggesting an immediate exit.

- Suggested Positions -

Long JUL $75 CALL (NTRS150717C75) entry $2.15

05/30/15 prepare to exit on Monday morning
05/26/15 new stop @ 73.85
05/12/15 new stop @ 73.45
05/05/15 triggered @ 75.05
Option Format: symbol-year-month-day-call-strike

chart:


Roper Technologies - ROP - close: 174.96 change: -2.22

Stop Loss: 173.25
Target(s): To Be Determined
Current Option Gain/Loss: -27.1%
Average Daily Volume = 441 thousand
Entry on May 27 at $177.75
Listed on May 20, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/30/15: ROP did not have a good day on Friday. The S&P 500 fell -0.6% while ROP dropped -1.2%. Shares are hovering near what should have been support at $175.00 but the intraday low on Friday was $174.37. If ROP doesn't bounce on Monday we are in jeopardy of being stopped out at $173.25. No new positions at this time.

Trade Description: May 20, 2015:
2015 is shaping up to be a record-setting year for ROP with profits on track for a new high. Investors have pushed the stock to new highs as well. ROP is up +12.8% year to date versus a +3.3% gain in the S&P 500.

ROP is in the industrial goods sector. The company just recently changed their name from Roper Industries to Roper Technologies.

According to the company, "Roper Technologies is a diversified technology company and is a constituent of the S&P 500, Fortune 1000, and the Russell 1000 indices. Roper provides engineered products and solutions for global niche markets, including software information networks, medical, water, energy, and transportation."

Their most recent earnings report was April 27th. ROP reported its 2015 Q1 results. Earnings per share rose 5% from a year ago to $1.55. Analysts were expecting $1.52. Revenues were up +3.7% to $865 million. That actually missed estimates of $873 million but the market didn't seem to care. ROP said their adjusted gross margin hit a new high, rising 140 basis points to 60.0%.

Management did lower their Q2 guidance but they raised their full year 2015 guidance. Again, traders seemed to look past the short-term lowered guidance in favor of the long view. ROP is forecasting 2015 earnings in the $6.75-6.95 range, up from $6.40 per share in 2014.

Barclays reiterated their overweight rating on the stock and raised their price target to $193.00. The point & figure chart is even more optimistic and currently forecasting at $209.00 target.

Shares of ROP hit new highs last week and have managed to hover there in the $175.00 region. The stock looks poised to push higher and we want to buy calls if ROP can trade at $177.75.

- Suggested Positions -

Long AUG $180 CALL (ROP150821C180) entry $4.80

05/27/15 triggered @ $177.75
Option Format: symbol-year-month-day-call-strike

chart:


Snap-on Inc. - SNA - close: 155.40 change: -1.41

Stop Loss: 153.85
Target(s): To Be Determined
Current Option Gain/Loss: -5.9%
Average Daily Volume = 346 thousand
Entry on May 07 at $153.50
Listed on May 06, 2015
Time Frame: exit PRIOR to June option expiration
New Positions: see below

Comments:
05/30/15: SNA was not immune to the market's widespread selling on Friday. Shares plunged toward the bottom of its $155-158 trading range and threatened to breakdown. The intraday low did pierce support with a drop to $154.65.

After two weeks of consolidating sideways followed by Friday's weakness we are calling it quits. It's time to exit our SNA trade.

- Suggested Positions -

Long JUN $155 CALL (SNA150619C155) entry $2.55

05/30/15 prepare to exit immediately
05/26/15 new stop @ 153.85
05/14/15 new stop @ 152.25
05/07/15 triggered @ 153.50
Option Format: symbol-year-month-day-call-strike

chart:




PUT Play Updates

Norfolk Southern Corp. - NSC - close: 92.00 change: -1.71

Stop Loss: 95.65
Target(s): To Be Determined
Current Option Gain/Loss: +28.3%
Average Daily Volume = 2.2 million
Entry on May 26 at $94.85
Listed on May 23, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/30/15: Friday's session saw weakness in transportation stocks continued to weigh on the market. Railroad stocks were underperformers and NSC underperformed its peers with a -1.8% plunge to new 52-week lows.

Tonight we are lowering the stop loss to $95.65. No new positions at this time.

The $90.00 level could be round-number support. Traders may want to consider taking some money off the table as NSC near $90.00. I wouldn't be surprised to see NSC tag $90 and produce an oversold bounce.

Trade Description: May 23, 2015:
The combination of weak fuel prices, lower global demand for fuel, and rising exports from other countries has been hurting U.S. coal exports. The U.S. Energy Information Administration expects U.S. coal exports to fall throughout 2015 before leveling off in 2016. Less exports means less coal that needs to be moved by railroad.

NSC is in the services sector. They're a major player in the railroad industry. According to the company, "Norfolk Southern Corporation (NSC) is one of the nation's premier transportation companies. Its Norfolk Southern Railway Company subsidiary operates approximately 20,000 route miles in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers. Norfolk Southern operates the most extensive intermodal network in the East and is a major transporter of coal, automotive, and industrial products."

Falling coal shipments is not the only problem for the railroads. Crude oil's decline from last year's highs and the massive slowdown in the amount of fracking in the U.S. has also hurt the railroad business. Less drilling means fewer rail cars of oil pipe and drilling equipment to be shipped. Less fracking means less fracking sand and other proppants to be shipped. Less drilling also means less oil produced and thus less oil to be transported by rails.

It's not just NSC that's suffering. In March 2015 railroad company Kansas City Southern (KSU) dramatically reduced their guidance. Two months later (about May 14th) KSU actually revoked its guidance altogether. Management sees no visibility due to so much uncertainty surrounding the energy market. KSU's energy-related business is down -50% from a year ago and carloads are down -38% in Q2 2015. Their utility coal shipments are down -68%.

Another company, Union Pacific (UNP), painted a similar picture of lower shipments and falling demand. The industry is facing difficult year over year comparisons. They have seen 11 weeks of negative rail volume. Industry wide coal shipments are down -15% from a year ago (UNP's was down -25%). Shipments of crude oil are down. Shipments of agriculture products are down.

It could be months before the oil industry in the U.S. recovers. Coal isn't expected to recover this year. That doesn't paint a very rosy picture for the railroads.

On April 13, 2015 NSC issued an earnings warning. They guided their Q1 results to $1.00 per share on revenues of $2.6 billion. That's a -15% drop in earnings from a year ago. Wall Street was expecting $1.29 per share on revenues of $2.68 billion. Shares of NSC crashed on this news and then rebounded but the bounce failed at technical resistance and shares have accelerated lower. NSC has broke down under major support near the $100 level.

Technical traders could argue that NSC has created a giant head-and-shoulders pattern (with two right shoulders) over the last nine months. This H&S pattern would suggest a downside target in the $80-85 region. Tonight we are suggesting a trigger to buy puts at $94.85. We will start this trade with a stop loss at $100.25. More conservative traders may want to use a stop around $98.30 as an alternative.

- Suggested Positions -

Long SEP $90 PUT (NSC150918P90) entry $2.65

05/30/15 new stop @ 95.65
05/26/15 triggered @ $94.85
Option Format: symbol-year-month-day-call-strike

chart:


SPX Corp. - SPW - close: 74.31 change: +0.14

Stop Loss: 76.55
Target(s): To Be Determined
Current Option Gain/Loss: -32.3%
Average Daily Volume = 500 thousand
Entry on May 28 at $73.45
Listed on May 26, 2015
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
05/30/15: SPW displayed a little strength on Friday with a minor gain. The stock has been churning sideways in the $73.50-75.00 zone the last three days.

I am suggesting traders wait for a new drop under $73.50 or even Thursday's low of $73.36 before initiating new positions.

Trade Description: May 26, 2015:
The business environment for SPW seems to be getting tougher. Their revenue growth has slowed down and now turned negative. Naturally shares of SPW have been under pressure.

SPW is in the industrial goods sector. According to the company, "Based in Charlotte, North Carolina, SPX Corporation (NYSE: SPW) is a global multi-industry manufacturing leader with approximately $5 billion in annual revenue, operations in more than 35 countries and over 14,000 employees. The company's highly-specialized, engineered products and technologies are concentrated in Flow Technology and energy infrastructure. Many of SPX's innovative solutions are playing a role in helping to meet rising global demand for electricity and processed foods and beverages, particularly in emerging markets. The company's key products include food processing systems for the food and beverage industry, critical pumps and valves used in oil & gas processing, power transformers used by utility companies, and heat transfer technology for power plants."

SPW's 2014 Q3 revenues only grew +1.1%. Their 2014 Q4 earnings report showed revenues falling -3.9% and management lowered guidance for fiscal year 2015. They forecasting revenues falling into the $4.48-4.67 billion range, which was below Wall Street's $4.8 billion estimate.

The disappointing performance continued into the first quarter of 2015. SPW reported earnings on April 29th. They missed estimates by three cents. The revenue decline accelerated with revenues down -12.1% from a year ago, and significantly below estimates. Management lowered their 2015 guidance again. They now forecast 2015 revenues in the $4.25-4.44 billion versus Wall Street's adjusted estimate of $4.5 billion.

Traders have been selling the bounces and SPW has a bearish trend of lower highs. Today's display of relative weakness (-2.8%) was significant because it's a breakdown under support at $75.00. I would be tempted to buy puts now but tonight we are listing a trigger to buy puts at $73.45.

FYI: In October 2014 SPW announced a spin-off of its flow business into a new independent company. In their press release SPW said the Future Flow Company will consist of SPX's current Flow segment and its hydraulic technologies business. It is expected to have annual revenue of approximately $3 billion. SPW just recently filed their Form 10 Registration Statement and said the new company's name will be SPX FLOW. The spin-off is expected to be complete in Q3 2015.

- Suggested Positions -

Long JUL $70 PUT (SPW150717P70) entry $1.55

05/28/15 triggered @ $73.45
Option Format: symbol-year-month-day-call-strike

chart:



CLOSED BULLISH PLAYS

Adobe Systems - ADBE - close: 79.09 change: -0.93

Stop Loss: 77.85
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 2.2 million
Entry on May -- at $---.--
Listed on May 21, 2015
Time Frame: 3 to 4 weeks, exit PRIOR to earnings in mid June
New Positions: see below

Comments:
05/30/15: ADBE was unable to shake off the market's broad-based decline last week. The stock remains inside its recent $79-81 trading range but it looks like it's ready to breakdown.

Our trade has not opened yet. The plan was to buy calls if ADBE hit $80.85. Tonight we are removing ADBE as an active candidate.

I would keep ADBE on your radar screen. The $75-77 area should offer some support.

Trade did not open.

05/30/15 removed from the newsletter, suggested entry was $80.85

chart: