Option Investor
Newsletter

Daily Newsletter, Thursday, 4/7/2016

Table of Contents

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

Market Wrap

A Turning Point

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Oil retreats and drags the broad market with it, on the cusp of another earnings season; a turning point may have been reached. Today's action was dominated by volatility in the oil patch, data from Cushing and output from Iraq combined to drive oil prices lower but the focus is on earnings season.

Trading in the international markets was mixed. Asian indices closed mostly higher but mixed is a better description. A rapidly strengthening yen is the story of the day in that circle, driven on the FOMC's minutes dovish tone and a lack of faith in the BOJ. European indices began the day moving higher on an early gain in oil prices but this did not last long. Bearish data sent oil prices lower and dragged them down as well.

Market Statistics

Futures trading indicated a negative open for the US indices all morning. The Dow was pointing to a drop near -100 points lower, about -12 for the SPX, and this held steady all morning. There was a brief uptick following the jobless claims data but that did not last long, going into the opening bell futures were near the lows of the morning. The open was as expected, declines in the range of -0.5% were logged for all the indices almost immediately. The first 45 minutes of trading saw the bulls try to stage a rally but this was capped near yesterday's break even level; from that point on the market drifted lower into the end of the day.

Economic Calendar

The Economy

Not much in the way of economic data today except the weekly jobless claims. Initial claims fell -9,000 to hit 267,000, the third week of decline since hitting a peak in early March. Last week's figure was not revised. The four week moving average of claims rose 3,500 to hit a four week high of 266,750 but remains very low and consistent with labor market health. On a not adjusted basis claims rose by 4.4%, less than the 7.9% predicted by seasonal factors and are now down only -3% from last years levels. The states with the largest increase in claims were Pennsylvania and New Jersey with gains of 2,058 and 1,457. The territory and state with the largest decreases were Puerto Rico and Indians with -1,415 and -908.


The number of continuing claims rose by 19,000 to hit 2.191 million on top of an upward revision of 1,000 to last week's figure. The four week moving average of continuing claims fell though, shedding 1,750 to 2.288 million. Despite the uptick in claims this figure remains very low, just above the 43 year low, and consistent with labor market health.

The total number of Americans receiving unemployment benefits is 2.454 million, down -83,120 from last week and the fourth week of pronounced decline. The total number of claims is now at a three month low and in seasonal decline, as expected. On a year over year basis the total claims is down -6%. If the figures hold true to historical trend the decline in total claims which began last month should continue into June and set a new low for the series. Regardless, at this time the claims data is consistent with labor market health.


The only data due out tomorrow is Wholesale Inventories, not too earth shattering. Next week is full again with over a dozen reports including retail sales, CPI, PPI and Fed's Beige Book.

The Oil Index

Oil prices had another wild ride. Yesterday's pop on bullish storage data carried through into the early part of this morning until new data, storage levels at Cushing and Iraqi output, reversed sentiment. Basically, Cushing storage was better than expected and seemingly unaffected by two major pipeline issues. Iraqi output was also better than expected; both pieces of news adding to the fundamental picture of oversupply and low demand. WTI fell more than -2% intraday to trade below $37, it closed with a loss near -1.25% trading near $37.50. Fundamentals will continue to drag on prices but the risk is that news, rumor, about production cuts and meetings could drive them higher.

The Oil Index fell about -1% to sit on the 1,050 support level. The index is suffering from volatility and indecision in the oil pits and is indicated to drift lower/retest support again. Both indicators are pointing lower but there is sign of near term support so a break of 1,050 is no guarantee. If it does fail the index could move down to next support target near 1,025 or lower to the 975-1000 level. Oil prices will be the primary driver in the weeks to come, with earnings a close second.


The Gold Index

Gold prices are the only thing supported by the FOMC minutes in today's session. Spot prices gained nearly 1.5% on dovish Fed outlook and a weaker dollar to trade above $1240. Prices are now just below possible resistance near $1250 but still well within recent ranges. The move higher could continue provided rate hike outlook remains diminished but is likely to hit resistance, if not at $1250 then near $1275-$1280. The ECB and BOJ are the biggest risk at this time, either of them could add to QE although there is little expectation of that now.

The gold miners ETF GDX moved up by roughly 3.25% to trade just below the $21 resistance target. The move created a gap that could be the beginning of a break out but for now is just churn within a consolidation zone. The indicators have been in retreat over the past few weeks, confirming consolidation and indicating caution, but have begun to roll into an early, trend following, bullish entry. Resistance is at $21 and needs to be broken to get overly bullish on the index, if not a retreat to retest support levels is likely.


In The News, Story Stocks and Earnings

The dollar weakened following the FOMC minutes but may have hit a bottom. Today's action say the dollar index fall more than a half percent to set a new low and then bounce back from a retracement level, a move indicative of support. This move may be just the first test of $94.25 but divergences in the indicators help confirm support of this level. Support may hold until the next central bank meetins unless strong data or surprise news hits the market. The next round of central bank meetings is begins in 2 weeks with the ECB. They are not currently expected to add more QE so the statement will be the focus. A break of support could take the index down to $92.60 and a full retracement of the trading range.


Food giant Conagra reported earnings before the bell. The company reported top and bottom lines beats driven on improvements in both consumer and commercial foods segments; both showing double digit increases in profit growth. They also reported the completion of a planned divestiture which led to a massive reduction in debt. Guidance for the year, when adjusted for comparable purposes, was slightly above expectations and helped to send the stock higher. Shares climbed by more than 1.5% to set a new high.


Yahoo caught a bid when news hit the market Verizon would be making a bid for the company. There is no news yet as to what kind of bid, those details are due next week, but the target is the web business. Shares of Yahoo jumped on the news after opening with a loss but were not able to sustain the gains. The stock closed with a loss of -1.3% but remains above the recently broken trading range.


Gap took a dive in after hours trading after reporting poor March and first quarter sales figures. The retailer saw a -6% decline in comp store sales, leading to year over year declines in revenues which, coupled with a warning of narrowing margins, helped spur a -10% fall in share prices. Look for shares of Gap to fall to the long term lows near $22.


The Indices

The indices did carry through on the post-Fed minutes rally of yesterday afternoon. They began the day in retreat and end the day near the lows of the session. Today's action was led by oil prices but mostly on low volume as we wait for massive round of earnings reports we're going to get over the next month. The decline was led by the NASDAQ Composite Index which fell -1.47% and set a one week intraday low; closing low is within the one week range. Price action is below resistance, and well above support targets, so risk appears to be to the downside. The indicators remain bullish, but also persist in showing weakness through divergences and indicative of a weakening market. If the market does pull back to support first downside target is near 4,775.


The Dow Jones Transportation Average made the second largest decline, about -1.30%, and fell below support targets at 7,700. This level is also the short term moving average and could lead to further decline without some form of bullish catalyst. The indicators confirm the break, both moving lower and gaining strength, so further decline should be expected. Next down side target is near 7,500.


The S&P 500 made the third largest decline, -1.20%, and appear set to test support levels near 2,020. The index set a 6 day low in today's session, within a multi-week consolidation, that could be setting the index for a short term head&shoulders reversal. Neck line appears to be the 2,020 level, coincident with current support targets and the short term moving average. The indicators have rolled over into a bearish signal so a test of support appears to be likely. A break of support could take the index down to stronger support levels near 1,950 to 2,000.


The Dow Jones Industrial Average made the smallest decline, about -0.98%, and is also approaching what could become the neckline of a head&shoulders reversal. The neck line of such a pattern would be between 17,400 and 17,500, consistent with near term support targets. The indicators have rolled into a bearish signal, consistent with a top, so a test of support should be expected. A break of support would help confirm the top and could the index down to 17,350 or further.


The market appears to be cresting a top. Today's action was driven by oil prices but that was just an excuse. The thing really driving the market now is earnings. The FOMC, the minutes and upcoming meetings are a back drop, earnings and the state of earnings growth and outlook for the same is what is on the minds of the market. The season is not going to be good. It may be better than expected but at best we can expect to see year over year declines near -4% for the S&P 500 and this is likely to cause the market to sell off.

What it will come down to are the statements within the report and guidance for future earnings. The longer term outlook remains positive so any market dip or test of support that occurs now is likely to be a buying opportunity for longer term positions. I'm still bullish for the long term, cautious in the near, waiting with the rest of the market to see what the earnings season brings us.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Directionally Challenged

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market is acting "toppy" with a lower high and lower low on the Dow and S&P. The Dow lost -133 on Tuesday, gained +113 on Wednesday and was down -234 at the lows today before closing with a -174 loss. This high volatility is a symptom of a market top.

After posting a seven-week rally the index has gone sideways for the last two weeks The 17,544 close is 50 points below the close on March 18th then the index first reached this level. Today was the lowest close since March 29th.

The S&P closed at 2,042 and also below its March 18th close of 2,050. These are lower highs and lower lows and suggest the market could be headed lower. There is support at 2,040 on the S&P and again at 2,025.

The problems are many and include the global economy, Japanese Yen, U.S. economy, earnings and the Fed. The S&P futures are down -4 points we I type this.

I am not recommending any new plays tonight until we see which direction the market takes on Friday.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays



NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Not a Bad Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

It was an ugly day in the market but the portfolio held up well. We did not lose any positions. The SPY put is correctly positioned for further declines and futures are negative as I type this.

The Dow and S&P failed without reaching prior resistance and each made a lower high and lower low. This is technically negative and could be setting up for a bigger decline.

In theory, the decline today was caused by a blowup in the yen carry trade but it could have been the result of many factors including falling oil prices, worry over U.S. economics and the rising number of earnings warnings.

We should be happy that the declines in the portfolio were minimal with two stocks actually posting gains. However, if the market continues lower it will eventually affect us.



Current Portfolio




Current Position Changes


CSC - Computer Sciences

The long call position was opened at $33.40.


NTAP - NetApp

The long call position was closed at the open.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


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.



BULLISH Play Updates


ADBE - Adobe Systems -
Company Description

Comments:

Minor decline in a bad market. Vetr downgraded from buy to hold. Dougherty & Co upgraded the price target from $116 to $122. Rosenblat reiterated a buy rating and $122 target.

Original Trade Description: April 4th.

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content.

For years they sold their Photoshop software and assorted tools as boxed software on a CD with a license key. Once you bought it you own it and Adobe never received any further revenue unless you upgraded to a newer version at some later date.

All that has changed with the move to the cloud. The new product is called the Creative Cloud and is a subscription based product where you pay and pay and pay for as long as you continue to use it.

Moving to the cloud model has a lot of inherent problems. Once you quit selling your boxed software that big chunk of retail revenue goes away. In the case of Adobe their software sold for many hundreds, if not thousands of dollars. That meant the one time revenue disappeared in exchange for a $19 to 49 a month subscription fee. Over the long term the revenue is stable and eliminates the volatility of the single sale model.

Earnings for the quarter reported in March were 66 cents that beat estimates for 61 cents. Revenue rose 25% to $1.38 billion also beating estimates for $1.34 billion. They signed up a whopping 798,000 new subscribers to the Creative Cloud suite service. They guided for earnings of 64-70 cents for the current quarter and above analyst estimates for 65 cents.

Earnings are June 21st.

Shares spiked to $98 on the news before pulling back to consolidate at $92 for over a week. Over the last several days they crept up to $96 and then sold off in the weak market on Monday. I believe this market weakness is a buying opportunity for Adobe.

I would like an entry point closer to $92 but there is no guarantee we are going to get it. The S&P futures are down hard tonight at -6.50 and the market is likely to open lower on Tuesday. I am suggesting we buy the option 5 min after the open. That will give the prices time to evaporate in a falling market. Hopefully ADBE will gap down a couple dollars.

Position 4/5/16

Long May $95 call @ $2.48. No initial stop loss.


CSC Computer Sciences Corp - Company Description

Comments:

Down with the market. No news.

Original Trade Description: April 6th.

CSC is an information technology and profesional services Fortune 500 firm that provides solutions in North America, Europe, Asia and Australia.

On February 11th the Supreme Court of Victoria, Australia, approved the acquisition of WXC Limited for (AU)$427.6 million. CSC believes the acquisition of UXC will strengthen their global commercial business by adding the UXC platform to the CSC cloud, cyber and big data offerings. Back in August CSC acquired two other companies, Fruition Partners, a service-management technology provider and London-based Fixnetix, a provider of front-office managed trading software for capital markets.

They are also acquiring Xchanging, a UK company that provides software and outsourcing services for the insurance industry for $697 million. That deal is currently going through the regulatory approval process.

The point here is that CSC is a leading provider of information technology and they are growing rapidly through acquisitions. They are moving towards a mix of cloud based higher margin products that will be beneficial over the long term. They are also buying back stock with a new authorization in January. They paid a special dividend of $10.50 when they spun off the public sector business in Q4. That accounts for the $10 drop in the stock price at the end of November.

Earnings for last quarter were 71 cents that beat estimates for 69 cents. However, revenue declined -10.2% to $1.75 billion missing estimates for $1.859 billion. Shares fell to $24 on the news. However, the reduced revenue came from a switch to cloud products, which have a long term subscription revenue rather than a short term one time sale. Adobe had the same problem when they went from software sales to software as a service. There is always a drop in revenue during the switch but long-term revenue rises and is more stable.

Total company bookings rose +21% to $2.7 billion. Operating income rose +9.2% to $190 million.

Earnings are May 17th.

Shares rebounded from that post earnings low in February to pass resistance at $33 last week. The market decline this week took some of the bloom off the stock and deflated the option premiums. Prior resistance became support and shares started to tick higher on Wednesday afternoon. This is a relatively slow mover but it has been steady since the rebound began.

I am recommending a June option but we will exit before earnings in May. Using a June option the premium will still have some earnings expectations premium when we exit.

Position 4/7/16:

Long June $24 call @ $1.50, initial stop loss $32.15


HCA - HCA Holdings - Company Description

Comments:

Minor decline in a bad market. Northwestern Mutual Investment Mgmt raised their stake in HCA to $37.9 million according to a notice filed with the SEC. They now hold 502,485 shares.

Original Trade Description: March 29th.

HCA provides health care services in the USA. They offer general, acute care, intensive care, cardiac care, diagnostic, emergency and outpatient services. They operate 164 general and acute care hospitals with 43,275 licensed beds. They also operate 3 psychiatric hospitals and 116 freestanding surgery centers. They were founded in 1968.

In their Q4 earnings they reported $1.69 per share compared to estimates for $1.39. Revenue rose 6.4% to $10.25 billion also beating estimates for $10.14 billion. They guided for the full year to earnings of $6.00-$6.45 and revenue in the range of $42 billion.

In October, the company had warned on Q3 for the first time since 2013. The entire health care market was shaken by the warning because everyone assumed the revenue and profits would always continue to grow. This is the largest company in the healthcare space and is seen as a bellwether for the sector. HCA rectified the problems by Q4 and the CEO assured everyone on the call that all was well and HCA was "well-positioned for continued success."

One of the problems in Q3 was retaining qualified staff. There is an extreme shortage of nurses and the company has to pay premium wages to keep nurses from being lured away to other hospitals. The CEO said they have a plan in place and they view it as an opportunity for 2016.

Shares sank from the October warning through the market washout in January. After they reported earnings the shares rebounded but were hit again in the February decline. Since the February market lows the stock has risen steadily and has reached initial resistance at $78. Once through this level it could be clear sailing to $86-$88 depending on the market.

Earnings are April 28th.

I am recommending an inexpensive $80 strike for May that should still have some expectation premium left when we exit ahead of earnings. The risk is the resistance at $78.50.

Position 3/30/16

Long May $80 call @ $2.50, see portfolio graphic for stop loss.


NTAP - NetApp - Company Description

Comments:

The NTAP was closed at the open and we escaped the big drop.

I made a mistake in yesterday's update. In the play changes section I said to close the position at the open. That was my original intent. However, in these comments I talked about closing it but then said to maintain the stop loss at $25.85. Since the explicit instructions in the play changes section said to close at the open that is the action that is being reported.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnings news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Closed 4/7/16: Long May $28 call @ 99 cents, exit .62, -.37 loss.


OA - Orbital ATK - Company Description

Comments:

Actually posted a gain in an ugly market. Still not back to resistance but headed in the right direction.

Target $88.85 to exit.

Original Trade Description: March 19th.

Orbital ATK was created in 2015 by the merger of Orbital Sciences and Alliant Techsystems. The company develops and produces aerospace, defense and aviation related products for the U.S. Government, allied nations, prime contractors and other customers in the U.S. and internationally.

The currently have a contract to convert the four segment Space Shuttle Solid Rocket Booster into a five segment booster for the new Space Launch System that will carry astronauts back into space. They are working on a new rocket booster to replace the boosters the U.S. is currently buying from Russia. They also develop satellites for commercial, scientific and security applications. They also produce the Cygnus spacecraft that delivers cargo to the International Space Station and returns with completed experiments.

The Defense Systems Group provides tactical missiles, defense electronics and medium to large caliber ammunition, fuzed warheads, etc. The Flight Systems Group produces the Pegasus, Minotaur and Antares launch vehicles.

One of their newest projects is the Mission Extension Vehicle or "space tug." When an existing satellite develops a problem and engineers believe it can be repaired, the space tug would go get the satellite and push it towards the International Space Station where it can be repaired and the tug would then push it back into orbit where it belongs. Since these satellites cost from hundreds of millions to billions of dollars each, having the capability to repair them would save a lot of money.

Sometimes the satellite has simply been active for so long that its orbit has degraded. The space tug would attach itself to the satellite and then lift it back into an orbit that would give the old satellite several more years of useful life. Then the tug would disconnect and repeat the process with a different satellite. The tug could also push dead satellites into a descending orbit where they will burn up reentering the atmosphere. That would essentially remove the trash from what is becoming an increasingly crowded orbital space. The first space tug is expected to have enough fuel to keep it active for up to 15 years. They plan to launch 5 by 2020 and with dozens of very expensive communication satellites running low on fuel every year, it will be a very profitable venture. Clients are already entering into discussions on how the tug can help their satellites.

These are just some of the hundreds of thing Orbital ATK has in the works. They were also named a subcontractor on Northrop's new $120 billion B-21 stealth bomber program.

In early March Orbital reported earnings of $1.45 that beat estimates for $1.09. Revenue of $1.137 billion beat estimates for $1.11 billion. Order backlogs were over $13.5 billion. They guided for the full year to earnings of $5.25-$5.50. Shares crashed from $87 to $74 the next day after they filed a statement with the SEC saying the financial statements covering the Q2-Q3 in 2015 were not accurate due to an accounting error that occurred when the two companies merged. It was a non-cash error covering long-term contracts that were accounted for using different accounting methods in each company. There was no material impact from the restatement but shares always crash when an "accounting error" is disclosed.

After two weeks, shares began to rise again one the smoke cleared. Shares hit resistance at $82.60 on Friday and pulled back only slightly. I am recommending we buy a breakout over that resistance with a target at $90.

Earnings May 30th.

Position 3/21/16 with an AO trade at $82.80

Long May $85 call @ $2.80, see portfolio graphic for stop loss.


PKG - Packaging Corporation of America - Company Description

Comments:

Minor decline and support at $58 held. No news.

Target $64.25 for an exit.

Original Trade Description: March 7th.

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 20th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Position 3/11/16:

Long April $55 call @ $2.20, no initial stop loss.


SRCL - Stericycle - Company Description

Comments:

No specific news. Lost only a penny in an ugly market. Excellent relative strength.

Original Trade Description: March 30th.

Stericycle provides regulated and compliance solutions to the healthcare, retail and commercial businesses in the U.S. and internationally. They collect and process regulated and specialized waste for disposal as well as personal and confidential records for destruction.

Everyone knows that doctors and hospitals produce tons of medical waste every month and that waste can be infected with all kinds of bacteria and viruses that can be contagious. You cannot just throw those bloody surgical gowns and blankets in the trash. They have to be disposed of in an environmentally safe way.

We also hear all the time about some food company recalling hundreds of tons of a particular food product because it was contaminated with ecoli or some other bad bacteria or foreign substance. Where does that food go? It goes to Stericycle and they dispose of it safely.

In Q4 they acquired Shred-It for $2.3 billion in order to expand into the confidential records destruction business. Stericycle sees Shred-It as an excellent opportunity for cross selling. Less than 20% of Stericycle's current customers use a document shredding service.

In their recent Q4 earnings they reported $1.11 per share that beat estimates for $1.08. However, revenue of $888.3 million missed estimates slightly of $889.1 million. Revenue was hampered by a $26.9 million hit from the strong dollar. Gross margins were 42.9%.

In 2016 earnings are expected to grow +20.3% to $5.26-$5.33 with revenue up +21% to $3.6-$3.67 billion.

Earnings are April 28th.

Shares have crept up to resistance from November at $126 and a breakout here could run to $140 or higher.

Position 4/1/16 with a SRCL trade at $126.75

Long May $130 call @ $2.70. See portfolio graphic for stop loss.


SWHC - Smith & Wesson - Company Description

Comments:

Up 20 cents in a down market. Great relative strength.

Original Trade Description: April 5th.

I am reloading the prior play on Smith & Wesson. Shares failed to decline any further today after being crushed on Monday. The triple downgrade by Cowen, CL King and BB&T Capital markets after the March NCIS background check data declined slightly was unreasonable. March checks declined -3% from February but they were sill up 25% over March 2015. The 3% decline was just noise in the greater outlook.

S&W shares declined to exactly the 100-day average on Monday and that has been support for a long time. I believe we should take advantage of this decline and the shrinkage of the option premiums.

Prior play description: Smith & Wesson was founded in 1852 and manufacturers firearms in the U.S. and internationally under many different brands but primarily Smith & Wesson.

Gun sales are booming. Sportsman's Warehouse said gun sales rose +34% in Q4 alone. With every terrorist attack or mass shooting more consumers rush out to buy guns for self defense. With the potential for additional attacks in the U.S. this trend is not going to slow. However, sales are cyclical. They surge after attacks like San Bernardino or after speeches by politicians about gun control. President Obama has been the best gun salesman we have ever had. Every push by the administration to get more laws passed results in millions of new gun sales.

In their Q4 earnings where there was a surge in gun sales after San Bernardino, the company reported earnings of 59 cents that beat estimates for 41 cents. Revenue rose +61% to $210.8 million and easily beat estimates for $182.3 million. The company guided significantly higher for the current quarter to revenue of $210-$215 million compared to estimates for $196 million. Earnings are expected to be 51-53 cents. That is a 13.7% increase in revenue and 20% increase in earnings. For the full year they guided to earnings for $1.68-$1.70 and analysts were expecting $1.42. This was also higher than the company's prior forecasts for $1.36-$1.41 from January.

The company said inventories were depleted because of the high demand and they were focused on increasing production rates to keep up with demand.

Earnings are June 16th.

Shares rocketed higher after the earnings in early March and they were already up strongly since December. I hesitated to buy the top since it was making new highs every week.

I am recommending a June call because it expires after earnings and should retain some expectation premium when we exit before earnings. Buying a May option would be subject to accelerated premium decay.

Position 4/6/16:

Long June $24 call @ $1.80, no initial stop loss.


XBI - SPDR Biotech ETF - ETF Description

Comments:

Only a -1% decline after the XBI gained 7% on Wednesday.

Original Trade Description: April 2nd.

The S&P Biotech ETF attempts to match the performance of the Biotech Select Industry Index. The ETF holds 90 stocks in the biotechnology and pharmaceutical sector.

The biotech sector has been in free fall since its high last July at 4,400 on the $BTK Index. The index hit 2,575 in early February and rebounded to trade in a narrow range between 2700-3000 for the last two months. On Friday, the index closed at 3,037 and a two month high. The rebound over 3,000 could be the beginning of a major breakout.

Biotech and pharma stocks have beenunder pressure because of attacks by political candidates claiming they would lower the prices on drugs if they are elected. This caused the sector to collapse most notably in January from 3,900 to that 2,575 level.

If a candidate is elected and did choose to follow through on a promise to lower drug prices it would take a long time, assuming they had the votes in the House and Senate to get a bill passed. I believe the selloff in the biotech sector has been overdone and I have been waiting for a sign there may be a rally in our future. The close over 3,000 on the $BTK could be that sign. The $BTK gained 5.7% last week suggesting buyers are returning.

The XBI gained 2.9% on Friday to cap off a week of gains. The ETF has resistance at $54 and again at $56.50. However, short interest in biotech stocks is so high that any further move higher in the $BTK could cause significant short covering.

I am recommending we buy the June $55 call, currently $3.40. If we get a breakout over $56, it could easily run to $70, which is significant resistance. Obviously that assumes a positive market as well.

A rebound in the biotech sector would lift the Russell 2000 and the S&P and that would help support a positive market.

Position 4/4/16

Long June $55 call @ $3.50, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)


ENDP - Endo Intl Plc - Company Description

Comments:

Spike at the open and $2 decline intraday. With the biotech short squeeze in progress Endo has found new life. I lowered the stop loss to $31.75 and just over today's high.

Original Trade Description: March 28th.

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $96 last April to $28 today. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also lowered guidance at the Barclay's Healthcare Conference on March 15th. The company lowered guidance to revenue of $928-$972 million for Q1 and analysts were expecting $1.03 billion. Earnings guidance was $1.02 to $1.08 and analysts were expecting $1.19.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are May 9th.

Shares have flat lined at the $28.50 level for more than a week and I believe we are about to see another leg lower. Today was the lowest close since January 2013.

Position 3/29/16:

Long May $25 put @ $2.10. See portfolio graphic for stop loss.


SPY - S&P 500 ETF - ETF Description

Comments:

S&P made a new low for the month and could be setting up for a bigger decline.

I am recommending we add to this position when/if the SPY trades up to $210.

Original Trade Description: March 16th.

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

Position 3/23/16 with SPY trade at $204.11

3/23/16: Long June $200 put @ $4.77 with SPY trade at $204.11
4/01/16: Long June $200 put @ $3.26 when SPY traded at $207.

If the market continues higher add to that position again at $210.
See portfolio graphic for stop loss.




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