Option Investor

Daily Newsletter, Thursday, 5/26/2016

Table of Contents

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

Market Wrap

Rally Fizzles

by Thomas Hughes

Click here to email Thomas Hughes


The rally began to show weakness today, even as new data supports strength in the economy. Jobless claims, pending home sales and durable good orders were all better than expected, reveal strength in the economy and point to an increased chance for a June rate hike. Adding to concerns were statements from at least 2 Fed officials; Bullard and Powell. According to them the market continues to mis-judge the FOMC and that a hike is warranted "very soon". Even so, the CME's Fed Watch Tool shows only a 30% chance of a hike at the June meeting.

International markets were fairly quiet today. Asian indices posted gains but they were minimal, led by a 0.27% gain in the Shang Hai Composite. Trading in the region was impacted by a strengthening yen and uncertainty of expected central bank actions in Japan and the US. European indices fared a little better, posting gains of roughly 0.5% as WTI and Brent crude both topped the $50 level for the first time since late last year.

Market Statistics

Futures trading indicated a flat to positive open for the US market. Trading ticked higher following the jobless claims and durable goods data but not substantially. At the open the indices moved higher, about 4 points for the SPX, and then proceeded to trend sideways in a very tight the rest of the morning. By 11AM most indices were showing a small loss for the day and were not able to regain positive territory until late afternoon. Even so, gains were small, less than a quarter percent, and within the early range.

Economic Calendar

The Economy

Today's data was pretty good and suggests the economic boom I've predicted for the 2nd half of the year may not be too far off. Initial jobless claims fell -10,000 to 268,000 from last week's unchanged data. The 4 week moving average of claims rose however, due to the recent spike in claims, but remains consistent with labor market health. Speaking of the recent spike in claims, I learned today that NY allowed certain public school employees to file for unemployment during the spring break holiday which accounts for the massive increase in claims we saw at the end of April. This week NY reported a -15,881 decline in new claims. On a not adjusted basis initial claims fell -1.6% versus an expected gain of 2.0% and have fallen back below last years levels by -3.7%.

Continuing claims rose this week, by 10,000, on top of an upward revision of 1,000 to last week's figure. Continuing claims totaled 2.163 million in this week's report and very near the 43 year low. The 4 week moving average also rose, by 8,500, to hit 2.151 million but remains very low and consistent with labor market health.

The total number of Americans filing for unemployment benefits fell once again, consistent with historical trends, to hit 2.055 million and a new 6 month low. Total claims are down -3.4% from last years levels and remain consistent with ongoing labor market health and declining unemployment levels. Based on the historical trends we can expect another 3 weeks of declinhes with a target below the 2 million mark, at which time we may see a month or two of increases before making another sustained move lower going into the fall and holiday season.

Durable Goods data was released at 8:30AM and came in above expectations. New orders for durable goods rose 3.4% versus an expected gain of only 0.6%. Transportation and aircraft led the increase, durables ex-transportation rising only 0.4%. Ex-defense orders rose by 3.7%. Shipments increased 0.6%, as did unfilled orders, while inventories declined by -0.2%. Capital goods, non-defense, rose by 7.8%. The weak spot was new orders for heavy machinery, down -0.7%.

Pending home sales data was also much better than expected and helps confirm strength in the broader housing market. Pending sales rose by 5.1%, analysts had expected only 0.6%, the third month of increases and set a new 10 year high. The index is now reading 116.3 and is up 4.6% versus last April. March was also revised higher.

The Dollar Index

The Dollar Index fell today, contrary to what I would've expected due to the strong data we received this morning. The index fell about -0.25% intraday, closing with a loss closer to -0.15%, confirming resistance at the 61.8% retracement level. Resistance is likely due to uncertainty over the FOMC decision due out in 3 weeks. Today the Fed's Bullard and Powell both made comments to the effect that the market was misjudging the FOMC intent and that a normalization of policy was warranted "soon" but both also hedged their comments. Powell says it doesn't feel like an economy with inflation about to break out.

The dollar has risen in value over the past few weeks because of hawkish sounding Fed talk, if they do not raise rates it is likely to fall back and test for support. However, even without a rate hike if the data continues to show signs of strength the dollar is likely to continue rising longer term. First target for support is along the short term moving average near $94.65, next target is just below that along the 78.6% retracement line, near $94.20.

The Oil Index

Oil prices flirted with the $50 level today. Both WTI and Brent moved above this level for the first time since late last year, both also fell back below $50 before the end of the session. On the one had we have increasing evidence of supply/demand rebalancing, on the other is a market that is still out of balance. Rebalancing is a future expectation, imbalance is a present reality and with prices reaching new highs is likely to continue. The higher prices get the more incentive shale producers, OPEC and non-OPEC countries will have to produce and sell more. Prices may continue to rise but there is reason to suspect a correction is coming.

The Oil Index persists in diverging from oil prices. The index opened with gains but is still well below the most recent peak, and far below a 7 month high. Today's action suggests resistance is building along the 1,140 level, also indicated by the short term moving averages inability to break above the 61.8% retracement level. The indicators are mixed, they suggest a shift in momentum to the upside is about to happen but without a break above 1,140 this may be temporary. Even if the index moves above 1,140, next target for resistance is just a few points higher, near 1,175.

The Gold Index

Gold prices were up in the early hours of the day, only to fall into the red following the release of economic data. Spot price fell about -0.25% to trade near $1220 and a two month low. Prices are being pressure lower by a stronger dollar and FOMC outlook and could move down to $1200 over the next couple of weeks if the data remains strong.

The gold miners are also in decline. Today the miners ETF GDX opened with a small gain, just below the short term moving average, and then fell from that level. The sector appears to be in reversal, today's action confirming a double top, with indicators in support of that move. The MACD momentum is bearish, strong and on the rise while stochastic is trending lower. If gold prices don't recover in the next few days the ETF will likely fall with targets near $21.80 and $21.20.

In The News, Story Stocks and Earnings

Dollar General and Dollar Tree both reported earnings before the bell, and both beat expectations. Dollar General beat EPS projections by nearly 10% although revenue fell a bit short. Even so sales rose by 7%. Dollar Tree did even better, aide by the purchase of Family Dollar, the opening of new stores and a 2.3% increase in comp store sales. Sales are up 133%, earnings up 105%, and guidance has been raised to a range above consensus estimates. Shares of both stocks were up today's session, but Dollar Tree is the real winner, gaining nearly 13% to trade at a new all time high. Dollar General gained only 5% but is also trading at a new all time high.

The retail sector was able to move higher on the DG and DLTR news but had a hard time holding on to the gains. The Retail Sector SPDR XRT gapped up at the open and then fell back to close the gap later in the day. Even so the ETF was able to post a gain near 0.5% and appears set to move higher. The indicators have rolled into a bullish signal, indicating higher prices, with the short term moving average as a first target. A break above the average would be bullish and could carry the ETF up to the $45-$46 level.

The housing sector did not move higher today despite the strong pending sales data. The XHB Housing Sector SPDR opened with a small gain only to give it up and more by the end of the session. Today's candle is black and may indicate a retreat to test support along the $33.50 level and the short term moving average. The indicators are bullish following the new home sales inspired break above the short term moving average so today's action appears to be consolidation rather than sign of reversal. First upside target is near $35, a break above this level would be bullish for the sector and could carry the ETF up to $37.50.

The Indices

Today's action was indecisive to say the least. Trading ranges were tight, moves small and without direction. The data shows a strengthening economy yet earnings outlook for the next quarter remains weak. While the data suggests that earnings and revenue will grow, it also suggests the FOMC will be raising interest rates. Raising interest rates is scary for the market, it could derail the growth, but it is also a sign the economy is strengthening.

The day's biggest mover was the Dow Jones Transportation Average with a loss of -0.27%. The transports made a very small spinning top style doji, just below resistance. Resistance is the short term moving average, just below the 7,750 level. The indicators have rolled into a bullish signal, confirmed by MACD's zero line cross yesterday, so more upside is very possible, but requires a break above the moving average. If so a move to next resistance, near 8,100, is very likely. If not a move back support at 7,500 become likely.

The next largest move, to the downside, was made by the Dow Jones Industrial Average. The blue chips fell -0.14% and created a small spinnning top candle with small upper and lower shadows. The move occurred close to neither support nor resistance, and appears to be consolidation before another move higher. The indicators have rolled into a bullish signal, confirmed today with a zero line crossover in the MACD, with upside target only 175 points above today's close, 18,000. This level is likely to provide resistance and may cap gains in the near term, a break above would be bullish and likely lead to a test of the all time high.

The S&P 500 made the smallest move of all the indices today, -0.02%. The broad market created a very small spinning top type doji not close to support or resistance. Today's move appears to be a pause within a near term rally, not surprising following two days of gains, and is supported by bullish indicators. Both MACD and stochastic are on the rise, confirming Tuesday's break above the short term moving average, and point to higher prices. First upside target is near 2,110 with a possible move to my resistance line at 2,120. A break above this level would be bullish and likely carry the index up to test resistance at the all time high near 2,130.

The NASDAQ Composite was able to post a gain for today's session, but a small gain, only 0.14%. The tech heavy index created a very small candle, doji, and indicated higher. Resistance is about 1% above today's close and is first target should the index continue higher. A break above this level would be bullish and could carry it up to the 5,050 level or higher. First target for support is near 4,795 and the short term moving average.

The market took a breather today, not unusual following 2 days of gains. Whether or not it continues to move higher is yet to be seen. Tomorrow there are two things to be aware of, either of which could move the market; a speech from Janet Yellen and the 2nd estimate for 1st quarter GDP. Yellen will be watched for FOMC clues, the GDP for signs of strength in the economy. Expectations are for GDP to be revised higher to 0.9%, a strong number will be bullish but also raise the chances for a sooner-rather-than-later rate hike.

I am still concerned about 2nd quarter earnings outlook, negative earnings growth is not good and could easily cause the market to correct, but the signs are good for a boom in activity that could carry us through the summer. Labor data remains strong, housing data is much better than expected, and the two combined could drive profits in the 2nd half. I'm not quite ready to give up my bearish stance for the near term, but am increasingly convinced the 2nd half of the year is going to be good for business, the economy and the market. Believe it or not the next earnings cycle begins in only 6 weeks, better than expected with rising forward expectations will go a long way to helping the market move higher.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Invest Like Buffett

by Jim Brown

Click here to email Jim Brown

Editors Note:

Warren Buffet is supposedly a shrewd investor. He buys value and then stick with it through thick and thin. One of his recent investments is IBM. He believes the giant is undervalued and recently added to high position despite some analysts calling IBM a value trap. Shares are about to break out of a 10-month consolidation base. Will he be right?


IBM - International Business Machines - Company Description

IBM provides information technology products and services worldwide. The Global Technology Services segment provides IT infrastructure including outsourcing, integrated technology, cloud, and technology support services. IBM used to be a hardware company but that is rapidly shrinking and the services business is rapidly expanding. The company was founded in 1910.

Buffett calls IBM one of his "big four" investments in public companies including American Express, Cocs-Cola and Wells Fargo. He said IBM "possesses excellent business outlook and are run by talented managers that are shareholder oriented." He increased his stake from 7.8% to 8.4% worth $13 billion. IBM trades at 9x earnings and pays a dividend that yields 3.9% and has grown at an annual rate of 15% over the last five years. IBM is also a buyback machine. They routinely buy back billions in stock.

IBM has been suffering from a decline in revenue for the last several years. Their mainframe business is declining because China will no longer let critical companies by hardware from American companies for fear of spyware imbedded in the equipment. They also dumped their PC business to Lenovo in an effort to move away from commodity businesses and more into services.

Their cloud business is growing quickly. This week they announced a deal with FleetCor (FLT) to move its business to IBM's cloud. FleetCor processes 1.9 billion transactions a year. Forbes calls FleetCor one of its top 20 Most Innovative Companies. FleetCor manages more than a dozen datacenters globally at a cost of about $100 million. The company said, "IBM has more scale than us and we expect to see further efficiencies with IBM processing for us." They expect to save up to $40 million annually and expect greater security.

This is what IBM does best. They provide computing and services for Fortune 1000 companies. IBM said it signed 26 new service contracts last quarter for more than $100 million each. This is why IBM will rebound out of the funk they have been in for the last year. Amazon and Google do not have the capability to provide the services part of the cloud like IBM can. They provide hardware access but you do the rest. IBM does everything.

Earnings July 18th.

IBM shares have rebounded from $120 in February and are about to break out over 10-month resistance at $153.50. Once they break through that barrier, they could run for $15-$20 as unbelievers become believers and begin chasing the price higher.

If you want to take the cautious approach, you might want to wait until IBM trades at $153.75. I am recommending an immediate entry.

Buy July $155 calls, currently $2.44, initial stop loss $146.50.


No New Bearish Plays

In Play Updates and Reviews

Resistance Held

by Jim Brown

Click here to email Jim Brown

Editors Note:

S&P resistance at 2,095 has held for the last two days with a fallback to close at 2,090 on both days. This is actually bullish for the S&P to not give back any gains. Volume was almost the same as Tuesday and Wednesday at 6.5 billion shares. While that is only moderate, there was no decline in volume as we would have expected on the day before a holiday Friday.

Holiday weeks tend to be somewhat bullish but this one has run its course. In theory, we could see another dormant day on Friday and then a sell off into the close as traders take profits before the long weekend.

However, Google won the $9 billion copyright suit against Oracle and we could see a spike in GOOGL shares on Friday and a decline in ORCL shares. Google should win the index battle with a bigger market cap and a Google gain could lift the Nasdaq.

We did not lose any plays today because the market was flat. We are now evenly weighted between calls and puts so we can profit in either direction.

Current Portfolio

Current Position Changes

OC - Owens Corning

The long call position remains unopened until a trade at $52.50.

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

DIS - Disney -
Company Description


No specific news. Dow component Disney did exactly as the Dow did. Nothing.

Original Trade Description: May 19th.

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 the introductory price of $57-$75. 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.

Position 5/20/16:

Long July $100 call @ $2.15, see portfolio graphic for stop loss.

MKC - McCormick & Co - Company Description


No specific news. Nice gain. 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, see portfolio graphic for stop loss.

OC - Owens Corning - Company Description


No specific news. Perfect timing! OC has not had a decent decline since the revenue miss at the end of April. The day after I recommend it the stock falls 1.7% and the biggest decline in a month. I am tempted to buy the dip but I want to see what Friday brings for the market.

Original Trade Description: May 25th.

Owens Corning, together with its subsidiaries, produces and sells glass fiber reinforcements and other materials for composites; and residential and commercial building materials worldwide. It operates in three segments: Composites, Insulation, and Roofing. The Composites segment manufactures, fabricates, and sells glass reinforcements in the form of fiber; and manufactures and sells glass fiber products in the form of fabrics, non-wovens, and other specialized products. Its products are used in pipe, roofing shingles, sporting goods, consumer electronics, telecommunications cables, boats, aviation, defense, automotive, industrial containers, and wind-energy applications in the building and construction, transportation, consumer, industrial, and power and energy markets. The Insulation segment manufactures and sells fiberglass insulation into residential, commercial, industrial, and other markets for thermal and acoustical applications; and manufactures and sells glass fiber pipe insulation, flexible duct media, bonded and granulated mineral fiber insulation, and foam insulation used in above- and below-grade construction applications. It sells its products primarily to the insulation installers, home centers, lumberyards, retailers, and distributors. The Roofing segment manufactures and sells residential roofing shingles, oxidized asphalt materials, and roofing accessories used in residential and commercial construction.

As you can see in the company description, they do a lot more than just fiberglass insulation but that is what they are known for in the industry. The sharp uptick in new home sales reported this week suggests there is a corresponding spike in new home construction both in the last several months and over the summer months. OC is the premier supplier of insulation materials for new home construction and their profits will blossom as a result.

In their recent earnings, they reported 53 cents compared to estimates for 33 cents. However, revenue was a slight miss at $1.23 billion compared to estimates for $1.24 billion. Shares were crushed for a 15% drop over the next four days. They have completely recovered and today's close was a new high.

In their guidance they said all three divisions were improving and this was for a winter quarter when demand is slower. I believe this is a better bet than investing in a homebuilder. All the builders use OC products so buying OC is a builder agnostic trade.

Earnings July 27th.

Shares do not move very fast but they have been a steady gainer since the February lows. Because it is a slow mover the option premiums are very cheap. Because Wednesday's close was a new high and the market has been up strongly for two days I am going to put an entry trigger at $52.50. We want to make sure there is a breakout before we enter and that the market is not going to tank at the open on Thursday.

With an OC trade at $52.50

Buy August $55 call, currently $1.15, no initial stop because of the cheap option.

SKX - Skechers - Company Description


No specific news. Shares starting to show a little uptick. Maybe the PVH and Costco earnings have ended the bearishness in 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.

TWTR - Twitter - Company Description


Two more executives leaving Twitter. Jana Messerschmidt head of global business development and Nathan Hubbard on the global media team announced their resignations. Reportedly they had been planning on leaving for months and it was not a shock. Ali Jafari will assume their duties.

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. Closed 3 cents above a new low.

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.

CP - Canadian pacific Railway - Company Description


No specific news. Traded within 21 cents of our stop loss before fading in the afternoon.

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.

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%. Earnings July 20th.

Position 5/10/16:

Long June $130 put @ $2.95, see portfolio graphic for stop loss.

DLPH - Delphi Automotive - Company Description


No specific news. Shares fell back to the Tuesday lows as the market short squeeze faded.

Original Trade Description: May 23rd.

Delphi, a former division of General Motors, manufacturers vehicle components and provided electrical and electronic, powertrain, and safety technology solutions to the automotive and commercial vehicle markets worldwide.

When they reported Q1 earnings of $1.36 they beat the estimates for $1.34. Revenues increased 7% to $4.05 billion but missed estimates for $4.08 billion. They repurchased 5.6 million shares worth $370 million in the quarter and had $137 million left to spend. In April the board authorized a new $1.5 billion repurchase program. They currently has $463 million in cash and $4.35 billion in debt.

On the surface it would appear they are a very healthy company. However, they are very dependent on U.S. auto production. The Autonation CEO said on his earnings call that auto inventories were at record highs and there was no space left to store them. He said manufacturers would have to cut back on production for the rest of the year to bring inventory levels back into balance.

Vehicle sales have been helped by low gasoline prices and the abundance of subprime loans available to consumers. Some 44% of borrowers were taking out 61-72 month loans. However, all good things must end. Gasoline prices are rising and are not likely to return to the recent lows for a very long time, if ever.

Recently banks reported that as many as 31% of those subprime loans were in trouble. While not technically in default, there have been problems like late or missed payments. Also, as many as 35% of those borrowers are underwater because the value of recently new cars has fallen sharply with the resale market still crowded with the used cars everyone is trading in to buy new.

As a result of those statistics the subprime auto loan market is evaporating. It is becoming increasingly hard to obtain financing and larger down payments are required. This is slowing the sale of new cars. In the March sales report the run rate fell to 16.6 million and a two year low. That rebounded to 17.4 million in April and analysts blamed the dip on the weather. However, the last five months have been significantly lower than the last five months in 2015 when the sales rate rose to 18.2 million. Manufacturers are compensating by raising incentives nearly to the rate immediately after the recession. Also, manufacturers leased a lot of cars in order to move inventory immediately after the recession. Those cars are now coming off lease with 2.55 million expiring in 2015 and that number will rise by 500,000 per year through 2018.

This is where Delphi runs into trouble. As auto sales decline it will reduce revenue for Delphi. We are also heading into the summer months when auto factories shut down to retool for the new models that come out in the fall.

Investors have caught on to the "peak auto" worries and Delphi shares have been declining since their earnings in early May. If a company is going to miss on revenue in the good times they are likely to miss again as auto sales slow.

Earnings August 3rd.

Position 5/24/16:

Long July $65 put @ $1.92, initial stop loss $69.25.

There is no open interest on the July strikes because the series was just added today after the May expiration. It should not be a worry because the pricing is not out of line and open interest will rise quickly.

NKE - Nike - Company Description


No specific news. Shares fell back to support at $55.75 and a breakdown could be soon.

Original Trade Description: May 21st.

Nike designs, develops, markets and sells athletic footwear, apparel, equipment and accessories for men, women and kids worldwide. The company offers products in eight categories including running, basketball, football, men's training, women's training, sportswear, action sports and golf under the Nike and Jordan brand names.

Part of Nike's successful marketing involves signing deals with various celebrities, sports teams, franchises, etc, for endorsements and advertisements obtained by teams and players wearing Nike apparel. Sometimes Nike discounts their equipment to enterprises including colleges, group sports associations, etc along with an agreement not to use another brand.

Last week Nike signed an $870 million, 10-year deal with the Chelsea soccer club and they will provide all their equipment and apparel starting in 2017. I am pretty sure the club cannot use $87 million a year in uniforms, shoes, balls and nets. That means the rest of the money Nike is paying is for advertising the Nike swoosh on all their uniforms. That is an expensive advertising deal but evidently Nike thanks it is worth the money.

Recently Nike paid endorsements have reached unbelievable heights with LeBron James receiving a $1 billion lifetime contract to endorse Nike products and allow his name to be used for a line of basketball shoes. The problem occurs when these sports start quit playing. Within a few years they are all but forgotten as a new crop of athletes become the new superstars and a new crop of teenagers want new gear named after or endorsed by those new stars. Under Armour's Stephen Curry is a prime example. He is the new star on the block and they cannot keep his shoes in stock.

When Foot Locker reported earnings on May 19th they said Nike's basketball shoes were not selling. Nike shoes account for 60% of Foot Locker revenue. Foot Locker accounts for 20% of Nike revenue. Nike's basketball shoes for named players including LeBron James, Kobe Bryant, Kyrie Irving and Kevin Durant occupy the most shelf space at Foot Locker and sales of those high dollar shoes are slowing. I reported several weeks ago that Foot Locker was selling some of those shoes for 50% off in their online store. That is a clear sign of slow retail sales.

With so much of Nike's revenue coming from the Foot Locker chain it suggests Nike could have some earnings problems in the current quarter. If those shoes are not selling in Foot Locker they are probably not selling at Finish Line (FINL) either. Finish Line has been struggling with sales anyway and having a Nike product that is not moving could make the situation worse. Add in the bankruptcy and closure of 450 Sports Authority stores and another sales outlet for Nike bit the dust.

Nike is a good company. They have great products and they sell worldwide and online. Their last quarter earnings rose 22% to 55 cents and beat estimates for 48 cents. However, revenue of $8.03 billion missed estimates. Nike blamed the strong dollar for the revenue miss. They said futures orders rose 12% and that also missed estimates for 15%. They also missed on revenues in the prior quarter.

Now that basketball season is over and all those unsold basketball shoes are cluttering up store shelves we could see further weakness in the current quarter earnings due out on June 23rd. With all the retail earnings declines over the last couple weeks it makes sense that Nike may have been having some of the same volume problems. Since they missed on revenues in the prior two quarters, it would seem to be a good bet they will miss this quarter as well given the weakness in retail.

Shares crashed after their earnings problem on March 22nd and flatlined around $60 for a month. That sideways movement has now turned into a downward slide with the stock hitting a three-month lod on Friday before rebounding from the initial FL instigated dip. I believe the stock is going to continue to move lower and the bounce on Friday was an entry point.

Position 5/23/16:

Long July $55 put @ $1.75, see portfolio graphic for stop loss.

SPY - S&P 500 ETF - ETF Description


The S&P closed flat at 2,090 as the short squeeze gains begin to consolidate. If we do not get a retracement of these gains next week our June options will quickly turn worthless. We need a 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