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Daily Newsletter, Saturday, 5/28/2016

Table of Contents

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

Market Wrap

Melting Up

by Jim Brown

Click here to email Jim Brown

With very little news on Friday, investors passed time while they waited for Yellen to speak. The post Yellen decline was lackluster and shorts covered at the close.

Market Statistics

Friday Statistics

When Yellen spoke in the early afternoon she was asked about a rate hike and she said, "It's appropriate, and I have said this in the past, I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate." That was the end of the conversation about rates and the market was underwhelmed.

Sellers tried to take the market lower after her comments but the S&P stopped falling at 2,092 and after 30 minutes of no decline the shorts began to cover and the market melted up into the close with the S&P ending the day at 2,099.

This was a holiday Friday and volume was very light at 5.5 billion shares and the second slowest day of the year. The Dow traded in a very narrow 49-point range. That was the narrowest for a full day of trading in the last 18 months.

Traders were absent and the meltup was more a lack of sellers than an abundance of buyers. Advancers were 2:1 over decliners and advancing volume was 3:2 over declining volume.

The economics for the day were positive but not stimulating.

The Q1 GDP revision saw the initial 0.5% number revised up to +0.8%. That is hardly a roaring economy despite what the Fed would have you believe. This was the slowest growth in a year. That compares to 1.4% in 2015-Q4, 2.0% in Q3 and 3.92% in Q2. The trend is going in the wrong direction.

Housing was the biggest contribution with consumer spending rising 1.29%, down from 1.66% in Q4 and 2.04% in Q3. Government added -.2% while inventories removed -0.2% and exports -0.21%. Nonresidential investment was the biggest loser at -0.81%. One bright point was a +1.94% increase in after tax profits compared to -8.08% in Q4 and -3.3% in Q3.


Consumer sentiment for May was revised lower from 95.8 to 94.7 but that was still well above the 89.0 in April. The present conditions component rose from 106.7 to 109.9 and the expectations component rose from 77.6 to 84.9.

This was the highest level for the headline number since last June. Gasoline prices have risen but are still well below the average for this time of year. Consumers are glad winter is over and summer has arrived.


The calendar for next week is very busy. The ISM Manufacturing, Fed Beige Book, ADP Employment and Nonfarm Payrolls head the list as the most important items but there is plenty of filler in the form of other reports.

The OPEC production meeting starts on Thursday and the ASCO cancer conference opens a 4-day run on Friday. That should continue to support biotech stocks next week.


Stock news was also muted with only a handful of companies making headlines. Big Lots (BIG) reported earnings of 82 cents that beat estimates for 71 cents. Revenue of $1.31 billion beat estimates of $1.30 billion. They guided for the current quarter to earnings of 42-47 cents and for the full year to earnings of $3.35-$3.50. Analysts were expecting $3.30. Same store sales were +3%. The CEO said their core customer continued to respond positively to improved merchandise selection and better in-store execution. Shares exploded higher by 14% to $51.


Ulta Salon (ULTA) reported earnings of $1.45 compared to estimates for $1.29. Revenue of $1.07 billion beat estimates for $1.03 billion. They guided for the current quarter to revenue of $1.04-$1.06 billion and analysts were expecting $1.03 billion. Earnings are expected to grow in the low 20% range and slightly higher than the prior 18-20% forecast. Same store sales rose a whopping 15.2% and beating estimates for 10.7%. The CEO said their consumers were healthy and demand was strong thanks to their unique format and offerings. Shares rose 9% on the news.


Palo Alto Networks (PANW) really stunk up the sector after they reported a loss of 86 cents that was significantly more than the 28-cent estimate. Revenue surged 47.7% to $345.8 million, which easily beat estimates for $339 million. However, expenses rose 50%. All of the revenue metrics were very positive for their various products but they are not making any money. They did guide for Q2 for revenue to rise 36% to $388 million and for earnings of 48-50 cents. Analysts were expecting a loss of 23 cents. Analysts did see the revenue growth as a guide down from the 47.7% in the last quarter. Shares fell -12% on the news.


GameStop (GME) reported earnings of 66 cents compared to estimates for 62 cents. Revenue fell -4.3% to $1.97 billion but matched estimates. However, shares declined on the guidance. Sales of game consoles and accessories declined -28.8% in Q1. They guided for earnings of 23-30 cents in Q2 and analysts were expecting 33 cents. The company said the gaming business would continue to decline in 2016 so it is expanding its technology brands business, which sells cellphones, tablets, computers and other computer electronics. While game sales declined -28.8% revenue from the technology brands business rose +62.2%. Shares fell -4%.


Deckers (DECK) reported earnings of 11 cents that beat estimates for 6 cents. Revenue of $378.6 million beat estimated for $363.4 million. They guided for full year earnings in the range of $4.05 to $4.40 per share. That missed analyst estimates for $4.60. The CEO said the warmer than normal weather impacted sales of their Uggs brand. They projected sales to be down -3% over the next fiscal year. They are looking for a loss of $2.10 to $2.20 for the current quarter with sales falling 20%-25%. This is traditionally a weak quarter because boot sales are very slow. The company was downgraded from buy to neutral by Citigroup. Strangely, shares rallied 8%.


More than 98% of the S&P-500 have reported earnings. The blended earnings through Friday were down -6.7%. Eighty companies have issued negative guidance and 31 companies issued positive guidance. Revenue declined -1.5%. This the fourth consecutive quarter of earnings declines and Q2 is also projected to be negative. This was the fifth consecutive quarter of revenue declines. This is the worst string of earnings since the financial crisis.

The earnings for next week are very light with Broadcom (AVGO) the highlight for the week followed by Kors, Ctrip.com and WorkDay.


Valeant Pharmaceuticals (VRX) shares rose 9% intraday before falling back to +5% after news broke that TPG and Takeda had made a takeover offer for the company. The offer was made several weeks ago before Joe Papa became CEO. There was talk on how an acquisition would work but a firm price was never discussed. The parties are no longer holding discussions. Valeant has about $30 billion in debt but they also have a lot of assets. Any acquisition would probably try to sell off non-core asset quickly to pay down the Debt. Papa has said Valeant expects to pay down $1.5 billion in 2016 and increase the amounts in future years.


Thermo Fisher (TMO) is buying FEI (FEIC) for $107.50 a share of roughly $4.2 billion. FEI is a microscope technology specialist company. Thermo Fisher CEO Marc Casper said the growing adoption of electron microscopy to study the structure of proteins is an important field in life sciences. FRI will complement our mass spectrometry leadership. The acquisition will add 30 cents to TMO earnings in the first year. Shares spiked to more than $108. I wonder if traders expect a competing offer?


Freeport McMoran (FCX) will pay Rowan Companies (RDC) $215 million to cancel another drilling rig contract. The lease on the Rowan Relentless drillship was scheduled to terminate in June 2017. Freeport could be liable for another $10-$20 million in contingent payments depending on the price of oil over the next 12 months. The ship had already moved to out of service mode because Freeport was not involved in any drilling.

Freeport has significant assets in the Gulf of Mexico and it said it was negotiating with several firms over "North American" assets. They bought some deepwater assets from Apache for $1.4 billion in 2014 just before the oil crash began. They own non-operated interests in the Lucius and Heidelberg developments along with 11 primary exploration blocks. The deepwater assets have an estimated 55 million barrels of oil reserves and several hundred million BOE of gas and liquids.

Freeport bought the assets after it sold Encana $3.1 billion in Eagle Ford Shale assets. Freeport also owns the gulf assets of McMoran Exploration that they took over in 2014 along with the $6.9 billion in assets from Plains Exploration & Production they bought at the same time.

Freeport's problem is their big shopping spree just before the oil crash. Now they have all these assets acquired when oil was $110 and they are worth less than half what they paid for them. Reportedly, they are in talks with China's Citic Metals to sell a stake in the North American and South American mining operations. The stake under discussion could be up to 20% and the reported price is $2 billion. They are also in talks with another "investor group" but no decisions have been made. Freeport is trying to reduce its debt by 50%.


Western Digital (WDC) revised its guidance to reflect the completion of the SanDisk acquisition. They now expect current quarter revenue in the range of $3.35-$3.45 billion compared to the prior forecast of $2.6-$2.7 billion. Earnings are expected to be between $.65-$.70 cents compared to the prior forecast for $1.05. The new guidance now includes interest costs of about $220 million. They incurred $30 million in debt issuance costs and $50 million in interest prior to closing on the acquisition. I believe WDC is going to rally off the recent lows and through resistance at $51. The combined companies are much stronger with a wider range of products than Seagate and sales late this year and in 2017 are going to be much stronger.


The National Oceanic and Atmospheric Administration (NOAA) released its predictions for this summer. They are predicting a hotter than normal summer primarily in the west and the Northeast. They also predicted a stronger hurricane season than in recent years. They expect a 70% likelihood of 10-16 named storms, 4-8 hurricanes and 1-8 major hurricanes. Over the last three years, we have averaged only four hurricanes per year. The second storm of the season could form this weekend. Tropical depression TWO is moving off the coast of Florida but is expected to move northwest and strengthen as it hits the warmer water off the coasts. The storm will be named Bonnie. This should produce some significant waves for the holiday beach goers in that area.


Holiday travelers are expected to spend $12 billion on gasoline this weekend. It would be worse but with the average gas price at $2.32 that is 40 cents less than in 2015. The ten-year average is $3.15. The average road trip this weekend is around 400 miles. With oil prices rising, we should expect to see gasoline prices rise as well. For every $1 gain in oil prices, we will see about a 2.3 cent rise in gasoline prices.

 

Do you remember how cheap gasoline was in January? The futures price set an 8-year low at 98 cents a gallon. We have rebounded a long way since then but compared to the last ten years we should be very grateful.


Crude prices touched the magic $50 level on Thursday and as expected, there was some instant selling. That was the target price for many traders. The new target is $55 but there is far less conviction that it will be hit.

The OPEC production meeting is Thursday and nothing is expected to change. There will be the obligatory headlines as every oil minister tries to grab his 5 minutes of fame by making some comment to the press. However, the outlook calls for more production and the end to a lot of current production outages. The oil sands in Canada are starting to come back online and Libya has worked out a deal with the various factions to start shipping oil again. Nigeria is still down about 800,000 bpd to a 20-year low and there is no immediate fix in sight. Venezuela is circling the drain with production down about 7% YTD and still falling as the economy implodes. Columbia is down about 200,000 bpd on pipeline problems. Iraq is down from 4.7 mbpd to 4.5 mbpd because of infrastructure problems. These problems will be fixed eventually and some OPEC countries are increasing production to take advantage of the $50 oil.


The decline in oil rigs has slowed. Active oil rigs declined only -2 last week after being flat the prior week. With oil at $50 there may not be any further declines. Most U.S. drillers can come close to breakeven at $50 and several including Pioneer (PXD) can even be profitable at that level. Pioneer said they would add 5-10 oil rigs if it appeared the price has stabilized at the $50 level. Saudi Arabia does not want to see this. We have not had enough companies go out of business to prevent production from accelerating if prices remain over $50. This is why I expect no production freeze at the OPEC meeting and more than likely promises of production increases. More than 60 U.S. oil companies have filed bankruptcy. That number rises to more than 100 if you count service companies. More than 185,000 workers have lost their jobs.


Markets

The Dow added 372 points last week and the Nasdaq +163. The S&P gained 47 points and the Russell 2000 added 38. It was a good week all around with the semiconductors adding 4.6%, biotechs 4.2% and a sector you do not see often, the brokers adding 4.5%.

The S&P halted its climb on Friday at 2,099 and right on the edge of critical resistance. The S&P is poised to blow through that resistance if we have positive news from the Asian and European markets over the weekend. The 2,111 intraday high from April 20th and the 2,116 high from November are the critical numbers to watch if we do get further gains.

We are well above support at 2,040 but we are not out of the woods yet. The next 15 points should be difficult once everyone is back at work next week.


The Dow is lagging the S&P in relative performance. The major resistance at 17,925 has not yet been retested and Friday's intraday high was lower than the prior two days. While the Dow added 372 points that may have been the last gasp for the index. Tuesday's market action will be the key. If the Dow rolls over after touching 17,925 then we could be targeting the support at 17,500 again.

With no further Dow earnings there is little in the way of headlines to push the stocks higher ahead of the summer doldrums. It can happen and traders are normally surprised when a summer rally breaks out.



The Nasdaq broke through resistance at 4,900 thanks to the biotechs and semiconductor sectors. The biotechs can continue their upward movement for the next week because the ASCO cancer conference does not start until Friday. The expectations of stock movement from presentations there could keep a bid under the sector. The semiconductor sector has broken out to an 11-month high and nearly a 10% gain over the last two weeks. Jeff Bailey used to call semis the "head of the snake." The direction of the semis was a leading indicator for the Nasdaq. Whether the semis can keep up this torrid pace is the $64 question.

The Nasdaq has resistance at 4,968 from the April highs then again at 5,000 from Q4. Those levels could be the end of the road for the Nasdaq rally.



The Russell 2000 is nearing the 1,150-1,156 resistance high from April. The index never tested real resistance at 1,165 so that range from 1150-1165 is going to be a real question for traders. Should it get though that level there is very strong resistance at 1,200.

The Russell is being powered by the same sectors as the Nasdaq with the addition of the energy sector as powerful support. However, with oil likely to peak around $50 that sector could begin to take profits and produce a drag on the Russell.


I am neutral for next week. Volume should be very light on Tuesday unless there is some event over the weekend that powers the markets. The meltup could continue due to the lack of volume assuming no major headlines. Once traders begin to return to work on Wednesday, they will be setting up for the barrage of late week economic reports and Yellen's economics speech on the 6th.

However, as one reader emailed me on Friday, "I don't get it. Earnings suck; guidance sucks; economic reports suck; commodities are in the tank; the dollar is rising; oil will probably be declining again. For six years, the Market has been terrified of another rate increase. In fact, all they wanted was more "stimulus". Now that there is a possibility of another rate hike in June/July they are cheering. Go figure. Bizarro World."

Rallies are strange market events. Sometimes when things seem the most bleak, the markets suddenly rebound. The bad news becomes good news and shorts get crushed over and over again because they cannot adjust to the new reality.

I do not know which reality we will get next week. We just need to follow the trend, whichever direction it decides to go. The trend is your friend, until it ends.


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

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Random Thoughts


The bullish sentiment in the AAII Investor Sentiment Survey for last week fell to 17.8% and the lowest level since April 14, 2005 when it was 16.5%. This was the 29th consecutive week and the 62nd out of 64 weeks, that bullish sentiment has been below the average of 39.0%. Neutral sentiment rose to 52.9% and the highest level in 16 years. The last time neutral sentiment was higher was in April 1990 at 56%. Neutral sentiment has now been above 40% for 12 consecutive weeks and above its average of 31% for 17 weeks. However, bearish sentiment at 29.4% is right at the historical average of 30%.

In the 28 times neutral sentiment has been above 50% only TWICE did the S&P decline over the next 26 weeks and it was only down once in the following 52 weeks. In fact, the 52-week return on the S&P averaged about 20.5% and the 26-week return was 8.4%. However, the AAII survey began in June 1987 and since 1989 neutral sentiment over 50% has only occurred 6 times in 27 years. The other 22 times were clustered in 1988-1989.

This is only the sixth time in 29 years that bullish sentiment has been under 20% and neutral sentiment over 50% in the same week. Five of those weeks were in 1988 and 1989. That means in 27 years this has only happened once before. In the 26 weeks that followed, the S&P averaged an 11.2% gain and over 52 weeks a 25.76% gain. There were no losses.

AAII Source



The CME FedWatch Tool is showing a 28% chance of a rate hike at the June meeting. This is up from a 4% chance just a couple weeks ago. The July meeting has risen from about 10% to a whopping 48% chance for a rate hike. The September chart shows a 68% chance of rates rising to .75% and a 21% chance of rates rising to 1%. November rises to a 71% chance for higher rates, December 81% and February an 83% chance.





Immigrants from Latin America are flooding across the Mexican border in a desperate race to get into the USA before Trump becomes president and tightens down on border crossings. Reportedly in 2015 there were 332,430 people detained trying to cross the border. Authorities on both sides of the border claim the numbers are much higher than in 2015 and U.S. border patrol agents have run out of space to house them. The Sacred Heart Catholic Church shelter in McAllen has been taking in more than 200 per day and that quantity has never happened before.

One 26 yr old mother of 3, Viude de Cruz, paid $2,800 in fees to smugglers and bribes to Mexican officials to reach the U.S. and avoid her 9-yr old son being drafted into a Salvadorian gang. As she was getting on a bus for Maryland, where she was to be housed until her court date nearly two years from now, she said, "There is not another country where you can provide something better for your children, where you will not get harmed. The only one is the United States."

Ruben Villarreal, a Republican candidate for Congress, former mayor of Rio Grande City and Trump supporter, called the wall idea a "12th-century technical solution to a 21st-century problem. There is no such thing as a fence that is impenetrable. And all the talk of it is causing a draw of people." The migrant attitude is "hurry, hurry, hurry, get there." The campaign trail talk "is going to encourage people from here to November."


Everybody knows when a major publication makes a market call the opposite normally happens. The cover of Barron's is almost unbeatable for jinxing the market direction. That means this weekend cover is the straw that could break the market's back. The jinx is in. Sell everything.

The article points out that only one market crash in the last 35 years was not caused by a recession. Therefore, no recession today equals no crash.

Contrary to the Barron's article, Goldman claims the median stock has never been more overvalued. More Americans between the ages of 18-34 live with their parents than any time since the Great Depression. Despite the strong sales of homes and the rapidly rising price, the majority of Americans cannot afford a home. China injected more than $1 trillion in new loans into the economy in Q1 to prevent an economic crash. Lastly, nearly every recession since the Depression has been caused by Fed rate hikes, which the Fed is suddenly in a hurry to execute.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"An open mind leaves a chance for someone to drop a worthwhile thought into it."

Mark Twain


 


Index Wrap

Semiconductors, Biotechs, Energy

by Jim Brown

Click here to email Jim Brown

The three pillars supporting the market last week were the chips, energy stocks and biotechs. Each of those sectors helped to power the Nasdaq, Russell 2000 and the NYSE Composite to 8-week highs. Considering the Dow was at an 8-week low just a week ago, that was no small feat. The week started out slow with the major indexes trading basically flat on Monday but Tuesday saw a gap higher on gains in Europe and that started a two day short squeeze on the news the Brexit vote was now solidly in favor of remaining in the EU. Financials rallied as various Fed heads continued to talk up the chances for a June rate hike.

The chip sector rose after Applied Materials said orders were at 15-year highs and raised their guidance significantly over analyst estimates. Following that news, a headline out of Asia said Apple had asked component suppliers to produce enough for 71-74 million iPhones in 2016. That lifted all the chip stocks that were Apple suppliers and the entire sector caught fire. The Semiconductor Index rallied to an 11 month high.


The biotech sector rallied to a 4.2% gain on expectations for the ASCO cancer conference that starts on Friday. This is an annual event where companies will make dozens of presentations on new drugs and cancer research that can change the future of the fight against cancer. Companies presenting novel new drugs or research that could lead to new therapies have been known to see their shares spike significantly. The sector found a bottom on the 12th and has been moving steadily higher ever since. This should last through next Friday and then the companies that fail to impress will be trashed the following week and that will be the large majority.


Energy stocks rallied as oil rose to $50 on Thursday. There was some immediate selling in the futures when that level was hit but the price still closed at $49.56 on Friday. Continued production outages around the world plus an inventory decline in the U.S. were responsible for the gains in crude. Now that the $50 level has been hit, we should see some of the excitement leave the sector. The next target is $55 and many analysts believe that will be hard to reach and have very little hang time as those outages are cured and U.S. producers begin to put rigs back to work.


The financial sector hit a five-month high on expectations for a June rate hike. Higher rates means banks can charge more for loans while their cost of deposited funds remains low. Even a 25 basis point hike is a 50% increase in the Fed funds rate. When you are talking about interest on trillions of dollars that is a lot of money.


The combination of those four sectors pushed the NYSE Composite much closer to strong resistance from 10500-10600. Those levels should be difficult to break but the NYSE is a broad 1,900 stock index that contains the large stocks like GE and XOM as well as hundreds of miniscule stocks that barely maintain enough market cap to remain listed. Therefore, it really takes a broad based rally to push it higher. If we remove one or two of those sectors mentioned above the May weakness will return.


The Russell 2000 Small Cap index exploded higher because all four of those outperforming sectors are big constituents of the index. The Russell erased a month of declines in only five days. However, there is significant resistance at 1155, 1165 and 1205. I seriously doubt it can continue to plow through those levels without any retracement.


The S&P-400 Midcap Index has broken out to nine-month highs and could continue its gains. This is the most bullish of all the index charts. If the midcaps continue to move higher, it could provide a spark for the broader indexes. The index is only 67 points from a new high.


The Nasdaq Composite benefitted from those four positive sectors but also from the FANG stocks. Facebook, Apple, Netflix and Google as well as Amazon were up strongly as were several other big cap tech stocks. The problem is whether they will continue the rally. Netflix was up +17 points over the last two weeks. Google was up almost $50 over the same period. How much longer can these gains continue?

Resistance at 4,968 is the next test followed by psychological resistance at 5,000. The Nasdaq is well below the November highs and it would take a monster rally to push the index to those highs.



The S&P-500 is entering a massive resistance zone and the next 33 points to a new high, or less than 1.5%, will be tough. There is serious resistance dating back a year and while it will not be impossible it will not be a cakewalk.


The Dow has a similar band of resistance from 17,925 to 18,165 where there will be plenty of potholes and the next two weeks may not be as easy as last week's +372 points. If we did add another 372 points we would be at a new high so everything is within easy reach under the right conditions.


The dollar will be a market and commodity headwind. The closer we get to the FOMC meeting the stronger the dollar will get. That is negative for equities, oil and gold. Declining oil prices will be negative for equities as well.




The Dow Transports struggled higher against rising oil prices thanks to the recovery in some airlines stocks and a rebound in the railroads. I believe this bounce will be short lived but never count them out.


High yield bonds continue to soar despite a record number of new issuance. The HYG is struggling to get back into the lead over the S&P and the impact of the bond market is being felt. The HYG always leads the S&P and should it move over the S&P it will be a major boost for equity sentiment.


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 correlation is nearly 100%.


The short-term view is neutral. It was a good week for the bulls but it remains to be seen if it can continue. Once we get into June and the summer doldrums take hold the current market strength 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

Play to Win

by Jim Brown

Click here to email Jim Brown

Editors Note:

Activision Blizzard is the largest gaming company in the market. With more than 500 million subscribers they are on the path to explosive earnings.


NEW DIRECTIONAL CALL PLAYS

ATVI - Activision Blizzard - Company Description

Activision Blizzard designs, developes and publishes online, personal computer, video game console, handheld, mobile and tablet games. The company operates through two segments, Activision Publishing, Inc. and Blizzard Entertainment, Inc. The company develops, publishes, and sells interactive software products and content through retail channels or digital downloads; and downloadable content to a range of gamers. It also publishes subscription-based massively multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products.

At the end of Q1, ATVI had 544 million monthly active users thanks to the acquisition of King Digital. King had a very diverse network of 463 million global game players. Activision said the acquisition will be accretive to 2016 revenues and earnings by 30% and significantly accretive to free cash flow per share. It also brings 463 million players into the Activision Blizzard massive multiplayer PC games like World of Warcraft that have monthly subscription fees.

Activision actually has a World of Warcraft movie premiering on June 10th. If you go to the movie, you will get a copy of the PC game World of Warcraft free. The movie characters have custom weapons that will be available to players after the movie debut.

Their new game "Overwatch" has been played by 9.7 million people in the open beta phase where it is released to the public in order to get the bugs out of it. It is a good bet the majority of those players will be buyers when the game launched on May 24th. Initial sales were huge and Jefferies expects ATVI to sell 5-7 million copies in Q2. When it reaches 10 million units Jefferies said that would produce up to $250 million in revenue for ATVI or 7-9 cents a share in earnings.

Metacritic has a 93 rating on the game and out of 11 professional reviewers five gave it a perfect 100. The Jefferies team that played the game in order to review it said "it was easy to learn but difficult to master."

Gamers spend $509 million in April in the U.S. alone.

Activision said they were working with Twitch and Instagram and would be producing a lot of content on Facebook live. They are planning on launching live streams of E-Sports programming to all of Facebook's 1.6 billion users. E-Sports provides live competition by gamers for millions of dollars in prizes as other gamers watch. Activision just launched its MLG.tv live streaming platform where gamers can watch others play in real time.

Webush believes ATVI could earn $3 per share by 2018 with $2 per share in 2016. The company reported 23 cents for Q1 on record revenue of $1.46 billion. Those numbers were up from 16 cents and $1.28 billion. Analyst estimates were for 12 cents and revenue of $823 million. The company raised guidance for Q2 and for the full year. They are guiding for earnings of 38 cents in Q2, up +192% on revenue of $1.38 billion, up +81%. For the full year they guided to earnings of $1.78, up +35% and revenue of $6.28 billion, up +36%.

Adding to earnings were continued sales of Call of Duty: Black Ops 3 and Candy Crush Jelly Saga.

Earnings are August 4th.

Shares are approaching new high resistance at $40 and should breakout, market permitting. I am proposing the August $40 calls even though they are a little more expensive than the July. I want to exit the position while those calls still contain some earnings expectation.

Buy Aug $40 Call, currently $2.10, initial stop loss $36.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Breakout Ahead?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P pushed through resistance at 2,095 and closed just below 2,100 as shorts covered positions ahead of the long weekend. There was an attempt in the afternoon to sell off the markets but it failed with the S&P dropping to 2,092 and then rebounding right at the close. Traders who initiated new shorts at 2,095 over the prior two days were forced to cover ahead of the weekend or risk a major gap higher at Tuesday's open.

Janet Yellen said, assuming the data does not change it would be appropriate for the Fed to hike rates in the coming months. The market sold off on the comment but when the index could not break below 2,092 they had to buy those shorts back at the close.

May is over and the sell in May cycle pushed the indexes to critical support levels. When those levels did not break, traders were forced to cover making this the best week for the markets in a long time.

Now we are faced with a lot of options for next week. All of the short positions posted gains on Friday and it appears there was buying across the board. This could be just shorts covering but that does not mean they will come back and reestablish those positions next week.

The S&P failed at the 2,100 level in December and again in April and sometimes the third time is the charm where it pushes through resistance and volume accelerates as shorts cover and buyers begin to chase the price higher. Some technicians do not believe in triple tops while others believe a triple top failure is a major selling opportunity because the price is likely to make new lows from that point.

Time will tell if this is a triple top failure or a breakout.



Current Portfolio




Current Position Changes


OC - Owens Corning

The long call position remains unopened until a trade at $52.50.


IBM - IBM Inc

The long call position was entered at the open with a trade at $152.35.


CP - Canadian Pacific

Close the long put position at the open.


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. Disney's new movie "Alice: Through the Looking Glass" could be a dud but "Finding Dory" will be out in two weeks and should be another big winner and "The BFG" will be out two weeks later. That is another kids show that is sure to be a hit.

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.


IBM - International Business Machines - Company Description

Comments:

No specific news on IBM but shares gained 40 cents towards its breakout.

Original Trade Description: May 26th.

IBM provides information technology products and services worldwide. The Global Technology Services segment provides IT infrastructure including outsourcing, integrated technology, cloud, and technology support services. IBM used to be a hardware company but that is rapidly shrinking and the services business is rapidly expanding. The company was founded in 1910.

Buffett calls IBM one of his "big four" investments in public companies including American Express, Cocs-Cola and Wells Fargo. He said IBM "possesses excellent business outlook and are run by talented managers that are shareholder oriented." He increased his stake from 7.8% to 8.4% worth $13 billion. IBM trades at 9x earnings and pays a dividend that yields 3.9% and has grown at an annual rate of 15% over the last five years. IBM is also a buyback machine. They routinely buy back billions in stock.

IBM has been suffering from a decline in revenue for the last several years. Their mainframe business is declining because China will no longer let critical companies by hardware from American companies for fear of spyware imbedded in the equipment. They also dumped their PC business to Lenovo in an effort to move away from commodity businesses and more into services.

Their cloud business is growing quickly. This week they announced a deal with FleetCor (FLT) to move its business to IBM's cloud. FleetCor processes 1.9 billion transactions a year. Forbes calls FleetCor one of its top 20 Most Innovative Companies. FleetCor manages more than a dozen datacenters globally at a cost of about $100 million. The company said, "IBM has more scale than us and we expect to see further efficiencies with IBM processing for us." They expect to save up to $40 million annually and expect greater security.

This is what IBM does best. They provide computing and services for Fortune 1000 companies. IBM said it signed 26 new service contracts last quarter for more than $100 million each. This is why IBM will rebound out of the funk they have been in for the last year. Amazon and Google do not have the capability to provide the services part of the cloud like IBM can. They provide hardware access but you do the rest. IBM does everything.

Earnings July 18th.

IBM shares have rebounded from $120 in February and are about to break out over 10-month resistance at $153.50. Once they break through that barrier, they could run for $15-$20 as unbelievers become believers and begin chasing the price higher.

If you want to take the cautious approach, you might want to wait until IBM trades at $153.75. I am recommending an immediate entry.

Position 5/27/16:

Long July $155 calls @ $2.40, initial stop loss $146.50.


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, see portfolio graphic for stop loss.


OC - Owens Corning - Company Description

Comments:

No specific news. Now that the obligatory new high dip is behind us and shares did not continue to decline, I am lowering the entry point to $51.75.

ENTER THE POSITION WITH A TRADE AT $51.75

Original Trade Description: May 25th.

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 $51.75

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


SKX - Skechers - Company Description

Comments:

No specific news. Uptick accelerated 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 but shares shot up 80 cents. We need some more days like this.

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. Minor rebound off the historic low.

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:

Shares are creeping up slowly on no news in a bullish market. This is a June option and we have seen our gain bleed away as shares ticked up from $128 to slightly above $130. Rather than see this position turn into a loss I am recommending we close it at the open on Tuesday.

CLOSE THE POSITION AT THE OPEN

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 ticked up slightly on a bullish tape.

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.


NKE - Nike - Company Description

Comments:

No specific news. Shares rose slightly in a bullish market.

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 closed gained 9 points as shorts closed positions ahead of the long weekend. If we do not get a retracement of these gains next week our June options will quickly turn worthless.

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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