Option Investor
Newsletter

Daily Newsletter, Wednesday, 5/4/2016

Table of Contents

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

Market Wrap

Data, Earnings Deflate Market

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Sluggish data and soft earnings weighed on the market today, NFP and unemployment are still ahead. Today's reports, both earnings and economic, did little to alleviate concerns. Earnings remain mixed but generally OK, if slightly better than a -8% decline for the S&P 500 is OK. Economic remains positive in the long term but shows slowing and weakness in the near.

Selling started in Asia although trading in the region was mixed. The Japanese Nikkei fell more than -3%, again, driven on floundering economics and lack of faith in the BOJ but the Chinese indices fell less than -1%. European indices tried to move higher in early trading but were overcome by negative sentiment sparked by weakness in Asia and poor earnings. By the end of the day they were in negative territory with losses in the range of -1%.

Market Statistics

Futures trading indicated a near -0.75% drop for most US indices as the early session began. Trading remained near the low of the session going into economic release at 8:30AM and held that level afterward and into the opening bell. The indices posted a large drop as soon as the bell sounded, the S&P 500 shedding a half percent in the first two minutes of trading. Momentum was strong the first 15 minutes of the day and drove the indices down to the early low, just shy of -1% for the broad market.

By 9:15AM an early bottom had been reached, a small rebound recouped about half of the initial losses and then more data at 10AM. ISM Services and Factory Orders were better than expected but not enough to recover the remainder of the day's loss. The market did move higher after the release but the move was choppy and did not last long. By 11:30 the market was back at the lows of the day, bounced again and then moved back to retest the lows again by 1PM. Afternoon trading was more of the same chop, below the mid point of the day's range, leaving the indices near the lows at the closing bell.

Economic Calendar

The Economy

The first release today, Mortgage Applications, shows that applications for new mortgages fell by -3.4% from last week. This is due in part to a slight uptick in interest rates. The rate for a 30 year fixed is now 3.87%, up 2 bps from last week. This week's is evidence of slowing in the housing market, which remains steady over the long term. Mortgage apps are up 0.4% year over year.

ADP Employment released their monthly employment report this morning at 8:15AM. According to them the pace of job creation slowed in April, contrary to the jobless claims data. ADP job creation ran at 156,000, short of the 195,000 expected, and the smallest increase in over a year. Within the report small business led with 93,000 new jobs, large business lagged by creating only 24,000 jobs. Services led with an addition of 166,000 offset by declines in goods producing and manufacturing. Construction added 14,000 new jobs.

Productivity and Labor Cost preliminary reports for the first quarter suggest that growth may have been weaker than the 0.5% estimate we received two weeks ago. First quarter productivity fell by -1.0%, more than expected. Increases in output were offset by hours worked and wages paid. On a year over year basis productivity is positive, up 0.6%. Labor costs rose by 4.1%, 3% in hourly earnings offset by -1% productivity. On a trailing 12 month basis labor cost are up only 2.3%.


ISM Services and Factory Orders were released at 10AM, both better than expected. ISM services rose to 55.7 from 54.5 versus an expected 54.7. This is a 1 year high. Within the report Business Activity fell -1% to 59.8 but Employment and New Orders both rose, gaining about 3% each to hit 56.7 and 59.9 respectively.

Factory Orders came in at 1.1% versus an expected rise of 0.5%. Shipments rose 0.5%, inventory rose 0.2% and unfilled orders fell -0.1%. The real driver of orders was New Orders, which rose 0.8% mainly on transportation equipment.

The Trade Deficit was smaller than expected. It shrank 13.9% to -$40.44 billion.

The Dollar Index

The Dollar Index was able to rebound somewhat in today's action. The data was enough to put a bid in the dollar although job creation appears to have weakened. The index was able to gain about 0.36% but the move was not strong. The indicators are consistent with a near term bottom, divergent from the recent low and rolling over in the nearer term, so the move could continue. The index is well below the short term moving average so a reversion to it is certainly possible. The only thing to drive the dollar over the next few weeks will be data, until the next round of central bank meetings, so ranges may dominate trading. Today's data did little to change overall outlook; one area appears strong while another appears weak. Support is at $92.62, with possible upside target near $94.25.


The Oil Index

Oil prices tried to rally in the early part of the session but a larger than expected build of US inventories curbed gains. WTI had been trading over $44.50 when news that stockpiles had gained 2.8 million barrels hit the wires. This, along with recent increases in Saudi and Russian output, adds to curent supply imbalance regardless of outlook for next year. The news sent prices heading lower, erasing most of the gains, to leave WTI trading near $43.50.

The Oil Index fell more than -2% and below the 1,120 support line in today's action. This line is coincident with the short term moving average and the 61.8% retracement line so this break could become significant to near term direction. The indicators are moving lower in confirmation of the break and pointing to lower prices. Bearish MACD is rising and stochastic %D is falling below the upper signal line so it looks like this move could have strength. If the index remains below 1,120 a move lower becomes more likely, next support target is near 1,050.


The Gold Index

Gold fell in today's session, shedding about -01.35% in a choppy session. This is the third day of decline since hitting peak and consolidation or decline may continue in the short term. The dollar appears to have hit a bottom and this could lead to range bound trading for both it and gold. Data will be the major mover of this market for the next few weeks with resistance at $1300 and first target for support near $1275 should prices pull back further. A break above $1300, should one come, would be very bullish for gold and could take it to $1325.

The gold miners fell today as well, the miners ETF GDX falling nearly -5% compared to gold's -01.35%. This move helps confirm the top set three days ago but does not rule out further gains. The ETF may consolidate at this level and will likely retest resistance before making a full reversal, if it does. The miners are still tied to gold, and gold to the dollar, so today's move could easily be reversed by Friday's releases, if not other news before now and then. If the NFP is as weak as the ADP it is very possible the dollar will fall back to the low and send gold back to $1300.


In The News, Story Stocks and Earnings

Randgold Resources reported earnings today and may have had some impact on the miners in general. The company reported a miss but there is a silver lining, evidence of the impact of higher gold prices. The miss is due to a -11% decline in production caused by commissioning and technical issues in certain mines offset by a 19% increase in quarter over quarter profits, a 25% increase in year over year earnings attributable to a 9% increase in average gold prices and lower input costs. Regardless, investors were not pleased and sent shares sinking in pre-market trading. Shares fell more than -5% at the open and -11% by the close.


Shares of Priceline fell more than -10% after revenue, profits and guidance fall short of expectations. The company is hurting from adverse conditions in several regions due to political instability, terrorism and the Zika virus. Guidance for the next quarter is in a range between $11.60 and $12.50, -16% below the consensus. Late day trading saw some buyers step in, enough to create a hammer doji, but not enough to recover the day's losses.


Health insurer Humana reported better than expected earnings, $1.86 versus $1.81, and reaffirmed full year guidance. According to the company is seeing improvement in most areas of business but remains cautious on it exposure to the healthcare exchanges. Shares of the stock opened with a loss near -1% but regained more than half that during the day. Despite the recovery prices remain below the short term moving average which may prove to be resistance.


Tesla reported after the bell but shares of the stock were moving long before then. Shares were down in early trading on low expectations for earnings, then extended those losses on reports two executives were leaving due to problems with the Model X roll out. Shares of the stock had been down about -2% and then extended those losses on the mid-day news. After hours trading saw the stock recover all of the earlier loss and add another 4% after the report of earnings. The company's reported loss was -$0.57 per share, one penny less than consensus.


The Indices

The indices began the day in retreat, hit new lows almost immediately, tried to rally and then moved lower again. Today's action left the indices at or below support targets in many cases, and indicate the market is ready to move lower if given the right push. Today's action was led by the Dow Jones Transportation Average, about -0.90%. Today's action created a medium bodied black candle which set a new one month low and came to rest on the 7,760 support target. The indicators are both pointing to lower prices and this level has not been strong in the past so it looks like a dip below 7,760 is coming. This move could go all the way to 7,500 if the index closes below today's support level.


The next largest decline was posted by the tech heavy NASDAQ Composite which lost nearly -0.8%. Today's action brings the index below the 4,750 level, the upper shadow on the candle suggesting resistance at that level. The index is now at a 2 month low and indicated lower by both MACD and stochastic. Both indicators are in decline and now confirmed by the short term moving average which has begun to move lower. Next target for support is near 4,650.


The S&P 500 fell about -0.60% today, created a medium bodied black candle and came to rest on a support target. The indicators are both confirming the move to support and suggest it will continue to be tested although momentum is not yet strong. A break below support, near 2,050, could take the index down to 2,020 in the near term with targets below 2,000 in the short term.


The Dow Jones Industrial Average made the smallest decline, about -0.56%, and came to rest on potential support. Today's action broke below the short term moving average and hit the support target near 17,620 where sellers were halted. The indicators are bearish and moving lower, indicating lower prices or at least a testing of current support, so it looks like a touch to 17,500 is very possible. An outright break of 17,500 could take the index as low as the long term trend line near 17,250.


The market appears to be moving lower and may extend losses over the next two days. Neither the data nor the earnings are inspiring rally and the way things are going it's hard to believe outlook will improve any time soon. Earnings may be, in general, better than expected but they are still down more than -7% from last year with forward outlook in decline so better than expected is the only thing positive about them. Economic data shows long term growth is still in the economy but that growth is slowing, no reason to expect earnings to grow or the market to move higher. Tomorrow will see quite a few more earnings reports and a little bit of data but nothing as earth shaking as the NFP report due Friday.

The way I see it now, the economy and market are stuck between a rock and hard place. If the NFP is weak like the ADP it could drag the market to new lows on slow growth, if it better than expected it may raise the specter of rate hikes, and that could drag the market to new lows, if it is in the sweet spot it may not be enough to overcome declining earnings outlook and that could result in selling too. I remain cautious in the near term, anticipating a test of support in some form and waiting for the next bounce.

Until then, remember the trend!

Thomas Hughes


New Option Plays

We Could be Monstrously Big

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Skechers CFO said, "We are just scratching the surface, and no one knows how big we can be. We could be monstrously big." Let's hope he is right.


NEW DIRECTIONAL CALL PLAYS


SKX - Skechers -
Company Description

Skechers designs, develops, markets and distributes foorwear for men, women and children, and performance footwear for men and women under the Skechers GO brand. The company owns, operates of has franchised more than 872 stores internationally. They opened 78 stores in Q1 and plan on opening 160-165 more throughout the rest of 2016.

The company reported record earnings that rose from 37 cents to 63 cents for Q1 and easily beat the 43-cent estimate. Operating income rose 57.1%. Revenue surged 27.4% to $978.8 million and easily beat the estimates for $890 million. The company raised guidance for the current quarter to $875-$900 million.

Wholesale revenues rose 47.1% with an 8.5% increase in distributor sales and 23.2% increase in retail sales. Comparable same store sales rose 9.8%. Domestic retail sales rose 15.3% and international sales +59%. International same store sales rose 17.7%. To say that the company is doing everything right would be an understatement.

Earnings July 21st.

Shares split 3:1 in October just as a revenue miss for Q3 knocked the shares down 35% from $46 to $31. The stock went sideways for the last six months but has recently rebounded to resistance at $35. The strong earnings spiked the stock to that level and it has traded sideways for the last week as it consolidated those gains. In the last two days of market weakness shares lost $1 and were actually positive on Wednesday. I believe we are going to see a breakout to a six-month high.

I know it is strange to recommend a bullish position in a negative market but the lack of a market related decline in SKX suggests they will surge higher if the market were to turn positive.

I am going to recommend a slightly longer option on this position so the premium will not decay as fast if the market continues to be weak.

Also, because we are in a negative market I am going to put an entry trigger on the position. I do not want to recommend a bullish position and have the market gap down -100 points on Thursday. If SKX does not rebound to hit the entry point we lose nothing.

With a SKX trade at $34.35

Buy July $35 call, currently $1.30. No initial stop loss.



NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Two out of Three

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow broke below 17,670 to a new low for the second decline in the last three days. The low for the day was 17,609 and a new three-week low. The Dow was down -141 points at the low but rebounded slightly at the close on short covering.

The positive economics with the ISM services beating expectations failed to support the market. The financial sector declined and there were no major names reporting earnings at the open to support the market.

The new low suggests the market has confirmed a move lower and the support at 17,500 may only be a bump in the road. Market sentiment has definitely turned negative and it will not take but a few more points before the selling should accelerate. Once under 17,500 it could be a long drop and it may happen in a hurry.

The volume was muted and the decline was calm but there was no material rebound at the close. We are experiencing the sell in May cycle and a lot of post earnings depression. I looked at a lot of charts today on companies that recently reported earnings and 85-90% were in decline despite beating estimates. This is normal for May.

I think we need to hold out bearish positions in anticipation of further declines. The risk here is something that causes another short squeeze like we saw on Monday.



Current Portfolio




Current Position Changes


V - Visa

The long call position was stopped out at $76.45.


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. Up in a weak market after being mentioned by a prominent hedge fund manager at the Sohn Conference.

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!

Position 5/2/16 with an ACN trade at $113.25

Long June $115 call @ $2.13, see portfolio graphic for stop loss.


PVH - PVH Corp - Company Description

Comments:

No specific news. Down slightly with the market but holding over support.

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.


V - Visa - Company Description

Comments:

No specific news. Visa down with the Dow. We were stopped out at $76.45 when support broke.

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

Closed 5/4/16: Long June $80 call @ $1.58, exit .95, -.63 loss.



BEARISH Play Updates (Alpha by Symbol)


FSLR - First Solar - Company Description

Comments:

Another big decline and break below support at $52. SunPower (SPWR) is expected to report a loss on Thursday and that could push the sector even lower.

Original Trade Description: May 2nd.

First Solar provided solar energy solutions worldwide through two segments. Those are components and systems. The component segment produces the actual solar modules that convert sunlight into energy. The systems segment produces the infrastructure to combine those panels into working systems that are sold to corporations, governments and utility companies.

The company reported earnings of $1.06 that beat estimates for 93 cents. Revenue of $848 million rose 3% but missed estimates for $958 million by a mile. The company blamed the shift to a lower priced module for the decline in revenue. Another factor was the decision by the government to extend the Investment Tax Credit (ITC) another five-years on solar installations. This caused some companies to postpone plans that were being rushed to take advantage of the ITC. Now they have time to think the plans through and make calm decisions. The number of urgent sales declined.

The company refined its guidance positively to revenue in the range of $3.8-$4.0 billion and earnings up from $4.00-$4.50 to $4.10-$4.50. The minor increase in guidance did not excite investors.

With the earnings the company also announced CEO Jim Hughes had resigned and CFO Alexander Bradley would be his interim replacement. Hughes had successfully rescued First Solar from a crisis in 2012 when polysilicon prices were crashing Today the company's panels are close to multi-crystalline. The sudden departure of a hero caused some investors to flee the stock.

Earnings August 2nd.

Shares have fallen significantly since the Thursday earnings but show no indications the drop is slowing. The entire solar sector is in distress since the SunEdison (SUNE) filed bankruptcy a couple weeks ago.

I expect the decline to continue with initial support at $52.50 but longer term support well below at $40. The transformational issues of the ITC extension and the CEO resignation could linger for several weeks.

Position 5/3/16

Long June $52.50 put @ $1.67, see portfolio graphic for stop loss.


MLNX - Mellanox Technologies - Company Description

Comments:

No specific news. The trend continued lower and is now targeting $37.

Original Trade Description: April 30th.

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.

Position 5/2/16

Long June $43 put @ $1.45, see portfolio graphic for stop loss.


QQQ - Nasdaq 100 ETF Description

Comments:

The Nasdaq declined for the second day on no specific news. The next support is $104. TSLA could provide lift on Thursday.

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 lost -12 points to push the SPY to another four-week low close. We need it to close under $204 to see the selling accelerate.

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 rebounded 6% after an analyst said the company does not have a user problem. They have a communications problem. Earnings rose 37% in Q1 and everyone is worry about users. They just need to continue working on their video product and increasing ad sales. Short covering caused the stock to spike $1 from a new low.

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.




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