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Daily Newsletter, Saturday, 6/11/2016

Table of Contents

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

Market Wrap

Brexit Beating

by Jim Brown

Click here to email Jim Brown

A new survey showed major gains by the "leave" the EU faction and with the vote just over a week away, investors bailed on equities.

Market Statistics

Friday Statistics

The new UK survey showed 55% of prospective voters favored leaving the EU while only 45% wanted to stay. This is the biggest percentage spread in favor of leaving and the tide is turning in their favor. The vote on June 23rd is a flashing warning signal on investor calendars but I suspect most really do not have any idea what will happen after the vote.

The vote itself is nonbinding. However, it will express the will of the people and the lawmakers will begin the process to leave the EU if that is how the vote plays out. The UK will have to file an "Article 50" request to exit the EU. That starts a two-year countdown clock that will give officials both in the UK and the other EU countries time to begin making plans for how they will handle business with the UK after their exit.

They will have to decide on passage requirements. Will EU citizens be able to travel into the UK without a visa as they do now? Will British citizens be able to travel to EU countries without a lot of passport problems? How will trade be handled after a UK exit? Currently they have a free trade system within the EU. Will they implement something to continue free trade or will they begin to put up tariff barriers? How will financial companies like banks be able to operate? Will they be restricted to the UK or will they be able to offer services within the EU countries and vice versa. Will companies stop investing and moving into the UK until after the exit in order to have all these problems resolved ahead of time?

The UK leaving the EU is not the biggest problem. The problem will be other countries also planning their exits. France and Italy have already expressed a desire to go back to an independent status. Italy is suffering from the EU rules and wants to go back to its own currency (Lira) and abandon the Euro. Wage and cost inequality between all the Eurozone countries makes it difficult for some countries to compete while others have become trade powerhouses.

Because of the potential follow on effect after a UK exit, the EU ministers are likely to exact a stiff price from the UK in terms of restrictions on travel, trade and financial access. They have to make it so painful that other countries will think long and hard before starting their own exit plans.

The EU experiment is failing for multiple reasons. The common currency prevents countries from issuing new money to combat economic conditions, budget limitations, etc. For a healthy country like Germany, that is not a problem. For countries like France, Italy and Spain, it is a serious problem. Also, the national pride inside each country is slipping because their individuality is becoming blurred. The immigration problem is a challenge where some countries want to halt the hordes at their borders but the EU Ministers want equal opportunity for everyone with open immigration. There are many problems with this failed experiment and most analysts believe it will eventually crumble. The UK exit is the first of several.

For the U.S. markets, I think the immediate impact of the Brexit vote is being over exaggerated. There will be no economic impact to the EU for at least two years. The only impact will be sentiment and how that sentiment impacts the European markets over the next several weeks. Then business will return to normal until the actual exit.

A lot of analysts are expecting the Fed to hold off on a rate hike in June because of the pending vote. I am not sure that is a real excuse. The Fed could use it as an excuse but there are no immediate impacts. I would not be surprised to see a decline ahead of the vote and then a rally afterwards when the world does not come to an end.

In the economic news, the Consumer Sentiment for June dropped slightly from 94.7 to 94.3. The present conditions component rose from 109.9 to 111.7 and a multi-year high. The expectations component declined from 84.9 to 83.2. Presidential elections tend to depress the expectations component with candidates telling everyone how bad things are now and how bad they will be if their opponent is elected. Consumers are not expecting the economy to improve over the next 12 months. The drop in the Nonfarm Payrolls soured some expectations about job availability and salary expectations.


The calendar for next week is very busy with a lot of important reports but the big event will be the FOMC announcement and Yellen press conference on Wednesday afternoon. If they do not hike in June, which nobody expects today, they most certainly will hike in July and Yellen will set the stage for that in her press conference. The data dependent qualifier will be ever present but few actually believe they are watching the data. They want to get several additional hikes completed before the next recession appears. With the IMF lowering global GDP forecasts for 2016 from 2.9% to 2.4% that should be a worry for the Fed.

The challenge is the choppy data and the mixed messages from the regional Fed heads. Hike, don't hike, hike, repeat. Even Yellen cannot seem to make up her mind. Hedgeye had a couple of great cartoons last week.



The Retail Sales for May could be a pothole as well as the Philly Fed Manufacturing Survey on Thursday. Both could be weaker than expected.

This is a quadruple witching expiration so expect early week volatility and high volume on Thr/Fri.


The European markets crashed on the Brexit news and German DAX lost more than 2.5% with the French CAC 40 dropping -2.24%. This carried over into the U.S. markets at the open. With the Dow struggling to break through the 18,000 level for most of the week the weight of the European markets was the news that ended that new high attempt.

The German 10-year bund hit a record low yield of 0.011%. With 23 countries and more than $10 trillion in securities currently holding negative yields it appears the German bund is about to join them. If the bund goes negative, that will create an entirely new round of craziness. This makes the yield on the U.S. ten-year treasury look fantastic. This was also the week that the ECB began buying corporate bonds in volume so there was a serious lack of available paper with any yield.



The yield on the ten-year treasury closed at 1.639% and the lowest close since May of 2013. The flight to safety was very strong on Friday. That is a signal that equities may continue lower in the week ahead.


The dollar soared on the new Brexit survey and the British pound imploded. The stronger dollar was negative for commodities except for gold. The yellow metal participated in the flight to quality trade and closed the day back over $1275. That was a significant improvement from the $1210 from last week before the payroll report.




The chances for a rate hike in June are very low because of the employment report and the Brexit vote. The Fed cannot take a chance that the June employment also crashed and waiting until July is a safe play since they get to see an extra month of economic reports and the uncertainty over Brexit will have passed. The major economists are still mixed over when the Fed will hike with only a few focused on July. Most are looking farther out in the year or even into 2016. The table below shows the economists and their expectations for the Fed's next rate hike.


The CME FedWatch Tool shows that June is only showing a 1.9% chance of a rate hike. It would be a real surprise for the market if a hike appeared and the response could be ugly.


In an interview on Friday Bill Gross warned the $10 trillion in securities with a negative yield was a "supernova" ready to explode. He believes the global move toward negative yields in order to force money into economic investments, will have dire consequences. Gross said "global yields are the lowest in 500 years of recorded history." How that explosion will impact financial instruments is unknown and the subject of numerous scholarly efforts. With central banks buying debt in all forms like there is no tomorrow there will be a climax to this event. Eventually that debt has to be sold back into the market. Even central banks have limits to how much debt they can buy and we may be approaching that point. Japan's central bank is even buying equities and ETFs to push prices higher in hopes of creating a wealth effect in the population in order to stimulate the economy.

The Fed has $4 trillion in treasuries on their balance sheet. This is the largest stimulus program ever and the Fed has never successfully unwound a stimulus program in the past without a major impact to the market. We should not expect them to suddenly be miracle workers and magically make that $4 trillion go away without making ripples. The Fed has said they can let the securities mature rather than put them back into the market. However, the Fed is still taking the proceeds from matured securities and buying more to replace those than mature. Is our economy so weak that we cannot stop those replacements?

If the Fed was so concerned about interest rates, they could stop buying treasuries and real rates would rise. Oh, but they can't because the economy is still limping along at only 0.8% growth in Q1 and only 2.1% average annual growth since the recession. So why are they so fired up about hiking rates? Because they are afraid of a coming recession and they currently only have one bullet (rate hike) they can roll back to stimulate the economy again. Riddle me this: If rates at or near zero are so good for the economy, why has the GDP declined for the last four quarters? You can go crazy trying to unravel all these economic questions and even if you did have the answers you could not convince the Fed you were right. Rant off.

In stock news, Amazon (AMZN) is said to be preparing a standalone music service that could launch later this year for $9.99 a month. This would be separate from the Prime subscription. The Prime subscription already has an extensive catalog of music for those subscribers. The new service could also work with the Echo device to stream music to the home. "Alexa, play Bon Jovi, You Give Love a Bad Name." How much easier could it get? Amazon is reportedly in discussions with the major record labels about access to their songs.

In a separate report, Goldman said Amazon was poised to dominate the apparel market by the end of 2017. According to Goldman Amazon's sales represent 20% of the online market at $10 billion. That is nearly twice what Macy's sells online at $5.2 billion. The report said online sales are expected to continue to grow at the 20% rate but sales at brick and mortar stores are expected to drop off a cliff. Goldman said 35% of millennials purchase their clothing online. "An additional $50 billion in sales will migrate online over the next four years." That is the equivalent of total sales for Macy's, Nordstrom and Kohl's combined.

Separately, William Blair initiated coverage with an outperform.


Tesla shares fell 5% after a bogus report of multiple suspension failures in the Model S vehicle. The report said the National Highway Traffic Safety Administration (NHTSA) had received multiple reports of problems with the Model S suspension. Tesla immediately denied it and by the end of the day, NHTSA had also denied it. The agency said "NHTSA confirmed today that they found no safety concerns with the Model S suspensions and have no need of further data from Tesla."

Apparently, some 40 reports were filed with NHTSA but at least 37 of them were bogus with false identification numbers and locations. The man operating the blog where the initial claim was posted, Edward Niedermeyer, previously ran a blog called "Tesla Death Watch" so his motives certainly seem questionable.

The blog also said Tesla demanded customers sign a Non Disclosure Agreement (NDA) that prohibited them from discussing or reporting the problems to NHTSA. Musk exploded and called that idea "preposterous" and said the "Goodwill Agreement" was only used in rare occasions when Tesla performed out of warranty work for free or at a discount. The form basically says if we fix your car for free you will not turnaround and sue the company or malign the company in the press because of the repair. Musk said he "did not want to do a good deed for a customer and then have that used against us in court for further gain." Musk was openly hostile that someone would file 37 fraudulent reports in order to create a false impression there was a safety issue when none existed. They were obviously attempting to tarnish the brand by making bogus reports and then going public with the claims.

Tesla said it had revised its Goodwill Agreements to make it clear that customers were free to report safety concerns to NHTSA.

The one car that may have stimulated the incident had 70,000 miles and the owner reportedly lived at the end of a long and rocky dirt road. Tesla said the car had seen "heavy use" and it took two wreckers to extract the car from the dirt road. Tesla said that particular car had abnormal rust on the ball joint, likely from the extreme punishment, and something the company had never seen before. However, the customer denied the dirt road claim but admitted it took two wreckers to retrieve the car.


H&R Block (HRB) reported earnings of $3.16 compared to estimates for $3.15. Revenue of $2.3 billion missed estimates for $2.6 billion. They also announced a 2-cent increase in the dividend to 22 cents. They hiked the dividend despite declining revenues and a decline of -4.1% in clients. The CEO said the results were not acceptable and they were committed to improving relationships and rebuilding their client base. Shares rose after they committed to further share buybacks. They bought back 20.5% of their outstanding shares in 2015.


Urban Outfitters (URBN) warned that same store sales are declining by the mid single digits in the current quarter that runs through July. That is not a good sign. The retailer blamed an unseasonably cool spring for the decline. That is interesting since most retailers were blaming warmer than normal temperatures for their sales losses. Whatever you blame it on it is clear that retailers are having a tough time and it does not appear to be improving.


Applied Materials (AMAT) announced a new $2 billion share repurchase program after completing the prior $3 billion program. The company also announced a 10-cent quarterly dividend payable September 15th to holders on August 25th. Shares declined only slightly in the weak market. Adding the two programs together means AMAT will have bought back 20% of the outstanding shares when this program is completed.


Twitter (TWTR) fell below Instagram in advertising interest. A new report from STRATA found 63% of survey respondents plan to advertise on Instagram compared to 56% considering Twitter. That is the first time Instagram has out polled Twitter. The survey said Instagram's agency attention has increased 86% from last year while Twitter's has declined -4%. Facebook is in the top spot with 96% of advertising agencies planning on spending money there.

Twitter also warned users to change their passwords after 33 million were posted as the result of a cyberattack. The hacker, Tessa88, was asking 10 bitcoins for the data or about $6,000. Twitter said they were confident the data advertised was not due to a breach in its systems. If it was not a breach then how did Tessa88 get the information? Did she have an inside agent? Why were they not encrypted? Tesla says the data is probably not valid BUT they are contacting everyone the list and forcing a password change.

Is it just my imagination or is Tom Dorsey going to be awarded the prize for being the first CEO to run two listed companies (TWTR and SQ) into single digits at the same time? Somebody PLEASE buy these companies and turn them around.



Wendy's (WEN) said it found a second case of malware at payment terminals at their restaurants. The malicious software allowed hackers to access the terminals remotely and capture cardholder data as purchases were paid. Originally the company had said only 300 stores were affected. Now they are saying the number affected could be "significantly higher" than 300. Wendy's launched an investigation after numerous complaints of fraudulent charges on customer cards after they ate at Wendy's. Oops!


Eagle Pharmaceuticals (EGRX) rocketed 11% after a patent court validated the patents on Treanda. Teva had already agreed to pay $30 million up front and $90 million in milestone payments, plus royalties on sales of Bendeka. That is a rapid-acting reformulation of Treanda. Treanda had revenues of $741 million in 2015 and Eagle Pharma only had revenues of $14.1 million. That means Eagle should get a windfall out of the patent approval. Eagle only has a PE of 9. As luck would have it, I was stopped out of a call on that dip five days ago.


Walgreens Boots Alliance (WBA) rose +4% and Rite Aid (RAD) gained 3% on news there are signs the FTC will approve the $17 billion acquisition of Rite Aid. The report was in the New York Post and cited "unnamed sources" so I would not count on it happening just yet. Helping the case was the top Pharmacy Benefit Manager (PBM), the CEO at Express Scripts (ESRX), saying he supported the deal. That should reduce concerns about competition being reduced. The CEO said there will still be plenty of competition in the retail sector.


Crude prices rose through Wednesday on more violence in Nigeria and a decline in U.S. inventories of -3.2 million barrels. However, other production is beginning to come back online and U.S. production rose for the first time in 13 weeks. Active rigs also rose for the last two weeks and the first gain since August.

The rebound in the dollar also penalized oil since it would take fewer dollars to buy a barrel of oil. Crude is highly reactive to the dollar because roughly 93 million barrels are produced daily. That is approximately $4.65 billion in oil every day. It is the world's most heavily traded commodity.

Conoco, Shell, Suncor and Imperial Oil have resumed operations after the Canadian wildfire. Cenovus and Canadian Natural Resources still have production offline because of a new fire on June 7th.

Some analysts believe there is a big decline ahead once China completes the filling of its strategic reserves. They imported nearly 800,000 bpd of extra oil in the first quarter as they fill the reserve. So far, they have added 135 million barrels to inventory and they only have storage for 155 million. If they hit capacity in the next 20-30 days there will be an extra 800,000 bpd of oil on the market just as production from some of the other production outages comes back online. With Saudi Arabia, Iraq and Iran all boosting production and U.S. production starting to rise again, we could see prices fall back to the lower $40s by September.

Not everyone is in the same camp. Continental Resources (CLR) CEO Harold Hamm said he expects oil to end the year between $69-$72 per barrel. Way to box yourself in Harold. That is not a lot of wiggle room. He believes global supply and demand have already rebalanced and by Q4 we could see a one million barrel per day shortfall. In 2017, he believes that shortfall will rise to two million barrels per day. I sure hope he is right. Harold, I do not know what you are drinking but please send me some.


Active rigs rose +6 to 414 with oil rigs rising +3 to 328 and gas rigs +3 to 85. That is the second weekly gain for oil rigs and last week was the first gain since August 21st. Offshore rigs were unchanged at 21.




Markets

According to the charts, it would appear the S&P failed again at resistance and we can expect a further decline. However, I would caution against using that logic until we see confirmation of a further decline. Headline sell offs like we had on Friday are just like short squeezes. Investors panic, stop losses are hit and that creates a new round of selling and more stops are hit. It becomes a self-fulfilling event. That does not mean it will continue on Monday just like those short squeezes we had in late May completely reversed the following day. I would not be surprised to see the market up on Mon/Tue ahead of the Fed meeting. That is the historical pattern.

Investors will have had time to digest the new Brexit survey and decide they may have been too hasty about their exits. Even if we do go lower, there is decent support at the 2,085 level and that could produce a trading bounce ahead of the Fed. After the Fed and before month end I would bet on a failure of that support.


The S&P broke through the heaviest portion of resistance from 2075-2116 and then stalled. It was though sellers were jumping in ahead of the next level at 2128 in order to get a seat on the downhill express. The high was 2120 and the high close was 2119.


The Dow was a much easier technical story. It failed at 18,000. Period. There were one close slightly above that level at 18,005 but it was immediately erased at the open on Thursday. Friday's decline hit -172 points intraday but recovered to close with a -119 loss at 17,875 and back under resistance at 17,925. If this is a one-day wonder then we will be back fighting that 18,000 level again next week. Otherwise, we could be revisiting the support at 17,700.

The financial stocks, specifically Goldman Sachs, were the biggest weight on the index but the international stocks and commodity stocks were also weak.




The Nasdaq fall from grace was dramatic with a monster gap down open and continued selling all day. The resistance at 4,968 held and support at 4,900 did not. This was a biotech crash. The Biotech Index fell -2.5% on Thursday and -2.4% on Friday. I wrote last week that once the ASCO meeting was over the biotech sector was going to be an anchor for the Nasdaq.

The intraday support at 4,885 was the support from May 25th/26th and it was reasonably solid on Friday. That will be the level to watch on Monday. A decline under 4,885 targets 4,700.




The Russell 2000 fell -1.5% on Friday, also a casualty of the biotech decline. The Russell was also hit by the drop in energy and the financials. Prior resistance at 1,155 could be support. The prior resistance at 1,165 was broken at the close but could still be in play if there is any rebound on Monday. A move under 1,155 targets 1,110.


Historically the market tends to rise on the Tuesday before a Fed decision. Depending on what happens on Monday it will be interesting to see if that trend continues.

The Fed is not likely to raise rates. That means the dollar will weaken and commodity prices should rise and possibly lift the market. That obviously depends on the wording of the Fed statement. "We are not hiking because the economy is weaker than expected and the global uncertainty is lingering. However, it will be appropriate to raise rates in the near term." That is about what I expect them to say. That will immediately make July even more of a live meeting and potentially put a cloud over an already lackluster market heading into the summer doldrums.

Historically the S&P is flat to slightly positive in early June, peaks around option expiration on the 17th and then closes the month at the lows.

I am neutral for next week until we see how the Fed phrases their statement and how the headlines are shaping up for the Brexit vote on the 23rd. If the European markets continue to decline that will weigh on the U.S. markets.


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


It is best not to pick a fight with a billionaire. The gossip media company Gawker.com is known for the Jezebel and Deadspin blogs and a constant spewing of news that is questionable at best. Several years ago, they outed billionaire Peter Thiel as gay. Thiel quietly joined forces with other targets of Gawker articles and sued the publication. The highest profile suit was the Hulk Hogan sex tape of him having sex with the wife of a friend. Theil paid the legal bills for Hogan and the court awarded Hogan $115 million plus another $25 million in punitive damages.

On Friday, Gawker filed bankruptcy in order to remain a going concern while they appeal that judgment and "a coordinated barrage of lawsuits intended to put the company out of business and deter its writers from offering critical coverage."

Later the announced they had a "stalking horse" bid of $100 million for the business from Ziff Davis publishing. A stalking horse bid is basically an opening bid to establish a bottom price. Later there was some confusion that the Ziff Davis bid was actually less than the reported $100 million. In testimony last year the Gawker founder, Nick Denton, claimed the business was worth $250-$300 million. Hogan's attorneys have already said they plan to press their judgment against whoever ends up owning the carcass of Gawker. The bankruptcy court could reduce the judgment but since it was so high profile and recently litigated, any reduction may be minimal.

The moral to this story is to not make a billionaire mad at you when he can make it his life's goal to put you out of business.


When the S&P closed at 2,119 on Wednesday the volume was a below average 6.4 billion shares. Thursday's weak market that closed slightly lower than Wednesday saw volume of 6.1 billion shares. Friday's market crash only saw volume rise to 6.8 billion shares and about average for a normal day without a market move.

The key here is the lack of conviction in either direction. However, on Friday, the decliners were 4:1 over advancers and there were a lot of stocks with major opening gaps lower that sealed their fate for the entire day. There was no race to the exits. It was only a headline move caused by the new Brexit survey. That could continue on Monday depending on the European markets or it could be instantly erased with another short squeeze.


Despite the market gains early in the week the bullish sentiment declined -2.3%. It is possible the dead stop by the Dow at 18,000 was seen as a problem that eroded sentiment. The survey ends on Wednesdays and that was when the S&P closed at the 2,119 high. Note that bearishness shrank slightly and neutral rose slightly. The weak economic reports could have also been a factor.



The earnings cycle has slowed to a crawl. Ctrip.com, Kroger, Oracle and Smith & Wesson are the only reports that warrant a mention.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"An economy hampered by restrictive tax rates will never produce enough jobs or enough profits."

John F Kennedy


 


Index Wrap

Knee-jerk Reaction

by Jim Brown

Click here to email Jim Brown

The lackluster market fighting to get over critical resistance the first three days of the week was hit by a knee-jerk reaction to the new Brexit survey. The most recent survey showed 55% of voters would like to leave the EU while only 45% wanted to stay. This 10% spread was the biggest ever in favor of leaving with only a little more than a week left before the vote. The major indexes all gapped lower on Friday and there was little in the way of recovery at the close.

The S&P dipped to 2,089 and rebounded only slightly to close at 2,096. The Dow gave up its fight at 18,000 and declined -172 points intraday. The index regained 50 points to close down -119. The Nasdaq was the biggest loser of the big three with a -1.3% decline thanks to the fall in the biotech sector.

After a 16% rally ahead of the ASCO meeting last weekend the Biotech Index fell -2.5% on Thursday and -2.4% on Friday as traders bailed on the stocks they had hoped would see big gains. The likely support target on the $BTK is around 3,000 with a potential drop to 2,900.


The Dow Transports ($TRAN) fell sharply with a -1.5% decline after nearing the 8,000 level on Wednesday. The big drop was driven by declines in trucking companies on weaker economics. However, railroads were down slightly as falling oil prices dampened expectations for a pickup in the energy sector. The 7,600 level is the next support that has held 2 of the last 3 times it was tested.


The financial sector was crushed over the last four days on expectations the Fed will delay hiking rates. The financials were a major reason for the market decline with Goldman Sachs the biggest loser on the Dow.


The energy sector declined about 4.5% from the Wednesday high when oil prices closed over $51. The failure in the XLE came exactly at strong resistance at $70. Many analysts believe the price of oil will remain in the $45-$55 range and that means energy equities will likely remain trapped near their current highs as well. Production outages are ending and the U.S. production rose for the first time in 13 weeks.


The NYSE Composite Index made a seven-month high at 10,638 on Wednesday and that was exactly resistance dating back to last July. The likely support on a protracted decline would be in the 10,000 range. The NYSE is made up of the smallest to the largest stocks in all sectors so it is representative of the broader market. It is not yet showing a break in the recent uptrend until it falls below the May low at 10,120.


The Russell 2000 Small Cap index exploded through resistance at 1,161 but then fell back to use that prior resistance as support on Friday. However, the RSI peaked at 71 on Wednesday and a level not seen since July 2013. The typical high dating back to 2013 has been around 69. This suggests the Russell was overbought but the MACD has now completed rolling over.


The S&P-400 Midcap Index hit a high at 1,526 on Wednesday and only 23 points from a historic high. The peak on the left side of the chart is the historic high from last June at 1,549. The midcaps have been the strongest index and they were fueled by biotechs, energy and banking. All those sectors were weak on Friday resulting in a -1.4% decline in the S&P-400.


The Nasdaq 100 big cap index ($NDX) rebounded off the 50% retracement support in May but is suffering from buyer fatigue in June. Many of the big cap stocks like Priceline, Google, etc, were weak. We will look for that 4,315 level to hold on any further decline.


High yield bonds continued to advance as Fed rate hike expectations declined. The red line (HYG) is moving ever closer to the black line (SPX) and the HYG normally leads. If the HYG breaks out to a new high the S&P should follow.


The Semiconductor Index always leads the S&P at major turning points. However, the SOX turned slightly lower last week and the S&P followed suit. Like the HYG we need the SOX to continue to a new high in order to drag the S&P and Nasdaq higher.


The similar chart of the dollar and oil prices shows the falling dollar lifting oil prices. This would also lift equities if it were to continue. Without a firm statement from the Fed on Wednesday suggesting a July hike the dollar should continue to decline.


The short-term view is neutral. We are now into June and approaching the summer doldrums where volume is very light and volatility can increase. With funds flowing out of the market the prior 8 weeks it suggests a lot of investors are choosing to wait safely on the sidelines until the summer is over. The FOMC announcement and the Brexit vote are the two biggest hurdles left for the market to cross.

Enter passively and exit aggressively!

Jim Brown

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New Option Plays

Picnic Season

by Jim Brown

Click here to email Jim Brown

Editors Note:

Costco is the number one stop for everything summer when it comes to eating, picnics, barbeques and vacations. You probably thought it was just a food store.


NEW DIRECTIONAL CALL PLAYS

COST - Costco - Company Description

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It provides dry and institutionally packaged foods; snack foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produce; and apparel and small appliances. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo-processing centers, and hearing-aid centers; and engages in the travel business. They operate 690 warehouse stores plus online shopping.

A Costco membership costs $55. It is almost worth the cost if all you bought was gasoline. The store charges 7-15 cents less than the prevailing rates at other local stations. There are normally lines at the Costco pumps because it is a bargain. If you purchased 15 gallons of gas per week and saved an average of 10 cents you would save $78 a year and more than enough to cover the cost of the membership. Multicar families would save even more.

However, Costco to many people means bulk purchases of items too big to store in your normal pantry. The mental image of Costco is someone pushing a cart with cases of toilet paper, paper towels, laundry soap and canned goods. While that may be true for a lot of shoppers there are still bargains on everything else. My son stopped there on Saturday to buy 15 gallons of ice cream, 10 watermelons, scores of picnic plates and plastic utensils for a party he was throwing. I know people who only shop at Costco and do not go to stores like Safeway, Kroger, etc. Once you get the Costco shopping virus it is hard to not go there. You can even by caskets at Costco. Members bought 465,000 cars through Costco in 2015. The warehouse chain is the number 1 seller of organic food at $4 billion in 2015 compared to Whole Foods at $3.6 billion. Costco has 84 million paying members and you can cancel at any time and get a full refund.

This has helped Costco maintain an average annual growth rate of 13% while other stores are lucky to manage 2-4% a year. Walmart only grew at 0.44% last year and Target 5.4%. In the latest quarter adjusted for fuel and currency fluctuations Costco managed only 3% same store sales growth compared to estimates for 4.6%. They blamed the colder than normal April weather and the weak retail consumer. We already know from other retailers that sales were down sharply all across the sector.

They reported adjusted earnings of $1.24 compared to estimates for $1.22. Revenue rose +2.6% to $26.77 billion and missed estimates for $27.07 billion for the reasons I stated above. Analysts expect earnings to grow 12% annually over the next two years.

Earnings are Sept 29th.

Shares spiked up to $154 after earnings on May 26th and then went sideways for a week while those gains were consolidated. Now they are trending higher again and even closed up on Friday in a weak market.

Buy October $160 call, currently $4.35, initial stop loss $146.85.

You could lower your cost and improve your profitability by selling the Oct $140 put short for $2.50 making your net debit $1.85 and it does not look like Costco will see $140 again.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Weekend Weakness

by Jim Brown

Click here to email Jim Brown

Editors Note:

Fear of holding longs over the weekend caused selling after negative comments from Soros, Icahn and Gross. Add in the new Brexit survey showing a rising number of voters want to leave the EU and the Dow fell -172 at the lows. The S&P lost nearly 20 points and closed at 2,096 and well off that 2,120 high on Wednesday.

Friday was a risk off day with multiple reasons to be a seller and very few reasons to be a buyer. The Dow closed at 17,865 and well below that 18,000 resistance level that plagued it all week.



Current Portfolio




Current Position Changes


HRL - Hormel Foods

The long put position was closed at the open at $36.68.


NKE - Nike Inc

The long put position was closed at the open at $54.64.


CAR - Avis Budget

The long call position was stopped with a trade at $33.35.


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. Dipped under support at $100 but still not a major decline given the weakness in the market.

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 fell -4% to stop us out for a nice gain at $33.35.

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

Closed 6/10/16: Long Aug $32 call @ $2.35, exit $3.53, +$1.18 gain.


IBM - International Business Machines - Company Description

Comments:

No specific news. Minor decline in a weak market showed good relative strength.

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. Excellent relative strength in a weak market after a strong gain.

Exit position with a MHC 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.


NVDA - Nvidia Corp - Company Description

Comments:

No specific news. Shares gave back some of Thursday's gains but still showing relative strength. There was a typo in the play recommendation. The stop loss is $44.65 not $46.65 as stated in the play description. That stop would have been only about 60 cents below the Thursday close. I apologize for the error.

Original Trade Description: May 11th.

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.

Position 6/10/16:

Long August $49 call @ $2.22, initial stop loss $44.65.


PRGO - Perrigo Company - Company Description

Comments:

No specific news. Down with the weak market. Not stock related.

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. Shares fell hard on news Under Armour sales accelerating and the weak market. I am dropping this position from the portfolio. It is a July option with no value but I would not close the position. Keep it in your portfolio just in case a miracle rebound appears.

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:

Dropped 6/10/16: Long July $35 call @ $1.00, no current value, -$1.00 loss. .



BEARISH Play Updates (Alpha by Symbol)

HRL - Hormel Foods Corp - Company Description

Comments:

No specific news. The position was closed at the open.

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:

Closed 6/10/16: Long September $32.50 put @ $1.00. Exit .82, -.18 loss.


NKE - Nike - Company Description

Comments:

No specific news other than UA sales are accelerating. Position was closed at the open.

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:

Closed 6/10/16; Long July $55 put @ $1.75, exit $1.97, +.22 gain.


SPY - S&P 500 ETF - ETF Description

Comments:

Major decline of 20 points on the S&P. The buyers gave up trying to push the indexes higher ahead of the weekend. The June options are going to expire worthless unless there is a major market crash over the next 5 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 -2.4% today after a -2.5% decline on Thursday as the post ASCO depression increases.

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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