Option Investor
Newsletter

Daily Newsletter, Wednesday, 5/25/2016

Table of Contents

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

Market Wrap

Pre-Memorial Day Rally

by Keene Little

Click here to email Keene Little
The last week of May, leading up to the Memorial Day holiday weekend, tends to be bullish and that's what we've seen this week. The rally usually extends into the first day of June and it's looking like that pattern will hold.

Today's Market Stats

So much for sell in May and go away. The bears are feeling that there's nothing that's going to knock this market down and they could be right. But the indexes have reached or are nearing important inflection levels and what happens after this rally will be an important tell for the bigger picture. The rally off the May 19th low could extend into June 1st (the typically bullish pattern with an end-of-month rally into the 1st of the month), especially since it's a typically bullish week in front of Memorial Day weekend, but the bulls need to hang on here and not let the bears back in.

May is turning into a good month for the bulls. While the Dow Industrials haven't done that well (+0.4% so far, thanks to today's +0.8%), SPX has done better with a +1.2% return and the tech big caps (NDX) have done very well -- up +3.1% for May. The SOX contributed the biggest boost, up +6.8% so far. But the tech indexes are working on a deficit for the year, down about -2.3% after this month's rally. The RUT has been a bit of a disappointment for the bulls, up only +0.9% for the month and +0.5% for the year, and the bulls would be in better shape if the RUT was out in the lead. But it's interesting that the month of May is what dug the RUT out of the hole for the year. Banks have had a good month, up +2.8%, as they look forward to higher rates from the Fed. Look for a very disappointing reaction in BKX if the market gets a whiff of no rate increase in June.

Speaking of a rate increase, the odds are still 2:1 against an increase but the market seems to be rallying now with the expectation that there will be one. Certainly the banks are. This is what the Fed wants to see and the reason for all the posturing and Fed-head speeches indicating that the Fed will be raising rates further this year, starting with one in June, is that they're gauging the market's reaction to the idea. It's certainly arguable whether or not the economy can handle a rate increase and I suspect the Fed will get the blame if they do raise rates again in June and the economy drops into a recession (I think it already has but it takes a while for the numbers to prove it). But the Fed no longer uses economic metrics to gauge what they do. They say they do but it's obvious they're deathly afraid of the market's reaction more than anything. It's the tail wagging the dog and it's all part of the bizarro world in which we trade.

There were no market-moving economic reports today and about the only thing the market seems concerned about overseas is the Brexit vote later in June. The latest polling shows more (about 55%) in favor of staying in the EU and that prompted an overnight rally in equity futures, which carried over into the start of our trading day. But after another gap-up start to the day the rest of the day was spent going sideways. It seems the favored way of rallying this market -- gap it up, go sideways, rinse and repeat. It prevents bulls from participating (unless you buy before the following day's gap up) and it traps the bears in their short positions.

Since last Thursday's low we've had 4 trading days, 3 of which started with a big gap up and then only sideways from there. Consequently we've had a strong week but on lower volume and without a strong participation in the rally it makes me wonder what kind of staying power it will have. If it starts back down there is essentially an air pocket below us. If you look at an intraday chart with VAP (Volume At Price) you'll see lots of volume where the market traded sideways and very little in the gap-up rallies. What the bulls need is a lot of backing and filling (big sideways choppy consolidation) to get the participants joining in and providing a little stronger foundation. Until that happens I think the market is at risk for a strong reversal back down (just another of many we've seen in the past few months.

I'll start tonight's chart review with a look at the "big" index, the Wilshire 5000 Total Market (W5000). Hopefully it will cut through some of the differences I'm seeing between the other broader market averages.


Wilshire 5000 Total Market index, W5000, Weekly chart

The weekly chart of the W5000 shows a downtrend line from June-July 2015, which cuts across the April 2016 high, and is currently near 17690. Today's high was 21655 and while we don't know if the downtrend line will stop the rally, with a short-term overbought market it's not unreasonable to think we'll see at least a pullback correction before proceeding higher. If the bulls are not going to let go of this market until at least next week, the April 20th high is another 100 points higher, at 17790. A continuation of the rally above that level would likely lead to a test of price-level S/R near 22000 and its November 2015 high at 22032. It would obviously be more bullish above that level. But there's a corrective pattern that calls for another leg down, to at least equal the 1st leg down from April, before possibly starting another rally leg. It's the bearish pattern that has me wondering if the downtrend line from last summer is going to hold as resistance and lead to a sharper decline.


Wilshire 5000 Total Market index, W5000, Daily chart

The daily chart of W5000 shows the choppy sideways move since the April high and the leg up from last Thursday could be the completion of a bounce correction off the May 6th low. If so then we'll see at least another leg down for either a larger pullback correction or the start of a more bearish move. The best thing the bulls can do here is get the index up and over its downtrend line from last summer, near 21690, and then hold above the line (such as on a back-test). We're still in the land of chop and it's hard to trust any move yet.

Key Levels for W5000:
- bullish above 21,790
- bearish below 20,857


Dow Industrials, INDU, Daily chart

The blue chips have a pattern very similar to the blue chips and one idea that works particularly well for the Dow, because it had a higher low in February, is a 5-wave move up from January. The W5000 and SPX both made minor new lows in February which violates an EW rule that says the 2nd wave pullback cannot drop below the start of the 1st wave rally. But knowing this market has often tended to over/undershoot support/resistance with all the program trading going on, I can turn a blind eye to the new February lows for W5000 and SPX and say they have the same wave count as the Dow's shown below.

The idea for a 5-wave move up from January says the pullback from April is the 4th wave correction and that now we're into the 5th wave. It's common for the 5th wave to equal the 1st wave, which is the leg up from January 20th into the February 1st high, and that gives us an upside projection at 18391, which is shown on the chart. That projection crosses the midline of its up-channel from January-February on June 7th, which is "suspiciously" inside the important Gann June 6-10 turn week. But before it reaches 18391 it will have to again deal with possible resistance against the top of its shallow up-channel from August-September 2015, currently near 18100 and slightly shy of its April 20th high at 18167.

But there's still a bearish pattern that calls the bounce pattern off the May 6th low an a-b-c correction in what will become at least a larger pullback pattern, if not something more bearish. The leg up from last week fits as the completion to the correction pattern and therefore we need to stay alert to the possibility of another sharp reversal following this week's rally.

Key Levels for DOW:
- bullish above 18,100
- bearish below 17,330


S&P 500, SPX, Daily chart

Looking at SPX as a 5-wave move up from January, the 5th wave would equal the 1st wave at 2160. Another possibility is where the 5th wave would equal 62% of the 1st wave, which is at 2109. That would be a test of the April high and only slightly higher, at 2116 it would test its November 2015 high. The May 2015 high near 2135 is another potential resistance level so there's plenty of work the bulls will need to do to reach 2160 but the bears should be aware of that kind of upside potential and not stubbornly hold short thinking the market "should not be rallying." However, as stated for the Dow, there is the potential for an a-b-c bounce pattern off the May 6th low to complete at any time and reverse hard back down. The bulls can hardly afford to get complacent here.

Key Levels for SPX:
- bullish above 2117
- bearish below 2025


S&P 500, SPX, 60-min chart

The 60-min chart shows the price action since the April high and the choppy overlapping highs and lows is what looks corrective and is the 4th wave correction that I discussed on the daily charts above. The corrective pattern is what points to a new high and an impulsive 5-wave move up from last week would support that view. But so far the rally off last week's low is just another 3-wave move and therefore could be just a bounce correction that will lead to a strong decline below the May 19th low. The bulls want to see just a high-level consolidation near today's high, which would point higher and likely at least a test of the April high, if not the November 2015 high at 2116. At that point it might be the entire rally or it might lead to just a pullback before continuing higher in June. What the larger pattern might be will have to be figured out once we get more price action.


SPDR S&P 500 Trust, SPY, Daily chart

For a little different look at the S&P 500, the SPY chart below shows how it has reached the top of its Bollinger Band (BB), currently at 209.00 and what the bulls don't want to see is a drop back down from it. That could result in a pullback to at least the midline (20-dma), currently at 206.22, if not back to the bottom of the BB, currently at 203.43. What's a little worrisome for bulls is the lack of confirming strength from volume and MFI, both of which have remained low even as the price spike back up is large. This further supports the idea discussed above that we might be looking at the conclusion to an a-b-c bounce correction rather than something more bullish. If the rally can hang on for a bit longer (perhaps pushing the top of the BB higher in the process), I'll be watching MFI to see if it stalls at or below the 50 line, which often indicates the current move will stall. The SPY chart tells me to be very cautious about the upside and even think about shorting it (with a stop just above 211).


Nasdaq Composite index, COMPQ, Daily chart

Today the Nasdaq almost made it up to its downtrend line from December 2015 - April 2016, near 4913, as well as a 78.6% retracement of its April-May decline, at 4908, with today's high at 4905. That was also a little shy of price-level S/R at 4920, which was support for the "island" that was created April 13-21. Following the gap down on April 22nd it was then unable to get back above 4920 and it's important for the bulls to now recover that level, otherwise the bears will become emboldened and start a new attack. What looks like an impulsive decline from April, followed by a 3-wave bounce pattern off the May 6th low, the pattern looks bearish but the bears must step in now otherwise a rally above 4920 would start to favor the bulls (for a new high).

Key Levels for COMPQ:
- bullish above 4920
- bearish below 4675


Russell-2000, RUT, Daily chart

The RUT has bounced back up to a grouping of trend lines that could be trouble for the bulls. A broken uptrend line form February 11 - May 6, currently near today's closing price at 1141, is the line that also stopped yesterday's rally. Slightly higher, near 1143, is its downtrend line from June 2015 - April 2016 and then the bottom of a parallel up-channel for the portion of its rally off the February low, running from March into the April high, is near 1146. If the RUT can get above all that we should then see at least a test of its April 27th high at 1156 and perhaps price-level S/R near 1160 (last tested with the December 29th bounce high). Back below its May 10th high at 1129 would be the first hint of trouble for the bulls.

Key Levels for RUT:
- bullish above 1160
- bearish below 1094


20+ Year Treasury ETF, TLT, Daily chart

The bond market is obviously important to watch since it's the "smarter" market and we need to take clues from it to help determine what it's thinking the Fed will do. But since the February high for bond prices, as shown with the TLT chart below, the bond market is not sure what to expect. In the meantime the stock market just keeps skipping to the beat of its own drummer (using drums with snorting bulls painted on them) and has rallied back up near its highs. The message I get from the bond pattern is that stock market bulls should be a little more careful.

TLT has been in a descending triangle pattern since the February high and ideally we'll see the completion of the leg down from May 13th to the bottom of the triangle, at which point the 5-wave move inside the triangle (a-b-c-d-e) will be complete and ready for the next rally leg. The e-wave (the leg down from May 13th) can complete at any time and therefore bond bears are at risk for a surprise rally at any time. And if bonds rally then yields will decline and that tells me the Fed will not be raising rates in June. Instead they'll spark a big bond rally and very likely scare the stock market into selling. I'll be watching closely for a message that's different than this.


Transportation Index, TRAN, Daily chart

Today's rally in the transports had the TRAN closing on its downtrend line from March-November 2015, near 7745, which is only marginally above its 20-dma at 7713 and 200-dma at 7732. Its bounce off the May 13th low would achieve two equal legs up for an a-b-c bounce correction at 7785, which is near the 50% retracement of its April-May decline, at 7809. And then slightly higher is its 50-dma at 7843, which is also its 50% retracement of its decline from November 2014 into the January low. So the TRAN has multiple levels of resistance in a 100-point span from here (7743) up to its 50-dma at 7743. If the bulls can drive the TRAN above 7857 I'd then give the bulls the nod but at the moment it's looking like a bounce correction off the May 13th low that should lead to another leg down.


U.S. Dollar contract, DX, Weekly chart

The US$ is now approaching the top of its down-channel from last December, near 96, and while I expect it to break out from this channel there's a good possibility we'll first see a multi-week pullback/consolidation before heading higher. I would imagine there's going to some volatility around the FOMC announcement on June 15th. It takes a drop below the May 3rd low at 91.88 to negate the bullish pattern, even though it might only lead to a lower low for the pullback from March 2015 before heading higher again.


Gold continuous contract, GC, Weekly chart

It looks like gold has finally started at least a correction to its December-May rally after tagging resistance at its previous high near 1308 in January 2015 (with a high at 1306 on May 2nd). The pullback has now dropped gold back inside its down-channel from 2013 and the bearish interpretation of that move is that it has left behind a failed breakout attempt. The more bullish pattern would have been a pullback to the top of the channel and then continue higher. We'll have to see how the pullback/decline develops but it's very possible we'll see a drop down to its recovered 50-week MA, currently near 1160. I think gold will drop to a new low but it doesn't matter what I think; it only matters what the market thinks so the pattern will be watched closely for clues. But if you're long gold for a trade (vs. holding onto the shiny metal no matter what happens) keep in mind that all of the December-May profits could be given back if my longer-term bearish wave count is correct (which suggest a drop down to 1000, if not to 890).


Silver continuous contract, SI, Weekly chart

Like gold, silver popped above the top of its down-channel from 2013 but it was only a minor break and it was quickly followed by a drop back inside the channel. The top of a smaller down-channel for the consolidation off the November 2014 low was also tested with the May 2nd high. From there it could be just a pullback before heading higher and it would be more bullish with a rally above 18. But the longer-term bearish wave pattern suggests silver has now started the next leg down and a drop below its 50-week MA, near 15.22, and then its April 1st low at 14.78 would be stronger confirmation new lows are likely next.


Oil continuous contract, CL, Daily chart

Oil is working its way marginally higher each day and is now close to its target zone at 50.21-50.95. The lower target is where the 5th wave of the leg up from April 5th would equal the 1st wave. At 50.92 it would test its October 2015 high and at 50.95 it would have two equal legs up from January (to complete an A-B-C bounce correction). The top of its rising wedge pattern is currently near 50.95 so there's a lot of resistance for the bulls to fight through and I don't think they'll be successful. The pattern calls for a drop below the January low near 26.


Economic reports

Thursday's economic reports include Durable Goods orders and pending home sales, along with the usual unemployment data. None are likely to be market moving. Friday's GDP numbers and Michigan Sentiment also will not likely move the market much.


Conclusion

A typically bullish week for the last week of May and into the 1st of June is living up to its reputation and it could hold on for more if the pattern follows through. But the indexes have rallied up to levels that urge caution by the bulls, especially since the rally from last week could be completing a bounce correction that will be followed by a decline below last week's lows. This market has seen repeated reversals of reversals with sharp moves in both directions and that could easily continue for longer. The more bearish pattern suggests a stronger decline than we've seen so far.

The big caution sign for the bears is the fact that last week's low was a good setup for the bulls. As indicated on the Dow and SPX charts, there is the potential for a rally to a new high in June. We're due a pullback at least, to correct the rally off last week's low, but if we see only small choppy pullbacks then we'll have a good idea that higher highs are coming. But if the decline becomes a sharp impulsive move down and that's followed by a choppy bounce correction I would then get more defensive/bearish and expect another leg down. We're in the "between" stage where the pattern is not helpful yet in determining the higher-odds direction and therefore short-term trades with good stop management is a must. Once we get a little more price action, hopefully in the coming week, we should get a better idea what the larger pattern is likely to be. In the meantime, trade safe.

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

Got Pink?

by Jim Brown

Click here to email Jim Brown

Editors Note:

Owens Corning makes insulation and roofing materials for commercial and residential building. The insulation has typically been pink in color and they adopted the Pink Panther as their mascot. The toll free number for customer service is 1-800-GET-PINK.


NEW DIRECTIONAL CALL PLAYS

OC - Owens Corning - Company Description

Owens Corning, together with its subsidiaries, produces and sells glass fiber reinforcements and other materials for composites; and residential and commercial building materials worldwide. It operates in three segments: Composites, Insulation, and Roofing. The Composites segment manufactures, fabricates, and sells glass reinforcements in the form of fiber; and manufactures and sells glass fiber products in the form of fabrics, non-wovens, and other specialized products. Its products are used in pipe, roofing shingles, sporting goods, consumer electronics, telecommunications cables, boats, aviation, defense, automotive, industrial containers, and wind-energy applications in the building and construction, transportation, consumer, industrial, and power and energy markets. The Insulation segment manufactures and sells fiberglass insulation into residential, commercial, industrial, and other markets for thermal and acoustical applications; and manufactures and sells glass fiber pipe insulation, flexible duct media, bonded and granulated mineral fiber insulation, and foam insulation used in above- and below-grade construction applications. It sells its products primarily to the insulation installers, home centers, lumberyards, retailers, and distributors. The Roofing segment manufactures and sells residential roofing shingles, oxidized asphalt materials, and roofing accessories used in residential and commercial construction.

As you can see in the company description, they do a lot more than just fiberglass insulation but that is what they are known for in the industry. The sharp uptick in new home sales reported this week suggests there is a corresponding spike in new home construction both in the last several months and over the summer months. OC is the premier supplier of insulation materials for new home construction and their profits will blossom as a result.

In their recent earnings, they reported 53 cents compared to estimates for 33 cents. However, revenue was a slight miss at $1.23 billion compared to estimates for $1.24 billion. Shares were crushed for a 15% drop over the next four days. They have completely recovered and today's close was a new high.

In their guidance they said all three divisions were improving and this was for a winter quarter when demand is slower. I believe this is a better bet than investing in a homebuilder. All the builders use OC products so buying OC is a builder agnostic trade.

Earnings July 27th.

Shares do not move very fast but they have been a steady gainer since the February lows. Because it is a slow mover the option premiums are very cheap. Because Wednesday's close was a new high and the market has been up strongly for two days I am going to put an entry trigger at $52.50. We want to make sure there is a breakout before we enter and that the market is not going to tank at the open on Thursday.

With an OC trade at $52.50

Buy August $55 call, currently $1.15, no initial stop because of the cheap option.


NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays



In Play Updates and Reviews

Low Volume Follow Through

by Jim Brown

Click here to email Jim Brown

Editors Note:

Tuesday's short squeeze continued today as Europe added to its gains on the end of the Brexit threat. The European indexes rallied about 1.5% on average and that carried over into the U.S. markets. The lack of any material economics or earnings in the morning allowed the bulls to continue to add to gains.

The volume was low at 6.4 billion shares and the second lowest dating back to March 26th. The lowest volume was Monday at 5.9 billion shares.

Volume for the rest of the week could be under 5 billion shares as traders close up shop and head for the holiday weekend.

The S&P pulled closer to the critical resistance at 2,100 with a high at 2,095 before giving back 5 points to close at 2,090. If the index is going to fail, it will be at the 2,100 level or below. While the chance of a Brexit is declining daily, so is the U.S. economy and the Chinese markets. Yellen's speech on Friday is going to be a pivotal event and given the low volume on Friday it could move the markets.

We were stopped out of two more shorts in the two-day squeeze. We lost GoPro and Harley-Davidson with minor losses.



Current Portfolio




Current Position Changes


GPRO - GoPro

The long put position was stopped out at $10.15.


HOG - Harley-Davidson

The long put position was stopped out at $44.85.


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:

No specific news. Deutsche Bank upgraded their target price from $113 to $115. Yes, $2 and they kept it at a hold rating. Why bother? Investors ignored it and shares only rose 31 cents.

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. Minor gain. 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. Retail sector weakness is still weighing on the stock.

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 but shares actually rebounded well from the new intraday low on Tuesday.

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. Heading back to the lows in a bullish market.

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.


CP - Canadian pacific Railway - Company Description

Comments:

No specific news. Minor short covering with the market and ahead of the holiday weekend. 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, see portfolio graphic for stop loss.


DLPH - Delphi Automotive - Company Description

Comments:

No specific news. Shares spiked at the open because of the market short squeeze but rolled over to close at the low for the day.

Original Trade Description: May 23rd.

Delphi, a former division of General Motors, manufacturers vehicle components and provided electrical and electronic, powertrain, and safety technology solutions to the automotive and commercial vehicle markets worldwide.

When they reported Q1 earnings of $1.36 they beat the estimates for $1.34. Revenues increased 7% to $4.05 billion but missed estimates for $4.08 billion. They repurchased 5.6 million shares worth $370 million in the quarter and had $137 million left to spend. In April the board authorized a new $1.5 billion repurchase program. They currently has $463 million in cash and $4.35 billion in debt.

On the surface it would appear they are a very healthy company. However, they are very dependent on U.S. auto production. The Autonation CEO said on his earnings call that auto inventories were at record highs and there was no space left to store them. He said manufacturers would have to cut back on production for the rest of the year to bring inventory levels back into balance.

Vehicle sales have been helped by low gasoline prices and the abundance of subprime loans available to consumers. Some 44% of borrowers were taking out 61-72 month loans. However, all good things must end. Gasoline prices are rising and are not likely to return to the recent lows for a very long time, if ever.

Recently banks reported that as many as 31% of those subprime loans were in trouble. While not technically in default, there have been problems like late or missed payments. Also, as many as 35% of those borrowers are underwater because the value of recently new cars has fallen sharply with the resale market still crowded with the used cars everyone is trading in to buy new.

As a result of those statistics the subprime auto loan market is evaporating. It is becoming increasingly hard to obtain financing and larger down payments are required. This is slowing the sale of new cars. In the March sales report the run rate fell to 16.6 million and a two year low. That rebounded to 17.4 million in April and analysts blamed the dip on the weather. However, the last five months have been significantly lower than the last five months in 2015 when the sales rate rose to 18.2 million. Manufacturers are compensating by raising incentives nearly to the rate immediately after the recession. Also, manufacturers leased a lot of cars in order to move inventory immediately after the recession. Those cars are now coming off lease with 2.55 million expiring in 2015 and that number will rise by 500,000 per year through 2018.

This is where Delphi runs into trouble. As auto sales decline it will reduce revenue for Delphi. We are also heading into the summer months when auto factories shut down to retool for the new models that come out in the fall.

Investors have caught on to the "peak auto" worries and Delphi shares have been declining since their earnings in early May. If a company is going to miss on revenue in the good times they are likely to miss again as auto sales slow.

Earnings August 3rd.

Position 5/24/16:

Long July $65 put @ $1.92, initial stop loss $69.25.

There is no open interest on the July strikes because the series was just added today after the May expiration. It should not be a worry because the pricing is not out of line and open interest will rise quickly.


GPRO - GoPro - Company Description

Comments:

GoPro shares continued to rise after the announcement on Tuesday of a partnership with Red Bull for a multi-year project that includes content production, distribution, cross-promotion and product innovation. Red Bull will receive some equity in GoPro and GoPro will become Red Bull's exclusive point-of-view imaging technology for capturing immersive footage of Red Bull's media productions and events.

We were stopped out at $10.15 for a minor loss.

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

Closed 5/25/16: Long July $8 put @ 62 cents. Exit .25, -.37 loss.


HOG - Harley Davidson - Company Description

Comments:

No specific news. Continued market short squeeze lifted all stocks and stopped us out at $44.85.

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:

Closed 5/25/16: Long June $45 put @ $1.50, exit $1.21, -.29 loss.


NKE - Nike - Company Description

Comments:

No specific news. Shares did not rally with the market and moved closer to support at $55.65.

Original Trade Description: May 21st.

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.

Position 5/23/16:

Long July $55 put @ $1.75, see portfolio graphic for stop loss.


SPY - S&P 500 ETF - ETF Description

Comments:

The S&P spiked again to nearly 2,100 but faded at the close to 2,090. If we do not get a retracement of these gains next week our June options will quickly turn worthless. We need a 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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