Option Investor
Newsletter

Daily Newsletter, Thursday, 4/14/2016

Table of Contents

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

Market Wrap

Drifting Higher

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market drifted higher on mixed data and mixed earnings reports. The data seems to edge us closer to a rate hike with one hand while keeping those same rate hikes at bay with the other; bank earnings are better than a expected, a little, but beg the question; in the face of year-over-year earnings decline are they better enough?

International markets were buoyed by earnings, data and oil prices. Asian indices were led by the Japanese Nikkei which gained nearly 3.25%, aided by a mildly softer yen. European indices were also able to close in the green after a morning spent hugging break-even. Late day trading got a boost following the release of US data and earnings from Bank of America and Wells Fargo.

Market Statistics

Futures trading indicated a flat-to-positive open all morning with little affect from either earnings or economic data. There was a little fluctuation during the early morning session but nothing major. At the open indices posted small gains, less than a tenth of a percent, and after a few minutes trading in the green quickly retreated below yesterday's closing prices. The market fell for the next half hour, reaching a low of about -0.17% for the SPX. Bottom was reached by 10AM, by 11:30 the market had returned to break-even level and pushed through to make a new high for the day, about +0.15%. This high was followed by another an hour later, about 0.30% for the SPX, after which the indices returned to break-even. The rest of the day saw more of the same sidewinding around break-even levels, leaving most of the indices in the green at the close of the session.

Economic Calendar

The Economy

CPI was released simultaneous to jobless claims, which dropped unexpectedly. Initial claims for unemployment fell -13,000 to 253,000, just above the 43 year low set last year. Two factoids; last weeks figure was revised lower by -1,000, this week makes the 58th week of jobless claims below 300,000, the longest streak since 1973. The four week moving average also fell, by -1,500, to 265,000. On a not adjusted basis claims rose by +10.4%, less than the +16.2% predicted by the seasonal factors, and are down -12% over this same time last year. On a state by state basis New York and New Jersey had the largest increases in claims, 4,511 and 3,836. California and Arkansas had the largest decreases in claims, -7,118 and -1,249. Simply put, initial claims data remains consistent with labor market health.


Continuing claims also fell, shedding -18,000 to hit 2.171 million, just above the long term 43 year low set last year. Last week's figure was revised lower by -2,000, the four week moving average fell by -10,250 to 2.178 million and is now at a 16 year low. Based on this week's data and long term trends continuing claims remains consistent with a health labor market.

Total claims also fell, -34,920, and are now 2.40 million. This is the lowest level since December 19th and down -4.25% year over year. Total claims continues to decline in line with seasonal trends and should continue to do so into June at least. Based on historical data total claims may shed as much as 35% in that time, falling to 1.85 million from the January high of 3.049 million, matching the long term low set last year, consistent with a healthy labor market.


The Consumer Price Index offered a mixed bag of results. Headline CPI rose only 0.1% versus an expected gain +0.3%, indicating some inflation growth but not much. Over the past 12 months not-adjusted CPI has risen 0.9%, better but still not nearly matching FOMC targets for a healthy economy. Within the report food inflation fell by -0.2%, offset by gains in energy, the first since November of last year. The core ex-food and energy CPI also rose only 0.1%, below expectations. Core CPI is up 2.2% year-over-year and it at least is trending at levels desirable for the FOMC. The low levels of growth helped remove any lingering expectation there would be a rate hike at the next meeting.


The Oil Index

Oil prices were choppy today but WTI held above $41.50. A new report from the IEA has lowered expectations for 2016 demand but at the same time the expected drop-off of US production is beginning to gain momentum. This is on top of anticipation of the Doha meeting and possible production caps, scheduled for Sunday. In the near term, prices are supported more by rumor and hope than anything else as fundamentals remain bearish. In the longer term prices may be supported by an evolving supply/demand outlook scenario that may be coming back into alignment. Risk over the next few days is firmly centered on the Doha meeting, most likely a buy-the-rumor-sell-the-news types of event.

The Oil Index continues to struggle with resistance at 1,120. The index has moved to the top of its range and, like the underlying commodity, not yet able to break above it. The current move higher is supported by hope and rumor, once the Doha meeting comes and goes there will be only the reality of production at current, high, levels. Since this reality is likely already priced into the market there is little reason to expect oil prices to move higher without some other fundamental change. If the index is able to break out next resistance target is near 1,150. If not, the index is likely to remain range bound with possible support along the short term moving average and/or the 1,000 levels. In either event oil prices remain the number one driver of this index.


The Gold Index

Gold prices retreat today on a stronger dollar, even though today's gains in the dollar were capped. Spot gold fell about -1.5% to trade near $1,228 and the middle of a three month trading range. The price of the metal, and the dollar, are winding up on central bank speculation with longer term direction in doubt. This wind-up is will likely continue until the next FOMC meeting, in just 2 weeks, driven by data and affected by the ECB meeting next week.

The Gold Miners ETF GDX fell a little more than -3.35% in today's action. Today's move is the first test of support at the $21 level and may not be the last. The sector made a major break out last week, so a test of support such as this is to be expected in order to confirm its strength. The indicators are mixed, bullish but divergent, so the strength of the break out is questionable. If support holds a move higher with near to short term target near $25 is very possible but whipsaw is another possibility. $22.50 has been significant resistance within the past 2 years and could mark a top. The next two weeks could be volatile while the market waits for the Fed meeting.


In The News, Story Stocks and Earnings

The Dollar Index moved up to make a one week high on today's data, and then confirmed resistance by pulling back from the short term moving average. Price action created a potential shooting star with the short term moving average as resistance, confirming the 4.5 month downtrend in dollar value. The data shows labor data is strong and trending healthy, supporting the longer view that interest rate hikes are coming, countered by CPI which shows consumer level inflation is tame with no indication an immediate rate hike is likely. With little left in the way of data to support the dollar before the FOMC meeting, and a low likelihood the ECB will weaken the euro, it looks like the index will retest the recent low near $94.


More bank earnings today. All in all, they are reporting better than expected but they are also reporting significant declines in year over year earnings. They are also reporting a troubled environment with uncertain outlook that helped to cap today's gains. Comments from the reports include things like uncertain FOMC outlook, volatile operating environment and negative market performance. Bank of America and Wells Fargo both beat by a penny, both impacted by near term hurdles including low interest rates. Bank of America saw a sharp decline in revenue from trading, Wells Fargo an impact from higher reserve requirements linked to energy exposure. Bank of America closed with a gain of 2.61% and a new 3 month high.


Wells Fargo was not able to close with a gain today. The stock opened with a loss and tried to move higher but was not able to do so. It looks like WFC is stuck in a near term trading range but was at least able to close above the short term moving average. The indicators are rolling into a bullish signal as well so a move to test resistance between $50 and $51 may be brewing.


The financial sector was able to move higher on the earnings news although the move was hesitant. The Financial SPDR XLF gained only a quarter percent in a move that indicates resistance at $23, consistent with a gap opened at the beginning of the year. The indicators are confirming today's new high so resistance could be broken with an upside target between $24 and $25. Support is near $22 and the short term moving average. Tomorrow Citigroup reports and could provide additional support for the sector.


The Indices

The indices, save one, crept higher in today's session led by the Dow Jones Transportation Average. The index made a gain of 0.25% and created a small spinning top candle just below 8,000. This is the third time the index has tested this level over the past month so it could provide resistance going into options expiration tomorrow. The indicators are mixed with bullish bias, stochastic is pointing higher while MACD approaches the zero line, so resistance may be tested or even broken. Next resistance target above 8,000 is close, near 8,125, a break above that could take it up to 8,400. Support is near 7,750.


The Dow Jones Industrial Average is the next biggest gainer in today's session, about 0.10%. Today's candle is a small spinning top, just below resistance at 18,000, with weakly bullish indicators. The indicators are moving up in the near term but persist in diverging from new highs in indication of weakness. Now that the index is back to 18,000 it will need to break through else risk a fall back to strong support levels. Support target is near 17,500.


The S&P 500 made the smallest gain in today's session, only 0.02%. The broad market created a small spinning top candle at 2,082 level. Price action over the past two days has negated any thoughts a head & shoulder were forming although signs of weakness persist. The indicators are both divergent from the newest high and consistent with a weakening market. A break above 2,082 could move up to test resistance near 2,100 or 2,020 but without a definitive break above the all time high this rally looks like it is cresting a peak.


The only index to post a loss in today's session was the NASDAQ Composite. The tech heavy index shed -0.03% in a move that indicates indecision. The candle is a spinning top, just below resistance, accompanied by rapidly weakening and divergent indicators. A break above 4,950 is possible but without some indication of strength or market conviction is would be questionable.


The market continues to move higher but signs the rally is tiring persist. The indices may not fall tomorrow but there are some things to consider before giving the all clear for rally, especially with options expiration day tomorrow. One is earnings. Earnings are mildly better than expected, reason to breath a sigh of relief but not to shout for joy, and it is still very early in the season. Another is oil prices. The indices are approaching all time highs driven primarily on oil prices. Oil prices are up on the hopes there will be an agreement to cap global production. These hopes are centered on a meeting scheduled to occur this weekend with an outcome likely to do little to change market outlook but a huge potential to drive oil prices on Monday morning. A sharp drop in oil prices could drag the broad market down with it, reason to close out positions going into the weekend. I remain bullish for the long term but wary of pull backs and correction in the near.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Solid as a Rock

by Jim Brown

Click here to email Jim Brown

Editors Note:

Despite weather challenges and the weak energy sector this company's product is solid as a rock. Eagle Materials produces concrete and sheetrock and you cannot get any more basic in the building materials sector.


NEW DIRECTIONAL CALL PLAYS


EXP - Eagle Materials -
Company Description

Eagle Materials Inc. manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard, Concrete and Aggregates, and Oil and Gas Proppants from 40 facilities across the US. Eagle is headquartered in Dallas, Texas.

In the last quarter revenues declined -5% and earnings -12% to 93 cents. However, cash flow from operations increased +66% to $108.7 million.

There were two problems impacting EXP results. The first was the dramatic decline in oil well drilling. They supply cement for those wells and they use a lot. The slowdown in the sector has weighed on EXP for the last year. However, they have survived and they are doing well.

The second problem was a high volume of rain October and December that reduced sales volume by delaying and slowing construction projects that use EXP materials.

Cement, concrete and aggregates revenue rose 11% in the quarter thanks to a 4% increase in prices to offset the lower demand for oil well cement. Cement revenues alone rose +9% to $135.4 million. They delivered 1.2 million tons at an average cost of $97.10 a ton.

The rain caused sheetrock sales to decline 9% but missed revenues will likely be pushed into Q1. They sold 568 million square feet of sheetrock, which is actually called Gypsum wallboard. They raised prices on that product as of March 31st and they expected a surge in bulk purchases ahead of the price increase. That will show up in the current quarter numbers.

Oil anf gas proppant sales declined 73% because of the slowdown in drilling and fracking. Fracsand volumes declined -47%. Proppants are a minor part of company revenue at only $8.5 million in Q4 compared to total revenue of $277.4 million.

Earnings are May 12th. We will exit before earnings.

Standpoint Research initiates coverage at accumulate and BB&T Capital upgraded them from hold to buy.

As we move into spring the construction activity will surge along with demand for concrete and sheetrock. Earnings should have improved for Q1 and will likely be much stronger in Q2 because of the activity and price increases.

Shares have rebounded to resistance at $71.50 and the close today was slightly over that level. I believe EXP is going to breakout and possibly run to the $77-$80 level before earnings, market permitting.

With a trade at $72

Buy May $75.00 call, currently $2.05, initial stop loss $69.50.



NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Short Squeeze Fades

by Jim Brown

Click here to email Jim Brown

Editors Note:

The two-day short squeeze faded but the major indexes did not decline. This was a consolidation day after strong gains. The markets were lackluster on low volume as the indexes tried to navigate through their respective resistance levels.

The Dow stopped exactly at the upper resistance level at 17,925. At this point, we may need another catalyst to power us higher. Citigroup reports earnings at the open on Friday and that could be a determining factor for market direction.

The Dow jumped completely over the resistance zone because of the short covering but moving higher from here could be a challenge. The next resistance zone runs from 18,125 to 18,165 and then the historic high at 18,351 from last May. We are very close and a failure at that historic high as we approach May this year would produce a monster double top formation ahead of the summer doldrums.

Friday could be driven by oil prices as well since the Sunday production freeze meeting in Doha is already falling apart. The Russian energy minister said it would only be a "loose agreement" or a "gentlemen's agreement" without any formal rules or specific details. Since the OPEC countries are some of the least reliable countries in the world when it comes to oil production, a deal has no chance of being reliable. OPEC cannot even depend on each country to supply accurate production numbers. OPEC contracts with tanker trackers and pipeline operators to calculate production info. There could be a sell the news event in crude oil on Friday. OR, gullible traders could buy it thinking there will be a miracle. WTI futures expire on Wednesday so that is another incentive for current holders to sell early next week.



Current Portfolio




Current Position Changes


LB - L Brands

The long put position remains unopened until LB trades at $78.85.


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:

No specific news.

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. See portfolio graphic for stop loss.


CSC Computer Sciences Corp - Company Description

Comments:

No specific news. The play description incorrectly said May $24 call instead of $34 call. The option symbol in the portfolio graphic was correct and we entered the play at $33.40 so buying a $24 call for $1.50 would not have made sense. I apologize for the clerical error.

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 $34 call @ $1.50, see portfolio graphic for stop loss.


HCA - HCA Holdings - Company Description

Comments:

No specific news. Moving at a snail's pace but another six-month high.

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.


SWHC - Smith & Wesson - Company Description

Comments:

The $22.35 level has now been support for three days. No specific news.

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:

Minor gain in a weak market.

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)


BBBY - Bed, Bath & Beyond - Company Description

Comments:

No specific news. Rebound began to fade.

Original Trade Description: April 11th.

BBBY operates a chain of retail stores selling a range of domestics merchandise for bedrooms, bathrooms, kitchens and home furnishings. They also offer health and beauty aids, giftware and infant and toddler merchandise. The currently operate 1,530 stores.

In the age of Amazon can a retail store still exist and be expected to grow their profits? The company posted earnings of $1.91 compared to estimates for $1.80. Revenue of $3.42 billion also beat estimates for $3.38 billion. For the full year they reported earnings of $5.10 and revenue of $12.1 billion.

On the surface that would appear to be a great operation. Revenue increased 2.4%. In the year ago quarter they reported earnings of $1.80. However, same store sales at 1.7% were below the 3.7% increase in the comparison quarter. Online sales increased 25%. They repurchased $1.1 billion in stock in 2015 and declared their first ever dividend of 12.5 cents along with the earnings report. This would seem like a recipe for a rising stock price.

Unfortunately, the post earnings spike of 6% lasted about 2 hours and shares closed negative. BBBY has been in a long-term decline and the February rebound was already fading when the earnings were announced. Analysts believe Amazon will eventually spell the end of profits for large retail chains like BBBY.

Earnings are July 6th.

Shares closed at a six-week low on Monday, only two days after the earnings beat. The chart suggests the stock is going back to the January lows at $41 with today's close at $46.

With the retail sales report on Wednesday likely to disappoint we could see an acceleration in the downward trend.

Position 4/12/16:

Long May $45 put @ $.98, no initial stop loss.


ENDP - Endo Intl Plc - Company Description

Comments:

No specific news. No material move in the stock. The trend is still down.

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.


LB - L Brands - Company Description

Comments:

No specific news. LB rallied to resistance at $81 and now the real test begins.

This position remains unopened until LB trades at $78.85.

Original Trade Description: April 13th.

L Brands operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. Everybody knows of Victoria Secret. They are the premier lingerie retailer in the country. They offer products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, CO Bigelow, White Barn Candle Company and many other brand names. They have 2,721 stores in the USA, 270 in Canada and more than 700 international stores in 70 countries.

Last week the company said it was cutting 200 jobs and restructuring into three divisions. Those will be lingerie, beauty and the teen brand PINK. The company said it was getting rid of multiple merchandise categories but they did not say which ones. The online business will be revamped and integrated into the main business rather than operating as a separate entity. They plan on reducing promotions and eliminating the catalog. Citigroup said eliminating the catalog could be a nightmare that could have serious repercussions. JC Penny's revived its catalog last year after seeing sales decline after it was discontinued. There is a rumor they are eliminating swimwear, a $500 million a year category. They plan on utilizing the retail space for sports clothing.

The company reported March sales growth of 5% to $1.027 billion. Same store sales rose +3%.

Goldman Sachs downgraded the stock from buy to neutral saying the restructuring and elimination of multiple merchandise lines would impact sales in the short term. Two weeks earlier Credit Suisse cut them from buy to neutral and JP Morgan made the same downgrade last quarter.

Earnings May 18th.

Shares fell off rather steeply ahead of the sales reporting and Goldman downgrade and then hit a seven-month low on the downgrade. Many traders thought it was a buying opportunity and shares rebounded promptly in Tuesday's short squeeze. However, on Wednesday the rebound fizzled to gain only 74 cents. This suggests the rebound may have run its course.

I am recommending we buy a put on a trade under today's low of $79.04. If the stock rolls over it will trigger the position, otherwise we are just watching. If shares fall below that $76 print from Tuesday there is a lot of air before the next support at $65.

With a LB trade at $78.85

Buy May $78 put, currently $1.95. Initial stop loss $81.35.


SPY - S&P 500 ETF - ETF Description

Comments:

Dead stop at resistance. The short squeeze appears to be fading.

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.


TWTR - Twitter - Company Description

Comments:

Minor gain in a lackluster market. We do not care which way it moves, just as long as it moves a lot.

Original Trade Description: April 9th.

Twitter operates as a global platform for public self expression and conversation in real time. I am pretty sure everyone knows what Twitter is so I am not going into depth in this explanation.

Twitter has become the bet of the year. Analysts either think it is going to single digits or going to the moon. The highest price target is $36 and the lowest is $11 with the average at $20.86 across a total of 27 brokers.

Twitter has trouble keeping users because the learning curve is steep and Twitter spam is increasing daily. Twitter bots can be programmed to spread tweets and make it appear there is a huge volume of interest in a specific subject. Andres Sepulveda, a Latin American political operative used custom software to direct 30,000 Twitter bots to create false enthusiasm for candidates and spread rumors about the opposition. Sepulveda said the tactics gave him "the power to make people believe almost everything." The man responsible for his operations said two American presidential candidates had contact him and one of those was Donald Trump.

Unfortunately, Twitter has been having trouble monetizing all the traffic regardless of whether it is real or fake. Their monthly active users include a lot of churn and barely any growth. While nobody expects Twitter to go out of business they are losing faith in the business model.

CEO Jack Dorsey is also CEO of Square and that carries mixed emotions. Some want him replaced and others want him full time. Almost nobody wants him to continue the dual role.

There are constant rumors that Twitter will be bought by someone like Google or Apple. If that were to occur it would carry a huge premium to the current $16 stock price.

Twitter has been earnings challenged for a long time and the stock has declined from $55 to the current $16 level on a lack of confidence they will turn the company around.

Earnings April 26th.

The stock is either going to single digits or it will be back well over $20 soon. It is not likely to continue moving sideways at $16.

I am recommending we do a strangle on Twitter using the June options. Regardless of the stock or market direction we should be able to profit. Because Twitter is $16 and stagnant the options are relatively cheap. I want to buy them now and hold over earnings because that is likely to be a volatility event. We could also get some market moving news with the earnings release.

You could use the $18 call and $15 put for a net debit of $2.22 if you want a cheaper option.

Position 3/11/16

Long June $17 call @ $2.07, no stop loss.
Long June $16 put @ $1.45, no stop loss.
Net debit $3.52.


USO - US Oil Fund - Company Description

Comments:

Waiting patiently for the Doha disaster on Sunday. Next week will be the big move up or down. The russian energy minister said today that it will be only a "loose agreement" without any specific details on production levels. Rather than a hard set of rules it will be a "gentlemen's agreement" and a guideline. As I have said for more than a month, it will not be worth the paper it is written on. Now we learn it may not even be in writing. The market should react badly next week.

Original Trade Description: April 12th.

The U.S. Oil Fund is designed to track the daily price movement of WTI crude oil. This is the simplest method to speculate on the direction of crude oil on a short-term basis.

The USO, or any futures ETF, should not be held long-term because it bleeds value when the futures roll over once a month. On a short term basis it works great for speculation.

Crude oil has spiked 15% over the last several days with a 4% rise today alone. This is speculation over a production freeze agreement in Doha, Qatar on Sunday between OPEC and major crude producing countries. On Tuesday Russia's Interfax news service quoted some diplomat in Qatar saying Russia and Saudi Arabia had agreed to freeze production even if Iran decided not to participate.

This is contrary to what the Saudi deputy crown prince has said over the last couple weeks. The prince said Saudi would not participate unless Iran and the other major producers all agreed to freeze production. Obviously, he could change his mind but after making those statements more than once a change of heart could make him look weak.

There is significant potential for a Doha disaster where the meeting deteriorates into a brawl and nothing is accomplished. Even if they do agree to a freeze that would still maintain 1.45 mbpd of excess production at current levels. Iran, Libya, Kuwait, Iraq, Nigeria and the UAE all have plans to increase production so it would be a major change of plans to agree to a freeze. Most have said they would not support a freeze but when it comes down to the meeting, anything is possible.

Lastly, OPEC members are notorious about saying one thing and doing another. They could all agree to the freeze, wink wink, in order to lift prices and then continue on doing what they are already doing and pumping every barrel they can produce.

I believe there is a good probability we will see oil prices significantly lower in the days/weeks following the meeting. I am recommending we buy an inexpensive put on the USO and see what happens. If you are aggressive you could also buy a call just in case a miracle does occur and prices spike higher. I view that as nearly impossible since Saudi Arabia has said they do not want to see prices much over $40 because that would allow U.S. shale drillers to increase production.

Position 4/13/16:

Long May $10.50 put @ 58 cents. No stop loss.




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