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Newsletter

Daily Newsletter, Wednesday, 5/18/2016

Table of Contents

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

Market Wrap

FOMC Minutes Spooks the Market

by Keene Little

Click here to email Keene Little
The stock market rallied off a brief low this morning and bounced into this afternoon's release of the FOMC minutes, which then spooked the market and it sold off sharply and broke this morning's lows. The bond market sold off all day in anticipation of a possible June rate hike.

Today's Market Stats

The market did not care about much today while it waited for the release of the FOMC minutes from last month's meeting and it appeared some were buying/covering shorts as the day progressed. But the bond market was selling off, driving yields back up, and that was a clue that the Fed's minutes could indicate a higher willingness to raise rates in June than had been verbally communicated to us last month. The Fed heads did in fact call for a June rate hike if the data continued to support it and recently we've seen some supporting data. Some recent economic improvements and higher-than-expected inflation data is prompting more to believe the Fed will take the opportunity to raise rates sooner rather than later so that they can "normalize" rates as soon as possible.

After the release of the minutes, at 14:00, Fed funds futures jumped to a 27% chance of a June rate hike (hardly what one would consider "locked in"), a rise from 16% before the minutes. Last week the futures indicated only a 4% chance so there's certainly been an increase in the expectation of a rate hike in the past week. Data into next week could reverse that so one week's data does not give us a trend that will necessarily hold into June's meeting.

A big challenge for the Fed is how to raise rates without killing the economy, which is already on life support. They've been pushing for years for people and businesses to borrow more money and spend it and many of these loans have rates tied to the 10-year Treasury Note. If they drive those rates higher it could create even more difficulty for all those borrowers. Most companies who have borrowed, usually by selling bonds at very low rates, used the money for stock buybacks. Several analysts attribute the rally from 2009 as almost solely a result of companies jacking up their own stock prices through share buybacks.

According to Yardeni Research, last year alone S&P 500 companies spent almost $1 trillion on buybacks and dividends, which is more than they earned in profits. This is more than they did in 2008-2009, which at the time led to a severe market selloff. These companies didn't invest the money into productive uses but instead spent it on supporting their stock prices. Paying back the borrowed money is becoming increasingly more difficult with reduced earnings and if the Fed raises rates it will cause companies to have to pay more to continue borrowing in order to pay their expenses and loans. This combined with a lack of spending on more stock buybacks will cause a loss of support for stock prices.

When you throw in all the personal debt, especially the auto loans which have reached bubble levels (thanks again to liar loans) and the huge increase in student loans (which can't be paid back because of the lack of good-paying jobs), we're sitting on a powder keg that could blow at any time. Raising rates only exacerbates the problem and yet the Fed wants to get it done so that they can "normalize" the rates. There's nothing normal about this time and that's why I think the Fed is trapped. They'll be damned if they do and damned if they don't.

Frankly the Fed will deserve all the damning coming to them for not knowing what the hell they're doing and only stealing from savers to enrich the rich. When the dam breaks this time, there will be nowhere for the Fed to hide. Unfortunately there will be a lot of pain to spread around but we'll need to get through it in order to get to the other side and back to health and a position from which to grow again (real growth, not the make-believe numbers we're getting now from companies). As traders we have an opportunity not only to protect ourselves but more importantly to make some money in a bear market and be in a position to do some buying at the bottom when most everyone else will have no money to do any buying. In fact, if played right (by being mostly in cash and trading some on the short side) we should have a buying opportunity of a lifetime at the end of the next bear market.

I'm going to start tonight's chart review with a top-down look at S&P 100 (OEX) since the patterns are fairly clean and should provide a good sense of direction with a break in one direction or the other.


S&P 100, OEX, Weekly chart

A few weeks ago I showed a weekly chart of OEX and the idea of a big rolling top pattern. The rally from October 2011, which fits as the c-wave of a big A-B-C bounce off the March 2009 low, started to run out of steam in 2014 and the result has been a slow topping and rollover. It's been 18 months where the market has essentially gone nowhere and the risk is that a decline could start to build up some strength once it does roll over.

We could see the OEX drop back down to price-level support near 810 and the bullish interpretation is that it's consolidating before heading higher. A break above the downtrend line from July 2015, which is where the rally into April stopped, is currently near 936 and it would be a bullish breakout above that level but if the rolling top pattern is correct we'll eventually see a drop below important price-level support near 810 (support since early 2014). The first thing the bulls need to do is hold support at its 50-week MA, near 898, a break of which would be the next sign of the bear.


S&P 100, OEX, Daily chart

The daily chart of OEX shows another support level that was tested with this afternoon's low -- the broken downtrend line from November-December 2015. OEX rallied above the downtrend line at the end of March, chopped around it for two weeks and then rallied up to its April 20th high. It then dropped back down for a back-test on May 6th and now again today. Usually a successful back-test, on May 6th, is not followed by another one so it's now questionable whether or not the downtrend line will hold as support. The next support level is price-level S/R near 895 and the bottom of an up-channel from January-February, near 898, which is also where its 50-week MA is located. Based on these levels the bears want to see OEX below 895 to start some serious selling.

The interesting thing about the up-channel from January is that it calls for another rally leg to complete a 5-wave move up. If the first leg of the rally, into the February 1st high, is the 1st wave, followed by the pullback into February 11th as the 2nd wave, then the February-April rally is the 3rd wave. Drawing a trend line from the 1st wave to the 3rd wave and then attaching a parallel line to the 2nd wave low (February 11th) gives us a parallel up-channel to help guide us. The bottom is often where the 4th wave correction will finish (approximately) and as you can see, OEX is now approaching the bottom of this channel, near 898. If we get another rally leg, for the 5th wave, and it starts from here, it projects up to 962 where it would equal the 1st wave. A lower projection, at 939, is where the 5th wave would equal 62% of the 1st wave and that would also result in a test of the April high and its downtrend line from July-November 2015 (where the rally into April stopped). A rally above its May 10th high, near 925, would indicate a new high/test of the high is coming.

Key Levels for SPX:
- bullish above 925
- bearish below 895


S&P 100, OEX, 120-min chart

Something that's true for most of the major indexes is a H&S top that has formed since the left shoulder in early April. This pattern has been discussed by other analysts and that's actually one of the reasons why it might not "work," but it's something to keep an eye on since many times they do in fact work. The OEX H&S top is shown on its 120-min chart below and the neckline runs from March through the May 6th low, which was broken today but recovered into the close. If the pattern gets follow through to the downside (right now it's not a confirmed break since the neckline is holding as of today's close) the price objective is down near 870. As noted on the chart, we now have 3 steepening downtrend lines since the April 20th high and steepening downtrend lines like this often lead to waterfall declines as the selling accelerates. That's not a prediction but it shows the risk for bulls. Two equal legs down from April 20th points to 890.83 so that's a level of interest if reached and then the next projection for the 2nd leg of the decline from April 20th is near 870, which is where the 2nd leg down from April equals 162% of the 1st leg down. That coincides very closely with the H&S price objective, which I'm sure is purely coincidental (wink).


S&P 500, SPX, Daily chart

SPX looks a lot like OEX, including the possible H&S topping pattern. A break below the neckline, near 2042, could usher in stronger selling. There's also price-level support near 2043 (the 2015 closing high is 2043.62), which has been getting hammered on since the May 6th low. The longer it gets hammered on the weaker it becomes but so far it's still holding, including again today with the bounce into the close, like yesterday. Someone big is supporting this level and it could be opex related (they want to be sure their short puts expire worthless this week). If 2043 does hold and we get another rally it's possible we're seeing a descending triangle playing out since the April high. As explained for OEX, it's possible this triangle is a 4th wave correction in the rally from January and it could lead to a rally to the 2175 area in June. Bears don't want to be caught short in that kind of move. But that means the bounce needs to start now since a further breakdown could lead to a drop to its H&S price objective near 1965 (near the 50% retracement of the February-April rally).

Key Levels for SPX:
- bullish above 2085
- bearish below 2039


Dow Industrials, INDU, Daily chart

The same parallel up-channel idea that was discussed with the OEX and SPX daily charts is shown on the Dow's chart below. The Dow has chopped its way down/over to the bottom of its up-channel, near 17530, which was broken intraday but recovered at the end of the day. It also came within 18 points of testing price-level support at 17400 (its March 24th low). Holding above 17400 keeps it potentially bullish and today's long-legged star doji could be the middle candle of a reversal pattern. A white candle for Thursday would be a bullish completion. However, I'd want to see the Dow above its broken 50-dma, near 16674, before turning bullish. That would also be a break of its downtrend line from May 10th and above today's high, all of which would be a stronger sign for the bulls.

For the bulls, the first upside target would be 18073, where the 5th wave of the rally from January would be 62% of the 1st wave, which would also be a test of its April highs and the top of a larger shallow parallel up-channel from August/September 2015 (bold blue line on the chart). The higher target, at 18478, is where the 5th wave would be equal to the 1st wave. That projection crosses the midline of its up-channel from January on June 2nd.

For the bears, the first downside target, if 17400 breaks, is price-level S/R and its 200-dma, both near 17140. Below that it would likely drop down to the next price-level S/R near 16500. It's an important time for the Dow right now and the bulls really need to step up to the plate. Many times a post-FOMC reaction gets reversed the next day and that's the move the bulls need here.

Key Levels for DOW:
- bullish above 17,935
- bearish below 17,400


Nasdaq Composite index, COMPQ, Daily chart

The Nasdaq is battling its uptrend line from February through the May 6th low, currently near 4750, which it back-tested today after breaking below it yesterday. It also tested, again, its downtrend line from April 20th, now near 4750. Following the sharp bounce off its May 6th low into the May 11th high it's been very choppy, which could indicate we'll get at least another leg up for its bounce pattern. In that case, two equal legs up points to 4832, slightly above the 50% retracement of its decline from April. A little below that level is a nest of MAs, with the 20-dma at 4792 and the 50- and 200-dma's near 4820. Its previous high on May 11th is at 4812 and based on all these I think it would be safe to say the Naz would be bullish above 4820 but until then it's looking vulnerable to more selling. A downside projection is near 4435 where it would test its uptrend line from October 2011 - November 2012.

Key Levels for COMPQ:
- bullish above 4820
- bearish below 4675


Russell-2000, RUT, Daily chart

If the H&S topping pattern is correct for the RUT as well, its neckline was broken yesterday and only back-tested today. Note also that its uptrend line from February through its May 6th low was broken last week and Monday's rally resulted in a back-test of the broken uptrend line, as well as its downtrend line from April 27th. This makes Monday's high near 1120 an important level for the bulls to recover. One thing I'm seeing for the indexes are MACD levels on daily and intraday charts that are below zero and staying below zero during the bounce attempts. This is bearish and as long as the series of lower highs continues to hold (the definition of a downtrend) I'd stay bearish.

Key Levels for RUT:
- bullish above 1129
- bearish below 1101


10-year Yield, TNX, Daily chart

Bonds sold off strong this morning and then spiked lower after the FOMC minutes were released, which spiked yields higher as the bond market adjusts to the potential for a June rate hike. That caused TNX to jump back up near its downtrend line from March 16, which at the moment fits as the top of a sideways triangle consolidation pattern. If it's a bearish continuation pattern, following the decline into the February low, today's rally could be completing the triangle pattern and will be followed by another leg down (perhaps as more information leaks out that a June rate hike is not likely). If the triangle consolidation holds, the top of which is near 1.90%, we could see another trip down to the bottom of it, near 1.71%, before a stronger rally follows. TNX becomes more immediately bullish (bearish for bond prices) above April 26th high at 1.941%, in which case its 200-dma will likely be tested, near the important 2.0%.


KBW Bank index, BKX, Daily chart

Higher yields help banks make a profit and the banks look to be banking on a rate increase from the Fed. BKX rallied +3.8% today that lifted it off 66.50 S/R level where it had been consolidating since May 4th. That could be bullish, pointing to a possible rally to its downtrend line from July-December 2015, currently near 72. But first BKX needs to deal with its 200-dma and 62% retracement of its leg down from November 2015 into the February low, at 69.17 and 69.06, resp. This afternoon's high was 69.13 and it closed at 69.04. Sometimes a correction (a bounce correction in this case) completes on news so it's possible that's what happened today. But obviously it would be more bullish if it can hold above 69.17.


U.S. Dollar contract, DX, Weekly chart

The US$ also got a little extra boost today after the release of the FOMC minutes. It's been rallying since the spike low on May 3rd but stalled at its broken 50-dma since last Friday. This afternoon's pop higher has it now solidly above the 50-dma at 94.72 with its close at 95.19. The top of its down-channel from last December is currently near 96 so that could be the dollar's upside target before a pullback correction. As long as it holds above 92 it should continue to rally up towards 100 into August before it will be ready for another pullback. Reviewing the commodities index it's looking like it's ready for a pullback following its bounce off the January low and that supports the idea that the dollar is going to bounce higher.


Gold continuous contract, GC, Weekly chart

The gold miners typically lead the price of gold and they've been looking vulnerable since GDX reached its broken 200-week MA on May 2nd and today's selloff (-7.9%, the bulk of which occurred following the FOMC minutes) looks like the kickoff to at least a stronger pullback and that will likely mean the same for gold itself. Gold was down only -2.70 (-0.2%) today but in its after-hours session (following its 13:30 close) is when it got it with additional selling and dropped another $21 (-1.6%) to 1256 before getting a little bounce later in the afternoon session. Between its 50-dma and short-term uptrend line from March 28th, both near 1252, and then the top of its parallel down-channel from 2013, near 1243, the bulls have support to help them. But if the selling gold takes it below 1240 there's a good chance we'll get at least a deeper pullback and possibly something more bearish (we'll know more after seeing what kind of pullback/decline develops, assuming we'll get one).


Silver continuous contract, SI, Weekly chart

Silver's parallel down-channel from 2013 is similar to gold's except that the top of the channel has held silver's rally down. It had a minor break above the top of the channel into its May 2nd high but then dropped back into the channel the following week. The top of the channel is currently near 17.45 and this morning's high was 17.19. Like gold, it spiked down following the FOMC minutes (as the dollar spiked up) and it looks like it's starting at least a deeper pullback. If it does rally higher, the next upside target would be its 200-week MA, currently at 20.53. But the longer-term bearish wave pattern suggests silver, and gold, have new lows ahead of them before we'll see a better buying opportunity. There are still too many people recommending gold and silver as a good investment, which I also think is true (for when fiat currencies collapse) but I think we have time to start accumulating the alternate currency at lower prices. That opinion will be updated of course as the price pattern dictates.


Oil continuous contract, CL, Daily chart

The daily chart of oil below gives me a strong impression that we're looking at an A-B-C bounce off the January low and that it will be followed by a drop below that low, potentially down to the $20 area. Two equal legs up from January points to 50.95, which would be a test of its October 2015 high at 50.92. For the c-wave, which is the leg up from April 5th, it's now a 5-wave move and can be considered complete at any time. But if the 5th wave is to achieve equality with the 1st wave, that points to 50.21. The top of a rising wedge pattern will be at 50.21-50.95 between this Friday and May 26th. With those upside projections, trend line and October 2015 high, we could easily see another push higher following the small pullback from today's high (it also spiked down after the release of the FOMC minutes) but at this point I think oil is vulnerable to a reversal back down at any time.


Economic reports

Tomorrow we'll get a couple more economic indications from the Philly Fed, before the opening bell, and Leading Indicators after the bell. But I think they'll be secondary to whatever post-FOMC reaction we get in the morning.


Conclusion

Typically when economic indicators show an improving economy and inflation ticks higher the stock market rallies in anticipation of improved earnings. However, in our bizarro world, better economic conditions will mean higher Fed rates (or more importantly, a less accommodative Fed) and that scares the stock market. Granted, these indications are only this week and it's questionable whether the past week's trend will continue. I think it's more likely we'll see a reversal back to the continuation of deteriorating economic indications and more signs of deflation than inflation. The Fed has made it very clear they want to start "normalizing" rates and want desperately to raise rates so that they have some wiggle room to lower them again when we drop into a recession.

If the Fed does raise rates in June I suspect it will be well timed with a reversal in the economy and the Fed will get the blame. Couldn't happen to a nicer bunch of Ph.D. banksters. The economy is deteriorating and deflation is still the greater problem (or it certainly will be when loans start defaulting in greater numbers) and the Fed has very little to fight that trend. They're playing with weekly numbers when trying to manage a years-long development. And the markets continue to knee-jerk react to every little word change from them. This could go on for longer than most of us traders wish but it's the hand we've been dealt.

Short term, an afternoon reaction to FOMC minutes/meetings is often reversed the next day and that means we could see at least a morning rally. The last 3 days we've seen morning rallies get sold as it appears big money is propping the market up in order to sell into it. The volume pattern supports this idea so a morning rally tomorrow might not develop legs. And if there is no rally attempt it would be immediately bearish since some important support levels will start breaking. It's a choppy market and we're finishing up opex week, which has been weaker than usual so it's possible we'll get a stronger squirt to the upside on Thursday to protect all those short puts. The upside looks riskier than the downside but with the whippy moves it's been hard for both sides to stay in a trade. Stay safe through the rest of the week.

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

Competition Growing

by Jim Brown

Click here to email Jim Brown

Editors Note:

The first leader in a new field can run away with the market until the competition understands what they are doing and begins to copy and improve on the same product. That visionary leader can remain in front as long as they execute well and continue to invent new ideas that keeps them ahead of the competition. GoPro has failed at this task. .


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

GPRO - GoPro - Company Description

GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.

GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.

They reported earnings on May 5th after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.

The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold an estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.

Next earnings July 21st.

There was an interesting article on Yahoo today about the flood of GoPro competitors hitting the market and why these competitors have better cameras than GoPro. GoPro Competition

If GoPro does not get their act together soon their stock could be in the low single digits. Today's close was only 5 cents from a new low.

The risk here is that somebody buys them but with the flood of new competitors why would they?

Buy July $8 put, currently 61 cents. No stop loss.



In Play Updates and Reviews

218 Point Range

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow traded in a 218-point range between 17,418 and 17,636 and closed with only a -3 point loss but another 8-week low. That was some extreme volatility. I wrote on Tuesday evening that the FOMC minutes could cause some afternoon volatility in either direction. It turned out the volatility was in both directions.

The Dow was up +107 before the FOMC minutes then declined to -111 after the minutes before rebounding to close back over that critical support at 17,500. However, that support has now been broken intraday for two consecutive days and it was a miracle it rebounded back to that level after bring down to 17,418. The outlook remains negative and eventually that support is going to fail significantly. The Dow almost tested the next support level at 17,400 and came within 18 points.

The pattern being formed is a classic head and shoulders with the neckline at 17,500. The top of the head was 18,167 or 667 points above the neckline. In theory, we could be looking at a 667 point decline from that 17,500 level or 16,833. With support at 16,665 and 16,500 those would be the more likely targets on a support break.

The biotech sector was strong again today with the ASCO conference coming on June 3rd. Stocks were up in anticipation of the abstracts being posted in advance at 5:PM today. This always provides some excitement for the sector and it has been strong for the last week. That is holding up the Nasdaq.

Earnings after the close today were mostly positive including CSCO and CRM. That put a slightly positive bias on the Dow and Nasdaq futures of 8 and 2 points respectively. The S&P futures are flat.

I still believe we are going lower.



Current Portfolio




Current Position Changes


GILD - Gilead Sciences

The long put position remains unopened until a trade at $81.65.


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. Still holding at the highs.

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.


MKC - McCormick & Co - Company Description

Comments:

No specific news. Big drop on market weakness. CEO will present at the Bernstein conference on June 3rd.

Original Trade Description: May 11th.

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.

Position 5/12/16:

Long June $100 call @ $.95, no initial stop loss.


SKX - Skechers - Company Description

Comments:

No specific news. Another big drop in a weak market. Too many negative earnings in the retail sector.

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.


TWTR - Twitter - Company Description

Comments:

The bounce from the Bloomberg report they were going to scrap the 140 character limit in tweets did not last long. Shares fell back to $14.14 despite a buy rating from Ronnie Moas and Standpoint research. Now that our put is closed we are looking for a rebound. This would be the right time for an activist shareholder or for somebody to announce an takeover offer.

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.

Previously Closed 5/17/16: Long June $16 put @ $1.45, exit $1.96, +.51 gain.



BEARISH Play Updates (Alpha by Symbol)


ABC - AmerisourceBergen - Company Description

Comments:

No specific news. Continued strength in biotech sector is holding it up.

Original Trade Description: May 12th.

AmerisourceBergen sources and distributes pharmaceutical products to healthcare providers, pharmaceutical and biotech manufacturers, and specialty drug patients in the United States and internationally. Its Pharmaceutical Distribution segment distributes brand-name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to various healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and other alternate site pharmacies, and other customers.

The drug market is not working out well for ABC. In the recent earnings they reported earnings of $1.68 that beat earnings by 9 cents. However, revenue rose 9% to $35.7 billion and missed estiimates for $35.8 billion. If that was the whole story ABC would be a lot better off today.

The company warned on full year guidance and on 2017 expectations. They reduced full year guidance from $5.73-$5.83 per share to $5.44-$5.54 and analysts were expecting $5.78.

The CEO said, "Looking ahead, we expect our gross profit in the second half of the year to be negatively impacted by certain accelerating headwinds, including an increase in the rate of generic deflation and a lower contribution from new generic launches. In addition, an internal strategic initiative we had launched to increase sales of PRxO Generics and to increase our independent retail segment revenues is ramping slower than we had anticipated."

The company said 2016 revenue growth would be 8% and below prior estimates. For 2017 they expect 4%-6% earnings growth to $5.71-$5.82 per share and below current analysts estimates for 2016.

Earnings 7/28.

The long-term guidance warning tanked the stock but that was just the beginning of the declines. Shares are at a new 52-week low and still falling.

I am recommending an ITM June $75 option because it has high open interest (2,728) and a small spread. It is also cheaper than the next available strike, which would be the August $72.50 at $3.20 with a 50 cent spread and open interest of 15. I do not expect to be in this position for more than a couple weeks so the short term June option makes more sense.

Position 5/13/16:

Long June $75 put @ $2.60, see portfolio graphic for stop loss.


AMX - American Express - Company Description

Comments:

No specific news. Shares rebounded on FOMC minutes and the increased chances for a Fed rate hike in April.

Original Trade Description: May 16th.

American Express provides charge and credit payment card products and travel related services to consumers and businesses worldwide.

I seriously doubt that anyone reading this play description is unfamiliar with American Express. Unfortunately, their prestige has take a number of hits over the last two years.

Costco dumped American Express and is moving to Visa as its accepted card. AXP said that loss represented 10% of AXP card holders.

Fidelity Investments also dropped AXP for Visa because Visa is accepted many more places than American Express. Fidelity has 68.9 million accounts. That has got to hurt AXP.

Jet Blue announced it was replacing AXP cards with a new MasterCard.

There are numerous other companies that have dropped AmExp as their preferred card. The reason is simple. Not all merchants accept the AMX card and the fees associated with that card are higher for merchants. The card also has higher credit requirements for being approved. It does not do these businesses any good to offer a partner card if only a small number of applicants can qualify.

American Express is different from MC/V because it actually owns the debt. When you charge on an AMX card it is AMX that is making you the loan. With wages in the U.S. declining for the last 7 years that means higher risk of default for AMX accounts.

V/MC accounts are backed by an issuing bank or credit union. V/MC have no risk in the transactions, they just take a processing fee.

A federal judge ruled against AMX in a lawsuit filed by the DOJ because AMX was penalizing retailers for suggesting customers use a different card because the AMX transaction fees were higher. The judge said retailers had the right to discourage AMX usage.

In the testimony for the suit CEO Chenault whined, "They have a billion cards, AMX has 55 million. They have 9 million merchants and AMX only has 6 million. I am dwarfed. We are swimming in a sea of bank cards." And that is exactly the problem.

The bank cards have lower credit standards, lower merchant fees and more generous customer bonus awards programs. The prestige of the AMX is fading and even the invitation only Black card, made out of titanium, is losing its luster.

Shares faded from $96 to $50 and then rebounded in April to $67. Now they are fading again. They guided to earnings declines for the second half of 2016 because of the switch from AMX to other cards at various corporate customers like Costco. Earnings will rise in Q2 because of the sale of their Costco card portfolio but then decline the rest of the year. The CEO warned at the shareholder meeting, "We continue to face substantial competitive and environmental challenges."

Earnings July 28th.

Shares have flat lined recently with support at $63.75. If that level breaks we could see a decline to $59 fairly quickly. With the summer doldrums ahead, investors are not going to be patient with a stock that is basically dormant and forecasting lower earnings in the second half. Why would an equity fund want to own that stock in this environment?

Position 5/17/16 with an AXP trade at $63.50

Long July $62.50 put @ $1.70, initial stop loss $65.50.


CP - Canadian pacific Railway - Company Description

Comments:

New six-week low. No change in the outlook.

The company said domestic intermodal traffic fell -1% to 8,300 cars for the week ended May 7th. However, international intermodal volume declined -4.6%. Total intermodal volume declined -3%.

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:

No specific news. Minor rebound in a weak 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.


GILD - Gilead Sciences - Company Description

Comments:

Shares rose only slightly despite strength in the biotech sector. Moody's affirmed their A3 credit rating and revised their outlook to stable.

The position remains unopened until GILD trades at $81.65.

Original Trade Description: May 14th.

Gilead is a research based biopharmaceutical company that discovers, develope and commercializes medicines in areas of unmet needs. They have numerous well known drugs for treatment of HIV and various cancers but their most recent winners have been for treatment of Hep-C.

The first Hep-C drug was Sovaldi and that one was revised and reformulated in conjunction with another drug and the result was the blockbuster drug Harvoni. When taken in an 8 to 12 week regimen it cures Hep-C in 98% of patients. Otherwise they would be facing liver transplants or death. It does not just end the symptoms but it cures the disease. The downside is that it costs $96,000 for the 12 week treatment.

Last year Gilead lost a patent dispute with Merck and now that company has a competitive drug that they are discounting well under the cost of Harvoni. In the Q1 earnings Harvoni sales declined 16% from $3.58 billion to $3.02 billion. Sales in the U.S. declined more than 50% from $3.02 billion to $1.41 billion. Sales in Japan were expected to offset some of that decline but failed.

The problem is the drug Zepatier from Merck. This competitor is being priced "aggressively" in order to take market share from Gilead.

Gilead is a great company but they made a mistake on the patent and that allowed Merck to enter the market. Gilead bought back $8 billion in shares in Q1 and that helped boost the stock price to $102 ahead of earnings. They still have $21 billion in cash but stock purchases have slowed as they look for an acquisition to give them a larger drug pipeline. The board did approve another $12 billion buyback but they are not likely to be aggressive in light of the rapid decline in sales.

In order to combat the Merck drug, Gilead is being forced to significantly discount Harvoni and that means cash flow and margins will continue shrinking. They also issued guidance that was lighter than analysts expected as a result of the price cuts.

Earnings July 26th.

Shares have declined to $82, which is support from the low in January. While they have fallen significantly, I believe they will continue to decline and make a new low. The current political environment is strongly against high priced drugs and politicians will continue to try and outdo each other with headlines as the election heats up. This should weigh on the entire sector.

Initial support is $80 but given the growing negatives, it could retest support at $63.

With a GILD trade at $81.65, which would be a new 52-week low:

Buy July $80 put, currently $2.66, initial stop loss $86.75


HOG - Harley Davidson - Company Description

Comments:

No specific news. Minor decline to just below support at $44.50.

Original Trade Description: May 11th.

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.

Position 5/12/16:

Long June $45 put @ $1.50, See portfolio graphic for stop loss.


SPY - S&P 500 ETF - ETF Description

Comments:

Very volatile day with the S&P trading in a 26 point range but closing with only a .42 point gain. Now poised again for a support break. We need the decline to appear quickly before our June options evaporate.

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.




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