Option Investor

Daily Newsletter, Thursday, 4/21/2016

Table of Contents

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

Market Wrap

ECB Roils Market

by Thomas Hughes

Click here to email Thomas Hughes


The ECB held rates steady but comments by Draghi roiled the markets. Holding policy steady, that was expected, talk of duration and risks to the economy were the wild card. In his comments Draghi said the bank would remain accomodative as long as needed, that risk to growth was to the downside and that EU inflation may turn negative in coming months. Mitigating this were comments on how households are improving and that recovery can be seen. The press release and press conference were about 30 minutes apart, plenty of time for the euro to shoot higher on as-expected news and then fall hard on the comments as market eyes turn to next week's FOMC meeting.

Asian indices ended their day mostly higher. Global financial turmoil seems to be settling down, Chinese markets are calm and earnings are better than expected if down from last year. EU markets were not so calm, trading was choppy and volatile while traders waited on the release, fell on the news and then supported by a weakening euro.

Market Statistics

Our indices were indicated to open flat to negative for the most of the morning. News from Europe, a heavy round of early morning earnings reports, mixed economic data and volatility in the oil pits each helping to confuse outlook. After the opening bell the indices hung at break even for about 3 minutes before moving lower. The first move lower was mild, only about a quarter percent for most indices. By 11AM the market was retesting opening prices but resistance held the rally at bay. Another move lower ensued that set new daily lows just after noon, and then again after 1PM. Weakness persisted all afternoon, driving the market to the low by mid afternoon and keeping there into the close.

Economic Calendar

The Economy

Economic data was mixed, jobless claims indicates a strengthening economy while the Philly Fed Business Outlook Survey does not. Initial claims fell -6,000 from last week's unchanged figure to hit 247,000, a new low not seen since 1973. The four week moving average of claims also fell, shedding -4,500 to 260,500 and very near its long term low. On a not adjusted basis claims fell -10.6%, more than the -8.4% predicted by the seasonal factors and -13% from this time last year. The biggest increases in claims were in California and Pennsyvania, 12,563 and 3,049, while the biggest declines in claims were in New Jersey and New York. These new low levels of claims are consistent with seasonal trends and long term recovery in the labor market.

Continuing claims also fell, -39,000, to hit 2.137 million. This is the lowest level in this indicator since 2000. The previous week was revised up by 1,250, the four week moving average fell by 10,000 to 2.168 million. This weeks drop in claims is consistent with recovery in the labor market and indicative it is heating up.

The total number of jobless claims also fell, -94,408, to 2.325 million. This is the lowest level of claims since late November and consistent with seasonal trends in the labor force. This week's number is -4.5% below last year and consistent with ongoing improvement in the labor market. Based on the seasonal trends we can expect another 6-7 weeks of declining total claims before hitting bottom in June, somewhere south of 2 million.

The Philadelphia Federal Reserve Business Outlook Survey diffusion index fell 14 points to -1.6% this month, well below the expected +0.9% predicted by the economists. All sub-readings within the report showed declines or remained in negative territory this month. New Orders was flat at 0, shipments fell to -10.8, unfilled orders remains in contraction and employment turned negative as well. The decline in current activity is off set by a near doubling of future outlook survey which rose above 40, a 15 month high.

The Index of Leading Indicators was released at 10PM, a little weaker than expected. The leading index rose by 0.2%, about half the gain predicted by analysts, pointing to ongoing but sluggish growth going forward. The previous month was revised lower to -0.1. The Coincident Indicator remained unchanged from last month, the lagging indicator rose 0.4%.

The Dollar Index

The dollar went on a wild ride this morning while the ECB event was unfolding. The first move was lower, policy was left unchanged and strengthened the euro. The second move was higher, to regain all of the early loss, sparked by Draghi's dovish and almost gloomy outlook. Today's action created a doji candle of significant magnitude, confirming support at the $94 level. This level is consistent with the 78.6% retracement level and may hold until next week and the FOMC meeting. The Fed is not expected to change policy but will be closely eyed for signs of when they may raise rates again. Dovish outlook could send the dollar down to test $93.

The Oil Index

Oil prices struggled to make gains in the early part of the session and then fell later in the day. Volatility in the currency market and a strengthening dollar combined with continued oversupply and outlook from the IEA to make a very choppy session. By end of day WTI was down nearly -2%, trading near $43.30. The IEA released new outlook that calls for an historical drop in US output this year helped support the market in early trading but this was offset by high production levels among OPEC nations, an end to the Kuwait oil strike, Iran's determination to ramp up production and market share, and a pledge from Russia that they may increase production too. Oil is holding above $40 and near two month highs but this may not last, near term outlook remains pressured by supply/demand imbalance that have yet to see change.

The Oil Index opened at new highs but did not hold them. The late day fall in oil prices dragged the index down, creating a small dark bodied candle, a spinning top, hanging just below potential resistance targets near 1,160. The recent push to new highs is confirmed by both indicators, pointing to higher prices, although the move remains weak. Stochastic is moving above the upper signal line but MACD momentum is divergent, an combination indicative of overbought conditions. In the end it will come down to oil prices, if they remain high they will lead the Oil Index higher on enhanced earnings outlook.

The Gold Index

Gold prices were also affected by today's volatility in the currency market. Spot price was first up on ECB expectations, then up again on the press release, and then down once Draghi's comments took their tool on the dollar. The early rally surged more than 1.5% to trade above $1270, a two month high, but prices remain within recent ranges. This range will likely hold until the FOMC meeting next week at which time direction will be dictated by the statement and rate hike outlook. Bias is to the upside, today's action shows that the dollar is ready to move lower and push gold higher, all we need is the Fed to indicate a willingness to hold off on rate hikes.

The gold miners ETF GDX made a new intraday high on the move but sold off in late day trading to create a dark bodied candle. The move is accompanied by bullish momentum and a bullish cross of the upper signal line on the stochastic so looks like it could continue to drift higher. The caveat is that divergence between the high and the indicators exists and suggests weakness in the market and potential correction. Support levels are currently near $22, first target should gold prices or the index begin to pull back.

In The News, Story Stocks and Earnings

The telecom sector was one of today's loss leaders. Verizon reported earnings before the bell, EPS was as expected but revenue fell short. That, along with flat outlook, helped to drive the stock and the sector lower. Although customer base earnings guidance for the full year was reaffirmed and earnings are expected to plateau. The telecom sector as a whole is expected to post greater than 10% earnings growth this quarter and next but that growth will fall off into the end of the year. Shares of the stock fell more than 4% to trade near a two month low.

GM also reported before the bell, beating on the top and bottom lines. Strength in sales trends was aided my product mix, more sales of higher cost/higher margin SUV's and crossovers. EPS came in at $1.26, a full quarter ahead of projections. Strength is expected into the end of this year although there is some fear than auto sales are peaking. Shares of the stock moved higher in the pre market, opened with a gap and then moved lower during the open session. Even with the move down from the high, shares of GM closed with a gain of 1.5% and trading at a near 4 month high.

Travelers Insurance helped Verizon drag the Dow lower. The insurance company missed on earnings, revenue beat, because of losses in catastrophe insurance. Losses are centered on the string of storms in Texas in late March. Despite the losses net premiums rose 5% and book value increase but it was not enough to support prices. Shares fell more than -6%.

The after hours session was very busy too. Today is not the busiest day of earnings season but it is the busiest day so far. ABC, Starbucks and Microsoft were only a few on the list, results were mixed at best. ABC, Google, missed on the top and bottom line. EPS of $7.50 was nearly $.050 below estimates. Starbucks reported EPS in line with projections but missed on revenue and comp store sales. Microsoft also missed, on the top and bottom, all three stocks fell on the news and are sure to have a negative impact on tomorrows session. Micrsoft lost -2% in the first minutes after the report, GOOG and SBUX fell -5%.

The Indices

The indices tried to hold their ground today but couldn't do it. Reaction to today's new was mixed, led by the Dow Jones Transportation Average. The transports made the largest decline, just over -1.21%, but remain above the 8,000 level. The indicators are mixed, momentum is to the upside but very weak and getting weaker. Both MACD and stochastic are divergent from this latest high which make it very suspicious. The index may continue to move higher but next resistance is near, at the 8,250 level, and looks like a likely spot for sellers to enter the market.

The Dow Jones Industrial Average made the second largest decline today, -0.63%, about half that of the transports. The blue chips fell from yesterday's new high to test support at 18,000 and may be set to fall through. Both indicators are giving mixed signals, and both are divergent from the high, providing plenty of reason to be suspicious of today's move. A drop below 18,000 could take the index down to next support target near 17,500. This target is near the short term moving average and stronger support targets, about 3% below the current high.

The S&P 500 made the third largest decline in today's session, only -0.52%. The broad market pulled back from the new high in a move that could take it back to 2,020. The indicators are both divergent from the new high, a sign of market weakness, and support the idea the market is reaching a peak. The index may continue to drift higher but next resistance target is very close, near 2,200, and likely to attract profit taking.

The NASDAQ Composite made the smallest decline today, about -0.5%, and created a small spinning top candle. This is the 7th day the index has traded beneath resistance at 4,950 and based on the indicators and the after hours earnings reports, it will not be broken tomorrow. The index has been riding a wave of momentum which has left it at 3.5 month highs. That momentum has been deteriorating for 2 months, diverging from the rally, indicating a growing chance of correction. First target for support is near 4,800 and the short term moving average, next target is 4,750.

There has been growing sign in the market that the rally begun in February is running out of steam. Divergences in indicators persist across the major indices even as they made new highs, and now that earnings seasons is unfolding that weakness may lead to correction. Today's action is sign that even though earnings are generally better than expected they really aren't that great and not enough to inspire confidence. Add in today's after hours action and the chance for correction in the coming days is greater. I still see the market moving higher in the longer term, once we get through the next quarter and return to earnings growth, but until then I am wary of the rally and cautious of the market at these levels. For now, I am watching and waiting for the next dip.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Acquisition Crazy

by Jim Brown

Click here to email Jim Brown

Editors Note:

PVH Corp, formerly Phillips-Van Heusen Corp, is either buying or partnering with every brand in its space. If you cannot beat them, buy them or partner with them.


PVH - PVH Corp -
Company Description

PVH is an international apparel company. They operate in six segments including Calvin Klein North America, Calvin Klein International, Tommy Hilfiger North America, Tommy Hilfiger International, Heritage Brands Wholesale and Heritage Brands Retail.

Some of the brands marketed by PVH in addition to those above include Van Heusen, iZod, Arrow, Warners, Olga, Eagle, Speedo, Geoffrey Beene, Kenneth Cole, Sean John, Michael Kors, Chaps, etc.

They sell through company operated stores, wholesale outlets, department stores, chain stoes, specialty stores, mass market stores, club stores, off-price and independent stores and distributors and through e-commerce. The company was founded in 1881.

Last week PVH announce it had closed on a deal to acquire the remaining 55% stake in TH Asia, the joint venture for Tommy Hilfiger in China. The deal will increase revenue by $100 million a year.

In February PVH inked a deal with G-III Apparel to allow G-III to design, manufacture and distribute Tommy Hilfiger women's wear in the U.S. and Canada. This not only includes PVH’s existing women's wear operations, but also new categories like suit separates, denim and performance. Long term I would not be surprised to see PVH buy G-III (GIII).

In January, PVH licensed MagnaReady, a shirt system without buttons, from MagnaReady Technology LLC. Men's sport and dress shirts with MagnaReady technology will be available in stores in 2016.

In their earnings reported in late March, they had earnings of $1.52 that beat estimates for $1.45 and exceeded PVH guidance for $1.37-$1.47. On a currency neutral basis earnings rose 7%. Revenue rose 2.1% to $2.112 billion also beating estimates.

Shares spiked on earnings in late March and then drifted lower as the gains were consolidated. They are starting to move higher again with resistance at $100. It may take a few days but I believe they will break that resistance, market permitting. Shares gained 78 cents today in a down market.

Earnings are late June.

Buy June $100 call, currently $3.30, initial stop loss $91.50


No New Bearish Plays

In Play Updates and Reviews

Earnings Stumbles

by Jim Brown

Click here to email Jim Brown

Editors Note:

Traders started revising their outlook for "less bad" earnings and market sentiment began to fade. Suddenly the earnings beats on significantly lowered expectations no longer powered the market higher. Dow components Verizon and McDonalds were the morning disasters with VZ losing -1.72 and MCD -2.76. This weighed on the index all day.

After the bell today Google, Starbucks, Microsoft and Visa all disappointed and all were trading down 4-5% in afterhours. This is going to be a serious drag on the Nasdaq on Friday. However, while the Nasdaq futures are down -11 points tonight the S&P futures are only down -1 point. Multiple traders were saying today's decline was selling ahead of those giants reported and tomorrow we could see a bounce. I would not turn it down but I believe we could go either way.

If the banks were the only stocks to beat lowered estimates and rally and tech stocks are going to miss estimates and decline then next week could be really rocky.

Current Portfolio

Current Position Changes

XBI - Biotech ETF

The long call position was closed at the open on Thursday.

CSC - Computer Sciences

Close the long call position at the open on Friday.

ACN - Accenture

The long call position remains unopened until ACN trades at $116.65.

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

ACN - Accenture PLC -
Company Description


Accenture faded with the market this morning and did not reach our breakout entry point of $116.65. No specific news.

This position remains unopened until ACN trades at $116.65.

Original Trade Description: April 20th.

Accenture provided management consulting, technology and outsourcing services worldwide. It operates in multiple segments including Communications, Media & Technology, Financial Services, Health & Public Services, Product support including supply chain management, Resources including chemicals, energy, commodities and utilities. The company was founded in 1989 and has risen to a $73 billion market cap. Accenture employs about 373,000 people in 120 countries.

Basically, Accenture helps other companies become more profitable. When Mondelez (MDLZ) wanted to improve its margins they called Accenture and implemented their suggestions. The new systems saved $350 million in the first year and is expected to save Mondelez more than $1 billion over the next three years. Accenture does this worldwide for almost any business in any sector.

This week they sold a 60% stake in their Duck Creek Technologies division to private equity firm Apax Partners. The joint venture will accelerate the innovation of claims, billing and policy administration software for the insurance industry leveraging advanced digital and cloud technology. They will invest in Duck Creek On-Demand, a native Software as a Service capability delivered through the cloud. Approximately 1,000 insurance and insurance software specialists will join the new venture. Accenture acquired Duck creek Technologies in 2011.

The key for Accenture is not specifically the Duck Creek venture but the rapidly expanding scope of the company. Nearly every day there is some new press release where they are expanding into new markets and new endeavors. This is what IBM and Hewlett Packard wish they were.

Earnings are June 23rd.

Accenture rallied to a new high in early April at $116.35. Shares paused with the market and consolidated their gains. Since April 8th shares have begun to move back to that high and could breakout at any time. I am recommending we buy that breakout over $116.35 because shares could begin a new leg higher, market permitting. Options are cheap!

With an ACN trade at $116.65

Buy June $120 call, currently $1.30, initial stop loss $113.45

ADBE - Adobe Systems - Company Description


No specific news. Price target was upgraded from $85 to $105 by Credit Suisse.

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.

Position 4/5/16

Long May $95 call @ $2.48. See portfolio graphic for stop loss.

CSC Computer Sciences Corp - Company Description


No specific news. CSC has been stuck to $33 for most of April. I am giving up on a breakout and recommending we close the position. With the market weakening the most likely direction for CSC is lower.


Original Trade Description: April 6th.

CSC is an information technology and professional services Fortune 500 firm that provides solutions in North America, Europe, Asia and Australia.

On February 11th the Supreme Court of Victoria, Australia, approved the acquisition of WXC Limited for (AU)$427.6 million. CSC believes the acquisition of UXC will strengthen their global commercial business by adding the UXC platform to the CSC cloud, cyber and big data offerings. Back in August CSC acquired two other companies, Fruition Partners, a service-management technology provider and London-based Fixnetix, a provider of front-office managed trading software for capital markets.

They are also acquiring Xchanging, a UK company that provides software and outsourcing services for the insurance industry for $697 million. That deal is currently going through the regulatory approval process.

The point here is that CSC is a leading provider of information technology and they are growing rapidly through acquisitions. They are moving towards a mix of cloud based higher margin products that will be beneficial over the long term. They are also buying back stock with a new authorization in January. They paid a special dividend of $10.50 when they spun off the public sector business in Q4. That accounts for the $10 drop in the stock price at the end of November.

Earnings for last quarter were 71 cents that beat estimates for 69 cents. However, revenue declined -10.2% to $1.75 billion missing estimates for $1.859 billion. Shares fell to $24 on the news. However, the reduced revenue came from a switch to cloud products, which have a long term subscription revenue rather than a short term one time sale. Adobe had the same problem when they went from software sales to software as a service. There is always a drop in revenue during the switch but long-term revenue rises and is more stable.

Total company bookings rose +21% to $2.7 billion. Operating income rose +9.2% to $190 million.

Earnings are May 17th.

Shares rebounded from that post earnings low in February to pass resistance at $33 last week. The market decline this week took some of the bloom off the stock and deflated the option premiums. Prior resistance became support and shares started to tick higher on Wednesday afternoon. This is a relatively slow mover but it has been steady since the rebound began.

I am recommending a June option but we will exit before earnings in May. Using a June option the premium will still have some earnings expectations premium when we exit.

Position 4/7/16:

Long June $34 call @ $1.50, see portfolio graphic for stop loss.

EXP - Eagle Materials - Company Description


No specific news. Initial resistance now $75.90. With the market losing momentum, I am adding an exit target at $76. The high today was nearly $78 but it was sold hard almost immediately. If we get another spike to resistance we should exit before our May option begins to deflate.

Set an exit target at $76.00.

Original Trade Description: April 14th.

Eagle Materials Inc. manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard, Concrete and Aggregates, and Oil and Gas Proppants from 40 facilities across the US. Eagle is headquartered in Dallas, Texas.

In the last quarter revenues declined -5% and earnings -12% to 93 cents. However, cash flow from operations increased +66% to $108.7 million.

There were two problems impacting EXP results. The first was the dramatic decline in oil well drilling. They supply cement for those wells and they use a lot. The slowdown in the sector has weighed on EXP for the last year. However, they have survived and they are doing well.

The second problem was a high volume of rain October and December that reduced sales volume by delaying and slowing construction projects that use EXP materials.

Cement, concrete and aggregates revenue rose 11% in the quarter thanks to a 4% increase in prices to offset the lower demand for oil well cement. Cement revenues alone rose +9% to $135.4 million. They delivered 1.2 million tons at an average cost of $97.10 a ton.

The rain caused sheetrock sales to decline 9% but missed revenues will likely be pushed into Q1. They sold 568 million square feet of sheetrock, which is actually called Gypsum wallboard. They raised prices on that product as of March 31st and they expected a surge in bulk purchases ahead of the price increase. That will show up in the current quarter numbers.

Oil anf gas proppant sales declined 73% because of the slowdown in drilling and fracking. Fracsand volumes declined -47%. Proppants are a minor part of company revenue at only $8.5 million in Q4 compared to total revenue of $277.4 million.

Earnings are May 12th. We will exit before earnings.

Standpoint Research initiates coverage at accumulate and BB&T Capital upgraded them from hold to buy.

As we move into spring the construction activity will surge along with demand for concrete and sheetrock. Earnings should have improved for Q1 and will likely be much stronger in Q2 because of the activity and price increases.

Shares have rebounded to resistance at $71.50 and the close today was slightly over that level. I believe EXP is going to breakout and possibly run to the $77-$80 level before earnings, market permitting.

Position 4/15/16 with a trade at $72

Long May $75.00 call @ $1.95, see portfolio graphic for stop loss.

FDX - FedEx - Company Description


No specific news. Minor decline with the market.

Original Trade Description: April 18th.

FedEx provides transportation, e-commerce and business services worldwide. I doubt there is anyone that does not already know what FedEx does so there is no need of a lengthy explanation.

FedEx operates 65,000 vehicles and trailers from a network of 370 service centers. By comparison Amazon is operating 20 planes but they are adding hundreds of trucks to move products between regional warehouses. After Amazon contracted for those 20 planes the analyst community was all worried that Amazon was going to create its own delivery service and kick FedEx and UP to the curb.

The FedEx CEO, Mike Glenn, called the rumors "fantastical" and said it would take years and tens of billions of dollars in order to build sufficient scale and density to even replicate some of the existing FedEx network." Glenn said Amazon is "supplementing" FedEx with their new push into moving product around the country. However, Amazon has no real interest in delivering that last mile to customers all across the country. Amazon is simply improving their capability to get vast numbers of packages to the UPS/FDX locations all around the country to reduce costs and improve delivery times. UPS/FDX will still be responsible for delivering each of those packages to the customers.

When FDX reported earnings in March they reported $2.51 compared to estimates for $2.34. That was up from earnings in the comparison quarter of $2.03. Revenue rose from $11.7 billion to $12.7 billion. The company raised guidance for the full year from $10.40-$10.90 to $10.70-$10.90. The analyst consensus estimate was $10.56 on revenue of $49.91 billion. Shares soared from $145 to $161 on the report.

After moving sideways for over a month, the shares are starting to tick higher. There was resistance at $165 and that broke late last week. I am recommending a $170 call with expectations FDX will try to make a new high over $180, market permitting. Oil prices are not expected to move much higher so that is a positive for future expenses.

Earnings are June 21st.

Position 4/19/16:

Long June $170 call @ $3.68, initial stop loss $162.50

XBI - SPDR Biotech ETF - ETF Description


The Biotech Index was starting to fade and I recommended we close this position. Of course this was the day the $BTK was the only positive sector.

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

Closed 4/21/16: Long June $55 call @ $3.50, exit $4.00, +.50 gain.

BEARISH Play Updates (Alpha by Symbol)

HRB - H&R Block - Company Description


Nearing a new low. No specific news.

Original Trade Description: April 13th.

H&R Block has been doing taxes since 1946. They provide tax preparation, banking and other services to the general public through a system of retail offices.

Unfortunately for HRB the times are changing. The general public is moving to do-it-yourself tax preparation software like Turbo-Tax from Intuit (INTU). That is not the biggest problem. On Wednesday Senator Elizabeth Warren introduced the "Tax Filing Simplification Act of 2016" and Bernie Sanders is a co-sponsor.

Donald Trump, Ted Cruz and John Kasich have all said they would drastically change the tax code and Ted Cruz wants to simplify it enough so that all your taxes can be submitted on a post card sized form. If a republican wins the election the tax preparation business is going to suffer. However, if Hillary wins she has proposed 18 new taxes to raise $1 trillion in new revenue. That will further complicate the preparation situation.

Obamacare has also made tax preparation harder and more complicated. Taxpayers have been forced to use accountants to prepare their forms because of the complications. HRB could do it but the perception is that you need somebody other than a part time tax preparer to give you the right advice.

In the last quarter HRB posted a loss of 34 cents that was larger than the analyst estimates for 26 cents. It was also larger than the 13 cent loss in the year ago quarter.

Revenue declined -6.7% because of lower volumes of clients. Revenue of $474.5 million missed estimates for $505 million. Tax preperation fees declined -4.2%. Operating expenses rose +1.7%. Long-term debt rose from $500 million to $2.6 billion. Cash burn rose from $1.2 billion to $1.4 billion.

Earnings are June 8th.

I am recommending a July option so there will still be some earnings expectation premium left when we exit before earnings.

Position 4/18/16:

Long July $23 put @ $1.10, no initial stop loss.

LB - L Brands - Company Description


LB moved slightly below our target entry for this position at $77.25 and we are now in the play. It is very close to breakdown below the April 12th low. The company confirmed it was dumping the swimwear line, which had the potential to be a $1 billion a year business. The company said the store space would be better utilized for the VS Sport, activewear line that could be sold all year.

Original Trade Description: April 20th.

We tried to play LB on the 13th but shares rallied unexpectedly for three days and I cancelled the play. Shares have since rolled over and are again threatening to collapse. I recommend we try it again.

L Brands operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. Everybody knows of Victoria Secret. They are the premier lingerie retailer in the country. They offer products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, CO Bigelow, White Barn Candle Company and many other brand names. They have 2,721 stores in the USA, 270 in Canada and more than 700 international stores in 70 countries.

Two weeks ago the company said it was cutting 200 jobs and restructuring into three divisions. Those will be lingerie, beauty and the teen brand PINK. The company said it was getting rid of multiple merchandise categories but they did not say which ones. The online business will be revamped and integrated into the main business rather than operating as a separate entity. They plan on reducing promotions and eliminating the catalog. Citigroup said eliminating the catalog could be a nightmare that could have serious repercussions. JC Penny's revived its catalog last year after seeing sales decline after it was discontinued. There is a rumor they are eliminating swimwear, a $500 million a year category. They plan on utilizing the retail space for sports clothing.

The company reported March sales growth of 5% to $1.027 billion. Same store sales rose +3%.

Goldman Sachs downgraded the stock from buy to neutral saying the restructuring and elimination of multiple merchandise lines would impact sales in the short term. Two weeks earlier Credit Suisse cut them from buy to neutral and JP Morgan made the same downgrade last quarter.

Earnings May 18th.

Shares fell off rather steeply ahead of the sales reporting and Goldman downgrade and then hit a seven-month low on the downgrade. Many traders thought it was a buying opportunity and shares rebounded promptly in last Tuesday's short squeeze. The rebound lasted four days and now the negative trend has returned.

I am recommending we buy a put on a trade under today's low at $77.25. If the stock continues to decline it will trigger the position, otherwise we are just watching. If shares fall below that $76 print from April 12th there is a lot of air before the next support at $65.

Position 4/21/16 with a LB trade at $77.25

Long June $75 put @ $2.20. Initial stop loss $81.05.

SPY - S&P 500 ETF - ETF Description


Nice 11 point decline on the S&P after the dead stop at 2,111 on Wednesday.

Original Trade Description: March 16th.

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

Position 3/23/16 with SPY trade at $204.11

3/23/16: Long June $200 put @ $4.77 with SPY trade at $204.11
4/01/16: Long June $200 put @ $3.26 when SPY traded at $207.

4/19/16: Long June $200 put @ $1.95 when SPY traded at $210.
See portfolio graphic for stop loss.

TWTR - Twitter - Company Description


Twitter posted a minor gain ahead of its earnings next Tuesday. Some analysts are predicting a big move higher and others are predicting a disaster. That is what makes a market.

Original Trade Description: April 9th.

Twitter operates as a global platform for public self expression and conversation in real time. I am pretty sure everyone knows what Twitter is so I am not going into depth in this explanation.

Twitter has become the bet of the year. Analysts either think it is going to single digits or going to the moon. The highest price target is $36 and the lowest is $11 with the average at $20.86 across a total of 27 brokers.

Twitter has trouble keeping users because the learning curve is steep and Twitter spam is increasing daily. Twitter bots can be programmed to spread tweets and make it appear there is a huge volume of interest in a specific subject. Andres Sepulveda, a Latin American political operative used custom software to direct 30,000 Twitter bots to create false enthusiasm for candidates and spread rumors about the opposition. Sepulveda said the tactics gave him "the power to make people believe almost everything." The man responsible for his operations said two American presidential candidates had contact him and one of those was Donald Trump.

Unfortunately, Twitter has been having trouble monetizing all the traffic regardless of whether it is real or fake. Their monthly active users include a lot of churn and barely any growth. While nobody expects Twitter to go out of business they are losing faith in the business model.

CEO Jack Dorsey is also CEO of Square and that carries mixed emotions. Some want him replaced and others want him full time. Almost nobody wants him to continue the dual role.

There are constant rumors that Twitter will be bought by someone like Google or Apple. If that were to occur it would carry a huge premium to the current $16 stock price.

Twitter has been earnings challenged for a long time and the stock has declined from $55 to the current $16 level on a lack of confidence they will turn the company around.

Earnings April 26th.

The stock is either going to single digits or it will be back well over $20 soon. It is not likely to continue moving sideways at $16.

I am recommending we do a strangle on Twitter using the June options. Regardless of the stock or market direction we should be able to profit. Because Twitter is $16 and stagnant the options are relatively cheap. I want to buy them now and hold over earnings because that is likely to be a volatility event. We could also get some market moving news with the earnings release.

You could use the $18 call and $15 put for a net debit of $2.22 if you want a cheaper option.

Position 3/11/16

Long June $17 call @ $2.07, no stop loss.
Long June $16 put @ $1.45, no stop loss.
Net debit $3.52.

USO - US Oil Fund - Company Description


May futures expired at the close on Wednesday and June became the front month today. I said last night it may take another day or two for the short squeeze to fade in the June futures. Assuming there is no headline spam out of the Middle East we should start to see a decline next week.

Original Trade Description: April 12th.

The U.S. Oil Fund is designed to track the daily price movement of WTI crude oil. This is the simplest method to speculate on the direction of crude oil on a short-term basis.

The USO, or any futures ETF, should not be held long-term because it bleeds value when the futures roll over once a month. On a short term basis it works great for speculation.

Crude oil has spiked 15% over the last several days with a 4% rise today alone. This is speculation over a production freeze agreement in Doha, Qatar on Sunday between OPEC and major crude producing countries. On Tuesday Russia's Interfax news service quoted some diplomat in Qatar saying Russia and Saudi Arabia had agreed to freeze production even if Iran decided not to participate.

This is contrary to what the Saudi deputy crown prince has said over the last couple weeks. The prince said Saudi would not participate unless Iran and the other major producers all agreed to freeze production. Obviously, he could change his mind but after making those statements more than once a change of heart could make him look weak.

There is significant potential for a Doha disaster where the meeting deteriorates into a brawl and nothing is accomplished. Even if they do agree to a freeze that would still maintain 1.45 mbpd of excess production at current levels. Iran, Libya, Kuwait, Iraq, Nigeria and the UAE all have plans to increase production so it would be a major change of plans to agree to a freeze. Most have said they would not support a freeze but when it comes down to the meeting, anything is possible.

Lastly, OPEC members are notorious about saying one thing and doing another. They could all agree to the freeze, wink wink, in order to lift prices and then continue on doing what they are already doing and pumping every barrel they can produce.

I believe there is a good probability we will see oil prices significantly lower in the days/weeks following the meeting. I am recommending we buy an inexpensive put on the USO and see what happens. If you are aggressive you could also buy a call just in case a miracle does occur and prices spike higher. I view that as nearly impossible since Saudi Arabia has said they do not want to see prices much over $40 because that would allow U.S. shale drillers to increase production.

Position 4/13/16:

Long May $10.50 put @ 58 cents. No stop loss.

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

subscribe now