Option Investor
Newsletter

Daily Newsletter, Wednesday, 5/11/2016

Table of Contents

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

Market Wrap

Retailers Getting Hit

by Keene Little

Click here to email Keene Little
There's a battle going on for control of the market and since the end of April we've seen multiple multi-hundred-point moves for the Dow Industrials and yet we're still near the price from 8 days ago. Today's tweezer-top for the Dow tells us the bears might win this round. But the battle for control could still go either way.

Today's Market Stats

Tuesday's rally in the stock market was credited to the rally in oil but today oil rallied even stronger and yet the stock market gave back yesterday's rally. I suppose the blame should still go to oil since higher oil prices will stifle the economy's growth. Yesterday's rally actually could not be attributed to much and looked like short covering could have been a large part of it. The lower volume in the rally was also a warning sign and sure enough, the rally was given back today. But trading volume was essentially the same and therefore we have to wonder if the market is simply getting whacked around without any true sense of direction. Both sides have been battling for control since the April high and you would not have a difficult time arguing your case for why the bulls or the bears should lead the market from here.

The blame for today's selloff goes to the retailers. We'll get some reported numbers for retail sales this Friday but we're already getting earnings reports from some retailers that tell us not all is well in consumer land. Macy's (M) reported earnings that missed analysts' expectations and the company said their profits going forward would be lower. Slow foot traffic in the malls is taking its toll on retailers and Macy's got hit with a -15.2% decline. Walmart (WMT) dropped -3.6% and Target (TGT) dropped -5.4%. The retail ETF, XRT, lost -4.4% today. The mighty consumer is not consuming and we know that GDP is dependent on consumer spending (accounting for about 70% of GDP).

Interestingly, Macy's is a higher-end store that caters to people that are middle class and above, people with good salaries and typically plenty of job opportunities. Yet they too are pulling back on spending and snapping their wallets shut. We're seeing reports of more retailers closing their doors or declaring bankruptcy in order to reorganize and settle their debts.

The debt overhang is an endemic problem and very likely we're going to hear more and more companies needing to "reorganize" so that they can work their debt levels down. Debt reduction, by paying it down or declaring bankruptcy, is deflationary. The past several years have seen companies taking on enormous debt loads for such "useful" purposes as buying back stock in order to inflate their stock prices. This has supported the stock market (some say almost the entire rally off the 2009 low can be attributed to stock buybacks, thanks especially to cheap money from the Fed) and once that support is gone and companies start struggling to use decreasing earnings to service their debt it's going to be a double whammy for the stock market.

Today's debt problem is far worse than it was in 2007-2008 and the market is more distorted than ever. The correction that is needed, and should have happened last time but was stopped by the Fed, will be painful but like horrible-tasting medicine, it's needed to make us healthy. The Fed will keep experimenting on us but they will ultimately fail miserably. I only hope they don't crash the entire financial system in the process.

Could the slowdown in retail sales be the canary in the coal mine? It's a lot easier to see what happened in hindsight but if the mighty consumer is pulling back into its shell I think it's going to be very hard for companies to turn around their earnings decline, which has already been in progress for a few quarters. When the stock market will reflect this is anyone's guess but with the Fed being discredited as time goes on, plus the fact that they are simply running out of ideas that work even temporarily, the "recognition phase" for the market might not be far off.

In addition to the retail sector taking a hit today, biotechs, homebuilders (retail related) and transportation stocks (economy related) were the underperformers. Holding up better, and in the green for the day, were gold/silver (alternate currency), energy and utilities (defensive). The broader market indexes continue to hold up reasonably well but the price volatility tells us there's a battle near the highs and oftentimes this leads to a reversal. Key levels to the upside and downside are fairly close on the shorter-term charts so we should know soon which side will likely be the winning side. But on the weekly chart we have to stay aware of the possibility for some wild swings that might not mean much in the bigger pattern. For example, for the Dow there's a 1000-point range (17140-18170) that it could swing around inside and until one of those levels breaks we can't know for sure what the longer-term direction will be. There will of course be shorter-term signals but the larger pattern is up for grabs.


Dow Industrials, INDU, Weekly chart

At the moment I'm leaning short the market for at least a larger pullback correction to the rally from February. If the pullback creates a choppy overlapping pattern it would point to higher prices, even if it first drops below the 17140 key level. So far the pullback from April is not clear enough to determine whether it's impulsive or corrective and that keeps options for both sides on the table. A typical correct to the February-April rally would be about a 50% retracement, which would see the Dow down to 16835 but that would have to be evaluated as the price pattern develops further. Higher support is its 50-week MA, currently at 17235, and then price-level S/R at 17140. If it rallies back above its April 20th high at 18167 it would obviously be bullish but not if we're seeing bearish divergences on the daily chart. Weekly MACD has just crossed down and any further selling would create a stronger sell signal by this indicator.


Dow Industrials, INDU, Daily chart

The price action around the top of the Dow's shallow up-channel off the August 2015 low can be seen on the daily chart below. The April 20th high was a test of the top of the channel, which was followed by a pullback and then a test of it again on April 27th (when the RUT made a new high above its April 20th high), which was also a back-test of its broken uptrend line from February through the April 12th low. The pullback from that test was a good signal to get short against the day's high. The bounce off last Friday's low finished with yesterday's spike up to its broken 20-dma, near 17890 (it closed above it at 17928 as the shorts ran for cover, leaving the market vulnerable to today's gap down). Today's red candle completely reversed yesterday's white candle, leaving a tweezer top and bearish engulfing candlestick. But it held its new uptrend line from February through last Friday's low, closing on the line, so the bulls have a chance to re-reverse today's reversal. For a trade position I like the short side against yesterday's high near 17935).

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,580


Dow Industrials, INDU, 60-min chart

As can be seen on the Dow's 60-min chart, the pattern since the April 20th high can be viewed as either impulsive (leading diagonal 5-wave move down to the May 6th low) or as corrective (a-b-c down to April 29th, expanded flat a-b-c bounce up to yesterday). Both patterns are calling for a strong decline that will likely drop the Dow down to at least the 17400 area and the more bearish pattern calls for much lower than that. Once the pattern develops further I'll have a better idea whether to expect the bulls to step back in or if instead the bears have taken over. Below 17400 would more strongly support the bearish interpretation of the pattern. But a rally above yesterday's high would point to a rally at least up to the 18050 area, potentially much higher.


S&P 500, SPX, Daily chart

SPX is doing battle with two trend lines and two MAs at the moment. Yesterday it back-tested its downtrend line from July-November 2015, and today it was supported by its uptrend line from March 24 - April 7 (the bottom of a potential expanding triangle topping pattern), which it closed on today. Its 20-dma was tested yesterday while its 50-dma was support for last week's low, which is currently near 2054, about 10 points below the uptrend line. The expanding triangle suggests a high near 2180 later this month (hold onto your hats!) and if it can get above yesterday's high I'd entertain that idea as a real possibility. But another close below the uptrend line, meaning a close below today's, would suggest a further breakdown, in which case I would expect to see a drop down to at least the 2025 area quite possibly down to the 1992 support level in the coming week before consolidating and then dropping further. But this suggests a bearish opex week and I'm always a little gun shy on the short side with opex coming up.

Key Levels for SPX:
- bullish above 2112
- bearish below 2033


Nasdaq Composite, COMPQ, Daily chart

Yesterday's high for the Nasdaq was a back-test of its broken 50-dma, near 4814, and today's selloff leaves a bearish kiss goodbye. It has tough resistance with the three MAs (20-, 50- and 200-dma) coming together, currently at 4814-4844. If the bulls can power through that price range I'll tip my hat to them and join them. Of course then the bulls would have to deal with price-level S/R at 4920 and its downtrend line from December 2015 - April 2016, which is nearing the same 4920 level. Above 4970 I'd be a stronger believer in the upside but a drop below last Friday's low near 4684 would confirm the next leg down is in progress.

Key Levels for COMPQ:
- bullish above 4970
- bearish below 4684


Russell-2000, RUT, Daily chart

The RUT's pattern is not as clear as the others at the moment and I could argue either side comfortably. As long as it holds above its 50-dma, which was tested last Friday and is currently near 1109 (less than 6 points below today's close), it remains bullish inside a rising wedge pattern. The bottom of the pattern, which is the uptrend line from February through last Friday's low, is also on top of its 50-dma, which makes a break below 1109 even more important for the bears. But another rally leg up to the top of the wedge could see the 1190 area next week. So the question here is whether we're going to have a bullish or bearish opex week.

Key Levels for RUT:
- bullish above 1160
- bearish below 1101


10-year Yield, TNX, Daily chart

As I've mentioned many times before, I think it's important to watch the bond market even if you could care less about bonds. It's the bigger market, by far, and arguably much smarter than the stock market. It's much more in tune with global economic issues whereas the stock market is more interested in drug, I mean central bank money. Many loans are based on the 10-year yield (10-year + some added amount) and therefore watching the 10-year yield provides clues about the health of our economy. The better the economy is doing and the better the inflation picture (as long as it doesn't get too high), the higher the yields have to be in order to compete with other investments. The higher the yield the lower the bond price. While we won't always see an inverse correlation between bond prices and stock prices, it happens often enough to pay attention to. That means yields tend to trade directionally with stocks. But primarily, to me, the bond market gives us a picture of economic health, which is obviously one of the factors affecting stock prices (well, at least in normal times without the Fed holding its thumb on the "wealth effect" button).

TNX (10-year yield) has been consolidating sideways since the February low while the stock market rallied back up near its previous highs. Last week I showed the divergence between the Nikkei 224 index and SPX, pointing out the vulnerability for SPX based on their close correlation in the past and until the stock market rallied strong off the February low. We now have the same divergence between TNX and the stock market and TNX is at risk of breaking down from its sideways consolidation following the February low. The decline into the February low followed by a sideways consolidation should lead to another leg down. The only question is whether we'll see another leg up to complete a sideways triangle (light-red dashed line and labels) but at the moment it's threatening to break down sooner rather than later. It's another warning sign for the stock market if it breaks down from here. (My longer-term pattern continues to suggest TNX will drop below 1% before the bull market in bonds completes).


KBW Bank index, BKX, Daily chart

BKX had made it back up to its broken 200-dma at the end of April but the drop back down from it leaves a bearish kiss goodbye following the back-test. That was followed by a break back below its 20-dma a week ago and this morning's high was a back-test of it, which was then followed by this afternoon's selloff for another bearish kiss goodbye. There is still upside potential since BKX remains inside its up-channel for the rally from February, the bottom of which is currently near 65.50. There's also price-level S/R near 66.50 and its 50-dma near 66.10. The bearish pattern says we'll get a break of all those support levels but obviously the bears have a little work to do to make that happen.


Transportation Index, TRAN, Daily chart

Since March 18th, when the TRAN first broke its downtrend line from March - November 2015 it has struggled to hold above the line. It dropped back down below the line on March 23rd, leaving a failed breakout attempt in its wake, but then managed to break above it again on April 13th. That lasted until May 3rd when it again closed back below the line. Yesterday it bounced back up to the line, which is also where its 50-dma is located, currently near 7840, and that back-test was followed by today's little selloff, leaving a bearish kiss goodbye. Yesterday it also closed back above its 200-dma, near 7770, but was unable to hold above it. All of this is bearish price action and the expectation is for lower prices. The first bullish sign, maybe, would be a close above its 50-dma and downtrend line, as well as the 50% retracement, near 7856, of its decline from November 2014 into the January 2016 bottom. For now though, this looks ready to drop further. Note the oscillators as well -- the April high was a test of the March high with bearish divergence. Last week's low was a test of the April low but there was no bullish divergence. The combination suggests lower prices are coming.


U.S. Dollar contract, DX, Weekly chart

Last week's sharp selloff for the US$ and then the v-bottom reversal on May 3rd looks to have set a bottom for at least the moment. It looks like an impulsive move up into yesterday's high and now we could see a pullback correction. But the expectation is for a move back up to the top of its year-long consolidation range, near 100, before dropping back down one more time later this year to set up the next rally leg for the dollar. This has been my expectation since it topped out in March 2015 and until price tells me otherwise I'll stick with that expected pattern. The time to abandon the consolidation idea would be a drop below last week's low at 91.88.


Gold continuous contract, GC, Weekly chart

Following last week's high gold appears to be consolidating before pressing higher, in which case I would expect to see at least a test of its 200-week MA, near 1322. But the daily chart is showing bearish divergence since its February high and the weekly chart is showing bearish divergence against its March high. It could make it higher but if it does I think it will set up a shorting opportunity in the shiny metal. If today's bounce is followed by a drop below yesterdays, which was a test of its 20-dma, currently near 1261, we could see an acceleration in the selling, especially if it breaks trendline support near 1250 and then below the top of its down-channel, near 1240


Silver continuous contract, SI, Weekly chart

For the past 3 weeks silver has been flirting with the top of its down-channel from 2013, currently near 17.60. There were no bearish divergences at April 29th high and the short-term pattern supports the idea that we're going to get another rally leg. But with the top of the down-channel holding as resistance it's not a bet I'd be willing to make. It's overbought on the daily (but coming down) and weekly charts and that's a risky time to bet on the long side as long as resistance is holding. But if it can hold above 17.60 we could get another rally and maybe even up to its 200-week MA, currently at 20.58. I don't think we've seen the bottom for silver yet but the short-term pattern does support a little higher before at least a larger pullback.


Oil continuous contract, CL, Daily chart

Oil's short-term pattern suggests we're going to see it push a little higher and I like an upside target just shy of 51 (it would be more bullish above 51), where it would test its October 2015 high (50.92) and achieve two equal legs up from January (50.95). It would also reach the top of its rising wedge pattern if it gets up there before the end of May. But a drop below its April 13th high at 42.42 would suggest a deeper pullback/decline was underway.


Economic reports

Tomorrow's economic reports include unemployment claims data and import/export prices, followed by natural gas prices mid-morning. Nothing market moving there. Friday we'll get PPI numbers and retail sales, which could be market moving. The hard part, as always, is trying to interpret how the Fed might think about the numbers and therefore what the market might think about what the Fed thinks, in which case we'd all be thinking about why we even bother thinking, I think.


Conclusion

The price patterns for the stock indexes suggest we're going to see more selling in the coming week. The challenge for that projection is opex. It's been a common pattern to see the market pulled back into a low before opex, typically on Thursday but as early as Wednesday and as late as Monday, and then like letting a stretched rubber band go, the market shoots back up with the help of short covering as the buy programs hit. This has been such a reliable pattern you could almost do it blindly and just hang on through opex. It is for this reason I am very reluctant to make a prediction that the market will be lower a week from now.

However, ignoring the opex week pattern (ignore at your own risk though), the charts tell me we're heading lower into next week. I like the short side but I'm trailing stops to just above the lower highs, which makes my current stop just above yesterday's high (this morning's highs for the techs). There is potential for a larger decline than the one from April and that makes the risk:reward a good play on the short side. Just don't let it get away from you to the upside.

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

Keene H. Little, CMT

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


New Plays

Copycat Crash

by Jim Brown

Click here to email Jim Brown
Editor's Note

Endo International has been called a Valeant clone. They pursued an aggressive acquisition strategy to acquire drugs and then raise the prices for those drugs. They issued a massive guidance warning last week and revealed they were under investigation for the same issue that crashed Valeant.


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays


ENDP - Endo Intl Plc -
Company Description

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $26 last week to $14 today. The company slashed full year guidance by -11% on revenue and -23% on earnings. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also disclosed they were being investigated by the U.S. Attorney's Office for its relationship with pharmacy benefit managers or PBMs. In light of the improper relationship between Valeant and Philidor the USAO is investigating to see if the same problems exist at Endo. In November, Novartis had to pay a $390 million fine to settle charges it paid specialty pharmacies for illegal kickbacks in exchange for inducing patients to refill certain medications.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are August 4th.

Even though shares are down significantly from the May 6th news, I believe they will continue falling and could go into single digits. The similarities to Valeant's pharmacy problems and the impact to Valeant's stock are too close and should weigh on Endo.

Short ENDP shares, currently $13.54, initial stop loss $16.45

Optional

Buy long June $12.50 put, currently $1.05, initial stop loss $16.45.




In Play Updates and Reviews

Head Fake

by Jim Brown

Click here to email Jim Brown

Editors Note:

Tuesday's short squeeze was clearly a head fake and the gains were completely erased today. I recommended we not add any new plays on Tuesday because of the strong chance the short squeeze to resistance would fail. That was the right call and the decline now suggests we are headed to a lower low.

The S&P declined -20 points to close at 2,064 and well above support at 2,040. I have said for a couple weeks that I expected May markets to be choppy and this one certainly qualifies. The spike on Tuesday created another lower high and now the confirmation signal will be a lower low under 2,040.

The biotech sector declined more than 3% and well more than the broader markets. Semiconductors and retail sectors were also weak. The Dow had a lot of major decliners including IBM, V, WMT, GS, NKE, MCD, UNH, HD and DIS. All declined more than $1 and the last six were down more than $2 each.

Three more retailers report earnings on Thursday. Those are Dillard's, Kohl's and Nordstrom's. The outlook is not good and that could weigh further on the market.

Today's sell off should have damaged market sentiment. By erasing all but 5 points of the Dow's gain on Tuesday, it completely killed that temporary euphoria.




Current Portfolio





Current Position Changes


No Position Changes


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


BLMN - Bloomin Brands -
Company Profile

Comments:

No specific news. Minor decline in a weak market.

Original Trade Description: May 9th.

Bloomin Brands owns and operates casual, upscale casual and fine dining restaurants primarily in the USA. Their brands include Outback Steakhouse, Carrabbas Italian Grill, Bonefish Grill and Flemings Prime Steakhouse & Wine Bar. They operate over 1,500 locations in 48 states and 22 countries.

They reported operating earnings of 47 cents that missed estimates for 50 cents. Revenue of $1.16 billion missed estimates for $1.17 billion. Same store sales in the U.S. declined -1.5%. Shares surged 9% despite the miss.

Despite the weak quarter the company reaffirmed full year estimates for earnings growth of at least 10%. The company blamed restructuring costs on the weak quarter and said that would not be a problem in future quarters. They had previously projected a strong second half of 2016. They also pointed to sales in the Brazilian Outback Steakhouse that rose 8.8%. During the quarter they also bought back $75 million in stock. Strong dollar currency translation issues also reduced earnings. The company also declared a dividend of 7 cents payable on May 19th to holders on May 6th. They entered into a sale leaseback transaction where they sold 41 restaurants for $141.4 million and used $87 million to pay down debt.

Shares spiked 9% after the earnings and continued moving higher over the last two weeks. They closed today at a 7-month high.

Position 5/10/16:

Long BLMN shares @ $19.71, initial stop loss $18.25.

No option recommendation due to wide spreads.



TRN - Trinity Industries - Company Profile

Comments:

No specific news. Holding over support.

We have time to wait for a rally.

Original Trade Description: March 18th

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings April 21st.

Position 3/21/16:

Long July $20 call @ $1.50, no stop loss.

Previously Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss.



WIN - Windstream Holdings - Company Profile

Comments:

No specific news.

Original Trade Description: March 11th

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Update 5/5/16: Windstream reported a much smaller loss than expected. The company reported an adjusted loss of 23 cents compared to estimates for 54 cents. Revenues declined slightly to $1,373.4 million and missed estimates for $1,378.8 million. However, product revenues rose 11% to $32.4 million. WIN bought back $75 million in shares in Q1. The company ended the quarter with 1,430,700 household subscribers.

Position 3/11/16

Long August $9.00 call @ .38 cents.(Adjusted) NO STOP LOSS

Previously closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.




BEARISH Play Updates


GPRO - GoPro - Company Profile

Comments:

No specific news.

Original Trade Description: May 5th.

GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.

GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.

They reported earnings on Thursday after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.

The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold and estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.

Shares fell slightly in afterhours but I expect them to make a new low in the weeks ahead. They closed the afterhours session at $10.16 and the historic low is $9.01. The afterhours low was $9.57.

Position 5/10/16 with a GPRO trade at $9.65

Short GPRO shares @ $9.65. See portfolio graphic for stop loss.



INSY - Insys Therapeutics - Company Profile

Comments:

No specific news. The Biotech sector was down -3% again and far more than the broader markets.

Original Trade Description: May 4th.

Insys is a specialty pharmaceutical company that develops and commercializes supportive care products. Their main drug (Subsys) is a sublingual fentanyl spray for cancer pain in opioid-tolerant patients.

They warned before earnings that Q1 sales of Subsys would only be in the range of $61-$62 million after Q4 sales were in the $91 million range, up +38%. In the year ago quarter Subsys sales were $70.5 million.

The problem is what the FDA said was improper off-label marketing that expanded the use of the drug last year. With that practice halted analysts believe the drug's best days are over.

Compounding the revenue problem was a decision by the FDA to move an approval date for Syndros from April 1st to July 1st. Syndros is a reformulation of the marijuana based drug marinol. Insys believes this could be a big seller in the hundreds of millions of dollars.

While that may be good for Insys in the future the trader community is leaving the stock until we get closer to the approval date.

Insys reported earnings of 11 cents that beat estimates for 8 cents. Revenue from Subsys was $62 million. Shares have been declining since the earnings report because of the revenue warning.

Earnings July 28th.

Position 5/5/16 with an INSY trade at $13.60

Short INSY shares @ $13.60, initial stop loss $14.60



SQ - Square - Company Profile

Comments:

Square dropped 3% ahead of Tuesday's IPO lockup expiration.

Original Trade Description: May 7th.

Square develops and provides payment processing, point-of-sale, financial and marketing services worldwide. It provides Square Register, a point-of-sale software application for iOS and Android, which enables sellers to process credit cards for multiple items through their smart device.

The company was knocked for a 22% loss after reporting a Q1 loss of 14 cents compared to estimates for 9 cents. Revenue rose +51% to $379.2 million and beat estimates for $343.6 million. However, operating expenses rose +72% to $207 million. G&A costs rose from $28 million to $96 million because of a $50 million charge for a lawsuit against Robert Morley, who claims to be the creator of the Square card reader.

Square also has a share lockup expiration on Square on May 17th. About 64 million shares will be unlocked and the float will increase nearly three times. A lot of early investors including Visa, Starbucks, Sequoia Capital (5%) and Khosla Ventures (17%) will be able to sell their shares. Given the reduced guidance and rapid decline there may be a race to the exits.

According to the Wall Street Journal, a whopping 69.48% of the shares (14.6 million) are short as of March 15th. Currently the public float is only 21.01 million shares. Source

I was going to recommend shorting the stock into the lockup expiration but the short interest is too high. The cost to borrow the shares would be prohibitive and with that much short interest it could be explosive. Also, I have seen many lockup expirations that have turned into the bottom for the stock. Expectations are so bearish that the stock declines to a ridiculous price before the actual expiration and then there is no selling. Anyone with shares in the lockup could have already shorted the stock to protect those declining shares. When the lockup expires they use their unlocked shares to cover their shorts.

I am proposing we use a combination strategy. I am recommending we buy a May $10 put, which expires three days after the lockup expiration. At the same time I am recommending we buy a June $11 call in expectation for a sharp post lockup rebound. Remember, revenue increased 51% in Q1 and they raised guidance.

If the stock declines, we sell our put for a profit before expiration and that reduces the cost in the call.

Position 5/9/16:

Long May $10 put @ 60 cents. No stop loss. (Corrected entry)
Long Jun $11 call @ 55 cents. No stop loss.



XLF - Financial ETF - ETF Profile

Comments:

The ETF completely erased the gains from Tuesday but remains a log way from our $22 strike price. The May option will expire on the 20th.

Original Trade Description: April 11th.

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slowly and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Position 4/12/16

Closed 4/29/16: Long May $23 call @ 19 cents, exit .58, +.39 gain.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.





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