Shorts playing the Sell in May cycle were caught off guard and a monster short squeeze was born. The Dow exploded out of the gate this morning after the S&P futures rose 11 points overnight on the drop in the Japanese yen and comments from the finance minister saying the BoJ would not hesitate to intervene in the currency markets if the yen continued rising. This knocked the yen down nearly 1$ and the Japanese market gained 2.15%.
The path of oil also reversed from a slide to $43 to rally to $44.65 on worries about production outages in multiple countries. This lifted energy stocks with some rising over 5% on short covering.
The Dow rebounded 222 points to close at 17,928 and right on critical resistance. After the bell Dow component Disney reported earnings that missed estimates and the stock is down more than $7 in afterhours. That equates to about 50 Dow points so the index should open lower in the morning.
The spike in the Nasdaq knocked us out of the QQQ short position for a minor loss. The short squeeze was felt in all our put positions with every stock gaining.
With the Dow stopping right on critical resistance it will take a new headline to overcome the Disney results and push through to the next level at 18,110.
Current Position Changes
QQQ - Nasdaq 100 ETF
The long put position was stopped out with a trade at $106.50.
SWKS - Skyworks Solutions
The long put position was opened with a trade at $64.15.
CP - Canadian Pacific
The long put position was opened at $137.19.
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
Named by Adobe as 2015 Marketing Cloud Partner of the Year. ACN broke out to a new high.
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
No specific news. The earnings warnings from the Gap and L Brands are holding Skechers down. It could be a rough week with the rest of the retail earnings ahead.
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. Minor rebound in a short covering market.
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. See portfolio graphic for stop loss.
CP - Canadian pacific Railway - Company Description
Minor rebound as shorts covered early in the session but CP shares faded into the close. No change in the outlook.
Original Trade Description: May 9th.
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.
Long June $130 put @ $2.95, initial stop loss $142.50
FSLR - First Solar - Company Description
Short covering in a rebound market. Canadian Solar reports earnings on Wednesday. That could further depress FSLR.
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.
Long June $52.50 put @ $2.40, see portfolio graphic for stop loss.
QQQ - Nasdaq 100 ETF Description
The short squeeze on the Nasdaq stopped us out at $106.50 for a minor loss of 57 cents. The Nasdaq 100 was up +61 points.
Original Trade Description: April 28th.
The Powershares QQQ is an index tracking stock for the Nasdaq 100 Index ($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.
Closed 5/10/16: Long June $106 put @ $2.63, exit $2.06, -.57.
SPY - S&P 500 ETF - ETF Description
Major spike in the S&P to 2,085. That is the upper end of the first resistance band and a good place to fail.
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
Very minor gain of 7 cents suggests SWKS shorts are not in any hurry to cover.
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 rebounded 43 cents because there are a lot of shorts in Twitter. This should be an entry point for new shorts.
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.
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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