Option Investor
Newsletter

Daily Newsletter, Tuesday, 6/14/2016

Table of Contents

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

Market Wrap

Down but Not Out

by Jim Brown

Click here to email Jim Brown

The markets battled another set of declines overseas and while we saw some lower lows, there was a rebound at the close.

Market Statistics

The European markets cratered again on yet another survey that showed those wanting to leave the EU were significantly above those that wanted to stay in the EU. The financials took another hit and the dollar spiked again to a two week high. The yield on the German 10-yr Bund fell into negative territory as a flight to quality as investors fled equities ahead of the Brexit vote.





In the U.S. the Retail Sales report for May came in with a +0.5% gain and slightly better than the +0.2% gain analysts expected. This was down from +1.3% in April. Unfortunately, the headline number was caused by a spike in gasoline prices ahead of the Memorial Day holiday. Excluding gasoline and autos, sales rose only +0.3%.

Sales in building materials fell -1.8%, general merchandise declined -0.3%. Gasoline sales rose +2.1%, food service and bars up +0.8%, non-store retailers +1.3% and clothing +0.8%. On a trailing 12-month basis, sales are up +2.5%.

Business Inventories for April rose only +0.1% compared to +0.4% in March and estimates for +0.4%. Manufacturers' inventories fell -0.1%, retailer inventories declined -0.1% and wholesaler inventories rose +0.6%. This was not a bullish report but it was for April and was ignored.

The NFIB Small Business Optimism Index rose slightly from 93.6 to 93.8. This was only the second increase in 2016 and it would be hard to say that was bullish. Those expecting the economy to improve rose slightly from -16 to -13. All the other components were basically flat. The uncertainty about the U.S. economy was blamed for the weakness in optimism. This report covered May.

Import and Export prices surged in May. Import prices surged +1.4% in May while April was revised higher from +0.3% to +0.7%. Analysts were only expecting a +0.7% rise. However, there is a catch. The rise in prices were led by a 17.4% increase in crude oil and refined products. This was the third consecutive month with petroleum up more than 10%.

Excluding petroleum, import prices rose only +0.4%. If you exclude fuel it only rose +0.3%. Excluding autos pushes it even lower at +0.1%.

The big events on the calendar for Wednesday are the FOMC announcement at 2:PM and the Yellen press conference at 2:30. The Philly Fed Manufacturing Survey on Thursday is the next most important event but it may be overshadowed by any reaction to the Fed news.


The API crude inventories after the close showed an unexpected rise of +1.2 million barrels for the week ended last Friday. Analysts were expecting a decline of -2.3 million barrels. Crude prices had closed at $48.47 with a decline of 41 cents. After the API news, WTI fell to $47.72 in afterhours. That is nearly a 4-week low. The real inventory number to watch is the EIA number at 10:30 Wednesday morning.


After the bell, MCSI rejected Chinese mainland stocks, again. The last time they rejected mainland stocks China responded by significantly devaluing the yuan and causing a ripple in the global markets. MCSI said there were lingering concerns about market access in China. They have too many trading halts. Those halts can last for months. Also, money cannot be easily removed from the market. The 20% monthly repatriation limit is a "significant hurdle" for investors. That assumes your stocks are not halted.

MCSI said it needed more time to assess the effectiveness of the Qualified Foreign Investor program including capital mobility, investment quota allocation and the effectiveness in the new trading halt rules. The MCSI emerging markets indexes has more than $1.5 trillion in assets and the inclusion of mainland stocks could result in those stocks representing 40% of the index. The potential for market disruption would be huge. The Chinese are making progress in improving their markets but they are not there yet according to MCSI. The China A-Shares (ASHR) ETF fell more than 2% in afterhours.

The Shanghai Composite had been trading sideways until June as investors waited for the MCSI decision. The spike over the prior week was speculation MCSI would approve China and an explosive rally would appear. The decline over the last two days could have been traders taking profits from that buildup rather than taking a chance on a rejection. The Chinese market could trade down significantly on Wednesday.


Synchrony Financial (SYF) a spin-off from GE warned it was facing higher charge off rates for delinquent accounts. The company expects an increase in charge-offs of 20-30 basis points over the next 12 months. This will cause loan loss reserves to increase and earnings to shrink. Write-offs as a percentage of total loans were 4.7% in Q1, up from 4.53% in the year ago quarter. More than 28% of Synchrony's credit-card loans in Q1 were to consumers with FICO scored under 660. Shares fell 13% on the news.

The CEO from Capital One warned earlier this month that default rates are rising. JP Morgan's Jamie Dimon warned that credit problems "are going to get worse." More than 31% of the subprime auto loans written over the last 3 years are in trouble. Revolving credit rose to $951.5 billion at the end of April. All the banks and credit card companies saw their shares decline today.


Alibaba (BABA) CEO Jack Ma, stunned attendees at their investor day when he said counterfeit goods are higher quality and sell at lower cost. While he has pledged to get rid of fake goods on his websites, that comment suggests it may be a long time before that happens. Ma said the fake products were made in the same factories but without the fancy name. That sounds like a theft of intellectual property if you contract to make Nike shoes and then use the same equipment to make an identical competitor. The company also lowered guidance for Q2 sales from $3.12-$3.19 billion to $2.81-$2.82 billion. Ma said he wants to reach $1 trillion in annual sales by 2020 and become the 5th largest global economy after Japan. Shares rose $2 on the trillion dollar comment.


Bob Evans Farms (BOBE) guided to $2.00 to $2.15 for the full year on revenue of $1.28-$1.33 billion. Analysts were expecting $2.19 and $1.32 billion. The company predicted same store sales in negative low-single digits for the year. For last quarter, they reported earnings of 48 cents and analysts were expecting 43 cents. Shares gained slightly on the earnings beat.


Perrigo (PRGO), a current Option Investor play, spiked $9 after Bloomberg reported they were close to a deal to be acquired by an unidentified UK company for $20 billion. That would be a 33% premium over Monday's close. Perrigo markets over the counter consumer goods and pharmaceuticals worldwide. Revenue is about $6 billion a year with strong growth. If the rumor were true, that would equate to a price in the $130-$135 range so plenty of upside left.


Exact Sciences (EXAS) rallied 33% on no news. Earlier this month they did hire Jeff Elliott, a former analyst for William Blair. He has been tasked with identifying and pursuing strategic business opportunities for Exact Sciences. Formerly he covered the diagnostic and lab industry for Baird. Coincidentally the company will be presenting at the 36th annual William Blair growth stock conference on Wednesday. Short interest was 22% and apparently, somebody got squeezed.


Whole Foods Market (WFM) received a warning letter from the FDA covering "serious violations" at a Massachusetts kitchen, claiming the food "may have been contaminated with filth." The FDA said leaky pipes were dripping onto work surfaces and employees were not changing gloves between tasks. Whole Foods replied with a letter but the FDA said it was unsatisfactory because it did not outline the steps the company would take to resolve the problems. Shares fell -$3 over the last two days.


Valeant (VRX) shares rose only slightly after the new CEO, Joe Papa, bought 202,000 shares for roughly $5 million. He paid an average of $24.48. The resulting blip on the chart was almost invisible.


There was very little stock news now that the earnings cycle has run its course. Everyone is waiting on the Fed and Brexit but there will be some earnings news on Thursday worth watching. Kroger, Oracle and Smith & Wesson will report.


Markets

The last 12 months of Brexit complacency is evaporating. Investors are moving to the sidelines ahead of the Fed and the exit vote. The Fed announcement should cause some market volatility, possibly in both directions. The first move after the announcement is often in the wrong direction and quickly reverses. Market spikes are sold and dips bought. You can never please everyone at the same time.

Nearly 100% of analysts surveyed do not believe the Fed will hike tomorrow. They list the jobs report (55%) as the number one reason, slowing global growth (15%), Brexit (13%), market expectations (5%) and other at (18%) as the additional reasons the Fed will not hike.

The VIX has broken out of complacency mode and this would normally be a buy signal for equities except for the headline events ahead. The 30 level is my preferred buy signal. I also like to sell calls when 30 is touched because it never remains there very long. If the Brexit vote is to leave we could see that 30 level.


The S&P declined to 2,064 intraday and then rebounded back to support/resistance at 2,075 at the close. That level has been both in the past year. The rebound of 11 points was strong and it started at exactly 3:PM at the low of the day suggesting it was a buy program or at least a program triggered a decent short squeeze. I am sure there were some shorts anxious to get out of their positions before the Fed decision in order to avoid the volatility.


The Dow had a similar pattern with a dip to light support at 17,595 and then a decent rebound to close at 17,784. The nearly 100-point rebound was likely short covering but it was not in the financials. Goldman, JP Morgan and American Express finished near their lows. The energy stocks were also a drag with oil prices closing in on $48 intraday.

The 16,680 level was resistance three times throughout the day so somebody was targeting the Dow at that level with some heavy selling.




The Nasdaq traded in a narrow range with the Nasdaq 100 ($NDX) actually closing positive. The winners and sinners list is not weighted towards any specific sector but the biotechs were down once again. The Nasdaq has support at 4,820 and resistance at 4,875.



The S&P futures were down nearly 5 points after the MCSI decision but rebounded to positive territory a couple hours later and are now back down again. The Asian markets opened lower but then rebounded slightly with only minor losses. There is still a lot of darkness before the dawn so anything is possible.

If you do not have to trade on Wednesday, I would recommend taking the day off. There are always plenty of cross currents surrounding the Fed announcements and with the Brexit only a week away, they could be more pronounced. There is always another day to trade if you have money left in your account.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Relative Strength

by Jim Brown

Click here to email Jim Brown

Editors Note:

When the stock market is weak it makes sense to look for growth stocks with good relative strength. Qrvo is one of these stocks. Share refused to decline each of the last two days when the market was down.


NEW DIRECTIONAL CALL PLAYS

QRVO - Qorvo Inc - Company Description

Qorvo, Inc. provides technologies and radio frequency (RF) solutions for mobile, infrastructure, and defense and aerospace applications worldwide. It operates through Mobile Products (MP) and Infrastructure and Defense Products (IDP) segments. The MP segment supplies its RF solutions into mobile devices, including smartphones, notebook computers, wearables, tablets, and cellular-based applications for the Internet of things. The IDP segment provides low noise amplifiers, switches, radio frequency filter solutions, CMOS system-on-a-chip solutions. This segment supplies its RF solutions to wireless network infrastructure, defense, and aerospace markets; and connectivity applications for commercial, consumer, industrial, and automotive markets.

Qorvo is a major supplier to Apple and other smartphone manufacturers. The slowdown in Apple iPhone sales hurt earnings last quarter but sales increases to Samsung and Chinese handset maker Huawei have helped to offset sluggish demand. The Samsung Galaxy S7 is selling very well and taking over the smartphone market. Strong base station demand rose +25% sequentially and a 9% increase in defense spending is helping offset the perceived slowdown in iPhones.

However, sales of the new iPhone 5E were only expected to be 10-15 million but sales have ramped up and are now expected to be in the 40-45 million range. Citigroup upgraded Qorvo and downgraded Slyworks saying the high performance Qorvo chips were much better than the Skyworks product and the company had a commanding lead in that segment. Qorvo is much better positioned for the carrier aggregation market and the low-band market fed by Skyworks was seeing a lot more competition.

Qorvo should benefit significantly from the ramp of 3G and 4G handsets into India and lower dollar emerging markets. The 5G specifications are starting to emerge and Qorvo is expected to be a leader in that transition, which will involve hundreds of millions of chips.

Earnings August 3rd.

Shares of QRVO gained 74 cents today in a very weak market. I have to stretch some on the strike because shares are just under $55 and that strike is too expensive. I am going out to $60 to get some premium relief.

Buy Aug $60 call, currently $2.05, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Pre Fed Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The normal trend is for a positive bias ahead of the Fed and the afternoon rebound could have been a weak effort on that trend. The S&P rebounded 11 points from the 2,064 low to close at 2,075. That level has been both support and resistance in today it appears to be resistance.

The afternoon rebound was probably shorts covering ahead of the Fed announcement and speculators entering new positions in hopes of some headline surprise in the Fed statement. We know that volatility spikes significantly at 2:PM on Wednesday and the first move is normally in the wrong direction.

We got some good news at the close with a rumor that Perrigo is going to be acquired for a 33% premium. Shares only spiked $9 on the news because it is just a rumor but assuming that price is right we could see something over $130.

Expect volatility tomorrow.



Current Portfolio




Current Position Changes


PYPL - Paypal

The long put position was opened with a trade at $36.37.


MKC - McCormick

The long call position was stopped with a trade at $98.85.


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


COST - Costco -
Company Description

Comments:

The switch over from the American Express Costco shoppers card to the Citigroup Costco Visa card will happen on June 20th. Shares of Costco continue to surge higher even in the 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, see portfolio graphic for stop loss.

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.


MKC - McCormick & Co - Company Description

Comments:

No specific news but therewas a sharp drop with the market at the open that stopped us out of this position. It was a mercy killing since it would have expired anyway on Friday. Despite the big dip at the open shares posted a 42 cent gain for the day.

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:

Closed 6/14/16: Long June $100 call @ $.95, exit .30, -.65 loss.


NVDA - Nvidia Corp - Company Description

Comments:

No specific news. More than 50 automakers are testing the new Drive PX chip for self-driving cars. The chip combines inputs from cameras, lasers, maps and sensors to allow cars to drive themselves and learn from each experience.

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, see portfolio graphic for stop loss.


PRGO - Perrigo Company - Company Description

Comments:

Perrigo shares spiked in afterhours when news broke the company is close to being acquired for $20 billion by a UK firm. No names were given. The source for the report was StreetInsider.com and released by Bloomberg. Shares spiked $9 to $108 in the last minute of trading. A $20 billion take would be over $135 with 143 million shares outstanding.

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)

PYPL - PayPal - Company Description

Comments:

No specific news but shares opened lower then rebounded to close up 62 cents as the broader markets rebounded. Short squeeze?

Original Trade Description: June 13th.

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.

Position 6/14/16:

Long Aug $35 put, @ $1.35, no initial stop loss.


SPY - S&P 500 ETF - ETF Description

Comments:

Big drop to 2,064 on the S&P at the open but that was followed by a 11 point rebound to close at 2,075 and right on prior resistance/support. The June options are going to expire worthless unless there is a major market crash over the next 2 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:

Another big drop at the open but the market rebound lifted the sector almost back to positive territory. I lowered the stop loss again.

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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