Option Investor

Daily Newsletter, Thursday, 5/12/2016

Table of Contents

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

Market Wrap

Shaky Market

by Thomas Hughes

Click here to email Thomas Hughes


The market tried to rebound as weak earnings, tepid data and sluggish outlook weigh on sentiment. Neither the current quarters earnings, the recent string of data nor outlook give much reason for bullishness and today's events did nothing to alleviate concerns.

Global markets were mixed. In Asia markets were mostly lower but comments from a prominent, but unofficial, Japanese source helped to weaken the yen which in turn helped the Nikkei to move into positive territory before the close. Takotoshi Ito, an academic reportedly close to BOJ Governor Kuroda, says the bank my be ready to add QE as early as June. In Europe the markets started off on better footing, rising as much as 0.5% by mid day, only to give up the gains and more by the end of the session. Early strength was supported by rising oil prices, the late day sell-off in equities driven in turn by a reversal in those same oil prices.

Market Statistics

Futures trading indicated a positive open for the entire morning although indicated gains fell steadily throughout the morning. Weak earnings from the retailers along with a surprise jump in jobless claims may have been the cause, or possibly anticipation of three speeches to be given by Fed officials, a rising dollar or combination of these and other factors. The open was rocky, the indices did indeed move higher after the bell but gains were muted and intraday resistance was met within the first 10 minutes of trading.

By 10AM the indices had retreat to break even levels and by 10:15 had moved into negative territory, where they remained for the greater part of the day. Losses were not severe, the S&P 500 shedding about -0.5% at the low, and most were recovered by 2PM. A late afternoon rally helped to send the indices back up to test the early high but once again those levels were not sustainable. The indices retreated from the intraday highs going into the close and ended the day relatively flat.

Economic Calendar

The Economy

Not a lot of economic data today but what we got was a little surprising. Initial jobless claims jumped 20,000 in the past week, the 5th week of increases, to hit a near 15 month high. Claims came in at 294,000, still below the much watched 300,000 level and consistent with labor market health, but the pace of increases and the new high are waving a red flag. The four week moving average of claims also rose, by 10,250 to 268,750, to hit a four month high. On a not adjusted basis claims gained 7.6% versus the 0.6% projected by seasonal factors and are now above last years levels. The near term gains in claims may fall in the coming weeks as we enter the summer season but they will need to be watched, a reversal in trend would not be good.

Continuing claims rose by 37,000 to it 2.161, a 6 week high. This is on top of an upward revision to last week's figure of 3,000. The four week moving average of continuing claims is still falling however, but may begin to rise in the coming weeks. Despite the gains, like with initial claims, continuing claims remains low relative to long term trends and consistent with labor market health.

The total number of Americans receiving unemployment benefits fell by -61,992 to hit 2.136. This is the lowest level since late November 2015 and consistent with seasonal and long term trends. We can expect the total claims figures to continue falling for about the next 4-5 weeks providing the jump in initial claims does not linger and/or spillover into longer term unemployment. On a year over year basis total claims are down -5.2% and consistent with ongoing recovery in labor markets and unemployment.

Import/Export prices were released at 8:30AM. Import prices rose 0.3% following a 0.3% gain April, driven primarily by rising fuel prices. Export prices rose by 0.5%, impacted by both agricultural and non-agricultural products.

Not one but 3 different Federal Reserve presidents, all voting members this year, made speeches to day. They each spoke to different aspects of the economy, as well as the pace of FOMC rate hikes, and as a whole sound fairly hawkish. First up was Rosengren who says the market is too pessimistic on the economy and underestimating the pace of rate hikes. Mester says that uncertainty in forecasting should not stop the Fed from acting. Esther George says that rates are currently too low for the state of the economy, that low rates pose their own risks to economic stability and that she expects to see moderate growth to continue.

The next meeting is only 4 weeks away, the CME Fed Watch tool shows an 8% chance for a rate hike. Looking out to future meetings the Fed Watch Tool shows a less than 50% chance of rate hike all the way out to December when it jumps to 59%.

The Dollar Index

The Dollar Index rose by about 0.33% today on the heels of expected, projected, speculated BOJ intervention. Today's action recovered some but not all of yesterday's losses, and fell short of resistance at $94.30, the 78.6% retracement level. This level may prove to hold the index in check as BOJ talk at this time is just that, talk, and US data does not support a strengthening dollar. The indicators are bullish and pointing higher so a test of resistance is likely, but they are also very weak at this time so the strength of the move is questionable at this time. A break above this level could signal a reversal in the dollar and/or yen that could have negative impact on forward earnings, and take the index up to $95.50 in the near term. Tomorrow's CPI release could have an affect on the index, and PPI next week. If inflation gauges remain weak, and rate hike expectations and other economic indications, the index could easily return to retest its recent lows.

The Oil Index

Oil prices got a boost in early trading from yesterday's surprise draw of US stockpiles and an IEA report that says global oil markets are heading for balance. Within the report they also upped 2016 demand by over 1.5 million BPD and expect to see a steady draw-down of US stockpiles going into the summer. Oil prices surged in early trading to near $47 and a 6 month high only to attract sellers who brought volatility to the market. Prices were driven back below $46 intraday, but only long enough for the bulls to regroup and send them back up. By end of day WTI was trading near $46.50, just off the earlier high. It seems that fundamentals may finally be coming back into alignment, for the bulls, but are still skewed toward supply. Prices may continue to rise in the near to short term.

The Oil Index tried to rally on the rise on oil prices but succumbed to profit taking. The index opened with a small gain and pushed marginally higher only to fall back to break even before the close. Today's candle is small and black, with upper and lower shadows, sitting on a critical level. This level is near 1,115 and consistent with the short term moving average, today's support, and the 61.8% retracement level, broken. If support at this level fails the index could fall as 1,075 in the near term, if oil prices remain steady at the new highs and/or moves higher a bounce may be in store for the Oil Index with upside target near 1,175.

The Gold Index

Gold prices held steady near $1270 despite strengthening in the dollar. Today's session was a little choppy, early losses were erased mid-day only to have the index fall back to the earlier low about -0.25% below yesterday's settlement price. Regardless, today's action is more consolidation than anything else, gold prices remain above recently broken support with little expectation for a fall at this time. The risks are stronger than expected data or anything else that may lead the market to move up rate hike expectations, as well as possible moves from the ECB (not expected) or the BOJ (probable). Until then gold is likely to remain range bound with support in the region of $1250-$1260 and resistance near $1285 - $1300.

The gold miners fell in today's session but remain near recent highs. The miners ETF GDX fell about -1.35%, just off the long term high, to trade near the middle of the near term consolidation range. The ETF is in consolidation, longer term direction dependent on economic data, central bank activity, the dollar and gold prices. The consolidation range has support near $23.25 and resistance near $26, a break above could take the index higher into the long term with targets near $27.50 and $30. A break to the down side could take it down to support targets near $20-$21.

In The News, Story Stocks and Earnings

Apple was a major mover of the market today. The beleaguered tech company saw shares fall more than -2.25% to hit a near 2 year low as investor confidence continues to wane. Today's action also removes it from the top spot in terms of market cap. The indicators remain weak although bearish momentum is on the decline which could lead to a rebound from or consolidation at current levels. Looking back over the past 3 years the current bearish MACD peak is an extreme, showing underlying weakness in the market and suggesting that lower prices are likely. If the stock is able to mount a rebound I would expect to see today's lows tested before any rally were to develop. The risk is that the company will produce a new innovation or product to rejuvenate market dominance but there is little expectation of that at this time.

The retail sector got hammered again today. Macy's miss yesterday set the tone, today's miss by Kohl's cemented fears. Kohl's reported a miss on earnings and revenue despite the addition of new stores in the quarter, driven primarily by a near -4% decline in comp sales across the company's footprint. Shares of Kohl's fell more than -10% on the news and hit a new low. The XRT Retail SPDR also fell, shedding about -0.25% in a move that is testing support. The indicators are bearish and ticking stronger so further testing of support is very likely. Count in the after hours misses by Nordstrom's and Dillard's, as well as concern over the health of the consumer (mentioned in the Kohl's report) and I think we can expect to see the XRT fall in tomorrow's session. I think I've said this before, certainly no one is talking about it in the media, but the thing weighing down the consumer, the ones who have jobs anyway, is most likely Obamacare. High rates, low coverage and rising healthcare costs are digging into budgets across America.

IPO darling Shake Shak managed to beat EPS projections this quarter. The hamburger seller posted earnings of $0.08 versus the $0.05 consensus projection and was also able to raise full year guidance. Within the report revenue grew more than 43%, same Shak sales rose nearly 10% and the addition of 4 new stores was announced. The news was well received and helped to lift the stock 5% in after hours trading.

The Indices

The indices tried to rebound from yesterday's sell-off but could not muster enough bulls to make or hold significant gains. Today's action was led by the Dow Jones Industrial Average which was the only major index to close in positive territory. Now, positive territory means a gain of only 0.05% so flat is the operative word. The blue chips tested support in today's action, at the short term moving average, but the small doji candle and low trading volume show indecision in the move. The indicators are consistent with a bounce/test of support but remain weak at this time. Both MACD and stochastic are showing signs of rolling over into bullish crossovers but there is no guarantee of that happening. Should the index stage another rebound from this level resistance is just above, near 18,000, and will likely halt any upside providing no bullish catalyst emerges. A break below support could take the index down to the long term up trend line near 17,250.

The next best performer in today's session was the S&P 500 which lost only -0.02%. The broad market also created a small doji candle but one with longer lower shadow than upper, closing just above the short term moving average, showing support along the short term moving average near the 2,060 level. This support may hold, the indicators are consistent with support at current levels, but any upside move will encounter resistance near 2,075. A break above resistance would be bullish in the near term only as next resistance is just above near 2,100, with next target for resistance at the all time high. A break below the short term moving average could take the index as low as the long term up trend line, near 1975 and about 6% below today's closing price, with first target closer to 2,020.

The next best performing index was the NASDAQ Composite which had the additional burden of Apple weighing it down. The tech heavy index fell about -0.5% in today's action, creating a small bodied black candle falling from resistance. Resistance is near my line at 4,785 and compounded by the short term moving average which has been moving lower over the past few weeks. The indicators are mixed; both are bearish but they may be rolling into a bullish signal but with resistance just overhead any upside potential is muted, at best. A break above resistance could take the index up to 4,900 in the near term, a further fall from resistance may find support near 4,650.

The biggest decliner in today's session was the Dow Jones Transportation Average which lost a little more than -1.4%. The transports look the most bearish of all four indices and set a new 2 month low with today's close. The index is moving lower after a test of resistance at the short term moving average and is confirming resistance at 7,750. The indicators are also weak, much weaker than the other major indices, and are moving lower with today's action suggesting that lower prices are still on the way. If the index continues to fall first target for support is 7,500.

For the most part, discounting the transports, today's action appears to be more indecisive than not. Now, taking into consideration Dow Theory and the fact that the transports led us into the correction last year, and led us in the rebound which began in January, today's move is highly suspicious. If the transports continue to move lower the others are likely to follow. I've been growing more and more wary of decline in recent weeks, expecting a pull-back or correction driven by poor and declining earnings outlook, and nothing changed that today.

The long term outlook remains positive, a return to earnings growth is still in the forecast, but another quarter and maybe two of earnings decline is expected before then and that will be hard for the market to handle, especially over the summer. I'm still bullish long term but increasingly bearish in the near, cautious in the short and waiting for the next big bounce.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Not as Easy as A-B-C

by Jim Brown

Click here to email Jim Brown

Editors Note:

Drug maker ABC is finding out the hard way that price competition for generics is heating up fast and prices are declining even faster. Their business plan to increase generic drug sales is meeting a lot of resistance.


No New Bullish Plays


ABC - AmerisourceBergen -
Company Description

AmerisourceBergen sources and distributes pharmaceutical products to healthcare providers, pharmaceutical and biotech manufacturers, and specialty drug patients in the United States and internationally. Its Pharmaceutical Distribution segment distributes brand-name and generic pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to various healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and other alternate site pharmacies, and other customers.

The drug market is not working out well for ABC. In the recent earnings they reported earnings of $1.68 that beat earnings by 9 cents. However, revenue rose 9% to $35.7 billion and missed estiimates for $35.8 billion. If that was the whole story ABC would be a lot better off today.

The company warned on full year guidance and on 2017 expectations. They reduced full year guidance from $5.73-$5.83 per share to $5.44-$5.54 and analysts were expecting $5.78.

The CEO said, "Looking ahead, we expect our gross profit in the second half of the year to be negatively impacted by certain accelerating headwinds, including an increase in the rate of generic deflation and a lower contribution from new generic launches. In addition, an internal strategic initiative we had launched to increase sales of PRxO Generics and to increase our independent retail segment revenues is ramping slower than we had anticipated."

The company said 2016 revenue growth would be 8% and below prior estimates. For 2017 they expect 4%-6% earnings growth to $5.71-$5.82 per share and below current analysts estimates for 2016.

Earnings 7/28.

The long-term guidance warning tanked the stock but that was just the beginning of the declines. Shares are at a new 52-week low and still falling.

I am recommending an ITM June $75 option because it has high open interest (2,728) and a small spread. It is also cheaper than the next available strike, which would be the August $72.50 at $3.20 with a 50 cent spread and open interest of 15. I do not expect to be in this position for more than a couple weeks so the short term June option makes more sense.

Buy June $75 put, currently $2.50, initial stop loss $78.50.

In Play Updates and Reviews

Calls Up, Puts Down

by Jim Brown

Click here to email Jim Brown

Editors Note:

Despite the mixed market every position did exactly what it was supposed to do today. That is unusual but this market is unusual. We had some really nice declines in the put positions and despite the weak market the three call plays all posted gains.

Skyworks crashed -2.93 on an announcement they were replacing the 15 year CEO. Cavium fell -1.71 on more bad news about Apple component orders. First Solar fell -1.65 on sector weakness. It was a good day for the puts.

The new call play McCormick rallied $1.34 despite the markets being negative most of the day. I think we are off to the races on that position.

The Dow was down about 90 points at its lows and recovered to close barely positive. The S&P was down -11 only to close fractionally lower. The Nasdaq was down the most at -50 until an afternoon rebound brought it back to close -23. While the rebound in the indexes lifted them off the lows it did nothing for market sentiment. The market path is still lower.

The Dow seems destined to break below last week's lows at 17,600 and retest 17,500 or even 17,400. The Sell in May strategy is in full bloom and while there may be some temporary bounces we should be headed for lower lows.

Current Portfolio

Current Position Changes

MKC - McCormick

The long call position was opened at $97.52.

HOG - Harley-Davidson

The long put position was opened at $45.99.

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 gain 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.

MKC - McCormick & Co - Company Description


No specific news. Big gain in a weak market.

Original Trade Description: May 11th.

McCormick & Company, Incorporated manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products to the food industry. It operates through two segments, Consumer and Industrial. The consumer segment offers spices, herbs, seasonings, and dessert items. It provides its products under the McCormick, Lawry's, Stubb's, and Club House brands in America. The company was founded in 1889.

This is truly a recession proof business. Everyone in the world uses spices in the food and you are not going to go without salt or pepper regardless of how poor you are. They reported earnings of 73 cents that beat estimates and revenue rose +2% to $1.03 billion. Cost of goods fell -1.6% and profit margins rose +1.8%. Cash on hand rose 36.7% and inventories declined. They guided for full year revenue growth of 4-6%, earnings growth of 6-8% and earnings of $3.68-$3.75. They pay $1.72 in annual dividends at 43 cents per quarter.

Earnings June 30th.

In mid April they acquired Botanical Foods Company based in Australia for $114 million. They provide packaged herbs and sales are growing at double digit rates. They export their products to 15 countries under the Gourmet Garden brand. McCormick expects the acquisition to be fully accretive to earnings in 2017.

The key point for this recommendation is that the shares are not going down despite the weak market over the last three weeks. Shares continue to climb despite the broader markets. However, they did decline 47 cents today after a four-week high yesterday. This will be a hedge against the market suddenly turning unexpectedly bullish. If shares move over Tuesday's high, I expect them to retest the April highs at $101.

Position 5/12/16:

Long June $100 call @ $.95, no initial stop loss.

SKX - Skechers - Company Description


No specific news. I am shocked to see Skechers up after Macy's earnings and expected misses by Kohl's and Nordstrom's.

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. Finally a decent drop. News that Apple cut orders for the second half of 2016 weighed on the entire sector.

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 decline despite strong gain in oil prices. 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.

Position 5/10/16:

Long June $130 put @ $2.95, initial stop loss $142.50

FSLR - First Solar - Company Description


The decline accelerated on sector weakness.

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.

HOG - Harley Davidson - Company Description


No specific news. Opening spike was quickly sold.

Original Trade Description: May 11th.

Harley Davidson manufactures cruiser and touring motorcycles. They design, manufacture and sell wholesale on-road Harley Davidson motorcycle as well as a line of motorcycle parts, accessories and general merchandise, motorcycle insurance and motorcycle maintenance contracts. The company was founded in 1903.

Harley has had a long and tortured career. Motorcycles are very cyclical. When economic times are tough the sales decline sharply. When times are good and the country is at full employment the sales rise sharply.

The problem is the price. The cost of motorcycles has rocketed higher over the last decade and bikes can cost $20,000 to $40,000. That is a lot of money for the blue collar worker that would be their biggest market if money was not a factor. Middle income families are just that, families and living expenses are high. With wages falling for the last 7 years it has caused a problem for sales of high-ticket items. High income jobs like those in the oil patch that allow for excess extra income have taken a serious hit with a loss of 192,000 jobs over the last two years. The U.S. accounted for 89% of global demand for Harley Davidson bikes.

In their last earnings report sales in the U.S. were declining and margins were shrinking. They suffered from the strong dollar impacting overseas sales, unfavorable product mix, meaning only the lower priced bikes were selling and increased manufacturing costs. Touring bikes, the high dollar bikes with the highest margins saw sales decline -0.8% while lower cost cruisers rose 15.1% and Sportster/street bikes rose +1.2%. Free cash flow is shrinking. Average revenue growth over the last 3 years has been 2.4% compared to 8.7% at competitors.

Debt is rising as they build new manufacturing plants and increasing competition from cheaper competitors is hurting sales.

Earnings July 19th.

Competitor Polaris (PII) has eaten into Harley sales with their new line of Indian motorcycles. They bought the iconic brand in 2011 and began introducing bikes to compete with Harley and sales are booming.

Analysts warned last month the shrinking cash flow and rising debt levels put the 2.9% dividend yield in danger. Shares have declined from $49.50 when they reported earnings to $45.60 today.

I am recommending a short term June $45 put. That gives us about three weeks to profit as the market weakens from now into early June. The next available strike is August and at $3, I would rather play with the short term June position.

Position 5/12/16:

Long June $45 put @ $1.50, initial stop loss $47.50.

SPY - S&P 500 ETF - ETF Description


No material movement but the negative trend is still alive.

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


Big drop after the long time CEO, David Aldrich, said he was being replaced by Liam Griffin. Aldrich has been CEO since 2000. The sudden change in leadership suggested there may be problems brewing at the chip maker.

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.

Position 5/10/16 with a SWKS trade at $64.15

Long June $62.50 put @ $2.00, see portfolio graphic for stop loss.

TWTR - Twitter - Company Description


Twitter fell -51 cents and moved ever closer to $14. No specific news. 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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