The S&P closed just under 2,110 after a 10-point gain that was mostly short squeeze rather than a surge in buying. It was an interesting day with the biotech sector recovering the losses from Friday in advance of the ASCO conference ending on Tuesday afternoon. After a 16% gain in 3 weeks the odds of that biotech rally continuing are very slim.
The S&P is poised for a major move on Tuesday. If we move higher there is going to be a monster short squeeze since that level over 2,115 has not been touched since last August. We could have an explosive day.
The other possibility is another resistance failure and this time it could be serious. This would be the fourth time to fail at that level since July.
I think traders are seeing the prior highs only 23 points away and rational thought has evaporated. All of the various problems surrounding the market have turned into a wall of worry and the bull is overcoming every headline, one brick at a time.
Historically the market has rallied in front of Janet Yellen's speeches and today was no different. She played her data dependent role perfectly and removed all references to any specific timeframe. That allowed investors to check off the "two hikes this year" but not right now button and buy stocks again.
Current Position Changes
XBI - Biotech ETF
The long put position was opened with a trade at $58.27.
ATVI - Activision Blizzard
The long call position was stopped with a trade at $36.85.
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. Big rebound to pit it right back at resistance.
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.
Long Sept $105 call @ $3.40, see portfolio graphic for stop loss.
ATVI - Activision Blizzard - Company Description
Big drop at the open to stop us out and then an equal rebound to only close down 5 cents for the day. Activision and Facebook announced a deal for Facebook to stream live the Overwatch, Warcraft and Hearthstone games. The announcement came the week before the Electronic Entertainment Expo in Los Angeles.
I am going to watch ATVI closely and should it rebound I will be recommending it again. There was no reason for the decline over the last several days other than consolidating under resistance. It will be back!
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.
Closed 6/6/16: Long Aug $40 Call @ $2.18, exit $1.05, -1.13 loss.
CAR - Avis Budget Group - Company Description
Shares spiked 7% after the CFO said pricing pressure is easing now that the big players have reduced the sizes of their fleets. The comment was made at a Goldman Sachs conference and he said "the fleets are becoming better aligned with demand and it has created a healthy, even robust, pricing environment. We tightened our fleet up and we are running relatively tight."
Original Trade Description: June 2nd.
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.
Long Aug $32 call @ $2.35, initial stop loss $27.50.
DIS - Disney - Company Description
No specific news. Weakness in ticket sales for Alice Through the Looking Glass is still weighing on the stock.
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.
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. No specific news.
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.
Long July $155 calls @ $2.40, see portfolio graphic for stop loss.
MKC - McCormick & Co - Company Description
No specific news. CEO will present at the Bernstein conference on June 3rd. We need a $3 bounce over 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.
Long June $100 call @ $.95, see portfolio graphic for stop loss.
SKX - Skechers - Company Description
No specific news.
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, see portfolio graphic for stop loss.
TWTR - Twitter - Company Description
Holding at 8-week high. No specific news.
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.
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)
DLPH - Delphi Automotive - Company Description
No specific news. Not going down but not going up either. Goldman removed them from the convistion buy list.
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.
Long July $65 put @ $1.92, see portfolio graphic for stop loss.
NKE - Nike - Company Description
No specific news. Minor rebound. We can't seem to get two consecutive days of decline.
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.
Long July $55 put @ $1.75, see portfolio graphic for stop loss.
SPY - S&P 500 ETF - ETF Description
The S&P showed no weakness today other than a little post Yellen volatility. The index rallied to 2,113 intraday but dipped back below 2,110 to close at 2,109. I am expecting a turnaround Tuesday. However, if we do get a move back over 2,110 we could go to new highs.
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 $210.
See portfolio graphic for stop loss.
XBI - S&P Biotech ETF - ETF Description
The ASCO conference is not over until Tuesday afternoon. There is plenty of time for the ETF to roll over.
Original Trade Description: June 4th.
The S&P Biotech ETF follows the S&P Biotechnology Select Industry Index. The fund holds 85 biotechnology and pharmaceutical companies. The XBI tracks the NYSE ARCA Biotechnology Index ($BTK) almost perfectly.
The $BTK has gained 16% over the last three weeks since May 12th. The reason for the rebound was the American Society of Clinical Oncology (ASCO) conference that started on Friday. More than 35,000 professionals in the field of Oncology attend this annual event. Any company with a new idea, treatment or drug will be there. A few will rocket higher after the event. Most will fall back into their original trend if they did not present anything new and notable.
The conference started on Friday and quite a few biotech stocks that rallied ahead of the event fell back 3% to 5% on profit taking. Investors wanted to take profits and not risk getting blindsided with some negative headline from the conference. If somebody announces a new drug that may work better than somebody else, then the loser gets crushed and the new guy gets praised.
I am proposing we buy a put on the XBI in anticipation of a return to the prior trend. Remember, both political candidates have been trashing the drug companies and promising to do something about the high cost of drugs. There is a new term being tossed around in the sector and that is "financial toxicity." That means the drug may work great but the cost will prevent it from being prescribed or covered by the insurance companies. This means, even without the political bashing drug prices are going lower.
Long July $57 put @ $2.20, no initial stop loss because of potential early weak volatility.
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