Option Investor
Newsletter

Daily Newsletter, Saturday, 4/30/2016

Table of Contents

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

Market Wrap

Slip Sliding Into May

by Jim Brown

Click here to email Jim Brown

Whether the "Sell in May" adage is correct or not, the constant repeating of the phrase in the press creates a negative bias for the month.

Market Statistics

Friday Statistics

There are multiple surveys and research papers proving the "Sell in May and go away" strategy. However, every year we hear a parade of analysts tell us it is not so. Some claim the market decline from April into summer is a self-fulfilling prophecy because the phrase is repeated so often. I agree the constant repetition creates a negative market bias but research proves the validity of the strategy.

The saying originated in the late 1700s and started out as "Sell in May and go away, comeback on St Leger Day." Established in 1776 the St Leger Stakes is the last thoroughbred horserace of the year and the final leg of the English Triple Crown. The idea was that once horseracing season was over everyone could go back to betting on stocks rather than betting on horses. Coincidentally the Leger Stakes coincided with the end of the worst six months of the market.

The real reason the next six months of the year offer pour returns are simple. The weather is nice, the kids and grandkids are out of school and investors would rather be spending time on the golf course, beach, vacations, etc than glued to their computers worried about what the next market swing was going to do to their portfolio. Volume shrinks significantly and the lack of buyers allows prices to slide. Over the summer, parents/investors are always trying to scrape together money for tuition, books, etc for the 50.1 million kids returning to K-12 school. The older those kids are the more they cost. College tuition today is obscene and replicated over the 20.2 million college students in the USA today it represents more than $300 billion a year in tuition/housing/living expenses. That sucks a lot of money out of the equity market. Note in the graphic below that September is the worst performing month of the year. School Facts

In a 2012 research paper by the University of Miami, they found that market gains for the six months starting in May averaged 0.95% compared to the 10.69% gains in the six-month period from November through April. Even more important they analyzed not just the American markets but they researched 37 different markets from 1998 through 2012 to arrive at those average returns.

The Stock Trader's Almanac first published their "Best Six Months Switching Strategy" in 1986. David Aronson, author of "Evidence-Based Technical Analysis," and his colleague Dr. Timothy Masters back-tested the Best Six Months Switching Strategy using their scientific methods from 1987 to April 2006. Using the S&P-500 as their benchmark the best six months produced an annualized return of 16.3% compared to only a 3.9% return for the worst six months. They concluded the strategy was statistically significant and unlike any of the 6,402 other rules they tested for their book. The chart below from the Stock Trader's Almanac shows why this strategy works. The summer months simply do not perform over the long term.


The Almanac produced this graphic showing the difference in the compounded value of $10,000 invested in the Dow in the best and worst six-month periods since 1950. It is pretty convincing.


Before everyone reading this starts running to cash out of everything on Monday there are other things to consider. If you sell your stocks, you will owe taxes. If you are out of the market and a summer rally breaks out you will miss it. There are some years where summer rallies can produce double-digit returns. They are few and far between but they do happen.

While that graphic above showing the monster gains is intriguing, there is one key point. If you had left that $10,000 invested for the entire 12 months your total return would have only been $1,024 less. It only makes sense to cash out if you expect a material decline over the summer rather than just a flat market.

It has long been proven that timing the market is a far worse strategy than time in the market. Long term the markets go up. If you want to avoid significant market declines, the best timing model is something like the 100-week average. As long as the S&P is over the 100-week average you are long and if it drops below you remain flat or short. You can avoid the sudden exits by adding another moving average like the 50-week in the graphic below. As long as the 50 is over the 100, you remain long. If it moves below the 100, as it is about to do now, you remain flat or short. There are dozens of moving average systems covering various time frames but for long-term investors the various crossover systems are the easiest to follow.


The bottom line is that the sell in May strategy is not a hard and fast rule that is guaranteed to make you more money in the long term. It is the product of the market analysis of hundreds of analysts over time simply showing that the majority of gains come in the best six-month period. If you have a taxable account, you should ignore it completely because the tax consequences of selling will wipe out any gains from the strategy. Time in the market is the key to long-term gains.

Art Cashin called the market decline on Thr/Fri the "Icahn Flush." On Thursday, Carl Icahn repeated his concern over a coming market decline in an interview on CNBC along with news he had bailed on his position in Apple. The stock declined sharply on the news on Thr/Fri and the market sank on his warning about a "day of reckoning ahead."

On Friday, Warren Buffett disagreed with Icahn and said he did not see any specific indications that the market was about to crash. That comment was news about the time the shorts began to cover their positions ahead of the weekend.

The Q1 GDP on Thursday was better than expected at +0.5% growth but still very lethargic. The Chicago Purchasing Managers report or ISM Chicago, declined from 53.6 to 50.4. New orders slowed and backorders were down sharply. The decline in the order components suggest manufacturing activity in future months is going to be weak. When coupled with the Chicago Fed National Activity Index, which has been negative for 9 of the last 12 months and at -0.44 last week was the lowest reading since early 2014, the outlook is weakening.

The Fed statement on Wednesday also said the economy had weakened since the last Fed meeting in mid March. The economic conditions are starting to weigh on the market.

Consumer Sentiment and Confidence are also fading. Sentiment for April declined from 91.0 to 89.0 with expectations declining sharply. The present conditions component rose from 105.6 to 106.7 but the expectations component declined from 81.5 to 77.6. This was the biggest decline since September and this is the lowest level since September 2014. Almost a third of respondents expect unemployment to rise over the next year. Rising gasoline prices are also a challenge.


Next week is payroll week. The ADP Employment on Wednesday is expecting to show a gain of 194,000 jobs while the Nonfarm Payrolls on Friday is expected to show a gain of 210,000 jobs. Both estimates are down slightly from the March numbers.

The ISM Manufacturing report on Monday could be a challenge for the market if it comes in under 50. Estimates are for 51.5 but the regional reports have been weak. The ISM Services on Wednesday is expected to be flat.

The vehicle sales for April are expected to come in around 16.5 million and flat with March. This is well below the highs over 18 million in September through November. I reported last week that car inventories are soaring while truck sales remained steady. The Autonation CEO said they were cutting back on car deliveries and the manufacturers needed to slow production because they were not selling. The cheap gas bounce in the fall has given way to the reality of prices well over $2 and rising. Prices have risen 41 cents in the last 55 days. That is already putting a squeeze on vehicles sales. If the Tuesday report is much under the 16.6 million estimate it could be a problem for the market.


Halliburton (HAL) has a problem. The proposed $28 billion acquisition of Baker Hughes (BHI) is in trouble. Both the U.S. and EU regulators are objecting to the deal and the U.S. Dept of Justice said it could not be fixed because it was so anticompetitive. Halliburton announced they were delaying their earnings from April 25th until May 3rd in what may be a sign the deal is self-destructing. There is a deadline of April 30th to complete the deal, which is not going to happen, or either party can walk away and Halliburton will have to pay a breakup fee of $3.5 billion to Baker Hughes. The parties can agree to extend the deadline for the 4th time. Because Halliburton delayed their earnings, analysts believe they are going to terminate the deal. Halliburton sold $7.5 billion in debt in November in anticipation of closing the deal. They can use part of that money to pay Baker Hughes the fee.


Gilead Sciences (GILD) reported earnings that missed on both the top and bottom lines. Harvoni, their top of the line Hep-C drug, saw sales decline from $3.58 billion to $3.02 billion. U.S. sales of the drug fell 50% on pricing issues. At $94,000 for a 12-week course of treatment, it is definitely pricey but still better than the alternative of eventual liver transplant or death. Patients with insurance have already taken the drug and insurance companies are now demanding discounts of as much as 45%. Some companies are delaying approvals as long as possible as they try to wait until a cheaper alternative is available. Gilead suffered a patent loss in court and Merck (MRK) is aggressively pricing their competitive drug Zepatier. Earnings declined from $2.76 to $2.53 per share. Adjusted earnings of $3.03 missed estimates for $3.12. They ended the quarter with $21.3 billion in cash after spending $8 billion on buybacks in Q1.


Valeant Pharmaceutical (VRX) finally filed their long awaited 10K to remove the danger of a technical default on their debt. Unfortunately, it may have raised more questions than presented answers. In the document, they said they would restate 2014 revenue with a reduction of $58 million and 9 cents a share, and 2015 revenue by $21 million and increase earnings by 7 cents.

The 10K blamed the "tone at the top" referring to top management and the board for numerous errors in accounting and decision making in order to inflate the stock price. Eight of the nine board members had more than $108 million in Valeant stock at risk. CEO Michael Pearson was on the Forbes billionaire list in 2014 because of his massive stock grants. The compensation plans were built around an escalating stock price.

The lax governance, faulty accounting and questionable transactions have made them the target of more than a dozen investigations from every type of regulatory agency including Senate hearings. Five directors will not be standing for reelection and Valeant has recommended three new directors for a vote.

The new CEO Joe Papa has his work cut out for him. His compensation plan includes a $100 million payout if he can rebuild the share price to $150. He will make $500 million if the stock reaches the $270 level within four years. He is of course stepping into the lion's den with the multiple suits and investigations.

Shares spiked at the open on the filing of the 10K but investors sold the news and the stock closed down -5%.


Gilead and Valeant were instrumental in crashing the Biotech Index and that impacted the Nasdaq and the Russell 2000. The $BTK declined -2.5% on Friday after a sharp drop Thursday afternoon.


Under Armour (UA) was hit by a blatant rip off of its logo and garment styles by a Chinese company. Chinese based Tingdei Long Sporting Goods launched its "Uncle Martian" brand of sports apparel very similar to that sold by Under Armour. Just being copies of UA garments was not enough but they copied the logo as well. "Under Armour is aware of the Uncle Martian launch event. Uncle Martian's uses of Under Armour's famous logo, name, and other intellectual property are a serious concern and blatant infringement. Under Armour will vigorously pursue all business and legal courses of action." Unfortunately, with the business in China it will be very difficult to win their fight. The name and logo are registered in China but that does not mean much unless it was an exact copy.


Chinese companies are notorious for copying American products. Business Insider put together examples of some obvious copycat products. Extensive List of Copies

Sqmy Playstation?

Chevron (CVX) reported earnings on Friday that missed estimates. Adjusted earnings of 11 cents missed estimates for 20 cents. Production declined slightly to 2.67 mbpd of oil equivalent, down from 2.68 mbpd. The E&P division lost $1.46 billion because of low oil prices. On a GAAP basis earnings declined from $2.6 billion to a loss of $725 million. That is a drop from $1.37 to a 39 cent per share loss. Revenue declined by nearly one-third to $23.6 billion. The last time Chevron posted a Q1 loss was in 1992 when oil was $18 a barrel. Chevron affirmed its $1.07 dividend for June that will cost the company nearly $2 billion. Capex spending is expected to be $25-$28 billion in 2016.


Exxon (XOM) reported earnings of 43 cents that easily beat estimates for 31 cents. Revenue declined from $67.62 billion to $48.7 billion. Production averaged 4.325 mbpd of oil equivalent. Exxon's earnings beat was helped by a $1.4 billion contribution by the chemical segment. That was up +$373 million from the year ago quarter. Exxon generated $5 billion in excess cash and returned $3.1 billion to shareholders in dividends and buybacks in Q1.


The disaster of the day was Stericycle (SRCL). The company reported earnings of $1.11 and missed estimates for $1.15. Revenue of $874.2 million narrowly beat estimates for $873.6 million. The company guided for full year earnings of $4.90-$5.05, down from prior guidance of $5.26-$5.33. They said the decline in estimates was due to lower volumes of industrial wastes and higher costs associated with international operations. Shares fell -21% on the news.


The winner for the day was Monster Beverage (MNST). The company reported 80 cents and beat estimates for 75 cents. Revenue of $680 million beat estimates for $660 million. The company said its strategic deal with Coca-Cola was paying off and international sales were rapidly expanding. They also have some new products coming out in 2016. Shares rallied 13% on the news.


Earnings for next week are missing the big names we had last week. We will get Tesla, Alibaba, Priceline and Wynn Resorts but they do not have the market moving power of Apple, Amazon, Facebook, Netflix, etc. The quality of earnings should decline but on the bright side, the smaller companies do not have as much exposure to the strong dollar.

According to FactSet, 62% of the S&P have reported with 74% beating on earnings and 55% beating on revenue. Blended Q1 earnings growth improved again last week to a decline of -7.6% compared to -8.7% on March 31st and -9.0% last week. You can thank large beats by Amazon and Ford for the declining estimates. Revenue has declined -1.3%. However, 36 companies have issued negative guidance and only 18 have given positive guidance. The 12-month forward PE is 16.8 and rising. The five-year average is 14.4 and 10-year average 14.2 suggesting the market is currently at the high end of its historical valuations especially when earnings are declining. Q2 earnings estimates are for a decline of -4.4%. The technology has seen the biggest drop with earnings expected to decline -9.4% in Q2.

There are 124 S&P companies reporting this week.


Apple started this tech wreck with earnings after the close on Tuesday. Shares have fallen from $104 to initial support in the $93 range on Friday. However, while some analysts are calling it a screaming buy there are others suggesting it could fall a lot lower.

I believe the downside risk from here is minimal. The 200-week average at $93 corresponds with the horizontal support since late 2014. However, Carter Braxton Worth, an analyst at Cornerstone Macro, believes Apple could decline to the long-term uptrend support at $85 as it did in 2013 after a particularly sharp correction.

I think the bad news is priced in. Who in the market has not heard about the Q1 miss and the lowered production guidance for Q2. I am sure there are a lot of holders that are hoping for a rebound to give them a better exit point but will there really be another $15 drop from here to break that long-term trend line? Over the last five days, Apple has traded more than 325 million shares and shed $62 billion in market cap. Their normal daily volume is about 35 million shares. Anybody that really wanted out is more than likely already out. The stock will remain volatile over the next week or two but I doubt there are any big declines left. Just my 2 cents.



Crude oil rose to the high for the year at $46 thanks to the crashing dollar. The drop in the dollar sent gold surging to a 16-month high at $1,295. The Dollar Index closed at a 16-month low on Friday after the Fed failed to produce a hawkish statement, the U.S. economic reports continued to be weak and the yen rose on the lack of any action by the BOJ. If the dollar continues to fall, the commodity complex will continue to rally.



If there is any doubt about the impact of the dollar on oil prices the chart below should erase that doubt. There is nearly a 100% inverse relationship and this is overpowering the negative fundamentals for crude oil.

We learned last week that Iran has boosted exports from 700,000 bpd to 1.8 million bpd and expects to increase that by another 500,000 bpd by July. OPEC production rose 170,000 bpd from 32.47 mbpd to 32.64 mbpd in April. Saudi Arabian output is expected to rise 350,000 bpd in April. Libyan officials announced on Friday a plan to boost exports from 400,000 bpd to 1.6 mbpd and the pre Gaddafi levels thanks to the backing of the new unity government.

Oil production is rising everywhere except the U.S. and Venezuela but prices are being powered higher by the dollar not the fundamentals. U.S. production declined only 15,000 bpd last week and inventories rose 2 million barrels.



Baker Hughes said active rigs declined -11 to 420 and another new historic low. Oil rigs fell -11 to 332 and gas rigs declined -1 to 87. Miscellaneous rigs rose 1.


Markets

The markets declined last week for multiple reasons. We can blame it on Carl Icahn's "day of reckoning ahead" comments. Or, we can blame it on Apple's earnings. We could also blame a long list of tech stocks with earnings disappointments but then we would have to factor in Amazon, Baidu, Expedia and Linkedin and their huge earnings beats that were completely ignored the day after the reports. The Bank of Japan could also be a convenient scapegoat when they elected to not add further stimulus even after officials had indicated stimulus was likely. We could also blame the lackluster GDP at +0.5% growth and a two-year low.

There are lots of factors we could blame but in reality, markets do not need a reason to go down. Selling happens. When the major indexes are facing such significant resistance, I would have been more surprised to see the indexes forge ahead in light of all the events I listed above.

Resistance held and we have to deal with it. The key for us is what to expect for next week. The resistance is still there and the headline flow is going to diminish. There are plenty of earnings reports but very few high profile companies. The farther into earnings season we go the weaker the earnings will become. Misses will become more prevalent. Fortunately, those misses will not mean as much as a Microsoft or Apple because the companies are smaller. However, it should keep the downward pressure on the market.

We have talked about the very low bar for earnings estimates but we are still seeing companies miss that bar. That should remain a cloud over the market.

However, investors are supposed to buy when there is blood in the streets. This quarter could be seen as one of those events. Analysts are calling it the trough quarter for earnings. If the cycle plays out as expected with a -7.6% earnings decline and the fourth consecutive quarter of declines, that should be a signal for long term investors to buy stocks before earnings improve. While they are still expected to decline slightly in Q2 at -4.4% the Q3 and Q4 estimates are bullish at +1.6% growth and +7.5% growth respectively. We are supposed to buy in advance of the good times and sell when those good times have peaked.

I do not think investors are prepared to dive in today to capitalize on earnings nine months from now. There far too many negative headlines and we are entering the worst six months of the year for the market.

This will make the summer a buying opportunity ahead of a bullish Q4. For the next month, the markets should continue to be choppy with a downward bias. That assumes a flood of investors do not rush into the market next week still targeting those historic highs.

The events of last week may have blunted the enthusiasm investors had for a new high attempt. The S&P dipped to 2,052 on Friday and is closing in on the decent support at 2,042 followed by 2,020. Resistance remains 2,100, 2,116 and 2,128.


The Dow was crippled by Apple, Intel and Microsoft, both of which closed at a two-month low, while some of the recent reporters are going through their post earnings depression phase. The outlook for the Dow is not positive.

Dow components Pfizer and Merck report next week and they are hardly going to set the market on fire. Both reports will be ignored.

The Dow made it all the way to 18,167 the prior week and right on the verge of a breakout before losing traction. Now that more than half of the Dow components have already reported and in their depression phase it will be very difficult to regain those highs.

Support is now just over 17,500 followed by 17,400 and then a potentially long drop. Resistance remains 18,110 and 18,165.



The Nasdaq could be in trouble. The Nasdaq Composite closed at a four-week low while the Nasdaq 100 closed at a seven-week low. On the composite index, the Friday low at 4,749 is the last ditch level before a potential retest of 4,600.

On the Nasdaq 100, the index could not post a gain even after Amazon added 58 points on Friday with Priceline +26, Monster Beverage +16, Expedia +9, etc. The tech sector is reeling from a flurry of negative reports and falling guidance.

Any further decline by the Nasdaq 100 and we could be looking at a retest of 4,085.

The drop in the biotech sector is also dragging the Nasdaq lower. The biotech rebound appears to have run its course and the earnings miss by Gilead was a nail in the coffin.




The Russell 2000 had been a leading indicator for the market as the Dow tried to make new highs but the Russell failed to move over 1,150 and never even tested the stronger resistance at 1163-1165. The Russell lost more than 32 points from the Wednesday high at 1,156 to the Friday low at 1,124 or roughly -3%. Given the positive trend the prior week that could be just some needed profit taking but the weakness was pretty widespread. Real support is about 1,090 with a couple speed bumps at 1,110 and 1,100. The 200-day average at 1,126 halted the decline on Friday and it is still in play.


The event calendar is headlined by the employment reports but nobody expects any material change so they should not impact the market unless there is a big surprise. The ISM Survey is important but unless there is a large negative surprise, I would not expect that to move the market either.

The market moving events will come from the ongoing earnings cycle and the misses will be more important than the beats. The market bias has shifted to negative and given the point on the calendar it may be harder to move it back into positive as we drift towards the summer doldrums.

Warren Buffett will be cheerleading for investors all weekend in Omaha and his bullishness could be contagious for the market on Monday.

I said last week we need to avoid being too long and I think that is true for this week as well. We need to be cautious as the quarter progresses and forward estimates are revised. Despite the decline last week, the markets are still complacent.


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Random Thoughts


The current bull market just became the second longest in history. It started on March 9th, 2009 and has lasted 2,608 days through Friday's close. The now third longest started on June 14th 1949 and lasted until August 2, 1956. Bull markets do not die of old age. They die from Fed actions and economic cycles. The longest bull market started in October 1990 and lasted until March 2000 and the S&P rose 417% in that period.


The capitalist Woodstock is underway this weekend in Omaha as the Berkshire Hathaway shareholder meeting is in full bloom. Thousands of shareholders make the trip to Omaha to rub shoulders with Buffett and his team and talk first hand with some of his companies that set up booths and displays in the convention center.

Unfortunately, all the news was not good. Buffett said the railroad business had fallen off drastically and the "pain is likely to continue." He said it was off sharply in Q1 and would likely be down the rest of the year. Buffett said the BNSF railroad had let investors down but referred to the operation as its "most important non insurance business." In the preliminary earnings, the segment lost $221 million for the quarter. The insurance segment also lost $267 million because there were more catastrophe events than normal in Q1.

Buffett is known for not being tech savvy. He said we are still trying to figure out how to harness the rapid growth of online commerce, something Amazon has done very well. "We are not going to try and out-Bezos Bezos." "The internet has already disrupted plenty of people and it will disrupt more." Charlie Munger said Berkshire's business were so strong they are not particularly vulnerable to web retailers like Amazon.


Google and Amazon are in competition to build the biggest database in the world. Six years after the Flash Crash of May 2010 the Consolidated Audit Trail (CAT) project is finally showing signs of life. The CAT is supposed to contain all the identifying information for every trade across all the exchanges, including bids and offers submitted. Each transaction is going to be tagged with the identifying information showing who placed the trade/bid, through what broker, at what time, what was the market price, etc. In theory, this will allow the SEC to backtrack the next market event to determine what caused it.

The biggest problem is that capturing all that information will produce 50-100 billion records per day. That will be a massive database that will require a supercomputer to manipulate when the SEC does want to search the data.

There are three bidders. FINRA, the market regulator is teaming with Amazon Web Services. FIS is teaming up with Google and Thesys Technologies, an affiliate of Tradeworx, is going it alone. The SEC is finally done with deciding what they want to be in the database and the three bidders will decide what it will cost. The winning bidder will not be chosen until Q3 or Q4.

The next question is who will pay for it. The brokers are going to be on the hook for the eventual cost and ongoing maintenance. They will pass the costs on to their clients. Once it is built and operational, who owns the data? How will privacy be protected? Without protections, an operator could track every trade Carl Icahn has ever made including any bids and offers that did not get filled. The potential for liability is huge.

The SEC is going to produce all the rules and there will be a comment period once they are published. It will be a monumental undertaking and the volumes of data collected will be mind-boggling. Amazon may need to add an entire data center just to handle the collection and processing of the data. After this effort, putting a man on Mars will be a walk in the park.


The bulls ran for cover this week. The prior week bullish sentiment rose 5.6% but last week it declined -6%. Bearish sentiment surged 4.7%. Since the survey closes on Wednesday, the respondents reacted to the Apple earnings and the big drop on Wednesday. At the time they did not know about the coming declines on Thr/Fri. This means the survey next Wednesday could be really different as long as the market does not rebound on Monday.



An Apple employee was found in a conference room at the Infinite Loop campus with a fatal head wound and a firearm on Wednesday morning. The campus houses 16,000 Apple workers. The employee was discovered the morning after Apple reported earnings and shares crashed Wednesday morning. The death is thought to be a suicide and no names were released. You have to wonder if this had something to do with the crash in the stock. Had the individual leveraged everything in an option trade to bet on a potential rally only to be wiped out when the stock crashed instead? It would not be the first time or the last time for something like that to happen.


Amazon posted a whopping 5,421% rise in tablet sales from Q1-2015 at 40,000 to 2.2 million in Q1-2016 according to International Data Corporation (IDC). IDC said global tablet sales of all brands declined -14.7% from 46.4 million to 39.6 million in Q1. Sales of 2-in-1 tablets with a detachable keyboard saw triple digit sales increases to 4.9 million units. Microsoft was credited with creating that category but everyone is now competing in the space.


No more beer in Venezuela. The largest beer maker closed its four production plants on Friday because of inability to buy raw materials. Importers will only take dollars in exchange for their goods and the government has run out of dollars. Venezuela can print all the local currency it wants but it is worthless outside of Venezuela. In fact, it is worthless inside Venezuela. The Empresas Polar plants make 80% of the beer consumed in Venezuela. President Maduro warned Polar it would seize any plants halted by private companies and hand them over to the workers. He called it a crime against production.

However, even if he did turn them over to the workers he still does not have any dollars to pay for the raw materials to make beer. Venezuela continues to circle the drain and the citizens are reaching the point where they are going to revolt. It is only a matter of time. Analysts believe oil production will stop soon because the government cannot pay the workers or buy the materials to drill new wells or pay for the services required to keep the old wells running. Crude oil exports is the only form of cash still flowing to the government and that is about to come to an abrupt halt.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"We aren't addicted to oil, but our cars are."

James Woolsey


 


Index Wrap

Central Banks Sway the Markets

by Keene Little

Click here to email Keene Little
Stocks markets around the world are central-bank driven (not fundamentals and may would argue not by anything else) and this past week we heard from both the Federal Reserve and Bank of Japan. Both are essentially on hold and the market is not entirely happy with that stance.

Week's Indexes


Review of Major Stock Indexes

As can be seen in the table above, just about all sectors suffered a loss in the past week. Utilities, a defensive sector, did well and finished +2.1%. Oil service did well with the price of oil continuing to climb higher (+5% for the week and nearly +20% for the year). The metals and commodities also did well, helped some by the US dollar's decline.

The techs were hammered this past week (about -3%), thanks in large part to biotechs (-5.9%) and the SOX (-3.5%), and they also finished in the red for the month of April. The blue chips finished the weak lower but were marginally positive for the month. Transports also struggled more than the blue chips, down -2.7% for the week and -0.9% for the month, which is a reflection of higher energy prices and slowing economic conditions.

This past week the stock market struggled with more economic numbers that indicate more trouble ahead. Some of the reports were decent, such as pending home sales, while others were not, such as housing starts and permits, durable goods orders, personal spending and Chicago PMI (it dropped to barely above contraction at 50.4). The deteriorating economic numbers is what prompted the Fed, with Wednesday's FOMC announcement, to not only hold rates steady but to also indicate they might not be able to raise rates in June either. Their dovish comments helped the market rally Wednesday afternoon but then the Bank of Japan (BOJ) torpedoed the market on Thursday.

I think it's important what happens to the Japanese market, reflected with the Nikkei 225 stock market index, because it's a reflection of global sentiment. As one of the weaker countries, financially speaking (not to dismiss the weakness in many of the EU countries), they're one of the leading market indicators because they've been out in front of the central banks in "helping" their economies. They have suffered pretty much continual recessions since they peaked in the late 1980s and unfortunately the Japanese experiment is now being followed by the U.S. and Europe. Japan is closer to the end game than we are but what happens with them will be instructive and therefore part of my discussion this weekend.

The markets had been anticipating the BOJ would implement more QE with their announcement on Thursday but instead they decided to do nothing. And nothing is bad for a market that is totally dependent on central banks doing something more. Most everyone expected the BOJ to increase their QE through the purchase of ETFs (essentially buying more stocks). The BOJ already buys stocks and all of Japan's government bonds (by simply creating the money out of thin air to do so), which has resulted in no market for Japanese government bonds -- there's only one buyer and they can therefore keep interest rates low (or negative) even while the government heads further into insolvency.

Japan is already technically bankrupt with no hope of ever being able to pay down their debt. As John Mauldin has said, "Japan is a bug in search of a windshield," but typically the bond market forces companies/governments into bankruptcy by not buying their bonds and/or driving yields much higher to compensate for the higher risk (until the company/country can no longer afford to pay the interest rates). In this case there is not a normal Japanese government bond market to force Japan into bankruptcy since the BOJ simply prints more money to keep things going (for now). They've also been purchasing stocks but have been promising to do more and therefore their decision to Not do more buying was a shock to the system. So by not adding to their already significant QE program traders saw that as a failure to help the market, I mean economy.

The Nikkei 225 index dropped nearly 1000 points (about -5%) into its low on Thursday (their market was closed on Friday) and the sharp drop could lead to the next leg down if the bounce off the February low is an a-b-c correction to its decline from last year's high. On the chart below the NIKK is the red line and the black line is SPX. Notice how closely the indexes have correlated over the years and how SPX met back up with NIKK at the 2015 highs after SPX charged ahead in 2014. The NIKK caught up in early 2015 after the BOJ started supporting their market with more QE, but that stopped helping their market after the mid-2015 highs. Now note the spread since February -- either the NIKK has some serious catching up to do or SPX has some serious correcting to do. While SPX tests its November-December 2015 highs the NIKK is not even close to doing the same. My bet is SPX is way out of whack with reality and has a serious correction coming, especially if NIKK drops below its April low near 15750 (which would leave a confirmed a-b-c bounce correction to the decline instead of something more bullish). Keep watching NIKK for clues for SPX.

Nikkei 225 index vs. S&P 500 index, 2013-present

Currently we have the three primary central banks -- the Fed, ECB and BOJ-- holding their current programs but not adding to them as they assess the results of their experiments (everything they're doing is one grand financial experiment). Not adding more stimulus is as good as taking it away as far as the markets are concerned. Paradoxically, not getting higher prices will drive buyers away and higher prices needs more liquidity, which is provided by more stimulus from the central banks. You can see how they're stuck between a rock and a hard place.

The U.S. stock market briefly rallied Wednesday afternoon only because it felt the Fed was forced to hold back on further rate increases. Never mind it's because the global economies are slowing, corporate revenues are slowing and earnings are in decline, and consumer spending is slowing. All of those things tell us the market should be in decline but hope for more central bank assistance continues to push the market higher. With the central banks going on hold (for now) it has the markets now worried, especially as we approach the season starting with "sell in May and go away."


A Look At the Charts


S&P 100, OEX, Weekly chart

At its April 20th high OEX tapped its downtrend line from July-November 2015 and then started pulling back. Last week it broke its uptrend line from February through the April 12th low, which was the first sign that the leg up from February has completed. A longer-term view is shown with its weekly chart below and I've drawn a curve over price action since 2012 to show the rolling top pattern. This represents a slow-motion topping pattern, which is further confirmed with the bearish divergence on the weekly oscillators. This also follows the achievement last year of the price projection near 950 (actually about 3 points shy of it) for the completion of an A-B-C bounce off the 2009 low where the c-wave is 162% of the a-wave. The bearish wave count, rolling top and bearish divergence leads me to believe the next big move will be a drop below price-level support near 810 on its way to much lower lows in the coming years. But before that happens we might see price consolidate between the 810 and marginal lower highs for several more month.


S&P 100, OEX, Daily chart

The OEX daily chart below shows last week's breakdown from its up-channel off the February low. This follows the test of its July-November 2015 downtrend line on April 20th and the combination puts it on a sell signal that can only be negated with a rally above its April 20 high at 938.30. A bullish heads up would be a rally above Thursday's high at 929.55 since that would leave a confirmed 3-wave pullback. The next support level to watch, assuming it will drop lower, is its broken downtrend line from November-December 2015 and its 50-dma, both of which will soon cross near 905.

Key Levels for OEX:
-- bullish above 939
-- bearish below 903


S&P 500, SPX, Daily chart

On Monday SPX also broke below its uptrend line from February through its April 12th low (a common theme as you'll see on the rest of the charts), as well as dropping back below its July-November 2015 downtrend line, both near 2091 at the time, and then on Tuesday and Wednesday it back-tested its broken uptrend line. Thursday's selloff left a bearish kiss goodbye following the back-test, which put it on a sell signal and then on Friday it gapped down below its 20-dma. It found support at an uptrend line from March 24th, which fits as the bottom of an expanding triangle (shown on the chart) and this pattern fits as a topping pattern. It's possible there will be one more leg up inside this triangle, which from here would look like a blowoff top with a test of the May 2015 high near 2135. But I think that's a lower odds scenario and at most I'm looking for a consolidation on Monday, perhaps for a couple of days, and then lower.

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


S&P 500, SPX, 60-min chart

Looking at the daily chart above I can see the potential for a drop down to its 50-dma later this coming week, currently near 2033, followed by a bounce correction the following week and then a stronger decline into the end of May. But from a short-term perspective we don't yet have proof that the trend has turned down, which is why I'm showing the potential for another rally up to the 2135 area. At the moment we have a 3-wave pullback from the April 20 high, as can easily be seen on the 60-min chart below. It could be an a-b-c pullback which will now lead to a bigger bounce as part of a larger pullback pattern or it could lead to another rally leg to new highs. But if we see a choppy sideways consolidation (I've drawn a little sideways triangle as an example) followed by another leg down we'd then have a 5-wave move down from April 20, which is what the bears want to see since that would confirm a trend change to the downside. Until we get a 5-wave move down we do not have evidence from price that a trend change has happened and therefore both sides need to trade cautiously.

One thing that happened Friday afternoon, and which is a good example of what to watch for in this situation, is the price action following the Friday morning decline. The decline broke below the bottom of a down-channel created with a downtrend line through the first bounce (Wednesday) and the parallel line attached to the first low (Monday). Once this channel was broken to the downside it made it more bearish, especially with the drop below 2066 where the pullback from April 20th had two equal legs down (stopping there would have been a good setup for a reversal back up if it was just an a-b-c pullback). Friday's late-day bounce was held down by the 2066 projection and the bottom of the channel and that's bearish as long as it continues to hold as resistance. A 4th wave consolidation (the sideways triangle idea) would be a typically pattern if the trend is down. So any bounce on Monday that holds above 2066 would be the first bullish heads up for bears to get defensive. As I'll review for the techs, that's something we could see.


Dow Industrials, INDU, Daily chart

On Monday the Dow broke its uptrend line from February 24th (drawn from the 2nd wave through the 4th wave of the rally from February) and that tells me the leg up from February finished at the April 20 high at 18167. That high achieved the projection at 18110 for two equal legs up from August 2015, for a big A-B-C correction, as well as the top of a parallel up-channel for the A-B-C bounce correction. It's a good setup for at least a larger pullback before heading higher but the more bearish pattern suggests we've started the next leg down that will be much stronger than either the one into the August low or the February low.

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


Nasdaq-100, NDX, Daily chart

When NDX gapped down on Friday, April 22nd, it left a bearish island top reversal in its wake (it had gapped up on April 13th, ran sideways and then gapped down). NDX is now on a sell signal but it's also short-term oversold and finding support at its crossing uptrend lines (June 2010- November 2012 and March 2009 - August 2015), near 4345, which could lead to a stronger bounce correction before heading lower. The short-term pattern suggests a little lower first and then a larger bounce correction but the start of another rally to a much higher high can't be ruled out yet. While I believe that's the lower-odds scenario, it's a good time for bears to be a little defensive until support breaks. The QQQ chart at the end of this report shows another reason to get defensive if you're playing the short side.

Key Levels for NDX:
-- bullish above 4525
-- bearish below 4213


Nasdaq Composite, COMPQ, Daily chart

The Nasdaq looks the same as NDX with the strong breakdown below its uptrend line from February and Friday's close below its 50-dma, near 4784. But if the 50-dma holds as support and the Naz is able to climb back above Thursday morning's high near 4889 it would be a bullish heads up that it's either in a large consolidation pattern or new highs are coming. Above 4970 would confirm a bullish pattern. In the meantime, a choppy sideways consolidation near Friday's low would point lower so early-week price action should provide the clues needed to figure out what the larger pattern could be.

Key Levels for COMPQ:
-- bullish above 4970
-- bearish below 4780


Russell-2000, RUT, Daily chart

The RUT has been the stronger index since April 20th when the other indexes topped. The RUT chopped its way higher from there into Wednesday's high and then on Friday it joined the list of indexes that have broken their uptrend lines form February. But so far it's only a one-day break and it held support at its crossing 20- and 200-dma's and its broken downtrend line from June-December 2015, all near 1126. If that holds as support we could see a bounce at least back up to its broken uptrend line, near 1145 by Monday afternoon. However, not shown on the daily chart below, Friday's decline also broke a short-term shelf of support at 1132-1134 and managed to bounce back up to it Friday afternoon. If that's a back-test of S/R that's followed by a drop below 1126 on Monday it would keep the RUT on a sell signal. We should know fairly quickly which side wants the ball on Monday morning. But until the RUT can close above 1149, which is where its 50-week MA is currently located it remains on a weekly sell signal. The RUT hasn't been able to get back above its50-dma since dropping below it last August and it again held back last week's rally.

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


SPDR S&P 500 Trust, SPY, Daily chart

Last week I highlighted the fact that SPY was coming down after piercing the top of its BB and this was accompanied by a bearish divergence for MFI (highlighted on the chart), which was a bearish sign. Thursday it tried to hold the midline (20-dma) but Friday that support line broke (207.34) and now it looks like it could drop from here down to the bottom of its BB, currently at 203.29. By this chart we would not see a setup for a buy signal until we see volume spike above 180M (Friday's volume did spike on the selloff (bearish) but was 142M). MFI has not dropped yet to potential support near 50 so watch for this possible setup before thinking about buying the "dip."


Powershares QQQ Trust, QQQ, Daily chart

Unlike the SPY chart above, QQQ's chart below does show a potential buy setup for at least a bounce. The techs, and especially the NDX (QQQ), got hit hard this past week and that has QQQ quickly expanding its BB and pushing below it. Williams %R has dropped below -90 and volume has spiked above 50M, all of which has warned traders in the past to expect at least an oversold bounce correction, such as we saw back in November-December 2015. If QQQ bounced back up to its midline (20-dma), currently near 109, it would be about 3% rally and nice trade. I'm not saying it will happen from here but it's a buy setup and therefore a warning for bears right here. As mentioned on the NDX chart, I see the potential for a little bounce and then lower in the early part of the week before setting up a larger bounce correction (I think that's all we'll see) but again, bears have fair warning for at least the short term with the QQQ chart.


Summary

We have some good topping signals with bearish divergence for the indexes and the small selloff so far looks like it could lead to lower prices. But especially for the techs, short-term oversold could lead to at least a decent bounce in the coming week. We do not yet have confirmation from the price pattern that the uptrend has reversed into a downtrend but the early signals are there. This coming week will either confirm a trend change or confirm the uptrend is still intact.

The bears want to see a choppy consolidation over the next couple of days and then another leg down. That would likely lead to a higher bounce the following week but it would tell us the trend has reversed to the downside. But a rally back above Wednesday's highs would leave just a 3-wave corrective pullback and point higher. For the RUT it would be to new highs for its rally from February (the RUT is still a good sentiment indicator). For this reason I think we'll have a better answer from this week's price action

Trade safe, have a good week and good luck with your trading. This weekend's Index Wrap will be my final one but I'll still be writing the weekly Market Wraps (typically on Wednesday). If you have any questions, don't hesitate to email them to me. I usually get back in only a few hours at the most.

Keene H. Little, CMT

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


New Option Plays

Techs in the Tank

by Jim Brown

Click here to email Jim Brown

Editors Note:

Mellanox is an Apple supplier and things are not going well at Apple today. Even if Apple shares were to rebound the outlook for suppliers for Q2 is not good. Production has been cut by 30%. Mellanox shares are feeling the pain.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays



NEW DIRECTIONAL PUT PLAYS


MLNX - Mellanox Technologies -
Company Description

Mellanox is a fabless semiconductor company that designs, manufactures and sells interconnect products and solutions. Their solutions are used in storage, datacenters and clouds. Their Internet communications products handle communications up to 100Gbps. They are also an Apple supplier.

The reported an 11% rise in revenue to $196.8 million and earnings of 81 cents. Both beat analyst estimates for $192.5 million and 75 cents. However, guidance was not so good. They expect Q2 revenue in the range of $210-$215 million and missing estimates for $216.8 million.

The company just acquired EZchip Semiconductor and the CEO believes the deal will translate into "compelling value to current and future customers." However, increasing expenses, expected to rise 8-10% could put a crimp into profits.

With Apple iPhone sales in a slump any supplier is guilty by association. Shares have declined -$10 since earnings and are falling fast. Support is in the $38 range. With tech stocks suddenly in the dog house there is no reason for shares to rebound.

Buy June $43 put, currently $2.05, initial stop loss $46.35.




In Play Updates and Reviews

WMT, MCD, IBM, AAPL

by Jim Brown

Click here to email Jim Brown

Editors Note:

Those were the four weakest stocks on the Dow and accounted for about 50 points of the Dow's 57-point decline. The Dow finished +119 points off its lows thanks to short covering in the last 30 minutes of the session.

There was no overriding reason for the decline other than declines in Asia and a general negativity over earnings. While there were some outstanding results on Thursday night that produced large single stock gains the overall feeling about earnings was negative. Add in the weak Chicago PMI at 50.4 and the overall mood in the market was negative.

The Dow fell -176 points at the low and we were stopped out on the FedEx call position. We also got a bad fill on the QQQ put entry because there was no rebound on the Nasdaq at the open. Despite big gains on those individual Nasdaq stocks the index opened lower and kept going lower until noon.

The Dow came to rest on support at 17,750 after making a two week low. It definitely appears that we are in a topping pattern but it will take another couple weeks to know for sure. The support at 17,500 is the critical breaking point that will confirm a bigger decline if broken.



Current Portfolio




Current Position Changes


QQQ - Nasdaq 100 ETF

The long put position was entered at the open.


FDX - FedEx

The long call position was stopped at $163.75.


FL - Foot Locker

Close the long put position at the open.


UA - Under Armour

The long call recommendation has been cancelled.


ACN - Accenture

The long call position remains unopened until ACN trades at $113.25. *** NEW TRIGGER ***


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:

No specific news. ACN dropped to $112.40 and came to a dead stop. This level has been support since the spike higher in March. I am recommending we change the recommendation to the $115 call and the trigger to $113.25. That is just to make sure we are not buying a gap down open on Monday.

This position remains unopened until ACN trades at $113.25.

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 $113.25

Buy June $115 call, currently $2.05, initial stop loss $111.45


FDX - FedEx - Company Description

Comments:

Despite receiving unconditional approval from China to acquire TNT Express, shares dipped to a two-week low at $163.74 to stop us out by a PENNY. FDX rebounded to close near the high for the day.

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:

Closed 4/29/16: Long June $170 call @ $3.68, exit $2.21, -1.47 loss.


PVH - PVH Corp - Company Description

Comments:

No specific news. Down with the market but rebounded to close positive.

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 broke down after a Chinese company copied its logo and introduced a line of sports clothing that was very similar to UA designs. You have to love the Chinese urge to blatantly copy winning designs for their own purposes with no hint of remorse. I am cancelling the recommendation.

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.

Recommendation cancelled.


V - Visa - Company Description

Comments:

No specific news. This Dow component was down with the weak Dow.

Original Trade Description: April 27th.

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.

Position 4/28/16

Long June $80 call @ $1.58, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)


FL - Foot Locker - Company Description

Comments:

No specific news. We only got a minor decline. I am closing this position.

CLOSE POSITION

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, see portfolio graphic for stop loss.


QQQ - Nasdaq 100 ETF Description

Comments:

There was no bounce at the open on the Amazon, Linkeding, Expedia, Baidu gains overnight. We entered the position but because of the negativity we paid about 40 cents more for the option than the prior close. I still believe the Nasdaq will decline because the tech sector has been posting the most earnings disappointments. Tech stocks are the most over valued and now there is nothing to support that valuation. I did add a stop loss at $109.50 just in case.

Original Trade Description: April 28th.

The Powershares QQQ is an index tracking stock for the Nasdaq 100 Index ($NDX). The QQQ represents the 100 largest domestic and international nonfinancial companies listed on the Nasdaq Stock market based on market capitulation.

The Nasdaq 100 is expected to gap higher at the open on Friday. As with most opening gaps based on some post earnings activity there is a good chance the opening print is the high for the day. The shorts in those stocks that are gapping higher will cover and the buying interest will wane.

Amazon was up $75 in the afterhours session. Linkedin gained +8. Expedia gained +11 and Baidu +8. This should produce a decent opening bounce in the index.

However, the Nasdaq 100 close at 4,363 was the lowest close since March 11th. This is below support at 4,378 and suggests the index is breaking down.

I am recommending we buy puts on the QQQ at the open when the market gaps higher in anticipation of a drop in the $NDX back to 4,200.

Since I expect the index to gap higher I am recommending the at the money put. It should be a little cheaper at the open.

Position 4/19/16

Long June $106 put @ $2.63, see portfolio graphic for stop loss.


SPY - S&P 500 ETF - ETF Description

Comments:

The S&P fell back to 2,052 intraday before short covering at the close lifted it to 2,065. The S&P could be poised for a longer-term drop to 2,042 or even lower. This is definitely starting to look like a topping process. 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:

Twitter declined only slightly. Support at $14 is the next hurdle.

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, see portfolio graphic for stop loss.
Long June $16 put @ $1.45, see portfolio graphic for stop loss.
Net debit $3.52.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now