Option Investor

Daily Newsletter, Monday, 4/4/2016

Table of Contents

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

Market Wrap

Equities Struggle

by Thomas Hughes

Click here to email Thomas Hughes


The equities market struggle for gains amid data, the Fed, the start of a new quarter and the onset of another earnings cycle. Last week's surge to 2016 highs, driven by a somewhat strong jobs report, did not see follow through today as a number of factors combined to weigh on sentiment. New economic data in the form of factory orders seems to point to ongoing weakness in the manufacturing sector and support a less aggressive rate hike timeline while comments from Fed president Rosengren seem to contradict that thought; according to him the market is miss-pricing the trajectory of rate hikes.

International markets were mixed. Japan's Nikkei was the largest decliner on the day, falling more than -0.25% on a strengthening yen despite the surge in dollar value we saw last Friday. New data shows that businesses are not confident the BOJ's use of negative rates will spur the economy and inflation. Chinese markets were closed due a holiday and will reopen tomorrow.

European indices ended the day positive, but well off the highs of the day. Early euphoria, likely driven by strong US labor data, was hindered by volatility in the oil markets and leaked documents suggesting that the IMF would try to push Greece into defaulting on bail-out terms.

Market Statistics

Futures trading was very light in the early part of the session, indicating a flat open for the major US indices. There was little to move the market in the pre-opening session so futures held steady up to and into the opening bell. After the open indices moved lower by a few tenths of a point until finding some support around 9:45AM and reversing the initial losses. By 10:15AM the indices had moved into positive territory, and reached the highs of the morning, at which time sellers stepped back into the market and drove them back to the initial low and then lower.

Another bottom was reached by 11:15AM, resulting in another bounce and move up to retest for resistance near break even levels. The bounce did not last long; falling oil prices, weak data, Rosengren's comments and concerns over the upcoming earnings cycle all helped to drive the indices back to the earlier lows and lower. However, even with the late day selling the indices only shed about a half percent on average and are holding very near to the highs set on Friday.

Economic Calendar

The Economy

Not much in the way of official economic data today and what we did get is fairly old. The final report on February factory orders showed a -1.7% decline, in line with expectations and erasing the +1.2% gain reported for January. Within the report shipments, unfilled orders, inventory and new orders all declined.

Moody's Survey of Business Confidence gained 0.5 to hit 31.2 in this week's report, the highest level since January. According to Mr. Zandi's commentary the survey shows business confidence is firming following the slump we saw at the end of last year/beginning of this year. Responses to all 9 of the questions asked by the survey are improving and many of the respondents say they see conditions on the mend. Despite the gains however sentiment remains low relative to last years peak, the data barely showing reversal.

According to data from FactSet the blended rate of earnings growth for the S&P 500 in the 1st quarter of 2016 is now -8.5%. This is slightly better than the -8.7% reported last week but still near the low of the cycle. So far 15 companies have reported, 13 have beaten earnings expectations and 9 have beaten revenue expectations; 7 are expected to report this week. On a sector by sector basis the telecoms are expected to lead with growth of 13.1%, followed by 10% among the consumer discretionary sector, while energy remains the laggard with expected earnings growth decline of -101.8%. Alcoa officially kicks off the season next Monday.

Looking forward nearer term expectations continue to decline but there is a brightening of sentiment the farther out you go. Projections for the 2nd and 3rd quarters all fell this week while those for the 4th quarter saw a noteworthy increase. Estimates are now -2.5%, 3.7% and 11% respectively, the 4th quarter upgraded by 2%. Full year 2016 expectations also fell, dropping two tenths to -2.2%, and full year 2017 expectations remain steady at 13.4%.

There is not much data due out the rest of the week either. Tomorrow we'll get Trade Balance and ISM Services, Wednesday is the FOMC minutes, Thursday is Consumer Credit and weekly Jobless Claims with Wholesale Inventories rounding out the week on Friday.

The Oil Index

Oil prices were volatile again today. Early action had prices down by about -1.25%, followed by a spike to about +1.25%, followed by a late day decline to -2.75% (at settlement) and then to -3.5% in after hours trading. Hope that oil producers will reach some agreement about capping production is still lending support but with the Saudi's now saying they won't agree unless Iran and other do as well the supply/demand picture is likely to take over. Supply, production and storage remain high and above demand levels so without additional catalyst a return to retest support near $35 or lower is very possible.

The Oil Index fell about -0.9% in today's action. The index is sitting on support levels near 1050 and the short term moving average and looks like it will continue, if not break through. The indicators are pointing lower, with bearish momentum on the rise, with nothing to provide support should oil prices continue to fall. A break below 1050 could take the index to 1015 or lower provided no bullish news/rumors hit the market. The risk remains with global producers, and in particular those countries who rely on oil for their budgets, any one of them could make a statement that may prop up prices regardless of fundamentals or reality.

The Gold Index

Gold prices held fairly steady today around $1220. Spot prices fell last week after the NFP report which increased the chances of a rate hike despite comments from Yellen earlier in the week. Today's data helped to alleviate some of that concern, weakening the dollar a bit, but did not provide enough support to send gold prices higher. This week there is little in the way of data to move gold but the FOMC minutes on Wednesday could do it; a hawkish tone could send gold lower, a dovish tone higher.

The gold miners continue to consolidate near recent highs despite today's weakness in gold. The miners ETF GDX fell about -2.9% but found support above $19.50 along the short term moving average. The indicators continue to weaken but with the ETF consolidating at relative high levels this appears to be setting up for another move higher rather than for correction. Over the past two weeks the 30 day EMA has been providing support, this may continue, however a break of this support would find next support near $19, a break below $19 could be bearish for the near to short term. Resistance is near $21.

In The News, Story Stocks and Earnings

The dollar moved lower on today's economic data. Data shows that the manufacturing economy is still struggling and helped to alleviate rate hike fears stirred up by the NFP. The Dollar Index fell about a tenth of a percent to close at a near 6 month low. The index is now sitting on potential support, near $94.25, with hints of confirmation from the indicators. Both MACD and stochastic are diverging from this low although there is no guarantee this is the bottom. This week the FOMC minutes could affect forward looking sentiment, as will CPI and PPI data next week. Regardless, the dollar is -6% below the December high and trading near the bottom of the 2 year range which should take some pressure off of companies whose earnings are suffering from currency conversion.

Alaska Airlines announced this morning that it would be buying Virgin America. The deal is worth about $2.6 billion, $57 per share, in cash and creates an airline with 280 aircraft servicing from hubs located in LA, San Francisco, Seattle, Portland and Anchorage. The deal was unanimously approved by both boards, the CEO of Virgin America was pleased with the deal but Richard Branson made a statement to the effect he tried to stop the deal. Shares of Alaska Airlines fell a little more than -4%.

Tesla announced more than a quarter million pre-orders for its yet to be released Model 3. The model is Tesla's mass market vehicle with a price tag in the range of $30K to $40K. Each registered pre-order comes with a refundable $1000 deposit. The demand for the model is so strong that now the speculation is whether or not Tesla will be able to produce the cars in a timely manner, first shipments are not expected until late next year. Shares of Tesla jumped more than 5% on the news and traded 11% off the all-time high. . . until after the bell and Q1 deliveries were announced. The company announced delivery of 14,820 vehicles, shy of expectations, sending the stock down in after hours trading.

The Indices

The indices basically held flat in today's trading. News and data gave reason for pause but not so much for full blown reversal. Today's leader was the Dow Jones Transportation Average which fell about -0.9%, more than double the other indices. Price action brought the index down to support just above the short term moving average, a support level that could prove to be fairly strong as it is also coincident with a previous support line near 7,800. The indicators have rolled over into a bearish signal so support is likely to be reached and tested as we move into earnings season next week. Earnings for this cycle are likely to be lack luster at best, it will be the forward guidance I think that provides catalyst for the index to move higher or lower.

The next largest decliner in today's session was the NASDAQ Composite. The tech heavy index did not get much help from Tesla's big move, dropping to near term support level near 4,890. The index has been riding high on a wave of momentum that may have run its course. It is now within a potentially strong resistance zone between 4,890 and 5,000, with weakening indicators. The indicators remain bullish but have been diverging from the new highs for at least two weeks, a sign of growing weakness in the market. These divergences may simply be a sign of a quieting market, ahead of earnings season, but may also indicate a growing possibility of correction with earnings season as catalyst.

The next largest decliner was the S&P 500 with a drop of -0.32%. The broad market created a small bodied candle, more of a spinning top than anything else, that closed near the low of the day. The indicators are bullish but like with the NASDAQ are showing divergences that may indicate a growing weakness in the market. The wave of momentum that has brought the index to current levels is petering out and with a weak earnings season on tap there is little reason to expect it or the market to move much higher, unless of course earnings are much better than expected. If it continues higher next target for strong resistance is near 2,100, first target for support is near 2,050.

The smallest drop was posted by the Dow Jones Industrial Average, about -0.31%. The blue chips created a small bodied white candle that, like the other indices, appears to be approaching the end of a run. The indicators here too remain bullish but are showing divergences from the rally indicative of slowing momentum and a weakening market. This could lead to a period of consolidation as easily as a correction but will be dependent on earnings. Near term support is between 17,500 and 17,650 with next target for resistance near 18,000.

Today's action was very mild, especially when considering the amount of volatility that a -3.5% in drop in oil would have caused only a month ago. The rally from January/February lows is not over yet, although there is reason to suspect the end may be near, but it is also not time to begin entering new bullish positions. This week may see the indices continue their march higher, with a possible test of resistance at or near precious long term/all-time highs. The FOMC minutes on Wednesday is a possible catalyst for such a move but with the earnings season set to start next week I am very leery of just how high the market can go before profit taking, re-positioning or outright selling begins to set in.

This earnings season is not likely to be very good. S&P 500 companies will have to blow away the projections to even post a 0% gain over the last quarter and that is far from likely. The best we can hope for is that businesses and analysts will start to be a little more upbeat about forward earnings. That being said I think we may be in for another earnings driven decline in the indices, but one that will set us up for a strong rally into the end of the year as the broader market returns to earnings growth.

I remain bullish for the long term, cautious in the near, waiting for the next entry.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Moving to the Cloud

by Jim Brown

Click here to email Jim Brown

Editors Note:

One time software sales are becoming an obsolete trend. Multiple companies are changing their business model to Software as a Service (SAS). Adobe was one of the first companies to move their high priced software to the cloud and it was a painful experience. Now they are being rewarded.


ADBE - Adobe Systems -
Company Description

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content.

For years they sold their Photoshop software and assorted tools as boxed software on a CD with a license key. Once you bought it you own it and Adobe never received any further revenue unless you upgraded to a newer version at some later date.

All that has changed with the move to the cloud. The new product is called the Creative Cloud and is a subscription based product where you pay and pay and pay for as long as you continue to use it.

Moving to the cloud model has a lot of inherent problems. Once you quit selling your boxed software that big chunk of retail revenue goes away. In the case of Adobe their software sold for many hundreds, if not thousands of dollars. That meant the one time revenue disappeared in exchange for a $19 to 49 a month subscription fee. Over the long term the revenue is stable and eliminates the volatility of the single sale model.

Earnings for the quarter reported in March were 66 cents that beat estimates for 61 cents. Revenue rose 25% to $1.38 billion also beating estimates for $1.34 billion. They signed up a whopping 798,000 new subscribers to the Creative Cloud suite service. They guided for earnings of 64-70 cents for the current quarter and above analyst estimates for 65 cents.

Earnings are June 21st.

Shares spiked to $98 on the news before pulling back to consolidate at $92 for over a week. Over the last several days they crept up to $96 and then sold off in the weak market on Monday. I believe this market weakness is a buying opportunity for Adobe.

I would like an entry point closer to $92 but there is no guarantee we are going to get it. The S&P futures are down hard tonight at -6.50 and the market is likely to open lower on Tuesday. I am suggesting we buy the option 5 min after the open. That will give the prices time to evaporate in a falling market. Hopefully ADBE will gap down a couple dollars.

Buy May $95 call, currently $2.98. No initial stop loss in order to get past any drop on Tuesday.


No New Bearish Plays

In Play Updates and Reviews

Losing Traction

by Jim Brown

Click here to email Jim Brown

Editors Note:

There was little impact from any leftover end of quarter retirement contributions hitting the market on Monday. After a -3 point decline at the open the market tried to move back into positive territory but the effort was lackluster and shares sold off sharply by 11:AM. The S&P has failed to even reach the beginning of strong resistance at 2,075 and enthusiasm is already fading.

Individual stocks were only down a few cents each except for the story stocks. We were stopped out of the Dephi position after Tesla said they had orders for nearly 300,000 Model 3s. We were also knocked out of S&P after three brokers downgraded it on the same day.

QSR is not moving despite being at the top of it recent range. I am recommending we close that position at the open on Tuesday.

The S&P futures are down -3.50 in afterhours on several guidance warnings and news that the Treasury Dept was implementing some new rules to limit tax inversions. Allergan (AGN) dropped -$60 (-21%) to $216 in afterhours on the news. The new rule targets "serial inverters" and prevent the parent companies outside the U.S. from lending money to subsidiaries in the USA.

Separately Donald Trump has changed his stump speech to a warning of a major recession next year if he is not elected. That headline has been making the rounds all day.

With the S&P stalling just below resistance and negative headlines dominating Wall Street the outlook for Tuesday is not positive. Anything can and sometimes does happen but the internals are negative.

Current Portfolio

Current Position Changes

XBI - Biotech ETF

The long call position was opened at $53.55.

DLPH - Delphi Automotive

The long call position was stopped out on the drop to $72.65.

SWHC - Smith & Wesson

The long call position was stopped out on the drop to $25.85.

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

AKAM - Akamai Technologies -
Company Description


No specific news. Shares are still flat but I believe we will see a break out or break down in the near future. The key is whether it will make the move before out April option expires.

Original Trade Description: February 26th.

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

Position 3/2/16 after an AKAM trade at $55.75

Long April $57.50 call @ $1.63, See portfolio graphic for stop loss.

DLPH - Delphi Automotive - Company Description


Delphi and the other automotive stocks were crushed on Monday after Tesla said it had received 276,000 orders for the Model 3 and expect that order level to be well over 300,000 by June. Also, an article in automotive news warned that gasoline and diesel vehicles could be under pressure because of the rapid electrification of the fleet in the EU. Obviously this is long term but the twin events crushed auto parts companies. We were stopped out of the DLPH position at $72.65.

Original Trade Description: March 5th.

Delphi manufacturers vehicles components and provides electrical and electronic, powertrain and safety technology solutions to the automotive and commercial vehicle markets worldwide. Whether you are buying a new car or repairing an old one the odds are very good you are using Delphi parts.

Vehicle sales in February were 17.54 million units on an annualized basis. As we move farther into spring and summer those numbers are going to rise sharply. Cheap gas means consumers are going to buy more new cars and upgrade their rides to the SUV category when possible.

Delphi reported earnings of $1.39 and beat consensus estimates for $1.37. Revenue of $3.88 billion rose +11% and also beat estimates for $3.79 billion. The company guided for full year earnings of $5.80-$6.10 and revenue of $16.6 to $17.0 billion.

Shares rallied after earnings and broke through resistance at $68 last week to close at $71.53. The next significant resistance is $77.25. Earnings are April 28th.

I am recommending we buy the May $75 calls at $2.40 so there will still be some earnings expectation premium in them when we exit before earnings. April options expire on the 15th so premiums will deflate significantly before we ever get to the earnings event. I am recommending an entry point at $72.50 and just over Friday's high. If the market does take profits early in the week we can lower the strike price and entry target depending on what happens to Delphi shares.

Position 3/17/16 with a DLPH trade at $72.50

Closed 4/4/16: Long May $75 call @ $2.50, exit $1.80, -.70 loss

HCA - HCA Holdings - Company Description


Minor decline after a big gain on Friday. No news.

Original Trade Description: March 29th.

HCA provides health care services in the USA. They offer general, acute care, intensive care, cardiac care, diagnostic, emergency and outpatient services. They operate 164 general and acute care hospitals with 43,275 licensed beds. They also operate 3 psychiatric hospitals and 116 freestanding surgery centers. They were founded in 1968.

In their Q4 earnings they reported $1.69 per share compared to estimates for $1.39. Revenue rose 6.4% to $10.25 billion also beating estimates for $10.14 billion. They guided for the full year to earnings of $6.00-$6.45 and revenue in the range of $42 billion.

In October, the company had warned on Q3 for the first time since 2013. The entire health care market was shaken by the warning because everyone assumed the revenue and profits would always continue to grow. This is the largest company in the healthcare space and is seen as a bellwether for the sector. HCA rectified the problems by Q4 and the CEO assured everyone on the call that all was well and HCA was "well-positioned for continued success."

One of the problems in Q3 was retaining qualified staff. There is an extreme shortage of nurses and the company has to pay premium wages to keep nurses from being lured away to other hospitals. The CEO said they have a plan in place and they view it as an opportunity for 2016.

Shares sank from the October warning through the market washout in January. After they reported earnings the shares rebounded but were hit again in the February decline. Since the February market lows the stock has risen steadily and has reached initial resistance at $78. Once through this level it could be clear sailing to $86-$88 depending on the market.

Earnings are April 28th.

I am recommending an inexpensive $80 strike for May that should still have some expectation premium left when we exit ahead of earnings. The risk is the resistance at $78.50.

Position 3/30/16

Long May $80 call @ $2.50, see portfolio graphic for stop loss.

NTAP - NetApp - Company Description


No specific news. Trading at the top of its recent congestive resistance range.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Long May $28 call @ 99 cents, see portfolio graphic for stop loss.

OA - Orbital ATK - Company Description


Minor decline. No news. Down with the market.

Target $88.85 to exit.

Original Trade Description: March 19th.

Orbital ATK was created in 2015 by the merger of Orbital Sciences and Alliant Techsystems. The company develops and produces aerospace, defense and aviation related products for the U.S. Government, allied nations, prime contractors and other customers in the U.S. and internationally.

The currently have a contract to convert the four segment Space Shuttle Solid Rocket Booster into a five segment booster for the new Space Launch System that will carry astronauts back into space. They are working on a new rocket booster to replace the boosters the U.S. is currently buying from Russia. They also develop satellites for commercial, scientific and security applications. They also produce the Cygnus spacecraft that delivers cargo to the International Space Station and returns with completed experiments.

The Defense Systems Group provides tactical missiles, defense electronics and medium to large caliber ammunition, fuzed warheads, etc. The Flight Systems Group produces the Pegasus, Minotaur and Antares launch vehicles.

One of their newest projects is the Mission Extension Vehicle or "space tug." When an existing satellite develops a problem and engineers believe it can be repaired, the space tug would go get the satellite and push it towards the International Space Station where it can be repaired and the tug would then push it back into orbit where it belongs. Since these satellites cost from hundreds of millions to billions of dollars each, having the capability to repair them would save a lot of money.

Sometimes the satellite has simply been active for so long that its orbit has degraded. The space tug would attach itself to the satellite and then lift it back into an orbit that would give the old satellite several more years of useful life. Then the tug would disconnect and repeat the process with a different satellite. The tug could also push dead satellites into a descending orbit where they will burn up reentering the atmosphere. That would essentially remove the trash from what is becoming an increasingly crowded orbital space. The first space tug is expected to have enough fuel to keep it active for up to 15 years. They plan to launch 5 by 2020 and with dozens of very expensive communication satellites running low on fuel every year, it will be a very profitable venture. Clients are already entering into discussions on how the tug can help their satellites.

These are just some of the hundreds of thing Orbital ATK has in the works. They were also named a subcontractor on Northrop's new $120 billion B-21 stealth bomber program.

In early March Orbital reported earnings of $1.45 that beat estimates for $1.09. Revenue of $1.137 billion beat estimates for $1.11 billion. Order backlogs were over $13.5 billion. They guided for the full year to earnings of $5.25-$5.50. Shares crashed from $87 to $74 the next day after they filed a statement with the SEC saying the financial statements covering the Q2-Q3 in 2015 were not accurate due to an accounting error that occurred when the two companies merged. It was a non-cash error covering long-term contracts that were accounted for using different accounting methods in each company. There was no material impact from the restatement but shares always crash when an "accounting error" is disclosed.

After two weeks, shares began to rise again one the smoke cleared. Shares hit resistance at $82.60 on Friday and pulled back only slightly. I am recommending we buy a breakout over that resistance with a target at $90.

Earnings May 30th.

Position 3/21/16 with an AO trade at $82.80

Long May $85 call @ $2.80, see portfolio graphic for stop loss.

PKG - Packaging Corporation of America - Company Description


Minor decline with the market. They changed their earnings date to April 20th.

Target $64.25 for an exit.

Original Trade Description: March 7th.

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 20th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Position 3/11/16:

Long April $55 call @ $2.20, no initial stop loss.

QSR - Restaurant Brands Inc - Company Description


Still waiting on a breakout. No news.

With a lack of forward movement and expiring April option I am recommending we close this position at the open on Tuesday. With the market weak and QSR stagnant there is growing potential for a decline instead of an advance.


Original Trade Description: March 7th.

QSR is the new name for the Burger King and Tim Hortons brands. Both have been serving customers for more than 50 years. QSR currently operates more than 19,000 restaurants in 100 countries with more than $23 billion in sales. The name change and rebranding came a year ago when Burger King bought the Tim Hortons chain.

QSR has been flying under the radar for the last year with all the news about McDonalds all day breakfast and Starbucks expanded menu. They reported earnings of 35 cents that beat estimates of 31 cents.

Same store sales rose +5.6% at Tim Hortons and 5.4% at Burger King.

Burger King sales are accelerating because of a flood of new menu items. They have Chicken Fries, which are fries dipped in fried chicken batter and fried. They have Jalapeno Chicken Fries. On February 23rd they introduced the Whopper Hot Dog. This is a foot long hotdog flame grilled and served with whatever you want on them.

Burger King received tons of free press when the new hot dog was delivered. Some food aficionados are calling the hot dog a "culinary calamity." Others called is a "disgusting disgrace" but customers are waiting in line to order them.

Franchisees claim the demand has been "overwhelming" and while only a couple weeks old they are selling over 100 a day and rising rapidly as more customers realize they are available. Americans eat more than 20 billion hotdogs a year.

Earnings are May 27th.

QSR shares are currently $37.85 and a breakout over resistance at $37.65 is in progress. I am recommending we buy the April $39 call, currently $1.10, and plan on exiting at $41 if that higher level of resistance slows the rally.

Position 3/9/16 with a QSR trade at $38.15

Long April $39 call @ $1.15. See portfolio graphic for stop loss.

SRCL - Stericycle - Company Description


No specific news. Very minor decline of 15 cents in a weak market.

Original Trade Description: March 30th.

Stericycle provides regulated and compliance solutions to the healthcare, retail and commercial businesses in the U.S. and internationally. They collect and process regulated and specialized waste for disposal as well as personal and confidential records for destruction.

Everyone knows that doctors and hospitals produce tons of medical waste every month and that waste can be infected with all kinds of bacteria and viruses that can be contagious. You cannot just throw those bloody surgical gowns and blankets in the trash. They have to be disposed of in an environmentally safe way.

We also hear all the time about some food company recalling hundreds of tons of a particular food product because it was contaminated with ecoli or some other bad bacteria or foreign substance. Where does that food go? It goes to Stericycle and they dispose of it safely.

In Q4 they acquired Shred-It for $2.3 billion in order to expand into the confidential records destruction business. Stericycle sees Shred-It as an excellent opportunity for cross selling. Less than 20% of Stericycle's current customers use a document shredding service.

In their recent Q4 earnings they reported $1.11 per share that beat estimates for $1.08. However, revenue of $888.3 million missed estimates slightly of $889.1 million. Revenue was hampered by a $26.9 million hit from the strong dollar. Gross margins were 42.9%.

In 2016 earnings are expected to grow +20.3% to $5.26-$5.33 with revenue up +21% to $3.6-$3.67 billion.

Earnings are April 28th.

Shares have crept up to resistance from November at $126 and a breakout here could run to $140 or higher.

Position 4/1/16 with a SRCL trade at $126.75

Long May $130 call @ $2.70. See portfolio graphic for stop loss.

SWHC - Smith & Wesson - Company Description


Major news! S&W was downgraded by Cowen, CL King and BB&T Capital Markets after March NCIS background check data declined -3% from February. March was stil up +25% over March 2015. Shares were crushed and we were stopped out at the open at $25.85.

The decline was crazy because a 3% drop is noise while year over year numbers were up +25%. We will be back in SWHC once it stabilizes.

Original Trade Description: March 26th.

Smith & Wesson was founded in 1852 and manufacturers firearms in the U.S. and internationally under many different brands but primarily Smith & Wesson.

Gun sales are booming. Sportsman's Warehouse said gun sales rose +34% in Q4 alone. With every terrorist attack or mass shooting more consumers rush out to buy guns for self defense. With the potential for additional attacks in the U.S. this trend is not going to slow. However, sales are cyclical. They surge after attacks like San Bernardino or after speeches by politicians about gun control. President Obama has been the best gun salesman we have ever had. Every push by the administration to get more laws passed results in millions of new gun sales.

The New York public advocate, Letitia James created an excellent buying opportunity in a stock that normally refuses to go down. James sent a letter to the SEC demanding they investigate Sturm Ruger (RGR) because their guns are used in crimes. She did the same thing to Smith & Wesson back on December 15th. Seriously? Guns are used in crimes? Who does not know that?

James believes investors in these companies could suffer "reputational risk" if people find out they own shares of SWHC or RGR. She also urged Toronto Dominion Bank (TD) to stop financing the firearms manufacturer. She threatened the bank with the possibly loss of "millions of dollars in contracts" from New York City if they continue to finance gun manufacturers. I wonder if she is going to attack auto manufacturers next for people injured in accidents?

In their Q4 earnings where there was a surge in gun sales after San Bernardino, the company reported earnings of 59 cents that beat estimates for 41 cents. Revenue rose +61% to $210.8 million and easily beat estimates for $182.3 million. The company guided significantly higher for the current quarter to revenue of $210-$215 million compared to estimates for $196 million. Earnings are expected to be 51-53 cents. That is a 13.7% increase in revenue and 20% increase in earnings. For the full year they guided to earnings for $1.68-$1.70 and analysts were expecting $1.42. This was also higher than the company's prior forecasts for $1.36-$1.41 from January.

The company said inventories were depleted because of the high demand and they were focused on increasing production rates to keep up with demand.

Earnings are June 16th.

Shares rocketed higher after the earnings in early March and they were already up strongly since December. I hesitated to buy the top since it was making new highs every week. The hatchet job by James has given us a buying opportunity.

I am recommending a June call because it expires after earnings and should retain some expectation premium when we exit before earnings. Buying a May option would be subject to accelerated premium decay.

Position 3/28/16:

Closed 4/4/16: Long June $28 call @ $1.95, exit $1.40, -.45 loss.

XBI - SPDR Biotech ETF - ETF Description


No specific news. The biotech sector posted a positive gain in a weak market. That suggests we could see the sector move higher.

Original Trade Description: April 2nd.

The S&P Biotech ETF attempts to match the performance of the Biotech Select Industry Index. The ETF holds 90 stocks in the biotechnology and pharmaceutical sector.

The biotech sector has been in free fall since its high last July at 4,400 on the $BTK Index. The index hit 2,575 in early February and rebounded to trade in a narrow range between 2700-3000 for the last two months. On Friday, the index closed at 3,037 and a two month high. The rebound over 3,000 could be the beginning of a major breakout.

Biotech and pharma stocks have beenunder pressure because of attacks by political candidates claiming they would lower the prices on drugs if they are elected. This caused the sector to collapse most notably in January from 3,900 to that 2,575 level.

If a candidate is elected and did choose to follow through on a promise to lower drug prices it would take a long time, assuming they had the votes in the House and Senate to get a bill passed. I believe the selloff in the biotech sector has been overdone and I have been waiting for a sign there may be a rally in our future. The close over 3,000 on the $BTK could be that sign. The $BTK gained 5.7% last week suggesting buyers are returning.

The XBI gained 2.9% on Friday to cap off a week of gains. The ETF has resistance at $54 and again at $56.50. However, short interest in biotech stocks is so high that any further move higher in the $BTK could cause significant short covering.

I am recommending we buy the June $55 call, currently $3.40. If we get a breakout over $56, it could easily run to $70, which is significant resistance. Obviously that assumes a positive market as well.

A rebound in the biotech sector would lift the Russell 2000 and the S&P and that would help support a positive market.

Position 4/4/16

Long June $55 call @ $3.50, initial stop loss $45.85.

BEARISH Play Updates (Alpha by Symbol)

ENDP - Endo Intl Plc - Company Description


Biotech sector was positive but Endo shares faded. Hopefully we will return to the lows.

Original Trade Description: March 28th.

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 $96 last April to $28 today. 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 lowered guidance at the Barclay's Healthcare Conference on March 15th. The company lowered guidance to revenue of $928-$972 million for Q1 and analysts were expecting $1.03 billion. Earnings guidance was $1.02 to $1.08 and analysts were expecting $1.19.

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

Earnings are May 9th.

Shares have flat lined at the $28.50 level for more than a week and I believe we are about to see another leg lower. Today was the lowest close since January 2013.

Position 3/29/16:

Long May $25 put @ $2.10. See portfolio graphic for stop loss.

SPY - S&P 500 ETF - ETF Description


The SPY is holding its gains over $205 but there is no forward progress and it cannot move past resistance at $207.

I am recommending we add to this position when/if the SPY trades up to $210.

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.

If the market continues higher add to that position again at $210.
See portfolio graphic for stop loss.

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