Option Investor

Daily Newsletter, Saturday, 6/18/2016

Table of Contents

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

Market Wrap

Should I Stay or Should I Go?

by Jim Brown

Click here to email Jim Brown

That is the lyrics from the original song by the rock group "The Clash" in 1982. That is also the question the British people are asking themselves this weekend.

Market Statistics

Friday Statistics

A lack of Brexit headlines on Friday allowed the European markets to rise after a similar move in Asia. The U.S. markets were hit by a large quadruple option expiration that saw 9.1 billion shares traded. The Dow dropped -133 points at the open due to expiration pressures then rebounded to close with a loss of -58.

Next week will be the hurdle week with investors entering/exiting positions based on the daily surveys on the possible outcome of the Brexit vote. A "leave" vote is expected to cause a sell off and a "stay" vote is expected to cause a rally, possibly a rally that takes us to new highs.

However, the last week of June, when there are no world changing headlines, is typically negative.

Helping to push the markets lower at the open was a drop in New Home Construction for May. The headline number declined from 1.172 million to 1.164 million. That was actually better than expectations for 1.150 million but the news was sold anyway. Single family starts increases slightly from 762,000 to 764,000. Multifamily starts declined slightly from 405,000 to 400,000.

Housing permits for single-family homes declined from 741,000 to 726,000. Multifamily permits rose from 389,000 to 412,000. Permits are a precursor to starts and a preview of what to expect for June. Overall starts fell -0.3% and permits rose +0.7%. Completions rose from 940,000 to 988,000 units. All numbers are the annualized rates.

In the Regional Employment report for May, hiring increased in only 3 states and the District of Columbia. That is less than the 11 states in April and the average of 34 states in the first quarter. However, hiring only declined in four states with 43 basically unchanged.

Those reporting increases in higher were Florida +24,500, Washington +8,700 and DC +6,800. Those with the largest declines were Tennessee -13,400, Michigan -12,700 and New Hampshire -4,000.

According to this report payroll employment declined by -27,000 in May and the first monthly decline since mid-2012. That was weaker than the adjusted nonfarm payroll gain of +38,000.

The economic calendar for next week has three major hurdles. Janet Yellen gives her House and Senate testimony on the economy on Tue/Wed. If she felt she was too dovish last Wednesday she may try to correct that assumption by being more hawkish in her testimony. After Bullard's comments on Friday I would not bet against Yellen trying to move expectations back towards a July rate hike.

The Brexit vote on Thursday is the big hurdle. While the vote is not binding, I do expect the government to begin preparations for an exit if that is the actual outcome. The latest poll of polls by the Financial Times on Friday had it 48% leave and 43% stay with the stay numbers declining and leave numbers rising.

FT Summary of Recent Polls

If Britain votes to leave the Pound Sterling currency is a sure bet to drop. The dollar will rise because capital inflows into the UK will slow significantly until the post exit trade agreements are worked out. A UK recession has been predicted. Michael Saunders, a Citigroup economist, warned a Brexit could trigger a 15-20% drop in the currency compared to the UK trading partners. The euro currency would also decline because of the turmoil and uncertainty in Europe.

Bank stocks would take the biggest hit and they have been declining for some time. Barclays (BCS), Royal Bank (RBS), Santander UK, Lloyds and HSBC would be hurt. US banks with revenue exposure to the UK include GS 27%, MS 15%, JPM 15%, Citi 13% and Bank of America 7%.

Many U.S. companies have high UK revenue exposure. According to JP Morgan (JPM) these are the most well known and their revenue exposure to the UK. If the Pound Sterling declines in value as expected these companies are going to get killed on currency translation back to dollars. There will also be cross border tariffs for products sold from the UK. Coke, Abercrombe & Fitch, Gap and Walmart are also heavily exposed to the UK but numbers were not available.

(NEM) Newmont Mining 64.1%
(TAP) Moulson Coors 34.3%
(PAG) Penske Automotive 33.4%
(PPL) PPL Corporation 31.4%
(WLTW) Willis Towers Watson 27.3%
(PRAA) PRA Health Sciences 26.5%
(IVZ) Invesco 22.5%
(BLK) BlackRock 21.6%
(XRX) Xerox 21.0%
(APA) Apache 20.1%
(LKQ) LKQ Corp 19.2%
(F) Ford 18.8%
(CPRT) Copart Inc 18.7%
(NWS) News Corp 18.5%
(CBRE) CBRE Group 17.6%
(GWR) Genesee & Wyoming 17.0%
(EBAY) eBay Inc 16.3%

The Fed decision on Wednesday was a 180-degree change in direction. They went from a majority of the panel saying publically we could see 2-3 hikes this year to the majority saying no hikes in the near future. Yellen actually said the problems the economy is experiencing could be structural rather than cyclical and they could persist for longer than expected. This was a major change in Fed outlook.

This is going to turn economically geeky for the next few paragraphs. If you want to skip a discussion of a monumental change in Fed policy just skip to the "stock news" heading.

The St. Louis Fed President, James Bullard, shocked everyone on Friday when he changed from the most hawkish member of the panel to the most dovish. He now believes that the Fed should only hike one more time between now and the end of 2018. The statement was so unbelievable it shocked the market into believing the economy was worse than it thought.

Bullard said, the Fed should discard its practice of projecting long-run values for things like economic growth and the target policy rate, acknowledge it has little certainty about the future, and state the economy is not likely to get much worse or much better than it is now, absent some outside shock. He said a Fed Funds Rate of 0.63%, roughly 25 basis points above the current level, will likely stay there "for the foreseeable future." He said for the Fed to publish projections that economic activity will rise steadily to historic norms of 3% to 4% GDP growth has been misleading.

He also said "the Fed's actual pace of rate increases has been much slower than what was mapped out by the committee in the past. This mismatch between what we are saying and what we are doing is arguably causing distortions in global financial markets, causing unnecessary confusion over future Fed policy, and eroding the credibility of the FOMC."

Bullard took his dot off the Fed's "Dot Plot" because he does not see any future rate increases through the end of 2018. He said the Fed should view the economy as in a "regime" and the "appropriate policy rate for that state would remain in place until a recession, a surge in productivity or other shock causes it to change." The rate path "is essentially flat over the forecast horizon" with "key economic variables likely stuck near current values, with growth around 2%, employment around 4.7% and inflation heading towards and likely anchored at the Fed's 2% goal."

While previously a rate hawk, he said he has been rethinking much about his view of the economy, including that the U.S. and other developed countries might be mired in a world of permanently low interest rates.

This monumental shift in Bullard's thinking and its apparent impact on Yellen's thinking suggests there will be a different Fed going forward. For Yellen to say in the press conference that the economy was facing structural rather than cyclical problems that could persist a lot longer than previously thought, shows that Bullard's new view had contaminated her thinking.

The Fed is basically saying the current 2.0% GDP growth rate is as good as it is going to get for a very long time. Larry Summers warned the Fed has been wrong for a long time and the U.S. is going through "secular stagnation." DoubleLine's Jeffrey Gundlach said the "rate hike cycle has left the building." Peter Boockvar warned, "The Fed has been mugged by reality."

In reality, if low rates were the answer to producing strong economic growth the entire world should be running at a 10% GDP. Rates in 23 countries are zero or negative. Japanese interest rates have been at or near zero since 2000 and they recently adopted a policy rate of +0.0% to -0.1%. If low rates were the answer, after 16 years at zero, Japan should be the strongest economy on the planet. They are the seventh largest global economy and growing at only a +0.1% annual GDP rate.

Since the financial crisis, we have seen central banks enact $12.3 trillion in money printing QE. There have been 654 interest rate cuts since 2008 and there is more than $10 trillion in global bonds with a negative yield. Bill Gross said that was a "supernova ready to explode." After all this the World Bank cut its 2016 global GDP growth forecast from 2.9% to 2.4% with the U.S. cut from 2.7% to 1.9% expected growth.

Bank America Merrill Lynch chief investment strategist Michael Hartnett said "The cocktail of QE, ZIRP and NIRP has been a potent one for Wall Street and the price of financial assets over the past eight years, and yet the bull market has waned in the past 18 months, there has been no normalization of growth, rates and asset allocation, no 'Great Rotation,' and bonds and stocks have been trapped in a Twilight Zone of volatile trading."

The Great Rotation was predicted by Bank of America as the shift out of bonds and back into equities. That has not happened. So far, in 2016, $106 billion has flowed out of equities and $75.8 billion has flowed into bond funds.

Stock News

Viacom (VIAB) lowered guidance for the first time since 2008 when they warned revenue would decline about 4% in Q2 compared to a 5% drop in Q1. They blamed the drop on a "theatrical underperformance" of "Teenage Mutant Ninja Turtles: Out of the Shadows." The movie was not just bad, it was horrible. My son saw it and said afterwards, "I wonder if I can sue them for my two hours back."

Viacom was also in the news for the soap opera that is Sumner Redstone and the musical chairs for the board members. He fired 4 board members and the CEO Phillip Duaman and filed papers with the State of Delaware to have them removed. Duaman is still the CEO but no longer on the board. However, those ejected are filing suit protesting their termination. Redstone wants to fire Duaman as CEO but Duaman has a strong contract that says if he is removed without cause before the end of his contract he gets three times his annual salary for his remaining unfilled term. He is already one of the most overpaid CEOs in the business and has received nearly $425 million since he became CEO in 2011. He makes between $37 and $54 million a year depending on the stock options but he made roughly $112 million in 2015. His current contract extends through 2018. To fire him he would get 3 times his salary through 2018 and that would be an astronomical amount of money. He is so hated that you could probably take up a collection from the employees to defray the expense. Sumner Redstone at age 93, controls 80% of Viacom shares through his private holding company National Amusements.

Analysts begin upgrading the stock as Redstone began removing directors. RBC upgraded the stock from sell to hold and raised the price target from $34 to $45, which is where it closed on Friday. Several believe Viacom could re-merge with CBS, which Redstone also controls. The companies split in 2005 and many analysts said the move did not make sense then and still does not make sense. The bigger the company and the more eyeballs they service the better deal they will get when negotiating for content. Analysts claim a CBS acquisition of Viacom for a 20% premium would still be 11% accretive to CBS earnings in 2017. CBS CEO Les Moonves is well respected and any deal would have to be carefully constructed to avoid a revolt at the much better performing CBS.

Oracle (ORCL) reported earnings Thursday after the close of 81 cents that beat estimates by a penny. Revenue fell -1% to $10.6 billion due to currency issues. They repurchased $1.9 billion in stock for the quarter while free cash flow declined slightly to a still enormous $12.4 billion. Hardware revenue fell 9% to $1.28 billion. New software license revenue fell 12% to $2.77 billion. Product support revenue rose 3% to $4.81 billion.

However, cloud was king. The software as a service (SaaS) business plus the platform as a service (PaaS) revenue rose 66% to $690 million. Infrastructure as a service (IaaS) revenue rose 5% to $169 million. While those service revenues are a lot smaller than the prior revenue categories they are growing fast and Oracle thinks they will be the revenue leaders in the not too distant future. Gross margin on the service revenues is 56%. They expect SaaS and PaaS revenue to rise 75-80% in the current quarter, which exceeded the prior forecast of 59% growth. Oracle shares rose 3% on the earnings news.

Smith & Wesson (SWHC) reported blowout earnings again only a week after Wedbush warned of possible earnings problems. Analyst James Hardiman reiterated a neutral rating and cut his price target to $23 while calling for a drop in sales and earnings. He said channel checks saw a good first quarter but April/May sales had slowed at 30 big box retailers. Sorry James but I could not resist reprinting your call.

Thursday after the close, S&W reported earnings of 66 cents that easily beat estimates for 54 cents. Revenue of $221 million also beat estimates for $214 million. The company said financial results continue to set records and they see no decline in the future. For the current quarter, they forecast earnings of 49-53 cents compared to analyst estimates at 34 cents. They predicted revenue of $190-$200 million compared to estimates for $161.8 million. The estimates were prepared before the Orlando shooting and did not include any calculation for increased sales because of the anti-gun furor following the terrorist attack. You can bet with all the politicians screaming gun control there will be a surge in new gun sales. With more than 300 million guns in the U.S. the pro gun population is actually gaining ground rather than losing it.

The Gun Room in Denver said buyer traffic was four times normal since Orlando. The gun stores in and around Orlando are reporting they have no inventory left. People have been standing in line to buy guns, sometimes more than one per person. Others are putting down deposits for guns the stores have on order. Guns & Ammo Unlimited said their concealed weapons permit classes normally has about 7 attendees but since the shooting they have been packed out at 24 per class and booked for weeks into the future. The Pink Pistols, the nationwide gun club for the LGBT community has 45 chapters and grew from 1,500 members a week ago to 3,500 as of Monday. Many gun stores have started offering an "active shooter" class on how to defend yourself in that situation. Option Investor included an active shooter guide in the last EOY package. That guide is available by request. Send an email to "support."

Apple Inc (AAPL) faced yet another setback on Friday after Beijing banned the sales of iPhone 6s and 6s Plus because they looked like the Shenzhen Baili 100C phone. That company had patented the "look" of their phone and filed a complaint with the Beijing patent court claiming the Apple phones copied their look. Apple immediately countered the news saying the ruling was on appeal and all iPhones were still available for sale in Beijing. The particular case only covers Beijing so even if Apple were to lose the appeal their phones would still be available everywhere in China except Beijing. The 6s and 6s Plus will be discontinued after September according to several reports. That means by the time the appeal runs its course the phones will no longer be available for sale and will be replaced by the iPhone 7. One analyst said the news could actually cause a rush to buy the phones before the appeal has been settled. China is Apple's second biggest market with $12.3 billion in sales last quarter compared to $19.1 billion in the USA. Seriously, look at the pictures below and I do not see the problem. It is just another way to make it hard for Apple to do business in China. Shares lost more than $2 on the news.

Do not try to use your American Express card at Costco (COST) on Monday because they will not accept it. The official cutover to the Citibank Rewards Visa is on Monday. Analysts believe it will save Costco up to $220 million a year in fees by switching to the Visa. Costco shares have been moving up steadily since the earnings surprise in late May.

Amazon (AMZN) expects to triple sales of the Echo device in 2017. They sold roughly 1 million in 2015, should sell around 3 million in 2016 and then expand that to 10 million in 2017. Considering they invented the category this is an amazing growth rate. If you go to Amazon and look at the reviews on the Echo device it will amaze you. There are nearly 38,000 and probably 37,700 of them are in love. Some people have multiples because they find them so handy. Google and Apple are both trying to get their device to market but Amazon has a huge lead. Google actually started working on their device before Amazon did but they wanted it to be so perfect that Amazon beat them to it.

Jeff Bezos has a killer product here and it will lead to untold billions in sales of other products. It is so easy to say, "Alexa, reorder toilet paper, Crest toothpaste and popcorn" rather than going online and doing it manually. "Alexa, ask Uber for a ride to the airport at 11:AM tomorrow." This year is going to be a big holiday season for the Echo.

Lumber Liquidators (LL) shares rallied 19% after they reached an agreement with the Consumer Product Safety Commission (CPSC) over Chinese made laminate flooring they sold from 2011 through May 2015. After a long testing process it was determined that removing the flooring that was already installed in customer homes would actually expose them to more formaldehyde emissions than leaving it in place. So far, none of the customers that have gone through the testing process has had their floors test above the guidelines from the CPSC. LL has tested the air quality in more than 17,000 homes and had a third party laboratory conduct extensive tests on 1,300 of those floors. None failed the CPSC requirements.

While this clears the company from having to do a recall on those 17,000 floors there is still the litigation problems. There is a class action suit and the testing will mitigate much of the liability from the suit but there is still liability. Secondly, the LL insurers are claiming they are not liable for any expenses related to this problem. The company has $22 million in cash and $62 million in available credit so they are not going out of business in the near future. They still have to convince consumers their current flooring inventory is safe and rebuild consumer confidence.

Google (GOOGL) shares dropped $20 after Citigroup warned that ad spending might be on the decline. The analyst said checks with two different ad agencies with more than $5 billion in ad spending a year, showed that spending growth was slowing in Q2 compared to Q1. Official estimates have not changed from the 18% growth previously expected but cuts could be coming. The analyst said Google revenue could fall 1-2% below consensus estimates. Currently analysts are expecting $16.87 billion.

There are a few notable earnings for next week. Adobe and FedEx report on Tuesday. Bed, Bath and Beyond and RedHat report on Wednesday. BlackBerry and Accenture report on Thursday. The final score for Q1 earnings was a decline of -6.7% and the fourth quarter of earnings declines. Eighty-one companies issued negative guidance for Q2 and 32 issued positive guidance.

The forecast for Q2 earnings is for a decline of -5.1% and it will be the first time since 2008 that we have seen five quarters of declining earnings. Revenues are expected to decline -0.8% for the sixth consecutive quarter of revenue declines.

On Friday, the $8 billion Visium hedge fund sent investors a letter saying it was closing its doors. There is an insider trading investigation underway and claims of self-dealing against Visium's founder Jake Gottlieb. The fund was down -9.3% year to date and reportedly there have been $3 billion in redemption requests.

One of its top portfolio managers, Sanjay Valvani, was charged several days earlier with wire and securities fraud. He reportedly used insider information from the FDA on pending decisions that would impact drug companies. In January 2014, Visium bought a 5% stake in Intercept Pharmaceuticals the day before favorable results were released on a drug. Gottlieb bought 25,000 shares in his own account, which was a violation of the company's rules. This gave the appearance that Gottlieb was self-dealing whenever a killer deal appeared. There were no details on how the firm would liquidate its holdings.

Crude Oil

Crude oil has had a couple of volatile days since falling from the $51.50 high last Thursday. On Thursday crude fell from $48.72 to $45.83 (-5.9%) and caused the energy sector to implode helping to drag the broader market lower. On Friday, crude rebounded +4.1% to close at $48.26 to nearly recoup the entire decline from Thursday. Much of the movement on both days was the result of the moves in the dollar. The dollar shot up on Thursday and declined back to the lows for the week on Friday.

Also hitting crude was the expiration of futures coming on Tuesday. If you were long for the rally, your time to exit was running short. When the price started to collapse, everyone ran for the exits.

There will be some additional pressure on crude next week with Baker Hughes reporting Friday afternoon that active rigs rose +10 to 424. Rigs are now up for three consecutive weeks and it is the first time they have been up since last August. Oil rigs rose +9 to 337 and gas rigs rose +1 to 86. Offshore rigs were unchanged at 21.


For a quadruple options expiration this one was relatively tame. Volume spiked to 9.2 billion shares and the most since the March 18th quadruple witching at 10.8 billion shares. There was more than $1 billion in S&P options that expired at the open on Friday. The market was boosted on Thursday by 4 distinct buy programs that lifted the S&P from 2,050 to roughly 2,080. That could have been accomplished by a large hedge fund or institution trying to make sure their options either expired in or out of the money depending on their position. Since the S&P options expire at the opening print on Friday and there was no further reason to support the index, it collapsed back to 2,063 almost immediately after the opening print. Trading the rest of the day was lackluster.

Option expirations are either chaotic or lackluster depending on the prior market movement and the open interest bias. Monday will likely be mundane as well. For example, on the March 18th quad witching the S&P closed at 2,049. On the Monday after expiration, it closed at 2,051. Post expiration Mondays are normally spent dealing with cleaning up your account. If you were put stock or had some stock called away, traders are deciding what to do with the leftovers. Now that their options expired, they are deciding what new positions they want to add.

Now that expiration is over there is no reason for funds to try and push the market around. They will be focused on restructuring their portfolio for the end of the quarter. June is rebalance month. The S&P-500 was rebalanced at the close on Friday to account for stock buybacks, acquisitions, etc. This is relatively painless because some stocks are sold and others bought and it normally fails to move the index significantly.

The NYSE Arca Gold Miners Index (GDM) is also rebalanced on expiration Friday every quarter. Other index rebalancing included the $NY, $NYA, $NYE, $NYI, $NYK, $NYL, $NYP, $NYY, $XCI, $XII, $XOI, $CZH, $DFI, $DGE, $HUI, $JHUI, $JPN, $DRG, $HKO, $HKX and $MXY. The Alerian MLP ETF was also rebalanced to include some new partnerships. It was a busy expiration.

Next Friday the Russell indexes will be rebalanced. They call it reconstitution since their indexes change constituents every June while the S&P-500 just changes the weighting of each stock.

The Russell company calculates the current market cap of all the stocks in the market. They sort them by market cap and the top 1000 become the Russell 1000, the next 2000 by market cap become the Russell 2000. The combination of the two become the Russell 3000. Each year numerous funds try to game the system by anticipating ahead of time which stocks will be added/deleted so they can buy them or short them depending on the result. Volume will be very heavy next Friday given the reconstitution and the day after the Brexit vote.

Russell Reconstitution Website

List of Stocks Being Added to the Russell 3000

List of Stocks Being Deleted from the Russell 3000

List of Microcap Stocks Being Added to the Russell Microcap Index

List of Microcap Stocks Being Deleted from the Russell Microcap Index

The internals were almost dead even on Friday. There were 3,658 advancing stocks and 3,462 declining stocks. There were 194 new 52-week highs and 86 new lows. A/D volume was also nearly even at 3.07 and 3.03 million shares.

The S&P closed at 2,071 and right in the middle of the rebound from May. The 2,075 level is resistance and 2,050 is support. One of those levels will be broken next week. If the "stay" voters win the Brexit vote we could see a rally that takes us back over 2,100 and possibly to new highs. The Brexit vote has created an enormous amount of uncertainty and a stay vote will end that uncertainty. A "leave" vote could cause extreme volatility but there is also the chance that a knee-jerk reaction to the downside could be a buying opportunity. We will not know the outcome until the event passes.

The Dow closed at 17,675 and under resistance at 17,750. However, that level has been crossed so many times it is starting to look like the welcome mat at Walmart. It did keep the index in check for the last three days so there is still some holding power. Support is 17,500 and that was tested on Thursday at the open. The next level to watch is 17,400, with the 300-day average at 17,382. That average stopped the decline in May and March. The financials should continue to be weak until after the vote and depending on the outcome they could continue to be weak. The winners on Friday were a mixed bag but you really cannot make any rational decisions based on stock direction on an expiration Friday.

The Nasdaq was the biggest loser on Friday with biotechs and techs of all flavors losing ground. There were only three stocks that gained over $2 and 37 that lost more than $2. The index closed exactly on 4,800, which was light support. We could easily test the May lows at 4,700 next week and a breakdown there could get ugly. A stay vote would propel us back to resistance at 4,968.

The Russell 2000 was actually relatively strong on Friday with only a -0.3% decline. Support has emerged at 1,140. However, the Russell is typically weak ahead of the June rebalance. Stocks being deleted are still in the index until Friday's close but traders will be shorting them all week trying to jump in front of the rebalance. The following week the Russell is typically positive because funds will be adding the stocks that Russell put into the indexes. They will try to do most of their buying and selling at the close on Friday but there are always some position adjustments the following week. It is easy to know exactly what to sell but getting the new entries in the correct quantity requires some additional effort.

I wish I had a crystal ball that could not only tell me the outcome of the vote but how the market reacts to that outcome. A stay vote "should" result in a relief rally. That is the easy assumption. A leave vote "should" result in a market decline but since that is already assumed and investors have been leaving the market for weeks, that decline could be brief and just be a buying opportunity.

The daily polls ahead of the vote will whipsaw the market before Thursday. Depending on the survey size and composition the resulting answers can be closer than expected or wider than expected. The European markets will be the driver for the U.S. market. Whatever happens to them overnight should carry over into the U.S. trading.

China and Japan are the wild cards. They have been up and down like yo-yos over the last couple weeks and it would be too much to ask for them to just be neutral for the week.

I am going to try and come up with some Brexit trades as the week progresses but they are speculation rather than fundamental trades. There is no way to game the vote with any certainty. Keep your fingers crossed. I am almost positive I will be writing next weekend, "Well we really did not expect that!" Since this has never happened before we do not really have anything to use for reference.

If you have a low risk tolerance, I would recommend going on a trading vacation next week. Come back the following Monday and the outlook will be entirely different and the volatility will be considerably lower.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Random Thoughts

Stocks have a fickle relationship with the summer months. Performance is either very good or very bad. This may be shaping up to be one of the years where performance is negative. The political conventions are going to be very troublesome. At the democratic convention in Philadelphia in late July, they are putting up a 10-foot security wall around the Wells Fargo Convention Center. While there are no plans yet for a wall at the Republican convention on July 18th we are still several weeks away. The optics on these events are going to be troubling for the market.

Even in a normal summer, the low volume doldrums can produce volatile results even though the trading activity is slow. However, some stocks are perennial winners. Source

Summer S&P-500 performance last five years.

2011 -12.3%
2012 +7.7%
2013 +7.4%
2014 +1.0%
2015 -8.1%.

These are the best performing stocks to own over the summer. This is the average gains over the last five summers according to S&P Global Market Intelligence.

(REGN) Regeneron +23.7%
(UA) Under Armour +15.8%
(LB) L Brands 13.0%
(ULTA) Ulta Salon 12.8%
(CELG) Celgene 11.9%
(MA) MasterCard 9.9%
(VFC) V.F. Corp 9.2%
(V) Visa 9.1%
(AGN) Allergan 9.0%.

The bearish camp picked up a lot of converts last week with a 9.7% gain to 37.5%. The bullish camp is back down to 25.3% and the least confident of all participants. The survey ends on Wednesday so the Thursday/Friday declines are not in the numbers.

What happened to safe deposit boxes? When I was young back in the 1950s, my parents had a safe deposit box. In today's mobile world with everyone paranoid about secrecy the concept of having a safe deposit box that is a pain to visit and even more difficult to move when you do is a thing of the past. Fidelity has come up with a new plan. It is a virtual safe deposit box. There is only one limitation. You can only store documents. You cannot store your grandmother's jewelry, or that Faberge Egg you have been meaning to sell. No rolls of gold and silver coins or rare collectables. However, you can scan all your important documents including wills, deeds, life insurance policies, birth certificates, passports, drivers licenses, etc. They are available to you online from anywhere in the world. If you are on vacation and lose your wallet or passport you can download a copy and present it to the proper authorities for replacement.

You still need a safe at home for those coins, jewelry and collectables but they do not need to be accessed from thousands of miles away when you are on vacation or a business trip.

Anything you upload is heavily encrypted and impossible for anyone to read or steal. I think it is a good idea just to have this as a backup to your personal archive. And the good news is that it is free. Source

Rio de Janeiro has finally waved the white flag. They admitted they do not have enough money to fund public services during the Olympics that start on August 5th. They declared a state of emergency and requested federal funds in order to "avoid a total collapse in public security, health, education, transport and environmental management." The states revenue is mostly tied to oil prices and that has been cut by more than half over the last two years. The lack of funds has caused a 30% cut in the security budget and Olympic safety is a major concern.

So now you can go to the Olympics, walk everywhere you go, get mugged daily or worse if caught in a terrorist event and as a bonus you can catch the Zika virus. I think I will watch on TV. Source

Is it just me or does the concept of lobster rolls seem out of place on a McDonalds menu? Starting June 20th, they will be available in seven northeastern states for the summer. After being absent for a decade they reappeared on the menu for a limited time last summer. The $8.99 roll is actually one of the healthiest items McDonalds serves at only 290 calories while a Big Mac has 530 calories. Being a landlubber in Denver there are no lobster rolls on any local menus where I have ever eaten. It just seems strange to me that McDonalds would serve them. Source


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"If everything seems to be going well, you have obviously overlooked something."

Steven Wright

Index Wrap

Batten Down the Hatches

by Jim Brown

Click here to email Jim Brown
Batten down the hatches because a storm is coming. While that may be navy parlance for lock the doors and windows the correlation for traders is to reduce your positions and make sure your stop losses are in place.

The coming Brexit vote on Thursday could produce some extreme volatility in either direction. A "stay" vote should produce a strong rally because the huge uncertainty that has been weighing on the market would be erased. A "leave" vote would intensify that uncertainty since no country has ever left the EU before. If citizens vote to leave there is a two-year waiting period once the Article 50 notice is filed. That means nothing is going to happen immediately but the market may react as though the EU died. Most investors do not understand there is a two-year waiting period while all the details of the actual exit are worked out and finalized. Therefore, a leave vote could provoke a knee-jerk response to the downside. I would view that as a buying opportunity and I am sure the smarter institutional investors also understand the rules.

The 2000 stock NYSE Composite index touched resistance at 10,625 the prior week and then declined to support at 10,200 on Thursday. The NYSE has everything from the smallest to the largest stocks and covers all sectors. This is a broad representation of market sentiment. Today, the dip to support and minor rebound was bullish. The NYSE closed positive on Friday in a weak market.

The broader Russell 3000, which is the 3,000 largest stocks in the market, is showing the same bullish pattern. It touched support at 1,250 and did not fully retest support at 1,195. The Thursday low was 1,209.

The broad indexes are showing the same relative strength as the S&P and Dow even though the S&P did come closer to the prior highs with a miss of only 23 points. If we were to see a dramatic sell off this week the 2,040 level is the key level to watch. That was strong support back in May. That is where I would expect institutions to trigger their buy programs.

The Dow Transports ($TRAN) were also positive on Friday after bouncing off strong support at 7,460. However, with FedEx reporting earnings on Wednesday it could be volatile after that report. The decline in oil prices was a positive but I think they will remain locked in the $45-$50 range for some time.

If the Dow Transports can remain positive or at least remain above 7,460 it will be supportive for the Dow.

The Volatility Index has returned to what would be a normal buying threshold at 20 but it has the potential to hit 30 next week and that is definitely a "fear in the streets" buy indicator. It rarely stays at that level for more than a couple days. A leave vote could propel it higher and a stay vote could knock it back down to 14 in a very rapid move.

If it hits 25 or even 30 I would sell a VIX bear call spread because the risk of a continued move higher is very low.

Despite the market weakness over the last couple of weeks the percentage of S&P-500 stocks over their 200-day average remains strong at 69.4%. That is significantly higher than the Jan/Feb levels. This suggests the majority of stocks are bullish but that is not the case. I have a symbol screen of roughly 800 stocks and I would estimate at least 650 of them are in a downtrend. The mismatch is because the 200-day average is slow and the rebound from May was sharp. The declining stocks have not yet dipped back below their long-term average.

The percentage of stocks over the shorter duration 50-day average has already declined to 53.0%. It would not take much in the way of a market decline to push that back down to the 40% range.

The percentage of S&P stocks with a buy signal on a point and figure chart is currently 57% and declining. That is still a relatively strong number but a couple more days of market declines could alter it dramatically.

The correlation between the High Yield ETF (HYG) and the S&P-500 remains intact at 72%. There has been some bleed as a result of the Fed meeting and the outlook for interest rates. In this environment I would not expect the HYG to decline significantly but anything is possible. More than $78 billion in outflows from equities have moved to bond funds year to date. If that money begins to rotate back into equities it could upset the correlation.

The correlation between oil prices and the dollar is also intact. However, should the vote be for an exit, the dollar is going to spike and oil prices are going to crash. That could also drag down energy equities.

The Semiconductor Index rolled over last week and is now dragging the S&P lower. The large number of chip stocks influence the tech sector and the combination of the two is a large drag on the S&P. If the semis return to test that May low, no amount of fund buying will overcome that drag on the S&P. In May you can see the bigger dip on the $SOX and the drag on the S&P.

Gold surged to $1,318 intraday on Thursday as a safe haven trade despite a sharp rise in the dollar on the same day. Cooler minds took over on Friday and gold settles right at $1,300. In case of an exit vote several analysts are predicting higher gold prices but the dollar is going to spike significantly and that will be a major headwind for gold. Analysts are saying the British Pound could decline 10-20% and the euro could decline 5-10%. That would mean a 10% or greater spike in the dollar and that would be dramatic and impact all commodities negatively.

There is no way to accurately predict the market direction after the Brexit vote. A stay vote should be market positive and a leave vote should be market negative. I would expect any dip to be bought but maybe not on the first day, which is Friday. Possibly, by Monday cooler heads would prevail. However, the dollar will be the key. If the dollar is headed to the moon we would probably need to see that move slow before equity buyers will return to the market.

If you can take a vacation from trading next week and come back the following Monday, the market will still be here and the volatility will be a lot lower.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Living Dangerously

by Jim Brown

Click here to email Jim Brown

Editors Note:

Recommending specific stock ahead of Brexit is like walking through a minefield. Since we do not know what direction the market will take after Thursday's vote, making any directional bet is dangerous. The market could be up or down 5% within a week after the vote. However, if we do not have any plays on board we cannot benefit from that directional move.

As the week progresses and we see how the polls are suggesting the vote will go I plan on adding some Brexit plays. I cannot do it today because we could be at significantly different market levels by Thursday. Stay tuned.


AMBA - Ambarella - Company Description

Ambarella, Inc. develops semiconductor processing solutions for video that enable high-definition (HD) video capture, sharing, and display worldwide. The companys system-on-a-chip designs integrated HD video processing, image processing, audio processing, and system functions onto a single chip for delivering video and image quality, differentiated functionality, and low power consumption. Its solutions enable the creation of video content for wearable sports cameras, automotive aftermarket cameras, and professional and consumer Internet Protocol (IP) security cameras, as well as cameras incorporated into unmanned aerial vehicles in the camera market; and manage IP video traffic, broadcast encoding and transcoding, and IP video delivery applications in the infrastructure market.

The company reported earnings on June 3rd of 34 cents that beat estimates for 28 cents. They guided for Q2 for revenues of $60-$66 million compared to estimates for $69 million. They announced a $75 million share buyback effective immediately or 5.4% of the company's stock.

The verbal guidance for stronger sales was much better than the actual numbers presented. Analysts believe they were underpromising so they can continue beating estimates. The revenue miss came from two sources. GoPro cameras are facing stiffer competition and sales are slowing. However, the hero 5 is expected to be announced in September and demand should be strong. Secondly, Sony had a problem with the sensors in its new cameras and production was pushed back significantly until they get the problem solved. That prevented Ambarella from delivering and billing for a large quantity of chips until Sony was ready to proceed. That is also expected to be solved in Q2.

Ambarella popped to about $53 in the week after earnings from a prior close at $42. Shares have consolidated in the $51-$52 range for more than a week and are now pressing the top end of that range. With a positive market I would expect a strong breakout. Even in the currently weak market the shares have been posting minor gains and no material declines.

Earnings are August 30th.

I am going to put an entry trigger on this play just in case the market tanks on Monday. If we do get a significant pullback next week I will revise the recommendation.

With an AMBA trade at $53.50

Buy August $57.50 call, currently $2.30, initial stop loss $49.50.


MYGN - Myriad Genetics - Company Description

Myriad Genetics is a personalized medicine company, focuses on the development and marketing of predictive, personalized, and prognostic medicine tests worldwide. It discovers and commercializes molecular diagnostic tests that: determine the risk of developing disease, diagnose disease, assess the risk of disease progression, and guide treatment decisions across six medical specialties where molecular diagnostics can enhance patient care and lower healthcare costs.

On June 10th, Crescendo Bioscience, a wholly owned subsidiary of Myriad announced the results of some trials on Vectra DA for patients with rheumatoid arthritis. Apparently the results did not please investors and shares began to collapse. Only a couple days before they announced a $200 million share buyback but that did not help.

When they reported earnings in early May the 41 cents beat estimates for 38 cents. However, they lowered revenue guidance for the full year from $750-$770 million to $753-$755 million. Analysts were expecting $758 million. Earnings guidance was also lowered from $1.63-$1.68 to $1.63-$1.65. Analysts were expecting $1.66. Guidance for the current quarter dropped to 36-38 cents and analysts were expecting 41 cents.

Earnings are August 9th.

Shares crashed on the 10th, consolidated slightly and then began to sell off again. Shares closed at a two-year low on Friday.

With a MYGN trade at $29.85

Buy August $29 put, currently $1.65, initial stop loss $31.25.

In Play Updates and Reviews

No Material Movement

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P lost -6 points and the Dow -58. Both were well off their lows and headlines were almost nonexistent. With the Brexit coming only five days before the end of the quarter, I would have expected a little more movement on Friday's expiration.

Advancers and decliners were almost dead even but decliners had bigger point moves than the advancers. Only 3 stocks on the Nasdaq gained more than $2 while there were 55 stocks that lost more than $2. Google was the biggest loser at -$20 with Priceline, Amazon and Regeneron all losing over $12.

Next week is going to be significantly different with the Brexit on Thursday.

Current Portfolio

Current Position Changes

FL - Foot Locker

The long put position was opened with a trade at $54.22.

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

COST - Costco -
Company Description


No specific news. Minor decline in a weak market.

Original Trade Description: June 11th.

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories. It provides dry and institutionally packaged foods; snack foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produce; and apparel and small appliances. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo-processing centers, and hearing-aid centers; and engages in the travel business. They operate 690 warehouse stores plus online shopping.

A Costco membership costs $55. It is almost worth the cost if all you bought was gasoline. The store charges 7-15 cents less than the prevailing rates at other local stations. There are normally lines at the Costco pumps because it is a bargain. If you purchased 15 gallons of gas per week and saved an average of 10 cents you would save $78 a year and more than enough to cover the cost of the membership. Multicar families would save even more.

However, Costco to many people means bulk purchases of items too big to store in your normal pantry. The mental image of Costco is someone pushing a cart with cases of toilet paper, paper towels, laundry soap and canned goods. While that may be true for a lot of shoppers there are still bargains on everything else. My son stopped there on Saturday to buy 15 gallons of ice cream, 10 watermelons, scores of picnic plates and plastic utensils for a party he was throwing. I know people who only shop at Costco and do not go to stores like Safeway, Kroger, etc. Once you get the Costco shopping virus it is hard to not go there. You can even by caskets at Costco. Members bought 465,000 cars through Costco in 2015. The warehouse chain is the number 1 seller of organic food at $4 billion in 2015 compared to Whole Foods at $3.6 billion. Costco has 84 million paying members and you can cancel at any time and get a full refund.

This has helped Costco maintain an average annual growth rate of 13% while other stores are lucky to manage 2-4% a year. Walmart only grew at 0.44% last year and Target 5.4%. In the latest quarter adjusted for fuel and currency fluctuations Costco managed only 3% same store sales growth compared to estimates for 4.6%. They blamed the colder than normal April weather and the weak retail consumer. We already know from other retailers that sales were down sharply all across the sector.

They reported adjusted earnings of $1.24 compared to estimates for $1.22. Revenue rose +2.6% to $26.77 billion and missed estimates for $27.07 billion for the reasons I stated above. Analysts expect earnings to grow 12% annually over the next two years.

Earnings are Sept 29th.

Shares spiked up to $154 after earnings on May 26th and then went sideways for a week while those gains were consolidated. Now they are trending higher again and even closed up on Friday in a weak market.

Position 6/13/16:

Long Oct $160 call @ $4.40, see portfolio graphic for stop loss.

You could lower your cost and improve your profitability by selling the Oct $140 put short for $2.50 making your net debit $1.85 and it does not look like Costco will see $140 again.

NVDA - Nvidia Corp - Company Description


No specific news. Profit taking ahead of the weekend event risk.

Original Trade Description: May 11th.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The companyÂ’s products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.

Q1 earnings rose 46% to 33 cents and beat earnings by a penny. They hiked full year revenue guidance as well as the current quarter. Tor Q2 they raised the forecast to $1.35 billion that was above analyst estimates at $1.28 billion. Gaming revenue was up 17% to $687 million but all areas of effort saw significant gains. They recently released a new graphics card that is twice as fast and 40% cheaper than the card it is replacing.

Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.

The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.

The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.

The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.

More than 50 automakers are testing the new Drive PX chip for self-driving cars. The chip combines inputs from cameras, lasers, maps and sensors to allow cars to drive themselves and learn from each experience.

Earnings August 11th.

I have been waiting for a dip to enter a position on Nvidia but it never came. I thought the $1 drop this week was a prelude and we could get a better entry point when the market pulled back. The market does not look like it will decline until after the Fed meeting and Nvidia is back at a new high. I am going to bite the bullet and make the entry before it is over $50 and I am kicking myself even harder.

Position 6/10/16:

Long August $49 call @ $2.22, see portfolio graphic for stop loss.

PRGO - Perrigo Company - Company Description


No specific news. Profit taking ahead of the weekend event risk.

Original Trade Description: June 8th.

Perrigo develops, manufactures, markets, and distributes over-the-counter (OTC) consumer goods and pharmaceutical products worldwide. The company operates through Consumer Healthcare (CHC), Branded Consumer Healthcare (BCH), Prescription Pharmaceuticals (Rx), Specialty Sciences, and Other segments. The CHC segment offers OTC products in various categories, including analgesics, cough/cold/allergy/sinus, gastrointestinal, infant nutritional, smoking cessation, animal health, feminine hygiene, diabetes and dermatological care, diagnostic, scar management, and other healthcare products, as well as vitamins, minerals, and dietary supplements (VMS); and contract manufacturing services. It serves retail drug, supermarket, mass merchandise chains, and wholesalers through sales force and industry brokers. The BCH segment provides branded OTC products in the natural health and VMS; cough, cold, flu, and allergy; personal care and derma-therapeutics; lifestyle; pain relief, nasal decongestants, and cold sore management; and anti-parasite areas, as well as offers generic pharmaceutical products. It serves pharmacies, drug, and grocery stores through pharmacy sales force, as well as a network of pharmacists. The Rx segment offers generic and specialty pharmaceutical prescription drugs in various dosage forms, such as creams, ointments, lotions, gels, shampoos, foams, suppositories, sprays, liquids, suspensions, solutions, powders, controlled substances, injectables, hormones, women's health products, oral solid dosage forms, and oral liquid formulations; and ORx products. It serves wholesalers; retail drug, supermarket, and mass merchandise chains; hospitals; and pharmacies. The company was founded in 1887.

In the first quarter Perrigo was doing ok in a weak market for pharma stocks until CEO Joe Papa resigned unexpectedly to take over as CEO of Valeant. Shares fell from $128 to $85 over about three weeks. The company suffered multiple analyst downgrades and investors fled the stock.

They reported earnings on May 12th of $1.75 that missed estimates for $1.83. However, revenue of $1.38 billion did beat estimates for $1.35 billion. You would have thought that would push shares even lower but the company reiterated guidance for full year earnings of $8.20 to $8.60 per share, an 8-13% increase. Adjusted gross margin was a record at 47.9% with operating margins of 25.1%.

Earnings August 4th.

Shares immediately begin to rise after the guidance. Today's close at $100 is above the close on the CEO exit drop. This should be the start of a major recovery back to the $120 level by year end. The strong earnings guidance offset the kitchen sink quarter that normally occurs when a new CEO takes charge. They want to get all the skeletons out of the closet so future quarters under their reign will be positive.

On June 1st, Morningstar named Perrigo as one of their top ten buys for 2016.

Unfortunately, Perrigo options are expensive. We cannot use July strikes because the next strike is $5 out of the money, June expires next Friday and the premiums will collapse. The next strike is August but at least that will leave some earnings expectations premium when we exit before earnings. If you want to defray your net debit you can sell a higher priced call or offset by selling a naked put.

I will profile both sets of options. My recommendation would be to sell the put since PRGO is in a strong uptrend. That way you are not limiting your upside as you would by selling the higher strike call.

Position 6/9/16

Long August $105 call @ $4.55, initial stop loss $94.45.


Preferred: Short August $90 put @ $2.20, initial stop loss $94.45.
Net debit $2.35. No limit to upside potential.

Less margin: Short August $115 call @ $1.77, initial stop loss $94.45
Net debit $2.78. Upside limited to $7.22.

QRVO - Qorvo Inc - Company Description


No specific news. Minor loss ahead of weekend event risk.

Original Trade Description: June 14th.

Qorvo, Inc. provides technologies and radio frequency (RF) solutions for mobile, infrastructure, and defense and aerospace applications worldwide. It operates through Mobile Products (MP) and Infrastructure and Defense Products (IDP) segments. The MP segment supplies its RF solutions into mobile devices, including smartphones, notebook computers, wearables, tablets, and cellular-based applications for the Internet of things. The IDP segment provides low noise amplifiers, switches, radio frequency filter solutions, CMOS system-on-a-chip solutions. This segment supplies its RF solutions to wireless network infrastructure, defense, and aerospace markets; and connectivity applications for commercial, consumer, industrial, and automotive markets.

Qorvo is a major supplier to Apple and other smartphone manufacturers. The slowdown in Apple iPhone sales hurt earnings last quarter but sales increases to Samsung and Chinese handset maker Huawei have helped to offset sluggish demand. The Samsung Galaxy S7 is selling very well and taking over the smartphone market. Strong base station demand rose +25% sequentially and a 9% increase in defense spending is helping offset the perceived slowdown in iPhones.

However, sales of the new iPhone 5E were only expected to be 10-15 million but sales have ramped up and are now expected to be in the 40-45 million range. Citigroup upgraded Qorvo and downgraded Slyworks saying the high performance Qorvo chips were much better than the Skyworks product and the company had a commanding lead in that segment. Qorvo is much better positioned for the carrier aggregation market and the low-band market fed by Skyworks was seeing a lot more competition.

Qorvo should benefit significantly from the ramp of 3G and 4G handsets into India and lower dollar emerging markets. The 5G specifications are starting to emerge and Qorvo is expected to be a leader in that transition, which will involve hundreds of millions of chips.

Earnings August 3rd.

Shares of QRVO gained 74 cents today in a very weak market. I have to stretch some on the strike because shares are just under $55 and that strike is too expensive. I am going out to $60 to get some premium relief.

Position 6/15/16:

Long Aug $60 call @ $2.10, no initial stop loss.

BEARISH Play Updates (Alpha by Symbol)

FL - Foot Locker - Company Description


No specific news. Minor rebound. Probably short covering ahead of the weekend event risk.

Original Trade Description: June 15th.

Foot Locker, Inc. operates as an athletic shoes and apparel retailer. The company operates in two segments, Athletic Stores and Direct-to-Customers. The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment under various formats, including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and SIX:02, as well as Runners Point, and Sidestep. As of January 30, 2016, it operated 3,383 primarily mall-based stores in the United States, Canada, Europe, Australia, and New Zealand.

Unfortunately, mall traffic is slowing as we have seen repeatedly in retailer earnings comments. Sports Authority just closed all 450 of its stores because of declining sales. The NPD Group Consumer Tracking Service said the "performance" shoe business has never been worse but the total sneaker business remains solid. That means all the high dollar shoes with a sports star name attached to them are not selling, with the exception of Stephen Curry.

Only about 24% of people who buy a specific type of shoe actually wear it for that purpose. That means 75% of the shoes are just bought to wear as a daily living shoe rather than the specific sport. Running shoes are the strongest with 50% of buyers actually running. Basketball logs in at about 33% and outdoor shoes are low at 10%. Asics has been a top selling brand for sports with 66% saying they use them for that particular sport. Skechers was the lowest brand at 10%.

The luxury brands with names like Michael Jordan, Le Bron James, etc are not selling near as well as they did in the past. Foot Locker had a 50% off sales on the high dollar shoes in April in order to reduce inventory.

With shoe makers paying more and more money for super star endorsements they have to charge more for their shoes. In the current economy that is not working out well. A $200 pair of shoes is not a hot item when money is being spent on smartphones and video games instead.

Foot Locker reported earnings back on May 20th and shares dropped $5 on the news. It was not pretty. Foot Locker has been declining since the highs back in October. After the post earnings drop they rebounded about $2 to $56 but could not gain any momentum. Now that basketball is over and the summer doldrums are approaching shares have declined back to $54 and could easily break to a new 52-week low.

Earnings are August 19th.

Given the lack of excitement in shoes and the slowdown in retail, I am recommending we place a bet that Foot Locker does break down before earnings. There is support at $52 but the decline since October is accelerating.

Position 6/16/16:

Long August $52.50 put @ $2.40, initial stop loss $56.25.

PYPL - PayPal - Company Description


Shares started at outperform by Oppenheimer. Believes the company has a first-mover advantage over Apple Pay. No gain on the news.

Original Trade Description: June 13th.

Paypal bills itself as a technology company that enabled digital and mobile payments on behalf of consumers and merchants worldwide. The software allows users to pay and be paid from any computer or mobile device. They have outlasted several competitors but their time in the number one position is running out.

Apple announced Apple Pay for the web. With more than 1 billion Apple devices in use worldwide and 300 million of those are iPhones. When counting Macs and iPads there are more than 500 million Apple users. That is an instant market for Apple Pay on the web and it is going to be a major blow to Paypal.

Paypal has 14 million active merchant accounts and 170 million active consumer accounts. The one feature that works in PayPal's favor is that Apple Pay will initially only be available in the Safari browser and not on Chrome, which has more than 1 billion users.

Regardless the perceived hit to Paypal is likely to be detrimental to the stock price, which is already in decline.

Earnings July 27th.

Position 6/14/16:

Long Aug $35 put, @ $1.35, no initial stop loss.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now