Option Investor
Newsletter

Daily Newsletter, Tuesday, 5/10/2016

Table of Contents

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

Market Wrap

Oil and Yen

by Jim Brown

Click here to email Jim Brown

Japan's finance minister warned the country would intervene in the currency market if the yen continued to rise. S&P futures spiked 10 points.

Market Statistics

The yen dropped sharply and a short squeeze was born. Crude prices shook off a drop to $43 and rebounded to close at $44.69 on worries over production outages in multiple countries. This caused energy stocks to soar as shorts covered and many rose more than 5%. Never short a dull market because you never know what headline will cause a short covering panic.

The surge in the overnight futures caused a massive short squeeze at the open that carried through until the close. After two weeks of declines a large number of short positions had been created ahead of the Sell in May cycle. Many of those positions were blown out this morning.

If you need further proof other than the Dow chart look at the Goldman chart below. Goldman had declined $10 in the prior six sessions and spiked $4 today on no news. The shorts that were built up during that decline were squeezed out on the spike.



Traders ignored a 7.6% intraday decline in steel in China and iron ore fell -6%. That does not sound like a growing economy. However, the Chinese consumer price index rose +2.3% for the third consecutive month led by food prices. The producer price index fell -3.4% and slightly less than the 4.3% decline in March. China is going to come back and haunt us but it was ignored on Tuesday.

On the U.S. economic front the NFIB Small Business survey rose for the first time in 2016. The headline number rose from the 2016 low of 92.6 to 93.6 and the highest level since December. However, the internal components were basically unchanged. The three categories that rose were plans to increase employment from 9 to 11, job openings from 25 to 29 and earnings trends from -22 to -19. Expectations for the economy to improve declined from -17 to -18, plans to raise prices fell from 17 to 16 and plans to raise compensation from 16 to 15. I thought it was interesting that respondents expect the economy to worsen but they are increasing employment.

The Job Openings and Labor Turnover Survey (JOLTS) showed the number of job openings rose from 3.7% in February to 3.9% in March. Job openings rose to 5.757 million but new hires declined from 5.5 million to 5.3 million. Separations declined from 5.16 to 5.06 million suggesting workers are content to stay in their current jobs. The JOLTS report is a lagging report for the March period and it was ignored.

Wholesale trade rose +0.1% for March after a -0.5% decline in February. This was the first gain since September. This was the first time in months that inventories did not decline and that suggests the inventory cycle has run its course and the manufacturing sector could rebound. Durable goods inventories declined -0.1% with nondurables rising +0.5%. Sales rose +0.7% with durables down -0.2% and nondurables up +1.6%. That is the first time sales have been up since October.

There is nothing material on the schedule for Wednesday with the April Retail Sales report on Friday the next big event. With the retailers all reporting earnings or lack thereof this week, that sales report could give us an earnings direction for Q2.


The Nikkei 225 rose +2.15% on the comments from the Japanese finance minister. Those were the strongest comments from an official since the BoJ failed to add additional stimulus several weeks ago and the yen has been rocketing higher. The drop in the yen on his comments helped lift the dollar to its fifth day of gains.




After the close on Monday The Gap (GPS) warned of slowing sales and guided lower on earnings. Shares fell -11% today and weighed on all the retailers. The Gap said same store sales fell -10 at Old Navy, -7% at Banana Republic, -4% at The Gap and -7% globally. With the majority of retailers reporting earnings later this week, it was not a good sign. Gap said earnings would be in the range of 31-32 cents compared to estimates for 44 cents.


L Brands warned on Thursday and shares are still falling. Several analysts have come out in favor of buying L Brands here but I would definitely wait until we see a bottom form and that may not happen until the other retailers report.


Allergan (AGN) shares spiked $11 after the company said it would buy back up to $10 billion in stock thanks to high drug sales. The company reported earnings of $3.04 that beat estimates for $2.99. Revenue rose 48% to $3.8 billion but missed estimates for $3.95 billion. That statistic drives me nuts. Revenue rose 48% but still missed analyst estimates. What are analysts thinking and why should a company be penalized for missing outrageous estimates? Fortunately, the stock buyback news helped push the stock higher.

Botox sales surged from $84 million to $637 million after the FDA approved it not only for wrinkles but for muscle spasms and bladder control. Allergan shares hit a two-year low on Thursday.


Stamps.com (STMP) ruined a string of impressive post earnings gains despite some really good numbers. The company reported earnings of $1.72 compared to estimates for 25 cents. The company raised full year guidance from $5.00-$5.50 to $6.00-$6.50. Shares spiked 17% in afterhours trading BUT gave it all back today. STMP has a habit of monster post earnings spikes but the gains from Monday after the close evaporated almost immediately this morning and ended the day with a $5 loss. There was no specific news that related to this decline. Once a trend is established traders will eventually bet against it. The options on STMP are extremely overpriced and it is next to impossible to trade them ahead of earnings.


Lumber Liquidators (LL) posted a loss of 29 cents compared to estimates for 28 cents. Revenue fell -10.2% to $233.5 million, which also missed estimates. Same store sales fell -13.9%. The CDC said in February that people buying laminate flooring from China were three times more likely to get cancer than it had calculated earlier. They originally said chemical levels in the flooring could cause as many as 9 deaths per 100,000 people. That estimate was updated to as many as 30 deaths per 100,000. Shares fell 8% on the earnings news.


Nokia (NOK) reported an 8% decline in network sales to $5.9 billion. Analysts were expecting $6.27 billion. Nokia said customers were holding off on purchases while the company digests the Alcatel-Lucent acquisition. The company bought Franco-American Alcatel-Lucent for $17.8 billion so it can compete with other network providers. Shares fell to a new low.


After the bell Dow component Disney reported earnings of $1.36 compared to estimates for $1.40. Revenue of $12.97 billion missed estimates for $13.19 billion. This was the first quarterly miss for Disney in five years. The company saw a slower than expected 4.5% increase in revenues from overseas theme parks after the terrorist attacks in Paris and Belgium. The revenue they did receive was reduced by the impact of the strong dollar.

Media network revenue of $5.793 billion missed estimates for $5.9 billion. The company said a calendar shift caused the majority of the weakness. In Q1 they only had one college football game compared to seven games in the year ago quarter.

Studio revenue was very strong with a 22% increase to $2.1 billion thanks to multiple blockbusters over the last six months and they have more to come.

Disney said it was dropping the Infinity game console business and would take a $147 million charge and lay off 300 workers. CEO Bob Iger said he had no plans to work past his previously announced retirement date in 2018. Analysts believe he would stay until a replacement is found if the board asks him to remain as CEO.

Disney shares declined from $106.60 to $100.92 in afterhours. As a Dow component that equates to about a 45 point headwind for the Dow on Wednesday.


Electronic Arts (EA) reported earnings of 50 cents that beat estimates for 42 cents. Revenue of $924 million beat estimates for $89 million. The company said the profits were driven by the Star Wars Battlefront game that has sold more than 14 million units. EA released multiple new games in the quarter including "Plants vs Zombies: Garden Warfare 2," "Unravel" and "EA Sports UFC 2." Shares spiked $5 in afterhours. Guidance for the current quarter was weak but the full year guidance was stronger.


The pox on retailers continued with Fossil (FOSL) reporting earnings of 20 cents that beat estimates for 14 cents. Revenue of $660 million fell -9% and missed estimates for $667 million. However, they warned that Q2 earnings would be 15 cents and full year earnings would now be $1.80-$2.80 compared to prior guidance for $2.80-$3.60. Analysts were expecting $3.03 and 58 cents in Q2. They blamed the fitness band craze and Apple Watch for increasing competition in the space. Shares fell -25% in afterhours.


Earnings for Wednesday are light with Jack in the Box and Macy's the most watched of the list. Thursday is retail day with Dillards, Nordstrom and Kohls with JC Penny on Friday.


Crude prices rebounded $1.21 in the regular session to $44.65 on worries the production cuts in Canada and elsewhere would actually eliminate the prior production surplus. Estimates for production cuts from Canada range from 280,000 bpd to 1.5 mbpd. Nigerian production is at a multiyear low at 1.7 mbpd because of attacks by MEND rebels. Columbian production is down -200,000 bpd and Libyan production is down to 300,000 bpd. Venezuelan production is falling because they cannot pay for workers or well services. While these concerns were lifting prices, traders were ignoring the new production coming online from Saudi Arabia at 350,000 bpd, Kuwait 250,000 bpd, etc. Iranian exports have risen to 2.8 mbpd from 700,000 under the sanctions. They are targeting 3.8 mbpd and the pre-sanction levels. Traders seem to fixate on one headline per day and today it was Canada and rising summer demand. May is the lowest demand month of the year and August is the highest. Demand will rise by 2.0 mbpd through August as Saudi Arabia burns an extra 1.0 mbpd to generate electricity during the summer months.

After the bell, the API inventory report for last week showed an inventory gain of 3.45 million barrels compared to estimates for a gain of 714,000. WTI turned slightly negative on the headline but it is the EIA number at 10:30 tomorrow morning that will drive prices on Wednesday. The CFTC said open interest on long futures contracts was at record highs. Nobody is left to buy oil.


Markets

The S&P exploded higher at the open on short covering. The index stalled at 2,080 for a couple hours before another surge of capitulation at the close pushed it above the light resistance from the prior Monday at 2,082.


The S&P has major resistance from 2,100 to 2,116 and it will take more than short covering to power the index through those levels at this point on the calendar. The current high close at 2,130 was made on May 21st last year after the index spent a week banging on the 2,130 level. The decline was not straight down but mostly sideways until the bottom fell out in August. This year there are far more events cluttering the headlines and the high close at 2,102 on April 21st could be the high for several more months. It will be interesting to see if there is any follow through to today's short squeeze. I am sure there are still some shorts in denial and expecting this rebound to fail. If we move higher that could produce some more short covering.

Key support remains 2,040 and key resistance 2,116.


The Dow came to a dead stop at key resistance at 17,925 but it did exceed that level in April to touch 18,167 and the top of the next resistance range. Key support is 17,500 and I doubt that will be seen this week. The 45-point Disney headwind is not really impacting the Dow futures overnight with only a -24 point decline. However, a lot of those gains in Dow components today are surely going to see some profit taking over the next couple of days. The $4 squeeze in Goldman Sachs on no news is just begging shorts to sell the rip. Same with IBM, Boeing and United Technologies.



The Nasdaq moved sharply higher with a 60 point gain to 4,809 and well over support at 4,750. However, the Nasdaq has a long way to go to retest the resistance from April at 4,960 and even farther to attempt a breakout over resistance at 5,160. The Nasdaq did not get any support today from the biotech sector with the index only slightly positive. That was the motive power for the Monday gain with the index rising 3%. Today it was up only .5% compared to 1.25% on the rest of the indexes.

This looks an awful lot like a normal oversold bounce and I will be very surprised if it continues significantly higher.



The Biotech Index rebounded only to the next resistance level over 3,000. This looks a lot like an ordinary oversold bounce and we could still retest 2,750.


The Russell 2000 rallied 10 points but it was only .94% compared to 1.25% on the big cap indexes. The underperformance suggests the short covering in the small caps was less pronounced and could easily fade. The bounce off 1,100 came from the right level but it needs to exceed 1,150 before it will garner any respect.


Historically a big short squeeze like we saw today, will fail over the next 48 hours. However, on rare occasions a big short squeeze is actually the start of a major rally that can run for weeks. While I do not expect that this week, it is always possible. The volume today was anemic at 6.6 billion shares and actually less than Monday's 6.8 billion. The recent down days like we saw last week came on 7.7 to 8.9 billion shares. Follow the volume. The days with the highest volume represent the correct direction.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 

If you like the market commentary 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

 


New Option Plays

Direction Unknown

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big short squeeze lost traction at critical resistance. The S&P is facing strong resistance at 2,100 and the Dow at 17,925 to 18,165. Both indexes have failed here recently. The short squeeze was an oversold bounce and it came on low volume of 6.6 billion shares. Today was the lowest volume since April 26th.

Volume dictates direction and a big move like we saw today on low volume shows no conviction. It suggests we will fail at resistance. I do not want to add new long plays only to have them roll over with the market if that failure occurs. I do not want to add new short plays just in case that short squeeze ignited a potential rally. We are already weighted with more bearish plays that will work if the markets fail at resistance. There is no need to add more today.



NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays



NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays




In Play Updates and Reviews

Monster Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

Shorts playing the Sell in May cycle were caught off guard and a monster short squeeze was born. The Dow exploded out of the gate this morning after the S&P futures rose 11 points overnight on the drop in the Japanese yen and comments from the finance minister saying the BoJ would not hesitate to intervene in the currency markets if the yen continued rising. This knocked the yen down nearly 1$ and the Japanese market gained 2.15%.

The path of oil also reversed from a slide to $43 to rally to $44.65 on worries about production outages in multiple countries. This lifted energy stocks with some rising over 5% on short covering.

The Dow rebounded 222 points to close at 17,928 and right on critical resistance. After the bell Dow component Disney reported earnings that missed estimates and the stock is down more than $7 in afterhours. That equates to about 50 Dow points so the index should open lower in the morning.

The spike in the Nasdaq knocked us out of the QQQ short position for a minor loss. The short squeeze was felt in all our put positions with every stock gaining.

With the Dow stopping right on critical resistance it will take a new headline to overcome the Disney results and push through to the next level at 18,110.



Current Portfolio




Current Position Changes


QQQ - Nasdaq 100 ETF

The long put position was stopped out with a trade at $106.50.


SWKS - Skyworks Solutions

The long put position was opened with a trade at $64.15.


CP - Canadian Pacific

The long put position was opened at $137.19.


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:

Named by Adobe as 2015 Marketing Cloud Partner of the Year. ACN broke out to a new high.

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:

No specific news. The earnings warnings from the Gap and L Brands are holding Skechers down. It could be a rough week with the rest of the retail earnings ahead.

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.

Position 5/9/16 with a SKX trade at $32.25:

Long July $35 call @ $1.00. No initial stop loss.



BEARISH Play Updates (Alpha by Symbol)


CAVM - Cavium Ind - Company Description

Comments:

No specific news. Minor rebound in a short covering 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. See portfolio graphic for stop loss.


CP - Canadian pacific Railway - Company Description

Comments:

Minor rebound as shorts covered early in the session but CP shares faded into the close. No change in the outlook.

Original Trade Description: May 9th.

Canadian Pacific is a transcontinental railroad in Canada and the USA. It transports bulk commodities including grain, coal, fertilizer, crude oil and refined products, lumber and minerals. They operate about 12,500 miles of track across Canada and the Northern and Midwest USA.

The fires have knocked more than one million barrels per day of production offline. Every day another operator announces a shutdown because the fire is approaching, employees are evacuating their homes or the roads and utilities are shutting down.

The actual oil facilities are relatively fire proof. They are engineered to avoid that danger. However, they cannot run without employees and more than 100,000 people have been evacuated from the area. Nearly 2,000 homes and businesses have been destroyed. The water is undrinkable and there is no gas or electric service. Roads are closed and facilities have been shutdown.

When the fire burns out and the workers come home, they may not have a home left standing. That means they are going to be out of work for weeks trying to relocate their families. The local governments are not going to let people back into existing homes because of the lack of water, gas, sewage, electricity, etc. This is going to be a long-term problem.

It could take weeks or even months to reopen the oil sands facilities because of the lack of electricity. The transmission lines have been destroyed. In some areas the towers have melted. The oil sands cannot operate without electricity. Pipelines, pumping stations, etc will also be offline until the electricity returns.

If production is going to be offline for weeks or even months there will be a lot less crude oil moved by train. With the entire province in turmoil there will be all manner of delays and trains carrying other commodities could be halted or severely delayed.

CP depends on crude oil, refined products, coal, lumber and grain for the majority of its revenue. I foresee weeks of delays and significantly lower railroad traffic. Shares are already declining on the news but I expect them to decline a lot further as investors begin to factor in the loss to earnings in Q2.

Earnings July 20th.

Position 5/10/16:

Long June $130 put @ $2.95, initial stop loss $142.50


FSLR - First Solar - Company Description

Comments:

Short covering in a rebound market. Canadian Solar reports earnings on Wednesday. That could further depress FSLR.

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.


QQQ - Nasdaq 100 ETF Description

Comments:

The short squeeze on the Nasdaq stopped us out at $106.50 for a minor loss of 57 cents. The Nasdaq 100 was up +61 points.

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

Closed 5/10/16: Long June $106 put @ $2.63, exit $2.06, -.57.


SPY - S&P 500 ETF - ETF Description

Comments:

Major spike in the S&P to 2,085. That is the upper end of the first resistance band and a good place to fail.

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.


SWKS - Skyworks Solutions - Company Description

Comments:

Very minor gain of 7 cents suggests SWKS shorts are not in any hurry to cover.

Original Trade Description: May 7th.

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.


TWTR - Twitter - Company Description

Comments:

Twitter rebounded 43 cents because there are a lot of shorts in Twitter. This should be an entry point for new shorts. I believe we will see it break below $14.

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