Option Investor
Newsletter

Daily Newsletter, Wednesday, 5/25/2016

Table of Contents

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

Market Wrap

Pre-Memorial Day Rally

by Keene Little

Click here to email Keene Little
The last week of May, leading up to the Memorial Day holiday weekend, tends to be bullish and that's what we've seen this week. The rally usually extends into the first day of June and it's looking like that pattern will hold.

Today's Market Stats

So much for sell in May and go away. The bears are feeling that there's nothing that's going to knock this market down and they could be right. But the indexes have reached or are nearing important inflection levels and what happens after this rally will be an important tell for the bigger picture. The rally off the May 19th low could extend into June 1st (the typically bullish pattern with an end-of-month rally into the 1st of the month), especially since it's a typically bullish week in front of Memorial Day weekend, but the bulls need to hang on here and not let the bears back in.

May is turning into a good month for the bulls. While the Dow Industrials haven't done that well (+0.4% so far, thanks to today's +0.8%), SPX has done better with a +1.2% return and the tech big caps (NDX) have done very well -- up +3.1% for May. The SOX contributed the biggest boost, up +6.8% so far. But the tech indexes are working on a deficit for the year, down about -2.3% after this month's rally. The RUT has been a bit of a disappointment for the bulls, up only +0.9% for the month and +0.5% for the year, and the bulls would be in better shape if the RUT was out in the lead. But it's interesting that the month of May is what dug the RUT out of the hole for the year. Banks have had a good month, up +2.8%, as they look forward to higher rates from the Fed. Look for a very disappointing reaction in BKX if the market gets a whiff of no rate increase in June.

Speaking of a rate increase, the odds are still 2:1 against an increase but the market seems to be rallying now with the expectation that there will be one. Certainly the banks are. This is what the Fed wants to see and the reason for all the posturing and Fed-head speeches indicating that the Fed will be raising rates further this year, starting with one in June, is that they're gauging the market's reaction to the idea. It's certainly arguable whether or not the economy can handle a rate increase and I suspect the Fed will get the blame if they do raise rates again in June and the economy drops into a recession (I think it already has but it takes a while for the numbers to prove it). But the Fed no longer uses economic metrics to gauge what they do. They say they do but it's obvious they're deathly afraid of the market's reaction more than anything. It's the tail wagging the dog and it's all part of the bizarro world in which we trade.

There were no market-moving economic reports today and about the only thing the market seems concerned about overseas is the Brexit vote later in June. The latest polling shows more (about 55%) in favor of staying in the EU and that prompted an overnight rally in equity futures, which carried over into the start of our trading day. But after another gap-up start to the day the rest of the day was spent going sideways. It seems the favored way of rallying this market -- gap it up, go sideways, rinse and repeat. It prevents bulls from participating (unless you buy before the following day's gap up) and it traps the bears in their short positions.

Since last Thursday's low we've had 4 trading days, 3 of which started with a big gap up and then only sideways from there. Consequently we've had a strong week but on lower volume and without a strong participation in the rally it makes me wonder what kind of staying power it will have. If it starts back down there is essentially an air pocket below us. If you look at an intraday chart with VAP (Volume At Price) you'll see lots of volume where the market traded sideways and very little in the gap-up rallies. What the bulls need is a lot of backing and filling (big sideways choppy consolidation) to get the participants joining in and providing a little stronger foundation. Until that happens I think the market is at risk for a strong reversal back down (just another of many we've seen in the past few months.

I'll start tonight's chart review with a look at the "big" index, the Wilshire 5000 Total Market (W5000). Hopefully it will cut through some of the differences I'm seeing between the other broader market averages.


Wilshire 5000 Total Market index, W5000, Weekly chart

The weekly chart of the W5000 shows a downtrend line from June-July 2015, which cuts across the April 2016 high, and is currently near 17690. Today's high was 21655 and while we don't know if the downtrend line will stop the rally, with a short-term overbought market it's not unreasonable to think we'll see at least a pullback correction before proceeding higher. If the bulls are not going to let go of this market until at least next week, the April 20th high is another 100 points higher, at 17790. A continuation of the rally above that level would likely lead to a test of price-level S/R near 22000 and its November 2015 high at 22032. It would obviously be more bullish above that level. But there's a corrective pattern that calls for another leg down, to at least equal the 1st leg down from April, before possibly starting another rally leg. It's the bearish pattern that has me wondering if the downtrend line from last summer is going to hold as resistance and lead to a sharper decline.


Wilshire 5000 Total Market index, W5000, Daily chart

The daily chart of W5000 shows the choppy sideways move since the April high and the leg up from last Thursday could be the completion of a bounce correction off the May 6th low. If so then we'll see at least another leg down for either a larger pullback correction or the start of a more bearish move. The best thing the bulls can do here is get the index up and over its downtrend line from last summer, near 21690, and then hold above the line (such as on a back-test). We're still in the land of chop and it's hard to trust any move yet.

Key Levels for W5000:
- bullish above 21,790
- bearish below 20,857


Dow Industrials, INDU, Daily chart

The blue chips have a pattern very similar to the blue chips and one idea that works particularly well for the Dow, because it had a higher low in February, is a 5-wave move up from January. The W5000 and SPX both made minor new lows in February which violates an EW rule that says the 2nd wave pullback cannot drop below the start of the 1st wave rally. But knowing this market has often tended to over/undershoot support/resistance with all the program trading going on, I can turn a blind eye to the new February lows for W5000 and SPX and say they have the same wave count as the Dow's shown below.

The idea for a 5-wave move up from January says the pullback from April is the 4th wave correction and that now we're into the 5th wave. It's common for the 5th wave to equal the 1st wave, which is the leg up from January 20th into the February 1st high, and that gives us an upside projection at 18391, which is shown on the chart. That projection crosses the midline of its up-channel from January-February on June 7th, which is "suspiciously" inside the important Gann June 6-10 turn week. But before it reaches 18391 it will have to again deal with possible resistance against the top of its shallow up-channel from August-September 2015, currently near 18100 and slightly shy of its April 20th high at 18167.

But there's still a bearish pattern that calls the bounce pattern off the May 6th low an a-b-c correction in what will become at least a larger pullback pattern, if not something more bearish. The leg up from last week fits as the completion to the correction pattern and therefore we need to stay alert to the possibility of another sharp reversal following this week's rally.

Key Levels for DOW:
- bullish above 18,100
- bearish below 17,330


S&P 500, SPX, Daily chart

Looking at SPX as a 5-wave move up from January, the 5th wave would equal the 1st wave at 2160. Another possibility is where the 5th wave would equal 62% of the 1st wave, which is at 2109. That would be a test of the April high and only slightly higher, at 2116 it would test its November 2015 high. The May 2015 high near 2135 is another potential resistance level so there's plenty of work the bulls will need to do to reach 2160 but the bears should be aware of that kind of upside potential and not stubbornly hold short thinking the market "should not be rallying." However, as stated for the Dow, there is the potential for an a-b-c bounce pattern off the May 6th low to complete at any time and reverse hard back down. The bulls can hardly afford to get complacent here.

Key Levels for SPX:
- bullish above 2117
- bearish below 2025


S&P 500, SPX, 60-min chart

The 60-min chart shows the price action since the April high and the choppy overlapping highs and lows is what looks corrective and is the 4th wave correction that I discussed on the daily charts above. The corrective pattern is what points to a new high and an impulsive 5-wave move up from last week would support that view. But so far the rally off last week's low is just another 3-wave move and therefore could be just a bounce correction that will lead to a strong decline below the May 19th low. The bulls want to see just a high-level consolidation near today's high, which would point higher and likely at least a test of the April high, if not the November 2015 high at 2116. At that point it might be the entire rally or it might lead to just a pullback before continuing higher in June. What the larger pattern might be will have to be figured out once we get more price action.


SPDR S&P 500 Trust, SPY, Daily chart

For a little different look at the S&P 500, the SPY chart below shows how it has reached the top of its Bollinger Band (BB), currently at 209.00 and what the bulls don't want to see is a drop back down from it. That could result in a pullback to at least the midline (20-dma), currently at 206.22, if not back to the bottom of the BB, currently at 203.43. What's a little worrisome for bulls is the lack of confirming strength from volume and MFI, both of which have remained low even as the price spike back up is large. This further supports the idea discussed above that we might be looking at the conclusion to an a-b-c bounce correction rather than something more bullish. If the rally can hang on for a bit longer (perhaps pushing the top of the BB higher in the process), I'll be watching MFI to see if it stalls at or below the 50 line, which often indicates the current move will stall. The SPY chart tells me to be very cautious about the upside and even think about shorting it (with a stop just above 211).


Nasdaq Composite index, COMPQ, Daily chart

Today the Nasdaq almost made it up to its downtrend line from December 2015 - April 2016, near 4913, as well as a 78.6% retracement of its April-May decline, at 4908, with today's high at 4905. That was also a little shy of price-level S/R at 4920, which was support for the "island" that was created April 13-21. Following the gap down on April 22nd it was then unable to get back above 4920 and it's important for the bulls to now recover that level, otherwise the bears will become emboldened and start a new attack. What looks like an impulsive decline from April, followed by a 3-wave bounce pattern off the May 6th low, the pattern looks bearish but the bears must step in now otherwise a rally above 4920 would start to favor the bulls (for a new high).

Key Levels for COMPQ:
- bullish above 4920
- bearish below 4675


Russell-2000, RUT, Daily chart

The RUT has bounced back up to a grouping of trend lines that could be trouble for the bulls. A broken uptrend line form February 11 - May 6, currently near today's closing price at 1141, is the line that also stopped yesterday's rally. Slightly higher, near 1143, is its downtrend line from June 2015 - April 2016 and then the bottom of a parallel up-channel for the portion of its rally off the February low, running from March into the April high, is near 1146. If the RUT can get above all that we should then see at least a test of its April 27th high at 1156 and perhaps price-level S/R near 1160 (last tested with the December 29th bounce high). Back below its May 10th high at 1129 would be the first hint of trouble for the bulls.

Key Levels for RUT:
- bullish above 1160
- bearish below 1094


20+ Year Treasury ETF, TLT, Daily chart

The bond market is obviously important to watch since it's the "smarter" market and we need to take clues from it to help determine what it's thinking the Fed will do. But since the February high for bond prices, as shown with the TLT chart below, the bond market is not sure what to expect. In the meantime the stock market just keeps skipping to the beat of its own drummer (using drums with snorting bulls painted on them) and has rallied back up near its highs. The message I get from the bond pattern is that stock market bulls should be a little more careful.

TLT has been in a descending triangle pattern since the February high and ideally we'll see the completion of the leg down from May 13th to the bottom of the triangle, at which point the 5-wave move inside the triangle (a-b-c-d-e) will be complete and ready for the next rally leg. The e-wave (the leg down from May 13th) can complete at any time and therefore bond bears are at risk for a surprise rally at any time. And if bonds rally then yields will decline and that tells me the Fed will not be raising rates in June. Instead they'll spark a big bond rally and very likely scare the stock market into selling. I'll be watching closely for a message that's different than this.


Transportation Index, TRAN, Daily chart

Today's rally in the transports had the TRAN closing on its downtrend line from March-November 2015, near 7745, which is only marginally above its 20-dma at 7713 and 200-dma at 7732. Its bounce off the May 13th low would achieve two equal legs up for an a-b-c bounce correction at 7785, which is near the 50% retracement of its April-May decline, at 7809. And then slightly higher is its 50-dma at 7843, which is also its 50% retracement of its decline from November 2014 into the January low. So the TRAN has multiple levels of resistance in a 100-point span from here (7743) up to its 50-dma at 7743. If the bulls can drive the TRAN above 7857 I'd then give the bulls the nod but at the moment it's looking like a bounce correction off the May 13th low that should lead to another leg down.


U.S. Dollar contract, DX, Weekly chart

The US$ is now approaching the top of its down-channel from last December, near 96, and while I expect it to break out from this channel there's a good possibility we'll first see a multi-week pullback/consolidation before heading higher. I would imagine there's going to some volatility around the FOMC announcement on June 15th. It takes a drop below the May 3rd low at 91.88 to negate the bullish pattern, even though it might only lead to a lower low for the pullback from March 2015 before heading higher again.


Gold continuous contract, GC, Weekly chart

It looks like gold has finally started at least a correction to its December-May rally after tagging resistance at its previous high near 1308 in January 2015 (with a high at 1306 on May 2nd). The pullback has now dropped gold back inside its down-channel from 2013 and the bearish interpretation of that move is that it has left behind a failed breakout attempt. The more bullish pattern would have been a pullback to the top of the channel and then continue higher. We'll have to see how the pullback/decline develops but it's very possible we'll see a drop down to its recovered 50-week MA, currently near 1160. I think gold will drop to a new low but it doesn't matter what I think; it only matters what the market thinks so the pattern will be watched closely for clues. But if you're long gold for a trade (vs. holding onto the shiny metal no matter what happens) keep in mind that all of the December-May profits could be given back if my longer-term bearish wave count is correct (which suggest a drop down to 1000, if not to 890).


Silver continuous contract, SI, Weekly chart

Like gold, silver popped above the top of its down-channel from 2013 but it was only a minor break and it was quickly followed by a drop back inside the channel. The top of a smaller down-channel for the consolidation off the November 2014 low was also tested with the May 2nd high. From there it could be just a pullback before heading higher and it would be more bullish with a rally above 18. But the longer-term bearish wave pattern suggests silver has now started the next leg down and a drop below its 50-week MA, near 15.22, and then its April 1st low at 14.78 would be stronger confirmation new lows are likely next.


Oil continuous contract, CL, Daily chart

Oil is working its way marginally higher each day and is now close to its target zone at 50.21-50.95. The lower target is where the 5th wave of the leg up from April 5th would equal the 1st wave. At 50.92 it would test its October 2015 high and at 50.95 it would have two equal legs up from January (to complete an A-B-C bounce correction). The top of its rising wedge pattern is currently near 50.95 so there's a lot of resistance for the bulls to fight through and I don't think they'll be successful. The pattern calls for a drop below the January low near 26.


Economic reports

Thursday's economic reports include Durable Goods orders and pending home sales, along with the usual unemployment data. None are likely to be market moving. Friday's GDP numbers and Michigan Sentiment also will not likely move the market much.


Conclusion

A typically bullish week for the last week of May and into the 1st of June is living up to its reputation and it could hold on for more if the pattern follows through. But the indexes have rallied up to levels that urge caution by the bulls, especially since the rally from last week could be completing a bounce correction that will be followed by a decline below last week's lows. This market has seen repeated reversals of reversals with sharp moves in both directions and that could easily continue for longer. The more bearish pattern suggests a stronger decline than we've seen so far.

The big caution sign for the bears is the fact that last week's low was a good setup for the bulls. As indicated on the Dow and SPX charts, there is the potential for a rally to a new high in June. We're due a pullback at least, to correct the rally off last week's low, but if we see only small choppy pullbacks then we'll have a good idea that higher highs are coming. But if the decline becomes a sharp impulsive move down and that's followed by a choppy bounce correction I would then get more defensive/bearish and expect another leg down. We're in the "between" stage where the pattern is not helpful yet in determining the higher-odds direction and therefore short-term trades with good stop management is a must. Once we get a little more price action, hopefully in the coming week, we should get a better idea what the larger pattern is likely to be. In the meantime, trade safe.

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

Sunburns Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

Solarcity is the company founded by Elon Musk. The company missed earnings but shares are rebounding on the strength of Musk's ownership.


NEW BULLISH Plays

SCTY - Solarcity - Company Profile

SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; MyPower loan agreements; grid control/energy storage systems; zep solar mounting systems and proprietary software. It also sells electricity generated by solar energy systems to customers.

Q1 was a bad quarter for the solar stocks. Multiple companies have missed earnings and lowered guidance. Solar City was no exception. The company lost -$2.52 compared to estimates for -$2.32. However, revenue of $122.6 million easily beat estimates for $110 million. They guided for the current quarter for a loss of $2.70-$2.80 and analysts were expecting $2.13. The company cut estimates for full year installations to 1,000 to 1,100 megawatts compared to analyst estimates for 1,250 megawatts. Shares dropped -21% on the news to support at $16.50. Shares are down -65% in 2016.

The company said they were expanding into new states in the second half and that would increase sales. Also, sales are normally up in the summer months because roofs are not covered with snow.

They blamed the weak first quarter on regulatory challenges and increased prices that slowed sales. Nevada regulators said they were increasing fees to connect your solar installation to the grid and they were reducing the price the utility companies were going to pay for your power when it reaches the grid. That slowed installations in Nevada. I would think utility companies would like the extra power because they do not have to pay to generate it.

There was also some uncertainty about the extension of the investment tax credits for solar installations. The government did not extend the credits until last December.

Solar City actually installed much more wattage than expected. The company had forecasted it would install 180 megawatts in the quarter. They actually installed 214 megawatts, up 40% from year ago levels. The problem came from the bookings. They only booked 160 megawatts to add to the order backlogs. That meant their backlogs shrank for the quarter. However, the CEO said bookings were up +25% in March/April.

This play recommendation is a bet on Elon Musk as much as it is a bet that Solar City will continue to improve its sales and reduce expenses. There have been rumors that Musk was thinking about taking Solar City private for multiple reasons. Whether that happens or not is of course unknown. However, I do not expect Musk to let Solar City fail or continue to post negative results. He will direct the company and if the current CEO cannot post solid improvements, I am sure Musk can find somebody that will.

Earnings Aug 8th.

With a SCTY trade at $24.75

Buy SCTY shares, initial stop loss $22.25.

Optional:

Buy July $28 call, currently $1.07, initial stop loss $22.25.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Rally Continues

by Jim Brown

Click here to email Jim Brown

Editors Note:

Anybody currently short is having a bad week. The back to back squeezes are causing havoc. The volume was low again but that does not mean we cannot be stopped out. The Dow rallied to nearly 17,900 before rolling over to close at 17,850. The S&P hit 2,095 before closing at 2,090. The afternoon fade was not significant and there was no indication sellers were going to take a stand.

The low volume is only going to get worse over the next two days and any material move should happen in the morning and then the markets should go dormant until next Wednesday with the three-day holiday weekend.

DB spiked at the open on the continued rally in Europe so our exit was less than desirable. We were also stopped out on RCII as the stock continued to rise on the buy rating announced yesterday and the market squeeze.

There were no economic reports of note and earnings lacked any market moving potential. I would expect more of the same for the rest of the week.




Current Portfolio





Current Position Changes


RCII - Rent-A-Center

The short position was stopped out at $12.95.


DB - Deutsche Bank

The short position was closed at the open at $17.88.


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


OMED - OncoMed Pharmaceuticals -
Company Profile

Comments:

No specific news. Shares close at a new four-month high.

Original Trade Description: May 21st.

OncoMed Pharmaceuticals is a clinical-stage company focused on discovering and developing novel anti-cancer stem cell and immuno-oncology therapeutics. OncoMed has seven anti-cancer therapeutic candidates in clinical development, where each target key cancer stem cell signaling pathways including Notch, Wnt and R-spondin LGR. OncoMed is advancing its wholly owned GITRL-Fc candidate and an undisclosed immuno-oncology candidate (IO#2) toward clinical trials in the 2016-2017 timeframe. OncoMed has formed strategic alliances with Celgene Corporation, Bayer Pharma AG and GlaxoSmithKline (GSK).

OncoMed is making six presentations at ASCO related to six oncology drug candidates, including robust preclinical anti-tumor activity data for its wholly owned GITRL-Fc candidate and from clinical trials of vantictumab, ipafricept, demcizumab and tarextumab.

All of that is Greek to me but this is a cancer conference and OncoMed is an up and coming cancer drug company. They should be right at home and the notes I have read suggest several of their drugs are very promising. They have milestone payments coming from GSK, Bayer and Celgene coming in 2016-2017 of more than $270 million.

Shares have risen steadily since the earnings miss on May 5th. As a preclinical company they do not have retail revenues and depend on funding from their partners. They will have operating losses until their drugs are in the marketplace.

Shares spiked on the 28th after AbbVie said they were buying cancer drug company Stemcentrx for $10.2 billion. That company is in the same stem cell research sector as OMED.

Earnings August 4th.

With the ASCO meeting still 10 days away we could benefit from some of the building excitement and hopefully the company's presentations at the meeting will increase the interest in the stock.

Position 5/23/16:

Long OMED shares @ $12.80, see portfolio graphic for stop loss.

No options recommended because of wide spreads.



SQ - Square - Company Profile

Comments:

No specific news, no gain.

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 Jun $11 call @ 55 cents. See portfolio graphic for stop loss.

Previously closed 5/17/16: Long May $10 put @ 60 cents. Exit $1.00, +.40 gain.




BEARISH Play Updates


DB - Deutsche Bank - Company Profile

Comments:

The position was closed at the open at $17.88 as markets and banks in Europe continued to rally.

Original Trade Description: May 14th.

Deutsche Bank AG provides investment, financial, and related products and services worldwide. The company operates through Global Markets; Corporate & Investment Banking; Private, Wealth and Commercial Clients; Postbank, Deutsche Asset Management; and Non-Core Operations Unit segments. It offers a range of financial markets products, including bonds, equities and equity-linked products, exchange-traded and over-the-counter derivatives, foreign exchange, money market instruments, and securitized products, as well as mergers and acquisitions, and debt and equity advisory and origination services; and commercial banking, advisory banking, and financial services. The company also provides investment and insurance, mortgages, business products, consumer finance, payments, cards and accounts, deposits, and mid-cap related products, as well as life and non-life insurance products, and corporate pension schemes; payments, financing for international trade, lending, trust, agency, depositary, custody, and related services; invests in a range of asset classes, including equities, fixed income, real estate, infrastructure, private equity, and hedge funds. As of December 31, 2015, it operated 2,790 branches in 70 countries. Deutsche Bank AG was founded in 1870. Unfortunately, DB may be in serious trouble. There are numerous rumors of financial problems of all types. The bank reported a record loss for 2015 and is being buried by a mountain of litigation related to subprime loans, manipulation of foreign exchange rates and gold and silver prices. They are under attack for rigging the Libor and Euribor interest rates used to set the prices for mortgage loans and derivatives. DB has paid more than $3 billion in fines already but that is a drop in the proverbial bucket compared to what is coming. There are numerous class action suits for multiple offenses, many of which DB has already admitted it committed.

DB debt yields are soaring as investors race to get out of positions before the bank crashes. Last week DB offered customers a 5% yield if they would deposit 10,000 to 50,000 euros and leave the money in the bank for 90 days. With the ECB willing to lend an unlimited number of euros to any European bank on almost any collateral, why is the bank offering customers 5% interest for 90 day money? It appears there is a massive liquidity squeeze underway and money is rapidly flowing out of DB accounts.

In the fine print on the offer DB says, "In case of bankruptcy or risk of bankruptcy of financial institution, the saver is at risk of losing their savings or may be subject to a reduction / conversion into shares (bail-in) of the amount of the claim that he has the financial setting on top of the amount covered by the double German guarantee scheme for deposits". I doubt savers are rushing to deposit money that can be confiscated by a bail-in for the bank like we saw in Greece.

Position 5/16/16:

Closed 5/25/16: Short DB shares @ $16.37, exit $17.88, -1.51 loss.

Optional

Closed 5/25/16: Long July $16 put @ $1.10, exit .44, -.66 loss.



ENDP - Endo Intl Plc - Company Description

Comments:

No specific news. Minor decline in a bullish market.

Resistance is 15.85 to 16.15 and I recommend we stay with it until we see if that resistance will hold. The current stop loss of $16.45.

Original Trade Description: May 11th.

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.

Position 5/12/16:

Short ENDP shares @ $13.81, see portfolio graphic for stop loss.

Optional

Long June $12.50 put @ $1.05, see portfolio graphic for stop loss.



FDC - First Data - Company Profile

Comments:

No specific news. Finally a minor decline.

While we were stopped out on the short on 5/23 there was no stop loss on the option and that position remains open. At the current 10-cent price that is a lottery ticket that the headlines will fade and the original direction will return.

Original Trade Description: May 16th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions.

In their Q1 earnings, they grew revenue 3% and operating income rose from $185 to $220 million. Earnings of 24 cents were slightly above expectations for 21 cents. Revenue of $1.69 billion was below estimates for $1.71 billion. Unfortunately, FDC has $19 billion in debt compared to its $3 billion market cap. Interest expense in the first quarter was $263 million or more than $1 billion a year.

Global business solutions revenue declined in the quarter while financial solutions and security solutions showed only marginal growth.

Earnings July 21st.

While the company tried to put a positive face on the future by projecting revenue growth, it appears investors were not impressed. Shares have fallen from $13.50 to $10.50 over the last three weeks since earnings. FDC does not provide guidance and that is troubling to some investors.

I am anticipating a retest of the post IPO low at $8.50 or even worse, depending on the market.

Position 5/17/16:

Long July $10 put @ $.60, no stop loss.

Previously closed 5/23/16: Short FDC shares @ $10.69, exit $11.55, -.86 loss.



LOCO - El Pollo Loco - Company Profile

Comments:

No specific news. Shares spiked at the open with the market but faded into the close.

Original Trade Description: May 18th.

El Pollo Loco develops, franchises, licenses and operates quick service restaurants in the USA. The company offers individual and family sized chicken meals, Mexican inspired entrees and sides. They currently have 430 company owned and franchised restaurants. They are planning opening 16-20 additional stores in 2016.

The big spike on the IPO came on name recognition, a successful roadshow and a small number of shares initially offered. They later waived the lockup period and allowed insiders to sell their shares on November 19th, 2014, two months earlier than stated in the IPO documents. Shares crashed from $33 on the news and have never recovered that level.

The reported earnings on May 5th of 17 cents that missed estimates for 18 cents. Revenue of $94.4 million also missed estimates for $96.9 million. They guided for full year earnings of 70-74 cents, which was almost zero growth from the Q1 numbers. That suggests the competition is fierce and they are having trouble gaining market share. Earnings in 2015 were 71 cents.

Net income declined -19.8% in Q1. Same store sales declined -0.6% for company operated restaurants. That is not a good track record to use when selling new franchises.

Next earnings August 4th.

I think the crazy chicken is dying. Their moment in the sun is fading along with their stock price. Shares are rapidly approaching their post IPO low of $9.58 and once you break under that $10 level it is very hard to recover.

Position 5/19/16

Short LOCO shares @ $10.61, see portfolio graphic for stop loss.
No options recommended.



RCII - Rent-A-Center - Company Profile

Comments:

Continued rally on the buy rating from yesterday and the positive market. We were stopped out at $12.95.

Original Trade Description: May 23rd.

Rent-A-Center leases household durable goods to customers on a rent to own basis. They offer products including consumer electronics, appliances, computers, tablets, smartphones and furniture. They also offer the products on an installment sale basis.

Their recent earnings of 48 cents fell -7.7% but they did beat estimates of 40 cents. Unfortunately, revenue declined -4.8% to $835.7 million and missed estimates for $851.1 million. Same store sales declined -2.5% overall and U.S. stores fell -3.8%.

The CEO said improving cost controls helped them beat on the top line. Unfortunately, when sales are falling you cannot continue to cut costs indefinitely. Sales have to rise in order to succeed.

The Acceptance Now division saw a zero increase in sales after rising sharply in the prior quarter. That division takes credit application at more than 1,400 kiosks in the U.S. and once approved the customer can shop at a large number of dealers that partner with RCII. The drop in revenue growth is due to higher numbers of credit declines.

Management also said rentals of computers, tablets and smartphones were also declining.

With same store sales declining and credit approvals harder to get, the company could continue to decline until those problems are reversed. I am targeting $10 on this position.

Earnings July 27th.

Position 5/24/16:

Short RCII shares @ $12.58, initial stop loss $12.95.

No options recommended because of wide spreads.





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

subscribe now