Option Investor

Daily Newsletter, Tuesday, 4/26/2016

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

The alphabet soup in that title was instrumental in keeping a lid on the markets on Tuesday.

Market Statistics

The big weight on the market was the expectations for Apple's earnings after the close. The worry over a big miss that would drive the indexes lower kept traders on the sidelines on Monday as well with volume the second lowest of the year at 5.9 billion shares. The lowest day of the year was Monday after Easter so that day does not really count.

Apple disappointed as did Twitter and Chipotle Mexican Grill. Immediately after the reports, the S&P futures were down hard at -7.50 and the Nasdaq futures at -61. Wednesday's open may not be pretty.

The morning economics were mixed but traders were not paying attention. They were too focused on the coming Apple event. The Richmond Fed Manufacturing Survey for April declined from 22 to 14 but at least it was still positive. New orders declined from 24 to 18 but back orders rose from 1 to 11. Employment slid from 11 to 8 and capital expenditure plans improved from 15 to 22.

Activity in the Richmond area grew slower than in March but it was still a good report. Manufacturing has been weak in the area for the last year and this could be a sign growth is returning.

In the separate services survey the headline number rose from 9 to 15 and the highest level since October. The three-month moving average doubled to 12 suggesting this recovery has legs and is picking up speed.

The Consumer Confidence for April declined from 96.1 to 94.2 and pushing the three-month average to the lowest level since December 2014 at 94.7. The expectations component fell from 83.6 to 79.3 and the lowest since February 2014. The present conditions component rose from 114.9 to 116.4. Those that felt jobs were plentiful declined from 25.4% to 24.1% but those that felt jobs were hard to get also fell from 25.2 to 22.7%. Potential homebuyers fell from 6.3% to 5.4%, appliance buyers from 50.5% to 49.5%. Car buyers were basically flat at 11.7% after 11.8% in the prior report.

With gasoline prices rising and political campaigners telling consumers daily how bad things are, it is not surprising to see confidence decline.

The Durable Goods orders for March rose from -3.1% to +0.8%. Unfortunately, analysts were expecting +1.8%. Over the last 12 months orders are -2.5% below year ago levels. If you subtract defense orders that falls to -1.1%. Nondefense orders are now down -11.6% from year ago levels. Shipments declined -0.5% and backorders improved only slightly from -0.4% to -0.1%. The manufacturing sector is still in decline and the strong dollar is keeping it in decline.

The calendar for Wednesday is stacked against the market. There are several U.S. reports, the Fed meeting announcement, which could be hawkish, and the full boat of Japanese economics including the BOJ monetary policy. There is downside risk for Wednesday and Thursday's GDP could also be a risk if it comes in with negative growth.

Dow component Procter & Gamble (PG) reported earnings of 86 cents compared to estimates for 82 cents. Organic sales rose +1% but net sales declined -7% to $15.76 billion. That also included a 5% negative impact from foreign exchange rates. The higher earnings came on the back of significant cost cutting rather than rising sales. This was the seventh consecutive quarter of revenue declines. However, there is a reason for this. P&G is shrinking its vast portfolio of products to focus on the most profitable items while selling off the low margin products. However, analysts believe that focusing strictly on high margin items will provide earnings growth in the short term but provide limited growth of both revenue and earnings in the long term. The company expects full year earnings to decline 3-6% but that was slightly better than the 3-8% drop they predicted in January. Shares declined -2% on the news.

Dow component 3M (MMM) reported earnings of $2.05 that easily beat estimates for $1.92. Revenue declined -2.2% to $7.409 billion. The strong dollar reduced revenue by -3%. Revenues from the energy and electronic segments were down -13.6% to $1.1 billion. 3M is also in a restructuring phase where they are selling off non-core products to concentrate only on the most profitable operations. They cut their business from 40 to 26 segments since 2012. Shares declined $2.30 on the news.

Dow component DuPont (DD) reported a 6% decline in revenue to $7.4 billion. Much of the decline, -4%, was due to the strong dollar. Earnings of $1.39 beat estimates by a whopping 22 cents. However, the company raised guidance for the full year from $2.95-$3.10 per share to $3.05-$3.20 per share. They said the dollar would not be as big an issue in Q2 with only a 2% impact. DuPont still believes the $130 billion merger with Dow Chemical is on track but there will be significant regulatory issues. The deal would create one company called DowDupont and then split into three independent public companies focused on agriculture, material science ans specialty products. DuPont shares rose 2.4% on the news.

Whirlpool (WHR) reported GAAP earnings of $1.92, down from $2.38 in the year ago quarter. Adjusted earnings of $2.63 missed analyst estimates for $2.68. Revenue of $4.6 billion saw a -$750 million hit from currency issues. They guided for the full year to earnings of $14.00 to $14.75. Shares fell $6.60 on the news.

Hershey (HSY) reported earnings of $1.10 and beat estimates of $1.05 by a nickel. Net revenue of $1.83 billion missed estimates of $1.91 billion. Revenue declined -5.6% with a -1.2% impact from the strong dollar. The company said revenues declined due to a shorter Easter selling season because of the position on the calendar. Sales in North America declined -4.3% to $1.63 billion. Sales in the international segment fell -15.4% to $195.3 million. Currency impact reduced those sales by 7.3%. Sales in Mexico rose 4.2% and 9.6% in Brazil. Chinese sales fell -37% due to problems with sell-in related to the Chinese New Year items. HSY shares fell -2% on the news.

After the bell Twitter (TWTR) reported earnings of 15 cents compared to estimates for 10 cents while revenues of $595 million rose +36% but still fell short of estimates for $608 million. Twitter said it expects Q2 revenue of $590-$610 million and analysts were expecting $678 million. Monthly active users rose only 3% to 310 million compared to estimates for 308 million. The company said major advertising brands cut back on spending in the quarter. The company said they were developing and would deliver additional features for advertisers later this year, including more detailed demographic targeting and verification, and offer frequency planning and purchasing. Twitter shares collapsed from the $17.75 close to trade at $15.35 in afterhours.

Apple (AAPL) shares collapsed to $96 from a $104.35 close after the company reported earnings of $1.90 that missed already lowered estimates of $2.00. Revenue of $50.56 billion missed estimates for $52 billion and was well below the $58 billion in the comparison quarter. iPhone shipments were 51.2 million, down -16% from 61.17 million. Analysts were expecting 50.3 million. Analysts had cut estimates so many times they were overly bearish. Apple raised the dividend 10% and added $50 billion to the stock buyback to lift it to $250 billion.

The company sold 10.3 million iPads, down -19% but beating estimates for 9.4 million, and 4.03 million Macs, -12% and missing estimates for 4.6 million. Service revenue rose +20% to $6 billion. "Other" revenue which includes the watch was $2.2 billion. Apple guided for the current quarter to $41-$43 billion in revenue and analysts were expecting $47 billion and that was the already dramatically lowered estimate. This guidance is very bearish. Tim Cook said Apple was only in the "early innings" of the iPhone cycle. Despite having Apple streaming turned off in China, he still felt good about the future for iPhone sales there saying the Chinese economy was "stable."

The bearish guidance for the current quarter is going to hit all the Apple suppliers and this should weigh on the Nasdaq on Wednesday. Nasdaq futures are down more than 60 points in afterhours.

Chipotle Mexican Grill reported a loss of 88 cents compared to estimates for a loss of 95 cents. Revenue declined 23.4% to $834.5 million and transactions declined -21.1%. Same store sales declined -29.7%. This was expected after a series of food problems at multiple stores. The company gave out more than six million free burritos and one million chips, salsa and guacamole orders in an effort to bring customers back into their stores. All this free food caused the average ticket to decline up to -5%. During the quarter, they opened 58 new stores and expect to open 220-235 stores by the end of this year. JP Morgan predicted their comps would not return to normal until Q1-2018 and that earnings growth would double in 2017. They expect 20% earnings growth through 2020. Chipotle did not give guidance for earnings, saying it would depend on the rate of recovery. Shares declined -$25 to $427 in afterhours trading.

Ebay (EBAY) reported earnings of 47 cents that beat estimates by 2 cents. Gross merchandise volume rose 1% to $20.45 billion. Active buyers rose +3.8% to 162 million. The company guided to current quarter revenue of $2.14 to $2.19 billion and earnings of 40-42 cents. Full year revenue is expected to be $8.6-$8.8 billion compared to the prior forecast of $8.5-$8.8 billion. Shares spiked to $26.25 in afterhours but fell back to $24.75 and a gain of only 25 cents.

Chinese regulators shutdown the content partnership between Alibaba (BABA) and Disney (DIS) called DisneyLife. The over-the-top streaming service was just launched in late 2015. The mouse shaped receiver cost $123 (799 yuan) and only needed an internet connection. This came after regulators shutdown Apple's streaming content service last week. Alibaba would only say the service was down for an upgrade but they immediately began issuing customer refunds. The Disney cartoon characters were in shock over the move to censor cartoons.

After the bell, the API reported a decline in crude inventories of -1.07 million barrels. However, inventories at Cushing rose +1.9 million. Gasoline declined -400,000 barrels and distillates fell -1.0 million barrels. Crude prices rallied 40-cents on the news but it will depend on the EIA numbers on Wednesday to see if the gain will stick.

WTI rallied a whopping 4.7% during the regular session and completely erasing the drop to $42.50 yesterday. The Monday decline came after Bank of American warned that the recent rally lacked any fundamental underpinning and could collapse at any time. Saudi Arabia announced a financial restructuring program based on $30 oil. All of those headlines evaporated when the dollar sank to a three-day low at the open. The dollar recovered into the close but the short squeeze in oil was already in full bloom. If the Fed gives a dovish statement tomorrow afternoon, the dollar could weaken again.


The markets traded sideways on low volume of 6.4 billion shares while they waited for the Apple earnings to pass. The small caps ignored the danger and the Russell 2000 and S&P-400 both gained more than 12 points with the S&P-600 adding 9 points. The NYSE Composite Index, which contains a high number of small and mid cap stocks, added 57 points while the Dow only garnered +13 and the S&P +4.

The resurgence of the small caps is good for market sentiment but Wednesday is likely to be a big cap day. The drop in Apple is going to impact the Dow, Nasdaq and S&P. However, it is only one stock and there could be a relief bounce by the rest. S&P futures are still negative at -6 and -50 on the Nasdaq so we should start off in the hole unless something changes by morning.

The S&P has gone dormant below resistance at 2,095 and above support at 2,075. As each day passes and more companies report, it will become more difficult for the index to move higher. As each company reports they are normally followed by a period of post earnings depression even if the immediate reaction is positive.

A break below 2,075 could test 2,042 and a break over 2,095 targets the 2,111 resistance high from last week.

The Dow was helped by a couple of component headlines today. Those positive reactions will begin to evaporate tomorrow. PG and MMM reported earnings but suffered large losses to drag on the index. Boeing was up strongly after receiving a large order from China. Caterpillar was up on an upgrade to buy from Argus Capital.

Apple will be a roughly 65 point drag on the Dow at the open thanks to its -$9 drop in afterhours. It would take a couple of really good earnings reports from Boeing and United Technology to offset the drag from Apple on Wednesday.

The index is stuck between resistance at 18,165 and support at 17,925. The old adage "the path of least resistance is down" has never been truer but the new high syndrome is still in place. Traders may try to reach that new high before they give up on the long-term direction.

The Nasdaq will be the battle ground on Wednesday. If investors realize how bad the Apple guidance really was there could be lower lows for the company on Wednesday. I mentioned last week we could see $94 on Apple and that is entirely possible if not lower. However, some analysts are recommending a dip buy here because of the 10% increase in the dividend and the additional $50 billion added to the stock buyback. We could see investors rush into the void but I would be surprised. I would personally want to see if a bottom appeared before committing new money to the company.

The Nasdaq has closed at resistance at 4,900 for three days and it should start the day off under 4,850 on Wednesday. That will make resistance at 4,900 that much stronger on the next rebound.

The Russell 2000 closed at a four-month high and just below resistance at 1,165. This was an outstanding performance for the small cap stocks and suggests underlying market strength despite what the big cap indexes are projecting. The Russell has a long way to go to a new high with the 1,165 and 1,200 resistance likely to be formidable.

I am neutral for the market on Wednesday. We know we are going to start negative unless a miracle happens overnight to lift the futures. The worry over a potentially hawkish Fed statement could keep investors on the sidelines until after 2:PM. Uncertainty over the potential Bank of Japan actions overnight could also keep them on the sidelines. I would pick Thursday as a directional day after all the various headlines are dissected. I still believe the big cap indexes are facing significant resistance but I am glad to see the small and midcaps leading the market with gains. The Dow Transports were also up strongly with a 91-point gain. That confirms the strength in the small caps. We just need the big caps to shake off the earnings weakness but that may be too much to ask. Apple will continue to be a key stock. If Apple rebounds from its opening drop then market sentiment would improve significantly.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Leap of Faith

by Jim Brown

Click here to email Jim Brown

Editors Note:

Choosing market direction over the next 48 hours would take a leap of faith. We know the market is going to open negative on Wednesday because of Apple's big earnings disappointment. That will be followed by the Fed announcement at 2:PM and the Bank of Japan monetary policy announcement early Thursday morning. Wednesday could be wildly negative, dormant or wildly positive if Apple investors buy the dip in volume.

In keeping with my past recommendations I do not want to add new positions unless we have at least some indication which way the market is going to move.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Rotten Apple

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow reversed an intraday loss to close positive but after earnings took a bite of Apple after the close, it may be a different story on Wednesday. Apple missed on earnings and fell from $104 to $96 in afterhours. The S&P futures fell -7.50 early in the session but improved slightly by 8:PM. The Nasdaq futures were down -62 and improved to -40.

Now that the Apple cloud has been removed from the market we might actually see some dip buying on Wednesday. The earnings and guidance were bad but not as bad as they could have been.

The challenge for Wednesday is the Fed announcement at 2:PM and the potential for a more hawkish statement suggesting a June rate hike. After June, they cannot hike again until December in order to avoid stirring up trouble for themselves during the political campaign.

Wednesday also has the Japanese economics with the monetary policy coming out early Thursday morning.

The small caps rallied today with the Russell and the S&P-400 both up more than 12 points. This is positive sentiment for the broader market if the small cap rally continues.

After the close today H&R Block warned and shares declined -$2 so that put position is in good shape. FedEx and PVH Corp both had good days with big gains in a weak market. Unfortunately, the retail sector rebounded today and that means Foot Locker and L Brands both posted gains.

Twitter disappointed on earnings and declined -$2 in afterhours. We could see some additional directional movement there in the coming days.

Current Portfolio

Current Position Changes

EXP - Eagle Materials

The long call position was closed at the open.

UA - Under Armour

The long call position remains unopened until UA trades at $48.05.

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 was up slightly in a weak market. 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


Adobe Cloud teamed up with Box to improve digital document access.

Minimal gain but still a gain in a weak market. Back over resistance at $96.

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.

EXP - Eagle Materials - Company Description


No specific news. We exited the position at the open to capture a nice gain. Earnings are not until May 12th but the weak market and impending resistance at $76 suggested we should take profits.

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

Closed 4/26/16: Long May $75.00 call @ $1.95, exit $3.40, +$1.45 gain

FDX - FedEx - Company Description


No specific news. Excellent +1.50 gain in a weak market. Still holding near the highs.

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, see portfolio graphic for stop loss.

PVH - PVH Corp - Company Description


No specific news. Outstanding $2.45 gain in a weak market!

Original Trade Description: April 21st.

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.

Position 4/22/16

Long June $100 call @ $3.41, see portfolio graphic for stop loss.

UA - Under Armour - Company Description


UA remains unopened until it trades at $48.05. No specific news.

Original Trade Description: April 25th.

Under Armour develops, markets and distributes branded performance apparel, footwear and accessories for men, women and youth in the U.S. and internationally.

Under Armour has posted double digit sales growth for 27 consecutive quarters. Competitor Nike saw sales rise 8% in Q4 and has only seen double digit revenue growth in 11 of the last 27 quarters.

When UA beat earnings last week they guided for the full year to revenue of $5.0 billion, a 26% increase compared to prior guidance of $4.95 billion. Gross margin is expected to remain at 48.1%. Analysts immediately raised earnings estimates from 65-85 cents to 67-87 cents. Footwear revenue rose +64% with basketball shoes especially strong in the Curry Two models. Premium products including $150 Speedform and Gemini 2 RE drove average sales prices higher.

Meanwhile, analyst channel checks included a high traffic Foot Locker location in NYC where several variations of the LeBron James shoes were discounted 50%, Kobe Bryant 40% and Kevin Durant 50%. On FL.com, 56 of the top 60 selling LBJ shoes, 50 of the top 58 KD shoes and 44 of the top 60 selling Kobe shoes are currently heavily discounted.

Under Armour footwear sales rose +64% while Nike shoes are being discounted by 50%. What is wrong with this picture? Apparently, UA has been nimble in their designs and marketing and will continue to outperform their larger competitor.

Earnings July 21st.

UA just completed a 2:1 split on April 8th and has undergone a little over two weeks of post split depression. They beat earnings on the 20th and shares spiked $3 on the news to $47. They have traded sideways for the last three days and there is always the possibility they will decline but scorching double digit growth is hard to find.

If UA moves higher from here I would like to own it. If it moves lower we will look for a bottom to form and try a lower entry. With the market choppy to weak, I do not mind putting a higher entry trigger on the stock. If we are hit, that is great but should the market continue to decline we remain safely out of the position. There is a good chance the market is going to decline so we may never be triggered. If that is the case we will try to get a lower entry somewhere under $45.

With a UA trade at $48.05

Buy July $50 calls, currently $1.25, initial stop loss $45.50.

BEARISH Play Updates (Alpha by Symbol)

FL - Foot Locker - Company Description


No specific news but shares rallied 92 cents in a weak market. All retailers were up today.

Original Trade Description: April 23rd.

Foot Locker is an athletic shoe and apparel retailer. They offer retail stores and online e-commerce. As of January 1st they operated 3,383 primarily mall-based stored in the U.S., Canada, Europe, Australia and New Zealand. There are 64 franchised stores in other countries. The company was founded in 1879.

Foot Locker is suffering from Nike fatigue. Nike whiffed on earnings last month and inventory was building. Cowen analyst John Kernan downgraded the stock from outperform to neutral. The analyst conducted multiple store checks. One included a high traffic location in NYC and several variations of the LeBron James shoes were discounted 50%, Kobe Bryant 40% and Kevin Durant 50%. On FL.com, 56 of the top 60 selling LBJ shoes, 50 of the top 58 KD shoes and 44 of the top 60 selling Kobe shoes are currently heavily discounted.

Cowen cited the popularity of the lower-priced Under Armour Steph Curry 2 and Nike Kyrie 2 was not enough to offset the declining growth/margins in the higher priced shoes. The analyst said the ability to constantly raise ticket prices was becoming more difficult. With Kobe now out of basketball they believe the sales of his shoes will decline. Same store sales (SSS) are likely to decline sharply because they are tied to the average selling prices. With so many shoes discounted it would be very hard to match prior SSS numbers. The increased promotional activity also reduces margins.

Another analyst said Foot Locker sales would be hurt by the current trend in declining mall traffic. It has been widely reported that mall traffic is in a secular decline and many malls are dying while others are spending millions to reinvent themselves. More and more people are shopping online and mobile rather than visit the malls.

Earnings May 20th.

Shares have been in decline since last September. The $59 level has been rough support but the decline is accelerating. I believe support will fail before earnings, which just happen to be on May expiration Friday.

Position 4/25/16:

Long May $60 put @ $1.94, initial stop loss $62.75.

HRB - H&R Block - Company Description


HRB announced a -4.6% decline in the number of tax returns processed by HRB. Assisted returns declined by -5.8% to 12.2 million. They claimed the decline was due to an increased number of people filing on the 1040EZ short form. Returns processed through the online and desktop software declined -2.6%. The CEO said he took full responsibility for the decline in volume and said he would take whatever actions necessary to improve the situation for 2017. Shares declined slightly during the day and the press release came after the market closed. Shares fell -$2 in afterhours.

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 preparation 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


All retailers up today in a sector rebound. No specific news.

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, see portfolio graphic for stop loss.

SPY - S&P 500 ETF - ETF Description


After a sharp drop at the open, the S&P rebounded again to gain +4 points. Resistance has held and it may be a choppy week or two before a longer-term decline appears. Be patient.

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


After the bell Twitter (TWTR) reported earnings of 15 cents compared to estimates for 10 cents but revenues of $595 million rose +36% but still fell short of estimates for $608 million. Twitter said it expects Q2 revenue of $590-$610 million and analysts were expecting $678 million. Monthly active users rose only 3% to 310 million compared to estimates for 308 million. The company said major advertising brands cut back on spending in the quarter. The company said they were developing and would deliver additional features for advertisers later this year, including more detailed demographic targeting and verification, and offer frequency planning and purchasing. Twitter shares collapsed from the $17.75 close to trade at $15.35 in afterhours. We should get some directional movement in the next couple days.

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


Crude recovered the 2% loss from Monday after Goldman reversed their call saying sentiment has turned bullish. I added a stop loss.

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.

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