Option Investor

Daily Newsletter, Thursday, 5/19/2016

Table of Contents

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

Market Wrap

The Fed Who Cried Wolf

by Thomas Hughes

Click here to email Thomas Hughes


The surprising sentiment in the FOMC minutes sent the dollar soaring, and just about everything else lower, but the market still isn't convinced a rate hike will happen in June. Based on the labor data, the leading indicators and CPI it certainly looks like the meeting will be a live one, even if the target rate isn't increased. FOMC voting member Dudley concurs with this sentiment, saying in statements today that June is definitely a live meeting. According to the CME's Fed Watch Tool the chance of a June hike is now 30%, up from 8% earlier this week.

International markets were affected by yesterday's new as well. Asian markets closed flat, perhaps waiting to see what happened during today's US session. European traders were not so cautious. Indices in that region fell more than -1% weighed down by interest rate fear and plunging commodity prices.

Market Statistics

Futures indicated a lower open all morning despite positive earnings results from Wal-Mart and Cisco. Early indications pointed to an opening decline of -0.25% and this held fairly steady going into the opening bell. At the bell stocks did indeed retreat, shedding that quarter point in the first minute, and then proceeded to move lower throughout the morning hours. An early low was hit at 10AM, and then another just before 11:15AM. Over the course of the next hour an intraday bottom was put in, resulting in a rebound from the low. The remainder of the day saw the indices move slowly higher, in fits and starts, but not enough to recover the days losses.

Economic Calendar

The Economy

Lots of data today, starting with jobless claims. Initial claims fell -16,000, reversing last week's gain, to hit 278,000 and has now been below 300K for 63 weeks. Last week's figure was not revised. The four week moving average of claims rose 7,500 to hit the highest level since early January. On a not adjusted basis claims fell -6.5% versus an expected -1.2% and remain above last years level by 0.5%. Despite the fact that not adjusted claims have been tracking above last years level for the past few weeks they and adjusted claims remain low relative to the long term trend and consistent with labor market health. On a state by state basis New York and Pennsylvania led with gains in new claims of +14,494 and +3,547 while Kansas and Ohio led with declines in new claims of -3216 and -2525.

Continuing claims also fell this week, shedding -13,000 to hit 2.152. Last week's figure was revised up by 4,000. The four week moving average of continuing claims rose by 4,250 reflecting last week's gains in claims. Even so, the 4 week average remains near the long term low and both it and the headline number are consistent with ongoing labor market health.

The total number of Americans continues to decline in line with seasonal and secular trends. This week the total number of claims fell -13,598 to hit 2.122 million. This is the lowest level of claims since mid-November of last year. Although the pace of decline slowed somewhat over the last week of data we can still expect to see this number decline over the next 3 to 4 weeks with an expected low near the 2 million mark. On a year over year basis total claims are down -3.5% from this same time last year and remain consistent with declining unemployment and labor market recovery.

The final read on the Philadelphia Federal Reserve Manufacturing Business Outlook Survey came in at -1.8. This is down from the advance read of -1.6, the 8th month of contraction and well below expectations for 2.7. Within the report the index for new orders fell from 0 to -1.9, the 2nd month of decline, shipments rose by 10 but remain negative, unfilled orders remains negative and inventories remain negative. The employment index did make a substantial gain from last month, up 15 points, but also remains negative, the 5th month of contraction within the sector. The only bright spot in the report is the 6 month forward outlook which is still positive although it too declined this month.

The Index of Leading Indicators was released at 10AM. It shows a 0.6% increase in the index for April, the largest increase in a year on a revised and adjusted basis. On a not revised basis it is equal to the headline initial release for October. The coincident index also rose, gaining 0.3% as did the lagging index, also 0.3%. According to commentary from the Conference Board economists the index shows moderate growth trends should continue into the end of the year. Areas of strength include the labor market, financial indicators and building permits.

Tomorrow the only release on tap is existing home sales. Sales are expected to run in the range of 5.40 million on an annualized basis, up slightly from last month. Next week is light on data but not void, look out for new home sales, the housing price index, pending home sales, durable orders, Michigan Sentiment and the 2nd read on 1st quarter GDP.

The Dollar Index

The Dollar Index got a big boost from yesterday's hawkish sounding FOMC minutes, and today's comments from Dudley. It appears that now the FOMC and the BOJ are back on diverging policy paths, the FOMC tightening and the BOJ loosening, but as yet this divergence is grounded in talk and not action. The BOJ may not have to act as they hinted due to the recent rebound in the dollar, and if they don't could easily wind up strengthening the yen, while likewise the likelihood of a June rate hike remains low in the eyes of the market. If the FOMC doesn't hike in June, or indicate the next hike is very very close, they could also weaken the dollar.

Today's action in the index shows some indecision, it moved up to touch next resistance at the $95.50 level and retreat from it. The candle is bullish, as are the indicators, so further testing of resistance at this level is likely. However, with the upper shadow appearing near resistance like it did a break above this level is questionable. We've got about 4 weeks until the next round of central bank meetings and lots of data between now and then so consolidation between support, $94.25, and resistance, $95.50, may be on the way.

The Oil Index

The oil price was volatile today as stronger dollar, an increase to US stockpiles and output disruptions in Nigeria vied for dominance. WTI had been down as much as -2.5% in early trading, driven by stronger dollar, only to recoup the loss by the end of the session. Today's supporting news, Nigeria's main oil terminal was shut down with all workers evacuated due to "criminal activity". Exxon, which operates the terminal, clarified an earlier report stating that production continued although business was disrupted. Today's action leaves oil prices near the 6 month high primarily supported by near term supply fears and long term rebalancing speculation.

The Oil Index lost about a half percent in today's action and persists in testing support even while the price of oil is testing resistance. Today's action gapped below the short term moving average, and broke the 1,100 level on an intraday basis, only to find support and move higher during the session. The lower wick on the candle shows support at this level although the strength of that support is questionable. The indicators are mixed; momentum is bearish but in decline while stochastic is bouncing from the lower signal line, a combination indicative of potential support but by no means a guarantee of it. A break below this level could take the index down to the 1,000 level while a bounce from it would likely find resistance at the 1,120 level and the 61.8% retracement.

The Gold Index

Gold prices took a tumble driven by a stronger dollar. The spot price fell more than -2.5% intraday to hit a 3 week low but managed to pare the losses before the close of the session. The FOMC minutes put a rate hike firmly on the table regardless of what actually happens and that has gold moving down to test support. Even with today's move the metal remains above the $1250 level and may remain there in the near term. Over the next 4 weeks data will be the primary driver; strong data will point to the June rate hike, a stronger dollar and lower gold prices, weak data the opposite. The real catalyst, the strong catalyst, will be the FOMC meeting/BOJ meeting.

The gold miners were affected by falling gold prices but the move lower was met by support. The Gold Miners ETF GDX gapped lower at the open by more than -2%, opening below the short term moving average and below potential support at the bottom of the 3 week consolidation range, but buyers stepped in to scoop up the bargains. By end of the day the ETF had recovered all the losses and more, moving back above the moving average and closing with a gain near 1.5%. The indicators remain mixed which, along with today's price action, point to further consolidation at current levels. For now, support is near $23.50 and appears strong. If gold prices are pushed lower this support could fail, is so a move below $22.50 and possibly as low as $21 looks likely.

In The News, Story Stocks and Earnings

Wal-Mart was one of few winners in today's session. The world's largest discount retailer reported a beat on the top and bottom lines despite the fact that others in the retail space, including Target, have not had much success. The results were driven by better than expected US sales and increased global comps (on a constant currency basis). Within the report the company revealed that it's move to raise wages had a positive affect on earnings and helped to drive the stock higher even though full year guidance is only in-line with expectations. Shares of the stock moved sharply higher in the pre-opening session, gapping up by more than 5% at the open, and then moved higher during the day.

Wal-Mart helped to lift the entire the retail sector. The XRT Retail SPDR gained a little more than 1% in today's action, moving up from the three month low set yesterday. The move appears to be a near term bottom as indicated by both MACD and stochastic. Bearish MACD has begun to retreat and stochastic is rolling over while deep in the lower signal zone, both indicative of potential support. The caveat is that the sector is highly divided, while one store does well another does not, so a sustained rally does not look likely at this time. For example, Ross Stores reported after the bell, EPS in-line, revenue weak with weak full year guidance. Gap also reported after the bell, meeting expectations but announcing the closure of more than 70 stores worldwide. First target for resistance for the XRT is about 2.25% above today's close, near the $41.50 support/resistance line broken at the end of last week.

Cato Corporation also reported before the bell. The retailer of women's specialty apparel and accessories reported that revenue and earnings grew from last year in the comparable quarter, and were above expectations. The results were driven by expanding margins, up 30 basis points, comp store sales were flat. Along with the report the company raised full year guidance to a range above the previous. The stock responded well to the news and closed with a gain near 6%. Even with the gain shares of Cato remain near the middle of a long term trading range, but indicated to move higher. Next target for resistance is near $38.

The Indices

The indices moved lower today on increased fear of impending FOMC rate hike. They also found support and were able to recover some of the losses as skeptics have reason to believe the Fed is just blowing more wind. Today's action was led by the Dow Jones Transportation Index with a loss of -0.58%. The transports created a small hammer-like doji, just above the 7,500 support line, and below the short term moving average. The indicators are mixed, momentum is bearish but in decline while stochastic rolls into bullish signal, consistent with potential support at this level. Near term the index may remain within 7,500-7,750 range, between support and the short term moving average, while longer term direction is unclear. A break below support could take it down to 7,250 or 7,000, a break above resistance could go as high 8,000 or 8,100 before meeting next resistance.

The tech heavy NASDAQ composite made the next largest decline in today's session, about -0.56%. The index created a small doji candle, setting a new 2 month intraday low, but not quite reaching my support target of 4,650. The index appears to be trying to put in a near term bottom but this is by no means confirmed. The indicators are consistent with a potential bottom but mixed, leaving it open to further decline. As of today's close the index is smack in the middle of a tight range between support at 4,650 and resistance near 4,780. A move beyond either of these target would be significant and could lead to further moves in the direction of the break. A break below support could go as low as 4,550 in the near term, a break above resistance could go as high as 4,900.

The third largest decline was posted by the Dow Jones Industrial Average which lost -0.52%. The blue chips created a small bodied black candle with long lower shadow that found support just above the long term up trend line. The lower shadow is comparable to a hammer, but today's candle is not overly strong. The indicators are weak; bearish MACD momentum held steady while stochastic flattens out just above the lower signal line with %K moving lower, leaving the index open to further decline. First target for support is the long term trend line, near 17,250, a break below that could take the index down to 17,000 or lower. Today's action also broke the neck line of a potential H&S reversal, that if confirmed would carry a target near 16,900.

The S&P 500 brings up the rear today, falling only -0.37% at the close. The broad market also broke through a potential neckline with today's action, a move that if confirmed could take it down to 1,980 or lower. The indicators are weakest with this index, bearish MACD ticked higher and stochastic has begun to move lower, consistent with potential reversal. If the index manages to regroup and move higher resistance is just above today's closing price near 2,050, and then again just above that at the short term moving average near 2,060.

Today's market action was mixed at best, and bearish at worst. The indices set new near term lows, have weak/mixed indicators and although found intraday support have little reason to rally. The FOMC may or may not raise rates in June but even so, a rate hike is coming soon and that, along with poor outlook for 2nd quarter earnings and declining full year outlook leave them susceptible to deeper correction. I remain bullish into the end of the year because we are expected to see earnings growth return, but find no reason to be so now without some catalyst to bring the bulls back out in force. I am bearish in the near term, waiting and watching for the next great bullish entry.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Money Printing Machine

by Jim Brown

Click here to email Jim Brown

Editors Note:

Disney is a money printing machine. Lately it has been punished for missing earnings estimates for the first time in five years. Yes, even the mighty still have to toe the analyst line regardless of how high that line may be.


DIS - Disney - Company Description

Disney operates as an entertainment company worldwide through broadcast and cable television networks, domestic TV stations, radio networks, movies and media distribution of all types, theme parks, hotels and cruise lines.

Disney missed earnings on May 10th and shares have fallen from $106 to $98 over the last week. This sell off is overdone and shares are approaching support at $96. I believe now is the time to buy.

Disney's latest movie, Captain America: Civil War has already broken $1 billion at the box office in only two weeks. It could end up one of the highest grossing movies of all times. Disney has an entire list of movies headed for the theaters and some will be as big as Captain America. Star Wars: The Force Awakens has already grossed over $2 billion and there are many more episodes planned.

Disney Movie Schedule

May 27th, 2016 - "Alice: Through the Looking Glass"
June 17, 2016 - "Finding Dory"
July 1st, 2016 - "The BFG"
Aug 12th, 2016 - "Pete's Dragon"
Nov 4th, 2016 - "Doctor Strange"
Nov 23rd, 2016 - "Moana"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
Mar 17th, 2017 - "Beauty and the Beast"
April 14th, 2017 - "Ghost in the Shell"
May 4th, 2017 - "Guardians of the Galaxy II"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Mid 2017 - "The Incredibles 2"
July 17th, 2017 - "Pirates of the Caribbean"
Late 2017 - "Thor: Ragnarok"
Early 2018 - "Frozen 2"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

They also are opening the Shanghai Disney theme park on June 16th and they expect up to 100 million visitors in the first year with tickets starting at $100. There are 330 million people living within 4 hours of the park. That is truly a cash-printing machine.

Disney has sold off because of a decline in ESPN subscriptions. This is vastly over rated as a problem. Given their recent billion dollar movies and the cash flow from Shanghai the ESPN problems will be forgotten. At this point all the bad news is already priced into the market.

With support at $96 and shares closing at $98 today I am recommending a July call that will expire two weeks before their next earnings report. It is cheap and we can capture any rebound from support. There is risk of a further decline to that support so I am putting the stop loss under that $96 level.

Buy July $100 call, currently $1.88, initial stop loss $94.85.


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P traded all the way down to 2,025 but rebounded to close fractionally over prior support at 2,040.04. The S&P was in full breakdown at the open with a -23 point decline but recovered to close down only -7 and technically hold at suppot even if it was only over by 4 cents.

The Dow declined -195 at the open only to recover 100 of those points to close with a -91 point loss. However, the Dow did close below critical support at 17,500. This should be the signal for everyone to begin dumping stocks but that fractional hold at support on the S&P may be giving the bulls some hope.

For one the biotech sector did not hold up the markets with a -1.44% loss compared to -0.5% on the major indexes.

Friday is option expiration and Thursday's can be either dormant or dramatic depending on how traders were positioned going into expiration.

We were given another gift today on Canadian Pacific with two downgrades that dropped the stock nearly $4. First Solar also closed at a new relative low.

Current Portfolio

Current Position Changes

GILD - Gilead Sciences

The long put position was opened with a trade at $81.65.

GPRO - GoPro

The long put position was entered at the open at $8.75.

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. The stock dropped to $114.50 at the open to stop us out at $114.75 for a small gain. I had the stop tight because this is a June option and we did not have time to wait for a rebound. That decline was $3 below yesterday's 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. Nice rebound in a weak market. CEO will present at the Bernstein conference on June 3rd.

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. Shares rallied slightly in a weak market.

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.

TWTR - Twitter - Company Description


No specific news. No drop either.

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.

Previously Closed 5/17/16: Long June $16 put @ $1.45, exit $1.96, +.51 gain.

BEARISH Play Updates (Alpha by Symbol)

ABC - AmerisourceBergen - Company Description


No specific news. Biotechs were weak today and ABC posted a gain. I am going to give it one more day to decline or I will drop it in the weekend newsletter.

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.

AXP - American Express - Company Description


No specific news. Shares down hard at the open but rebounded with the Dow in the afternoon.

Original Trade Description: May 16th.

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?

Position 5/17/16 with an AXP trade at $63.50

Long July $62.50 put @ $1.70, see portfolio graphic for stop loss.

CP - Canadian pacific Railway - Company Description


New six-week low. Nearly a $4 drop after CLSA warned the good times are over and Credit Agricole issued a sell rating. No change in the outlook.

The company said domestic intermodal traffic fell -1% to 8,300 cars for the week ended May 7th. However, international intermodal volume declined -4.6%. Total intermodal volume declined -3%.

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. The rebound was erased by a 3% decline.

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


The position was opened with a trade at $81.65. Shares rebounded with the market in the afternoon.

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.

Position 5/19/16 with a GILD trade at $81.65

Long July $80 put @ $2.58, see portfolio graphic for the stop loss.

GPRO - GoPro - Company Description


GPRO hit $8.75 at the open to trigger the entry into the position at a new low. Shares rebounded slightly with the market in the afternoon. No specific news.

Original Trade Description: May 18th.

GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.

GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.

They reported earnings on May 5th after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.

The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold an estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.

Next earnings July 21st.

There was an interesting article on Yahoo today about the flood of GoPro competitors hitting the market and why these competitors have better cameras than GoPro. GoPro Competition

If GoPro does not get their act together soon their stock could be in the low single digits. Today's close was only 5 cents from a new low.

The risk here is that somebody buys them but with the flood of new competitors why would they?

Position 5/19/16

Long July $8 put @ 62 cents. No stop loss.

HOG - Harley Davidson - Company Description


No specific news. Now firmly below support at $44.50.

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, See portfolio graphic for stop loss.

SPY - S&P 500 ETF - ETF Description


Unbelievable action on the S&P with a drop to 2,025 and then a rebound back to support at 2,040. That 2,040 level will not relinquish control. Still poised for a support break. 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.

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