Option Investor

Daily Newsletter, Monday, 5/9/2016

Table of Contents

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

Market Wrap

Market Wobble

by Thomas Hughes

Click here to email Thomas Hughes


Monday traders were quiet and cautious in the wake of last week's weak jobs data. Also affecting today's sentiment; the Saudi cabinet shake up, a warning from Japanese officials and weaker than expected Chinese trade data. The removal of Al-Naimi as the Saudi oil minister was a shock to the market but did not seem to have much affect on oil prices. It's affect on the greater oil market is yet to be established. As for China, weaker than expected traded data renewed fear of a slowing China and one growing slower than data suggests. In Japan the finance minister says Tokyo is ready to intervene to stop the yens recent strengthening.

These new developments, coupled with ongoing weakness in corporate earnings, poor earnings growth outlook gave market participants more than reason to be cautious. In Asia trading was mixed; Chinese indices fell on weak economic data, the Japanese Nikkei gained about 0.7% on quantitative easing hopes. European indices were equally mixed, driven by global uncertainty and late day declines in both oil and gold prices.

Market Statistics

Futures trading indicated a higher open for our markets right from the start. Gains were not large but they were positive, moderating to near flat-line by the open of the day's session. There was no official economic data released today and little in the way of high profile earnings before the bell although today's list of earnings reports is quite large. Trading at the open was very lethargic to say the least. The indices opened with little to no gains on incredibly light volume and then proceeded to trade sideways from there, up to and into the close of the session. Today's SPX trading range is the second smallest in nearly 6 months, further evidence of the lack of action in today's action.

Economic Calendar

The Economy

No official economic data from the US today and the calendar for the week is on the light side. Tomorrow we'll get the JOLTs report and wholesale inventories. On Wednesday we'll get the treasury budget. Thursday will be weekly jobless claims and import/export prices and then on Friday the week rounds out with PPI, retail sales, business inventories and Michigan Sentiment. Needless to say, the big day this wee, in terms of data, will be Friday.

Moody's Survey Of Business Confidence shows that global business sentiment fell -0.8% from last week, the first decline in two months. The index is now reading 33.3, high by historic standards but well below the highs set last summer. According to Mr. Zandi sentiment is mixed throughout the world; it is strongest in the US and Europe but on shaky ground in South American where political upheaval is still rampant. Just today the apparent impeachment of Brazil's corrupt leader was postponed due to political wrangling within the government.

We are through the bulk of the earnings season but there are still quite a few left to report. According to FactSet 87% of the S&P 500 has reported so far, 20 are expected to report this week. Of those who have reported 71% have beaten EPS projections (above average) while only 53% have beaten revenue estimates (below average). The blended rate of earnings growth for the 1st quarter of 2016 rose slightly in the last week, rising a half percent to -7.1%. The improvement is a plus, but leaves this quarter's earnings decline deep in negative territory for the 4th quarter in a row and is the deepest decline since the earnings recession began.

Looking out to the next quarter and beyond earnings growth outlook improves, but continues to weaken. Full year 2016 earnings growth estimates have risen by a tenth, due solely to better than expected Q1 results, but Q2, Q3 and Q4 remain weak. Projections for Q2 sank deeper into the red and are now -4.7%, Q3 projections are little better having fallen -0.2% to only 1.4%. Fourth quarter growth remains stable at 7.5% with the caveat that this is less than half what had been expected at the start of the year. Looking further out 2017 earnings growth projections remain strong at 13.6%, but they too were revised down this week.

While it looks like earnings growth will return to the market, and maybe even this year, I don't believe forward outlook will have positive effect on the market until after the next earnings cycle at the earliest. Until then negative expectations in the 2nd quarter and declining expectations for the 3rd and 4th quarter are likely to weigh on the market. At the rate expectations are declining it is very possible that the 3rd quarter projections will turn negative in the next few weeks.

The Dollar Index

The Dollar Index surged in today's session driven by comments from Japan. Japan's finance minister says Tokyo is ready to act to weaken the yen if needed, a comment that helped to weaken the yen and send it to a 2 week low versus the dollar. The Dollar Index itself rose about 0.3% in a move that is fast approaching resistance targets near $94.30. This level was previous support, now broken, and should be viewed as potentially strong resistance at this time. This level is consistent with the 78.6% retracement level and the short term moving average, a combination that, if broken, would end the 5.5 month downtrend in dollar value we've seen since the start of the year. A break above $94.30 could take the index up to $95.60, a failure to break would likely see the index retreat back to the recent low near $92.50. Since today's move was driven by talk and not a change to fundamentals I think it more likely to see the DXY halted at resistance than for it to break through. The next meetings of the BOJ and FOMC are not until June with no expectation of a US rate hike.

The Oil Index

Oil prices were quite volatile. They started the day in positive territory, rising 2.8% in the early session and then giving up all those gains and more later in the day. By close of trading WTI was down -2.8% as the immediate affect of Al-Naimi's removal and the wildfires raging in Canada were debated. The fire did not expand as much as feared over the weekend, reducing fear of supply disruptions, which was the major cause of today's turnaround. Even with a possible 1 million BPD disruption global supply remains high, production remains high and demand remains tepid. Today's action may be sign of growing resistance to higher prices, resistance target near $45, with a potential decline to $40 if no bullish catalyst emerge.

The Oil Index fell hard today too, dropping more than -3% intraday and extending the decline which began 2 weeks ago. Today's candle is not overly strong but does help confirm resistance in the 1,100 1,120 range. The indicators are also weakening, bearish MACD momentum is on the rise while stochastic moves lower, suggesting further decline is on the way. Next down side target is near 1,020.

The Gold Index

Gold prices got walloped today, falling nearly -2.25%, to trade near $1265. Today's move was driven by the Japan comments and helps to confirm resistance at $1300. Today's candle was long and black but not overly strong. We may see a continuation of this sell-off in the near term with a possible support target near $1250. Even with today's news gold is more likely in a consolidation than reversing. Consolidation may continue over the next month while we wait on data the next round of central bank meetings.

The gold miners took a hit on gold's fall. The miners ETF GDX fell more than -6% in today's action to trade near the bottom of the 2 week trading range. The ETF appears to be in consolidation, between $23.25 and $26, with a chance this will continue into the near term. The indicators are pointing lower at this time, suggestive of a test of support, but consistent with consolidation over the past few weeks. With so much time until the next central bank meetings economic data will be closely watched and will drive day to day action. Gold and the miners could could continue to fall on the Japan news but could just as easily rebound if no follow through comes from that quarter.

In The News, Story Stocks and Earnings

Lending Club, one of many on line lenders who have been experiencing trouble over the past few months, announced the ousting of its CEO this morning and the market took it very hard. The CEO exceeded his authority on a number of items, including re-dating applications and selling bundles of loans that did not meet investor requirements, and was forced to resign. The news shook investor confidence in the on-line lending model and sent shares of the stock down more than -30%.

Teva Pharmaceuticals reported earnings before the bell and pleased investors even though forward guidance is a little light. The company reported EPS of $1.36, flat year over year and better than the $1.13 expected by analysts. The results were driven by strength in generics and negatively affected by currency conversion. Revenue was down -3% year over year, -1% when considering forex impact. Guidance was weak, but came with the caveat it did not include the addition of revenue from an upcoming acquisition that is expected to bolster the company's presence in the generic market. Shares of the stock gained more than 5% but did not recover all of Friday's losses.

Krispy Kreme, maker of oh so delicious frosted doughnuts and OK coffee, reported that it was being bought out by JAB Beech, INC, a subsidiary of JAB Holding Company. The move is worth $21 per share to holders of KKD, a 25% premium to last week's closing price, and is expected to close by the 3rd quarter of this year.

Tyson Food's also reported earnings before the bell. The iconic processor of poultry and poultry products delivered EPS of $1.10, well ahead of the $0.96 expected, and raised full year guidance. Results were driven by record sales, record revenue and growth in key retail brands. Shares of the stock jumped more than 5% premarket and gapped open to a new all time high.

The Indices

The market moved very little today despite the flurry of news. Trading ranges were tight, resistance was tested more than once, and little to no gains were made. Today's leader was the NASDAQ Composite Index with a rise of only 0.3%. The tech heavy index tried to complete a small bodied white candle but was not able to close near the high of the day, leaving some upper shadow in evidence of resistance. Resistance is just above the high of the day, near 4,790, with the short term moving average just above that. The indicators remain weak and pointing to lower prices, as suggested by stochastic's crossing of the lower signal line, although bearish momentum is slackening in the near term. A break above resistance would be bullish, failing to do so could see the index return to firmer support. First target for support is near 4,650.

The next biggest gainer, the only other gainer in today's action, was the S&P 500 which posted a gain of only 0.8%. The broad market created a very small spinning top doji, wedged tightly between the short term moving average (resistance) and the 2,050 support target. The indicators remain weak but there is a little sign of support at this level in the MACD; bearish momentum has made a peak in the near term consistent with possible support. That being said stochastic is not showing signs of support at this time and suggest lower prices are on the way. A break below 2,050 could take the index as low as 2,020 or 2,000 in the near term while a break above the moving average could find next resistance just above it, in the range of 2,075.

The Dow Jones Transportation Average made the smallest decline in today's session, only -0.01%, basically unchanged to last Friday's close. The move created a very small spinning top doji, confirming possible resistance at the 7,750 level. The indicators remain weak, as with the other indices, with mixed signals. MACD is bearish and strong, but has peaked, stochastic is moving lower in the longer term but showing signs of support in the nearer; both consistent with a bounce or rebound but one not showing much strength. A break above resistance would be bullish and comes with an upside target near the short term moving average, only about 100 points above today's close. First support target is near 7,600 and the low set on Friday. A break below this level would be bearish and could carry the index down to 7,500.

The Dow Jones Industrial Average made the largest decline in today's session, -0.2%. The blue chips created a very small spinning top candle that tried to break above the short term moving average and failed. Today's move may confirm resistance at the moving average, and could signify lower prices to come. The indicators are mixed but more bearish than not; MACD is bearish but momentum is waning, stochastic %D is moving lower but %K is bouncing. Together the indicators are consistent with rebound or support although neither are confirmed. A break above the short term moving average would be bullish and has an upside target near 18,000. A break below 17,615 would be bearish and could carry the index down to the long term uptrend line near 17,000.

The market is waiting. Today's action is classic wait and see activity but waiting for what is the question. The next round of central bank meetings aren't for another month, earnings season is mostly over, economic data is on tap but nothing truly market moving is on the schedule for this week. With so little to grab attention the market may fall back on the fundamentals, fundamentals that show slowing, tepid, spotty growth and declining earnings expectations.

The long term is still bright, but that brightness is still in the future and a long way off. Between now and then we've got at least one more quarter of earnings decline before coming out of the earnings recession, tepid economics, uncertainty over the Fed and the summer season fast approaching. It may not be time to sell-in-May-and-go-away but it doesn't look like we're on the cusp of a rally either. I remain bullish for the long term but increasingly bearish for the near term, looking forward to the next big dip.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Fires Killing Business

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Canadian wildfires have nearly shutdown the country's oil production with more than one million barrels offline. There is one company you may not have thought of that will suffer significantly.


No New Bullish Plays


CP - Canadian pacific Railway -
Company Description

Canadian Pacific is a transcontinental railroad in Canada and the USA. It transports bulk commodities including grain, coal, fertilizer, crude oil and refined products, lumber and minerals. They operate about 12,500 miles of track across Canada and the Northern and Midwest USA.

The fires have knocked more than one million barrels per day of production offline. Every day another operator announces a shutdown because the fire is approaching, employees are evacuating their homes or the roads and utilities are shutting down.

The actual oil facilities are relatively fire proof. They are engineered to avoid that danger. However, they cannot run without employees and more than 100,000 people have been evacuated from the area. Nearly 2,000 homes and businesses have been destroyed. The water is undrinkable and there is no gas or electric service. Roads are closed and facilities have been shutdown.

When the fire burns out and the workers come home, they may not have a home left standing. That means they are going to be out of work for weeks trying to relocate their families. The local governments are not going to let people back into existing homes because of the lack of water, gas, sewage, electricity, etc. This is going to be a long-term problem.

It could take weeks or even months to reopen the oil sands facilities because of the lack of electricity. The transmission lines have been destroyed. In some areas the towers have melted. The oil sands cannot operate without electricity. Pipelines, pumping stations, etc will also be offline until the electricity returns.

If production is going to be offline for weeks or even months there will be a lot less crude oil moved by train. With the entire province in turmoil there will be all manner of delays and trains carrying other commodities could be halted or severely delayed.

CP depends on crude oil, refined products, coal, lumber and grain for the majority of its revenue. I foresee weeks of delays and significantly lower railroad traffic. Shares are already declining on the news but I expect them to decline a lot further as investors begin to factor in the loss to earnings in Q2.

Earnings July 20th.

Buy June $130 put, currently $3.10, initial stop loss $142.50

In Play Updates and Reviews

Mixed Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

After a mildly positive session in Asia the Dow opened lower because of heavy losses in GS, CVX and CAT. Chevron declined because of weakness in oil prices. Goldman continued their two week decline on no news. Caterpillar fell because David Einhorn recommended it as a short last Wednesday and it has been falling ever since.

The Nasdaq spiked at the open on a biotech rebound and those stocks kept the index in positive territory at the close. You can see the vast majority of the stocks on the Nasdaq point gainer list are biotechs.

The Nasdaq, S&P-500, Russell 2000, NYSE and S&P-600 did roll over and the NYSE and S&P-600 closed in negative territory. The rest were headed in that direction but time expired.

SolarCity (SCTY) reported a larger than expected loss after the bell and that should push First Solar lower tomorrow. We were stopped out on Mallanox after an analyst upgraded it to buy and shares spiked at the open.

Current Portfolio

Current Position Changes

SKX - Skechers

The long call position was opened with a trade at $32.25.

SWKS - Skyworks Solutions

The long put position remains unopened until a trade at $64.15.

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. Minor decline in a choppy session.

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.

SKX - Skechers - Company Description


The Skechers position was triggered this morning with a trade at $32.25. There was a big rebound from the intraday low on Friday and that carried over into another decent gain today.

Original Trade Description: May 4th.

Skechers designs, develops, markets and distributes footwear for men, women and children, and performance footwear for men and women under the Skechers GO brand. The company owns, operates of has franchised more than 872 stores internationally. They opened 78 stores in Q1 and plan on opening 160-165 more throughout the rest of 2016.

The company reported record earnings that rose from 37 cents to 63 cents for Q1 and easily beat the 43-cent estimate. Operating income rose 57.1%. Revenue surged 27.4% to $978.8 million and easily beat the estimates for $890 million. The company raised guidance for the current quarter to $875-$900 million.

Wholesale revenues rose 47.1% with an 8.5% increase in distributor sales and 23.2% increase in retail sales. Comparable same store sales rose 9.8%. Domestic retail sales rose 15.3% and international sales +59%. International same store sales rose 17.7%. To say that the company is doing everything right would be an understatement.

Earnings July 21st.

Shares split 3:1 in October just as a revenue miss for Q3 knocked the shares down 35% from $46 to $31. The stock went sideways for the last six months but has recently rebounded to resistance at $35. The strong earnings spiked the stock to that level and it has traded sideways for the last week as it consolidated those gains. In the last two days of market weakness shares lost $1 and were actually positive on Wednesday. I believe we are going to see a breakout to a six-month high.

I know it is strange to recommend a bullish position in a negative market but the lack of a market related decline in SKX suggests they will surge higher if the market were to turn positive.

I am going to recommend a slightly longer option on this position so the premium will not decay as fast if the market continues to be weak.

Also, because we are in a negative market I am going to put an entry trigger on the position. I do not want to recommend a bullish position and have the market gap down -100 points on Thursday. If SKX does not rebound to hit the entry point we lose nothing.

Position 5/9/16 with a SKX trade at $32.25:

Long July $35 call @ $1.00. No initial stop loss.

BEARISH Play Updates (Alpha by Symbol)

CAVM - Cavium Ind - Company Description


No specific news. Cavium continued its rebound but rolled in the afternoon suggesting buyers evaporated. If it rolls over again I would expect to see a new low.

Original Trade Description: May 5th.

Cavium designs, develops and markets semiconductor processors for intelligent and secure networks in the U.S. and internationally. They offer wired and wireless networking, communications, storage, cloud, wireless, security, video and connected home and office applications. What that company description does not say is that Cavium designs chips for Apple iPhones and iPads.

Cavium recently reported earnings of 25 cents on revenue of $101.9 million. Analysts were expecting 25 cents and $102 million. That is about as "in line" as you can get. However, they warned that the current quarter would see revenue in the $105-$108 million range and earnings of 28-30 cents. Analysts were expecting $110.6 million and 32 cents.

On the call management said, "We expect the access and service provider markets to be flat to down due to some delays in volume infrastructure and Asia. We expect the enterprise and datacenter markets to be up despite a soft enterprise macro." Investors were not impressed with the lackluster guidance and the stock tanked.

Add in Apple guidance warning and Cavium began a long decline. I kept thinking we would see rebound but shares just keep sliding. I now believe we will see a new low as tech stocks weaken into summer.

Earnings July 27th.

I realize the stock looks oversold but I believe the Apple guidance warning is the gift that keeps on giving. The warning from multiple tech vendors on slowing enterprise buying is also a long-term warning.

Position 5/6/16 with a CAVM trade at $46.40

Long June $45 put @ $2.25. Initial stop loss $50.25

FSLR - First Solar - Company Description


Big drop on no news. After the bell SolarCity disappointed on earnings and that should weigh on FSLR shares on Tuesday.

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 @ $2.40, see portfolio graphic for stop loss.

MLNX - Mellanox Technologies - Company Description


MLNX had coverage initiated by Brean Capital with a buy rating and shares spiked to $42.77 at the open to stop us out of the position for a minor gain.

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

Closed 5/9/16: Long June $43 put @ $2.00, exit $2.37, +.37 gain

QQQ - Nasdaq 100 ETF Description


The intraday rebound on the Nasdaq was caused by a surge in the biotech sector. Dozens of biotech charts I scanned had huge moves. The spike to $106.37 almost stopped us out at $106.50. With several earnings disappointments in Nasdaq stocks after the close we could see the decline continue on Tuesday. The Nasdaq closed -21 points below its intraday high.

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 rebounded at the open and fell back and then rebounded at the close and fell back. The trend lower is still intact.

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.

SWKS - Skyworks Solutions - Company Description


Skyworks rebounded at the open but faded in the afternoon. This was completely Nasdaq related and an analyst note posted after the close was negative saying, "Skyworks has not found the right solution yet."

Original Trade Description: May 7th.

Skyworks designs, develops, manufacturers and markets proprietary semiconductor products. They are a component supplier to smartphone makers worldwide.

We all know about the decline in iPhone sales in Q1 and Apple's order to cut manufacturing by 30% in Q2 after a similar decline in Q1. iPhone sales are slowing but it is not just the iPhone. Chinese smartphone manufacturers are all struggling to increase sales in a saturated market. In China about 45% of the phones have now been upgraded to 4G and the industry is ramping up the transition to 5G in late 2017. That means the 2016 versions of new phones have a shortage of new features to justify their hefty prices.

In their earnings last week Skyworks reported operating earnings of $1.25 compared to estimates for $1.15. Revenue of $775.1 million rose only 1.7% from the year ago quarter and missed current estimates. The company guided to current quarter revenues of $750 million with earnings of $1.21. These were below analyst estimates.

Skyworks is a great company. They are well positioned for future growth, have many new products, $1.177 billion in cash and zero debt. They are paying a 26-cent dividend on June 2nd to holders on May 12th. Their problem is the slowing smartphone market.

We know they will have a good Q4 because of the Apple iPhone 7 but the next few weeks of summer doldrums could see them touch a new low on the iPhone sales cloud currently hanging over the sector.

Shares rebounded from the opening dip on Friday along with the market. I think we should use this bounce to initiate a new short-term put position on Skyworks.

With a SWKS trade at $64.15

Buy June $62.50 put, currently $2.30, initial stop loss $67.50.

TWTR - Twitter - Company Description


Twitter moved to block access to its feeds by government agencies. The company said it respected the privacy of its users and asked its partner Dataminr not to give any data to government agencies. Twitter does not want to appear too friendly with the government and scare users away from the service. This is not going to go well for Twitter.

Snapchat overtook Twitter for downloads on Android devices in April. Some 22.7% of devices now have Snapchat compared to 21.8% for Twitter.

Twitter posted a minor decline in a positive Nasdaq market. I believe we will see it break below $14.

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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