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Daily Newsletter, Saturday, 5/7/2016

Table of Contents

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

Market Wrap

Fed Window Closed

by Jim Brown

Click here to email Jim Brown

The drop in the number of new jobs slammed shut the Fed's window for a June rate hike.

Market Statistics

Friday Statistics

The Fed is probably not going to admit it outright because that would take the volatility out of interest rates but they will have a tough time raising rates in June. The market initially took the bad news on jobs as bad news but then decided differently about 12:30 and another short squeeze began. The gains were not enough to bring the indexes back into positive territory for the week.

The April Nonfarm Payrolls showed a gain of +160,000 jobs compared to the initially reported 215,000 in March and estimates for 200,000. That is the slowest job creation since September. The March number was revised -7,000 lower to 208,000 and the February number was revised -12,000 lower to 233,000.

Analysts blamed the drop on a decline in the retail sector plus another 7,000 jobs lost in the energy/mining sector. The unemployment rate remained steady at 5.0% but the labor force participation rate fell from 63.0% to 62.8% with 562,000 people dropping out of the workforce. The broader U6 measure of unemployment declined slightly from 9.8% to 9.7%. Currently 94,044,000 people are unemployed. Private payrolls rose +171,000 and government jobs dropped -11,000.

Adding to the gains were professional/business services with 65,000 jobs, education and healthcare +54,000 and financial services added 20,000.

The energy/mining sector has now lost 192,000 jobs over the last 19 months. Manufacturing barely posted a gain of 4,000 jobs, mostly in auto production.

Average hourly earnings rose +0.3% to 2.5% for the trailing 12 months and suggests the labor market is firming if employers have to raise wages.

This follows the drop in the ADP Employment report from 200,000 in March to 156,000 in April. It also came after the weekly jobless claims spiked to the highest level in five weeks at 274,000. However, the prior week's 257,000 print was the lowest since December 8th, 1973. I believe this week's rise was just equalization in the reporting.

The Challenger Layoff report showed 65,141 layoffs were announced in April. That brings the year to date total to 250,061 and the highest since the financial crisis.

With all the payroll reports turning sharply lower, we should believe what they are saying. It is not just one report suddenly reversing course but all of them. This calls into question what the economy is doing in Q2 after only 0.5% growth in Q1.


After the jobs report, Goldman Sachs, Bank of America and Barclays changed their forecast on the next rate hike from June to September. However, I do not believe it will happen in September, only five weeks ahead of the election. The Fed is not political and tries to stay out of the political crossfire. Hiking rates that close to an election would bring both parties down on them. If a rate hike crashed the market ahead of the election, it would be even worse. If they pass on a June hike, the earliest they could hike safely would be December.

The economic calendar for next week is relatively flat. The only report that could shake up the market is the Retail Sales for April on Friday. After several retailers reported lower than expected April sales last week the outlook for the entire sector is not good. I believe the consensus estimate for a +0.5% rise in sales is wishful thinking.

We have a full calendar of Fed speakers and they are probably going to try and keep the idea of a potential June rate hike alive. This is their only hope for keeping some volatility in the market and keeping rates from collapsing.


The yield on the ten-year treasury dipped to 1.7% at the open on the weak jobs report. The yield rebounded to close positive at 1.779% but I cannot tell you why. Investors should have been buying bonds on Friday rather than selling them. The afternoon rebound correlated with the bounce in equities so maybe investors felt we had reached a support level on equities and it was time to buy. The dollar shot up at the same time.


The Dollar Index has rallied for the last four days after making a 16-month low on Tuesday morning. Gold had declined for three days until the jobs report spiked it back to the $1,300 range.



It was a relatively tame day for earnings. The biggest mover was Endo International (ENDP). The shares fell -39% after the company cut revenue guidance by 11% to around $4 billion and earnings guidance by 23% from $5.85-$6.20 to $4.50-$4.80. The problem was patent expirations on Voltaren Gel and increasing competition from generics. The company reported Q1 earnings of $1.08 that beat estimates for $1.05 but revenue of $963.5 million missed estimates. However, with the big guidance cut the actual earnings were immaterial.

The company announced layoffs of 740 workers and a restructuring to save $15 million a quarter by the end of 2017. Shares fell -39% and the worst decline since June 2002 when it dropped -46%.

The drop impacted Valeant as well since Endo was considered something of a "baby" Valeant with a roll up strategy to acquire drugs and raise the prices. Valeant shares lost -13% on the weak ENDP guidance. They were guilty by association.



Jack Dorsey's Square (SQ) was knocked for a 22% decline after reporting a Q1 loss of 14 cents compared to estimates for 9 cents. Revenue rose +51% to $379.2 million and beat estimates for $343.6 million. However, operating expenses rose +72% to $207 million. G&A costs rose from $28 million to $96 million because of a $50 million charge for a lawsuit against Robert Morley, who claims to be the creator of the Square card reader.

With Twitter disappointing on earnings last week, Dorsey is suffering from a 1-2 punch. His stock holdings declined about $355 million since April 27th. He still owns about 94 million shares of the combined companies so he is still doing ok.

He is also facing a share lockup expiration on Square on May 17th. About 64 million shares will be unlocked and the float will increase nearly three times. A lot of early investors including Visa, Starbucks, Sequoia Capital (5%) and Khosla Ventures (17%) will be able to sell their shares. Given the reduced guidance and rapid decline there may be a race to the exits.

According to the Wall Street Journal, a whopping 69.48% of the shares (14.6 million) are short as of March 15th. The public float is only 21.01 million shares. Source They only sold 27 million shares in the IPO and there are 295.9 million shares still restricted.


Activision Blizzard (ATVI) reported earnings of 23 cents that rose +44% after giving guidance in January for 11 cents. Analysts were expecting 13 cents. Revenue of $908 million easily beat estimates for $818 million. They guided for the current quarter to earnings of 38 cents and revenue of $1.38 billion, which was above estimates. More than 10 billion (with a B) hours were spent playing Activision Blizzard games in Q1 and 42 billion hours in the prior year. Monthly active users rose 10% to 55 million at Activision, 23% to 26 million at Blizzard and +3% to 463 million at King Digital. Cash on hand rose from $1.0 billion to $2.9 billion. Shares spiked more than 8% on the news.


Wynn Resorts (WYNN) reported operating earnings of $1.07 compared to estimates for 83 cents. Revenue was $997.7 million. Revenues ay Wynn Macau declined -14% to $608 million. The Macau property has been suffering for over two years because of a corruption crackdown in China that prevented many high rollers from making frequent trips to Macau because they did not want to be on the government radar. In April Macau gaming revenue declined -9.5%. That is actually a slower decline than we have seen in many months over the last two years. The company is preparing to open the $4 billion Wynn Palace in Q3 and that will make Wynn even more dependent on Macau where they already get 60% of their revenues. Shares posted only a minor gain on the earnings news.


Yelp (YELP) reported operating earnings of 8 cents on revenue of $158.6 million, a 34% increase. Analysts were expecting 3 cents on revenue of $155.6 million. They guided for Q2 revenue of $167-$171 million and 26% growth. They raised full year guidance slightly from $685-$700 million to $690-$702 million. Shares spiked 24% on the news.


Herbalife (HLF) made Bill Ackman's life a little more miserable on Friday. The company reported earnings of $1.36 compared to estimates for $1.07 and well over the prior guidance of $.97-$1.07 per share. Earnings were negatively impacted by a 32 cent hit from currency translation issues tied to Venezuela. Revenue rose +11% to $1.119 billion and well over prior guidance of 2.5% to 5.5% growth. They also raised full year guidance from $4.05-$4.50 to $4.40-$4.75.

The big news was a potential settlement with the government over its MLM business practices. Herbalife said they were getting close to a settlement that could require a payment of $200 million or less. Any settlement kills Ackman's chances for a big win on his short. He believes the company should get a cease and desist order from the FTC and be put out of business.

Shares spiked 9% to a two-year high on the earnings and settlement news. This means Ackman's $1 billion short took another major hit.


Berkshire Hathaway (BRK.A) reported operating earnings of $2,274 per share, down from $2,543 in the comparison quarter. Analysts were expecting $2,759 per share. The lower demand for coal caused a 25% decline in profits at BNSF to $784 million as volume declined -5.5%. BNSF revenue from industrial products fell -18% and coal fell -39%. Monster hailstorms in Texas caused Geico profits to fall 56% to $213 million. Berkshire ended the quarter with $58.34 billion in cash, down from $71.73 billion because of the acquisition of Precision Cast Parts. Berkshire also holds $106.4 billion in stock in companies like Wells Fargo and IBM. The earnings came after the bell on Friday and the stock did not trade after the results. Buffett had preannounced most of the numbers before the shareholder meeting so the big decline came on Tuesday.


According to FactSet 87% of the S&P-500 companies have reported as of the close on Friday. More than 71% have beaten earnings estimates and 53% have beaten on revenues. The blended earnings decline for Q1 is now -7.1% and the fourth consecutive quarter of declines. That has not happened since the financial crisis. On March 31st, the estimate was for an -8.7% decline. To date 55 S&P companies have issued negative guidance and 24 have issued positive guidance. The forward 12-month PE is 16.5 based on the current $124.64 EPS forecast.

Next week is the last week of the Q1 earnings cycle. Most of the major companies have already reported and the volume of releases drops off significantly after this week. Dow component Disney is the biggest report for the week after the bell on Tuesday. This is also retail week with Macys, Nordstrom, Dillards, Kohls, Fossil and JC Penny. Elon Musk's SolarCity will report on Monday. There have been some persistent rumors about him taking the company private but so far no real news.


Drug company Medivation (MDVN) rejected Sanofi's (SFY) $52.50 offer again and it may be getting some help from Pfizer and Amgen. Sanofi is trying to "bear hug" Medivation to the bargaining table by going public with the $52.50 offer. They are also hinting they could raise that offer if Medivation's board would agree to meet with them and disclose some financial information. The board rejected the offer to talk. Sanofi said it would go "hostile" if Medivation did not agree to talk. That means taking the offer directly to the shareholders in an effort to force a takeover.

Medivation is in the driver's seat. They have a major prostate drug on the market, which is expected to bring in $5.7 billion a year and more cancer drugs in the pipeline. If they were going to agree to be sold, there are plenty of other companies that would be eager bidders. Analysts believe the company is easily worth $70 a share rather than the $52.50 from Sanofi. Amgen (AMGN) and Pfizer (PFE) have reportedly made contact with Medivation to request talks to see if there is some common ground. Novartis (NVS) is also rumored to be interested. Pfizer just cancelled a $160 billion deal with Allergan and it has the cash and the desire to make a deal. Amgen has four of its top selling drugs going off patent and they need to buy some new drugs soon or revenue is going to plunge. AstraZeneca (AZN) has also been talking to Medivation for about 6 months.

It remains to be seen if Medivation will agree to be bought but should they make that decision there is likely to be a bidding war. Shares are already well over the $52.50 Sanofi offer but they could go higher.


A Bank of America analyst pointed out the massive outflows in equity funds and suggested selling the top five most widely held S&P stocks that are underperforming. Those are the ones that will be sold to cover redemption requests. The top 5 stock to sell according to her research are:

APA - Apache
TXN - Texas Instruments
NTAP - NetApp
ALXN - Alexion Pharmaceuticals
SCHW - Charles Schwab

Bank of America said equity fund outflows were the largest since the sharp market drop last August/September. Net outflows from equity funds nearly tripled last week to $16.9 billion and the largest since China's big currency devaluation crashed the global markets. Bond funds saw inflows of $5.6 billion and precious metal funds saw inflows rise 500% to $1.7 billion. High yield bond funds saw outflows of $2 billion while investment grade funds saw inflows of $5 billion and the largest in 13 months. Municipal bond funds saw their 33rd week of gains with $1 billion of inflows.

Clearly, a lot of investors are taking the sell in May cycle seriously with money flowing out of equities and into bonds.

Hulu, originally a service that offered on demand reruns of broadcast TV shows, is bulking up to deliver a more robust menu of programs. They are planning to stream entire broadcast and cable channels to consumers for a monthly fee. In effect, they are turning themselves into a cable content company that is delivered over the internet. The new "skinny bundle" service is expected to debut in early 2017 and cost about $40 a month. They will start out with content from Disney, Comcast NBCUniversal and 21st Century Fox. Those three companies all own a piece of Hulu. Hulu is doing this to compete with Sling TV at $20 a month and PlayStation Vue at $40 a month.

YouTube is also working on a paid subscription TV service called Unplugged, that would offer customers a bundle of cable TV channels streamed over the internet. The service is expected to start in early 2017 and would supply content from Comcast NBCUniversal, Viacom, 21st Century Fox and CBS. They already offer a subscription service on the web called YouTube Red that allows users to watch unlimited videos without commercial advertisements for $9.95 a month. I would expect Alphabet to spin off YouTube in the future in order to raise cash to pay for content.

Walmart announced it was hiring 9,000 additional greeters to its more than 5,000 locations. The new position will be called "customer host" and they will be wearing a yellow jacket so they will stand out. Their jobs will be helping customers and deterring shoplifting. They will be outfitted with radios to report suspicious customers and call for help. They will also spot check receipts against the items in a cart. At two stores in Arlington Texas, having employees check receipts reduced calls to police by 40% over six-months. At some stores, police are called as many as 4 times a day to arrest shoplifters. Walmart raised minimum hourly wages to $10 earlier this year. Shares are currently fighting resistance at $70.


The wildfires in Canada have cut production by up to 1.0 million bpd. While no oil facilities have been destroyed, they have been shutdown and the employees evacuated. It could be weeks before the facilities are restarted. On Saturday, another oil sands facility was being threatened and was likely shutdown. These facilities are extremely fire proof but the employees are not.

Once the fires are out and that could take weeks, the biggest problem to restarting production will be repairing electrical transmission lines that were destroyed in the fire. You cannot produce oil from oil sands without electricity. Secondly, those employees with homes destroyed will be absent as they pick through the charred remains in hopes of finding something undamaged and then setting up housekeeping in some new location.

Oil production could be hampered for weeks but I doubt it will remain at the same reduced level as we have today. It will just take weeks to return to pre fire production.

Oil prices moved sideways most of the week between $43 and $46. The outages from Canada impacted prices but rising production in the Middle East offset those concerns. Most traders realize that the Canadian shortfall will be brief. There is still no fundamental reason for oil prices to move higher.


Active rigs declined -5 to another record low at 415. Oil rigs declined -4 to 328 and gas rigs fell -1 to 86. Baker Hughes recently said active rigs could decline another 30% in Q2 before stabilizing in the second half of the year. Oil production in the U.S. has finally begun to decline sharply. Production fell -113,000 bpd to 8.825 million bpd last week and it is down -183,000 bpd over the last four weeks.


The bulls are in panic mode. Bullish sentiment declined another 5% last week to 22.3% while neutral sentiment rose 3.3% to 47.3%. Bearish sentiment only rose slightly by 1.7% to 30.3% so we have not turned into a bear market yet but the drop in bullish sentiment is telling. That 22.3% is the lowest level since the February 11th market bottom at 19.24%.


Markets

The S&P touched critical support on Friday at 2,040 and the rebound appeared about an hour later. Once traders realized the rebound was going to stick, a short squeeze began at 12:30 that power into the close. However, the short-term resistance at the 2,057 level was solid.

The support test was critical but it may not be over. This rebound was short covering ahead of the weekend event risk. The 2,040 level was a new three week low and each prior new low was met with minor rebounds that failed the following day. This is a typical market decline from a topping process. Many traders do not want to accept that the market is in decline and keep buying the dips only to be stopped out on the next decline.

If the S&P breaks below 2,040 it will likely break this pattern of minor rebounds. A break of that support will convince traders the decline is real and they will give up trying to buy the dips.

Resistance is now 2,057, 2,080 and 2,100. A break of support at 2,040 would target 2,020 and then 1,975.


The Dow benefitted from some sudden bursts of buying in prior decliners including IBM, BA, MMM and WMT. This suggests there were shorts being covered rather than a bunch of investors suddenly deciding to go long these stocks. In the Walmart chart below, does that one-day spike look like normal buying? Definitely not.


It was actually a pretty good day for the Dow with the majority of the components rebounding back into the green from the opening dip. That dip took the Dow down to 17,580 and very close to the 17500-17550 support from early April. That is the critical level that is equal to the 2,040 level on the S&P. A breakdown under 17,500 targets 17400 and then 17,135. Friday's dip was a new three week low.



The Nasdaq rebounded to just under prior support at 4,750 before losing traction. The opening drop to 4,684 was a low not seen since March 10th. It was clearly a breakdown of support and that support should now be resistance.

The Nasdaq was held back on Friday by the biotech sector, semiconductors and networking/security stocks.

The Nasdaq 100 was helped by gains in Amazon, Google and Priceline but failed to rebound over the prior support at 4,335.




The Russell 2000 found support at 1,100 and that is a critical level followed by 1,090 and then 1,065. The Russell rebound was definitely short covering because numerous small cap stocks had the same spike as the Walmart chart above. Support was hit and traders took profits.

With multiple levels of near term support, the Russell is not likely to simply crash lower. It may be a choppy decline but the odds are good it will be a decline.


There is nothing on the calendar for next week that "should" push the market up or down. The various Fed head speeches could cause some volatility and the Retail Sales could cause a market hiccup but that is not until Friday. The remaining earnings reporters are the equivalent of the horses at the end of a parade. You know why the horses are always last and they have a shovel brigade behind them. Some of these earnings reports will need the crew with shovels to clean up behind them.

There is not likely to be any sudden market rallies caused by earnings surprises. Only one Dow component reports and that is Disney on Tuesday. The earnings reports this week will be distractions rather than market movers.

In theory, this is a negative week on the market calendar as the sell in May followers accelerate their exits.


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.

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Random Thoughts


No Random Thoughts this weekend. I spent all day Friday in the ER with a family emergency.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Capitalism has been called a system of greed, yet it is the system that raised the standard of living of its poorest citizens to heights no collectivist system has ever begun to equal and no tribal gang can conceive of."

Ann Rand


 


Index Wrap

Critical Support Test

by Jim Brown

Click here to email Jim Brown

The S&P dipped to support at 2,040 on Friday and hung there for over an hour as traders battled for direction. When it became apparent the sellers were unable to press their advantage and break through that critical support level, the shorts gave up on the battle and began to cover ahead of the weekend event risk. A new short squeeze was born and the major indexes all closed positive. Unfortunately, they all closed under recent support/resistance.

The S&P closed at short-term resistance at 2,057 and just below stronger resistance at 2,063 and 2,080. Note that the oscillators are in full decline and the MACD separation is increasing. The odds of a break below that support at 2,040 are very good as we move closer to the end of May.


I used this chart previously to show the lack of movement at the top of a long advance. The moving averages have crossed for the fifth time since 1996 suggesting the long-term direction is down. However, the two year consolidation spread is 324 points and technically we should either see a 324 point breakout or a 324 point breakdown from this consolidation.

The recent volatility since August suggests a clear topping pattern that will resolve itself to the downside. Bear in mind this is a very long-term chart and it could take a long time for this to play out. I will continue to repost this chart as time passes.


The Dow nearly touched critical support at 17,500 on Friday before rebounding to close just under prior resistance/support at 17,750. The Dow is also clearly in decline and the 17,500 level is very important. A break below that level could produce some cascade selling since there is very little in terms of recent support.


The Nasdaq punched through support at 4,750, which is now resistance and touched a two month low. The Nasdaq Composite is targeting a return to support at 4,600 and with tech stocks declining due to earnings disappointments it should not take too long to get there.

Techs are seemingly over valued given the recent earnings cycle. Estimates are coming down and stocks are compressing. Only the top performers like Amazon are maintaining their gains.


The Russell 2000 failed to reach the top Fibonacci retracement at 1,162 and has declined sharply since that failure. The pause on Friday at support at 1,110 should only be temporary. There are multiple support levels at 1,190, 1,078 and 1,065 that should slow any decline into the summer doldrums.


The Biotech Index failed at resistance at roughly 3250 and just below the 150-day average, which has been resistance since last summer. The failure at resistance and the sharp decline has returned it to the short-term uptrend support at 2,925 but I doubt that will hold. I am targeting a return to the stronger support at 2,800. The MACD is in full decline and the RSI is approaching but not yet reached oversold. The 2,800 level would be a good rebound point.

The biotechs have been dragging the Nasdaq and the Russell 2000 lower for the last two weeks. If the biotechs were to firm the market would have a chance to rally.


The Russell 3000, the 3,000 largest stocks in the market, failed to reach resistance at 1,250 and is now threatening to break below support at 1,200. A support break here could produce cascade selling due to a lack of further near term support.


The broadest index is the Wilshire 5000 and note that it has come to a dead stop at 21,250 for the last quarter. This is a long-term chart and the MACD has right on the verge of turning negative. For long-term investors this is a market warning sign that should not be ignored. If the index closes below 20,000 it would be a strong sell signal.


The percentage of S&P stocks under the 200-day average has declined from 78% to 66%. The bloom is off the rose but it has not yet wilted. The average is moving higher as a result of the gains in March and April so this percentage will continue to decline unless the market rallies.


The percentage of stocks under the shorter 50-day average has fallen from a whopping 95% in late march to 63% today. Because this is a shorter average, it reacts faster and now that the March rebound has faded the stocks are starting to fall back below the average. This is a short-term warning that the momentum is fading.


On a positive note the rush into high-yield bonds has supported the equity market. The HYG normally leads equities and the last three quarters it has been negative. The rebound helped lift equities in March and April. We learned last week that $17 billion left equity funds and $2 billion flowed out of high-yield funds. If the HYG is about to roll over in an uncertain economy then is should drag equities lower.


The Baltic Dry Index has halted its rebound from a record low. The falling dollar lifted the price of commodities and that produced a spike in shipping rates. That was a temporary situation and now it will require additional demand from Asia to continue lifting rates. However, an onslaught of new freighters, ordered several years ago, are currently being delivered and with steel prices so weak it does not pay to scrap the older vessels. That means there too much capacity competing for what few cargoes there are to deliver. Without a resurgence in China the Baltic should continue to decline.


The commodity index rebounded because of the falling dollar. The dollar chart suggests a continued decline so commodities should at least stabilize until demand returns.


The Dollar Index appears poised to retrace its gains from two-years ago. This would be very positive for commodities and equities as well as earnings from international companies. The trend over the last four months is down and support has been broken. A move to a lower low in the coming days would be bullish for the markets.


The S&P Energy ETF (XLE) stalled just below resistance at $70. That is a major recovery but the price of oil has stagnated in the $44 range despite numerous production outages around the world including the 1.0 million barrels from Canada. It appears investors have begun to fade in their jubilation over the energy rebound. A falling dollar would do wonders here because it would push oil prices higher even if demand remains stagnant.


The longer-term market view is negative. The short term depends on headlines, the dollar, oil prices and the few remaining earnings reports. Typically, the end of May is negative and we have seen stocks sell off in anticipation of that decline. Numerous "high profile" analysts and hedge fund managers have warned of a coming crash. Whether that actually happens depends on a lot of factors including the Fed and the election cycle.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 


New Option Plays

More Component Problems

by Jim Brown

Click here to email Jim Brown

Editors Note:

Skyworks Solutions is an iPhone supplier, as well as for Samsung and Huawei phones. However, with smartphone sales slowing everywhere the chip maker has fallen on troubled times.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays



NEW DIRECTIONAL PUT PLAYS


SWKS - Skyworks Solutions -
Company Description

Skyworks designs, develops, manufacturers and markets proprietary semiconductor products. They are a component supplier to smartphone makers worldwide.

We all know about the decline in iPhone sales in Q1 and Apple's order to cut manufacturing by 30% in Q2 after a similar decline in Q1. iPhone sales are slowing but it is not just the iPhone. Chinese smartphone manufacturers are all struggling to increase sales in a saturated market. In China about 45% of the phones have now been upgraded to 4G and the industry is ramping up the transition to 5G in late 2017. That means the 2016 versions of new phones have a shortage of new features to justify their hefty prices.

In their earnings last week Skyworks reported operating earnings of $1.25 compared to estimates for $1.15. Revenue of $775.1 million rose only 1.7% from the year ago quarter and missed current estimates. The company guided to current quarter revenues of $750 million with earnings of $1.21. These were below analyst estimates.

Skyworks is a great company. They are well positioned for future growth, have many new products, $1.177 billion in cash and zero debt. They are paying a 26-cent dividend on June 2nd to holders on May 12th. Their problem is the slowing smartphone market.

We know they will have a good Q4 because of the Apple iPhone 7 but the next few weeks of summer doldrums could see them touch a new low on the iPhone sales cloud currently hanging over the sector.

Shares rebounded from the opening dip on Friday along with the market. I think we should use this bounce to initiate a new short term put position on Skyworks.

With a SWKS trade at $64.15

Buy June $62.50 put, currently $2.30, initial stop loss $67.50.




In Play Updates and Reviews

Surprise, Surprise.

by Jim Brown

Click here to email Jim Brown

Editors Note:

Friday's Nonfarm Payroll report showed a significant decline in new jobs and the market was surprised. The major indexes started with significant declines to support and then rebounded from that support around lunchtime. The afternoon uptick kicked into high gear as shorts began to cover and all the indexes ended the day in positive territory.

Goldman Sachs upgraded their jobs estimate the day before from 225,000 to 240,000 saying the bearish outlook was overdone. They were really surprised when new jobs declined to 160,000. Can you say "egg on their faces?"

The market initially thought the news was bad and sold off sharply but when support at 2,040 on the S&P held for more than an hour, the shorts suddenly decided it was better to take their profits than hold over the weekend when news from overseas could possibly trigger a positive open on Monday.

Each of these afternoon rebounds over the last couple of weeks has been erased the next day and Friday's low was a three week low.

The Dow dipped to just above strong support at 17,500 and then rebounded to close just under prior resistance at 17,750. Next week is typically a negative week on the market calendar and a break below 17,500 could see the selling accelerate.



Current Portfolio




Current Position Changes


CAVM - Cavium

The long put position was opened with a trade at $46.40.


SKH - Skechers

The long call position remains unopened until a trade at $32.25. *** 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. Up in a weak market again.

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.


SKX - Skechers - Company Description

Comments:

Skechers fell sharply at the open but rebounded strongly. We may have seen a bottom here. I lowered the entry trigger to $32.25.

Original Trade Description: May 4th.

Skechers designs, develops, markets and distributes footwear 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 $32.25, *** NEW TRIGGER ***

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



BEARISH Play Updates (Alpha by Symbol)


CAVM - Cavium Ind - Company Description

Comments:

Cavium dropped sharply at the open to a new low at $45.04 and $1.36 under our entry trigger at $46.40. Unfortunately, it also rebounded strongly with the market to close positive at $47.06. There was no news. This appears to be short covering since it rebounded exactly the same time as the market.

Original Trade Description: May 5th.

Cavium designs, develops and markets semiconductor processors for intelligent and secure networks in the U.S. and internationally. They offer wired and wireless networking, communications, storage, cloud, wireless, security, video and connected home and office applications. What that company description does not say is that Cavium designs chips for Apple iPhones and iPads.

Cavium recently reported earnings of 25 cents on revenue of $101.9 million. Analysts were expecting 25 cents and $102 million. That is about as "in line" as you can get. However, they warned that the current quarter would see revenue in the $105-$108 million range and earnings of 28-30 cents. Analysts were expecting $110.6 million and 32 cents.

On the call management said, "We expect the access and service provider markets to be flat to down due to some delays in volume infrastructure and Asia. We expect the enterprise and datacenter markets to be up despite a soft enterprise macro." Investors were not impressed with the lackluster guidance and the stock tanked.

Add in Apple guidance warning and Cavium began a long decline. I kept thinking we would see rebound but shares just keep sliding. I now believe we will see a new low as tech stocks weaken into summer.

Earnings July 27th.

I realize the stock looks oversold but I believe the Apple guidance warning is the gift that keeps on giving. The warning from multiple tech vendors on slowing enterprise buying is also a long-term warning.

Position 5/6/16 with a CAVM trade at $46.40

Long June $45 put @ $2.25. Initial stop loss $50.25


FSLR - First Solar - Company Description

Comments:

Only a minor decline but there was no rebound with the market.

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 @ $2.40, see portfolio graphic for stop loss.


MLNX - Mellanox Technologies - Company Description

Comments:

No specific news. Only a minor rebound so the shorts were definitely not racing to cover.

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 @ $2.00, see portfolio graphic for stop loss.


QQQ - Nasdaq 100 ETF Description

Comments:

Minor rebound on the Nasdaq after a drop at the open. This was more than likely short covering ahead of the weekend event risk.

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 touched support at 2,040 and it held, which it should have on the first test. The key will be what happens next week. If we touch it again the bulls may not be so happy.

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 barely moved on Friday after Square disappointed on earnings. The companion companies that share the same CEO are likely to both decline next week.

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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