Option Investor

Daily Newsletter, Wednesday, 6/1/2016

Table of Contents

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

Market Wrap

End-of-Month Into New-Month Money Helps the Market

by Keene Little

Click here to email Keene Little
We got the typical bullish move last week in front of Memorial Day weekend but the market has gone sideways for the past week. There is still more upside potential but there's enough evidence of topping to warn bulls to be more defensive.

Today's Market Stats

The market has been holding onto last week's gains since last Wednesday and the indexes put in new highs on Tuesday before dropping back down. The tech indexes and RUT have been stronger (although NDX finished in the red today), especially the RUT, and that's been bullish. But with the completion of end-of-month and today's new-month money we could see the market start to struggle more as waning bullish momentum warns us of a tiring rally.

Today's economic reports included the ISM index, which came in a little better than expected, at 51.3 vs. 50.4 expected and an improvement from April's 50.8. But Construction Spending for April was weaker at -1.8% vs. expectations for +0.5% and a drop from +1.5% in March. Auto and Truck sales were essentially the same as April so it was a neutral day for reports. Tomorrow's important report will be the ADP Employment and then Friday will be a big day with the nonfarm Payrolls, hourly earnings, unemployment rate, Factory Orders and ISM Services.

While this week's economic reports were somewhat neutral, we have had more negative than positive and that has been an indication that our economy continues to slow. Yet, in spite of the plethora of worsening economic and earnings news the stock market continues to ignore it all and is again challenging its 2015 highs. Pretty amazing and rallying on bad news is actually bullish so the bulls have to be given their due, even if it doesn't make much sense logically for how the stock market should be behaving. A logical stock market is of course an oxymoron, which is why we try to at least discern what's going on with the use of charts.

What has been reported by many is the huge bullish influence of share buybacks. There's a lot of data showing company buybacks have provided most, if not all, of the support that has driven the market indexes back up since 2009. Companies have borrowed huge amounts of money, made cheap by the Fed's policies, and they used the money to buy back shares and increase dividends. It's been a poor use of the money since it has been totally non-productive (vs. putting it into capital equipment and other revenue-enhancing investments) and that has only created a larger debt burden for companies to deal with. All in an effort to boost stock prices through higher "earnings."

The earnings "improvement" has of course been a sham since it only improves earnings per share but not actual earnings. The SEC is in fact close to changing the requirements for earnings reporting to be more in line with GAAP (Generally Accepted Accounting Principles) and that will force companies to report closer to actual earnings instead of make-it-what-you-want earnings. Earnings have been in decline for a few quarters and all signs are now pointing toward a recession (we've probably already entered one but we have to wait for numbers to confirm the fact in hindsight). This presents a real problem for the stock market if it's not able to attract new money from somewhere else. Stock buybacks have been in significant decline this year and earnings have also been in decline. Companies are buying back fewer shares (less support for the stock market) and earnings per share are deteriorating (especially after the SEC requires more GAAP requirements), which of course creates less support for high valuations. The combination of these factors should be knocking the stock market back down. Again, that's the logical conclusion but we know logic does not apply (yet).

Stock buybacks have amounted to trillions of dollars of support for the stock market since 2009 (far more than the money the Fed has created). But those buybacks have slowed significantly as described in a recent article in Bloomberg:

" After snapping up trillions of dollars of their own stock in a five-year shopping binge that dwarfed every other buyer, U.S. companies from Apple to IBM just put on the brakes. Announced repurchases dropped 38% to $244 billion in the last four months, the biggest decline since 2009, data compiled by Birinyi Associates and Bloomberg show."

As noted in the Bloomberg article, the number of companies they have been cutting their dividends has also increased to the highest level since 2009. And yet here we are with indexes testing all-time highs. Go figure.

My concern is that the market is once again whistling past the graveyard, just as I was warning back in 2007, and it's going to take a shock (be it a black swan or something less) to start the selling. I strongly suspect the selling will beget more selling and after a big down day leads to another we'll have many scratching their heads wondering why the market is suddenly selling off (probably on good news). Many bulls are waiting for a signal to get out but oftentimes the signal comes too late for them to get out near the top and then they're afraid to take a "loss" (of profits) so they hang on for an expected bounce back up that never comes. It's how bulls get trapped so my recommendation is to set your stops and then honor them, which might mean manually stopping yourself out if a limit stop order was not triggered after a big gap down.

The charts are showing upside potential but I'm looking at them with a wary eye. I see upside potential but I don't see it as worth the downside risk. In other words, I think the downside risk dwarfs upside potential so that has me feeling cautious about the market at the moment and trading very short term (selling weekly credit spreads and making small directional trades that have a lifespan of days, not weeks. Tonight I'll start the chart review with the SPX weekly chart.

S&P 500, SPX, Weekly chart

I'm not sure a downtrend line from July 2015 through the April high is an important one but SPX is now approaching it near 2105 (yesterday's high was 2103 and today was near 2101). All highs since May 2015 have been lower highs, even if only marginally, and so far the bounce off the May 19th low remains below the April 20th high at 2111, which is why the downtrend line is potentially important. You can see the bearish divergence on MACD at the moment against the April high, which is true on the daily and intraday charts as well. In other words the rally looks to be running out of steam as it approaches this line of resistance. If the bulls can break above 2105 and then 2111 they'll have to then deal with the November 2015 high near 2116 before finally tackling the May 2015 high near 2135. That's a lot of resistance to fight through and I don't think it's a good risk vs. reward trade on the long side here. Watching for a rollover from resistance to short could be the better bet.

S&P 500, SPX, Daily chart

The daily chart below is messy as I'm trying to show additional reasons for potential trouble for the bulls. If the rally from January is a 5-wave move and the 5th wave is the leg up from May 19th it will equal 62% of the 1st wave at 2109, which is between the downtrend line from July 2015 and the November 2015 high. It would obviously be more bullish above multiple levels of resistance between here and 2116 and if the bulls can drive SPX above 2117 it would open the door to 2135. Above that they'd then have their sights set on 2160, which is where the 5th wave would equal the 1st wave in the rally from January. The upside potential needs to be respected by the bears but I'll believe it if and when SPX is able to rally above 2135, which I think could be very difficult to reach. But I also know we're dealing with something other than fundamentals driving the buying in this market.

Key Levels for SPX:
- bullish above 2117
- bearish below 2060

S&P 500, SPX, 60-min chart

On the daily chart I talk about the 5-wave move up from January and the leg up from May 19th is the 5th wave. That 5th wave is shown in more detail on the 60-min chart below, which is itself now a 5-wave move up into yesterday's high and that suggests the rally from January could now be complete. But it's possible this morning's low is the start of the 5th wave of the move up from May 19th and upside projections for it are 2105 (to equal 62% of the 1st wave) and then 2117 (to equal the 1st wave). The 2105 projection matches the downtrend line from July 2015 and the 2117 projection matches the November 2015 high, so either is possible from here. But it's also possible the rally is already complete and it's the reason why I think betting on the upside is a poor risk vs. reward trade. A drop below this morning's low at 2085 would be a stronger indication that the top is in place. But for the larger pattern we still don't know yet if we'll get just a pullback correction to the rally from May 19th, and then proceed higher, or a larger pullback correction to the rally from January, and then proceed higher, or more bearishly, the start the next major decline. It's a risky spot to be long and I think it's a good time to get defensive and perhaps nibble on some short positions. Once we get a little larger pullback (assuming we'll get one) we can then look for evidence to see if we should be looking for just a pullback or something more bearish.

Dow Industrials, INDU, Daily chart

The Dow has been weaker than SPX as it has only been able to challenge its May 10th high at 17934, with yesterday's high at 17899, and is not yet close to challenging its April 20th high at 18167. It's bullish though above its 20- and 50-dmas, at 17683 and 17744, and the top of its broken down-channel from April, which was back-tested with this morning's low at 17664. The next support level is its uptrend line from February through its May 19th low, which is an untested uptrend line, currently near 17580. Therefore the bulls are theoretically in good shape above 17580 since there's a lot support between here and there. If the bulls can keep it up there's upside potential to 18350-18400 where the Dow would test its May 2015 high (18351) and then where the 5th wave of the move up from January would equal the 1st wave (18391). But before those levels could be achieved it would have to get through the top of a shallow up-channel from August 2015 (bold blue line), which is where the April rally stopped and is currently near 18100.

Key Levels for DOW:
- bullish above 18,100
- bearish below 17,330

Nasdaq-100, NDX, Daily chart

Yesterday NDX rallied up to resistance near 4525 where it met its downtrend line from December 2015 - April 2016 and the shelf of support to the island that was created in April between the gap up on April 13th and the gap down on April 22nd. Today it made a minor new high but it's still struggling near the 4525 resistance level and closed right on the downtrend line. The bulls need to do what they always do at resistance -- create a gap up to get over it and that would open the door for a possible run up to its April 19th high at 4574 and price-level S/R near 4600. But a decline from here would leave a bearish kiss goodbye against resistance and while that would give us a bearish heads up, the bears would not be in better shape until NDX drops below its May 11th high near 4408 and its 200-dma near 4401.

Key Levels for NDX:
- bullish above 4525
- bearish below 4400

Russell-2000, RUT, Daily chart

The RUT has been acting stronger the past several days and that's always a good sign for the bulls and as long as the RUT is leading to the upside it should keep the bears back on their heels. But today's high at 1163 is only marginally above price-level S/R near 1160. Considering the short-term bearish divergence since last week's highs, such as seen on its 60-min chart, it's a warning sign for the bulls to be careful here. A turn back down from resistance and a drop below this morning's low at 1148 would be the first bearish heads up. But if the bulls keep going we could see a rally to the 1200 area.

Key Levels for RUT:
- bullish above 1160
- bearish below 1094

10-Year Yield, TNX, Daily chart

Yesterday TNX tagged its downtrend line from March-April and then dropped back down. Today it dropped lower and tested its 20- and 50-dma's at 1.80 and 1.81, and only slightly lower is the uptrend line from July 2012 - January 2015, which TNX has been oscillating around since February. There's a sideways triangle pattern playing out since March and it continues to look like a bearish continuation pattern, which means TNX should drop lower out of it. This pattern, if we see downside follow through, suggests the Fed will not be raising rates in June and probably not in July (or the rest of this year).

KBW Bank index, BKX, Daily chart

BKX has now made it up near its downtrend line from July-December 2015, currently near 71.70 (last week's high was 71.53, yesterday's high was 71.46 and today's was 71.22). These highs are slightly higher than the late-April highs but showing bearish divergence and that suggests the downtrend line is going to hold as resistance. There is upside potential to its November 2015 high at 77.14 but until the downtrend line is broken I don't think that's a high-probability move. The weekly candle is currently a hanging man doji up against the downtrend line.

Transportation Index, TRAN, Daily chart

The TRAN has been fighting to break its downtrend line from March-November 2015 since March -- it has broken it twice but was unable to hold above it. Yesterday it closed marginally above the line and today it closed on the line, currently near 7770. Yesterday's high was a test of its broken 50-dma, currently at 7828, and near the same level is the 50% retracement of its November 2014 - January 2016 decline, at 7856. If the bulls can get back above 7860 it could be three time's a charm for the bulls, otherwise a rollover from here would indicate resistance will hold and the bears will get braver.

U.S. Dollar contract, DX, Weekly chart

Yesterday the US$ ran into the top of its down-channel from December 2015 and looks ready for a pullback but it should only be a pullback to a higher low before continuing higher within its sideways consolidation that it's been in since March 2015.

Gold continuous contract, GC, Weekly chart

Gold's decline last week had it dropping back inside its down-channel from 2013, leaving a failed breakout attempt in March and April. The new April price high left a bearish divergence against its March high and that was a warning that the rally probably wouldn't hold. But the larger pattern is still up for grabs and we'll have to wait for a few weeks before we'll get some better ideas. The longer-term pattern suggests (to me) that gold has not yet put in a longer-term bottom and that the May 2nd high will now be followed by a new low below the December 2015 low at 1045. The bottom of its down-channel crosses price-level S/R (from 2008-2009) near 1000 in August and that's a good target for now and until something in the pattern tells me to expect something different.

Silver continuous contract, SI, Daily chart

Silver has sold off hard since peaking May 2nd at the top of its down-channel from 2013 and the short-term shallow down-channel from the end of 2014. But silver is approaching its uptrend line from January, near 15.65 (today's low was 15.83) and that could produce at least a bounce. But as with gold, until I see something in the price pattern that tells me otherwise, the longer-term pattern continues to suggest lower prices for silver, potentially down to the $10 area.

Oil continuous contract, CL, Daily chart

In the recent weekly updates on oil I've shown an expectation for the completion of an A-B-C bounce pattern off the January low and a 5-wave move up from April 5th to complete the c-wave. Price projections for the wave count pointed to 50.21-50.95 for the completion of the rally, which would also have it testing its October 2015 high at 50.92. For the 5-wave move up from April 5th the 5th wave equals the 1st wave at 50.21 and last week's high was 50.21. Yesterday's high was 50.10 and then today it dropped further and broke its uptrend line from February, currently near 49.12. Notice too on the weekly chart below that in addition to the price projections at 50.21-5095 there is the broken uptrend line from 1998-2008, currently near 50, which was tested in January-March 2015, broken in July 2015, back-tested in September-October 2015 and now is being back-tested again. Oil would clearly be more bullish above 51 but with it being overbought (and showing bearish divergence on its daily chart since March) I don't give it high odds here for a breakout. We're more likely looking for at least a pullback if not a drop back down to the 20-25 area. And if oil turns down from here we could see the stock market follow it (or the other way around but regardless, the two have been following each other for a while now).

Economic reports

Tomorrow's economic reports include the ADP Employment Change report, which is expected to show a slight gain from April and the unemployment numbers. Unless the ADP report is really different from expectations there likely won't be much of a market response. The response is tough to guess anyway since it will be more from a guess how the Fed will treat the number in their rate decision.


There are plenty of reasons why the stock market should be selling off and yet it isn't. That alone tells us the market is more bullish than it might appear on the charts and the bears need to respect that. Don't short the market just because it shouldn't be rallying. Follow the charts and watch for breaks of support or play the rollover at resistance, both of which give you close stop levels and a way to tightly manage your risk. Getting short and staying short just because it will "eventually" roll over is not a good trading strategy. The market can, and will, remain irrational far longer than you can remain solvent fighting it.

The flip side is bulls cannot afford to get complacent here. The indexes are again testing the 2015-2016 highs but are vulnerable to a downside break because of the lack of fundamental support. I of course hesitate to use that word but the fact remains -- stock buybacks, which have provided the bulk (many say all) of the support for the stock market, are in a strong decline and the waning momentum to the upside is a warning sign. The rally can certainly continue higher, especially with short covering from frustrated bears, but I think we're a news event away from a nasty downside surprise.

From a percentage gain vs. percentage loss perspective I think the downside risk far outweighs the upside potential. Ask yourself if you would enter a new long position here and if the answer is "no" then pull your stop up tighter and get defensive. It might be early to get short but I would have some shorting ideas/candidates identified so that you're ready to go. Trade cautiously and stay safe.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Option Plays

Threading the Needle

by Jim Brown

Click here to email Jim Brown

Editors Note:

Ameriprise Financial through its subsidiary Columbia Threadneedle and Columbia Management Investment Advisers will acquire Emerging Global Advisors, a leading provider of smart beta portfolios focused on emerging markets. This is just one more in a long line of acquisitions for Ameriprise and its subsidiaries.


AMP - Ameriprise Financial - Company Description

Ameriprise Financial is a large holding company of broadly diverse investment companies. They provide financial products to individual and institutional investors worldwide. They operate as a full service brokerage and provide investment products and advice to retail, high net worth individuals and institutional clients. They also provide mutual funds and exchange traded funds, variable product funds underlying insurance and annuity accounts. They also provide life insurance, disability income, property and casualty insurance through various relationships. The company was previously known as American Express Financial Corporation and changed its name in 2005.

Ameriprise is a complete provider of financial services. Acquiring the Emerging Global Advisors portfolio of ETFs gives them another line of products to sell to their high net worth clients. EGA launched its first ETF in 2009 and specializes on providing rules based, smart beta strategies in order to provide diversification and growth opportunities in emerging markets. In the first quarter the company applied to the SEC for registration of numerous additional ETFs that provide equity income to investors. Blackrock believes smart beta ETFs will reach more than $1 trillion in assets by 2020 and $2.4 trillion by 2025. Blackrock is a competitor whit its iShares series of smart beta offerings.

When AMP reported earnings on April 27th they missed the estimates of $2.20 with earnings of $2.17. Revenue was $2.8 billion. They blamed the miss on the extreme market volatility in January and February. They returned $568 million to shareholders in buybacks and dividends.

Shares declined on the news but analysts began saying given the volatility they did really well and shares have now moved over the April pre-earnings high.

Earnings are July 27th.

They have resistance at $109 and again at $115. With expectations for a Fed rate hike lifting the financial sector we should see a couple more weeks of gains on that alone. Since the July options expire before the earnings they do not have any expectation premium. Also, when June options expire in two weeks the July premiums will immediately evaporate. I am recommending we go with the more expensive September calls and plan on selling them before AMP earnings.

Buy September $105 call, currently $4.00, initial stop loss $95.35.


No New Bearish Plays

In Play Updates and Reviews

Missed a Good Chance

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P dipped to 2,085 intraday but climbed back to close at 2,099 and a 2-point gain. We missed a good chance at a sell off. The market is looking increasingly like it wants to move higher and that rebound right back to resistance was telling.

However, the biotech index was the best performing index again and supported the S&P, Nasdaq and Russell 2000. The BTK is living on borrowed time with only one more day before the ASCO conference begins. Next week could be an entirely different story.

While the rebound was encouraging we are still facing strong resistance from 2,100-2,132 and we may need some added headlines to push us to new highs. The trouble with headlines they can cut both ways.

Current Portfolio

Current Position Changes

No Changes

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

ATVI - Activision Blizzard -
Company Description


No specific news. Shares saw some profit taking in a weak market.

Original Trade Description: May 28th.

Activision Blizzard designs, developes and publishes online, personal computer, video game console, handheld, mobile and tablet games. The company operates through two segments, Activision Publishing, Inc. and Blizzard Entertainment, Inc. The company develops, publishes, and sells interactive software products and content through retail channels or digital downloads; and downloadable content to a range of gamers. It also publishes subscription-based massively multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products.

At the end of Q1, ATVI had 544 million monthly active users thanks to the acquisition of King Digital. King had a very diverse network of 463 million global game players. Activision said the acquisition will be accretive to 2016 revenues and earnings by 30% and significantly accretive to free cash flow per share. It also brings 463 million players into the Activision Blizzard massive multiplayer PC games like World of Warcraft that have monthly subscription fees.

Activision actually has a World of Warcraft movie premiering on June 10th. If you go to the movie, you will get a copy of the PC game World of Warcraft free. The movie characters have custom weapons that will be available to players after the movie debut.

Their new game "Overwatch" has been played by 9.7 million people in the open beta phase where it is released to the public in order to get the bugs out of it. It is a good bet the majority of those players will be buyers when the game launched on May 24th. Initial sales were huge and Jefferies expects ATVI to sell 5-7 million copies in Q2. When it reaches 10 million units Jefferies said that would produce up to $250 million in revenue for ATVI or 7-9 cents a share in earnings.

Metacritic has a 93 rating on the game and out of 11 professional reviewers five gave it a perfect 100. The Jefferies team that played the game in order to review it said "it was easy to learn but difficult to master."

Gamers spend $509 million in April in the U.S. alone.

Activision said they were working with Twitch and Instagram and would be producing a lot of content on Facebook live. They are planning on launching live streams of E-Sports programming to all of Facebook's 1.6 billion users. E-Sports provides live competition by gamers for millions of dollars in prizes as other gamers watch. Activision just launched its MLG.tv live streaming platform where gamers can watch others play in real time.

Webush believes ATVI could earn $3 per share by 2018 with $2 per share in 2016. The company reported 23 cents for Q1 on record revenue of $1.46 billion. Those numbers were up from 16 cents and $1.28 billion. Analyst estimates were for 12 cents and revenue of $823 million. The company raised guidance for Q2 and for the full year. They are guiding for earnings of 38 cents in Q2, up +192% on revenue of $1.38 billion, up +81%. For the full year they guided to earnings of $1.78, up +35% and revenue of $6.28 billion, up +36%.

Adding to earnings were continued sales of Call of Duty: Black Ops 3 and Candy Crush Jelly Saga.

Earnings are August 4th.

Shares are approaching new high resistance at $40 and should breakout, market permitting. I am proposing the August $40 calls even though they are a little more expensive than the July. I want to exit the position while those calls still contain some earnings expectation.

Position 5/31/16:

Long Aug $40 Call @ $2.18, initial stop loss $36.85.

DIS - Disney - Company Description


No specific news. Shares were down with the Dow. Disney announced The Return of Mary Poppins would be in theaters on Christmas Day 2018 staring Emily Blunt in the role Julie Andrews played when she won the Best Actress Oscar in 1964.

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"
Dec 25, 2018 - Mary Poppins Returns
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.

IBM - International Business Machines - Company Description


IBM announced the acquisition of EZSource, an Israel-based application discovery company, to help developers modernize mainframe applications. IBM has acquired 13 other Israeli companies since 1998. Shares were down with the Dow.

Original Trade Description: May 26th.

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.

Position 5/27/16:

Long July $155 calls @ $2.40, initial stop loss $146.50.

MKC - McCormick & Co - Company Description


No specific news. 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. Nice rebound.

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.

Position 5/31/16 with an OC trade at $51.75

Long August $55 call @ $.85, no initial stop because of the cheap option.

SKX - Skechers - Company Description


No specific news. Uptick continues.

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. The company released some new tools for regulating comments on Periscope. Shares dipped after negative comments by a guest on CNBC.

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


Ray Dalio at Bridgewater Associates quadrupled his stake in ABC in Q1 by adding 185,507 shares at an average price of $89.32 per share. The news lifted the stock. The biotech sector was the biggest gainer again and that provided support as well.

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.

DLPH - Delphi Automotive - Company Description


No specific news. Shares fell after the major automakers announced double digit sales declines for May.

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


Bank of America downgraded from buy to neutral and Morgan Stanley downgraded from overweight to equal-weight. Wells Fargo downgraded from outperform to market perform two weeks ago. Things are not going well for Nike.

Shares saw a big dip to $52.92 at the open but rebounded to close at $54.93 and only a 29-cent loss. I lowered the stop loss.

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 dipped to 2,085 at the open but worked its way back to positive territory to close at 2,099 for a 2-point gain. This looks a lot like a potential rally forming.

If we do not get a retracement of these gains next week our June options will quickly turn worthless.

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.

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