Option Investor

Daily Newsletter, Saturday, 5/14/2016

Table of Contents

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

Market Wrap

Time for the Real Support Test

by Jim Brown

Click here to email Jim Brown

The Dow closed at an 8-week low and the S&P closed only 6 points above critical support. There will be a test and I expect a failing grade.

Market Statistics

Friday Statistics

There was no apparent reason for the Friday decline other than economics came in better than expected and expectations rose for a Fed rate hike in June. Add in the destruction in the retail sector and investor sentiment took a serious hit. The retail ETF (XRT) has collapsed -11% in just over a week and we still have some major retail earnings next week. Somebody please kick me for not shorting it last week after Macy's warned their earnings would be weak.

On the economic front, we got a big surprise from the April Retail Sales report. April sales rose +1.3% after a -0.3% decline in March and twice what analysts were expecting. At 1.3% that is about 500% more than I was expecting. On a week when every major retailer is reporting sharp declines in same store sales of 2% to 5%, the economic report shows a 1.3% gain. Obviously, there is a catch.

The sales of autos rose 3.2% and gasoline rose 2.2%. Those categories supplied all the lift necessary to post an unexpectedly high number. Back in the real world sporting goods rose +0.2%, food service and bars +0.3%, general merchandising was flat, electronics and appliances +0.5% and home furnishings +0.7%. Building materials declined -1.0% to be the only drop.

I do not think we should be too excited by a 2.2% rise in gasoline sales since that is totally related to the higher prices at the pump. Also, the +3.2% spike in auto sales only offset the -3.2% decline in sales in March. If you average the two months you get zero. If you average the last five months you get -0.06%.

The euphoria over the stronger than expected retail sales was very misplaced especially when analysts were saying it put the Fed back into the picture for a June rate hike.

Also blamed for stimulating Fed worries was the +0.2% increase in producer prices. That was the biggest gain since last June but less than estimates for a +0.3% rise. This was only the second rise this year. The core rate excluding food and energy rose +0.3% and stronger than the +0.1% gain in each of the last four months. Some of the gains could be from the decline in the dollar over the last month. A cheaper dollar means commodity goods cost more.

There is still nothing for the Fed to get excited about. For the trailing 12 months the PPI is only up +0.1%, goods are down -1.9%, core goods +0.5% and services up +1.1%. That is hardly rampant inflation and the pace of the rise is miniscule.

Moody's Chart

The biggest surprise for the day was the nearly 7-point spike in Consumer Sentiment from 89.0 to 95.8 for May. That is the highest level since last June. The present conditions component rose from 106.7 to 108.6 but the expectations component rose from 77.6 to 87.5, a whopping 10 points. This was the first gain in the expectations component since November. Sentiment had been declining for the prior four months and this was a stunning rebound. There is a very good chance that we will see these numbers fade when the final report comes out at the end of June. You have to wonder if Trump becoming the presumptive republican nominee had anything to do with this spike. Blue collar workers taking this survey may have been feeling elated about the event. In an exit poll survey after the Indiana primary only 19% of college educated voters were for Trump but 83% of non-college educated voters did vote for him.

We have a busy calendar for next week and a several important events. The three housing reports will be closely watched for a rebound now that we are in the spring selling season. The Consumer Price Index is expected to show a big spike in inflation and that could aggravate expectations for the June Fed meeting. The Philly Fed Manufacturing Survey is the most important regional survey for the month and analysts are expecting a major improvement from 1.6 to 6.5 and that could also be Fed negative.

The FOMC minutes of the April meeting will be dissected for clues about a possible June rate hike.

This is also an option expiration week and volatility could be increased but I do not know how it could be worse than last week.

The destruction in the retail sector has called into question the health of the economy. The yield on the ten-year treasury declined to 1.7% at the close and very near a three-month low. This pressured the banking sector and Goldman Sachs (GS) was the biggest loser on the Dow.

Despite the apparent weakness in the economy, the expectations for a possible rate hike have pushed the dollar back up to 94.50 on the dollar index. This has weighed on commodities like oil and gold and on equities. The 15-month low the prior week has been erased and the return of a stronger dollar will depress Q2 earnings and raise prices for manufacturers. The celebration over the falling dollar was premature.

Apple (AAPL) broke below support at $92.50 on Thursday but held at $90. On Friday, Apple announced a $1 billion investment in Didi Chuxing which translates in English to Honk Honk, Commute. This is the Uber of China. They operate in 400+ cities, control 99% of taxi hailing in China and 87% of private car hailing. They also offer bus and chauffer booking services. They provide more than 11 million rides a day with 11 million registered drivers. The Didi Hitch service allows you to hail a designated driver that takes you and your car home if you had too much to drink. Uber only operates in 50 cities in China and does about one million rides a day. Didi recently paid $100 million to join the Lyft coalition so riders can use each other's networks when out of their home country.

Didi has a market cap of $20 billion, up from $6 billion a year ago. They have $3 billion in cash. So why is Apple making this investment? This is about appeasing the Chinese government more than investing for a future return. The Chinese government recently closed down the iTunes and iMovie services in China in order to reduce western influences. iPhone sales declined -11% in Q1 in China.

Apple needs to make friends with the government and they can do that by investing in Chinese businesses. Apple can also use its investment to learn how the ride share business works in China and possibly serve as a stepping stone when they eventually produce the iCar. Apple will also learn more about the buying and traveling habits of Chinese consumers.

Freeport McMoRan (FCX) cancelled leases on two drilling rigs owned by Noble Corp (NE) and agreed to pay Noble a $600 million termination fee. The cancelled leases covered the Noble Tom Madden and Noble Sam Croft, both ultra-deepwater rigs in the Gulf of Mexico. They were on 3-year contracts that expired in July and November 2017 and had $800 million in remaining payment obligations.

What is unusual about this cancellation penalty is that Freeport can pay using cash, Noble bonds and Freeport stock. Freeport can use stock up to 9.9% of its outstanding shares of stock. They can also pay with up to $200 million in Noble bonds due no later than December 19th, 2019. Apparently, Freeport believes they can buy Noble debt in the open market at less than face value and then tender it to Noble at face value.

Freeport also agreed to pay up to $75 million in contingent payments, depending on the price of oil over the next 12 months. Freeport cancelled the leases because current oil prices do not support deepwater drilling. If oil suddenly shot up to $75 a barrel then Freeport would owe Noble some additional money.

Freeport is saving about $200 million in cancelling the leases but they only had $224 million in cash at the end of Q1. That suggests they will have to issue stock to complete the payment. Shares fell -6% on news of the deal and Freeport's market cap sank by about $500 million on the drop. Sometimes you just cannot win.

Alibaba (BABA) was suspended from the International AntiCounterfeiting Coalition (IACC) only one month after it joined. This is a global nonprofit organization that fights counterfeit products and piracy. Alibaba has long been a site where just about any form of counterfeit product is available for sale. Alibaba says it has been working to reduce the number of counterfeit products (wink, wink) but other members of the IACC said it was not doing enough. The IACC includes companies like Nike, Apple, Rolex, etc. The IACC board also discovered a conflict of interest where the IACC president, Bob Barchiesi, owned Alibaba stock and had close ties to a company executive that used family members to help run the coalition. The board said they were not told about "certain aspects" of his conflict of interest. IACC had created a special category of membership just so Alibaba could join. That category is now on hold.

On a positive note, Alibaba teamed up with Japan's SoftBank to launch a cloud computing enterprise in Japan. The company will be called SB Cloud.

Herbalife (HLF) told investors in its earnings release that is was close to a settlement with the FTC over its marketing efforts. The company said it could be fined or sued but it expected a positive outcome. On Friday the National Consumers League (NCL) sent a letter to the FTC demanding "meaningful reforms and significant consumer redress" in any Herbalife settlement. The letter asked the FTC to insure that any injunctive relief addressed "persistent structural concerns." The NCL said "the threat of pyramid scheme behavior in the MLM industry is significant and persistent." Shares declined slightly on the news.

Allergan (AGN) was added to Goldman's conviction buy list with a $275 price target only a couple weeks after Pfizer ended their acquisition attempt. Goldman said Allergan had a "best in class" drug pipeline with 70+ unique drugs, an improving business model based on branded-growth pharma and a double digit revenue growth forecast based on volume-driving durable assets. They are going to deleverage their balance sheet when the sale of assets to Teva is completed for $40 billion and they authorized a $10 billion share repurchase.

Activision Blizzard (ATVI) and Electronic Arts (EA) are still gaining after strong earnings from both companies. However, NPD reported that video game hardware sales were down -23% in April and game software was down -21%. However, Activision just announced it had more than 9.7 million players testing its new game Overwatch, which is currently in beta. This is their biggest open beta debut ever. The game goes from beta to sales on May 24th and anyone wishing to continue playing will have to pay.

Activision also announced they were launching a new live-streaming video game platform in conjunction with Facebook. Activision acquired MLG.tv earlier this year. Viewers can watch live streams of other people playing games in real time. Viewers can learn the tricks and tips from watching and that improves their own game experiences. Amazon has a live stream gaming portal in Twitch.com and Google is trying to break into the space with YouTube Gaming.

Activision is going to be the winner in the gaming space with more than 500 million active gamers currently playing its games.

Sanofi (SNY) is planning on nominating 8 people to replace the entire Medivation (MDVN) board. Sanofi has been trying for months to buy MDVN for $52.50 a share but MDVN is not interested. They have held talks with Novartis, Amgen and Pfizer in an effort to find a better partner than Sanofi. Shares have rallied to $62 on expectations that somebody other than Sanofi will end up with a deal. Do not bother looking at the options because the premiums do not make sense.

Warren Buffett emerged as a potential bidder for Yahoo. Berkshire Hathaway is backing a consortium that is bidding the company's internet assets. The founder of Quicken Loans, Dan Gilbert, is part of the consortium. This group has apparently made it into the second round of bidding. Buffett's backing is a surprise since he is definitely not a tech person. It is also rare for Buffett to be bidding on a company where he cannot leave management in place. He is always a fan of companies with great management that can continue to operate without his involvement. Also, he never buys declining businesses. Former Yahoo president Sue Becker is on Buffett's board.

Verizon is still expected to emerge the winner because they have deep pockets and they own AOL. They could easily integrate Yahoo into their Internet portfolio. Other bidders still in the running include private equity firms TPG Capital, KKR and Bain Capital has partnered with Vista Equity Partners. YP Holdings is also a bidder.

The U.S. House of Representatives has blocked access to Yahoo Mail because of an increasing number of ransom ware attacks being spread through spam emails through Yahoo. Two individuals in the House fell victim to the attacks and had their files encrypted and held for ransom.

Reportedly, the bids are in the $4-$8 billion range. Yahoo currently has a $35 billion market cap but that includes $29 billion for its 15% stake in Alibaba and $8 billion for its stake in Yahoo Japan. The core Yahoo business is currently valued at less than zero because of the difficulty in splitting the various assets apart and the tax ramifications. I looked at several option combinations on Yahoo to capitalize on the rise or fall after the bidding process is completed. I passed because the prices do not make sense. In theory, any bid for Yahoo should make the stock rise but there is always the danger of a "take under" where the price is unexpectedly low because of factors unknown in the press. We do not know what skeletons they are hiding. For instance, they just lost a 15-year deal with AT&T that was producing $100 million a year in revenue. Are there more problems like that still being hidden?

In earnings news, JC Penny (JCP) reported a loss of 32 cents that was smaller than the 38 cents analysts expected. Revenue of $2.81 billion missed estimates for $2.92 billion. However, given all the retail results over the last week JCP came in at the top of the class. Penny still expects same store sales to rise 3-4% for the year. Penny reported only a 0.4% same store sales decline in Q1. The company said it was reducing its reliance on sales of apparel and moving more into appliances and other types of products. "We looked at our categories, and we look at what customers are spending." They are spending on entertainment, experiences and home beautification.

Penny got out of appliances some 30 years ago. Now they are putting appliances back into 500 of their stores. The CEO said one-third of our appliance customers are new customers and the average sale is $1,200. The company said they are also expanding its Sephora beauty shops and updating its salons now branded Salon by InStyle.

It is very strange that the company given up for dead over the last two years is now rebounding with an entirely new game plan that is beating companies like Macy's, Nordstrom's and Kohl's.

Nvidia (NVDA) reported earnings of 46 cents that beat estimates for 31 cents. Revenue of $1.31 billion also beat estimates for $1.27 billion. Nvidia is the leader in the high-end graphics processor market and they just keep getting better. I wrote several times last year that Nvidia was going to continue to exceed estimates because their technology is so far ahead of the rest of the pack. I said if you could only buy one chip stock this is it.

I had several readers email me back in January asking if I still liked the stock after it took an $8 drop in January along with the rest of the market. I told them to keep the faith, it will recover. Shares have nearly doubled since that January low.

Revenue from its GeForce graphics cards for PCs rose 17% to $687 million in Q1. Revenue from its datacenter business that includes Tesla processors, rose 62.5% to $143 million. They raised guidance and said they would return $1 billion to shareholders through dividends and buybacks.

Their newest high end gaming graphics card, the GeForce GTX 1080, has 8 GB of GDDR5X memory with 10 Gbps memory speed, 320 Gbps bandwidth, 2,560 CUDA cores, 1,733 Mhz cpu speed and supports monitor resolution of 7680x4320. I have been in computers since the mid 1960s and that much power in one card is beyond my comprehension. Nvidia said current high intensity graphics games will run 3 to 5 times faster with this card with significantly enhanced graphics.

Shares spiked 15% on the earnings and any pullback to $35 would be a definite buying opportunity.

Earnings are really slowing down next week. The large retailers Home Depot, Lowes, Walmart and Target will report. There will still be a few apparel chains reporting including L Brands, Stage Stores, The Gap and Ross Stores. Foot Locker closes the retail week on Friday.

The biggest tech stock to report is Cisco after the close on Wednesday.

After this week, there will only be a trickle of earnings reports until the Q2 cycle starts in July.

Crude oil rose to a six-month high at $47 on Thursday after U.S. inventories declined -3.4 million barrels for the prior week. This was due to the one million barrel production outage from Canada that flows into the U.S. pipeline system. It was also due to higher refinery demand as they ramp up for the summer driving season. Gasoline demand rose to 9.658 million bpd last week. That is the highest level since August 7th, 2015. We should continue to see inventory declines for the rest of the summer.

U.S. oil production declined another 23,000 bpd to 8.802 million bpd. That is down 808,000 bpd from the June 5th peak last year.

Active rigs declined -9 to a new record low at 406. That is down a whopping 1,565 rigs or -80% from the peak of 1,931 in early 2015. Offshore rigs fell -2 to a new multiyear low at 22. Gas rigs rose +1 to 87 and have been relatively stable in the upper 80s for several months now.

I reported last weekend that outflows from equity funds exceeded $16.9 billion the prior week and the most since the market crash last August. Bank of American said the outflows continued this week with $7.4 billion leaving equity funds. That brings the five-week total to $44 billion and the most since August 2011. This is also the 14th consecutive week of outflows and the longest run since February 2008. Money market funds saw inflows of $10.9 billion and the most in 13 weeks. Investment grade bond funds saw inflows of $3.2 billion.


The major indexes are teetering on the brink of a potential collapse. The sell in May cycle coupled with all the other negative headlines has pushed them back from their effort to make new highs on April 20th to making lower lows on Friday May 13th. There were no black cats or broken mirrors but simply a large outflow of cash for too many consecutive weeks.

Friday was more a lack of buyers than an abundance of sellers. Volume has been weak for the last seven sessions and Friday was no exception with 6.6 billion shares. Decliners were exactly 2:1 over advancers.

The earnings cycle is drawing to a close and the summer doldrums are rapidly approaching. Family vacations are being planned and schools begin their summer holidays in two weeks.

With the Fed lurking in the background, the UK Brexit vote in four weeks and weekly downgrades to the global economic outlook there is little reason to buy equities today.

Q2 earnings are not expected to be much better than the -7.1% we saw for Q1 and the rising dollar is going to continue depressing results. We should be buying trough earnings with a 6-9 month time horizon but in an election year, that involves a lot more risk. I think everyone would agree the current set of candidates are producing an abnormal risk environment with every sentence they speak.

Institutional investors are seeing the next several months as a risk off environment until the smoke clears and we have a better idea of what to expect in November and beyond.

While I do not believe the markets are going to go straight down in the months ahead, I do believe the bias will be negative and the market action choppy. The last two weeks have proven that point.

The S&P is poised to break below critical support at 2,040 and where that decline will stop is anybody's guess. Additional support levels are 2020, 1990, 1975 and then back to the August lows at 1867. I am not predicting any specific level but once below 2,040 the market sentiment could change dramatically.

The S&P closed under the 50-day average (2,054) on Friday for the first time since February 26th. The 200-day average at 2,012 could also be support but the S&P has not been reactive to that average since last August.

The Dow closed at an 8-week low at 17,535 and just over critical support at 17,500. A breakdown there would test light support at 17,500 and then decent support at 17,135. The Dow sprinted higher so fast in March there are few support levels that could slow any decline.

The decline on Friday saw nearly half the Dow components lose more than $1 and only three closed positive. Apple was the biggest gainer at +19 cents after dragging the index lower in prior sessions.

I am hoping we avoid a decline like the one we saw in January once support at 17,135 broke. The final resistance failure at 17,750 created two weeks of cascade selling that knocked 2,300 points off the Dow in only 13 sessions. The current resistance failure at 17,925 looks ominous since we have lost about 400 points in just three days. A break below 17,500 could see that selling accelerate.

The Nasdaq was buoyed again by the biotech sector. The $BTK gained +1% on Friday despite a sharp drop in the big cap indexes. The Nasdaq decline was limited to -19 points. Note the majority of the stock on the gainers list are biotechs.

The Nasdaq has been leaving tracks all over support at 4,750 but it does not seem to stick. The Friday close at 4,717 was not yet a lower low like the one we saw on the Dow. We would need to see a break under 4,685 for that to happen. However, that resistance failure at 4,800 was a lower high.

While the Nasdaq lagged in relative performance to the upside over the last couple of months, it is also lagging to the downside. The Dow is now the market leader in this decline.

Support on the Nasdaq is 4,600 then 4,500 and then a long drop to 4,200. Resistance remains 4,800.

The biotech index appears destined to retest that 2,750 support level. This sector is either feast or famine with alternating days of big declines and gains. It should remain under pressure as long as the presidential candidates continue to pick on the drug sector.

The Russell 2000 closed right on support at 1,100 and should easily test 1,090 on the next decline. The Russell was also helped by the biotechs and gave back only 6 points on Friday. Any continued decline should test strong support at 1,065.

I said last week, "In theory, this is a negative week on the market calendar as the sell in May followers accelerate their exits."

It was the third consecutive week of declines and this streak could easily turn into 4 or 5 weeks unless we get another monster short squeeze that is not erased because of a lack of market participants. Traders will be cleaning up their positions ahead of option expiration next Friday and probably not adding too many new positions ahead of the Memorial Day weekend the following week. After Friday's expiration, the volume is going to decline even further as summer begins with the holiday weekend.

Watch S&P 2,040 for market direction.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Random Thoughts

Donald Trump is declaring war on Jeff Bezos and Amazon. Trump said Amazon had a huge antitrust problem because they control so many markets and are running small entrepreneurs out of business. While Amazon is big and does have its fingers in a lot of pies, the real problem is political.

Jeff Bezos owns the Washington Post personally. Trump called the Post, "Jeff Bezos toy." He said Bezos is using the Post for power over Washington so politicians will not tax Amazon the way it should be taxed and break up the monopoly portions.

While that may sound presidential in some circles, that is still not the problem. The problem is that the Post has put 20 reporters on researching Trump and calling him out on a large number of his past sins and outrageous statements.

Trump is hitting back at Bezos by threatening antitrust actions because of the negative articles written by the Post. Analysts claim Bezos should not take Trump's threats lightly because he has been known to carry grudges for a long time and could actually cause Amazon a lot of trouble if he was actually elected.

The U.S. is moving to activate a ballistic missile defense shield in Europe to defend against missiles from Iran. The former Soviet-era base in Romania is the first point in the shield that will eventually stretch from Greenland to the Azores.

Russia's President Putin came close to declaring war in comments he made after the announcement from the U.S. and NATO. He said Russia will act to neutralize the U.S. missile shield threat. He said the missile defense base activated in Europe was the first step in a new arms race and he vowed to adjust budget spending to neutralize it.

Putin claims the missile system was aimed at blunting Russia's nuclear arsenal. "This is not a defense system. This is part of the U.S. nuclear strategic potential brought onto a periphery. In this case Eastern Europe is such periphery. We are now forced to think how to neutralize emerging threats to the Russian Federation." This is "yet another step to rock international security and start a new arms race."

Of course, it is Russia that violates other countries airspace with fighters and bombers on a weekly basis and runs mock attack drills against American ships in the Black Sea.

Venezuela is moving closer to total collapse. The last beer producer went out of business two weeks ago because they could no longer buy supplies without dollars and the government has run out of money. They have actually run out of money needed to print more money. Last week mobs of more than 5,000 ransacked food stores and warehouses looking for something to eat. Children are dying for lack of medicine and food. Mobs are roaming the streets looking for anything they can steal and trade for food and supplies.

Government food dispensaries were overrun and looted by the mobs while government troops stood by and watch because they were so outnumbered. One reporter said there were 250 rioters for every policeman.

The stores were already empty with people waiting in lines for hours just to get a loaf of bread or a can of food. Now they are really empty with nothing left and no chance of being restocked with the government out of money. In March, food prices rose 582.9% and that was if you could actually find something to buy.

People have resorted to hunting pigeons, cats and dogs for food to feed their families. Livestock like horses, cows, goats, pigs and chickens have long since been stolen from farmers and killed for food. Citizens are now trying to flee to neighboring countries in hopes of finding food and shelter. With millions walking to the borders, this will cause the same type of rioting in neighboring countries when they cannot feed the masses.

There are rumors of an impending coup against President Maduro. The state security personnel have been disarmed to prevent them from turning on the government. The National Guard is said to be waiting for the entire situation to reach a boiling point and the population marches on the government before joining them to overthrow Maduro and his socialist policies.

Goldman Sachs strategist David Kostin warned last week of a coming crash. He said 35 out of 53 tech stocks saw their profit margins decline while valuations were near record highs. "It is time to play defense in a tough market." He currently has a yearend target of 2,100 on the S&P but he said "with 80% of fund managers underperforming their benchmark, the probability of irrational capital allocations increases, and as a result there is a reasonably high probability of a large drop in the S&P-500 this summer."

Also, "unbalanced distribution of upside/downside risks suggests 'sell in May' or buy protection. A shift in investor perception of various risks could easily trigger a sell off."

Officially, Goldman's risks include "elevated valuation, investor positioning, money flow trends, uncertain interest rate policy, weak economic growth, and election year politics. A 5%-10% drawdown in S&P 500 during the next few months implies an index level of 1850 to 1950 and a forward P/E of 15x-16x based on bottom-up consensus EPS." Full article

Dirty bombs? The State of Texas has begun issuing its game wardens radiation detectors. Since game wardens travel in remote areas and encounter many strange situations, they are potentially likely to come into contact with people that are intent on sowing destruction in America. There have been many stories about the potential for ISIS or Al-Qaeda to smuggle in radioactive material over the Mexican border for use in a dirty bomb in some densely populated city.

The devices issued to the game wardens are about the size of a cell phone and will be worn on their duty belts and will emit sounds if the warden approaches something that is radioactive. Multiple thefts of radioactive substances have been reported in Mexico in recent years. Why transport it from overseas if you can steal it in Mexico? We should be worried, very worried.

The Texas Parks & Wildlife division now has its own SWAT teams complete with camo painted assault rifles and night vision goggles.

Wendy's has announced they are going to install self-service kiosks at 6,000 locations because of the hikes in the minimum wage. McDonalds is expected to follow suit but at a slightly slower pace. All 258 Wendy's stores in California, where the wage is rising to $15 an hour will be installing the kiosks. Carls Jr is also installing the self-service kiosks because "the government is making it difficult to afford employees." Does it help to boost workers wages to $15 an hour if it costs them their jobs?

The Eatsa fast food chain now has a zero human interaction ordering process. The customer orders on an iPad and when the food is ready it is placed into a cubicle that looks like a microwave and the customer's name pops up on the screen associated with the order. Customers never see a human employee. It is considered the first fully automated restaurant. Full Story


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The short memories of the American voters is what keeps our politicians in office."

Will Rogers


Index Wrap

Critical Support Test, Again

by Jim Brown

Click here to email Jim Brown

Last weekend the S&P was testing support at 2,040 and I called it a critical support test. Over the last five days, the S&P rallied to 2,084 and then fell back to close at 2,046 and right back at critical support once again.

The index failed exactly where it should have failed at the convergence of downtrend and horizontal resistance at 2,085. The return to the support at 2,040 for the fourth time is not a good sign. We have a series of lower highs and lower lows and to complete the scenario the S&P should break below 2,040 to another lower low. Only this time a failure of that support level should lead to significantly lower lows.

The next material support is 2,000, which is also psychological support, followed by 1,975. Below that level, we enter into a congestion range from about 1850-1950 and no clearly defined support point.

The support at 2,040 is so clearly defined that a breakdown should attract a lot of technical selling. There are plenty of bulls holding positions with their fingers crossed that 2,040 holds and a break there should cause them to hit the sell button.

One obstacle to a continued rally is the dollar. Last week the decline in the dollar to a 15-month low reversed and that is negative for the S&P. It is also negative for commodities like oil but the global supply outages and the first major decline in inventories for the summer demand season helped to lift oil prices despite the spike in the dollar. If the dollar rolls over as it did on the last four rebounds this year and then finds a lower low that would be market positive and could overcome the normal selling into the summer doldrums.

The Dow closed at an 8-week low and exactly on critical support just like the S&P. If the Dow drops below the 17,500 mark it may find some weak support at 17,400 but I doubt it will hold. A break of support targets 16,820 but I am going to round it to 16,800. That could be a fairly straightforward decline because there is no material support in its path until that level.

The next stop if the decline continues could be 16,500 and then 16,000 and 15,500. Those levels are easy to spot. The key here is the initial support break. That should poison sentiment and the decline could accelerate quickly.

The Dow Jones Composite Index tracks all the stocks in the Dow Industrials, Dow Transports and Dow Utilities. There are 65 stocks in all and it is thought to be more representative of the broader market than just the Dow industrials. The composite index has already broken the corresponding support at 6,160 and could begin to free fall at any time. The utility stocks have been holding it up as investors hunt for dividend yield in a troubled market.

The Dow Transports have already broken strong support at 7,600 and closed at weak support at 7,500 on Friday. With oil rising and the U.S. economy still weak, the transports are suggesting the Dow will break down and return to the lows. A move under 7,500 could produce some cascade selling on the transports.

The Nasdaq closed on short term support at 4,700 and given the weakness in the big cap techs a breakdown here is almost guaranteed. With Netflix, Apple and all the Apple suppliers crashing, the index is weak. Only the rebound in the biotech sector on Friday saved the Nasdaq from posting a new 8-week low.

The Biotech Index chart may not look like a rebound but it did gain more than 1% on Friday. On Tuesday there was a 3% gain. These rebounds supported the Nasdaq and kept it from setting a new low but it is not likely to last. The $BTK is headed for support at 2,750-2,800 and possibly 2,600 if the candidates continue to bash the drugs companies.

The Russell 2000 was also supported by the biotech rebound but it still declined to near term support at 1,100. The next level is 1,095 and should provide a speed bump in the downward slide. Critical support is 1,065 and the last stop before a drop to 1,000 or even 950.

The Russell 3000, the largest 3,000 stocks in the market, found critical support at 1,200 but the odds are good it is going to fail. The next material level to test is 1,160. This is a broad market index and it represents the actual health of the market rather than a small sector like industrials, financials or tech stocks. This index is threatening to collapse just like the smaller indexes.

The percentage of S&P stocks over their 50-day average declined from 63% the prior week to 51.8% on Friday. The percentage is dropping rapidly because a large number of S&P stocks are in steep decline. Only the big cap discretionary and biotech stocks are keeping this decline from being worse.

The McClellan Oscillator on the NYSE closed at a three month low on Friday. This is an indicator of overbought/oversold and it is nearing the levels we saw during the market correction in January. While we are not there yet we should be able to tell when it is time to reverse from bearish positions when the $NYMO reaches -80 or worse.

The energy sector appears to be stalling out despite the high oil prices. The rebound has run too far too fast and now that we have reached the summer demand season the crummy earnings have weakened the outlook and stocks are no longer rising for more than a couple days a week. The XLE has strong resistance at $70 and we have not yet reached that level. The energy stocks may not be market supportive unless there is another sudden and unexpected spike in crude to more than $50.

The short-term view is bearish. Once we get into June and the summer doldrums take hold the current market weakness could fade and just turn into choppy trading for the summer as we wait on OPEC, the Fed and the political conventions in late July.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


subscribe now

New Option Plays

Chipping Away at the Leader

by Jim Brown

Click here to email Jim Brown

Editors Note:

Being a leader in drug creation means you have to constantly come up with new drugs because competitors are going to be copying your winners and chipping away at your market share. Gilead was the undisputed leader in Hep-C treatments for about two years but the competitors have arrived.


No New Bullish Plays


GILD - Gilead Sciences - Company Description

Gilead is a research based biopharmaceutical company that discovers, develope and commercializes medicines in areas of unmet needs. They have numerous well known drugs for treatment of HIV and various cancers but their most recent winners have been for treatment of Hep-C.

The first Hep-C drug was Sovaldi and that one was revised and reformulated in conjunction with another drug and the result was the blockbuster drug Harvoni. When taken in an 8 to 12 week regimen it cures Hep-C in 98% of patients. Otherwise they would be facing liver transplants or death. It does not just end the symptoms but it cures the disease. The downside is that it costs $96,000 for the 12 week treatment.

Last year Gilead lost a patent dispute with Merck and now that company has a competitive drug that they are discounting well under the cost of Harvoni. In the Q1 earnings Harvoni sales declined 16% from $3.58 billion to $3.02 billion. Sales in the U.S. declined more than 50% from $3.02 billion to $1.41 billion. Sales in Japan were expected to offset some of that decline but failed.

The problem is the drug Zepatier from Merck. This competitor is being priced "aggressively" in order to take market share from Gilead.

Gilead is a great company but they made a mistake on the patent and that allowed Merck to enter the market. Gilead bought back $8 billion in shares in Q1 and that helped boost the stock price to $102 ahead of earnings. They still have $21 billion in cash but stock purchases have slowed as they look for an acquisition to give them a larger drug pipeline. The board did approve another $12 billion buyback but they are not likely to be aggressive in light of the rapid decline in sales.

In order to combat the Merck drug, Gilead is being forced to significantly discount Harvoni and that means cash flow and margins will continue shrinking. They also issued guidance that was lighter than analysts expected as a result of the price cuts.

Earnings July 26th.

Shares have declined to $82, which is support from the low in January. While they have fallen significantly, I believe they will continue to decline and make a new low. The current political environment is strongly against high priced drugs and politicians will continue to try and outdo each other with headlines as the election heats up. This should weigh on the entire sector.

Initial support is $80 but given the growing negatives, it could retest support at $63.

With a GILD trade at $81.65, which would be a new 52-week low:

Buy July $80 put, currently $2.66, initial stop loss $86.75

In Play Updates and Reviews

Not a Good Sign

by Jim Brown

Click here to email Jim Brown

Editors Note:

When the markets close on the lows on a Friday that is a negative signal for the following week. Sometimes we get a strong rebound on Monday but closing at the lows is very bad for market sentiment. Normally shorts like to cover before the weekend just in case there are some headlines that cause the market to gap up on Monday. There was no short covering on Friday. Nobody was afraid to go into the weekend short.

The Friday decline was more than likely the bulls bailing on the longs they accumulated on the Tuesday short squeeze. With the market declining from that Tuesday high there was no reason for investors to continue holding those losses.

The shorts are looking at the approaching support on the S&P at 2,040 and thinking next week will be the week that it breaks. The Dow closed exactly at the March 28th closing low, which was 8 weeks ago. That is terrible for market sentiment with two weeks left in the Sell in May cycle.

We now have a lower high and a lower low for the Dow and it closed just above critical support at 17,500.

We received a gift on the CP put with a -$3.59 drop on no specific news. The headlines out of Canada suggest it will be weeks if not months before the infrastructure is repaired. That will be detrimental to CP earnings.

FSLR and SWKS both made new lows for this cycle and out puts appreciated. The declines on the long calls were minimal. ACN was the biggest drop at -92 cents after a new high on Wednesday.

I lowered the stop losses on the puts but I am trying not to get too close where we are knocked out by volatility rather than an actual rebound.

Current Portfolio

Current Position Changes

ABC - AmerisourceBergen

The long put position was opened at $74.71.

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 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. Only a minor decline in a weak market. Gave back only about 30% of Thursday's gain.

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)

ABC - AmerisourceBergen - Company Description


No specific news. Shares dropped $1.12 as we entered the position.

Original Trade Description: May 12th.

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.

Position 5/13/16:

Long June $75 put @ $2.60, see portfolio graphic for stop loss.

CAVM - Cavium Ind - Company Description


No specific news. Barclays cut the price target from $75 to $65 and left the rating at overweight. Shares dipped to a new low at the open but rebounded to close fractionally positive.

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


Huge $3.59 drop on no specific news. Wildfires still burning but have slowed due to weather. 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


No specific news but plenty of articles negative on the outlook for solar. New 7 month low.

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. Another opening spike was quickly sold. Third day to close on the lows.

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


Nearly 2 point drop and closing in on critical support at $204 (S&P 2,040). A break below that level could see some cascade selling.

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


Another decent decline on no news. The negativity from the CEO replacement story on Thursday could last for several days.

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 was flat for the day. No specific news. I believe we will see it break below $14. When that happens we could see a quick decline since that has been strong support.

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.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now