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Daily Newsletter, Saturday, 4/23/2016

Table of Contents

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

Market Wrap

Nice Recovery

by Jim Brown

Click here to email Jim Brown

Tech stocks were an anchor for the market on Friday as disappointing earnings knocked the Dow and Nasdaq down about 75 points at the open. The Dow recovered to close positive.

Market Statistics

Friday Statistics

A combination of negative earnings from Google, Starbucks, Microsoft and Visa knocked the markets lower at the open. GOOGL lost -42 for the day, SBUX -3 and MSFT -4 to push the Nasdaq 100 down -67 at the close.

The Dow shook off the $4 drop in Microsoft and a nearly 75-point drop at the open to close with a gain of 21 points. The Russell 2000, S&P-600 and the Dow Transports were the biggest gainers with a 1% gain each.

The strength in those indexes suggests we could see the markets try to rebound again next week.

There were no economic reports on Friday. I would like to review the Philly Fed Manufacturing Survey from Thursday. Analysts were all excited after the positive +12.4 print in the headline number for March. Some of the components were also positive. For April the headline number reversed to -1.6 and the material components turned deeper into negative territory with the exception of new orders. Everything in orange is negative. This represents the manufacturing sector in the Philadelphia region. It has been negative for most of the last year. We care about the Philly Fed because it is a proxy for the national ISM report due out in two weeks.

The two components that actually rose were prices paid and received. That means inflation is finally filtering through the system but the actual business components are falling deeper into contraction. This brings back fears of stagflation where the economy is stagnant but inflation rises. That is very tough for the Fed to combat because raising rates to slow inflation also slows economic activity.



The Atlanta Fed GDPNow is forecasting growth at 0.3% for Q1. Note the shaded blue line and the rapid decline. This is the average of 20 forecasters and their outlook is dropping fast.

The Fed cannot raise rates with GDP at zero regardless of how much they think they should. Moody's is predicting a -0.1% decline in GDP for Q1.


The Fed meets this week and they are expected to be neutral for the short term but still claim they intend to raise rates later in the year. They have to say this or there would be no volatility in the bond market and actual interest rates would sink even farther. The market expects a rate hike in June but analysts believe there is only a minimal chance. The CME Fed Watch Tool is showing only a 21% chance of a hike in June.


There is a full calendar of economic reports next week but other than the Fed and the GDP, the most important is the numbers from Japan. We get the full boat of data on Wednesday and then the BOJ monetary policy on Thursday. Last time they met the rates went negative but the yen spiked contrary to what they thought would happen. Analysts believe they may try to tune the negative rates at this meeting or even apply them to bank loans. More than likely, they will ramp up purchases of Japanese equity ETFs in an effort to enhance the wealth effect and make the Japanese consumer fell better about spending money.

If the Fed produces a dovish statement and the BOJ goes even deeper into negative territory and ETF purchases we could see the flight to quality trade on U.S. Treasuries continue to reverse. With fears over China easing, we have seen selling in treasuries with the yield on the ten-year rising from 1.68% to 1.89% over the last two weeks.



The market recovered from some of the bad earnings on Friday partly because of comments from the Caterpillar CEO. He said do not expect a hockey stick rebound like in 2010 but sales in China actually improved in Q1. This is the first time in three-years that sales have improved. He believes the global economic bottom is either behind us or occurring now but the rebound out of the trough will be slow.

Despite his optimism, the company posted a 68% decline in earnings to 67 cents that was in line with estimates and in the middle of CAT's guidance of 65-70 cents. Revenue fell -26% to $9.461 billion and missed estimates for $9.499 billion as a result of currency translation issues. Latin America is crashing with a -43% decline in sales there. This is the second company that warned on an implosion in Latin American economics. CAT still made $1.04 billion in profits even with the sharp declines in sales. They ended the quarter with $5.9 billion in cash. Order backlogs at the end of the quarter were $13.1 billion.

CAT guided slightly lower for all of 2016 with revenue estimates declining from $42 billion to $41 billion. Earnings are now projected to be $3.70 compared to earlier projections for $4.00. CAT shares declined slightly from resistance at $80. If you are a long-term investor with the CEO calling a bottom in the Asian economy, I would look to buy CAT with a move over $80. CAT shares already posted a 35% rebound from the January low so I would wait for any post earnings depression to fade before adding it to the portfolio.


Who knew breakfast was such a powerful marketing tool? McDonalds (MCD) saw same store sales rise +5.4% in the U.S. because of 24-hour breakfast menu. This is the third consecutive quarter that sales have risen. MCD also introduced the McPick 2 value deal to attract cost conscious consumers. They abandoned the dollar menu because the margins were too small. The McPick 2 is any two premium items for $5. The company also raised prices by 3% during the quarter. McDonalds now has 14,200 domestic stores and they are currently selecting underperforming stores to be closed.

Global same store sales rose +6.2% with China rising +3.6%. Earnings were $1.23 and beat estimates by 7 cents. Revenue of $5.9 billion also beat estimates. Shares declined slightly but they have been rising steadily since August last year. Expect some further profit taking.


General Electric (GE) reported earnings of 21 cents that beat estimates for 19 cents. They have 9.3 billion shares outstanding so it takes a lot to add a penny to earnings. Revenue rose 6% to $27.6 billion and in line with estimates. However, GE met estimates because they completed the acquisition of Alstom during the quarter. Without that acquisition revenue would have declined -5.3% to $23.1 billion. Order backlogs increased 18% to $316 billion. GE returned $8.3 billion to shareholders in dividends and buybacks in Q1.

GE is on track to exit the financial services business with $166 billion in deals signed and $146 billion closed. The company has already submitted an application to be removed as a "systemically important financial institution" or SIFI and expects that to be granted soon.

The biggest problem for GE in the quarter was the oil and gas division, where profits are expected to decline 30% in 2016. Despite that drop, the company reaffirmed full year guidance of $1.45-$1.55 with 2-4% organic growth. They plan to return $26 billion to shareholders this year.


AutoNation (AN) reported earnings of 90 cents compared to estimates for 93 cents. The earnings miss came from a $6.8 million loss from "epic biblical hail" that damaged vehicles in Texas. Revenue of $5.1 billion missed forecasts for $5.29 billion because thousands of cars could not be sold because of hail damage. The Insurance Council of Texas said there was more than $1 billion in damage from a couple of major hail storms that produced hail as big as cantaloupes. The company also said 25% of sales come from markets that depend on energy and profits were down 20% in those areas because of depressed oil prices.

The CEO said automobile manufacturing has to be cut back significantly. The low gas prices has seen consumers flood into pickups and SUVs and there is a shortage in that category. AutoNation cut back on orders for cars in Q1 and is reducing orders again for Q2.

Shares dipped sharply at the open to $45.50 but rebounded $4.00 after the CEO said he was still optimistic on the business pointing to a recent acquisition and $371 million spent on buybacks in Q1. He still expects the U.S. to sell more than 17 million vehicles in 2016.


Google and Microsoft reported earnings on Thursday after the close and Friday was a bad day. Eight firms cut their price targets for Google and four cut targets on Microsoft. Google lost $42 on Friday and Microsoft lost $4. Combined, those drops erased $53 billion in market cap.


Earnings just kicked into high gear with close to 750 companies reporting next week. The highlights are Apple, Facebook and Amazon. On the second tier are Twitter, Linkedin and Ebay followed by the major oil stocks, BP, Exxon, Conoco and Chevron. Dow components include AAPL, DD, MMM, PG, BA, UTX, CVX and XOM.


Apple had a bad week after being downgraded more than once and news broke they were cutting production by 30% in Q2 following a similar cut in Q1. According to researcher TrendForce, Apple is now expected to have shipped only 42 million iPhones in Q1, down from 61.2 million in the year ago quarter. That is a 31% drop in shipments and suggests Apple is going to have an ugly earnings report.

For the full year, TrendForce expects Apple to ship 213 million phones, down -10% from 2015. At the same time Samsung is expected to ship 316 million units and about the same as 2015. The Apple Watch has been a flop even though they are expected to sell about 4 million. The iPhone grew to 68.1% of Apple's revenue last quarter and while the watch may be producing some nice pocket change, it is the iPhones that drive the bus.

Part of the problem for Apple and Samsung is that the global smartphone market has reached a saturation point. Phones are lasting longer and the refresh cycle is becoming stretched. Consumers do not need to buy another expensive phone every two years and the upgraded feature list is not enough to convince them their old phone is obsolete. A $700 phone is a huge expense for consumers outside the U.S. and sometimes it equates to several months wages.

Credit Suisse is not expecting as dire a quarter but cut their iPhone estimates from 55 million to 48 million. Piper Jaffray cut estimates from 62.5 million to 55 million. TrendForce is more bearish because they are deeply involved in the entire market where bank analysts have other tasks besides predicting iPhone sales.

We also learned on Friday that Apple's mobile entertainment services in China had been blocked. The online book and film service was censored by the Chinese government for providing access to content that might promote some independent thinking by consumers. China is Apple's second biggest market by revenue and this is a blow to Apple. In March, China introduced strict rules for online publishing, especially by foreign companies.

Much of these negative expectations have already been baked into the price on Apple shares but depending on the actual units sold, we could retest the support at $92. The guidance is also critical since they have already ordered production cuts for Q2.


Another stock that could face problem next week is Twitter (TWTR). The company is expected to report earnings of 10 cents but that will be of less importance than the monthly average users (MAU). Revenues are expected to increase 39% to $605 million. The MAUs are expected to come in at 317 million. Last quarter users were flat at 320 million. Twitters problem is that it cannot grow the user base. You are either a tech savvy extrovert or you are not. Twitter is an instant gratification or instant embarrassment tool depending on which side of the tweet you are on. Twitter is having trouble keeping users after they are deluged by negative tweets responding to something they said. There are more than 500 million inactive users that only view tweets without actually logging in. Twitter has been changing its ad format to capture more revenue from these "drive by" readers.

Marketbeat.com reports there are 17 buy ratings, 25 hold and 3 sell ratings. CEO Jack Dorsey is under the gun to do something that will revolutionize Twitter and make it more "sticky." Earnings are not the problem. They beat estimates by 46% last quarter and have averaged a 28% beat over the last four quarters. If Dorsey has been able to significantly increase the MAUs in Q1, he will be a hero and the stock will react strongly. Most investors believe Twitter will be successful but their patience is wearing thin.


Linkedin (LNKD) reports on Thursday and they need some love too. They were crushed after guiding for revenue of $820 million in Q1 and significantly under the $867 million analysts were expecting. They guided for the full year to $3.60-$3.65 billion and analysts were expecting $3.91 billion. The company said online ad revenue growth slowed from 56% to 20% for the quarter. More than $11 billion in market cap was erased from the stock. At least nine brokers cut the stock from buy to hold saying the lofty valuation was no longer justified. More than 36 brokers cut their price targets. Pacific Crest cut their target in half to $190. The analyst average is now $188. Shares closed Friday at $119. The weekly options that expire on Friday are extreme with near the money puts/calls trading at $8. Obviously, some traders are betting on a big move.


Contrary to reports last Tuesday that Yahoo (YHOO) received only two bids from Verizon and YP Holdings, Bloomberg reported at the close on Friday that the company received 10 bids ranging from $4 billion to $8 billion for the core business. Yahoo executives are spending the weekend working on the list and will narrow the second round to 7 buyers. Those selected will receive access to internal documents and access to management.

Reportedly, some of the higher bids were from PE firms and companies that had not spent much time with Yahoo and executives are trying to find out how much analysis they did and how did it in order to come up with a number. Secondly, Yahoo executives are trying to understand all the various deal structures to decide which makes sense and has the best chance of succeeding. Bidders are not allowed to talk to other bidders because of non-disclosure agreements they signed.

SoftBank has said it has no interest in making a bid but it does want to talk to prospective bidders about buying back its stake in Yahoo Japan from whoever wins. Verizon has already held talks with SoftBank.

Yahoo said a decision on a winner is probably at least a month away.


More than 26% of the S&P have already reported earnings and 76% have beaten estimates with 55% beating on revenue. The current blended earnings growth is -8.9%, a slight improvement from the -9.4% a week ago. Of those companies that have reported, 10 have issued negative guidance and 10 issued positive guidance. FactSet said Apple is projected to be the largest contributor to the decline in S&P earnings. Earnings are expected to decline from $2.33 to $2.00 with several estimates sharply lower than the consensus.

Despite the high profile declines in the Nasdaq stocks on Friday the market has been rewarding those companies that beat even slightly and not punishing those that have missed estimates slightly. There are examples in both directions but mostly investors just seemed relieved the earnings have not been worse.

Currently the decline in revenue growth is -1.2%. If the quarter ends negative it will be the first time FactSet has seen five consecutive quarters of revenue declines since they began tracking the data in 2008.

In the strange but true section today, oil prices rose after there was no agreement in Doha despite very high short interest ahead of the meeting. I wrote several times that the expiration of futures on Wednesday would give those shorts only two days to cover before expiration and we could see prices rise. However, I expected prices to decline once the futures rolled over. Instead, prices continued to rise to touch $44.45 on Friday.

Since Russia, Kuwait, Saudi Arabia, Iraq, Iran, the UAE and Libya have all stated their intent to increase production and therefore increase the current glut, the rise in prices makes no sense. Last week we had a flurry of analysts, CEOs and "experts" all making calls for $65 to $85 oil by the end of 2016. Each had their own reason but none made much sense. I guess it is possible for all the producers to get together and continually "say" the glut is disappearing and prices will be $100 in December. There is a large contingent of traders that would believe them and buy oil regardless of whether it was true. Some of our political candidates have been making a lot of wild claims about what they will do when elected. Those claims have no basis in fact and no chance of happening but voters are delirious in their support. The same thing can happen in the oil market. Say something enough and maybe enough traders will believe you and oil prices will rise.

We are approaching the magic number where rigs will be put back to work in the USA. That number is $45. It will take more than a couple weeks at that level but once cash starved producers believe the number will stick they will give the orders and rig activity will spike. I seriously doubt OPEC leaders want to see that activity but they need the higher price for oil so maybe they take a deep breath and let it happen.

We are approaching that part of the year where inventories begin to decline as gasoline production increases. Oil prices typically rise in May through August and maybe this historical trend is encouraging investors to buy crude.

Goldman Sachs changed from bearish to neutral on crude prices. They said the lows are behind us. Of course, the lows were $26 so we could fall significantly and not retest the lows. Goldman said, "While this recent rally has the potential to run further to the upside, we believe that it is not yet driven by a sustainable shift in fundamentals. It is premature to embrace these green shoots."

Analysts said producers would not hesitate to hedge future production once prices rise enough. That will provide them some cash and some comfort for their banks. However, even with the rebound in current prices to $44 the price for December 2017 crude is only $48. That is hardly a strong incentive to rush out and hedge a million barrels when they really need $60-$65 to make it worthwhile. If they hedge at $48 and prices really did rally over $70 by December they would be looking to take a dive off a high bridge.


Active rigs declined -9 to 431 last week. Active oil rigs fell -8 to 343 and gas rigs dropped -1 to 88. Those are new 65-year lows.


Markets

It was not a big week in the markets. The first three days were positive and the last two days negative and the Dow only gained .6% for the week and S&P .5%. The Nasdaq lost .6%. Those numbers do not indicate that the Dow hit a nine-month high and the S&P traded at a 5 month high. Resistance in both cases held and two days of declines appeared.

The S&P came to a dead stop at 2,111 at 3:PM on Wednesday and the decline was sharp. The low on Friday was 2,081 for a -30 point drop from the high.

In reality, this is just a normal hiccup. We should not try to assign too much importance to the minor decline. With the S&P rebounding +10 points on Friday to close positive, we should be looking it as a potential short-term buying opportunity. This is even more appropriate given the gains in the small and midcap indexes.

However, just because the S&P paused and rebounded slightly ahead of weekend event risk does not mean there is a new rally ahead. We may be assigning too much value to the late Friday short covering that brought the S&P back to positive territory.

Keith Bliss from the Cuttone Company was interviewed on Friday and he said their research had shown that last week was the strongest week in Q2 dating all the way back to 1957. This is the ramp up into the first surge of earnings from the bluest of the blue chips. After last week, the market tends to fade into June as the sell in May cycle takes hold. He said the markets "ebb" into June, not crash into June.

The remaining earnings cycle will still provide sticking power for the markets. The coming week is the busiest week of this cycle and a lot of investors placed their bets over the prior weeks. It is after the peak in earnings in the coming week that excitement begins to fade. We call it "post earnings depression." Stocks typically fade after they report earnings as traders take profits from an earnings run and move on to something else. This is true even when the company posts an earnings beat. Sometimes a major disaster like Starbucks or Netflix attracts buyers at the bargain price but shares could linger at the lows for days to weeks before rebounding. Those who were holding when the disaster occurred are looking for any bounce to sell at a better price.

The purpose for explaining the earnings reactions is to enforce the reason the market may begin to fade soon. Add in the strong resistance and the seasonal factors and we could see some weakness.

Offsetting that post earnings depression this year is the new high syndrome. We are close enough to new highs that traders may want to stick around until those highs are hit. Whether we continue to make higher highs is another problem. Then you have to take into account the Fed's potential rate hikes, the Brexit vote in June, the quality of the earnings, the price of oil and the political campaigns leading up to the summer conventions. All those things can and will impact the market. One analyst said this could be an especially severe sell in May cycle.

The S&P needs to exceed 2,134.72 to make a new intraday high and 2,130.82 for a new closing high. We still have some significant resistance to cross to get to those levels.


The Dow was the closest to a new high on a relative basis with a print at 18,167 and right at the top of the current resistance band. At Friday's low, the Dow had declined -258 points from that Wednesday high. With half the Dow components already reported, there will be less uplift from future releases but it is always possible for somebody to blowout earnings and rocket the Dow higher for a single day. Dow components reporting this week include AAPL, DD, MMM, PG, BA, UTX, CVX and XOM. Apple could be a major drag ahead of Tuesday's night's release and afterwards if they gap down significantly.

Chevron and Exxon have such low expectations they could actually beat and possibly provide some lift.

Dow support is about 17900-17875 and then it drops a lot lower to about 17,500 and 17,400. Resistance remains the band from 18,110 to 18,165.



The Nasdaq cannot seem to get away from the 4,950 level after spending 7 days trading in that range. Friday's 39-point drop took it back to 4,900 and a level that has been resistance in the past. The real resistance is still the 5,100 to 5,160 level and the index has not even come close since failing there in December.

If the tech stocks are going to continue missing earnings it may be really difficult to reach that level and even harder to punch through it. Critical earnings next week are FB, EBAY, AMZN, TWTR, AMGN, AAPL, AKAM, PNRA, SNDK, LNKD, SWKS and WYNN. The elephants in the room are Apple, Amazon and Facebook.

Real support on the Nasdaq is back at 4,831 and 75 points below Friday's close.



The Russell 2000 had a good week with a +1.4% gain and closed at a three-month high at 1,145. That is still 20 points below strong resistance at 1,165 but it is the relative strength that matters. The S&P-400 Midcap index closed at an eight-month high and just over resistance at 1,473. The S&P-600 Small cap index closed only 10 points below strong resistance at 712 but it was still a five-month high.

The relative strength in the lower end of the market capitalization is bullish for sentiment. These indexes are telling us the broader market could move higher.




The Dow Transports broke through resistance at 8,000 once again and this time the retracement used that 8,000 level as support. If the transports can mover 8,300 this would be another bullish event. The transports rose even though oil prices were rising.


The Volatility Index ($VIX) dipped to 12.50 on Wednesday and that is a level that equates to an overbought market. As you can tell by the chart, it can remain at that 12 level for some time before a volatility event sends it soaring. The 12 level also signals market complacency. Investors are so confident the market is going up they are no longer buying puts to protect their positions. This is dangerous when a volatility event appears because there is little downside protection in place and investors tend to hit the sell button quicker rather than ride it out.


The dollar halted its decline last week and rebounded to 95 on the Dollar Index. When the dollar was falling, equities and commodities were rising. If the dollar is done going down, those same sectors are not likely to rise. The dollar impacts earnings for the S&P-500 and reduces revenue by 3% to 12% depending on the company. With Japan likely to enact some more stimulus next week, the dollar could continue to rebound. However, if the Fed statement is ultra dovish that could weaken the dollar.


The Apple earnings are going to be the focus for the week. As the biggest stock in the Dow and the Nasdaq, any movement is going to be felt in the indexes. Because of the fear over Apple earnings there could be a cloud over the market on Monday/Tuesday. That goes double for fear of the Fed but at least you have the normal pre announcement bullish bias on Tuesday. That could offset some of the pre Apple announcement bias to the downside.

I think we need to be careful being "too long" over the next couple of weeks. With the potential for a retest of the highs, there is incentive to try and remain long. We just need to refrain from getting married to those long positions because of the historical May weakness. Everyone is looking for a top to appear so they can set up for the next directional move lower. Unfortunately, when everyone is looking for a particular direction to appear, a move in the opposite direction appears with annoying frequency.


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Random Thoughts


Baltic Dry Index

I have been having some running conversations with several readers about the sudden rebound in the $BDI. The shipping index has rallied +135% since mid February and there is no apparent reason. This is the cost to ship a freighter of dry goods like corn, coal, beans, iron ore, cement, etc, from one country to another. Analysts blame this on the Chinese New Year. In four of the last five years, the month of February was the weakest month for Chinese imports, especially iron ore.

Bloomberg pointed out that the low price for iron ore makes it less desirable to scrap the older antiquated freighters. However, 163 dry bulk freighters have been scrapped so far in 2016. That leaves 9,484 still in service.

When rates were high several years ago all the shipping companies ordered brand new ships. Rates fell and those ships are now being delivered. Since December about 2.8 million tons of shipping has been added or the equivalent of one Capesize freighter every five days. That size freighter is currently renting for about $6,000 a day and more than $1,000 below the cost to operate it. Bloomberg said shippers burned through $12 billion in cash in Jan/Feb and it will take 2.5 years for the excess capacity in the market to be eliminated.

Meanwhile, China has increased imports slightly. Copper and iron prices are rising. Maybe these are the green shoots of a rebound in the global economy.



The advance/decline line on the Dow has gone to extremes. This is the highest level since the financial crisis. The previous high was 188 back in December 2014. Exactly how much more overbought can this get?




The Carlucci indicators are all pinned to their upper maximums indicating extreme overbought. This is another graphic representation of our overextended market. Nothing prevents it from becoming more over extended but we are in nosebleed territory.



The bulls are starting to turn frisky but the bears are holding their own. The bullish sentiment rose +5.6% to 33.4% but most of it came out of the neutral camp. This is the new high syndrome at work. Investors do not want to be left out if the market breaks out to new highs and continues to rally.



The bullish percent index on the S&P has broken out to two-year highs at 78.4%. This means 78.4% of the S&P-500 stocks have a buy signal on a Point and Figure chart. It also means the rally may be nearing a top.


The percentage of S&P stocks over their 50-day average reached 95% before the earnings cycle began. That has declined to 80% just since the beginning of April. Not all stocks are continuing to rise.



One final thought from Hedgeye ahead of the Fed meeting this week.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

Mark Twain


 


Index Wrap

Mixed Signals From The Indexes

by Keene Little

Click here to email Keene Little
The week was generally positive for the stock market, with more sectors in the green than the red but there wasn't as much unison between some sectors that would be considered typical. Earnings of some individual stocks seemed to skew the results for their respective sectors more than anything else. The mixed performance and a downturn late in the week has a whiff of bearishness but nothing the bulls can't handle by stepping back in on Monday.

Week's Indexes


Review of Major Stock Indexes

As you can see in the table above, the Nasdaq and NDX closed in the red and NDX was especially hurt by some of the bigger tech names. The FANG stocks did not do that well, especially NFLX on Tuesday (and never recovered) and GOOG on Friday. MSFT also got hit hard on Friday, down -7.2%, as did SBUX, down -4.9%. As I'll review on the NDX chart, it resulted in a big gap down on Friday and an island reversal following its gap up on April 13.

But while the techs struggled, especially on Friday, the RUT was outshining the others with a gain of +1.4% for the week. Transportation stocks (+1.4%), oil service stocks (+10%) and commodity-related stocks (+3.3%) all helped the small cap index.

The banks also did well and not so much because of great earnings but because they were "less bad" than had been anticipated. Some short covering helped lift many of the bank stocks (+5.2%) for another week. The utility sector was down (-3.3%) while the higher-beta names were up so we had signs of bullishness with risk-on doing better than risk-off. This was also reflected in the bond market, which sold off and drove yields higher (TNX +7.8%).

Taken together, the above information is bullish for the stock market and we could certainly see the indexes press higher in the coming week. But the turn down from Wednesday's highs is looking a little more bearish (albeit very small) and while the numbers in the table above show a relatively strong week, it would have been much stronger if it hadn't been for the selling on Thursday and Friday. The bounce off Friday morning's lows cut Friday's loss but as I'll review on the charts, the damage might have been done to the bulls and Friday afternoon's bounce could be just a correction to a new decline. Certainly the techs have some work to do to recover from the damage.

But the bulls have done reversed many pullbacks that have been worse than the one off last Wednesday's high and they could certainly do it again. The price action this coming Monday and Tuesday should provide the clues for what the rest of the week will be like, and potentially point the way well into May.


A Look At the Charts


S&P 500, SPX, Weekly chart

Wednesday's high at 2111 for SPX came within 5 points of testing its November high near 2116. It was also good for an intraweek rally above its downtrend line from July-November, which it closed on for the week, near 2091.50. If the bulls can hold SPX above 2092 they'll keep the bullish pattern alive. But if the bears grab hold of this market in the coming week we'll be left with a failed breakout attempt and a bit of a shooting star for the weekly candle. A red candle for the coming week would be a strong signal that the rally from February completed last week and that we'll be into at least a deeper pullback.

As I've mentioned a few times in the past few weeks, what we don't know yet is whether the February-April rally is just the 1st wave of what will become a much stronger rally this year or if instead it's the c-wave to complete an a-b-c bounce pattern off the August low. That will not become clearer until we see what kind of pullback/decline follows. A corrective pullback, such as an a-b-c pullback that retraces around 50% of the rally would at first be an opportunity to evaluate it for a long play since a 3rd wave higher would be a monster rally. But if the decline develops strength and looks more impulsive, kind of the like a mirror version of the February-April rally, then we'd know to look for bounces to short since the next decline should be more powerful than what we saw in August and January.


S&P 500, SPX, Daily chart

Following last Wednesday's high SPX dropped below its uptrend line from February 11 - April 7, near 2095 at the time and currently near 2110. You can see the little doji cross for Friday's candle, which could turn into a bullish reversal candlestick if Monday produces a white candle. That would be a bullish reversal of the bearish reversal following Wednesday's little doji star and Thursday's red candle. I would look for higher prices if that happens, potentially up to just 2116 but more than likely up to the May 2015 high near 2135. But with the reversal off Wednesday's high we're currently on a small sell signal and it won't be negated until price rises above Wednesday's high at 2111.

Key Levels for SPX:
-- bullish above 2117
-- bearish below 2073


S&P 500, SPX, 60-min chart

For a short-term perspective, to show my thinking for the coming week, the 60-min chart below shows what we should see if in fact the rally completed last Wednesday. The leg down into Friday morning looks impulsive (small 5-wave move down) and therefore we should get at least another leg down following the bounce off Friday morning's low. The bounce could be over with the back-test of the broken uptrend line from February 11 - April 11. After dropping back below its July-November 2015 downtrend line it bounced back up to it Friday afternoon. Note how it looks like a bearish back-test on the 60-min chart vs. closing on support on the daily and weekly charts. I show a depiction for a larger 5-wave move down this coming week but obviously that's just speculation based on a top being in place. The bulls could quickly negate that with another rally leg.


S&P 100, OEX, Daily chart

OEX made it up to its July-November 2015 downtrend line with Wednesday's high and then pulled back to support at its uptrend line from February 11 - April 12 on Friday. The bounce off the uptrend line Friday morning keeps the bullish uptrend intact and it would not take much for the bulls to prove the uptrend is still alive. But if the bounce off Friday's low is followed by a drop lower it would be a confirmed break of the uptrend and that in turn would tell us to expect a multi-week pullback correction at a minimum.

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


Dow Industrials, INDU, Daily chart

On Wednesday the Dow rallied up to and slightly beyond its price projection at 18110 for two equal legs up from August for a large A-B-C bounce correction, as well as the top of a parallel channel for the correction, but then dropped back down and closed at 18096 that day. The decline from there into Friday broke the uptrend line from February 11 - April 7 but it was able to close above the uptrend line drawn through the April 12th low. So it's not quite clear yet whether or not the Dow is still holding inside its up-channel. A rally above Wednesday's high is needed to negate the bearish setup and confirm the likelihood we'll see at least a test of the May 2015 high at 18351. But a drop back below Friday's low at 17909 would be further evidence that the trend has turned back down. Some are reporting the "Golden Cross" (50-dma crossing above the 200-dma) this past week as a bullish sign for the market. But in fact the Golden Cross has more typically coincided closely with the end of the uptrend. Same with the Death Cross -- it typically is followed by the bottom of a decline.

Key Levels for INDU:
-- bullish above 18,120
-- bearish below 17,484


Nasdaq-100, NDX, Daily chart

As mentioned at the beginning of this wrap, NDX got creamed on Friday, gapping down about 62 points and it then sold off another 38 points before recovering about 34 of those into the close. As highlighted on its chart below, the gap up on April 13th was followed by a sideways choppy consolidation, which looked bullish at the time, and then Friday's gap down created a bearish island reversal. This is typically a strong reversal pattern and the best way for the bulls to negate this pattern is with a rally above Thursday's close near 4541, about 77 points above Friday's close. But even then it might result in only a back-test of its broken uptrend line from February 11 - April 12, currently near Thursday's high at 4558.

At the moment it's looking like an important reversal back down but even if we get a deeper pullback we still won't know for a few weeks whether it will be just a continuation of the big sideways consolidation that the market has been in since 2015 or if instead we're going to see the next leg of the bear market. Following what looks like a 5-wave move down from December into February, which fits well as the 1st wave of what will become a much more significant decline, we have a bounce correction that retraced 78.6% of the decline. If we're now starting a 3rd wave down it's going to be a strong selloff that takes the NDX well below the February low. Because of this risk I think it's prudent for bulls to get defensive and think hard about whether they really want to be a buy-and-holder or instead a trader. Bear markets reward traders, not buy-and-holders, even if all you do is step out of long positions. But trade at least a little bit short, such as inverse ETFs (trade them though, don't hold onto them since they decay over time), and you'll not just protect your account but actually increase it while others are suffering losses.

Key Levels for NDX:
-- bullish above 4600
-- bearish below 4435


Nasdaq Composite, COMPQ, Daily chart

The Nasdaq wasn't hurt as bad as the NDX on Friday and it doesn't have as clear an island reversal. But it did break its uptrend line from February 11 - April 12, which will be near 4960 Monday morning. It could go either way here although the selloff from Wednesday tilts the odds in favor of the bears until proven otherwise.

Key Levels for COMPQ:
-- bullish above 4970
-- bearish below 4808


Russell-2000, RUT, Daily chart

The RUT did well on Friday and finished the week strong, which followed a strong week the week before. This week's rally resulted in a break of its downtrend line from June-November 2015 and its 200-dma, both currently near 1129. With the RUT remaining bullish it's hard to turn bearish the broader market so it's the big caution flag for the bears. Not until the RUT drops back below its broken downtrend line and 200-dma, assuming the other indexes are also dropping, will the bears have better confirmation of a top in place. The short-term pattern supports the idea for a little higher on Monday but then a reversal back down. Any rally that does not reverse Monday morning would keep the bulls in control.

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


SPDR S&P 500 Trust, SPY, Daily chart

We have a potentially bearish signal from the SPY chart below as it turned down from the upper band of the BB higher but with a lower low for MFI (bearish divergence). The last time we had this setup was back in November. It's certainly possible we'll see another push up against the upper band but with the large bearish divergence on MFI following an extended rally I think that's a risky bet.


Powershares QQQ Trust, QQQ, Daily chart

On the QQQ chart below you can see it's harder to identify tops than it is bottoms with Williams %R since it tends to flatten out in overbought, indicating a strong trend. But I've identified those times, with the red vertical lines, when we get a sell signal as Williams %R drops back below the 50 line, which it did on Friday. Trading volume ticked higher but is not above 50M, which is when bears need to be careful about a reversal back up. But that's usually only when Williams %R drops below -90 and price drops below the lower band of the BB, neither of which has happened yet. QQQ closed below its 20-dma for the first time since climbing above it on February 17th. This chart's indicators are confirming the sell signal that I see on the NDX chart.


Summary

Are the stars, or at least the moon, aligned in favor of the bears here? My highly proprietary trading system, the MPTS, says Friday's full moon could mark an important turning point for the market. Could the big gap down for NDX be part of the emotional event around full moons? Only time will tell but we certainly have enough important highs and lows around new and full moons to pay attention here as the big indexes test previous highs.

By most measures this current rally has stretched the rubber band and we're starting to see some deterioration in the momentum and market internals. The rally from February has been primarily a momentum-driven rally since there's very little fundamentally that's driving the market higher and the risk for buyers is that this type of rally can spin around on a dime once momentum shifts in the other direction. At a time when some of the indexes are testing previous highs (but importantly, not some of the important indexes like the banks or the RUT), it's looking like the bulls could have trouble recruiting more buyers to fill in behind those who just want to take profits. Most often tops are found simply because the market runs out of buyers.

Even if you feel bullish about this market, and certainly price action is a reason to feel bullish, now is a good time to be extra cautious and to play defense. Don't let nice profits go poof! as they head off to money heaven. Take a little and put it on red and make a little money on the downside, or at least use short positions to hedge your portfolio (maybe for tax reasons you don't want to sell). To me it's looking like the bulls are bringing their kicker out onto the field.

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

Mall Traffic Dying

by Jim Brown

Click here to email Jim Brown

Editors Note:

Foot Locker has 3,383 mall based stores. They sell high dollar products in a highly competitive marketplace. Promotional activity is increasing and average selling prices are declining.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays



NEW DIRECTIONAL PUT PLAYS


FL - Foot Locker -
Company Description

Foot Locker is an athletic shoe and apparel retailer. They offer retail stores and online e-commerce. As of January 1st they operated 3,383 primarily mall-based stored in the U.S., Canada, Europe, Australia and New Zealand. There are 64 franchised stores in other countries. The company was founded in 1879.

Foot Locker is suffering from Nike fatigue. Nike whiffed on earnings last month and inventory was building. Cowen analyst John Kernan downgraded the stock from outperform to neutral. The analyst conducted multiple store checks. One included a high traffic location in NYC and several variations of the LeBron James shoes were discounted 50%, Kobe Bryant 40% and Kevin Durant 50%. On FL.com, 56 of the top 60 selling LBJ shoes, 50 of the top 58 KD shoes and 44 of the top 60 selling Kobe shoes are currently heavily discounted.

Cowen cited the popularity of the lower-priced Under Armour Steph Curry 2 and Nike Kyrie 2 was not enough to offset the declining growth/margins in the higher priced shoes. The analyst said the ability to constantly raise ticket prices was becoming more difficult. With Kobe now out of basketball they believe the sales of his shoes will decline. Same store sales (SSS) are likely to decline sharply because they are tied to the average selling prices. With so many shoes discounted it would be very hard to match prior SSS numbers. The increased promotional activity also reduces margins.

Another analyst said Foot Locker sales would be hurt by the current trend in declining mall traffic. It has been widely reported that mall traffic is in a secular decline and many malls are dying while others are spending millions to reinvent themselves. More and more people are shopping online and mobile rather than visit the malls.

Earnings May 20th.

Shares have been in decline since last September. The $59 level has been rough support but the decline is accelerating. I believe support will fail before earnings, which just happen to be on May expiration Friday.

Buy May $60 put, currently $1.80, initial stop loss $62.75.




In Play Updates and Reviews

Nasdaq Anchor

by Jim Brown

Click here to email Jim Brown

Editors Note:

Massive declines in a few Nasdaq favorites sent the index lower at the open. The Dow and S&P rebounded into the green in the afternoon. The Dow Transports and Russell 2000 were up strongly and that suggests we could go higher next week. The last three days of choppy trading may have just been a consolidation phase after the temporary push to upper resistance.

With multiple tech companies missing estimates we are starting to see traders less interested in rewarding them for a C- performance. The farther we progress into the earnings cycle the more companies will miss because the bluest of the blue chips report first and the quality of earnings degrades with each passing week.

Adobe was the big mover on Friday with a -1.58 drop on no news. That was our only long position in a Nasdaq stock and I suspect it was just Nasdaq sympathy.

The new PVH position was entered at the open and unfortunately that came on a big spike with the stock and option at the high of the day.

Crude prices continued to rally on absolutely zero fundamentals. We seem to have everyone in the act trying to talk up oil prices including the CEO of Schlumberger in their conference call saying the supply glut should be gone by the end of 2016. I do not know how he got that job being so bad at math.



Current Portfolio




Current Position Changes


PVH - PVH Corp

The long call position was entered at the open on Friday.


CSC - Computer Sciences

The long call position was closed at the open on Friday.


ACN - Accenture

The long call position remains unopened until ACN trades at $116.65.


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


ACN - Accenture PLC -
Company Description

Comments:

Accenture faded with the market again. No specific news.

This position remains unopened until ACN trades at $116.65.

Original Trade Description: April 20th.

Accenture provided management consulting, technology and outsourcing services worldwide. It operates in multiple segments including Communications, Media & Technology, Financial Services, Health & Public Services, Product support including supply chain management, Resources including chemicals, energy, commodities and utilities. The company was founded in 1989 and has risen to a $73 billion market cap. Accenture employs about 373,000 people in 120 countries.

Basically, Accenture helps other companies become more profitable. When Mondelez (MDLZ) wanted to improve its margins they called Accenture and implemented their suggestions. The new systems saved $350 million in the first year and is expected to save Mondelez more than $1 billion over the next three years. Accenture does this worldwide for almost any business in any sector.

This week they sold a 60% stake in their Duck Creek Technologies division to private equity firm Apax Partners. The joint venture will accelerate the innovation of claims, billing and policy administration software for the insurance industry leveraging advanced digital and cloud technology. They will invest in Duck Creek On-Demand, a native Software as a Service capability delivered through the cloud. Approximately 1,000 insurance and insurance software specialists will join the new venture. Accenture acquired Duck creek Technologies in 2011.

The key for Accenture is not specifically the Duck Creek venture but the rapidly expanding scope of the company. Nearly every day there is some new press release where they are expanding into new markets and new endeavors. This is what IBM and Hewlett Packard wish they were.

Earnings are June 23rd.

Accenture rallied to a new high in early April at $116.35. Shares paused with the market and consolidated their gains. Since April 8th shares have begun to move back to that high and could breakout at any time. I am recommending we buy that breakout over $116.35 because shares could begin a new leg higher, market permitting. Options are cheap!

With an ACN trade at $116.65

Buy June $120 call, currently $1.30, initial stop loss $113.45


ADBE - Adobe Systems - Company Description

Comments:

No specific news. Shares declined in sympathy with the Nasdaq.

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:

The CSC position was closed at the open this morning for a 25 cent loss.

Original Trade Description: April 6th.

CSC is an information technology and professional 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:

Closed 4/22/16: Long June $34 call @ $1.50, exit $1.25, -.25 loss.


EXP - Eagle Materials - Company Description

Comments:

No specific news. Another nice gain and came within 45 cents of our exit target.

Set an exit target at $76.00.

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.


FDX - FedEx - Company Description

Comments:

No specific news. Recovered some of Thursday's loss.

Original Trade Description: April 18th.

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.

Position 4/19/16:

Long June $170 call @ $3.68, see portfolio graphic for stop loss.


PVH - PVH Corp - Company Description

Comments:

No specific news. The position was entered at the open, which happened to be a spike to $96.80 and the high of the day on both the stock and the option.

Original Trade Description: April 21st.

PVH is an international apparel company. They operate in six segments including Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale and Heritage Brands Retail.

Some of the brands marketed by PVH in addition to those above include Van Heusen, iZod, Arrow, Warners, Olga, Eagle, Speedo, Geoffrey Beene, Kenneth Cole, Sean John, Michael Kors, Chaps, etc.

They sell through company operated stores, wholesale outlets, department stores, chain stoes, specialty stores, mass market stores, club stores, off-price and independent stores and distributors and through e-commerce. The company was founded in 1881.

Last week PVH announce it had closed on a deal to acquire the remaining 55% stake in TH Asia, the joint venture for Tommy Hilfiger in China. The deal will increase revenue by $100 million a year.

In February PVH inked a deal with G-III Apparel to allow G-III to design, manufacture and distribute Tommy Hilfiger women's wear in the U.S. and Canada. This not only includes PVH’s existing women's wear operations, but also new categories like suit separates, denim and performance. Long term I would not be surprised to see PVH buy G-III (GIII).

In January, PVH licensed MagnaReady, a shirt system without buttons, from MagnaReady Technology LLC. Men's sport and dress shirts with MagnaReady technology will be available in stores in 2016.

In their earnings reported in late March, they had earnings of $1.52 that beat estimates for $1.45 and exceeded PVH guidance for $1.37-$1.47. On a currency neutral basis earnings rose 7%. Revenue rose 2.1% to $2.112 billion also beating estimates.

Shares spiked on earnings in late March and then drifted lower as the gains were consolidated. They are starting to move higher again with resistance at $100. It may take a few days but I believe they will break that resistance, market permitting. Shares gained 78 cents today in a down market.

Earnings are late June.

Position 4/22/16

Long June $100 call @ $3.41, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)


HRB - H&R Block - Company Description

Comments:

Nearing a new low. Forbes ran a story about two anti-IRS bills that are moving through the House.

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.


LB - L Brands - Company Description

Comments:

No specific news.

Original Trade Description: April 20th.

We tried to play LB on the 13th but shares rallied unexpectedly for three days and I cancelled the play. Shares have since rolled over and are again threatening to collapse. I recommend we try it again.

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.

Two weeks ago 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 last Tuesday's short squeeze. The rebound lasted four days and now the negative trend has returned.

I am recommending we buy a put on a trade under today's low at $77.25. If the stock continues to decline it will trigger the position, otherwise we are just watching. If shares fall below that $76 print from April 12th there is a lot of air before the next support at $65.

Position 4/21/16 with a LB trade at $77.25

Long June $75 put @ $2.20, see portfolio graphic for stop loss.


SPY - S&P 500 ETF - ETF Description

Comments:

Finished flat on Friday after an early morning drop. Be patient.

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.

4/19/16: Long June $200 put @ $1.95 when SPY traded at $210.
See portfolio graphic for stop loss.


TWTR - Twitter - Company Description

Comments:

Twitter is still moving sideways ahead of its earnings next Tuesday.

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:

Crude rallied at the open but fell back fo only a 57 cent gain. I said last night it may take another day or two for the short squeeze to fade in the June futures. Assuming there is no headline spam out of the Middle East we should start to see a decline next week.

Original Trade Description: April 12th.

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

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

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

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

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

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

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

Position 4/13/16:

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




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