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Daily Newsletter, Saturday, 4/16/2016

Table of Contents

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

Market Wrap

Doha Disappointment

by Jim Brown

Click here to email Jim Brown

Crude oil declined to just over $40 and the equity markets faded on Friday ahead of a potential OPEC disappointment from Doha on Sunday.

Market Statistics

Friday Statistics

The OPEC production freeze meeting is Sunday and expectations are very low. Most believe this dog and pony show is exactly that, a show arranged to pump up oil prices, only the excitement is fading. You can only spin the headlines so many ways before gullible investors finally get the feeling they have been conned.

The Russian energy minister said Thursday 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 only 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. Since the OPEC countries are some of the least reliable countries in the world when it comes to oil production quotas, a deal has little or 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 determine production info.

There are multiple potential outcomes. The meeting can deteriorate into a verbal brawl with each country, primarily Saudi Arabia and Iran, firing headlines at each other and Saudi vows to continue pumping at maximum capacity to prevent Iran from regaining market share. However, we learned on Saturday that Iran has cancelled its attendance at the meeting so there will be no fireworks between the two countries. The deputy crown prince of Saudi Arabia has said multiple times, without Iran there will be no agreement and we will sell at every opportunity. Oil prices could fall back to $30.

Or, the meeting ends with no agreement and everyone tries to spin it positive because oil at $40 is a fair price. Instead, oil declines to $35.

Lastly, the meeting ends with a lot of high fives for the cameras and some key sound bites pledging cooperation with some countries "agreeing" to freeze production at current levels. This would all be for the cameras and nothing concrete would ever be accomplished. The agreement would be hailed as a large step in cooperation ahead of the real OPEC production meeting in June. Gullible traders run oil prices up a couple dollars on short covering and OPEC ministers laugh behind closed doors that they pulled one over on the market. They immediately begin scheming on how fast they can start "talking" about a production cut at the June meeting in order to spam the headlines once again and push prices higher. At the same time, they continue pumping at maximum capacity and global inventories continue to grow.

I would be extremely surprised if they were able to pull off option three. The group is so fractured that getting any three countries to agree on anything, even putting on a false front for the cameras, would be nearly impossible. However, they lifted oil from $30 to $40 with this production freeze charade so anything is always possible.

Here is the kicker. Futures expire on Wednesday. That means anybody long oil in the hope of a Doha miracle will still have to sell early next week. Anyone short oil in anticipation of a disaster will have to cover those shorts early next week. I suspect there are more shorts than longs given the history of OPEC agreements. Oil prices are going to be very volatile over the next couple of days and they could easily drive the market.


The market digested a lot of weak economics last week but there was a bright spot on Friday. The NY Empire Manufacturing Survey spiked from 0.6 in March to 9.6 for April and the highest reading in more than a year. Note on the chart below the negative readings for the last 14 months. The headline number has bounced more than 29 points since the -19.4 reading in January.

New orders rose from 9.6 to 11.2. Backorders almost turned positive with a rise from -4.0 to -1.0. Employment rose from -2.0 to +1.9. Some of the positive rebound was attributed to the drop in the dollar that relieved some of the pricing pressures for manufacturers.


The Dollar Index is down -6.8% from the December high at 100.50 to the April 12th low at 93.67. This has taken a significant amount of pressure off exporters but as you can see, it is still significantly higher than the 80.0 back in June 2015. The dollar has a long way to go to really equalize those currency pressures.


On the negative side of the economics, the Industrial Production for March declined -0.6% after a -0.5% drop in February. Consensus estimates were for 0.0%. Manufacturing output fell -0.3%, mining declined -2.9% and the seventh monthly drop. Auto production fell -1.6%. This is also a result of weak global growth and the strong dollar. Note the slow decline into negative territory on the right side of the chart.


Consumer Sentiment for April declined from 91.0 to 89.7 and the lowest reading since September. This was the fourth consecutive monthly decline. The present conditions component declined from 105.6 to 105.4 and the expectations component declined from 81.5 to 79.6. Weak retail sales suggest consumers are hoarding cash despite gasoline prices under $2 in most areas. Healthcare costs have risen 25% year over year and the Obamacare penalty for not having insurance is rising.


The week's economic reports lifted the Atlanta Fed's real time GDPNow forecast from +0.1% growth to +0.3%. The next update will be on Tuesday after the residential construction report. The April FOMC meeting is the next week and the Fed is not going to raise rates with GDP growth near zero.


There is a 97.7% probability the Fed will not hike rates at the April 27th meeting. That drops to 86.7% for June, 72.2% for July, 63.6% for September, 59.6% for November and 48.2% for December. The Fed is also not likely to hike rates late in the election cycle in order to remain out of the political fray.


The calendar for next week is mostly home sales and construction. That is not likely to move the market. The Philly Fed Manufacturing Survey on Thursday is a proxy for the national ISM report due out two-weeks later.

The biggest event is the Doha meeting on Sunday. That will likely determine market direction on Monday.


Intel (INTC) reports earnings on Tuesday but a report out on Friday said they were going to cut thousands of jobs over the next couple months. The report from the news website Oregonlive said Intel was going to reduce headcount in some divisions by "double digit percentages." Intel had 107,300 employees on December 31st. In 2014, they cut the workforce by 5,000 jobs. They cut another 1,100 in 2015. Reportedly, some of the 2016 cuts would include top executives. Intel shares declined slightly on the news. Since we have seen multiple earnings warnings over the last several weeks saying enterprise spending was slowing, I am not surprised Intel is being forced to cut costs again.


Earlier in the week research firm Gartner reported PC sales had declined to 64.8 million units in Q1, down -9.6% year over year. According to Gartner this was the first time since 2007 that PC sales fell under 65 million units. This is the sixth consecutive quarter of PC shipment declines. Gartner said Hewlett Packard PC sales fell -9% globally but -17.3% in the USA. HP said it was trying t highlight high-end sales as the reason for the quantity decline. Dell moved to the top position and the first time in 25 quarters that spot was not held by Hewlett Packard. PC sales in Asia Pacific declined -5.1% because of weakness in China. Europe, Africa and the Middle East saw sales decline -10% and Latin America saw a 32% decline. This decline in PC sales is another reason Intel is struggling.

A report from the Nikkei Asian Review on Friday said Apple had notified parts suppliers to cut production -30% on iPhone parts for Q2. Apple had previously lowered production in Q1 by 30% and they are now carrying that forward into Q2. Apple had previously forecasted a decline in iPhone sales in Q1. That would be its first ever year over year decline in sales. On Thursday, Canaccord Genuity predicted sales would decline in Q3 as well. The debut of the iPhone 7 in the fall would boost sales in Q4. However, there have been multiple reports that the form factor for the model 7 will be the same as the model 6 and most of the internal components will remain the same. There may not be enough changes to the model 7 to entice customers to upgrade and that would be a serious blow to Apple's stock price. Having iPhone sales decline for three consecutive quarters will be bad enough but a drop in Q4 would be a major shift. Shares fell -$2 on the Nikkei story. Apple reports earnings on April 25th.


Motor Trend spent the early part of the week with headlines teasing pictures of the Apple Car to be unveiled on Thursday. When the story and pictures finally broke it was a disappointment and MT was ridiculed significantly. The "exclusive" on an Apple Car was an "imagined" article. There was zero truth and simply their imagination of what Apple could do if they decide to produce a car. MT was laughed at for having a severe lack of imagination when it came to styling a hypothetical Apple car.


Get ready for the big announcement. Yahoo's deadline for acquisition bids is Monday. The New York Times and Fortune Magazine reported on Friday that Yahoo was hiding or holding back important financial information from prospective bidders. Executives for Yahoo did give gloomy predictions for 2016 but refused to discuss forecasts for 2017 or answer hundreds of questions about critical aspects of the business. The publications reported several of the three dozen or more potential buyers questioned whether Yahoo was even truly for sale. They felt the reluctance to share any critical information may mean the business is a lot worse off than previously thought.

Yahoo has been giving a 90-slide presentation to prospective bidders that was more confusing than enlightening according to people that have seen it. The presentation raises more questions than it answers and there are no answers. Bidders were told they had to listen to the long recorded presentation before Yahoo managers would answer any questions and then very few questions were answered.

Analysts have speculated that more than 30 companies were seriously interested but actual bidders will be less than 10 and there is the possibility that nobody will come close to Yahoo's asking price of $10 billion for the core business. Analysts believe the company is only worth $3 to $5 billion. Reportedly, only Verizon, Comcast and IAC Interactive actually got to meet with Yahoo management and even then they struggled to extract information from CEO Marissa Mayer and CFO Ken Goldman.

Reporters for the publications speculated the entire process was a sham in order to pacify the activist shareholders and Mayer had no intentions of actually selling the company and giving up her $365 million, five year, compensation package. She has to remain at Yahoo for five years since her hire date and the stock price has to be over $40 at the end of those five years. She made $42 million in 2014. She started in July 2012 so she has to make it until July 2017 to fully vest in her compensation package.

However, if Mayer is fired by the board she will receive a $25.8 million severance package. If she loses her job because Yahoo is acquired she will get $110 million in severance. I doubt she would ever find another job after the Yahoo fiasco but with that kind of money, she no longer needs to work.

It is going to be very interesting to see who makes an offer, what price they offer and what Mayer does with the offers. Yahoo reports earnings on Tuesday after the close and that should be a very volatile earnings call.


Twitter (TWTR) has been banned in China since 2009. However, they just hired Kathy Chen to be managing director for China. Apparently, even though Twitter is not allowed in China there are plenty of Chinese advertisers that want to use Twitter. Last year, advertising sales to Chinese companies rose 340%. Chen previously worked at Cisco and Microsoft.

Morgan Stanley cut Twitter saying falling user engagement and shrinking user growth will impact execution. Morgan Stanley said Twitter will end this year with 307.1 million global users, down from the original projection of $310.6 million. The bank said users last quarter spent only 2.7 minutes a day on the service compared to 40.5 minutes for Pandora, 30.3 minutes for Facebook and 8 minutes on YouTube.

Twitter shares are struggling higher after bottoming in mid February. Earnings are April 26th.


Sturm Ruger (RGR) and Smith & Wesson (SWHC) got some bad news on Friday. A judge in Connecticut ruled that a 2005 law that shields gun manufacturers from lawsuits brought by victim's families does not prevent victim's families from arguing that the semi-automatic rifle used in the Sandy Hook school shooting should not have been sold to civilians.

The case has no chance in court. The gun was made by Bushmaster Firearms, a subsidiary of Remington Arms, and no relation to either Ruger or S&W. However, the bad ruling by this judge means the families will sue Remington and there will be plenty of bad press before it is settled.

The gun belonged to Adam Lanza's mother and was stolen from a locked closet by her son and used to kill her and the victims at the school. The AR-15 style rifle is the most popular sporting rifle in America with millions sold every year by dozens of different companies.

Remington should not incur any liability by the son's illegal use of the firearm any more than GM is liable for the thousands of people killed every year by drunk drivers using GM cars. If a person decides to purposefully drive his car into a crowd of people, nobody is going to sue GM.

Shares of RGR fell 4% on the news even though they are not directly involved in the case. SWHC shares fell -3%.


On Wednesday after the close, disk drive maker Seagate Technology (STX) warned on Q1 earnings saying revenue would be closer to $2.6 billion than the previously forecast $2.7 billion. Profit margins would be 23% instead of 25.6% in the prior guidance. The company said demand for "enterprise" products, those mission critical drives used in corporate servers and cloud operations, was slowing. The company also cited slowing demand for PC drives. Shares of Seagate and Western Digital fell sharply.


Just two days earlier Juniper Networks (JNPR) warned for the quarter because of weak enterprise demand at its largest customers. Shares fell sharply.


It does not take a rocket scientist to put 2+2 together and get 4. PC sales are slowing dramatically. Intel is preparing to announce massive layoffs. Seagate and Juniper reported declining corporate demand. Q1 GDP growth is expected to be nearly zero. Something is not right in corporate America.

Next week we have earnings from IBM on Monday, Intel on Tuesday and Microsoft on Thursday. What are the odds that those companies are going to report positive earnings? At this point, I would say those odds are not very high. Microsoft has the best chance since they are in the middle of an upgrade to their operating systems. That means they can still get revenue from existing PC users and not depend 100% on new PC sales. However, they get a lot of revenue from enterprise customers using server operating and database systems.

The bank earnings last week were positive. Everyone reported a decline in revenue but they beat the street estimates. This is that lowered bar we have talked about so much in recent weeks. I will be surprised if the tech giants I mentioned above have earnings that are significantly above their own lowered forecasts. Will that spoil market sentiment?


On Wednesday somebody made a $13 million bet that the Russell 2000 would be a lot lower by June expiration. They bought 90,000 of the June $108 puts and sold 90,000 of the June $98 puts on the Russell 2000 ETF (IWM) for a net debit of $1.50. That is $13.5 million with a breakeven point of $106.50 on the IWM. If the IWM closes at $98 at expiration, the trader stands to make about $75 million. The column on the far right of this option montage is the open interest.

IWM Put Montage

For that bet to reach the maximum profit the IWM/Russell would have to return almost to the January lows or roughly a 12.5% decline from Friday's close.

There is a good possibility this was a portfolio hedge rather than an outright bet on a market decline. However, you do not spend $13 million for the hedge unless you actually believe the market might decline. I would have to be a real believer to spend that kind of money but then I do not have a billion dollar portfolio at risk either. I am short the SPY and/or IWM in almost every newsletter I manage so I am hedging my bets as well, just not to this extreme. I suggest we watch this open interest and see when/if the trader removes this bet.


We talk about the strong dollar all the time and the impact on commodities. This is a chart comparing the dollar to oil over the last three years. The black line is the dollar and blue line is oil prices. Note that the dollar began shooting up at exactly the same time oil prices collapsed. Over the last two months, the dollar has fallen and the price of oil has rebounded even though the fundamentals for oil prices have not changed or have actually gotten worse.


The IEA updated their outlook for demand growth in 2016. They now expect global demand to grow by 1.16 million barrels per day. Excess production today is between 1.45 and 2.0 million barrels per day (Mbpd). Over the last month, that has been a little less because of disruptions in Iraq, Nigeria and Columbia. Nearly 900,000 bpd was offline for days to weeks because of a pipeline explosion in each country but for different reasons. The prior week the 590,000 bpd Keystone pipeline in the U.S. was shut down for 7 days because of a leak. Despite all these outages, inventories still grew. This is just another example why a production freeze will have no impact to the global glut.

Last week the U.S. active rig count declined -3 to 440. Oil rigs declined -3 to 351 and gas rigs were unchanged at 89. Active rigs are now down 1,491 from the peak at 1,931 in 2015. That is a 78% decline. If the OPEC representatives in Doha want to reverse the trend in U.S. shale oil drilling all they have to do is spike oil prices about $5 to $45 and that decline in rigs will turn into weekly gains. They need to be careful what price they wish for or U.S. production will begin to rise again.


As part of the bank earnings last week, we learned what exposure they had to energy loans. Every bank raised loan loss reserves for the quarter to cover potential defaults. This is their individual exposure and Citigroup has double the exposure as a percentage of total loans as the other three banks.

JPM $46.0 billion, 5.4% of total loans.
BAC $43.5 billion, 2.4% of total loans.
WFC $40.7 billion, 4.3% of total loans.
Citi $58.0 billion, 9.4% of total loans.

Energy XXI (EXXI) filed bankruptcy on Thursday. In the year before the oil crash they bought more than $5 billion in reserves from Exxon and EPL Oil and Gas to raise their market cap to nearly $7 billion. They bought the reserves with debt. Over the last year, they bought back $1.7 billion in debt at a significant discount but still had roughly $3.2 billion outstanding. When oil prices imploded, they could not generate the cash flow to service the debt. They bought the reserves with oil at $105 and went bankrupt on $35 oil. In their bankruptcy filing, they listed their assets at $500 million. Existing shareholders are going to be eliminated and debtors are going to exchange $2.8 billion in debt for 100% of the new equity in the company.

Now project this across the entire sector. There have been more than 25 bankruptcies over the last 18 months and sources claim there are 11 more in the planning stages today. Those are just the ones we know about. Since filing bankruptcy requires having some debtor in possession funding in place before you file, those 11 companies have been shopping for that funding. I am sure there are others that will appear in the coming months. The best thing OPEC could do this weekend is produce a miracle that sends oil prices higher and breathes life back into the U.S. oil sector. I would not hold my breath on that happening.


A Citibank analyst was cautioning investors last week about discounting the potential for new market highs in the coming weeks even though this will be the worst quarterly earnings since the financial crisis. She quoted an amazing statistic. She said there are more than 8.5 billion shares short. If the markets begin to break through the various resistance zones those shorts will have to cover and that would provide a significant short squeeze that could power the markets to new highs.

Analysts have been talking up a rally on "less bad earnings" and next week we will get to see if that can happen this quarter.

Markets

The major indexes rallied on Tuesday and Wednesday and the rest of the week they were lackluster. The S&P rebounded 48 points from the Tuesday low to the Thursday high at 2,088 and only gave back -8 points from that high despite strong resistance. This was somewhat bullish because normally there is some backing and filling after a big gain. That is especially true when that high is at strong resistance.

Clearly, investors are hoping for better than expected earnings and a possible surprise from Doha. Actual estimates declined again from -9.1% to -9.3% over the last week. At the end of March, the forecast was for a -8.7% decline. Seven percent of S&P companies have already reported and 71% beat on earnings and 60% beat on revenue. Ninety-four companies have warned and 27 have issued positive guidance.

The four major banks beat the lowered estimates but earnings and revenue declined from the year ago quarter. Industrial corporations may not be so fortunate. This week will be pivotal for the earnings outlook and market direction.

The S&P stalled right at downtrend resistance at 2,085 and that will be the key level to watch next week. If the index does reverse the 2,040 level should be initial support followed by 2,020.


The Dow could be a problem next week. There are 14 Dow components reporting earnings. Those reporting are IBM, GS, INTC, JNJ, AXP, KO, MSFT, TRV, VZ, V, CAT, MCD, UNH and GE. The challenge is likely to come from IBM, Intel and Microsoft. If enterprise spending is really slowing, those companies could post weak earnings and/or weak guidance, which could sour the market.

The Q2 production cut on Apple iPhones is likely to drag Apple lower as well.

The Dow touched the very top of its resistance band with a brief intraday spike to 17,962 before falling back to close below 17,925. That was just shy of the intraday spike on November 3rd at 17,977. If we were to get a couple really positive earnings reports and IBM fails to depress, we could see a breakout to the next resistance band from 18,120 to 18,165. That should be a lot rougher resistance than the current level.

The big thing about the Dow outlook is the new high syndrome. The prior high from last May was 18,312. That is just over 400 points above our Friday close. That old high has become a price magnet and it is calling traders with an almost irresistible siren song. Whenever an index gets this close to an old high it is almost a given that it will be retested. Obviously, crummy earnings could derail that new high process but it would take some really bad earnings to blunt market sentiment. What happens if we actually reach that high is another story for a future commentary.



The Nasdaq catapulted over resistance at 4,900 on Tuesday and then held its gains the rest of the week. The Nasdaq also has some earnings challenges coming up this week with NFLX, INTC, GOOGL, YHOO, QCOM, MSFT, ISRG, BIIB and SBUX reporting. IBM could be a problem on Monday even though it is not a Nasdaq stock. It still impacts the tech sector.

The Nasdaq has psychological resistance at 5,000 but then a easy path to its own resistance band from 5,100 to 5,160.

The biotech short squeeze faded earlier in the week but then buyers returned as the week progressed. The $BTK needs to move over 3,250 to trigger more short covering and help lift the Nasdaq.




The Russell 2000, S&P-600 Smallcap and the S&P-400 Midcap indexes were all positive on Friday when the big cap indexes were negative. That is a positive for market sentiment and suggests fund managers are starting to nibble at stocks again. This is unusual with the big caps at strong resistance and only a couple weeks before the sell in May cycle begins.



I am neutral on the market for next week. I could make a case for it to go in either direction. If earnings are "less bad", we could move higher and closer to the attraction of the historic high price magnet. If earnings are more negative than expected it could damage market sentiment and see the indexes move lower.

The Doha meeting on Sunday will have a big impact. If oil moves higher, the market should move higher and declining oil prices could drag the market lower. With Iran boycotting the meeting, the potential for a negative result has increased. The futures expiration on Wednesday is an added volatility bonus that should accelerate any directional move.


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Random Thoughts


There is a bill in Congress to allow the Saudi Arabian government to be held responsible in American courts for the 9/11 attacks. President Obama has been doing everything in his power to block the passage of the bill. The president will be in Riyadh on Wednesday to meet with King Salman and other Saudi officials.

The 9/11 commission found "no direct evidence that the Saudi government as an institution or senior Saudi officials individually funded the 9/11 plot." However, critics have noted that the very narrow wording left open the possibility that lesser senior officials or parts of the Saudi government could have played a role. The 2002 congressional inquiry into the attacks cited some evidence that Saudi officials living in the U.S. at the time had participated in the plot. Those conclusions, contained in 28 pages of the report, have been classified and have not been released publicly. People who have seen those pages indicate the information is incriminating for Saudi Arabia.

The Senate bill is intended to make clear that immunity given to foreign nations in a 1976 law should not apply to nations found to have participated in terrorist attacks that kill Americans on U.S. soil. If the bill passes and the president signed it, there would be a path for Saudi Arabia to be held liable. The bill is sponsored by both democrats and republicans and has wide support. Since the president has bent over backwards to be friendly and agreeable to Saudi Arabia, I doubt he would sign it.

However, we learned on Saturday that Saudi Arabia told the Obama administration that it would sell off hundreds of billions of dollars in U.S. assets if Congress passes the bill. The Saudi foreign minister delivered the message personally warning the kingdom would be forced to sell up to $750 billion in treasuries and other assets in the U.S. before they could be in danger of being frozen by American courts.

The government discloses exactly how much U.S. debt is held by every country in the world except Saudi Arabia. That one number is classified. I wonder why?

Source


China's economy expanded at a 6.7% rate for Q1 compared to 6.8% in Q4. For all of 2015 the economy grew at 6.9%. The government is targeting 6.5% to 7.0% for all of 2016 and the current stimulus programs appear to be working.

Fixed asset investments rose +10.7% and higher than the 10.3% Reuters had predicted. Retail sales rose +10.5% and slightly over estimates for 10.4%. Industrial production rose 6.8% and well over the 5.9% estimate.

The yuan appears to have stabilized since the government switched the peg from the dollar to a basket of currencies used by their trading partners. China is still facing a significant debt load of 160% of GDP. The IMF warned that about $1.3 trillion in corporate bank loans were owed by firms that could not even make the interest payments. The IMF said this could lead to bank losses equal to 7% of China's GDP. Earnings in some sectors have fallen so sharply that firms are unable to pay but China continues to "extend and pretend" that they will eventually be able to pay.


Are you ready for a really big move? The S&P has traded in a multi-year consolidation range since the end of 2013. This range has covered 324 points and technically a measured breakout would travel the distance of the range or 324 points. The bulls would like to see a breakout to the upside and that would target 2,458 on the S&P. However, the breakdown in the economy and four quarters of declining earnings suggest the eventual measured move will be a breakdown and target 1,486. The breakdown in the RSI is confirming the loss of market momentum and suggesting the next big move will likely be a decline.

Obviously, nobody can guarantee any technical outcome. Technical indicators are based on historical patterns that tend to repeat. The measured breakout from a long-term consolidation pattern is fairly reliable. When coupled with the 10/21 moving average crossover as additional confirmation the long-term outlook is not favorable. We will review this chart from time to time to see if the pattern repeats.



Despite the indexes trading near their historic highs the market sentiment is moving slightly in the bearish direction. Apparently, some investors can read charts.



Deutsche Bank (DB) has admitted it conspired with other banks to rig the price of gold and silver. Last week the bank settled a long-running price fixing lawsuit on silver by giving "valuable monetary consideration" and agreed to provide cooperation to prosecutors including instant messages and other electronic communications as part of the settlement. In other words, they are turning into a government witness against the rest of the cartel that conspired with Deutsche Bank.

Almost immediately two class action lawsuits for $1 billion in damages each were filed on behalf of Canadian gold and silver investors. The class includes anyone who traded a silver instrument of any kind from January 1st, 1999 through August 14th, 2014 and includes equities, ETFs, hedge funds, pension funds or any other investment vehicle that transacted in a silver market instrument. An identical suit was filed for investors in gold. These are the first of what could be many suits attempting to recover losses from Deutsche Bank and their co-conspirators. Since DB has already admitted their guilt there will be a huge settlement down the road.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Time is like a river. You cannot touch the same water twice, because the flow that has passed will never pass again. Enjoy every moment of your life. "

Heraculitus 535-475 BC


 


Index Wrap

Another Bullish Opex Week

by Keene Little

Click here to email Keene Little
The week started off slowly for what is a typically bullish week but made up for it on Tuesday and Wednesday. Wednesday's rally recovered the losses on Monday and Tuesday and nothing more was added on Thursday and Friday so the week's rally came down to just one day and now with opex influence finished it's looking like we're setting up for a pullback.

Week's Indexes


Review of Major Stock Indexes

Looking at the table above you can see that it was a good week for all sectors but as mentioned in the opening paragraph, the whole week owes its performance to just Wednesday's rally, which had started with the recovery off Tuesday morning's lows. But a rally is a rally and the bulls had a good week.

It was a mixed picture for the metals with silver up +6% while gold dropped marginally (-0.7%). Most of the broader averages finished the week up a little less than +2% but the RUT outperformed with its +3.1% finish. Oil service and transports did well, up +4% and +3.1%, resp., and they helped the small cap sector.

The three most beaten down sectors for 2016, the banking, brokers and biotechs, have had the best month so far. Biotechs have had a strong recovery this month but only a so-so performance in the past week. The brokers are the opposite -- April is barely in the green and that's only because this past week they bounced +5.7%. A little short covering perhaps?

JPMorgan is the "prime broker" for most of the world's largest hedge funds and they have reported large redemptions from these funds in March. Apparently many large investors were liquidating losing positions and in order to meet redemption requests the hedge funds had to liquidate their profitable positions. Many of those positions being liquidated were short positions and according to JPM March saw the largest volume of hedge-fund short covering since 2009. The huge rebound in beaten down sectors, and the broader market, likely came from this short covering and other than a minor new high last week we can see on the charts that the sharp rally completed at the end of March. If the sharp rally was primarily short-covering related there might not be enough buying this month to keep the rally going. This past week's minor new highs are showing bearish divergences.

The banks had a strong week, up +7%, thanks to some short covering following earnings reports from some of the bigger banks that were "less bad" than had been feared. A lot of bad news was already priced into bank stocks' prices and once the actual results were seen it caused a sell-the-rumor, buy-the-news reaction. Some banks, like JPM, are not offering forward guidance and that probably helped their stock prices (ignorance is bliss?).

The defensive sectors -- utilities (+0.1%) and consumer staples (not shown in the table but XLP finished down -0.1%) -- did not participate in this past week's rally as money was put to work in the riskier groups. Again, many of those riskier sectors had been shorted the most and likely rallied stronger on short covering. The defensive sectors were not shorted and therefore did not participate in the rally. This could be simply speculation on my part but it fits the pattern for what we're seeing and helps explain the stronger-than-usual rally off the February low (the strongest rallies are typically in bear markets because they tend to be mostly short covering).

Considering the outperformance by some of the higher-beta sectors I'm a little surprised that the SOX hasn't done better (+0.3% last week and -0.5% for the month). One of the things I often point to when trying to see if a market move could be sustainable is to look at the SOX and BKX. When they're not in synch, and clearly they were not last week or even this month, it's a warning sign that the current trend is susceptible to a reversal. In this case that means we should be wary of the rally.


A Look At the Charts

When I look at the big picture with the SPX weekly chart below, I see a big 3-wave pullback from last May into the February low. From a bullish perspective the rally off the 2009 low is still in progress and the rally off the February low is simply the next leg up in the longer-term rally. The bullish EW (Elliott Wave) count says the February low was the completion of the 4th wave correction and we're now into the 5th wave to new highs.

The leg up from February is likely completing very soon, either already or potentially early in the coming week. At that point, it could be the 1st wave of what will become a larger 5-wave move up from February and we should expect only a 2nd wave pullback before heading much higher (light green labels and dashed line on the chart below). The argument in support of this is that the U.S. is the least-smelly turd of all the turds out there and we'll attract money into this country for the next couple of years.

It's possible the bullish wave pattern could finish with this leg up from February (as a truncated finish to the bullish pattern with the lower high) and now we'll start the next bear market leg down. It's also possible the price action since last year's highs is a large A-B-C bounce correction following the August 2015 low and now we'll start a stronger selloff as part of a larger pullback correction. So many choices, so little to go on.

Actually, in either case, whether the bigger pattern is still bullish or will instead turn more bearish, we can expect at least a deeper pullback correction. Because of this I think it's best to get defensive if you're long the market and to start thinking about shorting candidates. Once the pullback gets started we'll then be able to look for clues to help identify whether it will be a pullback to buy or instead a decline where we'll want to short bounces.


S&P 500, SPX, Weekly chart

SPX has rallied up to just shy of its downtrend line from July-November 2015, currently near 2092 (last Thursday's high was a little shy of 2088). I see the potential for at least a little pop higher on Monday-Tuesday but the short-term pattern suggests it would be risky to chase it higher. I think a break above the downtrend line would likely turn into a head-fake break once the short covering completes.


S&P 500, SPX, Daily chart

The daily chart shows the rally up near the July-November 2015 downtrend line. The small consolidation below this trend line could result in at least a test of the trend line, near 2092, and potentially up to a price projection zone at 2098-2103. The bearish divergence at last week's high warns bulls not to get aggressive here.

Key Levels for SPX:
-- bullish above 2100
-- bearish below 2033


S&P 500, SPX, 30-min chart

Zooming in on the short-term pattern, to show what I'm watching for in the coming days, the 30-min chart shows a couple of channels and a possible rising wedge pattern for the rally from April 7th. The little choppy pullback from Thursday, which could extend a little lower on Monday, could then be followed by one more leg up to complete a 5-wave move up from April 7th. Upside projections for the 5th wave are near 2093 (which matches the July-November 2015 downtrend line) and then 2103. While those are upside levels to watch if we get another leg up, the risk is for Monday to start a strong decline right away, in which case I'd abandon the upside, especially if it breaks below the April 8th high near 2060.


Gann Square of 9 chart

For a quick reminder, the Gann Square of 9 chart, a portion of which is shown below, tells us SPX 2088-2089 and 2098-2099 levels are important ones. SPX 2088 is square to the May 2015 high at 2134 (not shown on the chart but 2134 is 90 degrees from the red vector, a small portion of which can be seen at the bottom right side) and 2088 is on the same vector as the October 2002 low (768), April 2012 high (1422), the October 2007 high (1576). Back in October 2007 I used this chart to highlight the importance of 1576 for a potential high and it was nailed to the point. Last Thursday's high was 2087.84 so was that close enough for government work? If it does press higher in the coming days, the next important Gann level (2098-2099) is on the same vector (blue) as the March 2009 low. It's also square (90 degrees) to the September 2014 high and October 2012 low. That would actually be pretty fitting -- the entire 2009-2016 bull market on the same vector, bottom to top (if it tops out at 2098-2099).


S&P 100, OEX, Daily chart

I've drawn a parallel up-channel for OEX's rally from February and last week's rally almost made it back up to the midline of the channel, which it crossed below during the consolidation off the April 1st high. The midline of the up-channel crosses its July-November 2015 downtrend line on Tuesday near 938 so that's upside potential for now, maybe even its November high near 944. The first bearish warning sign would be a drop below the April 8th high near 915 and the top would be confirmed in place with a drop below the April 7th low near 903.

Key Levels for OEX:
-- bullish above 944
-- bearish below 903


Dow Industrials, INDU, Daily chart

Thursday's high for the DOW, at 17962, was within 15 points of testing its November 2015 high at 17977. As shown on the OEX chart, the midline of its up-channel from February will be near 18200 by Tuesday and therefore that's upside potential for now. That's another 300 points that the bears need to think about if they're itching to get short. The first hint of trouble for the bulls would be a drop below its April 8th high at 17694 and a top would be confirmed in place with a drop below the April 7th low at 17484.

As for an upside target to keep an eye on, if reached, is 18058. This is where a large A-B-C bounce off the August low would achieve two equal legs up. The rally above its May-November 2015 downtrend line, currently near 17600, makes it more difficult to support the idea that the Dow is hammering out a big sideways triangle from May 2015 (a pattern I've shown in past weeks). This pattern called for one more leg down to complete the triangle and then start a strong rally. I think that pattern is now OBP (overcome by price), although I suppose I could argue it's an ascending triangle instead of a sideways triangle.

As mentioned for SPX, regardless of whether we have a larger bullish pattern yet to play out or if instead we're going to start the next big decline, both scenarios call for at least a larger pullback and considering the downside risk I think it would be prudent to get defensive about being long the market. It's still a trader's market rather than a buy-and-hold market. If the market starts a strong impulsive decline we'll have a better sense that something more bearish has started. But if the pullback gets choppy with overlapping highs and lows then we'd have a good idea that it's just a pullback correction and we'll know to start looking for where to buy it. A bullish pullback correction should last at least half the time it took for the rally from February so we're talking mid-May before looking to get long.

Key Levels for INDU:
-- bullish above 18,200
-- bearish below 17,484


Nasdaq-100, NDX, Daily chart

I've drawn a rising wedge pattern for NDX, the top of which will be near 4640 by Tuesday and that's the upside potential that I see presently. But between the 78.6% retracement of its December-February decline, near 4558, which is a common retracement level for this market, and price-level S/R near 4600 it could be a struggle for the bulls to make much more headway. A drop below its uptrend line from February and its 20-dma, both near 4484 on Monday, would be bearish and a drop below its April 12th low at 4435 would confirm a top is in place. As with the other indexes, the bearish divergence at last week's high is a warning sign that the rally is simply running out of buyers and without the bullish opex influence it could be a struggle for the bulls to put many more points on the board.

Key Levels for NDX:
-- bullish above 4640
-- bearish below 4435


Nasdaq Composite, COMPQ, Daily chart

It's the same picture for the Nasdaq as for NDX and the top of its rising wedge will be near 5020 on Tuesday. Bullishly, it climbed above price-level S/R near 4920 on Wednesday and is holding that level as support on a pullback on Friday. It would turn into a failed breakout if it closes back below 4920 so watch for that possibility. A drop below its uptrend line from February, near 4862 by Tuesday, is also where it would drop back below its broken downtrend line from December as well as its 20- and 200-dma, which are converging at the same level. From all this I would expect the 4860 area to be strong support on a pullback but obviously bearish below it.

Key Levels for COMPQ:
-- bullish above 4811
-- bearish below 4570


Russell-2000, RUT, Daily chart

The RUT had a big rally on Wednesday and bumped up against its 200-dma and downtrend line from June-December 2015. Thursday and Friday were spent consolidating beneath these two, currently near 1130 and 1132, resp., and in the meantime the top of a rising wedge that it's been in since March 7th is currently near 1133. It's a lot of resistance to get through and obviously it would be more bullish above 1133, which would open the door to its 78.6% retracement of its December-February decline, near 1149. The consolidation on Thursday and Friday actually saw price chop its way marginally higher from Wednesday and that's looking like an ending pattern, potentially with just one more minor new high to complete the pattern.

Key Levels for RUT:
-- bullish above 1150
-- bearish below 1088


SPDR S&P 500 Trust, SPY, Daily chart

As can be seen on the SPY chart below, it has been pushing up against the top of its BB for the past few weeks but now the BB is narrowing and flattening out. The MFI shows bearish divergence against the highs since March 18th. Trading volume has been tailing off during the entire rally and price has reached the peak in VAP, all of which suggests the rally is tired and running out of steam as it hits maximum resistance. A drop below Wednesday's open, at 208, and MFI below 50 would strongly suggest the top is in place, especially if price drops below the midline of the BB (20-dma), currently at 205.29. The narrowing BB suggests a big move is coming and I think the odds have shifted in favor of the bears.


Powershares QQQ Trust, QQQ, Daily chart

QQQ is showing the same setup as SPY with its BB and Williams %R is showing bearish divergence as well. The rally could continue but I don't think that's the higher-odds play here.


Summary

I had mentioned several times above that we could see the rally continue into Tuesday, April 19th and I provided some upside targets to watch for if the buyers can keep going for another two days. I don't believe the bulls will be able to do any better than that and watch for the resistance levels I pointed out in case the market does manage to push a little higher. The short-term bullish pattern suggests we'll see another push higher but there's a bearish pattern that suggests last week's high are all we're going to get. The downside levels noted with the discussion for each chart will provide the clues needed to know when the top is in place. The trend is your friend and it's currently up so any short plays here are counter-trend until we identify the break of the trend.

Regardless of whether we have a larger bullish pattern playing out (with much higher levels to come this year) or if the market is topping out for good (for years to come), they both suggest we should be looking for at least a short-term top and a larger multi-week pullback. Because the pullback could develop into a more serious decline I think it's prudent to be defensive here. This rally has offered plenty of higher lows to pull your stops up and maximize profits on long positions. Don't give those profits back. We're in a trader's market instead of a buy-and-hold market. Look at the market since the end of 2014 and at the larger pattern since 2000 and it's not hard to see that those who traded the market rather than just hold on are the ones who are better off. Even if you simply step away from the market during the down swings you've done better. Play the short side on the down swings and you've done much better.

The trick will be identifying a pullback as either bullish or bearish. If the market starts a strong impulsive decline we'll have a better sense that something more bearish has started. But if the pullback gets choppy with overlapping highs and lows then we'd have a good idea that it's just a pullback correction and we'll know to start looking for where to buy it (probably around mid-May).

Trade safe, have a good week and good luck with your trading. I'll be back with you next weekend.

Keene H. Little, CMT

Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville


New Option Plays

Days are Numbered

by Jim Brown

Click here to email Jim Brown

Editors Note:

What happens when the business you have been running profitably for decades is eliminated by change? H&R Block's days are numbered. They will probably be around for years to come but their business is slowing. Fewer people are turning to HRB for help with their taxes.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays



NEW DIRECTIONAL PUT PLAYS


HRB - H&R Block -
Company Description

H&R Block has been doing taxes since 1946. They provide tax preparation, banking and other services to the general public through a system of retail offices.

Unfortunately for HRB the times are changing. The general public is moving to do-it-yourself tax preparation software like Turbo-Tax from Intuit (INTU). That is not the biggest problem. On Wednesday Senator Elizabeth Warren introduced the "Tax Filing Simplification Act of 2016" and Bernie Sanders is a co-sponsor.

Donald Trump, Ted Cruz and John Kasich have all said they would drastically change the tax code and Ted Cruz wants to simplify it enough so that all your taxes can be submitted on a post card sized form. If a republican wins the election the tax preparation business is going to suffer. However, if Hillary wins she has proposed 18 new taxes to raise $1 trillion in new revenue. That will further complicate the preparation situation.

Obamacare has also made tax preparation harder and more complicated. Taxpayers have been forced to use accountants to prepare their forms because of the complications. HRB could do it but the perception is that you need somebody other than a part time tax preparer to give you the right advice.

In the last quarter HRB posted a loss of 34 cents that was larger than the analyst estimates for 26 cents. It was also larger than the 13 cent loss in the year ago quarter.

Revenue declined -6.7% because of lower volumes of clients. Revenue of $474.5 million missed estimates for $505 million. Tax preperation fees declined -4.2%. Operating expenses rose +1.7%. Long-term debt rose from $500 million to $2.6 billion. Cash burn rose from $1.2 billion to $1.4 billion.

Earnings are June 8th.

I am recommending a July option so there will still be some earnings expectation premium left when we exit before earnings.

Buy July $23 put, currently $1.30, no initial stop loss.




In Play Updates and Reviews

Summer Friday

by Jim Brown

Click here to email Jim Brown

Editors Note:

While it may not be summer yet it was definitely summer trading with no market movement and low volume. I view Friday's lack of a material decline as bullish. After a big gain early in the week the market has held those gains even though they are in a strong resistance zone. We had every opportunity to sell off over the last two days and it did not happen.

The challenge for next week will be oil prices and earnings. If the OPEC meeting in Doha turns into a disaster we could see a significant drop in oil prices that could weigh on the market. If they come out of that meeting with dozens of positive headlines about the agreed production freeze we could see oil prices move higher because short interest is high in expectations of a disaster.

There will be a surge in earnings and so far, with about a dozen companies reported, the earnings have been relatively good but predominantly from banks. Next week we have a wide range of reporters and we wil see how the real world earnings turn out.



Current Portfolio




Current Position Changes


LB - L Brands

The long put recommendation has been cancelled.


SWHC - Smith & Wesson

The long call position should be closed due to adverse news.


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. Finally an uptick in the shares.

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.

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.


EXP - Eagle Materials - Company Description

Comments:

No specific news. Shares pushed through resistance to trigger the position at $72 intraday.

Original Trade Description: April 14th.

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.

Position 4/15/16 with a trade at $72

Long May $75.00 call @ $1.95, initial stop loss $69.50.


HCA - HCA Holdings - Company Description

Comments:

No specific news. Huge dip intraday to $78.58 but recovered to close at $80.33 and a loss of only 39 cents.

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:

Gun manufacturers received some bad news on Friday that knocked SWHC below support again. A judge in Connecticut ruled that a 2005 law that shields gun manufacturers from lawsuits brought by victim's families does not prevent victim's families from arguing that the semi-automatic rifle used in the sandy Hook school shooting should not have been sold to civilians.

The case has no chance in court and the gun was made by Bushmaster Firearms, a subsidiary of Remington Arms, and no relation to S&W. However, the bad ruling by this judge means the families will sue Remington and there will be plenty of bad press before it is settled.

The gun belonged to Adam Lanza's mother and was stolen from a locked closet by her son and used to kill her and the victims at the school. The AR-15 style rifle is the most popular sporting rifle in America with millions sold every year by dozens of different companies.

Remington should not incur any liability by Adam's illegal use of the firearm any more than GM is liable for the thousands of people killed every year by drunk drivers using GM cars.

CLOSE THE POSITION

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:

No selloff 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. Early morning spike faded in the afternoon.

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. -3% loss for the day. 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 continued to rebound out of the Tuesday dip. I am cancelling the recommendation.

CANEL THE RECOMMENDATION

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.

Recommendation cancelled


SPY - S&P 500 ETF - ETF Description

Comments:

Continuing to hold at resistance with no material selling.

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:

Twitter took the unusual step of hiring Kathy Chen to market twitter to Chinese businesses even though Twitter has been banned in China since 2009. A Twitter VP said Chinese advertising has seen 340% growth in Chinese advertisers on Twitter over the past year.

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. Futures expire on Wednesday.

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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