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Newsletter

Daily Newsletter, Thursday, 6/9/2016

Table of Contents

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

Market Wrap

Stock Market Holding On

by Keene Little

Click here to email Keene Little
The stock market is challenging all-time highs but now showing signs of tiring and too much bullish sentiment. The big question as we look at the longer-term charts is whether the market can bust through the highs or instead create a double top. It's an important time for traders on both sides of the market.

Today's Market Stats

Despite many signs of a slowing economy and deteriorating corporate earnings, plus a Fed that appears to be forced to sit back down and forget about further rate increases, the stock market has high hopes it can bust through last year's highs and make new ones. But the slowing momentum combined with high bullish sentiment is now working against the market so it could use at least a breather to bring on some new buyers before attempting to charge back up the hill. But today is the typical head-fake day in front of opex where they pull the market back in the morning, get the shorts in and then use short-covering to add to the rally into opex. Today's bounce left me wondering if that pattern will repeat this coming week because at the moment it's looking like it might not work.

The stock market indexes are overbought in all time frames now and at the same time they're showing bearish divergence (waning momentum) at the new highs vs. the highs earlier this year and even vs. the highs over the past three years. At the same time bullish sentiment has jumped back up to an extreme level, as can be seen with CNN's Fear & Greed index below. This combination makes it a risky time to be long the market and certainly too late to be thinking about entering new long positions (unless you're good at selectively choosing strong companies that will be able to fight a downturn). The index has reached a level (80) that has marked previous market reversals. It can go higher but it's a risky bet.

CNN Fear & Greed index, chart courtesy money.cnn.com/data/fear-and-greed/

Many are baffled why the stock market is rallying and not showing more concern about the deteriorating fundamentals (and I include the Fed in the funnymentals). The market started rallying when the Fed started saying more strongly that there would be a good chance for a rate increase in June because they felt the economy was doing well enough to continue their rate-increase campaign. The theory then was that a stronger economy would be good for the stock market.

But recent reports, especially last Friday's dismal NFP report, now has most everyone firmly believing the Fed doesn't have the needed room to raise rates in July, let alone in June. So what does the market do? It rallies. If ever there was a place that can have its cake and eat too it's the stock market. It's like oil prices -- depending on the mood of the market it will either rally or decline on an oil rally/decline and just make up a reason for the move. There's very little rhyme or reason for it. It's why I will always say news is noise and it's best to stick with the charts. That's hard enough (wink).

The employment data from the Bureau of Labor is so saddled with inaccuracies, especially the unemployment rate, that the Fed has developed its own data, which they track as the "Change in Labor Market Conditions Index," shown below. This chart runs from 1976 and as you can see, there have been several drops below the zero line that did not lead to recessions in the U.S. But that's the risk right now as the latest data shows the index dipping below zero, which could be an early indication that our economy is slipping into another recession. The plethora of other economic data, including declining tax receipts, supports the likelihood that a recession has already started and we're just waiting for the confirmation of it (usually six months after the fact). The stock market usually sniffs out a recession and tops about six months before the official declaration of a recession. I wonder if the stock market might peak around here, as it nears last year's highs, or if instead it will continue to defy fundamentals in hopes that the Fed will be able to continue to support the market, I mean economy.

FRED Change in Labor Market Conditions Index, 1976-June 2016, chart courtesy research.stlouisfed.org

While we continue to receive more evidence of a slowing economy we have a stock market that's challenging its all-time highs. There's a lot of hope in this market right now, not to mention greed as shown with the first chart, and that has it looking like it did in May 2008 when there was a big recovery off the January-March 2008 double-bottom lows following the 2007 highs. This year we have a recovery off the January-February double-bottom lows and we could be setting up another big fall just as people get the most bullish, buying near the top again.

From a timing perspective we are at an interesting point where it's been a Fibonacci 377 weeks since the March 2009 low and a Fibonacci 55 weeks from the May 2015 high. The 55-week period is also an important Gann cycle. So with an Elliott Wave pattern that can be considered complete at any time and a Gann/Fibonacci time cycle occurring at the same time we could have a very important time/price setup for a big market reversal. There's no price evidence yet that declares a top is likely in place but we have enough that has come together right here as a reason to be on the lookout for the possibility. I'll start off with the granddaddy of the indexes, the Wilshire 5000 index, to help us look for more clues.


Wilshire 5000 Total Market index, W5000, Weekly chart

The W5000 index has rallied back up to price-level resistance near 22000, which was last tested in November 2015. This level goes back to the high in December 2014 and became a shelf of support for the first half of 2015 until it broke in August 2015. The first back-test in November 2015 was followed by a strong breakdown into the January 2016 low and now here it is back again testing this S/R level. What it does from here will tell us plenty about the expected longer-term price pattern. It's a significant drop back down to price-level support near 21000 and that's the level the bears need to see broken, especially since it would also be back below its 50-dma, currently at 21042. It's a wide 1000-point range but keeping it simple, it's bullish above 22K and bearish below 21K, with the potential for it to be choppy and whippy in between.


Wilshire 5000 Total Market index, W5000, Daily chart

You can see on the daily chart below how the W5000 rallied right up to the 22000 S/R line on Tuesday and Wednesday (with a high at 21999.99) and today's decline could be the start of a larger move down, or maybe just a small pullback before continuing higher. If a pullback finds support at either its broken downtrend line from June 2015 - April 2016, near 21630, or its 50-dma, near 21490, and then rallies above 22000 I'd abandon all short positions and get long. But if we start to see a sharp impulsive move down and only choppy bounce corrections we'd then know to play the short side. It's too early to tell yet which it's going to be and therefore stay short-term oriented for now. We're heading into a normally bullish week, with opex and FOMC next week and it remains possible we'll see the market continue to melt up into the FOMC meeting (provide as big a cushion as possible before the FOMC rate decision and then the Brexit vote the following week).

Key Levels for W5000:
- bullish above 22000
- bearish below 21000


S&P 100, OEX, Weekly chart

Before looking at my regular updates to the S&P 500 charts I wanted to show the S&P 100 weekly chart to point out that it too is back up to important resistance and what happens from here should provide some good clues. The rally into the April high stopped at the downtrend line from July-November 2015, pulled back and is now again testing this downtrend line, currently near 936. It tried to get through the downtrend line on Tuesday and Wednesday and today's pullback could be the start of a kiss goodbye. But it's too early to tell for sure and OEX would obviously be more bullish above 936. But if the bears go on the attack here we could see resistance hold once again. And with a rolling top pattern this could be an important high for this index.


S&P 500, SPX, Daily chart

I figured SPX 2105-2118 was going to be a tough resistance zone based on some price projections off the wave pattern, trend lines and price-level S/R. Yesterday's high was near 2120 so it made it through that resistance zone but fell back inside it today. As we've seen repeatedly over the past two weeks, this morning's gap down was followed by a slow choppy move back up and it has it looking like there's "someone" very afraid of a selloff and supporting the market. But there's a lot of buying power going into just holding the market up (for the past two years, as seen on the OEX weekly chart above). There's upside potential to the May 2015 high near 2135 and then a price projection near 2160 but I'd be very careful chasing this market higher right now. There's the potential for a nasty surprise some morning.

Key Levels for SPX:
- bullish above 2118
- bearish below 2075


S&P 500, SPX, 60-min chart

Looking at the rally from May 19th into this week's high it looked good for the completion of a 5-wave move but today's price action leaves a question mark as to whether or not we should be looking for at least a minor new high before a larger pullback or if instead it will start from here.


Dow Industrials, INDU, Daily chart

There are two price projections that I'm watching for the Dow, the first being 17986, which is where the 5th wave of the rally from January is 62% of the 1st wave. This is a common projection when the rally simply gets too tired to make it up to the projection where the 5th wave (the leg up from May 19th) will equal the 1st wave, which is at 18391. In between is the top of a shallow parallel up-channel from August 2015, which is where the April rally stopped and is currently near 18120. Yesterday's high at 18016 has achieved the first upside target but it's still a little shy of the top of its up-channel. A rally above 18120 would have me thinking the May 2015 high at 18351 and the price projection at 18391 would be the next target zone. But with waning momentum it's looking like it could be a struggle to add more points to the board.

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,664


Nasdaq-100, NDX, Daily chart

I'll give NDX bulls credit for not giving up. They've been facing tough resistance near 4525, which is the shelf of support back in mid-April for the little island between the gap up on April 13th and the gap down on April 22nd. It hasn't been able to close the April 22nd gap yet, at 4540.80 (Monday's high was close at 4536.55), but it keeps trying. For eight straight days now, since first hitting 4525 on May 31st, it has tried to climb above both its downtrend line from December 2015 - April 2016, currently near 4509, and price-level resistance at 4525. We have either a bullish consolidation at resistance or a small rolling top pattern and I suspect we'll soon find out which one it is. If it does rally from here I'd look for a test of the 4600 area before setting up a larger pullback/decline. But if it rolls over from here and drops below the May 11th high, near 4408, it would tell us a top of significance is likely in place.

Key Levels for NDX:
- bullish above 4525
- bearish below 4407


Russell-2000, RUT, Daily chart

The RUT has been the leader to the upside for the rally from May 19th and that's been a good sign for the bulls. But today's bounce attempt off the morning low was not as strong as the others and it looked more like a correction than the start of another rally. That was a warning flag by the end of the day so the bulls will want to see the indexes pushing to new highs with the RUT out in front. If it instead starts down stronger than the others and breaks back below support at 1158-1160 it would provide a bearish heads up and likely embolden the bears to get more aggressive. While opex week tends to be bullish it can also be strongly bearish if it starts to break down. Neither side can afford to make any assumptions heading into next week.

Key Levels for RUT:
- bullish above 1206
- bearish below 1130


10-year Yield, TNX, Daily chart

It's looking like the bond market is predicting no rate increase in June (or July) as TNX breaks down from its sideways triangle that it had been trading inside of since the March high. It's nearing yield-level support at 1.64% and the short-term pattern look like a setup for a bounce correction before heading lower. A break below 1.64 would be more immediately bearish and could lead to a strong decline in yields (with a bond market rally). But if we do see yields bounce back up I think we could see TNX back up to its 50-dma, currently near 1.79%, before starting a stronger decline. It now takes a rally in TNX above its May 31st high at 1.89 to turn it bullish. Typically the stock market trades in synch with yields (e.g., a bond market rally often sees money rotating out of stocks and into bonds, which has yields dropping with the stock market) but so far the stock market has been ignoring the bond market. That's oftentimes a dangerous time for the stock market since the bond market is recognized as the smarter market.


KBW Bank index, BKX, Daily chart

The banks have been weak since peaking on May 25th and like the bond market, they've been showing concern that the Fed will not be raising rates anytime soon, which has been my argument since before they inappropriately (imho) raised rates last time. Higher rates provide greater profitability for the banks, one of the reasons why the Fed wants desperately to raise rates (they're trying to take care of their own blood-sucking selves). But there's no clear pattern yet and I could argue the pullback since May 25th is a correction within an up-channel from February. That argues for new highs and a rally above 71.50 would be bullish (for the broader market as well). A drop below 68 would provide a bearish heads up.


U.S. Dollar contract, DX, Weekly chart

The US$ has had a sharp pullback from its June 1st high, especially with the negative reaction on June 3rd to the weak Payrolls report. This week's low has been a test of price-level support near 93.80 and the top of a parallel up-channel from May 2011 (which the dollar broke above in December 2014). The top of this channel was also tested in May and as long as the rally continues from here we should see a bullish break of its down-channel from December 2015, which was tested last week. If we see the dollar get a little bounce and then continue lower it would be a bearish breakdown, especially if it drops below its May low at 91.88.


Gold continuous contract, GC, Weekly chart

Following gold's pullback from its May 2nd high it has had a sharp rally back up from the low on May 31st. It appears gold traders were the only ones who abided by the "sell in May and go away" and then returned on June 1st. The two-week bounce had now retraced a little more than 62% of the pullback and it could continue higher but I think we'll see at least a larger pullback, potentially down to its 50-week MA, currently near 1162. A decline below 1160 is needed to tell us gold could drop to a new low rather than just give us a pullback. If it rallies above its May high at 1306 I'm not sure it will be able to do any better than its 200-week MA, currently at 1315 and coming down.


Silver continuous contract, SI, Weekly chart

Silver's two-week rally has brought it back up to the top of its parallel down-channel from 2013, near today's high at 17.34. There could be one more minor new high coming before it will be ready for at least a larger pullback but holding inside its down-channel keeps it in an established downtrend. Like gold, I think there's a good chance we'll see lower prices before setting up a longer-term rally. But a rally from here above 18 would be at least short-term bullish, which could mean a rally up to its 200-week MA, currently at 20.36 and coming down.


Oil continuous contract, CL, Daily chart

Yesterday oil made it up to a price projection at 50.95 where the A-B-C bounce off the January low achieved two equal legs up. It's also a test of the October 2015 high at 50.92. The c-wave, which is the leg up from April 5th, has formed a rising wedge, which is a common ending pattern for c-waves (and 5th waves). The bottom of the wedge is currently near today's low at 50.23 so a continuation lower would be a bearish heads up that the rally finished this week. Rising (and descending) wedges tend to get completely retraced faster than it takes to build them so that would mean back down to the April 5th low at 35.24 in less than two months. I think there's a good chance oil will drop below the January/February lows near 26 and the first sign of trouble for oil would be a drop below its June 1st low at 47.75.


Economic reports

Other than the Michigan Sentiment (preliminary) report tomorrow morning there's not much for the market to pay attention to. It's more likely to react to overseas reports and markets but in reality the market has its attention focused on what it thinks the Fed will do next week.


Conclusion

The stock market is in denial and is ignoring the messages from the economy, the bond market, the dollar and just about everything else. As it so often does at important tops, it's whistling past the graveyard, apparently confident that the Fed can protect it. The market doesn't realize that the Fed is behind it getting mauled by the zombies and is no longer in a position to help. I'm just waiting for the day the market turns around, screams like a little girl and runs away (sells).

There's been a lot of buying power going into just holding the market up and preventing a selloff and that smells like the work of the Fed/government. With indexes up against resistance there's a good chance the rally will fail but with us heading into opex week and FOMC next week I can certainly see the possibility for the market to continue being supported. I can't see a reason to go long here since the upside potential is again dwarfed by downside risk. Extreme bullish sentiment in a market that is showing waning momentum and deteriorating market breadth is typically a time when new buyers jump in and then get hurt.

If we start to see strong impulsive moves down followed by choppy bounce corrections and then lower again it would be a time to start playing the short side. We don't have any strong signs of a market top yet so it's risky jumping in front of this market that continues to press higher. At the moment I think the sidelines is a safe place to be until we start seeing confirmation that a high is in place, especially since next week could be volatile so trade carefully in the coming week.

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

Keene H. Little, CMT

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


New Option Plays

Buy the Dip

by Jim Brown

Click here to email Jim Brown

Editors Note:

For four weeks I have been waiting on a dip on Nvidia and I thought it would be more than $1 given the recent gains. However, I was wrong and we are going to buy the new high.


NEW DIRECTIONAL CALL PLAYS

NVDA - Nvidia Corp - Company Description

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The companyÂ’s products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.

Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

Earnings August 11th.

I have been waiting for a dip to enter a position on Nvidia but it never came. I thought the $1 drop this week was a prelude and we could get a better entry point when the market pulled back. The market does not look like it will decline until after the Fed meeting and Nvidia is back at a new high. I am going to bite the bullet and make the entry before it is over $50 and I am kicking myself even harder.

Buy August $49 call, currently $2.34, initial stop loss $46.65.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Bulls Fight Back

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P rebounded from a -12 point opening loss to close down only 3.6 points. The Dow fought back from an 89 point drop to close with only a 20 point decline after nearly turning positive just before the close. The volume was very light at 5.4 billion shares and volatility was very low. There was no rush to the exits and traders bought the dip a little bit at a time.

This suggests the markets are going higher. Maybe not on Friday but probably Monday/Tuesday next week ahead of the Fed announcement. Historically the markets peak around option expiration in June and then decline into month end. This is setting up for a post FOMC market move that could be strong.



Current Portfolio




Current Position Changes


PRGO - Perrigo

The long call position was opened with a trade at $100.68.


DIS - Disney

The long call position was stopped with a trade at $97.25.


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


AMP - Ameriprise Financial -
Company Description

Comments:

Still no specific news. Resistance has been solid. Sticking in a tight range with support at $100.

Original Trade Description: June 1st.

Ameriprise Financial is a large holding company of broadly diverse investment companies. They provide financial products to individual and institutional investors worldwide. They operate as a full service brokerage and provide investment products and advice to retail, high net worth individuals and institutional clients. They also provide mutual funds and exchange traded funds, variable product funds underlying insurance and annuity accounts. They also provide life insurance, disability income, property and casualty insurance through various relationships. The company was previously known as American Express Financial Corporation and changed its name in 2005.

Ameriprise is a complete provider of financial services. Acquiring the Emerging Global Advisors portfolio of ETFs gives them another line of products to sell to their high net worth clients. EGA launched its first ETF in 2009 and specializes on providing rules based, smart beta strategies in order to provide diversification and growth opportunities in emerging markets. In the first quarter the company applied to the SEC for registration of numerous additional ETFs that provide equity income to investors. Blackrock believes smart beta ETFs will reach more than $1 trillion in assets by 2020 and $2.4 trillion by 2025. Blackrock is a competitor whit its iShares series of smart beta offerings.

When AMP reported earnings on April 27th they missed the estimates of $2.20 with earnings of $2.17. Revenue was $2.8 billion. They blamed the miss on the extreme market volatility in January and February. They returned $568 million to shareholders in buybacks and dividends.

Shares declined on the news but analysts began saying given the volatility they did really well and shares have now moved over the April pre-earnings high.

Earnings are July 27th.

They have resistance at $109 and again at $115. With expectations for a Fed rate hike lifting the financial sector we should see a couple more weeks of gains on that alone. Since the July options expire before the earnings they do not have any expectation premium. Also, when June options expire in two weeks the July premiums will immediately evaporate. I am recommending we go with the more expensive September calls and plan on selling them before AMP earnings.

Position 6/2/16:

Long Sept $105 call @ $3.40, see portfolio graphic for stop loss.


CAR - Avis Budget Group - Company Description

Comments:

No specific news. Shares still holding their monster gains.

Original Trade Description: June 2nd.

Avis Budget Group provides car and truck rentals, car sharing and services to consumers and businesses worldwide. The Avis system has approximately 5,500 locations and the Budget system has 3,900 locations. The Avis system is the premium version while Budget is the economy version. Budget offers Zipcar, a membership based car sharing network that supplies vehicles to roughly one million members. The Payless brand has about 200 locations and they represent the "value" segment of the market. They also operate the Apex brand and the Maggiore brand. They also operate in the truck rental market with a fleet of 21,000 vehicles that are rented through roughly 1,000 dealers and 450 company owned locations. The company was founded in 1946.

Shares had been in the dumps since early January until news broke on the 17th that CEO John Tague purchased 66,000 shares to bring his total ownership to 220,000 shares. Shares began rising and institutional buying has accelerated. One institution purchased 3,000 June $13 calls on Wednesday. Call option volume was 3x normal on Wednesday and call buying was 14:1 over put buying. On Tuesday, an institution purchased 4,000 July $30 calls when the open interest was only 389 in the strike.

In their Q2 earnings, they missed the estimates on currency fluctuations and unusually soft seasonal demand. However, they raised guidance for the full year on earnings and revenue saying "pricing has already turned the corner."

With the spring and summer months a high demand season for car rental agencies this could be the time to speculate in the stock. The rebound on the insider buying and high call volume has pushed the stock over resistance at $30.50 with the next material level at $37.

Earnings August 3rd.

Position 6/3/16

Long Aug $32 call @ $2.35, see portfolio graphic for stop loss.


DIS - Disney - Company Description

Comments:

Despite a flood of news about the Shanghai Disney opening next week, shares still dipped below short term support and stopped us out at $97.25.

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"
Dec 25, 2018 - Mary Poppins Returns
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:

Closed 6/9/16: Long July $100 call @ $2.15, exit .80, -1.35 loss.


IBM - International Business Machines - Company Description

Comments:

No specific news. Minor decline after a 10-month high on Wednesday.

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, see portfolio graphic for stop loss.


MKC - McCormick & Co - Company Description

Comments:

No specific news. Finally a real move. If we can spike over that next resistance at $100.75 we could see a powerfull move. However, we only have 5 days left on this June option and the moves needs to come ASAP or we will lose. I am pretty sure we are going to hit that $100.75 level but I am not sure we are going to break out. I would recommend exiting the trade on a touch of $100.75 for a breakeven rather than take our chance on a breakout. I have no problem adding a new position but with earnings in two weeks it could be volatile. I would rather be glad the position returned to a breakeven than turn a neutral play into a possible loser.

Exit position with a MKC trade at $100.75.

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.


PRGO - Perrigo Company - Company Description

Comments:

No specific news. Shares spiked at the open but faded back near the close to only a minor gain.

Original Trade Description: June 8th.

Perrigo develops, manufactures, markets, and distributes over-the-counter (OTC) consumer goods and pharmaceutical products worldwide. The company operates through Consumer Healthcare (CHC), Branded Consumer Healthcare (BCH), Prescription Pharmaceuticals (Rx), Specialty Sciences, and Other segments. The CHC segment offers OTC products in various categories, including analgesics, cough/cold/allergy/sinus, gastrointestinal, infant nutritional, smoking cessation, animal health, feminine hygiene, diabetes and dermatological care, diagnostic, scar management, and other healthcare products, as well as vitamins, minerals, and dietary supplements (VMS); and contract manufacturing services. It serves retail drug, supermarket, mass merchandise chains, and wholesalers through sales force and industry brokers. The BCH segment provides branded OTC products in the natural health and VMS; cough, cold, flu, and allergy; personal care and derma-therapeutics; lifestyle; pain relief, nasal decongestants, and cold sore management; and anti-parasite areas, as well as offers generic pharmaceutical products. It serves pharmacies, drug, and grocery stores through pharmacy sales force, as well as a network of pharmacists. The Rx segment offers generic and specialty pharmaceutical prescription drugs in various dosage forms, such as creams, ointments, lotions, gels, shampoos, foams, suppositories, sprays, liquids, suspensions, solutions, powders, controlled substances, injectables, hormones, women's health products, oral solid dosage forms, and oral liquid formulations; and ORx products. It serves wholesalers; retail drug, supermarket, and mass merchandise chains; hospitals; and pharmacies. The company was founded in 1887.

In the first quarter Perrigo was doing ok in a weak market for pharma stocks until CEO Joe Papa resigned unexpectedly to take over as CEO of Valeant. Shares fell from $128 to $85 over about three weeks. The company suffered multiple analyst downgrades and investors fled the stock.

They reported earnings on May 12th of $1.75 that missed estimates for $1.83. However, revenue of $1.38 billion did beat estimates for $1.35 billion. You would have thought that would push shares even lower but the company reiterated guidance for full year earnings of $8.20 to $8.60 per share, an 8-13% increase. Adjusted gross margin was a record at 47.9% with operating margins of 25.1%.

Earnings August 4th.

Shares immediately begin to rise after the guidance. Today's close at $100 is above the close on the CEO exit drop. This should be the start of a major recovery back to the $120 level by year end. The strong earnings guidance offset the kitchen sink quarter that normally occurs when a new CEO takes charge. They want to get all the skeletons out of the closet so future quarters under their reign will be positive.

On June 1st, Morningstar named Perrigo as one of their top ten buys for 2016.

Unfortunately, Perrigo options are expensive. We cannot use July strikes because the next strike is $5 out of the money, June expires next Friday and the premiums will collapse. The next strike is August but at least that will leave some earnings expectations premium when we exit before earnings. If you want to defray your net debit you can sell a higher priced call or offset by selling a naked put.

I will profile both sets of options. My recommendation would be to sell the put since PRGO is in a strong uptrend. That way you are not limiting your upside as you would by selling the higher strike call.

Position 6/9/16

Long August $105 call @ $4.55, initial stop loss $94.45.

Optional

Preferred: Short August $90 put @ $2.20, initial stop loss $94.45.
Net debit $2.35. No limit to upside potential.

Less margin: Short August $115 call @ $1.77, initial stop loss $94.45
Net debit $2.78. Upside limited to $7.22.


SKX - Skechers - Company Description

Comments:

No specific news. Minor gain in a weak market.

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, see portfolio graphic for stop loss.


TWTR - Twitter - Company Description

Comments:

Millions of Twitter users may have had their information hacked according to published reports. Twitter denies it but the details are pretty specific. More than 32 million users reportedly had their passwords and personal information stolen.

Twitter shares gave back their recent gains and there is no reason to continue monitoring the Twitter position. I would not close the long call just in case a miracle happens. Hold it until expiration.

I am dropping the position from the portfolio with a full loss on the call position. We were killed on the entry when Twitter spiked sharply and the price of the call went from the 85 cent quote to $2.07 at the open. I would never have done a combination play with those numbers on a low dollar stock.

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

Closed 6/9/16: Long June $17 call @ $2.07, likely to expire, -2.07 loss.

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



BEARISH Play Updates (Alpha by Symbol)

HRL - Hormel Foods Corp - Company Description

Comments:

No specific news. The trend has reversed with three consecutive daily gains.

CLOSE THE POSITION

Original Trade Description: June 6th.

Hormel Foods Corporation produces and markets various meat and food products worldwide. The company operates in five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and International & Other. It provides various perishable meat products, including fresh meats, frozen items, refrigerated meal solutions, sausages, hams, wieners, and bacon; and shelf-stable products comprising canned luncheon meats, shelf-stable microwaveable meals, stews, chilies, hash, meat spreads, flour and corn tortillas, salsas, tortilla chips, peanut butter, and other products. The company also offers poultry products, such as turkey products; and nutritional food products and supplements, sugar and sugar substitutes, dessert and drink mixes, and industrial gelatin products.

In their recent Q1 release they reported earnings of 40 cents that beat estimates for 38 cents. However, revenue of $2.30 billion missed estimates for $2.33 billion. The top line only rose +0.9% and that was due to a price hike on their products, not higher demand. Selling, general and administrative expenses rose 11.3%. Jennie-O Turkey Store sales fell -3.5%. Specialty Foods revenues declined -5.2%. International revenues declined -17.2%. Margins declined with the refrigerated foods division falling from 14.4% to 11.9%.

While revenues for most of their divisions declined, the company did raise guidance from $1.50-$1.56 to $1.56-$1.60 for the full year.

Revenue is weak, margins are slipping and a price increase was the only thing lifting revenues in Q1. People are becoming more health conscious and fatty meat packed in a can is not really on everyone's shopping list. They do have healthy products as well but the Spam label seems to be failing. About six months ago they introduced Spam Snacks, a dried, bite sized version of Spam designed to compete with beef jerky in the snack isle. There were three flavors, classic, bacon and teriyaki. They announced last week they were cancelling that product line after a review of consumer comments and low sales.

Earnings August 18th.

Shares have been declining since the earnings and closed at a 7-month low today.

Position 6/7/16:

Long September $32.50 put @ $1.00. No initial stop loss.


NKE - Nike - Company Description

Comments:

Flood of news today surrounding Nike but nothing specific to Nike. The stock closed at a 7-day high and the decline may be over.

CLOSE THE POSITION

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:

Minor decline after the S&P fought back from an opening drop. The bulls are in charge. The June options are going to expire worthless unless there is a major market crash over the next 6 days.

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.


XBI - S&P Biotech ETF - ETF Description

Comments:

The biotech index declined -2.5% today as the post ASCO depression increases. No specific news.

Original Trade Description: June 4th.

The S&P Biotech ETF follows the S&P Biotechnology Select Industry Index. The fund holds 85 biotechnology and pharmaceutical companies. The XBI tracks the NYSE ARCA Biotechnology Index ($BTK) almost perfectly.

The $BTK has gained 16% over the last three weeks since May 12th. The reason for the rebound was the American Society of Clinical Oncology (ASCO) conference that started on Friday. More than 35,000 professionals in the field of Oncology attend this annual event. Any company with a new idea, treatment or drug will be there. A few will rocket higher after the event. Most will fall back into their original trend if they did not present anything new and notable.

The conference started on Friday and quite a few biotech stocks that rallied ahead of the event fell back 3% to 5% on profit taking. Investors wanted to take profits and not risk getting blindsided with some negative headline from the conference. If somebody announces a new drug that may work better than somebody else, then the loser gets crushed and the new guy gets praised.

I am proposing we buy a put on the XBI in anticipation of a return to the prior trend. Remember, both political candidates have been trashing the drug companies and promising to do something about the high cost of drugs. There is a new term being tossed around in the sector and that is "financial toxicity." That means the drug may work great but the cost will prevent it from being prescribed or covered by the insurance companies. This means, even without the political bashing drug prices are going lower.

Position 6/6/16:

Long July $57 put @ $2.20, see portfolio graphic for stop loss.




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