Option Investor

Daily Newsletter, Thursday, 6/2/2016

Table of Contents

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

Market Wrap

Many Catalysts, Little Movement

by Thomas Hughes

Click here to email Thomas Hughes


The market barely budged today despite a plethora of potential catalysts, all eyes remain locked on tomorrows NFP report. Even so, today's events are sure to have long lasting impact on markets ranging from forex, to commodities, equities, options and bonds.

To start things off Japans Prime Minister Shinzo Abe surprisingly put off the long awaited sales tax increase by another 2.5 years. This is the second time he has put it off and the second time he has raised questions about the health of Japan's economy and the effectiveness of Abenomics. The move sent the yen shooting to a multi-week high, and the Nikkei down by -2.32%.

The Japan news had an effect on European markets which were down in the early half of their trading session. However, traders in this region were more concerned about the ECB decision and Mario Draghi's comments. The ECB did not change policy, as expected, but did add commentary to the effect that economic recovery is not moving forward quite as fast as the central bank would like.

According to the statements EU recovery is slow but progressing, interest rates will remain low, or lower, for an extended period of time, inflation will remain low or negative into the near term, inflation may pick up in the second half of the year and GDP will remain below 1.75% out to 2018 or beyond. European indices moved higher initially, fell back to morning lows after the statements and then recovered enough to close flat by the end of the day.

Market Statistics

Futures on the US indices indicated a lower opening right from the start. The trade was weak, losses were indicated to be less than a tenth of a percent, moved marginally lower after the morning data and held those levels into the open. After the open the first 20 minutes of trading were decidedly bearish; the SPX moved down in two steps to hit a morning low of -0.51%. Once the low was hit the tone of the day's session changed and the market began to move up. By 1PM the day's losses had just been about completely erased, the Dow Jones Industrial Average at least moving in to positive territory. By 2PM the NASDAQ Composite and SPX followed the blue chips into positive territory and continued higher into the close of the day.

Economic Calendar

The Economy

Due to the Monday holiday many of the data points usually scheduled for Wednesday were released today. This means we got a massive dose of labor data, all good, with only the NFP/Unemployment left for tomorrow. The first bit was the Challenger Job Cuts data which fell to a 5 month low, and the second lowest level since October 2014. Planned job cuts fell to 30,157 and are -27% lower from last May although on a year-to-date basis are still running hot, +13%. Energy led with cuts numbering 7,572.

The ADP Employment report, a precursor to the NFP data, shows that 173,000 new jobs were created in May. This is up from last month, slightly below expectations, but well within the range we have seen over the past 18 months. Small businesses led with gains of 76,000 followed by medium size businesses with 63,000 and large business with gains of 34,000. One headline that may cause concern is that all of last months gains were due to gains in the services sector, 175,000, offset by declines in goods producing jobs, -1,000, and manufacturing, -3,000. When you look at where services jobs were created, trades financial and professional services, concerns melt away. I'd also like to point out a gain of +13,000 construction jobs which, along with the trades jobs, point to ongoing strength in the housing sector.

Initial claims for unemployment fell by -1,000 this week from last week's unrevised figure. Initial claims are now 267,000 for the 65th week running and remain low/consistent with labor market health. The four week moving average of claims fell by -1,750 to 276,750. On a not adjusted basis claims rose by 2.1% versus an expected gain of 2.4% and have moved back above last year's level in the comparable period, +6.5%. Not-adjusted claims have been moving above and below last years levels for the last 6 weeks and may be indicating a change in labor trends. Regardless, they are very low and consistent with current labor market health.

Continuing claims rose by 12,000 to 2.172 million on top of a downward revision to last week's figure of -3,000. The four week moving average of continuing claims also gained 12,000, reaching 2.162 million. This figure has been has been rising over the past month and reached a new 6 week high today, but remains very low and consistent with labor market health.

The total number of Americans receiving unemployment benefits fell once again, by -6,372, to hit 2.069 million. This is the lowest level since last November and consistent with historical trends and ongoing labor market health. On a year over year basis total claims are down -3.6%, a much narrower margin than we've seen over the past few years and may be indicative of slowing in labor market recovery. Based on historical data I think we can expect to see total claims fall for another week or two before hitting bottom, my target is still below 2 million.

Auto loan data was released this morning as well. The value of US auto loans hit a record high in May, a 10% jump from the previous month, totaling more than $1 trillion dollars. Also, the average loan, $30,000, and the average payment, $500, are at all time highs too. Jamie Daimon responded to the data by saying "the market is a little stretched" and that someone, not JP Morgan, was "going to get hurt". One reason may be the rising number of sub-prime loans and sub-prime borrowers entering the market.

Tomorrow the big news will be of course the NFP data but that is not all that is on tap. Also look out for unemployment, hours, wages, factory orders and ISM Services.

The Dollar Index

There was lots to impact the dollar today. First off the surprise move by Shinzo Abe sent the yen higher as expectations for a BOJ action declined; delaying the tax hike takes pressure off the economy and reduces the need for further QE. Next the ECB decision and statements; no move but hints at further stimulus and weaker outlook for EU growth weakened the euro. After that there is the US labor data which indicates tightening labor markets and points to FOMC rate hikes.

The Dollar Index began the day moving lower, then reversed above support levels and moved higher. It is now just below resistance at $96 and above support at the short term moving average, near $95, waiting on tomorrow's data and the FOMC meeting next week. If the data is strong, strong enough to indicate the need for rate hikes, the dollar could break above resistance and move up to $96.50 or higher. Looking to the CME's Fed Watch Tool there is only about a 21% chance of rate hike next week, down from 32% last week.

The Oil Index

Oil prices had a wild ride again today, driven by OPEC. OPEC had their bi-annual meeting in Vienna today and members have indicated there will be no change of policy, no production caps and that the market "can't rule out supply increases". The oil price began the day about 0.5% higher, WTI was trading near $49.30, then fell on comments from OPEC delegates, and then later in the day regained the earlier high on hopes of summer drawdowns to inventory. US inventory data was released today, because of the holiday affected week, and showed a 1.4 million barrel decline from last week and elevating expectation for higher summer demand for gasoline. Oil prices may continue to rise while inventory declines but fundamentals are still skewed to the down side so caution is due.

The Oil Index traded sideways from yesterday's candle, creating a small white candle that did not close above the short term moving average. The index has now been trending near the 1,120 level for more than 6 weeks, all while the price of oil has been flirting with 7 month highs, and has not been able to break out of its range. The index is currently below resistance targets near the 1,125 level and indicated lower by both MACD and stochastic. The caveat is that the indicators, while both are forming bearish crossovers today, remain consistent with range bound trading.

The Gold Index

Gold prices also saw some volatility today although the trading range was tight. Spot prices moved up by about 0.3% in the early part of the session on strong yen/weaker dollar only to fall back below break even later in the day on stronger dollar/weaker euro. Today's move was driven more by the data and dollar outlook than it was by Abe or Draghi, the focus being next week's FOMC meeting. Both the EU and Japan are faced with slow/slowing/sluggish growth and the possibility of further stimulus while the US is looking for the next move to tighten policy. If the FOMC does tighten the dollar is likely to move higher and drive gold prices lower. Support is still present in the range between $1200 and $1215, a break below here could take gold down to $1150 or lower.

The gold miners are under pressure in the face of declining gold prices and FOMC outlook. Today the miners ETF GDX traded in tight range and created a small spinning top doji below the short term moving average for the second day in a row. Over the past two weeks the ETF has moved below support levels at $23.50, confirming a double top formed in May, and appears set to move lower. The indicators are bearish although momentum seems to be subsiding, that being said the current MACD peak is an long-term extreme and suggests lower prices are on the way. My first downside target, provided gold prices remain low or move lower, is near $20.

In The News, Story Stocks and Earnings

Home builder Hovnanian reported earnings before the opening bell. The company reported substantial increases to revenue, +39.6%, but nevertheless posted a net loss for the quarter. Losses are due to massive debt load, a factor management says is being addressed. On a comparable quarter basis this quarter's loss was half that of the previous year, sign the company is making strides, but more work needs to be done. Company CEO says in the release they are focused on de-leveraging the balance sheet and investing in new lands rather than trying for growth at this time. Shares of the stock fell more than -11% on the news but found support, today at least, along the short term moving averaging. Based on housing trends, if they continue to make improvements to the balance sheet, this company could return to profitability in the not too distant future.

Ciena, maker of optical networking solutions, announced earnings before the opening bell. The company posted a top and bottom line beat, sending shares soaring, despite a decline in both from the same period last year. Company execs say results were driven by efforts to diversify the business and momentum in geo-specific locations. Guidance for the next quarter is in-line with expectations. Shares of the stock jumped more than 12% to hit a three month high.

Ambarella, supplier to GoPro and other imaging technology companies, announced earnings after the bell. The company beat EPS estimates smartly, $0.05 versus $0.02 expected, with revenue in-line with projections although down -19.5% from last year. The company also reported an increase in margins, as well as a stock buy back plan, which helped to send the stock higher in after hours trading. The stock traded higher all day, closing with a gain near 1%, and then gained an additional 5% following the release of earnings.

The Indices

Today action a bit mixed. Early trading saw the indices move lower, find support and then drift higher. Most of them were able to move into positive territory but even so daily ranges were only equal to about 0.5%. The only index to fail to move into positive territory was the Dow Jones Transportation Index which closed with a loss of -0.13%. The transports created a very small spinning top doji, sign of indecision, but above the short term moving average and near term support target of 7,750. The indicators are rising, suggestive of higher prices, but weak and in light of tomorrow's data and next week's FOMC meeting not too convincing. IF support holds and the index is able to move higher next target is 8,000 with a possible move to 8,250.

The NASDAQ Composite made the biggest move to the upside, 0.39%, and set a new 2016 high. The tech heavy index created a small white bodied candle, bigger than a spinning top but small nonetheless, which closed at the high of the day. Today's action took the index above the 4,950 resistance target with rising indicator so further upside is expected. Next target is near 5,050.

The second largest move to the upside was made by the S&P 500. The broad market gained 0.27% and closed at the highest level since early November. Today's action created a white bodied candle, closing at the high of the day, with long lower shadow indicative of support at this level. The indicators are bullish and pointing higher, suggestive of higher prices, but very weak. Next target should the index continue to move higher is near 2,120 with a possible touch to the all-time high near 2,133.

The day's smallest move to the upside was made by the Dow Jones Industrial Average. The blue chips gained 0.26% in a move that confirms support along the short term moving average. Today's candle is a small bodied white candle with long lower shadow, indicative of that support, just above 17,500. The indicators are bullish so a further move to the upside is likely although they have yet to show strength. Next upside target is near 18,000 with a possible move up to 18,150.

The indices are moving higher. It seems like maybe good news is good news again. The data, the labor data anyway, is positive and suggests economic recovery is at hand and while it also suggests a rate hike is due, it may not be the market shattering even we've all feared for the last year. The caveat is that earnings in the current quarter are still expected to be negative, and have declined again this week. The second half of the year is still expected to see growth, same with next year, so I am bullish into the longer term.

In the near term, the market may be able to reach the all time highs set last year but I am still nervous about correction. We've seen it happen before, the market move up to touch a new high only to pull back again on profit taking and repositioning. Tomorrow's data could help send the market higher, next week's FOMC meeting the same, but I reserve judgment until the next earnings season begins which is only 6 week's away.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Going on a Trip?

by Jim Brown

Click here to email Jim Brown

Editors Note:

If you are flying to Disneyland, you will need transportation when you arrive. Unless you have relatives nearby you will rely on that old staple of renting a car.


CAR - Avis Budget Group - Company Description

Avis Budget Group provides car and truck rentals, car sharing and services to consumers and businesses worldwide. The Avis system has approximately 5,500 locations and the Budget system has 3,900 locations. The Avis system is the premium version while Budget is the economy version. Budget offers Zipcar, a membership based car sharing network that supplies vehicles to roughly one million members. The Payless brand has about 200 locations and they represent the "value" segment of the market. They also operate the Apex brand and the Maggiore brand. They also operate in the truck rental market with a fleet of 21,000 vehicles that are rented through roughly 1,000 dealers and 450 company owned locations. The company was founded in 1946.

Shares had been in the dumps since early January until news broke on the 17th that CEO John Tague purchased 66,000 shares to bring his total ownership to 220,000 shares. Shares began rising and institutional buying has accelerated. One institution purchased 3,000 June $13 calls on Wednesday. Call option volume was 3x normal on Wednesday and call buying was 14:1 over put buying. On Tuesday, an institution purchased 4,000 July $30 calls when the open interest was only 389 in the strike.

In their Q2 earnings, they missed the estimates on currency fluctuations and unusually soft seasonal demand. However, they raised guidance for the full year on earnings and revenue saying "pricing has already turned the corner."

With the spring and summer months a high demand season for car rental agencies this could be the time to speculate in the stock. The rebound on the insider buying and high call volume has pushed the stock over resistance at $30.50 with the next material level at $37.

Earnings August 3rd.

Buy Aug $32 call, currently $2.40, initial stop loss $27.50


No New Bearish Plays

In Play Updates and Reviews

Poised for a Breakout

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P dipped to 2,088 at the open but worked its way back to positive territory to close at 2,105 and the highest close since November 3rd. This definitely looks like a setup for a retest of the 2,132 high.

The biotech index was the biggest mover once again with a +2.55% gain and a breakout over resistance at 3,250 ahead of the ASCO conference this weekend.

The biotech rally caused us to be stopped out of the AmerisourceBergen position when it broke through resistance.

The market looks like it is going to power higher but the Dow remains the weakest link. The Dow traded down -86 points this morning before recovering in the afternoon to close with a +49 point gain. However, it still closed at 17,838 and under prior resistance at 17,890 and 17,925.

The next few days are going to be critical as we head into the dog days of summer.

Current Portfolio

Current Position Changes

AMP - Ameriprise Financial

The long call position was opened with a trade at $101.43.

ABC - AmerisourceBergen

The long put position was stopped out with a trade at $76.25.

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

AMP - Ameriprise Financial -
Company Description


No specific news. Dipped at the open with the market to give us a better entry point and then recovered to close at the high for the day and a minor 33 cent loss.

Original Trade Description: June 1st.

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.

Position 6/2/16:

Long Sept $105 call @ $3.40, initial stop loss $95.35.

ATVI - Activision Blizzard - Company Description


No specific news. No move in a lackluster market.

Original Trade Description: May 28th.

Activision Blizzard designs, develops 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. Shanghai Disney opens June 16th and tickets are already being scalped for several times their official price. The new theme park is expected to pull as many as 20% of gamblers away from Macau in the months ahead.

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


Dead stop on resistance at $153.50. IBM announced a partnership with Cisco Systems (CSCO) to bring Watson closer to the Internet of things (IoT). The Watson super computer software is leaving the cloud and moving closer to where real people work and live. IBM said there were already 4,000 paying clients using the Watson software across 170 countries. The Watson software is able to interface with almost anything and allow clients to monitor performance of anything from high speed powerboats to heavy machinery in the Port of Cartagena in Columbia.

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. We need a $3 bounce in the next week.

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. Alternating daily gains and losses as it consolidates just under resistance.

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. Holding at 8-week high.

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. A 2.55% spike in the biotech sector sent all the stocks soaring and ABC was one of them with a +$1.44 gain to stop us out at $76.25.

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:

Closed 6/2/16: Long June $75 put @ $2.60, exit .60, -2.00 loss.

DLPH - Delphi Automotive - Company Description


No specific news. A huge drop in auto sales announced on Wednesday and shares of DLPH exploded higher today on no news. Buyers must have decided that the stock was oversold and would not decline further because of the intraday rebound on Wednesday. I will drop this in the weekend newsletter if we do not get a decline on Friday.

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.

NKE - Nike - Company Description


Under Armour (UA) said it would take a $23 million charge related to the Sports Authority bankruptcy. This will also hurt Nike. Analysts at SportsScan said Nike's market share has fallen from 54% at the end of December to 51.2% last week. Under Armours market share rose to 5.1% over the same period. Adidas increased its share from 4.4% to 5.6% in the 3-month period ending last week. There are plenty of reasons for Nike shares to decline but they are moving really slow.

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 2,088 at the open but worked its way back to positive territory to close at 2,105 and the highest close since November 3rd. This definitely looks like a setup for a retest of the 2,132 high.

If we do not get a retracement of these gains next week, our June options will expire 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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