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Daily Newsletter, Saturday, 5/21/2016

Table of Contents

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

Market Wrap

Two Squeezes in One Week

by Jim Brown

Click here to email Jim Brown

Applied Materials reported earnings and said orders were at 15-year highs and the semiconductor sector exploded higher causing a Nasdaq short squeeze.

Market Statistics

Friday Statistics

The Semiconductor sector rallied 5% for the week and most of that (3.16%) was on Friday. The Biotech sector gained 2.2% on Friday and 4.5% for the week to close at a three week high. The Banking sector gained 4.24% for the week thanks to the FOMC minutes and the potential for a Fed rate hike in June.

The AMAT earnings triggered short squeeze caused a ripple effect in the Nasdaq and Russell 2000 stocks and the indexes both posted strong gains. The Russell 2000 was the biggest gainer of the broader indexes. The Russell gained 5 points in the last 30 minutes of trading that looked an awful lot like short covering before the weekend.


The only economic report of note was the existing home sales for April. The headline number rose from 5.33 to 5.45 million annualized and easily beat estimates for 5.40 million. The March number was revised up to 5.36 million. April sales were 6% higher than the 5.14 million pace in April 2015.

Sales rose +12.1% in the Midwest and +2.8% in the Northeast. Sales declined -2.7% in the South and -1.7% in the West. The median price for a home rose from $221,500 to $232,500. Months of supply rose from 4.4 to 4.7 and the highest since October.

Sales for homes prices $500K to $750K rose 15.9% from April 2015. Homes prices $250K to $500K rose 15.8%. Homes prices under $100K fell -5.1%.


The new home construction numbers earlier in the week dented the rising estimates for Q2 GDP. The housing starts, CPI and Industrial Production reports pushed the forecast back down from 2.8% to 2.5% for Q2. The Q1 GDP revision will be out next Friday and it is expected to rise from 0.5% to 0.8%. It is hard for me to believe that the Fed wants to raise rates with the prior three quarters of GDP declining. Q3 was 1.98%, Q4 1.39% and Q1 0.54%. We have a long way to go before the Q2 GDP is finalized and it could be a lot lower than the current forecast. Even if it did not change from the 2.5% estimate that would mean only a 1.6% growth rate for the last four quarters. That is really anemic and does not suggest the economy can withstand two more hikes this year.


The economic calendar for next week will be anchored by the Janet Yellen speech on Friday. She is the leader of the FOMC and what she says, normally happens. She will be the counterweight to the other Fed speakers. If she is dovish, the market will start breathing easier. If she is hawkish, the market will assume the worst and move lower. Actually, the key Yellen speech will be the one on June 6th. That is the last speech by a Fed head before the FOMC meeting. Whatever tone she sets in that speech is the tone we should expect from the Fed meeting.

The economic reports that matter are the Richmond Fed Manufacturing Survey and the GDP revision. The Richmond survey spiked from -4 to +22 from February to March and then declined to 14 in April. The Philly Fed Survey last week was expected to rise from -1.6 to +6.5 and it came in at -1.8. If the Richmond survey declines sharply as well, it could impact market sentiment and rate hike expectations.

The GDP will only be critical if it drops below 0.5%. That would indicate less chance of a rate hike and greater chance of a continued slow economy.


Applied Materials (AMAT) was the big news moving the market on Friday. The company reported earnings of 34 cents compared to estimates for 32 cents. Revenue of $2.45 billion also beat estimates for $2.43 billion. However, the actual earnings were not what moved the stock. They guided for sales to rise 14-18% in Q2 and for earnings in the range of 46-50 cents. Analysts were expecting 36 cents.

The CEO said, "We booked our highest orders in 15 years and we expect to deliver record earnings in fiscal 2016." Net sales in chips for LCD and OLED screens are expected to rise 70-90% to about $300 million. The shift to LED/OLED screens is causing strong demand from mobile-handset makers. The shift to OLED by many manufacturers increases our total available market by 300% according to the CEO. Overall orders rose 15.3% in Q1.

Shares spiked 14% to $22.66 and a new 52-week high. The other chip companies rallied from 3% to 8% causing the Semiconductor Index to gain 3%.



On the opposite side of the ledger, Campbell's Soup (CPB) shares fell -6% to $60 after posting disappointing earnings. Investors said Campbell's earnings were not mmm-mmm good. Adjusted earnings of 65 cents beat estimates for 64 cents but were below the 66 cents posted in the year ago quarter. Revenue declined -2% from $1.9 billion to $1.87 billion and missed street estimates. The company said they were facing a very challenging consumer environment. Really? It is soup. They have been making it since 1869. How much more experience do they need?

In all fairness, it was an extraordinarily warm winter with record temperatures. I am sure that slowed the use of soup as a hot meal to warm up consumers. The company raised full year guidance for earnings to increase 11-13% to $2.93-$3.00 per share. Prior guidance was for 9-12% growth.


Deere & Company (DE) reported a 28% decline in earnings from $2.03 to $1.56 but still beat estimates for $1.48. Revenue was $7.88 billion and well over expectations for $6.71 billion. While the earnings beat estimates, the guidance was ugly. Deere predicted sales in the U.S. would decline 15% to 20% and fall -5% in the Eurozone due to low commodity prices and stagnant farm income. The most expensive and highest profit tractors are the ones expected to see the biggest declines in sales. Economic and political turmoil in Brazil is expected to reduce sales by 15% to 20% in South America. Shares fell 5% on the news.


Footwear retailer Foot Locker (FL) reported earnings of $1.39 and missed estimates by a penny. Revenues increased 3.7% to $1.987 billion but missed estimates for $2.007 billion. Same store sales rose 2.9% and well below estimates for 4.5%. In the year ago quarter they rose 7.8%. The company opened 32 new stores during the quarter to end March with 3,396 stores. They repurchased 1.37 million shares for $88 million during the quarter.

The reason for the weak earnings came from basketball shoes. Nike shoes account for 60% of Foot Locker revenue. Foot Locker accounts for 20% of Nike revenue. Nike's basketball shoes for named players including LeBron James, Kobe Bryant, Kyrie Irving and Kevin Durant occupy the most shelf space at Foot Locker and sales of those high dollar shoes are slowing. I reported several weeks ago that Foot Locker was selling some of those shoes for 50% off in their online store. That is a clear sign of slow retail sales. This is not a good sign for Nike since they have a $1 billion lifetime endorsement contract with LeBron James. With his shoes not selling that is going to be a lifetime anchor for Nike.



Ross Stores (ROST) reported earnings of 73 cents that matched estimates but revenue of $3.09 billion missed estimates for $3.12 billion. Same store sales rose +2.0% and slightly below estimates for 2.5%. The blamed a slowdown in women's apparel for the weak results. The company guided for Q2 earnings of 64-67 cents and below estimates for 70 cents. Same store sales are expected to rise only 1% to 2%. For the full year, they are expecting $2.63-$2.72 and analysts were expecting $2.73. Shares fell -5% on the news.


Autodesk (ADSK) reported a loss of -10 cents compared to estimates for +14 cents. Revenue from licenses fell -43% to $185.9 million. They guided for Q2 to revenue of $500-$520 million and loss of 11-18 cents. Analysts were expecting $542 million and loss of 7 cents. The company added 132,000 subscribers to push active subscriptions to 2.71 million. They are in the midst of switching from a onetime sale model to a cloud subscription model and that always causes some pain from earnings. In the future, it will provide a more reliable forecast and higher earnings.


The earnings calendar for next week is highlighted by Costco, Hewlett Packard, Best Buy and Gamestop. Hewlett earnings typically signal the end of the earnings cycle like Alcoa (AA) is seen as the first major announcement to start the earnings cycle.

According to FactSet, 95% of the S&P has reported. Thirteen S&P companies report next week to raise that percentage closer to 98%. The blended earnings for Q1 is now expected to be -6.8%, up slightly from the -7.1% a week ago and the -8.8% estimate on March 31st. The decrease was due to the 10-cent beat by Walmart and 9-cent beat by Home depot.

Revenue has declined -1.5%. Some 73 companies have issued negative guidance and 30 companies have issued positive guidance. Because of the low expectations, 71% of companies have beaten earnings estimates. This is above the five-year average but it is the result of the dramatically lowered estimates. Only 21% have missed estimates for the same reason. Only 53% have beaten on revenues and 47% missed estimates.

Earnings from the energy sector have declined -107%, metals and mining -14.4% and financials -12.3% for top three losing sectors.

This is the fourth consecutive quarter of earnings declines and the fifth quarter of revenue declines. The corporate sector is in a profits recession. The strong dollar, weak consumer and weakness in energy prices were the top three reasons for the earnings decline.


The dollar rallied to a two-month high after the FOMC minutes. It was already climbing ahead of the release because of the almost daily headlines from Fed speakers that June would be a live meeting. The rising dollar is going to give the Fed something else to think about in June. If the dollar continues to rise ahead of the meeting, it will pressure commodities and corporate earnings as well as global trade. With the rest of the global economy limping along, allowing the dollar to rocket higher could be a negative for the Fed's decision.


A week ago the chance for a rate hike at the June meeting was about 3%. Over the last week that has risen to 26% according to the CME FedWatch Tool. That chance jumps to 43.2% for the July meeting.



The best guess today is that the Fed will use the June meeting to telegraph a rate hike at the July meeting. The reason the Fed may not move in June is the June 23rd Brexit vote. While the most recent surveys show that 55% of voters want to remain in the EU there is a very active effort by those that want to leave the EU. The UK Treasury released figures claiming an exit would cost each household 4,300 euros a year because roughly three million jobs are linked to EU trade and an exit would end those trade treaties. The migration problem is a big reason 51% of those surveyed said they want to exit the EU. They want to close the borders and protect the country. Apparently, some of those surveyed would still vote to remain in the EU because the numbers do not match.

Several of the Fed heads have said fear of a Brexit could weigh on their decision to hike rates in June. Obviously if the surveys show there is a solid majority planning on voting to stay in the EU, the Fed could go ahead and hike rates. It would have to be a strong majority for them to take the risk. A Brexit could be an economic disaster for Europe that would be felt in the global economy.

In order for the Fed to remain nonpolitical and cautious it makes sense they would wait until July rather than risk making a wrong decision.

The yield on the ten-year treasury rose from 1.70% the prior Friday to 1.85% this Friday on expectations short term rates are going to rise with a Fed hike. I think investors are jumping the gun a little since there is an entire month of economic reports before the meeting and there is always the possibility of waiting until July allows another month of economics that could be negative.


Yahoo (YHOO) offers are well below the asking price. The Wall Street Journal ran a story on Friday saying the offers for Yahoo were in the $2 to $3 billion range. Yahoo is reportedly asking in the $8 to $10 billion range. After the story broke another "source" said that was incorrect and they expected the final offer to be in the $4 to $5 billion range.

The problem is the context of the bids. Some bidders are reportedly not bidding on the entire business less the Asian assets. Others, like Verizon, are reportedly bidding on the entire business and could be closer to the $5 billion number.

There is another rumor circuit developing on whether CEO Marissa Myer will accept any of the bids or simply say they are all too low and we tried our best but Yahoo will remain independent. That is about the only way she could keep her high paying job. However, at this point, with a $55 million golden parachute and four new board members, it may be easier to just hand the office keys to the high bidder and go home.

You may remember that Microsoft actually offered $41 per share in mid-2007 in a private meeting with the Yahoo CEO. They could not come to terms and Yahoo shares declined. In late 2007, Microsoft went public with a $31 offer and it was rejected, twice. The rest of the story everyone knows but I am sure Microsoft CEO at the time, Steve Ballmer, is really glad that deal fell apart. Hindsight is always 20:20.

The next round of bidding is scheduled for the first week of June.



What happened to McDonalds (MCD)? Shares have lost $10 since the $132 high on May 10th. Did they quit serving breakfast all day? McDonalds shares are an example of what is happening in the market the last couple weeks. Stocks with major gains are being chopped down to size as investors take money off the table ahead of the Sell in May cycle and the summer doldrums. There are dozens of stocks like McDonalds that are suddenly crashing on no news. McDonalds was up 40% over the last 12 months so there was plenty of profit to be captured.


Crude prices rallied on a long list of production outages including the resurgence of the Canadian wildfires. The oil sands operators were preparing to restart until the fire turned north and put them in the path once again and facilities had to be evacuated. The best guess for the amount of Canadian production declines is between 1.1 and 1.3 million barrels per day.

Nigeria fell to 1.3 mbpd and a 22-year low as the Niger Delta Avengers escalated their attacks on oil facilities. Exxon said rebels had blocked staff from entering the 300,000 bpd Qua Lboe production terminal and the Nigerian media was reporting all but essential staff had been evacuated.

Venezuela has shortened the workweek to only two days as a power crisis cripples the country. Power is now shutoff for 4 hrs a day and analysts claim this is slowing oil production. Production was 2.53 mbpd in Q1 but is estimated to be less than 2.3 mbpd today and could get worse as the economic crisis accelerates and electricity becomes even scarcer.

Some analysts claim the global production outages have removed more than 3 million barrels per day from the market as we move into the high demand season. This is supporting prices but that $50 level is going to be tough to break. June futures expired on Friday at $47.67 and July futures will be the current month on Monday and they closed at $48.48 or only about $1 higher.

If the dollar continues to rise on rate hike expectations, the price of oil will decline and weigh on the equity market.


Active rigs declined by -2 for last week. Oil rigs were unchanged at 318 but gas rigs declined -2 to 85. The U.S. rig count is down -1,527 rigs from the peak in 2015. Oil CEOs are mixed on what price would convince them to put rigs back to work. Most say they want to see a sustainable level rather than just a spike to some magic number. The $65 level seems to be a common target but a couple firms said anything over $50 would allow them to put some rigs back online if the price was sustainable. Nobody wants to contract for rigs only to have the prices fall back into the $40s. A couple companies were targeting $75 for a restart in order to provide a downside cushion in case prices weakened again.


Last week I reported the five-week total of fund outflows from equities was $44 billion and the most since August 2011. This week Bank of America said the year to date equity outflows were approaching $100 billion ($98.5B). Hedge funds are at their lowest net long positions at 44% after hitting a record long position at 57% in early 2015 when the markets were setting new highs. Corporate buybacks are slowing dramatically after a near record in Q1. The second longest bull market in history could be coming to an end because of the outflow of funds.

With earnings negative for the fourth consecutive quarter and expected to be negative again in Q2, the Fed raising its rate hike bias and a contentious political campaign underway, investors are not feeling a need to be invested in stocks.

The bullish sentiment in the AAII Investor Sentiment Survey for last week fell to 19.3% and the lowest level since February and only the 9th time since 1990 that it has fallen below 20%. Bearish sentiment rose to 34.1% and the highest level since February 19th.


Markets

The short squeeze on Friday was much less energetic than the one on Monday and most of the gains were seen at the open. The S&P rolled over at 11:30 as the index hit the short-term downtrend resistance from May 10th. The 2,040 level continued to play an important role with the S&P refusing to close under that support.

However, every high is a lower high and every low is a lower low. The trend remains negative despite these one-day wonder rebounds. Some headline is going to appear that will force an S&P close under 2,040 and that would be such a clear signal we should see selling accelerate.

The S&P and the Dow have completed a head and shoulders pattern and while the Dow has already broken down the S&P is still fighting that neckline at 2,040.



The Dow closed below critical support at 17,500 on Thursday and then fought to retain that level on Friday's rebound. The index closed 50 points off its highs at 17,500 exactly. This is a crucial level that is not likely to hold. The drop on Thursday to 17,331 should have cleared out numerous sell stops and support at 17,400 should be weaker as a result. The next material level is 17,135 and then 16,500.

The leaders list was an unlikely bunch but there is a clear reason. The top five names had been heavily shorted and that made them the biggest gainers as shorts were forced to cover. We cannot expect these short squeezes to continue to rescue the indexes from a continued decline. Once shorts in particular stocks have covered, there is no additional reason for those unloved stocks to rally and they should return to their old direction. Those stocks with accumulated profits like Chevron, Exxon, Boeing and McDonalds were hit hard by profit taking last week.




The Nasdaq chart is not as ugly as the Dow and S&P but the support at 4,700 is just as critical. Friday's big short squeeze was just another lower high off a lower low so the trend is intact even though it looks like the index is moving sideways. Next support is 4,600.

Note the number of biotech stocks in the winners list. With the ASCO meeting in ten days the sector is finding buyers. The Biotech Index was up +2.2% on Friday. Once past ASCO the excitement will fade. The meeting is June 3-7th.




The Russell 2000 chart "looks" like a breakout of the multiple resistance levels but that green candle at the end is just the last 15 minutes of trading. I strongly suspect that was the last surge of short covering before the close ahead of the weekend. We will know on Monday if the index continues moving higher or instantly declines back under the 1,110 level.

I seriously doubt the Russell has suddenly decided to break that month long downtrend.



Despite Friday's positive close, it was the Dow's first four-week losing streak since October 2014. The index is breaking down and the S&P is clinging to the cliff edge by its fingernails. We have one more week in the Sell in May cycle and then we enter the summer doldrums where our already weak volume is going to shrink even further. Volume on expiration Friday is normally high but even with the short squeeze we only managed a very weak 6.6 billion shares. The volume on Wednesday's decline was 8.0 billion and Thursday's decline was 7.3 billion. Follow the volume. Those days with the heaviest volume indicate the real market direction.


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Random Thoughts


All week the topic on the news has been the long lines at the security checkpoints at various airports around the country. Some airports were warning passengers to arrive 3 hours early to avoid missing flights and then some flights were missed anyway. Chicago O'Hare was one of the worst offenders. This link is a video of the line at O'Hare. It is unbelievable. O'Hare Security

Here is the kicker. On Friday, the head of TSA and selected elected officials were scheduled to meet at O'Hare to discuss the lines and plans to reduce them. When the press and officials showed up there was NO LINE. There was nothing for reporters and news crews to take pictures of and use to blast the TSA head over the breakdown in management.

I can just hear the phone calls from management the day before. "I don't care how many people you have to call in and how much overtime you have to pay. There had better not be a line when we get there for the news conference on Friday or you will be looking for a new job." Where there is a will there is always a way.


Notable Quotes:

Keith Bliss, Senior VP at Cuttone & Co.

"Equity markets hate two things: decelerating earnings inside of their issuers and a rising interest rate environment. We're getting both right now so I'd be very cautious as we step into the summer."

Jack Bouroudjian, co-founder and director of UCX.

"The Street doesn't think the central bank will move and it certainly hasn't priced in two or three rate hikes. In fact, when the markets and gold moved lower, the dollar strengthened and all yields along the Treasury curve went up on the news of the Fed minutes, it was a warning signal that the market is not prepared. We are preparing, unfortunately, for a shock. This market is not ready. We could see a move lower in stocks and it could be a vicious move."

Rene Nourse, CEO and founder of Urban Wealth Management.

"Investors need to brace themselves in the coming months because things are going to get rocky for the stock market. This summer is going to be ugly. I've never been in the corner of 'sell in May and go away' but I've had to change my tune this year."

Goldman Sachs in a note to investors.

Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels. The firm is neutral on U.S. equities for the rest of the year.

Deutsche Bank.

"There is an old saying amongst market watchers that economic expansions do not die of old age. Rather, during the course of the business cycle dynamics emerge that threaten to become unacceptable from a policy perspective. In the context of economic expansion, that dynamic has been inflation. Recessions are effectively created by policymakers to counter otherwise accelerating inflation."


The Niger Delta Avengers (NDA) sound like a Marvel Comics group of super heroes. Unfortunately, for Nigeria, they are real rebels and they are mad. Between 2003-2009 a group militants called the MEND rebels, (Movement for the Emancipation of the Niger Delta) terrorized oil producers by blowing up pipelines and oil facilities and nearly brought Nigeria's oil production to a halt. The government ran out of options and bribed the MEND rebels to stop the attacks.

The government paid the rebels millions of dollars and contracted with them to protect the oil facilities. The leaders got a fat payday and the rank and file got a small bonus and the promise of vocational training. Everything was fine until the training never appeared and the leaders vanished with their cash and left the underlings to guard the facilities for pocket change.

You know where this is headed. The remaining rebels realized the government paid millions to their leaders once before and decided to repeat the process. They came up with a new name, which is a lot cooler than the old name, and recruited some new blood to help with the mischief.

They warned the government if they did not agree to their demands, they were going to stop oil production again. This time the government has no money because of low oil prices. Instead of renewing the protection contracts and paying the new bribe, the government sent the soldiers out to capture the rebels. However, as in any guerilla war, the militants are indistinguishable from the normal citizens. They work during the day and then attack at night.

They have been very successful in their attacks. They are not trying to harm or capture workers, but simply stop oil production by blowing up pipelines, oil wells and various facilities. Nigerian oil production has declined 800,000 bpd or roughly $32 million a day in revenue the government is no longer receiving. They have attacked facilities operated by Shell, Eni, Chevron and Exxon.

They claim they only want the protection contracts reinstated along with the amnesty provided by the government to the MEND rebels. I guess it is a sweet deal if they can get it. The amnesty was a massive payoff system and they want it reinstated.

President Buhari claims he has extended the amnesty program through 2017 but he also reduced the payouts significantly. He quit funding the original militant leaders and the trickle down payments to the rank and file ended.

The amnesty payoff system is doomed to failure. Nigeria's production is likely to decline because the NDA fighters are gaining the cooperation of the population and they are not likely to be rooted out. This battle could continue for a long time and neither side will win in the end.


What crude glut? The first picture below is a fleet of oil tankers anchored outside the entrance to Galveston and the Houston Ship Channel. The red triangles are tankers underway either to or from Houston. The red squares are tankers anchored outside the entrance waiting for the cargo owner to find a buyer or simply anchored as offshore storage while the owners wait for prices to rise. Those tankers cost $30,000 to $40,000 a day to sit and wait for instructions.


The picture below is the tankers anchored offshore Singapore where tens of millions of barrels of crude are sitting in floating storage waiting for a buyer or for prices to rise. These tanker farms are losing money. The cost to rent a tanker and have it sit for weeks or months requires a large difference in the price of the futures. With the current price of oil at $48.50 and the future price for December crude at $50.13 there is no profit. The owners of these cargoes are losing money every day but there is nowhere to put the crude. There are no buyers. Tanker prices are rising because the number of anchored tankers is growing. Eventually there will not be enough tankers available to actually transport oil from producing locations where they actually have buyers. When the pain becomes too great, the owners of these anchored cargoes will capitulate and lower their asking price to the point where a willing buyer will appear. When the capitulation event occurs, we could see a dramatic drop in crude prices because every owner will be trying to under bid every other owner.

With onshore storage near maximum levels, there is nowhere to put this oil and new storage tankers are added daily. There will be a capitulation event. Only the timing is unknown.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves."

Abraham Lincoln


 


Index Wrap

Transports, Russell 2000 Lead

by Jim Brown

Click here to email Jim Brown

The main event behind Friday's short squeeze was the positive guidance by Applied Materials. The secondary forces pushing the markets higher were the Dow Transports and the Russell 2000. The Transports gained +1.1% on strong gains by the railroads and minor gains in the airlines. The railroads were seen as oversold and a port of safety in the market storm. The airlines rose after Jet Blue said they were going to cut some capacity to offset the heavy discounting currently in progress.


The Russell 2000 rose because of gains in semiconductors and biotechs. The Semiconductor Index gained 3.1% on the AMAT news. The sector had been consolidating from a sharp drop at the end of April on earlier earnings misses.

The biotech sector currently has a positive bias because of the ASCO cancer conference from June 3rd through 7th. There are dozens of companies presenting their latest findings and many times at least a few stocks suddenly find their shares rising after the presentations. This powered the Russell and the Biotech Index higher. This is a short-term event and once the conference passes, the vast majority of stock will begin to fade. Only those with good news will see increased buying.



The Russell 3000 ($RUA) is the 3,000 largest stocks in the market. The support at 1,195 held on Thursday at the close despite a solid intraday break. That break should have weakened that support so the next test could fail. There is almost no near-term support for the R3K once that 1,195 level fails.


The Dow posted its first 4-week losing streak since October 2014. Critical support at 17,500 broke but then recovered at the close on Friday. That fingernail grip on 17,500 is not likely to last and it could be a long drop to 16,500. There is very little near-term support under 17,500. Since all the Dow stocks have reported their earnings, we are in the post earnings depression phase where investors are moving out of those stocks and looking for something new to play.


On a positive note the High Yield Bond ETF (HYG) is moving higher and it typically leads the S&P. This should continue because of the expectations for higher rates and the urge to avoid the equity markets in search of a safer investment ahead of a Fed rate hike. If the HYG continues above the S&P it could spark an rally in equities. I have to admit I do not understand why that would happen in this context but the HYG always leads equities.


The McClellan Oscillator is moving very close to the oversold range and could be predicting a rebound. However, the last three significant declines die reach the -90 level before rebounding. This is an overbought/oversold indicator and it is telling us to look for a bottom.

Since the NYSE Composite Index is much stronger on a relative basis than the Dow or S&P it would seem the NYSE could rebound before those other indexes. The comparable support on the NYSE is 10,000 and the index closed at 10,250.



The percentage of S&P stocks over their 200-day average has stalled the decline at 65%. This suggests some broader firming in equities beyond what we can see in the index values.


However, the percentage of stocks over their 50-day average has sunk to 48%, which was about 5% higher than Thursday's reading at 43%. The shorter term average is more than likely rising in most stocks at the same time the recent selling has pushed prices lower.


The S&P Bullish Percent Index declined to show only 67% of S&P stocks have a buy signal on a point and figure chart. That is down from 80% in early April. This is a bearish indicator. P&F charts are calculated differently than regular price charts and once reversed to a sell signal they can remain there for a longer period.


The Chinese economy and markets tend to lead the U.S. markets. The Shanghai Composite index is threatening to decline to three-month lows and possibly retest the lows set back in Feb/March. If current support breaks it could lead the Fed to reconsider its current rate hike bias and would likely weigh on U.S. markets.


The Japanese Hang Seng index is falling and appears headed back to retest the lows below 19,000. Like the Chinese markets the Japanese markets should weigh on U.S. equities.

The falling markets seem to indicate the current stimulus programs in each country are not working and investors are afraid of future events.


The rising dollar has not yet impacted commodities for more than just a couple of intraday blips. The CRB Index is at the highs for the year but this will not remain in an uptrend if the dollar continues to rise and the Chinese/Japanese markets continue to decline.


The Semiconductor Index always leads the S&P at major turning points. Look closely at the blue line and you can see the relationship. The SOX averages about a 10-14 day lead over equities. The spike on Friday is a fluke. It only matters if the semi stocks continue to climb. If they roll over quickly and return to test the lows they will drag the S&P lower. The correlation is nearly 100%.


The short-term view is bearish. Once we get into June and the summer doldrums take hold the current market weakness could fade and just turn into choppy trading for the summer as we wait on OPEC, the Fed and the political conventions in late July.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

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New Option Plays

Market is Changing

by Jim Brown

Click here to email Jim Brown

Editors Note:

Nike has spent billions, yes billions, on celebrity endorsement deals and they did really well until recently. Michael Jordan is one of their best endorsement deals and even though he has not played basketball since 2003 his shoes are still popular.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

NKE - Nike - Company Description

Nike designs, develops, markets and sells athletic footwear, apparel, equipment and accessories for men, women and kids worldwide. The company offers products in eight categories including running, basketball, football, men's training, women's training, sportswear, action sports and golf under the Nike and Jordan brand names.

Part of Nike's successful marketing involves signing deals with various celebrities, sports teams, franchises, etc, for endorsements and advertisements obtained by teams and players wearing Nike apparel. Sometimes Nike discounts their equipment to enterprises including colleges, group sports associations, etc along with an agreement not to use another brand.

Last week Nike signed an $870 million, 10-year deal with the Chelsea soccer club and they will provide all their equipment and apparel starting in 2017. I am pretty sure the club cannot use $87 million a year in uniforms, shoes, balls and nets. That means the rest of the money Nike is paying is for advertising the Nike swoosh on all their uniforms. That is an expensive advertising deal but evidently Nike thanks it is worth the money.

Recently Nike paid endorsements have reached unbelievable heights with LeBron James receiving a $1 billion lifetime contract to endorse Nike products and allow his name to be used for a line of basketball shoes. The problem occurs when these sports start quit playing. Within a few years they are all but forgotten as a new crop of athletes become the new superstars and a new crop of teenagers want new gear named after or endorsed by those new stars. Under Armour's Stephen Curry is a prime example. He is the new star on the block and they cannot keep his shoes in stock.

When Foot Locker reported earnings on May 19th they said Nike's basketball shoes were not selling. Nike shoes account for 60% of Foot Locker revenue. Foot Locker accounts for 20% of Nike revenue. Nike's basketball shoes for named players including LeBron James, Kobe Bryant, Kyrie Irving and Kevin Durant occupy the most shelf space at Foot Locker and sales of those high dollar shoes are slowing. I reported several weeks ago that Foot Locker was selling some of those shoes for 50% off in their online store. That is a clear sign of slow retail sales.

With so much of Nike's revenue coming from the Foot Locker chain it suggests Nike could have some earnings problems in the current quarter. If those shoes are not selling in Foot Locker they are probably not selling at Finish Line (FINL) either. Finish Line has been struggling with sales anyway and having a Nike product that is not moving could make the situation worse. Add in the bankruptcy and closure of 450 Sports Authority stores and another sales outlet for Nike bit the dust.

Nike is a good company. They have great products and they sell worldwide and online. Their last quarter earnings rose 22% to 55 cents and beat estimates for 48 cents. However, revenue of $8.03 billion missed estimates. Nike blamed the strong dollar for the revenue miss. They said futures orders rose 12% and that also missed estimates for 15%. They also missed on revenues in the prior quarter.

Now that basketball season is over and all those unsold basketball shoes are cluttering up store shelves we could see further weakness in the current quarter earnings due out on June 23rd. With all the retail earnings declines over the last couple weeks it makes sense that Nike may have been having some of the same volume problems. Since they missed on revenues in the prior two quarters, it would seem to be a good bet they will miss this quarter as well given the weakness in retail.

Shares crashed after their earnings problem on March 22nd and flatlined around $60 for a month. That sideways movement has now turned into a downward slide with the stock hitting a three-month lod on Friday before rebounding from the initial FL instigated dip. I believe the stock is going to continue to move lower and the bounce on Friday was an entry point.

Buy July $55 put, currently $1.77, initial stop loss $60.25



In Play Updates and Reviews

One More Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P gapped up +17 points to 2,057 at the open and the high for the day was 2,058. Shares began to decline at 11:30 and faded into the close at 2,052. This was the result of a 14% spike in Applied Materials (AMAT) on an earnings beat. This spiked the entire semiconductor sector and that lifted the Nasdaq for a 57 point gain.

The S&P is just delaying the inevitable. That support at 2,040 is destined to break but every intraday dip has been a head fake. The drop/rebound cycle is causing havoc in the individual stock charts. The volatility is deflating option premiums because there is no clear direction. You would think it would be the opposite with the volatility inflating the premiums but the VIX is holding right at 15 and that suggests nobody is buying puts. While almost no analysts expects the market to rally prior to the Fed meeting we keep getting these short squeezes and dip buys. So far, everyone has been a lower high and lower low and the trend remains negative but we have yet to get that breakdown event.

Friday's short squeeze was primarily Nasdaq stocks but the Russell 2000 was the biggest gainer at +1.6% and +17 points. Having the Russell rally that much even in a short squeeze market does not show much bearish sentiment as we head into summer. We may have to change our bias back to bullish if this continues.



Current Portfolio




Current Position Changes


DIS - Disney

The long call position was entered at the open at $99.00.


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


DIS - Disney -
Company Description

Comments:

Disney said more than one million Chinese people have visited the area adjacent to the Shanghai Disney park and the park does not open for three more weeks. The area immediately surrounding the park is now called Disney Town and has an artificial lake, stores and restaurants. More than 100,000 visited Disney Town on one day alone in early May.

Original Trade Description: May 19th.

Disney operates as an entertainment company worldwide through broadcast and cable television networks, domestic TV stations, radio networks, movies and media distribution of all types, theme parks, hotels and cruise lines.

Disney missed earnings on May 10th and shares have fallen from $106 to $98 over the last week. This sell off is overdone and shares are approaching support at $96. I believe now is the time to buy.

Disney's latest movie, Captain America: Civil War has already broken $1 billion at the box office in only two weeks. It could end up one of the highest grossing movies of all times. Disney has an entire list of movies headed for the theaters and some will be as big as Captain America. Star Wars: The Force Awakens has already grossed over $2 billion and there are many more episodes planned.

Disney Movie Schedule

May 27th, 2016 - "Alice: Through the Looking Glass"
June 17, 2016 - "Finding Dory"
July 1st, 2016 - "The BFG"
Aug 12th, 2016 - "Pete's Dragon"
Nov 4th, 2016 - "Doctor Strange"
Nov 23rd, 2016 - "Moana"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
Mar 17th, 2017 - "Beauty and the Beast"
April 14th, 2017 - "Ghost in the Shell"
May 4th, 2017 - "Guardians of the Galaxy II"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Mid 2017 - "The Incredibles 2"
July 17th, 2017 - "Pirates of the Caribbean"
Late 2017 - "Thor: Ragnarok"
Early 2018 - "Frozen 2"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

They also are opening the Shanghai Disney theme park on June 16th and they expect up to 100 million visitors in the first year with tickets starting at the introductory price of $57-$75. There are 330 million people living within 4 hours of the park. That is truly a cash-printing machine.

Disney has sold off because of a decline in ESPN subscriptions. This is vastly over rated as a problem. Given their recent billion dollar movies and the cash flow from Shanghai the ESPN problems will be forgotten. At this point all the bad news is already priced into the market.

With support at $96 and shares closing at $98 today I am recommending a July call that will expire two weeks before their next earnings report. It is cheap and we can capture any rebound from support. There is risk of a further decline to that support so I am putting the stop loss under that $96 level.

Position 5/20/16:

Long July $100 call @ $2.15, see portfolio graphic for stop loss.


MKC - McCormick & Co - Company Description

Comments:

No specific news. 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. Shares rallied slightly.

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:

No specific news. Nice 2% gain.

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. Just enough decline after testing resistance at $75.25 to induce me to keep this in the portfolio a little longer.

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.


AXP - American Express - Company Description

Comments:

No specific news. Shares up with the market but came to a dead stop at $64.

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, see portfolio graphic for stop loss.


CP - Canadian pacific Railway - Company Description

Comments:

Minor short covering rebound on no news. 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.

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%. 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 on short covering after a 3% decline on Thursday.

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:

No specific news. Shares posted only a minor rebound in a positive market.

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.

Position 5/19/16 with a GILD trade at $81.65

Long July $80 put @ $2.58, see portfolio graphic for the stop loss.


GPRO - GoPro - Company Description

Comments:

No specific news. Shares rallied early on short covering but sank again at the close.

Original Trade Description: May 18th.

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?

Position 5/19/16

Long July $8 put @ 62 cents. No stop loss.


HOG - Harley Davidson - Company Description

Comments:

No specific news. Only a minor 10 cent rebound.

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:

Another amazing day with a short squeeze rebound well above 2,040 to close at 2,052. Still poised 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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