Rising oil prices, a lack of negative data and several biotech stories helped power a new short squeeze in the biotech sector.
This powered the S&P to a 21-point gain. The S&P rebounded from 2,045 to 2,066 and closed 9 points under the start of its strong resistance band. This was just a short squeeze and not a fundamental reversal.
The rebound was caused by a short squeeze in the biotech sector. The $BTK rallied 6% and the XBI ETF rallied 7%. We entered that play just in time at the open on Monday. The XBI is up $4 since w started the position and has room to run.
The Allergan/Pfizer deal was cancelled and Bill Ackman was bullish about Valeant on his earnings call this morning. These news items helped power the biotech squeeze as analysts kept talking about who would be the next takeover target.
Unfortunately the biotech short squeeze was also felt in our put position on Endo Pharma. After setting a new 3-year low on Tuesday, it was up 9% today in a short squeeze.
Everyone loves a short squeeze in the market but typically they do not last. While every major market rally normally starts with a squeeze, every squeeze does not produce a rally.
The S&P and Dow failed to return to their resistance levels at 2,075 and 17,750 but the Nasdaq closed at 4,920 and well over resistance at 4,900 thanks to the biotech explosion. The Russell gained 1% but remains trapped in the 1100-1110 range and did not recover its recent high.
The biotech rally should fade slightly after the index closed exactly on the 100-day average and strong resistance. However, I believe it will eventually break through and retest 3,800.
Current Position Changes
SWHC - Smith & Wesson
The long call position was opened at $23.55.
NTAP - NetApp
The long call position should be closed at the open on Thursday.
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
ADBE - Adobe Systems - Company Description
Nice rebound from Tuesday's selling. Back up testing new high resistance. No news.
Original Trade Description: April 4th.
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.
Long May $95 call @ $2.48. No initial stop loss.
HCA - HCA Holdings - Company Description
Back over recent resistance. We need to get over $80 to trigger short covering. 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.
Long May $80 call @ $2.50, see portfolio graphic for stop loss.
NTAP - NetApp - Company Description
No specific news but only a minor rebound. I considered closing the play but this is a cheap option and we still have a month to go. Maintain the stop loss at $25.85.
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.
Long May $28 call @ 99 cents, see portfolio graphic for stop loss.
OA - Orbital ATK - Company Description
Decent rebound. No news. Still not back to resistance but headed in the right direction.
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
Nice rebound from Tuesday's drop. Let's hope the trend returns. No news.
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.
Long April $55 call @ $2.20, no initial stop loss.
SRCL - Stericycle - Company Description
No specific news. Minor rebound but holding over prior resistance at $126. We need a catalyst to break the deadlock.
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
Minor gain but this was a tech/biotech rally day and S&W was not invited to the party.
Original Trade Description: April 5th.
I am reloading the prior play on Smith & Wesson. Shares failed to decline any further today after being crushed on Monday. The triple downgrade by Cowen, CL King and BB&T Capital markets after the March NCIS background check data declined slightly was unreasonable. March checks declined -3% from February but they were sill up 25% over March 2015. The 3% decline was just noise in the greater outlook.
S&W shares declined to exactly the 100-day average on Monday and that has been support for a long time. I believe we should take advantage of this decline and the shrinkage of the option premiums.
Prior play description: 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.
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.
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.
Long June $24 call @ $1.80, no initial stop loss.
XBI - SPDR Biotech ETF - ETF Description
Outstanding day for the biotech sector. The ETF gained 7% and the biotech index 6%. The breakout came just like we expected.
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.
Long June $55 call @ $3.50, see portfolio graphic for stop loss.
BEARISH Play Updates (Alpha by Symbol)
ENDP - Endo Intl Plc - Company Description
The biotech rebound erased the big decline from Tuesday with a $2.32 gain. The sector rebound did not solve Endo's problems. It just created a short squeeze and Endo was heavily shorted.
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.
Long May $25 put @ $2.10. See portfolio graphic for stop loss.
SPY - S&P 500 ETF - ETF Description
One short squeeze does not make a trend and the S&P failed to return to the prior highs.
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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