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Newsletter

Daily Newsletter, Wednesday, 5/11/2016

Table of Contents

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

Market Wrap

Retailers Getting Hit

by Keene Little

Click here to email Keene Little
There's a battle going on for control of the market and since the end of April we've seen multiple multi-hundred-point moves for the Dow Industrials and yet we're still near the price from 8 days ago. Today's tweezer-top for the Dow tells us the bears might win this round. But the battle for control could still go either way.

Today's Market Stats

Tuesday's rally in the stock market was credited to the rally in oil but today oil rallied even stronger and yet the stock market gave back yesterday's rally. I suppose the blame should still go to oil since higher oil prices will stifle the economy's growth. Yesterday's rally actually could not be attributed to much and looked like short covering could have been a large part of it. The lower volume in the rally was also a warning sign and sure enough, the rally was given back today. But trading volume was essentially the same and therefore we have to wonder if the market is simply getting whacked around without any true sense of direction. Both sides have been battling for control since the April high and you would not have a difficult time arguing your case for why the bulls or the bears should lead the market from here.

The blame for today's selloff goes to the retailers. We'll get some reported numbers for retail sales this Friday but we're already getting earnings reports from some retailers that tell us not all is well in consumer land. Macy's (M) reported earnings that missed analysts' expectations and the company said their profits going forward would be lower. Slow foot traffic in the malls is taking its toll on retailers and Macy's got hit with a -15.2% decline. Walmart (WMT) dropped -3.6% and Target (TGT) dropped -5.4%. The retail ETF, XRT, lost -4.4% today. The mighty consumer is not consuming and we know that GDP is dependent on consumer spending (accounting for about 70% of GDP).

Interestingly, Macy's is a higher-end store that caters to people that are middle class and above, people with good salaries and typically plenty of job opportunities. Yet they too are pulling back on spending and snapping their wallets shut. We're seeing reports of more retailers closing their doors or declaring bankruptcy in order to reorganize and settle their debts.

The debt overhang is an endemic problem and very likely we're going to hear more and more companies needing to "reorganize" so that they can work their debt levels down. Debt reduction, by paying it down or declaring bankruptcy, is deflationary. The past several years have seen companies taking on enormous debt loads for such "useful" purposes as buying back stock in order to inflate their stock prices. This has supported the stock market (some say almost the entire rally off the 2009 low can be attributed to stock buybacks, thanks especially to cheap money from the Fed) and once that support is gone and companies start struggling to use decreasing earnings to service their debt it's going to be a double whammy for the stock market.

Today's debt problem is far worse than it was in 2007-2008 and the market is more distorted than ever. The correction that is needed, and should have happened last time but was stopped by the Fed, will be painful but like horrible-tasting medicine, it's needed to make us healthy. The Fed will keep experimenting on us but they will ultimately fail miserably. I only hope they don't crash the entire financial system in the process.

Could the slowdown in retail sales be the canary in the coal mine? It's a lot easier to see what happened in hindsight but if the mighty consumer is pulling back into its shell I think it's going to be very hard for companies to turn around their earnings decline, which has already been in progress for a few quarters. When the stock market will reflect this is anyone's guess but with the Fed being discredited as time goes on, plus the fact that they are simply running out of ideas that work even temporarily, the "recognition phase" for the market might not be far off.

In addition to the retail sector taking a hit today, biotechs, homebuilders (retail related) and transportation stocks (economy related) were the underperformers. Holding up better, and in the green for the day, were gold/silver (alternate currency), energy and utilities (defensive). The broader market indexes continue to hold up reasonably well but the price volatility tells us there's a battle near the highs and oftentimes this leads to a reversal. Key levels to the upside and downside are fairly close on the shorter-term charts so we should know soon which side will likely be the winning side. But on the weekly chart we have to stay aware of the possibility for some wild swings that might not mean much in the bigger pattern. For example, for the Dow there's a 1000-point range (17140-18170) that it could swing around inside and until one of those levels breaks we can't know for sure what the longer-term direction will be. There will of course be shorter-term signals but the larger pattern is up for grabs.


Dow Industrials, INDU, Weekly chart

At the moment I'm leaning short the market for at least a larger pullback correction to the rally from February. If the pullback creates a choppy overlapping pattern it would point to higher prices, even if it first drops below the 17140 key level. So far the pullback from April is not clear enough to determine whether it's impulsive or corrective and that keeps options for both sides on the table. A typical correct to the February-April rally would be about a 50% retracement, which would see the Dow down to 16835 but that would have to be evaluated as the price pattern develops further. Higher support is its 50-week MA, currently at 17235, and then price-level S/R at 17140. If it rallies back above its April 20th high at 18167 it would obviously be bullish but not if we're seeing bearish divergences on the daily chart. Weekly MACD has just crossed down and any further selling would create a stronger sell signal by this indicator.


Dow Industrials, INDU, Daily chart

The price action around the top of the Dow's shallow up-channel off the August 2015 low can be seen on the daily chart below. The April 20th high was a test of the top of the channel, which was followed by a pullback and then a test of it again on April 27th (when the RUT made a new high above its April 20th high), which was also a back-test of its broken uptrend line from February through the April 12th low. The pullback from that test was a good signal to get short against the day's high. The bounce off last Friday's low finished with yesterday's spike up to its broken 20-dma, near 17890 (it closed above it at 17928 as the shorts ran for cover, leaving the market vulnerable to today's gap down). Today's red candle completely reversed yesterday's white candle, leaving a tweezer top and bearish engulfing candlestick. But it held its new uptrend line from February through last Friday's low, closing on the line, so the bulls have a chance to re-reverse today's reversal. For a trade position I like the short side against yesterday's high near 17935).

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,580


Dow Industrials, INDU, 60-min chart

As can be seen on the Dow's 60-min chart, the pattern since the April 20th high can be viewed as either impulsive (leading diagonal 5-wave move down to the May 6th low) or as corrective (a-b-c down to April 29th, expanded flat a-b-c bounce up to yesterday). Both patterns are calling for a strong decline that will likely drop the Dow down to at least the 17400 area and the more bearish pattern calls for much lower than that. Once the pattern develops further I'll have a better idea whether to expect the bulls to step back in or if instead the bears have taken over. Below 17400 would more strongly support the bearish interpretation of the pattern. But a rally above yesterday's high would point to a rally at least up to the 18050 area, potentially much higher.


S&P 500, SPX, Daily chart

SPX is doing battle with two trend lines and two MAs at the moment. Yesterday it back-tested its downtrend line from July-November 2015, and today it was supported by its uptrend line from March 24 - April 7 (the bottom of a potential expanding triangle topping pattern), which it closed on today. Its 20-dma was tested yesterday while its 50-dma was support for last week's low, which is currently near 2054, about 10 points below the uptrend line. The expanding triangle suggests a high near 2180 later this month (hold onto your hats!) and if it can get above yesterday's high I'd entertain that idea as a real possibility. But another close below the uptrend line, meaning a close below today's, would suggest a further breakdown, in which case I would expect to see a drop down to at least the 2025 area quite possibly down to the 1992 support level in the coming week before consolidating and then dropping further. But this suggests a bearish opex week and I'm always a little gun shy on the short side with opex coming up.

Key Levels for SPX:
- bullish above 2112
- bearish below 2033


Nasdaq Composite, COMPQ, Daily chart

Yesterday's high for the Nasdaq was a back-test of its broken 50-dma, near 4814, and today's selloff leaves a bearish kiss goodbye. It has tough resistance with the three MAs (20-, 50- and 200-dma) coming together, currently at 4814-4844. If the bulls can power through that price range I'll tip my hat to them and join them. Of course then the bulls would have to deal with price-level S/R at 4920 and its downtrend line from December 2015 - April 2016, which is nearing the same 4920 level. Above 4970 I'd be a stronger believer in the upside but a drop below last Friday's low near 4684 would confirm the next leg down is in progress.

Key Levels for COMPQ:
- bullish above 4970
- bearish below 4684


Russell-2000, RUT, Daily chart

The RUT's pattern is not as clear as the others at the moment and I could argue either side comfortably. As long as it holds above its 50-dma, which was tested last Friday and is currently near 1109 (less than 6 points below today's close), it remains bullish inside a rising wedge pattern. The bottom of the pattern, which is the uptrend line from February through last Friday's low, is also on top of its 50-dma, which makes a break below 1109 even more important for the bears. But another rally leg up to the top of the wedge could see the 1190 area next week. So the question here is whether we're going to have a bullish or bearish opex week.

Key Levels for RUT:
- bullish above 1160
- bearish below 1101


10-year Yield, TNX, Daily chart

As I've mentioned many times before, I think it's important to watch the bond market even if you could care less about bonds. It's the bigger market, by far, and arguably much smarter than the stock market. It's much more in tune with global economic issues whereas the stock market is more interested in drug, I mean central bank money. Many loans are based on the 10-year yield (10-year + some added amount) and therefore watching the 10-year yield provides clues about the health of our economy. The better the economy is doing and the better the inflation picture (as long as it doesn't get too high), the higher the yields have to be in order to compete with other investments. The higher the yield the lower the bond price. While we won't always see an inverse correlation between bond prices and stock prices, it happens often enough to pay attention to. That means yields tend to trade directionally with stocks. But primarily, to me, the bond market gives us a picture of economic health, which is obviously one of the factors affecting stock prices (well, at least in normal times without the Fed holding its thumb on the "wealth effect" button).

TNX (10-year yield) has been consolidating sideways since the February low while the stock market rallied back up near its previous highs. Last week I showed the divergence between the Nikkei 224 index and SPX, pointing out the vulnerability for SPX based on their close correlation in the past and until the stock market rallied strong off the February low. We now have the same divergence between TNX and the stock market and TNX is at risk of breaking down from its sideways consolidation following the February low. The decline into the February low followed by a sideways consolidation should lead to another leg down. The only question is whether we'll see another leg up to complete a sideways triangle (light-red dashed line and labels) but at the moment it's threatening to break down sooner rather than later. It's another warning sign for the stock market if it breaks down from here. (My longer-term pattern continues to suggest TNX will drop below 1% before the bull market in bonds completes).


KBW Bank index, BKX, Daily chart

BKX had made it back up to its broken 200-dma at the end of April but the drop back down from it leaves a bearish kiss goodbye following the back-test. That was followed by a break back below its 20-dma a week ago and this morning's high was a back-test of it, which was then followed by this afternoon's selloff for another bearish kiss goodbye. There is still upside potential since BKX remains inside its up-channel for the rally from February, the bottom of which is currently near 65.50. There's also price-level S/R near 66.50 and its 50-dma near 66.10. The bearish pattern says we'll get a break of all those support levels but obviously the bears have a little work to do to make that happen.


Transportation Index, TRAN, Daily chart

Since March 18th, when the TRAN first broke its downtrend line from March - November 2015 it has struggled to hold above the line. It dropped back down below the line on March 23rd, leaving a failed breakout attempt in its wake, but then managed to break above it again on April 13th. That lasted until May 3rd when it again closed back below the line. Yesterday it bounced back up to the line, which is also where its 50-dma is located, currently near 7840, and that back-test was followed by today's little selloff, leaving a bearish kiss goodbye. Yesterday it also closed back above its 200-dma, near 7770, but was unable to hold above it. All of this is bearish price action and the expectation is for lower prices. The first bullish sign, maybe, would be a close above its 50-dma and downtrend line, as well as the 50% retracement, near 7856, of its decline from November 2014 into the January 2016 bottom. For now though, this looks ready to drop further. Note the oscillators as well -- the April high was a test of the March high with bearish divergence. Last week's low was a test of the April low but there was no bullish divergence. The combination suggests lower prices are coming.


U.S. Dollar contract, DX, Weekly chart

Last week's sharp selloff for the US$ and then the v-bottom reversal on May 3rd looks to have set a bottom for at least the moment. It looks like an impulsive move up into yesterday's high and now we could see a pullback correction. But the expectation is for a move back up to the top of its year-long consolidation range, near 100, before dropping back down one more time later this year to set up the next rally leg for the dollar. This has been my expectation since it topped out in March 2015 and until price tells me otherwise I'll stick with that expected pattern. The time to abandon the consolidation idea would be a drop below last week's low at 91.88.


Gold continuous contract, GC, Weekly chart

Following last week's high gold appears to be consolidating before pressing higher, in which case I would expect to see at least a test of its 200-week MA, near 1322. But the daily chart is showing bearish divergence since its February high and the weekly chart is showing bearish divergence against its March high. It could make it higher but if it does I think it will set up a shorting opportunity in the shiny metal. If today's bounce is followed by a drop below yesterdays, which was a test of its 20-dma, currently near 1261, we could see an acceleration in the selling, especially if it breaks trendline support near 1250 and then below the top of its down-channel, near 1240


Silver continuous contract, SI, Weekly chart

For the past 3 weeks silver has been flirting with the top of its down-channel from 2013, currently near 17.60. There were no bearish divergences at April 29th high and the short-term pattern supports the idea that we're going to get another rally leg. But with the top of the down-channel holding as resistance it's not a bet I'd be willing to make. It's overbought on the daily (but coming down) and weekly charts and that's a risky time to bet on the long side as long as resistance is holding. But if it can hold above 17.60 we could get another rally and maybe even up to its 200-week MA, currently at 20.58. I don't think we've seen the bottom for silver yet but the short-term pattern does support a little higher before at least a larger pullback.


Oil continuous contract, CL, Daily chart

Oil's short-term pattern suggests we're going to see it push a little higher and I like an upside target just shy of 51 (it would be more bullish above 51), where it would test its October 2015 high (50.92) and achieve two equal legs up from January (50.95). It would also reach the top of its rising wedge pattern if it gets up there before the end of May. But a drop below its April 13th high at 42.42 would suggest a deeper pullback/decline was underway.


Economic reports

Tomorrow's economic reports include unemployment claims data and import/export prices, followed by natural gas prices mid-morning. Nothing market moving there. Friday we'll get PPI numbers and retail sales, which could be market moving. The hard part, as always, is trying to interpret how the Fed might think about the numbers and therefore what the market might think about what the Fed thinks, in which case we'd all be thinking about why we even bother thinking, I think.


Conclusion

The price patterns for the stock indexes suggest we're going to see more selling in the coming week. The challenge for that projection is opex. It's been a common pattern to see the market pulled back into a low before opex, typically on Thursday but as early as Wednesday and as late as Monday, and then like letting a stretched rubber band go, the market shoots back up with the help of short covering as the buy programs hit. This has been such a reliable pattern you could almost do it blindly and just hang on through opex. It is for this reason I am very reluctant to make a prediction that the market will be lower a week from now.

However, ignoring the opex week pattern (ignore at your own risk though), the charts tell me we're heading lower into next week. I like the short side but I'm trailing stops to just above the lower highs, which makes my current stop just above yesterday's high (this morning's highs for the techs). There is potential for a larger decline than the one from April and that makes the risk:reward a good play on the short side. Just don't let it get away from you to the upside.

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

Keene H. Little, CMT

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


New Option Plays

Bullish and Bearish

by Jim Brown

Click here to email Jim Brown

Editors Note:

The obvious market direction is down but sometimes the unexpected occurs and big declines like we had today can be reversed just as quickly as the short squeeze from Tuesday. McCormick has been moving higher in the face of a weak market for the last three weeks. Harley Davidson has significant structural problems and a weak market could make their shares even weaker.


NEW DIRECTIONAL CALL PLAYS


MKC - McCormick & Co -
Company Description

McCormick & Company, Incorporated manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. It operates through two segments, Consumer and Industrial. The consumer segment offers spices, herbs, seasonings, and dessert items. It provides its products under the McCormick, Lawry's, Stubb's, and Club House brands in America. The company was founded in 1889.

This is truly a recession proof business. Everyone in the world uses spices in the food and you are not going to go without salt or pepper regardless of how poor you are. They reported earnings of 73 cents that beat estimates and revenue rose +2% to $1.03 billion. Cost of goods fell -1.6% and profit margins rose +1.8%. Cash on hand rose 36.7% and inventories declined. They guided for full year revenue growth of 4-6%, earnings growth of 6-8% and earnings of $3.68-$3.75. They pay $1.72 in annual dividends at 43 cents per quarter.

Earnings June 30th.

In mid April they acquired Botanical Foods Company based in Australia for $114 million. They provide packaged herbs and sales are growing at double digit rates. They export their products to 15 countries under the Gourmet Garden brand. McCormick expects the acquisition to be fully accretive to earnings in 2017.

The key point for this recommendation is that the shares are not going down despite the weak market over the last three weeks. Shares continue to climb despite the broader markets. However, they did decline 47 cents today after a four-week high yesterday. This will be a hedge against the market suddenly turning unexpectedly bullish. If shares move over Tuesday's high, I expect them to retest the April highs at $101.

Buy June $100 call, currently $1.05, no initial stop loss.



NEW DIRECTIONAL PUT PLAYS


HOG - Harley Davidson - Company Description

Harley Davidson manufactures cruiser and touring motorcycles. They design, manufacture and sell wholesale on-road Harley Davidson motorcycle as well as a line of motorcycle parts, accessories and general merchandise, motorcycle insurance and motorcycle maintenance contracts. The company was founded in 1903.

Harley has had a long and tortured career. Motorcycles are very cyclical. When economic times are tough the sales decline sharply. When times are good and the country is at full employment the sales rise sharply.

The problem is the price. The cost of motorcycles has rocketed higher over the last decade and bikes can cost $20,000 to $40,000. That is a lot of money for the blue collar worker that would be their biggest market if money was not a factor. Middle income families are just that, families and living expenses are high. With wages falling for the last 7 years it has caused a problem for sales of high-ticket items. High income jobs like those in the oil patch that allow for excess extra income have taken a serious hit with a loss of 192,000 jobs over the last two years. The U.S. accounted for 89% of global demand for Harley Davidson bikes.

In their last earnings report sales in the U.S. were declining and margins were shrinking. They suffered from the strong dollar impacting overseas sales, unfavorable product mix, meaning only the lower priced bikes were selling and increased manufacturing costs. Touring bikes, the high dollar bikes with the highest margins saw sales decline -0.8% while lower cost cruisers rose 15.1% and Sportster/street bikes rose +1.2%. Free cash flow is shrinking. Average revenue growth over the last 3 years has been 2.4% compared to 8.7% at competitors.

Debt is rising as they build new manufacturing plants and increasing competition from cheaper competitors is hurting sales.

Earnings July 19th.

Competitor Polaris (PII) has eaten into Harley sales with their new line of Indian motorcycles. They bought the iconic brand in 2011 and began introducing bikes to compete with Harley and sales are booming.

Analysts warned last month the shrinking cash flow and rising debt levels put the 2.9% dividend yield in danger. Shares have declined from $49.50 when they reported earnings to $45.60 today.

I am recommending a short term June $45 put. That gives us about three weeks to profit as the market weakens from now into early June. The next available strike is August and at $3, I would rather play with the short term June position.

Buy June $45 put, currently $1.62, initial stop loss $47.50.




In Play Updates and Reviews

Right Call

by Jim Brown

Click here to email Jim Brown

Editors Note:

I did not add new plays on Tuesday because there was a strong possibility the short squeeze on low volume was a head fake. I believe that was the right call. After rising +222 on Tuesday the Dow declined -217 today to give back almost 100% of Tuesday's gains. The S&P lost -20 points and the Nasdaq -50.

Resistance held to produce another lower high and we should now be on track for a lower low under 2,040 if the current trend holds.

The market typically declines into June and a dip under 2,040 should cement that decline. The retail sector is imploding as sales decline sharply. The rest of the sector reports earnings on Thursday and they are not likely to be positive. The retail sales for April will be out on Friday and I expect them to disappoint as well.

Apple shares declined back to $92.50 but Taiwan Semiconductor said just before the close that Apple has ordered production cuts for the June-December period on iPhone 7 components. That is not a good sign for Apple or the semiconductor sector. This was not widely reported in the press but it will eventually make it to the headlines.

A spike in oil prices, after the first major decline in inventories ahead of the summer demand season, helped to lift energy stocks or the market selloff would have been even worse.

The drop in the retail sector after the Macy's earnings, crushed Skechers. There are three more retailers reporting on Thursday and it could be ugly. There is no stop loss on the Skechers position because it was cheap and it is a July option.



Current Portfolio




Current Position Changes


No Position Changes


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. Down with the market.

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. Macy's earnings and guidance cut crashed the sector. It could be a rough week with the rest of the retail earnings on Thursday.

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 decline in a weak market. I lowered the stop loss to $48.75.

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 decline but the key here is that the rebound failed. 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:

Shares declined despite an earnings beat by Canadian Solar and 12% spike. This is a good sign for us.

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.


SPY - S&P 500 ETF - ETF Description

Comments:

Resistance failed as expected at $208.

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:

Small decline but there was news out just before the close that Apple has cut iPhone 7 component orders for the June-December period. That should weigh on the market on Thursday.

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.

Position 5/10/16 with a SWKS trade at $64.15

Long June $62.50 put @ $2.00, see portfolio graphic for stop loss.


TWTR - Twitter - Company Description

Comments:

Twitter was only down -4 cents but heavily sold stocks are sometimes bought in a weak market. Short interest rose 8.5 million shares to 63.7 million. Twitter averages 12 million per day. 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.




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