Option Investor
Newsletter

Daily Newsletter, Wednesday, 4/27/2016

Table of Contents

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

Market Wrap

Market On Hold for Fed Followed By Small Rally

by Keene Little

Click here to email Keene Little
Following the small decline off last week's high the market had essentially gone on hold (except the RUT, which kept rallying) while waiting for today's FOMC announcement. No significant changes from the Fed resulted in a muted reaction from the market.

Today's Market Stats

The stock market indexes were able to bounce marginally off Monday's lows (the RUT more strongly so and to new highs above last week's) but the choppy price action looks more like a bounce correction than something more bullish. This afternoon's post-FOMC reaction, while slightly bullish, still leaves us guessing what the next big move will likely be.

The pending home sales report for March, released shortly after this morning's open, was better than expected (+1.4% vs. +0.3%) but a significant drop from the +3.4% in February. Other than the crude oil inventories (increased 1.99M) it was a quiet morning for economic reports and the market wasn't focused on any of the reports anyway. For the past several days it's been more concerned about the hints from the Fed about future rate hikes. No one expected them to raise rates today, and they didn't, but the language about future rate hikes is still important to the market.

There was a slightly positive reaction to the 14:00 announcement but nothing to write home about. It was the usual pop higher (following the initial spike down) to shove the shorts out of the market and keep the Fed from being embarrassed by the market but not much more than that. Tomorrow could be more telling as far as providing the clues needed to help us determine the next bigger move.

The Fed stated "Economic activity appears to have slowed" and "Growth in household spending has moderated" and did not give any indication when the next rate increase might happen. The dovish comments helped pop the market up in the afternoon because after all, everyone knows a more accommodative Fed is much more important than slowing corporate revenue and earnings, a slowing economy and slowing consumer spending. I mean it must be true since the market did not sell off (yet) on the not-encouraging economic news from the Fed.

Missing from this month's statement is their assessment of a "balance of risks," which they've consistently stated when measuring risks to the economy vs. expected growth. And once again it's that "transitory effects of declines in energy and import prices" that's keeping inflation from reaching their 2% target (no mention of the 73% increase in oil's price since February; that's one of those inconvenient truths). Not helping the Fed is the fact that the Atlanta Fed has lowered their growth expectations to just 0.6%. The end result of this and their dovish statement is that the market believes a rate hike in June is off the table and that's a reason to celebrate.

Between the longer-term chart patterns showing a lot of whippy up and down moves and now the shorter-term charts showing the same thing it's making it more difficult to get a bead on this moving target. The only thing I can do is watch for the completion of some patterns and/or support and resistance lines to see how prices react and then trade accordingly. I'll start tonight's review with SPX.


S&P 500, SPX, Weekly chart

SPX has nearly retraced its entire November-February decline, stopping last week at 2111, 5 points shy of its November 3rd high near 2116. It has broken its downtrend line from July-November 2015, currently near 2090 but it's been chopping around the trend line since breaking above it on April 18th. That's not exactly bullish price action but it's not bearish yet either. A drop below Monday's low near 2077 would be a little more bearish since it would leave a failed breakout attempt but the bulls still have the potential to drive this at least up to 2116 if not the May 2015 high near 2135. The challenge for bulls is an overbought weekly chart up against tough resistance with a daily chart showing bearish divergence.


S&P 500, SPX, Daily chart

The daily chart below shows how SPX has been chopping around its July-November 2015 downtrend line and while the consolidation can be considered bullish, Monday's break of an uptrend line from February through the April 12th low has been followed by only back-tests of the trend line. The bounce pattern is also choppy and that has it looking a little more bearish than bullish but the bulls could easily overcome that with a stronger rally on Thursday.

Key Levels for SPX:
- bullish above 2111
- bearish below 2073


S&P 500, SPX, 60-min chart

The SPX 60-min chart below shows the bounce off Monday's low, which is so far just a 3-wave move and as such could be just an a-b-c bounce correction to the decline from last week. This interpretation says we should get ready for the next leg down, which could start right away Thursday morning or after a brief pop higher (two equal legs up from Monday points to 2101.66).


Dow Industrials, INDU, Daily chart

The Dow has the same pattern as SPX and following last week's achievement of the 18110 projection (two equal legs for a possible A-B-C bounce off the August 2015 low) and the top of a parallel up-channel for the price action since last August, it then broke down slightly and broke its uptrend line from February 11 - April 11. The bounce off Monday's low looks like a correction but it would achieve two equal legs up at 18108, only 2 points shy of testing the 18110 level again. It would be more bullish above 18120 but at the moment it looks vulnerable to a stronger decline.

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


Nasdaq-100, NDX, Daily chart

NDX suffered a bearish event last Friday when it gapped down as a result of some key components suffering a negative reaction to earnings. It happened again from some more disappointing earnings reactions, namely AAPL, this morning. But it is last Friday's gap down that created an island top reversal after it had gapped up on April 13th, ran sideways and then gapped down last Friday. This is typically a strong reversal signal so it's currently on a sell signal and the first thing the bulls need to do is negate it by getting back above 4525, which is the little support shelf between the gap up and gap down. Today it gapped below its 200-dma, near 4424, but found support at its 50-dma near 4394 and made it back up to its 200-dma this afternoon before dropping slightly into the close. Was that the back-test to be followed by a bearish kiss goodbye tomorrow? That's the bearish setup. If it does drop lower, there could be stronger support near 4343, which is where two uptrend lines cross, one from June 2010 - November 2012 and the other from March 2009 - August 2015 (using the log price scale here).

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


Russell-2000, RUT, Daily chart

As mentioned above, the RUT has been showing relative strength recently, especially compared to the techs, by continuing to push higher while the others either consolidate or pull back further. It's now only 4 points away from price-level S/R near 1160, which includes its December 29th high near 1161. But it's still well below its November high near 1204 while the blue chips challenge their respective highs. The RUT has rallied up to the top of a possible rising wedge pattern, the top of which will be close to the 1160 S/R level tomorrow and therefore it's worth watching closely to see if it will be strong resistance.

Key Levels for RUT:
- bullish above 1162
- bearish below 1119


10-year Yield, TNX, vs. KBW Bank index, BKX, Daily chart

The 10-year yield has been closely correlating to the prices of the bank stocks, as can be seen on the chart below. This makes sense since the higher the bond yields the more profitable the banks (many loans, including mortgages, are pegged to the 10-year yield while savings rates are being kept near zero). So if you want to know the probable direction of bank stocks just keep an eye on TNX.

There is a warning sign currently for bank stocks and that's because yesterday's high for TNX is so far a lower high than its March 11th high but not so for BKX, which has gone on to make a significantly higher high in April. Is it getting ahead of itself in anticipation of higher yields? Will the bond market support the Fed's efforts to raise rates further? Will the economy support the Fed's efforts? At the moment the bond market is telling us lower rates are coming, despite what the Fed wants, and that bank stocks have gotten ahead of themselves.

Notice the last divergence back in June-August 2015, where TNX started coming down but BKX held up into August and then crashed lower to "catch down" to TNX. Now we have an even wider disconnect and the warning here is that BKX could once again "catch down" to TNX.


KBW Bank index, BKX, Weekly chart

Taking a little longer-term look at the banking index, the weekly chart below shows it has almost made it back up to its 50-week MA at 71.23 with this afternoon's spike up to 71.09. Following this afternoon's spike up it then spiked back down so it's not clear if that was a little blow-off move or if there's still higher prices coming. Two equal legs up from February (for a possible a-b-c bounce correction) points to 72.13, which is a little shy of its downtrend line from July-December 2015, currently near 72.65. So there's at least a little more upside potential even for the bearish pattern but it doesn't turn more bullish until, and if, it can climb above 72.75. Watch TNX from here and see if it can recover today's decline to at least support BKX moving a little higher.


VIX Short-Term Futures ETF, VXX, Daily chart courtesy Tom McClellan

There's an interesting sentiment indicator when looking at the number of VXX shares outstanding, which as Tom McClellan describes it, acts as a "double-contrary indicator." Back in February he had pointed out how low the VXX shares outstanding had dropped, which showed a lack of interest in holding onto shares of an ETF that would benefit from a further selloff in the stock market (a further selloff in the stock market would spike VXX even higher). But instead of viewing this as a contrary indicator (lower interest in VXX, more bearish for the stock market) it should instead be viewed as a "smart money" indicator -- smart money gets in and out of VXX at important turning points for the market and the higher the number of outstanding shares the more likely the stock market is going to turn back down and vice-versa.

Yesterday Tom tweeted "VIX futures ETF extremely popular now. Can this possibly end well?" And if you look at his chart below you'll see the extreme spike as the stock market rally has progressed off the February low. This is smart money saying "I don't think so" when it comes to believing the stock market rally will continue. Can the market push higher? Absolutely. But this is another example of why you should be very cautious about the upside in an overbought market that has indexes pushing up against potentially strong resistance with bearish divergence (waning momentum). The market has been holding up very well, despite all the fundamental reasons why it shouldn't (unless you consider the Fed a fundamental reason for bullishness) but the problem is when it lets go it could do so with a bang and result in a selloff worse than what we saw in August and January.


U.S. Dollar contract, DX, Weekly chart

The US$ gyrated a little after the FOMC announcement this afternoon but then settled slightly higher than it was pre-FOMC. But it was somewhat meaningless and we're still waiting to see if the dollar is going to hold support near 94 or instead drop to about 93 before setting up a bounce back up toward the top of its year+ consolidation range, near 100. There's no change to my expectation for more consolidation this year before heading higher next year.


Gold continuous contract, GC, Weekly chart

On gold's daily chart I see a possible bullish sideways triangle since its March 11th high, which fits as a bullish continuation pattern. But on the weekly chart, shown below, I see price stalled at the top of a parallel down-channel from 2013 and the potential to roll over at any time. It could certainly be viewed as a bullish consolidation at the top of the channel as it prepares to break out so I'm ready for that possibility but I'm not sure a breakout would result in much more than a test of its January 2015 high near 1308 before starting a deeper pullback (possibly something more bearish). For the short term I think gold remains vulnerable to at least a larger pullback as long as it stays below last week's high at 1272.40. But a rally above 1273 could lead to a rally at least up to 1308.


Silver continuous contract, SI, Weekly chart

Since their highs on February 11th both gold and silver went sideways but silver's rally off the April 1st low for both of them led to a new high and that has had many precious metals analysts pounding the table about what a great buying opportunity this is for both gold and silver. I wonder if they're pounding the table because they want people to buy their metals so they can take their profits (you don't make money as a trader until you sell). Silver played catch-up in April and it too is now at the top of a parallel down-channel from 2013, near 17.60. Silver spiked up to 17.72 last week before dropping back down and it's been trying to bounce back up since Monday's low at 16.81. Along with the top of the down-channel there's also a price projection at 17.60 for an a-b-c bounce pattern off the August 2015 low and that was achieved last week. Until there's a breakout I think it's best to pass on the "opportunity" to buy silver here. Let it first prove it's going to be able to break out.


Oil continuous contract, CL, Weekly chart

Oil is looking a little stronger now that it has been able to break out the top of its down-channel from 2014, which is slightly above its 50-week MA at 43.24. As long as oil is able to hold above that level on a pullback it stays bullish. I'm not seeing bearish divergence on either its weekly or daily charts so that's a good sign for the bulls. The strength in oil has helped the energy stocks as well and that in turn has been helping the RUT. So if this can continue it could be the driver behind another rally leg for the stock market. The next level of resistance for oil is near 51, which is where it would test its October 2015 high and achieve two equal legs up from February (it could still be just an a-b-c bounce correction coming off very oversold in February). For now it looks bullish but keep in mind that it's getting overbought.


Economic reports

Thursday's economic reports are few and non-market moving. Friday we'll get the PCE numbers, personal spending and income, Chicago PMI and the final Michigan Sentiment numbers.


Conclusion

There's usually a head-fake move around the FOMC announcement followed by a reversal that carries into the close and then another reversal the following morning. That could mean this afternoon's rally attempt will be reversed Thursday morning. In reality all we have is a bunch of small corrective moves in both directions since last week's decline and that leaves the short-term pattern about as clear as mud as far as helping determine the next big move. The decline from last week looks impulsive and the bounce following it looks corrective (overlapping highs and lows) and that points to at least another leg down to follow the bounce. For this reason I give the nod to the bears but that means we should see a decline on Thursday. There might be a little pop higher at the open but the bearish pattern says it will be reversed quickly. So we should find out quickly whether or not the bears are going to get another chance or if instead the bulls are going to snatch the ball away them again.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Passport to Anywhere

by Jim Brown

Click here to email Jim Brown

Editors Note:

Visa is accepted worldwide and you can go and do anything you want as long as you have credit available on your card. Fortunately for Visa, millions of people do and they use it every day.


NEW DIRECTIONAL CALL PLAYS


V - Visa -
Company Description

Visa bills itself as a "payments technology" company. They operate an open-loop payment network worldwide. The company facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities.

Everybody understands Visa. Unlike American Express, Visa does not have any credit risk. Visa licenses its cards and network to banks and financial companies and charges them a transaction fee for the service. Visa assumes no credit risk because it has no borrowers. The underlying banks assume the risk and the loans created by the customers.

This is about as close as you can get to the perfect business. It is a service everyone wants and you get paid every time one of your licensee's customers use their card.

Visa reported earnings on the 22nd and warned that earnings growth may be delayed because its purchase of Visa Europe Ltd for 21.2 billion euros would be delayed following feedback from the European Commission. Visa made changes to the deal to get EU approval. Visa and Visa Europe split in 2007 before Visa's IPO in the USA. The reacquisition of the European business will add significant earnings and growth to Visa. The modified acquisition may not be completed until after June 30th and therefore appear on the earnings for Q3 rather than Q2 as previously expected.

They also said timing issues surrounding the new partnership with Costco, and USAA would push some of the expected earnings into Q3.

They lowered top line growth estimates for fiscal 2016 to 7-8%, down from "high single digit to low double-digit" range they have previously specified. This is only due to the timing of the Europe acquisition and issues in the implementation of the Costco and USAA partnerships. Visa is fine and once they complete those items the growth will rise.

In the recent period earnings rose 10% to 68 cents and beat estimates by a penny. Revenue rose 6.4% to $3.63 billion. Payment volume rose 5.7% to $1.3 trillion.

Shares dipped $3 after the earnings report and have been moving up steadily the last four days. Visa is a Dow component and any Dow rally will lift Visa as well. Conversely, a Dow decline will weigh on Visa as well.

Buy June $80 call, currently $1.61, no initial stop loss.



NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Bulls Return

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow and S&P managed to post a decent gain while the Nasdaq remained negative because of Apple. The Dow shook off the $7 drop in Apple shares after Boeing soared +$4 after reporting earnings. The Nasdaq lost -25 points as a direct result of the Apple decline.

The Dow started out negative but rebounded to nearly 18,100 before fading slightly at the close. The dovish Fed statement removed a weight from the market and most of the gains were made after 2:PM.

After the bell, Facebook crushed earnings and shares rallied from $108 to $118 in afterhours. This will be positive for the Nasdaq on Thursday.

The problem for the market on Thursday will be the Japanese data out tonight along with their monetary policy update. The Q1 GDP will also be out in the morning but the Fed statement today admitted the economy had weakened so a weak GDP number should not be a surprise.

The Dow has not broken through resistance so there is still a lot of indecision about the future. The Russell 2000 small caps were weak today with only a 3-point gain. We need to watch them for market direction.



Current Portfolio




Current Position Changes


USO - US Oil Fund

The long put position was stopped out at $11.05.


LB - L Brands

Close the long put position at the open.


UA - Under Armour

The long call position remains unopened until UA trades at $48.05.


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:

Another nice gain. 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. Rebounded +1.50 off the morning low. The drop was strictly Apple/Nasdaq related.

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.


FDX - FedEx - Company Description

Comments:

Decent move but could have been better. UPS reports earnings before the bell on Thursday and investors may be a little scared of a miss. Still holding near the highs.

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. Minor gain after that outstanding $2.45 gain on Tuesday.

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.


UA - Under Armour - Company Description

Comments:

UA plunged -4% after Adidas raised guidance and Cowen & Co and Piper Jaffray said the company could be taking market share from UA and Nike. A Piper poll showed Adidas surpassing UA among teenagers.

UA remains unopened until it trades at $48.05. If shares do not rebound on Thursday/Friday I will drop this position in the weekend newsletter.

Original Trade Description: April 25th.

Under Armour develops, markets and distributes branded performance apparel, footwear and accessories for men, women and youth in the U.S. and internationally.

Under Armour has posted double digit sales growth for 27 consecutive quarters. Competitor Nike saw sales rise 8% in Q4 and has only seen double digit revenue growth in 11 of the last 27 quarters.

When UA beat earnings last week they guided for the full year to revenue of $5.0 billion, a 26% increase compared to prior guidance of $4.95 billion. Gross margin is expected to remain at 48.1%. Analysts immediately raised earnings estimates from 65-85 cents to 67-87 cents. Footwear revenue rose +64% with basketball shoes especially strong in the Curry Two models. Premium products including $150 Speedform and Gemini 2 RE drove average sales prices higher.

Meanwhile, analyst channel checks included a high traffic Foot Locker location in NYC where 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.

Under Armour footwear sales rose +64% while Nike shoes are being discounted by 50%. What is wrong with this picture? Apparently, UA has been nimble in their designs and marketing and will continue to outperform their larger competitor.

Earnings July 21st.

UA just completed a 2:1 split on April 8th and has undergone a little over two weeks of post split depression. They beat earnings on the 20th and shares spiked $3 on the news to $47. They have traded sideways for the last three days and there is always the possibility they will decline but scorching double digit growth is hard to find.

If UA moves higher from here I would like to own it. If it moves lower we will look for a bottom to form and try a lower entry. With the market choppy to weak, I do not mind putting a higher entry trigger on the stock. If we are hit, that is great but should the market continue to decline we remain safely out of the position. There is a good chance the market is going to decline so we may never be triggered. If that is the case we will try to get a lower entry somewhere under $45.

With a UA trade at $48.05

Buy July $50 calls, currently $1.25, initial stop loss $45.50.



BEARISH Play Updates (Alpha by Symbol)


FL - Foot Locker - Company Description

Comments:

No specific news but shares up for 2 consecutive days. One more day and I am kicking it to the curb.

Original Trade Description: April 23rd.

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.

Position 4/25/16:

Long May $60 put @ $1.94, initial stop loss $62.75.


HRB - H&R Block - Company Description

Comments:

HRB announced a -4.6% decline in the number of tax returns processed by HRB. Assisted returns declined by -5.8% to 12.2 million. They claimed the decline was due to an increased number of people filing on the 1040EZ short form. Returns processed through the online and desktop software declined -2.6%. The CEO said he took full responsibility for the decline in volume and said he would take whatever actions necessary to improve the situation for 2017. Shares declined slightly during the day and the press release came after the market closed. Shares fell -$3.23 on the news.

I lowered the stop loss to take us out on any rebound.

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 preparation 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, see portfolio graphic for the stop loss.


LB - L Brands - Company Description

Comments:

Deutsche Bank initiated coverage with a buy rating and $94 price target. Company suggested this was an attractive entry point. On Monday Stifel upgraded from hold to buy with a $90 price target.

I am recommending we close the position. Those upgrades could continue to lift the stock.

CLOSE THE POSITION

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:

The S&P was choppy today and did not really rebound until after the Fed announcement. The S&P rebounded from 2,086 to 2,095 in the last 90 min of trading. However, that 2,095 level was -5 points off the high. Resistance has held and it may be a choppy week or two before a longer-term decline appears. 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:

I have good news and bad news. Twitter collapsed nearly $3 on the earnings disappointment. That is the good news because it closed near the low for the day and maybe it will go directional for the next week or two. The bad news is the $2 drop in the call premium. The gain in the put side did not offset the loss in the call side because the earnings expectation premium evaporated. I put a stop loss on the put side but I left the call side open. CEO Jack Dorsey was asked in an interview if he was talking to any potential buyers and he refused to answer the question. He actually looked down as thought he was guilty of something and it was a blatant tell that conversations had been held. We have about six weeks left on the call side and with the premium today at 50 cents, I think it is worth a 50 cent bet to see if something happens.

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 continued to rally on no fundamentals to trade at $45.62 intraday. We were stopped out on the USO put at $11.05. The original concept was to own the put over the Doha meeting in expectations of a drop in prices. The drop lasted less than one day and the short squeeze has lasted for two weeks.

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:

Closed 4/27/16: Long May $10.50 put @ 58 cents, exit .25, -.33 loss.




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