Option Investor

Daily Newsletter, Tuesday, 5/3/2016

Table of Contents

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

Market Wrap

China, Australia and the Fed

by Jim Brown

Click here to email Jim Brown

Weak economic data from China, a rate cut in Australia and a Fed head warning of a possible rate hike in June.

Market Statistics

Those events combined to push an already uncertain market sharply lower and erases the gains from Monday. In China, the Caixin purchasing managers index declined from 49.7 to 49.4 and the 14th month below 50, a level representing contraction. The official Chinese PMI declined from 50.2 to 50.1 for March. The Caixin numbers suggest the recent stimulus that lifted Q1 growth slightly, is fading. The Caixin gauge is considered more accurate than the government PMI because it focuses on private firms while the government number is heavily influenced by state owned companies. The government PMI is thought to be manipulated to remain positive.

The Reserve Bank of Australia cut interest rates to a record low of 1.75% in an effort to head off deflation. Australia is a commodity economy and has not seen the major economic problems of other countries until now. The Australian dollar crashed causing a ripple higher in the other global currencies.

The spike in the U.S. dollar accelerated the decline in equities and commodities. WTI declined -2.5% on the dollar strength and news that OPEC nations were boosting production even higher. After the close the API inventory report said U.S. crude inventories rose +1.3 million barrels with another 382,000 barrel rise at the futures delivery point of Cushing Oklahoma.

Gold declined from its high at $1,300 to $1,287 on the dollar spike.

Atlanta Fed President Dennis Lockhart said "June is a live meeting." Also, "two rate hikes are certainly possible. We have enough meetings remaining. June is a real option." He also warned that the Brexit vote in June was a real risk to the global economy. Bringing the Fed back to the forefront of the conversation put an additional cloud over the equity markets.

The ISM-NY report rebounded significantly with a sharp increase from 50.4 to 57.0 and a four-month high. This is material since the index was only 0.5 away from contraction in March. However, the six-month outlook fell from 65.0 to 53.1 and the lowest reading since 2009 and the financial crisis. The quantity of purchases fell from 57.1 to 48.2 and a three-month low. While the headline improved, the internals components were mostly lower. Only employment showed a dramatic improvement from 40.9 to 49.9 but still in contraction territory for 7 of the last 8 months.

Vehicle Sales for April rebounded to an annualized pace of 17.4 million after 16.6 million in March. This is 4% higher than April 2015. Auto sales rose from 6.9 million to 7.1 million and trucks/SUVs rose from 9.7 million to 10.4 million. All the major manufacturers posted gains except for Ford, which was flat at 2.8 million.

The first April employment report is due out tomorrow and expectations are for a 5,000 jobs decline to 195,000. If the ADP report comes in anywhere close to this number, it will be ignored. The Nonfarm Payrolls forecast has declined slightly and is now expected to show a decline of 15,000 jobs to 200,000. This would also be a Goldilocks number and the market would probably breathe a sigh of relief.

Dow component Pfizer (PFE) led the earnings parade today. Pfizer earnings jumped +27% to $3.02 billion due to higher sales and lower taxes. Adjusted earnings of 67 cents easily beat estimates for 55 cents. Revenue rose +20% to $13.01 billion and well above estimates for $11.97 billion. This comes only four weeks after Pfizer cancelled the $160 billion merger with Allergan. This was the sixth consecutive quarter of revenue growth despite an increase in generic competition. The company got a boost from the $15 billion acquisition of Hospira last September. That company supplied $1.2 billion in revenue for the quarter.

The company guided for full year earnings of $2.38-$2.48, up from $2.20-$2.30 in January. Revenue estimates rose by $2 billion to $53 billion. Pfizer also began an accelerated share repurchase program of $5 billion announced in March. The company has bought back nearly $51 billion since 2010. Shares rose to a six-month high at $34.

Molson Coors (TAP) reported earnings of 54 cents that easily beat estimates for 43 cents. Revenue of $657.2 million beat estimates for $602 million. TAP is made up of more than 65 leading brands of beer and operates in 30 countries. They have been struggling for several quarters because of weak economies in Europe, the USA and Canada. Sales declined as consumers cut back on beer purchases. To combat this decline the company launched multiple premium categories with higher prices and higher margins. Apparently this strategy has worked.

CVS health (CVS) reported earnings of $1.18 that beat estimates by 2 cents but that was the slowest earnings growth since Q4-2013. Revenue rose +19% to $43.22 billion compared to estimates for $43 billion. The company guided for earnings of $1.28-$1.31 for Q2 and that was lower than the $1.35 estimate. For the full year, they guided to earnings of $5.73-$5.88 compared to analyst estimates for $5.82.

Pharmaceutical company Mallinckrodt (MNK) reported earnings of $2.01 compared to estimates for $1.72. Revenue of $918 million also beat estimates for $874 million. The company guided for full year earnings of $8.15-$8.50, up from $7.85-$8.30. Sales in the specialty brands segment rose from $334 million to $535 million. However, sales of specialty generics fell -27.1% to 264.4 million. Shares spiked 7% or $4.40 but the chart remains mired in consolidation.

Clorox (CLX) may not be sexy as a growth stock but they reported earnings of $1.21 that beat the street by 11 cents. Revenue of $1.43 billion rose +2% and beat estimates for $1.41 billion. They guided for full year earnings of $4.85-$4.95 compared to prior guidance of $4.75-$4.90. Sales are expected to rise 4-5% on a constant currency basis. The company said it had completed the $290 million acquisition of Renew Life, the number 1 brand of natural probiotics. Clorox said that $10 billion digestive supplement market is very fragmented and growing 7% a year. Within that is the $1.3 billion probiotics category that is growing 15% a year. Does anyone else think it is strange a bleach company is going to clean out your digestive system? Actually, bleach only accounts for 15% of total revenue at Clorox.

American International Group (AIG) reported earnings of 65 cents that was well below estimates for $1.00. Net investment income fell -44% to $577 million. The commercial property and casualty business saw income fall -38.5% to $720 million. This was the third consecutive quarter of earnings below expectations. AIG did return $4 billion to shareholders in Q1. AIG is rapidly removing investments from hedge funds. They had been active investors until the market turned volatile a couple years ago and now the model no longer works for them. They received $1.2 billion in redemptions in Q1 and said it will be several quarters before they receive the rest of their investment back because of fund withdrawal restrictions. Shares declined slightly on the earnings news.

Mylan (MYL) reported earnings of $1.18 billion or 76 cents that beat estimates by a penny. Revenues of $2.19 billion missed estimates of $2.26 billion. The company affirmed full year guidance for $4.85-$5.15 with analysts expecting $4.90. Revenue is expected to be $10.5-$11.5 billion and analysts were expecting $10.6 billion. Mylan is one of the largest generic and specialty pharmaceutical companies in the world. They currently have over 1,400 drugs on the market. They expect to complete the $9.9 billion acquisition of Meda in Q3. Shares rose slightly on the minor beat.

After the bell, Zillow Group (ZG) reported a loss of 13 cents compared to expectations for a loss of 9 cents. Revenue rose 25% to $186 million and easily beat estimates for $177 million. The company raised full year guidance from $805-$815 million to $825-$835 million. Monthly average unique users rose to 156 million with a record number of visitors in March. Shares spiked 12% or $4 in afterhours.

Online craft site Etsy.com (ETSY) reported earnings of a penny that beat estimates for a loss of 2 cents. Revenue rose 4-% to $81.85 million compared to estimates for $75.2 million. Gross merchandise volume rose 18.4% to $629.5 million. They guided in line for revenue growth of 20-25% for the year. They currently have 1.6 million active sellers and 25 million active buyers.

Match.com (MTCH) rose $1 in afterhours after posting earnings of 11 cents that beat estimates for 9 cents. Revenue of $285.3 million also beat estimates for $280.5 million.

Overall the earnings calendar for Tuesday was rather bland. That will continue the rest of the week with Tesla and Priceline the two attention getters on Wednesday. Overall, the size and quality of companies reporting in the days ahead will dwindle. Excitement will focus on a couple of companies a day and next week it will be even slower.

Abercrombie & Fitch (ANF) former competitor Aeropostale (AROP) is reportedly preparing to file for bankruptcy. This came as no surprise to traders since the stock was delisted from the NYSE on April 22nd when its market cap declined below $50 million for a 30-day period. The Wall Street Journal said today they could file bankruptcy this week and will close 100 stores. This is just one more example of the dying malls. This store was a teen hotspot ten years ago but lost its attraction and sales have been imploding. Same store sales in Q4 declined -6.7%.

Valeant Pharma (VRX) saw a little daylight on Tuesday after both Moody's and S&P eased up on the negativity. S&P upgraded Valeant's CreditWatch rating from "developing" to "positive" suggesting the company could be upgraded from its current B rating. The analyst said an upgrade to B+ was possible once they have greater confidence in the 2016 operating trends.

Moody's raised the "probability of default rating" to B2-PD from Caa1-PD. They made the upgrade after Valeant filed the 10K on Friday and removed any possibility of default on a technical basis. Moody's said there were still significant challenges related to stabilizing operations and generating sustainable earnings growth without large acquisitions.

The dual upgrades powered the stock to a 10% gain and that is probably the first of many gains we will see once traders begin to feel the worst is over. The installation of Joe Papa as CEO on Monday was the first step and the replacement of the board is currently underway. Bill Ackman said he has no doubt he will get all his money back because the assets are there and the company is very profitable. They just need to wade through the skeletons and get back to business.

Apple shares rebounded $1.54 after eight consecutive days of decline. Support at $92.50 held and Tim Cook's appearance on CNBC brought investors back into the market. The 8-day decline was the longest streak of losses since 1991. I think investors are missing an important point or two. They reported revenue of more than $50 billion and earnings of more than $10 billion in Q1. No other company has earnings of $10 billion a quarter that are considered "bad." Apple is trading at a PE of 10. They have $230 billion in cash. Their market cap today is $521 billion and they have a stock buyback authorization for $250 billion. They are going to buy back roughly 50% of their stock between now and 2018. What other company is doing that?

Cook said massive innovations are coming. "We are going to give you new features on the iPhone that you will not be able to live without. You will wonder how you ever got along without them." Obviously, he would not disclose those features until the new product announcement in September. He said China was doing great. Cook said in 2007 when the first iPhone was released the middle class in China was 50 million people. Five years from now, it will be 500 million people. The switch rate from Android phones to Apple phones in China is 40%. In ten years, India will be the most populous country and nearly 50% of the population is under 25. That is the target generation for smartphones. Unfortunately, India is also a poor country and $700 phones are a real stretch for consumers. He believes that will be rectified in the years to come just like China's rapidly growing middle class.

There are more than 1 billion people currently subscribing to some Apple service like music, iCloud, etc. Services revenues have been growing at 26% and are accelerating.

I was already a convert on buying Apple at the current levels but Cook's comments convinced me even more. The bad news is already priced in and the good news is still ahead. The average analyst price target for 37 analysts is $126 with the high estimate at $185.


Tonight we are faced with a decision. The market sold off late last week and then rebounded strongly on Monday with a triple digit gain. Today there was a larger triple digit loss. However, the Dow was down -220 at the low and ended the day down only -140. Which day was the correct market direction? Was it the +117 Dow gain on Monday or the -140 loss today?

We will not know until later this week. As is always the case, the market tends to over react in both directions. However, the S&P put in a lower high at 2,111 two weeks ago and put in a lower low on Friday. While this may only be a period of volatility resulting from profit taking after seven-weeks of gains in March, it looks suspiciously like a topping process. Volume on Thursday was 8.0 billion and Friday was 8.99 billion shares on sharply declining days. Volume on Monday's rebound was 7.0 billion or -2 billion less than Friday. Volume today was only slightly higher at 7.7 billion. When in doubt follow the volume. The direction with the most volume is the right direction and that direction is to the downside. Declining volume was 4:1 over advancing volume today compared to 2:1 on Friday. Yes, volume was more negative today than Friday.

The key levels to watch this week are support at 2,040 and resistance at 2,100. We could chop around between those levels for several days. We could see an oversold bounce on Wednesday that completely negates today's losses. You may remember back in Nov/Dec we saw alternating triple digit gains and losses almost every other day. Volatility and uncertainty are always part of a topping process.

The Dow benefitted from the Apple rebound and the Pfizer earnings. Unfortunately, the Chinese economics and the Australian rate cut pushed the banks lower and JPM/GS were contributors to the decline. Falling oil prices from the spiking dollar pushed Chevron and Exxon lower as well.

The Dow decline came to a dead stop on support at 17,750 and that is a key level. Today's low at 17,670 was nearly equal to the lows on Friday and that means we should watch that level for a failure. A drop below 17,670 should target 17,500. Resistance remains 17,925 through 18,165.

With only a couple Dow components reporting earnings this week there is little to lift the Dow higher while post earnings depression could weigh on the index.

The Nasdaq lost 54 points and tested support at 4,750 again intraday. There are a lot of tech stocks with bearish charts. The tech stocks tend to suffer more post earnings depression than industrial or consumer discretionary stocks. Tech investors are fickle and are quick to move from one stock to another in search of a new earnings report.

The 4,750 level is critical for the Nasdaq with the next support down at 4,600. The Nasdaq failed to even come close to the relative levels of the Dow and S&P in late April and remains only about 1% out of correction territory. A break under 4,750 would put it back into correction again. That is hardly a bullish outlook.

The biotech index ($BTK) crashed again with -2.5% decline today and that weighed on the Nasdaq and the Russell 2000.

The Russell 2000 dropped -19 points to fall back below the 200-day average at 1,125 and to stop on prior uptrend resistance at 1,121. There are multiple converging support levels from 1,090 to 1,110 so further declines could be choppy as those levels are tested. The Russell failed to retest resistance at 1,165 and struggled to even make a print over 1,150. There is a good chance the Russell rally is over as we head into the sell in May cycle and the summer doldrums. Fund managers are not going to be excited about putting money into low liquidity stocks ahead of the very low liquidity summer months.

I am neutral on the market for Wednesday but I am bearish on the market for the weeks ahead. I think we will see lower lows as we head into late May and early June. Earnings are normally weak in Q2 and the current negative projection could become weaker as the Q1 earnings cycle plays out.

The worry over a June rate hike, weakness in China, sell in May and the election cycle will weigh on the markets. That is just my opinion but I think I am in good company.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Looking for Direction

by Jim Brown

Click here to email Jim Brown

Editors Note:

The last three days have seen triple digit moves, each in the opposite direction. The market appears to be in a topping process but we will not know for several more days. The S&P futures have been down -2 and up +3 in the afterhours session. With the indexes closing right on support we are facing either a rebound on Wednesday or a significant failure.

I see no reason to jump into a new position until we have a clue about market direction. The topping process can produce continued triple digit moves in alternating directions and I have no interest in putting on new plays only to be stopped out.

We currently have twice as many bearish plays as bullish plays and I am comfortable with the hand we are holding.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Dead Stop on Support

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow declined -140 points to erase Monday's gains and close exactly on support at 17,750. The afternoon short squeeze on Monday was completely erased and the Dow closed at a three-week low. That makes Monday's close at 17,891 another lower high and seems to suggest we are going lower.

The key level here is now is 17,670 and the intraday low on today and Friday. That low was bought on both occasions and a failure there on Wednesday would immediately target 17,500 or even lower.

Analysts blamed weak economics from China, a rate cut in Australia and a weakening earnings cycle as the major motivation. However, the dollar rose after a week of declines and Atlanta Fed President Dennis Lockhart said "June is a live meeting." Also, "two rate hikes are certainly possible. We have enough meetings remaining. June is a real option." He also warned that the Brexit vote in June was a real risk to the global economy.

With all those negatives in an already uncertain market, the path of least resistance was down. We have been planning for a declining market for the last couple weeks and that is why we have twice as many puts as calls.

Current Portfolio

Current Position Changes

FSLR - First Solar

The long put position was entered at the open.

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


No specific news. Down to support in a weak market.

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!

Position 5/2/16 with an ACN trade at $113.25

Long June $115 call @ $2.13, see portfolio graphic for stop loss.

PVH - PVH Corp - Company Description


No specific news. Down with the market but holding over support.

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.

V - Visa - Company Description


No specific news. Visa down with the Dow.

Original Trade Description: April 27th.

Visa bills itself as a "payments technology" company. They operate an open-loop payment network worldwide. The company facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities.

Everybody understands Visa. Unlike American Express, Visa does not have any credit risk. Visa licenses its cards and network to banks and financial companies and charges them a transaction fee for the service. Visa assumes no credit risk because it has no borrowers. The underlying banks assume the risk and the loans created by the customers.

This is about as close as you can get to the perfect business. It is a service everyone wants and you get paid every time one of your licensee's customers use their card.

Visa reported earnings on the 22nd and warned that earnings growth may be delayed because its purchase of Visa Europe Ltd for 21.2 billion euros would be delayed following feedback from the European Commission. Visa made changes to the deal to get EU approval. Visa and Visa Europe split in 2007 before Visa's IPO in the USA. The reacquisition of the European business will add significant earnings and growth to Visa. The modified acquisition may not be completed until after June 30th and therefore appear on the earnings for Q3 rather than Q2 as previously expected.

They also said timing issues surrounding the new partnership with Costco, and USAA would push some of the expected earnings into Q3.

They lowered top line growth estimates for fiscal 2016 to 7-8%, down from "high single digit to low double-digit" range they have previously specified. This is only due to the timing of the Europe acquisition and issues in the implementation of the Costco and USAA partnerships. Visa is fine and once they complete those items the growth will rise.

In the recent period earnings rose 10% to 68 cents and beat estimates by a penny. Revenue rose 6.4% to $3.63 billion. Payment volume rose 5.7% to $1.3 trillion.

Shares dipped $3 after the earnings report and have been moving up steadily the last four days. Visa is a Dow component and any Dow rally will lift Visa as well. Conversely, a Dow decline will weigh on Visa as well.

Position 4/28/16

Long June $80 call @ $1.58, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

FSLR - First Solar - Company Description


Big decline to open the position but we were filled on the option at the high for the day. We need the decline to continue and break through support at $52.50.

Original Trade Description: May 2nd.

First Solar provided solar energy solutions worldwide through two segments. Those are components and systems. The component segment produces the actual solar modules that convert sunlight into energy. The systems segment produces the infrastructure to combine those panels into working systems that are sold to corporations, governments and utility companies.

The company reported earnings of $1.06 that beat estimates for 93 cents. Revenue of $848 million rose 3% but missed estimates for $958 million by a mile. The company blamed the shift to a lower priced module for the decline in revenue. Another factor was the decision by the government to extend the Investment Tax Credit (ITC) another five-years on solar installations. This caused some companies to postpone plans that were being rushed to take advantage of the ITC. Now they have time to think the plans through and make calm decisions. The number of urgent sales declined.

The company refined its guidance positively to revenue in the range of $3.8-$4.0 billion and earnings up from $4.00-$4.50 to $4.10-$4.50. The minor increase in guidance did not excite investors.

With the earnings the company also announced CEO Jim Hughes had resigned and CFO Alexander Bradley would be his interim replacement. Hughes had successfully rescued First Solar from a crisis in 2012 when polysilicon prices were crashing Today the company's panels are close to multi-crystalline. The sudden departure of a hero caused some investors to flee the stock.

Earnings August 2nd.

Shares have fallen significantly since the Thursday earnings but show no indications the drop is slowing. The entire solar sector is in distress since the SunEdison (SUNE) filed bankruptcy a couple weeks ago.

I expect the decline to continue with initial support at $52.50 but longer term support well below at $40. The transformational issues of the ITC extension and the CEO resignation could linger for several weeks.

Position 5/3/16

Long June $52.50 put @ $1.67, see portfolio graphic for stop loss.

MLNX - Mellanox Technologies - Company Description


No specific news. The trend continued lower below support at $43.

Original Trade Description: April 30th.

Mellanox is a fabless semiconductor company that designs, manufactures and sells interconnect products and solutions. Their solutions are used in storage, datacenters and clouds. Their Internet communications products handle communications up to 100Gbps. They are also an Apple supplier.

The reported an 11% rise in revenue to $196.8 million and earnings of 81 cents. Both beat analyst estimates for $192.5 million and 75 cents. However, guidance was not so good. They expect Q2 revenue in the range of $210-$215 million and missing estimates for $216.8 million.

The company just acquired EZchip Semiconductor and the CEO believes the deal will translate into "compelling value to current and future customers." However, increasing expenses, expected to rise 8-10% could put a crimp into profits.

With Apple iPhone sales in a slump any supplier is guilty by association. Shares have declined -$10 since earnings and are falling fast. Support is in the $38 range. With tech stocks suddenly in the dog house there is no reason for shares to rebound.

Position 5/2/16

Long June $43 put @ $1.45, see portfolio graphic for stop loss.

QQQ - Nasdaq 100 ETF Description


The Monday short squeeze reversed and the QQQ is back at 6-week lows. A drop below $105 should see the selling accelerate.

Original Trade Description: April 28th.

The Powershares QQQ is an index tracking stock for the Nasdaq 100 Index ($NDX). The QQQ represents the 100 largest domestic and international nonfinancial companies listed on the Nasdaq Stock market based on market capitulation.

The Nasdaq 100 is expected to gap higher at the open on Friday. As with most opening gaps based on some post earnings activity there is a good chance the opening print is the high for the day. The shorts in those stocks that are gapping higher will cover and the buying interest will wane.

Amazon was up $75 in the afterhours session. Linkedin gained +8. Expedia gained +11 and Baidu +8. This should produce a decent opening bounce in the index.

However, the Nasdaq 100 close at 4,363 was the lowest close since March 11th. This is below support at 4,378 and suggests the index is breaking down.

I am recommending we buy puts on the QQQ at the open when the market gaps higher in anticipation of a drop in the $NDX back to 4,200.

Since I expect the index to gap higher I am recommending the at the money put. It should be a little cheaper at the open.

Position 4/19/16

Long June $106 put @ $2.63, see portfolio graphic for stop loss.

SPY - S&P 500 ETF - ETF Description


The S&P lost -18 points to push the SPY to a four-week low close. We need it to close under $204 to see the selling accelerate.

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


Twitter dropped to a historic low at $13.90 intraday but rebounded to close over support at $14. It is moving in the right direction and a close under $14 could trigger additional selling as long time investors give up at new lows.

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, see portfolio graphic for stop loss.
Long June $16 put @ $1.45, see portfolio graphic for stop loss.
Net debit $3.52.

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