Option Investor
Newsletter

Daily Newsletter, Monday, 4/18/2016

Table of Contents

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

Market Wrap

The Saudis Sandbag Doha

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

There was no deal in Doha, oil prices fell and the market rallied. The fact that the Doha meeting fell apart is no surprise, neither is the drop in oil prices. What is a surprise is that the market rallied on the news, a move that perhaps confirms the notion the market had little confidence the Doha meeting would bear fruit.

Asian indices mostly fell on the news, led by the Japanese Nikkei. The Nikkei was down nearly -3.5% on the close due to a second earthquake on the Island of Kyushu. The quake led to a disruption of infrastructure for companies like Toyota, Honda and Sony which shut down operations until later in the week. European indices began the day lower, about -3%, but moved higher throughout the day. The DAX was trading near break even at the open of our markets and moved into the green by the close of the day.

Market Statistics

Early trading indicated a lower open for the US indices all morning. The futures were down by a half percent at the start of the electronic session but moderated to about half that by 8:30AM. Earnings reports, a cut to US growth outlook from Citigroup and comments from several Fed presidents all had some affect on early trading, as did a fall in oil prices, but none enough to really drive the market. At the open the indices fell as expected but unexpectedly found support within the first 7 minutes of trading. From that point until about 12:30 the market rose, the SPX gaining nearly 12 points, until settling into a trading range that lasted 2 hours. A little after 2:30PM the bulls gathered their strength, broke above resistance and set a new highs in many of the indices. Rally persisted into the end of the day, leaving the indices at or near their highs at the close of trading.

Economic Calendar

The Economy

Only one economic release today, Home Builder Sentiment, and it remained unchanged from last month. Sentiment came in at 58, the third month of unchanged data, positive but mild and characterized as optimistically cautious. Within the report sales fell by 2 points while traffic and future activity each gained 1. Analyst had expected home builder sentiment to gain a point to 59.

Moody's Survey Of Business Confidence jumped 2 points to hit 33.7 this week. This is the largest gain in a year and the highest level in 4 months. Within the report responses to all 9 questions are seeing improvement with emphasis on sales, financing and pricing. According to Mark Zandi the strongest responses are to sales and the availability of financing.


Despite the banks mostly beating expectations earnings for the broader market are coming in worse than estimated. According to FactSet the blended rate for Q1 2016 earnings is now -9.3%, down -0.2% from last week due to lower estimates in 6 sectors. To date, only 7% of the index has reported with 71% of those beating earnings estimates and 60% beating revenue estimates.


Full year 2016 projections have fallen as well. 2016 is now expected to see earnings growth of only 2.0%, down a tenth, as all three remaining quarters are revised lower. The silver lining is that earnings are expected to return to growth in the 3rd quarter and expand into the 4th, followed by more robust growth in 2017. Full year 2017 estimates continue to rise, gaining a tenth to 13.60%.


This week is fairly light on data but still important. Throughout the week will be housing data including starts, permits and existing home sales. Later in the week is the Philly Fed and Leading Indicators and of course the weekly jobless claims.

The Oil Index

No deal in Doha was a headline from more than one news service. The deal fell apart apparently on a shady shift in terms perpetrated, allegedly, by the Saudi's. According to reports terms of the agreement were not dependent on Iran's involvement Saturday night, and then on Sunday morning they were. The news caused an expected decline in oil prices, about -5% for WTI, but did not spark a massive reversal in prices, at least not yet. Fundamentals remain skewed to the supply side but signs persist the balance is coming back into line naturally, if very slowly, which is helping provide some support. WTI fell below $38 in early trading but closed $2 higher, just shy of $40. Where it is going next is hard to say but we may get a clue this week.

The Oil Index fell more than -3% in the pre-market and opened with a gap lower, just above the short term moving average. It then proceeded to move higher all day and close with a gain of nearly 1.65%. Despite the gain the index remains below resistance at the 1,120 level with weak, if bullish, indicators. The index may continue to test resistance and may break through with next resistance near 1,150. Support appears to be along the short term moving average, near 1,070.


The Gold Index

Gold prices were up in early trading on the Doha news but fell back to break even by late in the day. Spot price held near $1235, near the middle of recent ranges, likely tied to economic data, and a meeting of the ECB later this week. The bank is not expected to make any changes to policy but the comments could sway sentiment. At the last meeting Draghi indicated that there would likely be no additional QE in Europe, if he holds this line again the euro will likely strengthen, weaken the dollar and support gold.

The gold miners tried to move higher but were not able to hold the gains. The miners ETF GDX opened with a gain near 1% but closed with a loss. The index is trying to extend a bounce from support but so far has made little progress. The move is likely tied to central bank activity and economic data which means gains/losses could muted until the FOMC meeting next week. Resistance is likely at the recent high, near $23, with support at the top of the recently broken trading range near $21.25.


In The News, Story Stocks and Earnings

The dollar lost a little ground today, about -0.25%, on the Doha deal and risk off appetite. The Dollar Index fell back to potential support at the 78.6% retracement level, near $94.45, and may fall through. The drop to support and potential break down are in line with 4.5 month trend and consistent with central bank outlook. The ECB is not expected to expand QE, the FOMC is not expected to tighten policy, the theoretical effect being stronger euro and weaker dollar. If support is broken the index will likely retest the recent low, just below $94, with a chance of moving down for a full retracement of the trading range.


Disney helped to lift the market today, gaining more than 3%. The stock got a boost from much better than expected results from the release of the new Jungle Book movie. The movie's success helped to alleviate fears the movie pipeline had already been priced into the stock and sent it up to a new three month high. Disney is scheduled to report earning May 10th.


Toy maker Hasbro released earnings this morning and beat on the top and bottom lines. The company increased sales and earnings on all fronts, boosted by brands such as Play Doh and Nerf. Licensed merchandise for Star Wars and Frozen also contributed. Earnings grew 83% from last quarter, revenue only 16%, with positive outlook for the rest of the year. Shares of the stock jumped more than 5% on the news and is now trading at a new all time high.


Morgan Stanley reported earnings before the bell. The investment bank beat on the top line, revenue fell short, but nevertheless posted a year over year decline in both. EPS of $0.55 was $0.09 better than expected, but down more than 50% from last year. Revenue was $7.8 billion, down 21% from previous. Shares of the stock tried to move higher at the open but couldn't. Sellers took charge and drove prices below break-even to close with a loss near -0.5% and below resistance.


Netflix and IBM both reported after the bell, and both beat bottom line expectations. Netflix fell short on revenue expectations, IBM did not, but was able to increase revenues by 24%. Netflix also provided weaker than expected outlook, primarily on 2nd quarter projections, sending shares lower in after hours trading. IBM reaffirmed guidance and sent shares of its stock higher.

The Indices

The Doha deal fell apart, oil prices tanked and yet the market moved higher. Today's rally was broad, led by the S&P 500, but not overly strong. The candle is long and white but only of average size so nothing worth special note. The move does appear to confirm near term support at 2,075 although the indicators persists in weakness. Both MACD and stochastic are divergent from the new high and highly suspicious. The divergence has been growing for weeks, as the index approaches record highs, and does not instill much confidence in the strength of the rally. Despite this it appears as if the index will move up to test resistance near 2,120.


The Dow Jones Industrial Average made the 2nd largest gain in today's session. The blue chips added 0.60% in a light session and managed to move above 18,000 for the first time in 9 months. Today's move is not very strong and accompanied by divergent indicators so caution is due. Upside target is near 18,315 but beyond that is highly questionable.


The NASDAQ Composite gained 0.44% in today's session. The move is weakly bullish, with glaring divergences, but does manage to break above resistance. Resistance is at 4,950, the move above marginal at best, with next target near 5,035 should the the index continue to drift higher. The indicators are divergent and indicate a weakening and extended rally, vulnerable to correction.


The Dow Jones Transportation Average made the smallest gain, only 0.31%. The move is very weak for this index, considering it led us higher the first three months of the year. This index did not make a new high with today's action and is still below potential resistance near 8,050. The indicators are bearish but may cross into a bullish signal any day. A break above resistance would be bullish, with a first target near 8,250.


The market moved higher once again and seems to want to keep moving up, possibly to test the current all time highs. The caveat is that the move also appears to be a little heady and is certainly losing momentum. We could easily get a test of the highs, there is still no sign the rally is stopping. The question is, what will happen then? Will the market break out or will it correct? A break to new highs would be nice but what will drive it, weak earnings, unstable oil prices or slow growth?

The longer term outlook is much brighter and lending support but near term the indices appear to be overextending and ripe for a correction. I remain bullish for the long term and very cautious in the near.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Flying High

by Jim Brown

Click here to email Jim Brown

Editors Note:

FedEx said Amazon would have to spend tens of billions of dollars and hire thousands of highly paid workers to compete with the FedEx delivery model. Meanwhile FedEx is beating on earnings and raising guidance.


NEW DIRECTIONAL CALL PLAYS


FDX - FedEx -
Company Description

FedEx provides transportation, e-commerce and business services worldwide. I doubt there is anyone that does not already know what FedEx does so there is no need of a lengthy explanation.

FedEx operates 65,000 vehicles and trailers from a network of 370 service centers. By comparison Amazon is operating 20 planes but they are adding hundreds of trucks to move products between regional warehouses. After Amazon contracted for those 20 planes the analyst community was all worried that Amazon was going to create its own delivery service and kick FedEx and UP to the curb.

The FedEx CEO, Mike Glenn, called the rumors "fantastical" and said it would take years and tens of billions of dollars in order to build sufficient scale and density to even replicate some of the existing FedEx network." Glenn said Amazon is "supplementing" FedEx with their new push into moving product around the country. However, Amazon has no real interest in delivering that last mile to customers all across the country. Amazon is simply improving their capability to get vast numbers of packages to the UPS/FDX locations all around the country to reduce costs and improve delivery times. UPS/FDX will still be responsible for delivering each of those packages to the customers.

When FDX reported earnings in March they reported $2.51 compared to estimates for $2.34. That was up from earnings in the comparison quarter of $2.03. Revenue rose from $11.7 billion to $12.7 billion. The company raised guidance for the full year from $10.40-$10.90 to $10.70-$10.90. The analyst consensus estimate was $10.56 on revenue of $49.91 billion. Shares soared from $145 to $161 on the report.

After moving sideways for over a month, the shares are starting to tick higher. There was resistance at $165 and that broke late last week. I am recommending a $170 call with expectations FDX will try to make a new high over $180, market permitting. Oil prices are not expected to move much higher so that is a positive for future expenses.

Earnings are June 21st.

Buy June $170 call, currently $3.45, initial stop loss $162.50



NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Surprise, Surprise

by Jim Brown

Click here to email Jim Brown

Editors Note:

Monday definitely did not work out as most traders expected. The OPEC meeting in Doha failed to reach an agreement on freezing production. Oil prices dropped sharply Sunday night. S&P futures were down -14 points. Oil stocks fell 2-5% at the open. Then an amazing thing happened. Oil rebounded, oil stocks rebounded to close positive by 2-5% and the broader market rebounded with the Dow gaining +106 to close over 18,000.

After the close Dow component IBM reported earnings and shares dropped from $152 to $145. Netflix reported earnings and shares dropped from $108 to $92 and then rebounded to $101 at the close of the afterhours session. Illumina (ILMN) warned on earnings for Q1 and shares collapsed from $178 to $145, a -$33 drop. What is so strange about these earnings? The S&P futures are only down 25 cents. The Nasdaq futures are actually up +3.50 in afterhours.

Bearish events are not having any impact on the markets. Apparently, traders have their "new high blinders" on and nothing matters until the market hits a new high. I wrote in the weekend commentary that the old highs were a price magnet and they were exerting a siren call for investors.

What do we do now? In theory, the market should be weak given the expectations for a 9.3% decline in Q1 earnings. Some are now saying this is the "trough" quarter and we should be buying stocks in expectations for a strong Q4 where earnings are expected to rise 11%. Others are saying the S&P at close to 19 times earnings is now expensive and the market should fail once those new highs are touched.

There is no guaranteed answer or everyone would own a private island in the Caribbean. We just need to trade in the direction of the trend until that trend changes.



Current Portfolio




Current Position Changes


ENDP - Endo Pharma

The long put recommendation was stopped at $27.85.


SWHC - Smith & Wesson

The long call position was closed at the open.


HRB - H&R Block

The long put position was entered at the open at $23.78.


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. Adobe posted a nice gain to close at a new high!

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. I would close this for no movement but I keep thinking some news event will cause a spike. Unfortunately, the IBM earnings tonight may have a negative impact.

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 moving slowly higher.

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, see portfolio graphic for stop loss.


HCA - HCA Holdings - Company Description

Comments:

No specific news. New six-month high close.

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:

Shares dipped at the open to take us out right at the low for the day. We closed the position at the open per the recommendation from the last newsletter.

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.

Update 4/15/16: 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.

Position 4/6/16:

Closed 4/18/16: Long June $24 call @ $1.80, exit .55, -1.25 loss.


XBI - SPDR Biotech ETF - ETF Description

Comments:

Decent gain but still below the resistance high from last week.

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. Down in a bullish market. Could be a sign it is going lower.

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. Big 8% spike stopped us out at $27.85 for a 15 cent loss.

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:

Exit 4/18/16: Long May $25 put @ $2.10. Exit $1.95, -.15 loss.


HRB - H&R Block - Company Description

Comments:

Minor rebound in a bullish market. No specific news.

Original Trade Description: April 13th.

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.

Position 4/18/16:

Long July $23 put @ $1.10, no initial stop loss.


SPY - S&P 500 ETF - ETF Description

Comments:

Market moved contrary to all expectations after the futures were down hard overnight. The next resistance band is 211-212 and earnings tonight were not good.

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 stumbled today in a bullish market. Their new hire for Chinese marketing ruffled some feathers because she used to work for the Chinese military and state security branch. Negative comments were flowing steadily.

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:

The Doha meeting failed to reach an agreement and oil prices dropped to $37.61 overnight. However, they rebounded during the day to trade over $40 again. Since so many people were short and futures expire on Wednesday, I suspect it was shorts covering when the decline did not continue. Once we are past the futures expiration the impact of Doha should push prices lower. I am not closing the position.

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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