Option Investor

Daily Newsletter, Monday, 5/16/2016

Table of Contents

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

Market Wrap

Buffet, Oil Spark Rebound

by Thomas Hughes

Click here to email Thomas Hughes


The market rebound today following news Warren Buffet bought a $1 billion stake in Apple, rising oil prices helped too. The new stake, about 10 million shares, was purchased during the first quarter and is already showing a near $200 million loss, helped restore confidence in the tech giant which gained over 4% in today's session. Aiding the bounce was bullishness in the oil pits, renewed by output disruptions in Nigeria and a slightly bullish tone from Goldman Sachs concerning the ongoing supply/demand imbalance.

Global indices did not take part in today's rally. Asian indices closed higher but gains were not strong. Weak data from China increased hopes for QE but also raised the specter of continued slowing of the economy. European indices were much the same. The German DAX was closed for Whit Monday but other indices in the region were not, closing mixed in a low-volume session.

Market Statistics

Futures trading was mixed in the early part of the electronic session, first slightly up, the slightly down as economic data and surging oil prices vied for dominance. Going into the opening bell the indices were indicated to open flat, and did, but proceeded to march higher for just about the remainder of the day. Intraday high was hit just after 3PM, at which time gains were trimmed. Despite the late day pull back the indices were able to close near the high of the day, more than 1% higher than Friday's close.

Economic Calendar

The Economy

First on the economic calendar today was Empire Manufacturing, released at 8:30AM. The survey came in at -9.0, -19 points lower than last months reading of +9.6, and well below forecast of 7.5. Within the report New Orders fell into negative territory, -5.5, as did Shipments and Inventories, -7.3, while prices paid edged marginally higher. Prices received also fell. On the employment front the Employment Index remained unchanged but hours work fell to -9.3. The forward looking Future index remains in positive territory but fell as well.

The NAHB Housing Market Index was released at 10AM. The index shows home builder confidence held steady at 58 for the 4th month running. Within the report sales are unchanged at 63, future expectation rose 3 to 65 and traffic remains unchanged. On a region by region basis confidence fell by -5 in the Northeast, rose by 3 in the Midwest, rose by 2 in the South and was unchanged in the West.

Moody's Survey of Business Confidence mad a surprise drop this week, down -2.7 to 30.6 and the lowest level since March 21st. Mr. Zandi makes note of this week's drop but says it is too early to make much of it. This is true but no less concerning as sentiment has weakened considerably from last year and has yet to stage a significant comeback. According to the data confidence varies greatly worldwide and is the strongest in the US, weakest in South American due to ongoing political upheaval in Brazil and Venezuela. Sentiment in the EU deteriorated somewhat over the last week, possibly due to the upcoming British referendum on EU membership.

According to FactSet 91% of the S&P 500 has reported earnings so far this season. The blended rate for earnings growth is now -7.1%, unchanged from last week, better than the -8.7% predicted as the season began but still the worst quarter of growth since the earnings recession began. Of those who've reported 71% have beaten EPS projections, above average, while only 53% have beaten revenue projections, below average. Of the 10 sectors tracked, 7 have beaten expectations led by Consumer Discretionary.

Looking forward earnings projections for the rest year held steady from last week but projections for 2017 fell by a tenth. The 2nd quarter is still expected to show negative growth, about -4.6%, with growth returning in the 3rd quarter, about 1.4%. Growth is expected to improve going into the 4th quarter, about 7.5%, and into the following year. Full year 2016 growth projection now stands at 0.9%, flat from last week, with growth in 2017 expanding to 13.5%, down a tenth form last week.

The Dollar Index

The dollar tried to extend gains made on Friday but was not able to hold them. The Dollar Index gained less than a tenth intraday only to give it all up by the close, trading in a very tight range and creating a small doji candle. Last week the index broke above potential resistance on talk from the BOJ and may continue to move higher in the near term. The BOJ is warning it will add to QE in some form come the next meeting, July at the latest, if yen strength persists. However, given the fact that the yen has fallen on that news and may keep falling could preclude the need for such action. In the near term, upside target appears to be $95 or $95.50 provided the index can remain above $94.25 and the short term moving average. Risks this week include the FOMC minutes due out on Wednesday which could fuel rate hike speculation and dollar strength/weakness. As yet the BOJ talk is just that, talk, so the minutes could easily spark a movement, as could tomorrow's CPI data.

The Oil Index

Oil prices surged today on two things. First, a new report from oil bear Goldman Sachs sees supply/demand imbalance coming back into line quicker than they had expected. Second, supply disruptions in Nigeria, Canada and Libya helped to bolster this sentiment. However, there are some off-setting factors that should not be dismissed, namely that OPEC production rose again in the last month and that Canadian supply disruption is not as bad as feared. WTI gained more than 3.5% and set a new high dating back to November of last year and appears to be moving higher. The caveat is that supply and demand balance is still skewed to the supply side leaving oil prices vulnerable to whatever bearish news may hit the market. Additionally, with WTI trading above $47 it is likely that the shale producers will come back on line and further add to supply side imbalance.

The Oil Index gained only about 1.8% in today's action and did not set a new high. Today's action was the fifth day of consolidation around the short term moving average and closed near the middle of that range, if above the moving average and just above 61.8% retracement level. The indicators remain mixed, more bearish than not but showing signs of some support at this level, so there is no clear indication of direction at this time. If oil can maintain these levels earnings expectations for the sector should begin to rise and if so could carry the index back to retest it's recent high near 1,200. If not a retreat to 1,000 is also possible.

The Gold Index

Gold prices shot higher in early trading only to fall back to break even as the equities rally sapped demand. Spot price for gold jumped nearly 1.5% in the first half of the day, approaching resistance in the $1285 to $1290 region, and then fell back to erase all the gains by close of day. Fundamentals still support gold prices and potentially higher prices, given declining expectation for FOMC rate hiking, but danger exists in the form of the BOJ. BOJ talk to weaken the yen could prop the dollar up and send gold lower despite any action or inaction from the FOMC. Despite today's wild swing the candle formed is small and weak, near the middle of the three week range between $1250 and $1300. Volatility may increase in the coming weeks as we get a little more data, and wait on the next round of central bank meetings.

The gold miners got a pop from gold prices even though they, gold prices, were not able to hold the early gains. The Gold Miners ETF GDX gained 0.12% to trade near the top of it's three week consolidation range but the move was without conviction. Today's candle is a small doji and accompanied by mix indicators so it is likely the consolidation will continue. The indicators are mixed, MACD momentum is very weak, if to the downside, while stochastic continues to move lower, suggesting that a move back to retest support is likely. Support is near the short term moving average, near $23.25, with potential resistance just above today's close near $26.

In The News, Story Stocks and Earnings

Apple was a big name in the news today. The stock got a big pop from a Berkshire Hathaway filing which revealed a near $1 billion stake in the company. This news was tempered by another SEC filing, from hedge fund Tiger Management, which revealed it had sold off it's position in the company during the same period. Adding to the confusion, Leon Coopermans Omega Advisors also revealed they had purchased a stake in the company during the first quarter, but had already dissolved it. After the bell Greenlight Capital announced it had upped it's position in Apple. Regardless, the vote of confidence by Warren Buffet was enough to send the stock up by 3.7% to approach $95 and the recently broken line now turned potential resistance. The indicators are consistent with a rebound, bearish MACD and stochastic are rolling into a bullish crossover following the recent low, but also show confirmed weakness through extreme peaks (MACD) and a likely retest of that same low.

There were no earnings reports on the schedule today but this does not mean the season is over. There are on expected 21 S&P companies reporting this week, most of which are in the retail sector. The sector took a beating last week on a number of misses and reduced guidance, there is not much expectation for that to be any different this week. The Retail Sector SPDR XRT gained nearly a full percent today but was not able to reverse losses experienced on Friday, or to regain the support level broken with Friday's action. The indicators are showing sign of peaking at this level, but no indication of reversal is yet present. A move back above $41.50, support now turned resistance, would be bullish but will require better than expected earnings and more likely better than expected guidance. A failure to break above this level along with more weakness in the sector could take the XRT down to $40 or lower before support begins to kick in. Tomorrow Home Depot and TJ Maxx are on tap.

Home Depot may be able to surprise the market as it, as a retailer, is more exposed to housing trends than to factors driving the broader the retail sector. Today's action saw the stock rise by more than 1.75% intraday, confirming support along the short term moving average and approaching the all-time high set just last week. The indicators are mixed but more neutral than anything else, MACD is holding near the zero line, stochastic is trending near the middle of the range and both appear to imply a move is on the way, depending on how results are. Positive results could take the stock to another new high, a break above $125 very bullish, while negative results could drag the stock back to support levels between $125 and $130.

The Indices

It did not look like a bullish day in the early hours, pre-opening, and there really wasn't a major bullish catalyst to drive the market but the market rallied nevertheless. Today's action was led by the NASDAQ Composite which gained 1.22%, led by Apple. The tech heavy index recovered losses incurred Thursday and Friday of last week but was not able to regain the 4,800 resistance line or move above the short term moving average, both of which provided resistance, curbing today's gains. The indicators are rolling over into a bullish signal, stochastic is already firing what could be a strong signal, but MACD has yet to confirm. A break above the moving average and resistance would help confirm this move and if so could take it back to retest highs set last month. If not move to retest support near 4,675 is likely.

The next largest move in today's session was made by the Dow Jones Industrial Average with a gain of 1.00%. The blue chips created a long white candle, confirming the existence of support near 17,500, but the move was capped at the short term moving average. The indicators are mixed, showing some sign of support at this level and early signs of rolling over but no sign of strength. If the index is able to keep moving higher a break above the short term moving average would be bullish and could take it up to retest the 18,000 level. If not a retest of 17,500 with possible move down to the long term trend line near 17,250 is likely.

The next biggest winner in today's session was the S&P 500 with a gain of 0.98%. The broad market created a large but not overly strong white candle, was able to move back above the short term moving average but gains were capped just shy of the 2,075 resistance target. The indicators are mixed as with the other indices, stochastic is possibly rolling into a strong bullish signal, but this signal is not yet confirmed by MACD. Today's move appears to confirm support at 2,050 but again, the indicators are mixed so I am very cautious about it. If the index can continue to move higher and break resistance a test of recent highs near 2,100 is likely to find additional resistance. If the index moves lower first target for support is 2,050, a break below here could take it down to the 2,025 level or lower.

The Dow Jones Transportation Average brings up the rear in today's action and by doing so, assuming the transports are leading the market, lend weakness to today's analysis. The transports gained only 0.74% and created only a smallish, medium bodied white candle with upper shadow. This candle shows potential support at the 7,500 level but also resistance to a bounce from this support that when combined with the indicators is not promising. The indicators are weak and weakening with today's move, MACD is bearish and holding steady while stochastic moves below the lower signal line, suggesting that further testing of support is likely. Support is currently at the 7,500 level with possible upside target near 7,750. A break below support would be bearish and could take the index down to 7,250 or 7,000 in the near term.

The indices bounced today and the bounce could be good. Today's catalyst was a combination of Warren Buffet activity and oil prices, neither to be disregarded but also neither reason to be overly bullish. With earnings as poor as they are, expectations for earnings growth still poor, tepid and weak economic data, and the central banks still in focus (not to mention the fact we're on the verge of the summer season) I see little reason to expect much follow through. I am still very cautious, borderline bearish, for the near term and expecting further weakness in the market. I could be wrong, but I think it better to be cautious now and get into a rally late rather than wishing for one and losing. Longer term I see the bull market continuing, earnings and the economy will return to growth soon, it's just a matter of when.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Broken Status Symbol

by Jim Brown

Click here to email Jim Brown

Editors Note:

It is nice to have the clout in your sector but when that prestige fades it can be ugly. American Express, Don't leave home without it! The Gold, car, Silver card or a Platinum card with a $450 annual fee, etc, was once seen as a status symbol and in business environments, the person paying for the meal, drinks or entertainment was quick to whip out his card to show his status. That is no longer the case.


No New Bullish Plays


AMX - American Express - Company Description

American Express provides charge and credit payment card products and travel related services to consumers and businesses worldwide.

I seriously doubt that anyone reading this play description is unfamiliar with American Express. Unfortunately, their prestige has take a number of hits over the last two years.

Costco dumped American Express and is moving to Visa as its accepted card. AXP said that loss represented 10% of AXP card holders.

Fidelity Investments also dropped AXP for Visa because Visa is accepted many more places than American Express. Fidelity has 68.9 million accounts. That has got to hurt AXP.

Jet Blue announced it was replacing AXP cards with a new MasterCard.

There are numerous other companies that have dropped AmExp as their preferred card. The reason is simple. Not all merchants accept the AMX card and the fees associated with that card are higher for merchants. The card also has higher credit requirements for being approved. It does not do these businesses any good to offer a partner card if only a small number of applicants can qualify.

American Express is different from MC/V because it actually owns the debt. When you charge on an AMX card it is AMX that is making you the loan. With wages in the U.S. declining for the last 7 years that means higher risk of default for AMX accounts.

V/MC accounts are backed by an issuing bank or credit union. V/MC have no risk in the transactions, they just take a processing fee.

A federal judge ruled against AMX in a lawsuit filed by the DOJ because AMX was penalizing retailers for suggesting customers use a different card because the AMX transaction fees were higher. The judge said retailers had the right to discourage AMX usage.

In the testimony for the suit CEO Chenault whined, "They have a billion cards, AMX has 55 million. They have 9 million merchants and AMX only has 6 million. I am dwarfed. We are swimming in a sea of bank cards." And that is exactly the problem.

The bank cards have lower credit standards, lower merchant fees and more generous customer bonus awards programs. The prestige of the AMX is fading and even the invitation only Black card, made out of titanium, is losing its luster.

Shares faded from $96 to $50 and then rebounded in April to $67. Now they are fading again. They guided to earnings declines for the second half of 2016 because of the switch from AMX to other cards at various corporate customers like Costco. Earnings will rise in Q2 because of the sale of their Costco card portfolio but then decline the rest of the year. The CEO warned at the shareholder meeting, "We continue to face substantial competitive and environmental challenges."

Earnings July 28th.

Shares have flat lined recently with support at $63.75. If that level breaks we could see a decline to $59 fairly quickly. With the summer doldrums ahead, investors are not going to be patient with a stock that is basically dormant and forecasting lower earnings in the second half. Why would an equity fund want to own that stock in this environment?

With an AXP trade at $63.50

Buy July $62.50 put, currently $1.55, initial stop loss $65.50.

In Play Updates and Reviews

Weekly Short Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

We saw the obligatory weekly short squeeze on Monday but it failed at -200 points below the high from last week's Tuesday squeeze. This will likely end up like the prior two triple digit squeezes on the Dow and we will retest the support at 2,040 before the week is over. Today's Dow high at 17,755, which was resistance, was sold hard in the last 20 minutes of trading and the Dow closed 50 points off its high as a preview of things to come.

The short squeeze helped our long positions but it hurt the short positions. The SPY was up +2 to erase the -2 point decline on Friday. Skyworks rallied nearly $2 after closing at a 3 month low on Friday. All the oversold stocks posted gains as shorts covered. The exception was Harley-Davidson, which lost ground to a new six-week low.

I considered changing the entry point on the Gilead put to capture today's high but passed. I want to make sure the stock is falling before we buy that put.

Twitter is reportedly preparing to change the 140-character limit on tweets. That could produce a bigger bounce or even reverse the current trend lower. The stock has refused to trade under $14 so I am recommending we close the long put but retain the long call.

Current Portfolio

Current Position Changes

GILD - Gilead Sciences

The long put position remains unopened until a trade at $81.65.

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. Excellent gain to a historic high.

Original Trade Description: April 20th.

Accenture provided management consulting, technology and outsourcing services worldwide. It operates in multiple segments including Communications, Media & Technology, Financial Services, Health & Public Services, Product support including supply chain management, Resources including chemicals, energy, commodities and utilities. The company was founded in 1989 and has risen to a $73 billion market cap. Accenture employs about 373,000 people in 120 countries.

Basically, Accenture helps other companies become more profitable. When Mondelez (MDLZ) wanted to improve its margins they called Accenture and implemented their suggestions. The new systems saved $350 million in the first year and is expected to save Mondelez more than $1 billion over the next three years. Accenture does this worldwide for almost any business in any sector.

This week they sold a 60% stake in their Duck Creek Technologies division to private equity firm Apax Partners. The joint venture will accelerate the innovation of claims, billing and policy administration software for the insurance industry leveraging advanced digital and cloud technology. They will invest in Duck Creek On-Demand, a native Software as a Service capability delivered through the cloud. Approximately 1,000 insurance and insurance software specialists will join the new venture. Accenture acquired Duck creek Technologies in 2011.

The key for Accenture is not specifically the Duck Creek venture but the rapidly expanding scope of the company. Nearly every day there is some new press release where they are expanding into new markets and new endeavors. This is what IBM and Hewlett Packard wish they were.

Earnings are June 23rd.

Accenture rallied to a new high in early April at $116.35. Shares paused with the market and consolidated their gains. Since April 8th shares have begun to move back to that high and could breakout at any time. I am recommending we buy that breakout over $116.35 because shares could begin a new leg higher, market permitting. Options are cheap!

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

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

MKC - McCormick & Co - Company Description


No specific news. Struggling higher to close at the high of the day.

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. Still holding the $31 level despite the retail weakness. Big reports due out this week from TGT, HD, WMT that could help or kill the retail sector.

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. Tried to rally with the biotech sector but the gain was lackluster.

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. Big short squeeze spike at the open but faded in the afternoon.

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


No specific news. Minor rebound after the -$3.50 drop on Friday. 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. Minor rebound after two weeks of declines.

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.

GILD - Gilead Sciences - Company Description


Rebound with the biotech sector. No specific news.

The position remains unopened until GILD trades at $81.65.

Original Trade Description: May 14th.

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

HOG - Harley Davidson - Company Description


No specific news. Fourth 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


Another major short squeeze that is likely to fail. We need the decline to appear quickly before our June options evaporate.

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


No specific news. Short squeeze rebound from three-month lows.

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 is preparing to expand the 140 character limit on tweets and this could cause a significant spike. I am recommending we close the long put but retain the long call.


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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