Option Investor
Newsletter

Daily Newsletter, Monday, 6/13/2016

Table of Contents

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

Market Wrap

Market Falters Ahead Of FOMC

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market fell again today as we await the FOMC meeting, but there is more danger ahead than just the FOMC. This is going to be a full week, to say the least. The FOMC will announce their policy decision on Wednesday, we'll get the newest reads of PPI and CPI, the BOE is scheduled to meet, the BOJ is scheduled to meet, the Swiss National Bank is scheduled to meet, the first report for 2nd quarter earnings is scheduled... and the Brexit vote is next week... more than enough to spark some market volatility.

International markets are not immune. Indices from Japan to China and into Europe fell in today's action. In Asia Japanese and Chinese indices fell more than -3% on concern over the BOJ's possible policy changes, a surging yen and weak Chinese data. The BOJ is expected to move in order to further stimulate the economy, but maybe not at this meeting in order to coordinate efforts with a government fiscal package later this year. Chinese data shows slowing in fixed-asset investment growth. European indices fell roughly -1.80% on the latest polling from Britain which shows an increasing number of Britons favoring a Brexit.

Market Statistics

Futures trading reflected global pessimism, down about -0.4% from the earliest part of the electronic session. Without much in the way of economic data or earnings to alter sentiment futures maintained their early levels all morning and into the open of trading. The indices opened as indicated but quickly attempted to regain losses. By 10AM the SPX was flirting with positive territory and by 10:30AM were in the green, but this did not last long. By 11AM the indices were retreating from the early high and moved steadily lower over the next hour. A mid-day low was hit around noon, and then by 2PM the market was moving lower again and didn't stop until the close of the day.

Economic Calendar

The Economy

There was no official economic data for the US today, but there is quite a bit this week. Tomorrow we'll get Import/Export Prices, Retail Sales and Business Inventory. Wednesday is the FOMC announcement, at 2PM, before that PPI, Empire Manufacturing, Industrial Production and Capacity Utilization are all on tap. Thursday is Initial Claims, CPI, Philly Fed and the Home Builder Sentiment. Friday closes out the week with Housing Starts and Building Permits.

Moody's Survey Of Business Confidence gained 0.8%, rebounding from a multi-year low set last week. The index is now sitting at 27.5, slightly below the previous multi-year low set in late February. According to Mark Zandi the index is showing a downturn in global sentiment begun earlier this year with varying conditions from region to region. The US remains the strongest but has also suffered a downturn in sentiment.


There are 2 S&P 500 companies left to report earnings for the 1st quarter; unless they surprise the rate of earnings decline for the quarter will be very close to -6.7%. Looking forward to the 2nd quarter earnings cycle the first company will report earnings this week. As for the 2nd quarter, projections continue to slide. The expected rate of earnings decline fell over the past week to -4.9%, down a tenth from the last estimate. The energy sector is expected to post the largest decline, about -74.5%, but that projection has been ticking upward over the last two weeks. Materials is expected to post the 2nd biggest decline, about -11.6%, with telecom leading positive gains at +8.1%.


Looking beyond the 2nd quarter growth is expected to return in the 3rd. Projections for 3rd quarter growth are holding steady around 1.4% but still in danger of downward revision to negative territory unfortunately. Growth is expected to expand into the 4th quarter, to 7.6%, with that estimate ticking higher by a tenth in this week's report. Full year 2016 estimates are holding steady near 0.9% while full year 2017 estimates have gained 2 tenths to hit 13.6%.


The Dollar Index

The Dollar Index lost some ground today as markets try to handicap this week's round of central bank meetings. The index fell about -0.25% from the short term moving average to test support at the $94.25 level. Support held and may lift the index higher but this will of course depend heavily on the FOMC and other bank policy decisions. The indicators are mixed, bearish but confirming near term support with declining downside momentum and a very weak bullish crossover on the stochastic, but consistent with a bounce from support. The index may hover at or near current levels, between resistance at the short term moving average and support near $94.25, until the FOMC and/or BOJ statements with a break above being bullish and a break below being bearish. The CME tool is showing only a 2% chance of FOMC rate hike at this meeting.


The Oil Index

Oil prices had another day of volatility. Early trading saw price for WTI fall nearly -2% only to rebound and regain positive territory, climbing by more than 0.6%, only to fall again later in the day. By close of session WTI had lost about -1% for the day. Driving today's volatility was last week's US rig count, the 2nd week of gains, and profit taking offset by high refinery demand, a cut to China output and supply/production disruptions in Iraq, Libya and Nigeria. Today's action centered around the $49 level, with a settlement near $48.60.

The oil producers continued their decline from 6 week's highs on today's drop in oil prices. The Oil Index fell for the 4th day in a row, dropping below the short term moving average, and posted a loss near -1%. The index surge to a 6 week high has already fizzled out, with the price of oil so questionable may not reach that level again. The indicators are consistent with a fall from resistance and may be indicating lower prices ahead through bearish crossovers. The stochastic is rolling over, well below the upper signal line and consistent with resistance, while MACD has retreated to the 0 line. This, along with today's move below the short term moving average, do not bode well for near term prices. If today's move is confirmed, and if oil prices remain below $50 and/or move lower, the index could easily retreat to 1,050.


The Gold Index

Gold prices got a lift today on flight to safety, driven by BOJ concerns and the Brexit, as well as a weaker dollar, also driven by BOJ concerns. The spot price rose nearly 1% intra-day, closing with gains near 0.8%, and are approaching resistance levels near $1290. This move is also aided by declining FOMC interest rate fears which, ahead of the meeting, have sent prices up to the top of their range and leave little room for upside movement... unless the FOMC is more dovish about rate hikes than the market expects. Regardless of what they do this meeting they are still expected to raise rates sometime this year and that could keep prices from moving above $1300. Even without the FOMC, there is also the BOJ to consider. They may cut rates, or indicate a willingness to do so, which could also strengthen the dollar and put a lid on gold prices. And there is also CPI/PPI data to consider.

The gold miners have benefited from gold's move higher and are trading near multi-year highs. Today's action took the miners ETF GDX up to the $26.70 resistance target at the open but the candle is not too promising. The abandoned baby possibility I outlined last week did not play out but nonetheless bearish signals continue to appear. Today's candle is long and black, and qualifies as dark cloud cover appearing at resistance levels. The indicators are mixed but generally consistent with resistance, but not yet reversal. If the ETF continues to move lower downside target is near the short term moving average, about $24.15, with next target near $22.50. A break above the $26.70 level would be very bullish and could indicate a continuation of this years bull market in gold.


In The News, Story Stocks and Earnings

The big story of the day, in terms of business news, is Microsoft's announced purchase of LinkedIn. The move came as a big surprise for shareholders of LinkedIn, but welcome in that it created a near 50% surge in share value. The move is worth $26.2 billion and will merge LinkedIn with Microsoft's cloud service. The deal is questionable, the value of LinkedIn to Microsoft's cloud presence is yet to be ascertained. In light of Microsoft's history of non-accretive purchases I am skeptical. Shares of Microsoft fell nearly -3% on the news.


Apple's annual developers conference began today. The company announced a number of changes to systems including the addition of Siri to desktop operating systems, a change to the watch operating system, Apple TV gets an upgrade with Siri and connectivity to phones, Siri and Maps are being opened up to outside developers and a preview of iOS 10. The news was welcomed, but not thought to be substantive in terms of forward earnings and the company's ability to sell its products. Shares of Apple fell more than -1.25%, helping to confirm resistance at the $100 level and falling below the short term moving average.


I haven't touched on the VIX in a while, today's action is noteworthy. The volatility index gained more than 20% in a move extended last week's break above the short term moving action and closed above the 20 level. The index is moving higher on central bank fear, as well as Brexit and perhaps earnings season fear, and confirmed by both indicators. This move could continue into next week, when the Brexit referendum is held, with first upside target near $25 and next target near $30.


The Indices

The indices tried to rebound this morning from a lower opening but were not able to do it. FOMC and central bank fear, along with the Brexit and earnings outlook are weighing on equity prices. By mid-day they were testing the early lows, and only moved lower from there. Today's leader was the Dow Jones Transportation Average which lost -1.14% in a move that brings the index below the short term moving average. Today's action is accompanied by weakening indicators and a possible bearish signal. Stochastic has already rolled over, following a bearish crossover, with MACD sitting on the zero line and in position to confirm. A move lower could go as low as 7,500, first target for strong support.


The next largest decline was posted by the NASDAQ Composite which was hindered by Microsoft and Apple. The tech heavy index fell -0.94% in a move that broke below the short term moving average. The index appears to be moving toward the bottom of a near term range and confirmed by the indicators. Both stochastic and MACD confirm a downward movement with first target for support near 4,800. A break below this level could move down to to 4,600 with possible support targets near 4,700.


The S&P 500 made the third largest decline in today's session, just over -0.80%. The broad market fell beneath the short term moving average and is approaching potential support at 2,075. The indicators confirm the fall from resistance, today confirmed by a MACD crossover, with a possible target of 2,075. A break below this level could go as low as 2,050 in the near term.


The Dow Jones Industrial Average fell the least, but still nearly 0.75%. The blue chips also fell beneath the short term moving average, a move confirmed by stochastic, with downside target near 17,600. MACD reached the zero line today, a crossover to the downside helps confirm downside target and may draw in additional sellers. A break below 17,600 could go as low as 17,250, near the long term up trend line.


I've been very cautious over the past month or so, maybe a little longer, and still see Q2 negative earnings growth as a major hurdle for the market. The reasons for today's sell-off include the FOMC, and the Brexit, as well as earnings and could be the onset of a larger of correction. If so, I'm not of the mind it will be a very deep one, maybe 3-5%, which would bring the indices down to or slightly below the targets I listed today. Even if the FOMC, and the other central banks set to meet this week, do not scare the market there will still be the Brexit to worry about, and the earnings, so I won't be expecting them to cause to much of a bounce. Needless to say this week is likely to be very volatile, and I haven't even mentioned yet the fact that this Friday is OPEX.

What I really want to see before I get bullish again is Q2 earnings better than expected, maybe move into positive growth, with rising expectations for Q3, Q4 and maybe even next year.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Competition has Arrived

by Jim Brown

Click here to email Jim Brown

Editors Note:

Apple announced Apple Pay for the web at the WWDC today. They already have thousands of merchants taking payments by phone and now those same customers can shop online as well.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

PYPL - PayPal - Company Description

Paypal bills itself as a technology company that enabled digital and mobile payments on behalf of consumers and merchants worldwide. The software allows users to pay and be paid from any computer or mobile device. They have outlasted several competitors but their time in the number one position is running out.

Apple announced Apple Pay for the web. With more than 1 billion Apple devices in use worldwide and 300 million of those are iPhones. When counting Macs and iPads there are more than 500 million Apple users. That is an instant market for Apple Pay on the web and it is going to be a major blow to Paypal.

Paypal has 14 million active merchant accounts and 170 million active consumer accounts. The one feature that works in PayPal's favor is that Apple Pay will initially only be available in the Safari browser and not on Chrome, which has more than 1 billion users.

Regardless the perceived hit to Paypal is likely to be detrimental to the stock price, which is already in decline.

Earnings July 27th.

Buy August $35 put, currently $1.35, no initial stop loss.



In Play Updates and Reviews

Asia Crashing

by Jim Brown

Click here to email Jim Brown

Editors Note:

Major declines in Asia overnight followed by declines in Europe poisoned the U.S. markets. Weak economics in China caused a major drop of -3.5% in the Japanese markets and a -3.2% decline in the Shanghai Composite. European markets followed them lower with average declines of -1.8%. The U.S. markets got off light with only a -0.8% drop.

The global economy is weakening as evidenced by the IMF lowering the GDP estimates from 2.9% to 2.4% last week. There is trouble brewing in Asia and the potential Brext vote is another log on the fire.

There is almost no way the Fed could raise rates even if they wanted to and a weak economy trumps wishful thinking.

The S&P collapsed under strong support at 2,085 and is approaching 2,075. The next level under 2,075 is 2,040.



Current Portfolio




Current Position Changes


COST - Costco

The long call position was opened with a trade at $154.76.


AMP - Ameriprise Financial

The long call position was stopped with a trade at $98.75.


IBM - IBM

The long call position was stopped with a trade at $150.85.


Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.


Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



BULLISH Play Updates


AMP - Ameriprise Financial -
Company Description

Comments:

Still no specific news. Dipped to a low of $98.75 which wa exactly our stop loss. Financials are declining because the Fed rate hikes are off the table.

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:

Closed 6/13/16: Long Sept $105 call @ $3.40, exit $2.00, -$1.40 loss.


COST - Costco - Company Description

Comments:

No specific news. Minor gain in a weak market.

Original Trade Description: June 11th.

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.

Position 6/13/16:

Long Oct $160 call @ $4.40, 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.


IBM - International Business Machines - Company Description

Comments:

No specific news. Minor decline in a weak market but it was enough to stop us out.

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:

Closed 6/13/16: Long July $155 calls @ $2.40, exit $1.79, -.61 loss.


MKC - McCormick & Co - Company Description

Comments:

No specific news. An 85 cent decline probably killed this position after trading over $100 on Thursday. If we do not have a rebound back to $100 on Tuesday this play is toast. The June option will trade penny for penny in the money but be zero under $100.

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. Nomura upgraded from neutral to buy. Goldman Sachs initiated coverage with a buy rating. The new high performance video cards Nvidia announced back on May 27th are now sold out and on backorder.

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:

Perrigo announced it has filed an ANDA with the FDA for ingenol mebutate gel and the generic versions of Picato gel. By being the first filer of a generic application, they are eligible for 180 days of generic exclusivity.

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.



BEARISH Play Updates (Alpha by Symbol)

SPY - S&P 500 ETF - ETF Description

Comments:

Major decline of 17 points on the S&P. It was another nice move to the downside but we need an 8 point move. The June options are going to expire worthless unless there is a major market crash over the next 4 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 -1.7% today after a -2.4% decline on Friday and a -2.5% decline on Thursday as the post ASCO depression increases. I lowered the stop loss.

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.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now