Option Investor

Daily Newsletter, Saturday, 5/2/2015

Table of Contents

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

Market Wrap

Sell in May or Stay and Play?

by Jim Brown

Click here to email Jim Brown

The last day of April was ugly as winners were sold but the first day of May was positive as month end retirement contributions hit the market. Historically the first two weeks of May are negative as the sell in May crowd leave the market. That is followed by a positive uptick as bullish investors buy the dip. After these two weeks of volatility the market settles down ahead of the summer doldrums.

Market Statistics

Investors ignored some ugly earnings news on Friday as biotechs rebounded from their second worse sell off since the Great Recession. In just five days the Nasdaq Biotech ETF (IBB) declined more than -9%. On Friday it rebounded +3.1%. Earnings from Gilead Sciences (GILD) helped break the cycle of negativity created by the failure in a trial by Celadon (CLDN) leading to an 80% drop in those shares and poisoning sentiment for the sector.

The market may have rebounded on Friday but all the major indexes were well below their highs. The Russell 2000 rebounded only .6% after falling -5% over the prior four days. That is hardly a strong rebound and bullish conviction was severely lacking. Experienced traders know the historical trend.

Some of the hesitancy may have been from the economic reports. The ISM Manufacturing report for April was flat at 51.5 and almost a two-year low after declining -6 points since November. Fifteen of eighteen U.S .manufacturing industries expanded in April. Apparel and computers were two of the industries that declined. Holding the index back was a drop in the employment component to contraction territory at 48.3 and the lowest level since 2009. That was the fourth consecutive monthly decline. Inventories also declined into contraction territory at 49.5 down from 51.5. Backorders were flat at 49.5, customer inventories declined to 44.0 and prices paid rose slightly from 39.0 to 40.5. Any number under 50 represents contraction.

On the positive side new orders rebounded to a four month high at 53.5, up from 51.8. Analysts blamed the manufacturing weakness on the weather, port disruptions, the strong dollar and a sharp decline in energy investments.

March construction spending declined -0.6% compared to Moody's estimates for a rise of +0.8%. Private construction fell -0.3% while public construction declined -1.5%. Highway construction fell -2.4% and school construction fell -2.2%. This is going to further weigh on Q1 GDP numbers. Total spending was $967 billion and +2% over March 2014 levels.

Consumer Sentiment for April was flat with the preliminary report at 95.9. This was a +2.9 point improvement over March but only a three-month high. Sentiment in January was 98.1. The present conditions component rose from 105 to 107 and the expectations component rose from 85.3 to 88.8.

Auto sales declined from the 17.1 million annualized rate in March to 16.5 million in April. However, consumers were buying higher dollar cars. The average price for a Ford F-150 pickup rose +$3,200 from a year ago to a record price of $42,600. The average term for a new car loan in April also rose to a record at 67.8 months with 80-84 months loans becoming more common. If the dealer can lower the monthly payments the consumer is likely to spend an extra $5,000 to $10,000 more than they had planned.

Audi posted an 11.9% sales gain with Lexus sales rising +11.7% thanks to sales of their SUV. Ford posted a sales increase of about 5.4% while Fiat Chrysler, GM and Nissan averaged about 6% growth.

The calendar for next week is dominated by labor reports. The ADP Employment on Wednesday is expected to show a gain of +205,000 private jobs. The Nonfarm Payrolls on Friday are expected to show gains of +220,000 jobs. However, there are a lot of lower estimates after the 126,000 new jobs in March.

There were no material weather events in April and the jobless claims last week at 262,000 was the lowest in 15 years. The ISM Manufacturing report for April showed that employment contracted and layoffs are still occurring in the energy sector. This suggests there could still be a low number surprise on the Nonfarm numbers.

The results of the Fed meeting caused a +10.3% rise in the yield on the ten-year treasury to 2.117%. The removal of all the calendar references in the post meeting statement means every meeting in the future starting with the June meeting could produce a rate hike. In theory this should force some money out of treasuries and back into equities but the timing is not ideal. With the summer doldrums still a couple months away it suggests investors could be worried about putting money into equities at the current level. Summer rallies do occur but investors would be a lot more confident if a correction of some sort, even just -5% occurred first. Some analysts believe yields will decline after this temporary headline spike but others are targeting 2.35-2.40% as the next threshold. That would be a lot of pain for holders of treasuries.

The split calendar is starting to expand with new announcements by Marathon Petroleum and Patrick Industries. I do not expect a split run by either company. The most promising company will be Netflix once they announce he split ratio on June 9th after the shareholder meeting.

It was another ugly day for social media stocks. Linkedin (LNKD) posted earnings of 57 cents that were in line with estimates and revenue that rose +35% to $638 million and beat estimates. However, Q2 guidance of 28 cents and revenue of $672.5 million was well below estimates for 74 cents and $717.5 million. The stock was knocked for a -27% decline intraday but rebounded slightly to lose "only" 18.6%.

This came after Twitter (TWTR) lost -24% after earnings and Yelp (YELP) lost -22%. Facebook was the only real survivor with a -4% decline.

Brinks (BCO) reported adjusted earnings of 41 cents on revenue of $776.1 million. The company raised full year guidance to $1.55 to $1.75 per share. The stock exploded higher with a +14% gain.

Expedia (EXPE) posted an adjusted loss of -3 cents compared to expectations for a 9 cent profit. However, revenue rose +14% to $1.37 billion. Bookings at hotels rose +32%. Overall bookings rose +19% but would have been +25% except for currency translation issues related to the dollar. Shares gained +8% on the news.

Gilead Sciences (GILD) posted earnings that rose +100% from $1.44 to $2.89 and well above estimates for $2.78. Revenues rose from $5 billion to $7.6 billion. Antiviral product sales for the quarter rose +55% to $7 billion. Hep-C treatment Harvoni had revenues of $3.6 billion, up 70% from Q4. The company raised guidance from $26-$27 billion to $28-$29 billion for the full year. That is what I call a real guidance raise. The company announced its first quarterly dividend of 43 cents payable June 29th to holders on June 16th. They also repurchased $3 billion in shares in Q1. Shares rallied 4.5% on the news.

Abaxis (ABAX) reported adjusted earnings of 17 cents compared to estimates for 27 cents. Revenue of $52 million also missed estimates for $56.7 million. Shares hit an air pocket and dropped -13% on the news.

Athenahealth (ATHN) lost another 7% today after falling the same amount on Thursday. The company reported adjusted earnings of 24 cents that beat estimates of 13 cents. Revenue rose 27% to $206.4 million. They reiterated full year guidance for $1.10-$1.20 and revenue of $905-$925 million. Analysts were expecting $1.16 and $919.8 million. Shares fell ahead of the Ira Sohn conference that kicks off on Monday. David Einhorn spotlighted ATHN in a major presentation as a monster short last year saying the company was only worth a fraction of its current share price. He said it was part of a basket of bubble stocks. When asked last week he said he was still short and analysts are expecting him to double down on his efforts to get the hedge fund crowd to join him.

Email marketing firm Constant Contact (CTCT) fell -21% after posting earnings of 22 cents and revenue of $90.4 million compared to estimates for 19 cents and $91.1 million. The real problem came in the guidance. The company cut its full year outlook to $1.29-$1.38 and $371-$377 million and their prior forecast was $1.38 and $388 million. They also lowered guidance for Q2 below analyst estimates. The company said it "failed to execute on its plans."

YUM Brands (YUM) shares rallied +7% after Dan Loeb's Third Point disclosed a "significant stake" of more than $1 billion in the company. Loeb said the company has "turned the page on recent trouble in its Chinese business." Loeb disclosed the position in a letter suggesting the company offer more "handheld chicken sandwiches" and the potential for the company to spin off its China business. About 6,700 of the company's 41,500 stores are in China but the country accounted for 52% of the company's revenue in 2014. Growth in the U.S. has slowed as consumers transition to healthier and more natural fast food choices.

Shares of Altera (ALTR) rallied +10% on news the standstill agreement Intel signed with Altera expires on June 1st. The expiration of the agreement would allow Intel to make a hostile offer for the company directly to shareholders. Altera rejected a $54 per share offer in April after both companies had been negotiating for two months. Altera makes communications chips and Intel is looking to expand into new markets. Altera missed on earnings estimates by a penny and by $35 million on revenue estimates for $470 million.

Berkshire Hathaway (BRK.A) posted earnings that rose +9.8% to $3,143 per share, up from $2,861 in the year ago quarter. Adjusted operating results rose +20% to $4.24 billion or $2,583 per share. Analysts were expecting $2,373 per share. Revenue rose +7% to $48.64 billion. Warren Buffett will celebrate his 50 year anniversary at the firm when the shareholders show up in Omaha on Saturday for the annual meeting or what Buffett calls "Woodstock for Capitalists." Berkshire now owns 80 companies and more than $115 billion in stock.

Burlington Northern Santa Fe recovered from a poor 2014 and posted a 44% increase in profit of $1.05 billion. The railroad is recovering as a result of $6 billion in capital improvements that are still in progress. Berkshire said its Geico subsidiary saw profits decline -55% because it paid out more to cover claims. They plan on increasing insurance rates to offset the higher claims.

Several Berkshire businesses struggled with currency issues with General Re losing money from underwriting because of higher claims and currency losses. Berkshire ended the quarter with $62.71 billion in cash and Buffett still looking for another acquisition or two.

The coming week is the last major week of the Q1 earnings cycle. The majority of blue chips have already reported so the easily recognizable symbols are disappearing. This is small cap week with close to 600 companies reporting and a large percentage of them are small cap stocks.

The highlights for the week are in yellow with Dow component Disney reporting on Tuesday. Green Mountain and Tesla report on Wednesday and Alibaba, Priceline and Monster Beverage on Thursday.

Tesla and Alibaba are probably the crowd favorites for the week. Tesla announced its new battery products on Thursday and shares failed to recapture the Monday high at $238. Alibaba had trouble with its last earnings and shares fell -$10 the day after.

I have wanted to short BABA for several weeks but the potential for a turnaround on earnings kept me out of it. If they spike on earnings that will be my entry point. If they crash I will be kicking myself for weeks.

Alibaba modified its job listing for applicants that know how to praise the "code monkeys," wake them up and organize meetings. "Physical characteristics similar to adult film star Sara Aoi may help the applicant succeed" the job post said. Sara is a popular Japanese porn actress. They took the ad down after being criticized for being sexist. Alibaba said it was only a humorous marketing attempt to attract talent. The company is still running the ad for a programmer cheerleader but the reference to Aoi has been removed and it now emphasizes that both men and women can apply.

Tesla announced its new battery products that Elon Musk said would bring in billions in revenue in the "near term." The home battery version is called the Powerwall. Multiple units can be stacked side to side up to 90-Kwh if you need more power. The base version is for 10-kilowatt hours and will let you run minimum appliances in your home for a "few days" in case of an outage. The battery module weighs 220 pounds and is just 7.1 inches deep. The cost for the battery is $3,500. Unfortunately that does not include the cost of installation or the inverter. Solar City is already taking orders at $5,000, which includes installation, for a nine year lease. To buy the same system outright it costs $7,140. Installations will begin in October.

The second product was the Powerpack, which consists of 100-kilowatt-hour blocks that can e clustered to meet any project size. Costs for the Powerpack were not disclosed. There is already a waiting list. An unnamed utility company has approached Tesla to build a 250-megawatt-hour installation. That is 2,500 Powerpack towers. Other non-utility customers include Amazon, Walmart and Target.

Industrial sized Powerpack configuration.

Crude oil was the biggest gainer for the month with a +20% jump. Inventory levels are still rising but at a slower pace. Active rigs are still declining but also at a slower pace. With refiners shifting into high gear for the summer driving season speculators are looking for inventory levels to decline and production to slow.

Active rigs fell -27 last week to 905 and a -53% decline from their recent highs of 1,931. Oil rigs declined -24 to 679, a -58% drop from their 1,609 high. Gas rigs declined -3 to 222 and only five rigs above the 18-year low from two weeks ago.

The EIA is now projecting a 57,000 barrel per day decline in production for May and it should only get worse from there. The current estimates are for a decline in production from the 9.422 million barrel peak in March to less than 9.0 million barrels per day at the end of 2015. That is a huge decline and it spells pain for the producers. However, the estimate for crude prices at the end of December is $70 for WTI and $80 for Brent. That would be music to their ears because it means longer dated futures contracts for 2016 and 2017 would be much higher and give producers the opportunity to hedge their future production for a profit and raise some short term cash.


The +183 point Dow rebound on Friday brought the index back to only a -56 point loss for the week. That is hardly something worth bragging about. The market rebound was probably due to between $4-$8 billion in rebalancing at the close of April and funds putting that money back to work in May. When actively managed funds see a large gain in stocks that throws their allocations out of balance they rebalance at month end. If the fund is supposed to be 70% vs 30% stocks over bonds and a rally throws that out of balance they sell some winners at the end of the month and rebalance the portfolio. If you look at any 100 charts this weekend you will probably see the winners being sold on Thursday and the losers being bought on Friday. The influx of month end retirement cash also lifts the indexes the first couple days of the month.

However, we are now in the sell in May cycle and the next couple weeks are traditionally negative. That does not mean we are headed into a correction only that they should be more sellers than buyers over the next couple of weeks. Option expiration comes early this May, only two weeks from now. That will also add a little volatility at the end of next week.

The S&P dipped to 2077 on Thursday and just slightly above the 2072 low from the 17th. I realize it would be grasping at straws to claim that as a higher low and suggest the market was going higher. That higher low trend does exist (pink line) but it could be erased in a single day by another decline like we had on Thursday. The earnings cycle is drawing to a close with most of the big names already reported. That removes a lot of catalysts for movement and a lot of those have been to the downside for Q1.

We need to just trade what the market gives us over the next two weeks and not get hung up worrying over which direction it is going. At Friday's close the S&P was only 10 points from the historic high.

The Dow was helped to its +183 point gain by several unlikely supporters. Apple had been declining since its earnings on Monday and rebounded +3.80 on Friday on short covering and hopes that the taptic engine problem would not be a major deal. Even the news that wrist tattoos would interfere with some watch functions did not hold the stock down. The "TattooGate" problem was acknowledged by Apple saying, "Permanent or temporary changes to your skin, such as some tattoos, can also impact heart rate sensor performance. The ink, pattern, and saturation of some tattoos can block light from the sensor, making it difficult to get reliable readings." Also, the watch was repeatedly locking up because the sensors thought the watch was not sitting correctly on the wrist.

Home Depot (HD) had also been declining for the last several weeks and closed at a two-month low on Thursday. The stock rebounded +2.4% on Friday. United Health (UNH) closed at a two-week low on Thursday after topping out after a six-month rally.

The Dow has struggled with resistance at 18,100 since early March but the range has been narrowing. That suggests the dip buyers are moving up their buy orders but the downside to this theory is the volume. Downside volume has far exceeded upside volume. For instance total market volume on Thursday was 8.3 billion shares compared to the 6.3 billion for Friday. For the four day ended on Tuesday the volume averages only 6.3 billion shares. There does not seem to be any conviction on the upside despite the shrinking range from 17,800 to 18,100.

With only one Dow component reporting earnings next week there are few catalysts. The payroll numbers are the only major economic headlines and strong numbers means we are closer to a rate hike.

Resistance is solid at 18,100 despite numerous intraday spikes above that level. When not driven by some specific headline the lows have been over 17,900 so the real range is very tight.

The Nasdaq benefitted the most from the biotech rebound. The number of strong biotech gains crowded Apple off the point gainer list. The severity of the losers was also minimal compared to the big gainers. Friday was a good day for the Nasdaq and the index rebounded to just over 5000 again. Thursday was a break of uptrend resistance but we are back over at Friday's close.

It will be interesting to see if the biotechs can sustain their gains. The sector had been hot and was pulled down by more than -9% since Monday so short interest was high. Going into summer we might see that investors are a little less confident about buying these stocks at the highs.

Even if the Nasdaq chart breaks down again next week there is solid support just above 4850. That level has held multiple times. If the index moves further over 5000 it faces resistance at 5020, 5070 and 5125.

The small cap Russell 2000 is the real train wreck for the week. The Russell finally broke below short term support at 1250 and 1230. The index lost -3.1% for the week even after the +8 point gain on Friday. That is roughly a -40 point decline. However, the drop ended exactly on the 100-day average at 1216. The 200-day has been strong support since December.

Whether that will hold on the next test is of course unknown. We know it will eventually fail whether next week or next month. It is only a matter of time. The next support level is 1208 and then it is a long drop to 1150.

I would like to think that the 100-day test will begin a rebound back to the highs but summer is not normally kind to small cap stocks. What the test did do is give us a line in the sand for a trade signal. If the Russell drops below the 100-day that would be a solid signal to either be flat or short.

I would continue to be cautious on holding too many long positions until the market picks a direction. The next couple weeks could be volatile as he sell in May crowd exits the market. The major headlines next week are payroll related with Wednesday's ADP giving us a heads up on what Friday's employment report might look like.

In this case a strong payroll number on Friday might be bad news for the market and investors will begin pricing in a rate hike in June. This is all psychological since a quarter point above zero is still basically zero. Once investors have their rate hike tantrum the markets should rally as long as the economics improve as the Fed expects. That would be a change in the current direction so there is still plenty of uncertainty.

Don't be in a rush to trade. There is always another day as long as you have capital in your account.

If you like the market commentary 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.

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Random Thoughts

The Yale School of Management has a Buy the Dip Index. They survey individual and institutional investors and ask them about their confidence levels regarding buying the next dip. The individual investors (red line) hit a two year high last week while institutional investors were far less confident. This suggests dips will continue to be bought. However, this can also be seen as a contrary indicator. If so many individuals are bullish should we expect a correction soon?

About the only thing this proves is that institutional investors are more concerned about the market's future and are probably under invested. If the indexes did rebound and breakout to new highs we could see some institutions throwing money at the market to prevent it from running away from them.

The Q1 GDP came in at +0.25% growth for Q1. The consensus estimates had declined from +3.0% at the beginning of the quarter to +1.4% just before the GDP release. Analysts and economists missed it by a mile and the Atlanta Fed real time GDP Now forecast tool nailed it with a +0.2% forecast as of April 24th.

April 24th GDPNow Forecast

So how are the economists doing for Q2? The consensus forecast is +3.2% growth with the high estimates for +4.2% and the low estimates for +2.6%. However, the Atlanta Fed GDP Now forecast is now for a paltry +0.8% growth after the initial economic reports showed continued weakness. There appears to be a lot of hopium in the analyst community and they refuse to believe the economy is not growing.

Chain store retail sales were growing at a +5.4% rate at the end of November. At the end of February that had dropped to +0.8% growth despite a monster drop in gasoline prices and extra cash in every consumer's pocket.

Wholesale trade has declined -$101 billion over the last four months. During the financial crisis it took 7 months for that same decline. That means the economy has slowed faster over the last several months than in 2008-2009.

Over the last 7 months new manufacturing orders have declined 6 times. Only one month was positive and that was January. That never happened before not even during the financial crisis.

The Fed claims this is transitory weakness and they are ready to raise rates instantly when a green shoot appears. Enquiring minds want to know when this transitory period is going to end. Source for above facts

Britain has informed the U.N. Security Council of two instances of Iran attempting to acquire nuclear components through two blacklisted front companies. They also described an "active Iranian nuclear procurement network." The sanction violations and the existence of the procurement network proves that nobody should expect Iran to be honest in regard to any agreement it signs on June 30th.

The panel also noted reports of Iranian weapons shipments to Syria, Lebanon, Iraq and Yemen as well as Hezbollah and Hamas in violation of a U.N. embargo. Iran ignores the sanctions and embargos and does whatever it wants in an effort to spread terrorism and its influence in the Middle East. Just wait until they start spreading nuclear weapons to its friends. Source

Vice President Joe Biden told the Washington Institute for Near East Policy on Thursday:

Iran would have enough enriched uranium within three months to be able to make up to eight nuclear weapons if negotiations with the international community blow up, Vice President Joe Biden said late Thursday, noting that "the path has already been paved" for that outcome.

"Let’s get something straight so we don’t kid each other," Biden said. "They already have paved a path to a bomb's worth of material. Iran could get there now if they walked away in two to three months without a deal."

Biden now accepts the Israeli estimate of 90 days to a nuclear device, and says that is why we have to make a deal now, with the same entities who Biden tacitly admits has been lying the whole time. Basically, we agree to whatever Iran wants us to agree to and then hope they don't lie to us again like they have been doing for the last 20 years.

Albert Einstein said "the definition of insanity is to keep doing the same thing over and over and expecting a different result."

The U.S. Navy has been accompanying ships through the Strait of Hormuz since Iran seized the Maersk Tigris last Monday. The ships are American flagged and they are taking this precaution because of the Iranian aggression. While Navy ships are not following along a couple hundred yards behind they are standing by the strait with assets in the air monitoring Iranian activity. The Navy has five patrol craft, four destroyers, one cruiser and one minesweeper in addition to the carrier USS Theodore Roosevelt in the Persian Gulf and Arabian Sea. Four Iranian patrol boats tailed the U.S. flagged cargo ship Maersk Kensington for 20 min but veered away as U.S. helicopters approached.

Investors are still neutral on the market according to the AAII Investor Sentiment Survey. For the first time in more than 26 years the majority of investors that are neutral on the market has been over 45% for three consecutive weeks. In fact the number of neutral investors rose last week with both bulls and bears switching their outlooks. There is a huge amount of chatter in the press about an impending correction and overvalued markets. Apparently that is wearing off on investors.

Does "sell in May" really work? Jeff Hirsch created the "Best Six Months Switching Strategy" in 1986. According to Hirsch, a hypothetical $10,000 investment in the DJIA compounded to $816,984 for November-April in 64 years compared to $221 loss for May-October. The same hypothetical $10,000 investment in the S&P 500 compounded to $607,883 for November-April in 65 years compared to a gain of just $8,090 for May-October.

He also cautions that it is not infallible on single years and those results are over a very long time. For instance from 1985-1997 May was the best month of the year every single year for 13 years with an average of a +3.3% gain on the S&P. From 1965-1984 May was down 15 out of 20 years. May has been down 3 of the last 5 years. Since 1997 it has only risen 7 times but three of those years were up more than 4%. Hirsch also cautions that since 1950 pre-election year Mays rank as the 10th worst month on the Dow and S&P. This is a pre-election year May. Source

Cleveland Fed President Loretta Mester told reporters on Friday, "All meetings are on the table" for the first rate hike in nine years. SF Fed President John Williams echoed the data dependent language saying, "Really positive data trends, improvement in the labor market, signs that improve the confidence in the expectation that inflation will move back to 2 percent, I mean, I can imagine those -- that constellation of data coming in," he said. "Whether before June, or meetings right after that, too, but it would require the data to be good."

The Fed clearly wants to announce the first rate hike so it can return to a normalization of policy. A quarter point hike will not affect the economy but it will give the Fed credibility and market rates will begin to gravitate higher in anticipation even if the next hike does not come for six months.

Have you considered being a fighter? Floyd Mayweather will take home $120 million and Manny Pacquiao will pocket $80 million on Saturday night. That is their minimums and they will make more than that based on the pay-per-view sales. The 17,000 tickets to the live event sold out in 60 seconds and they are being resold for more than $10,000 each. However, that is a misleading statistic. About 16,500 were given directly to sponsors, promoters, casino high rollers and the fighters themselves for friends and family. That left only 500 for retail buyers.

Mayweather is undefeated but he has spent time in jail twice for assaulting women. He has been accused of assault seven times by five different women. Pacquiao has had two prior losses.

Noted bear, Marc Faber, author of the Gloom, Boom and Doom Report, warned last week that the market could drop 30-40% in the near future. He said it won't be just a 10% correction but a 30-40% minimum. He said the market was overvalued as a result of the Fed's super loose monetary policy for the last six years. "All assets are grossly overvalued." However, he is not yet short because he does not know how much higher the market might run before the crash comes. He said the market could "go up and up and then one day it will go down, big time." Fortunately Faber has been calling for a significant market correction for several years. Eventually he will be right if he lives long enough.

Need a penthouse? Demi More is selling her $75 million 7,000 square foot triplex on Central Park West. She said she is spending most of her time in "my other homes" and I rarely visit this apartment and it is "too magnificent not to be lived in full time." The monthly maintenance fee is $21,186. She and Bruce Willis bought it in 1990, the year "Ghost" came out. Source with pictures


Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Investors have become infatuated with calling the next correction, crash or market top because so many lost money during the last crisis. The next time the market tops out it will seem so easy to have predicted it after the fact. Unfortunately, calling a top is not as easy as it looks in the rearview mirror. '

Ben Carlson


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New Plays

Summer Movie Blockbusters Are Already Here

by James Brown

Click here to email James Brown


IMAX Corp. - IMAX - close: 37.89 change: +0.53

Stop Loss: 35.90
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on May -- at $---.--
Listed on May 02, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 617 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
It's only May 2nd but the summer movie blockbuster party has already started with the "Avengers: Age of Ultron" hitting theaters this weekend. Ultron just delivered the second biggest opening day with $84.4 million in U.S. sales. That's just below the last Harry Potter movie, which brought in $91 million on its first day.

This Avengers 2 movie has already raked in $425 million overseas and is poised to do more than $200 million this weekend. Estimates suggest it could hit $600 million in the U.S. This movie is produced by Marvel Studios, a division of Disney (DIS), but it also means big business for IMAX. The Ultron movie delivered the biggest opening night sales for any IMAX film ever.

IMAX is part of the services sector. They're considered part of the entertainment industry. According to the company, "IMAX, an innovator in entertainment technology, combines proprietary software, architecture and equipment to create experiences that take you beyond the edge of your seat to a world you've never imagined. Top filmmakers and studios are utilizing IMAX theatres to connect with audiences in extraordinary ways, and, as such, IMAX's network is among the most important and successful theatrical distribution platforms for major event films around the globe. IMAX is headquartered in New York, Toronto and Los Angeles, with offices in London, Tokyo, Shanghai and Beijing. As of March 31, 2015, there were 943 IMAX theatres (820 commercial multiplexes, 18 commercial destinations and 105 institutions) in 63 countries."

Today there is a battle for consumer's viewing habits. People consume their content on all sorts of devices from their smartphones, tablets, laptops, desktops, and their big screen TVs at home. Netflix and other streaming services have changed viewer habits and expectations. When consumers choose to go to the movies they want something different. According to IMAX's CEO that's why IMAX tickets are doing so well. It's an experience that can't be replicated at home.

The company had a lot of momentum going into 2015 thanks to huge hits like "American Sniper". IMAX has managed to beat Wall Street's earnings and revenue estimates for the last four quarters in a row. Their most recent earnings report was April 30th. Income surged +50% from a year ago. Analysts were expecting $0.05 a share. IMAX delivered $0.07. Revenues rose +29% to $62.2 million, significantly above estimates for $55.4 million.

IMAX CEO Richard Gelfond commented on their results, "This is a very exciting time for IMAX. Our continued progress in expanding our theatre network globally, along with our strong film performance during the first quarter, resulted in robust financial results with almost 30% revenue growth and over 50% adjusted earnings growth compared to the same period last year. With record results from Furious 7 in April and a great start to the Avenger's sequel internationally, the momentum has continued into the second quarter."

2015 is expected to be a huge year. The "Fast & Furious 7" film kept the momentum going. IMAX will also benefit from high-profile movies like "Avengers: Age of Ultron", the new James Bond movie, another Mission Impossible film, and the next episode of Star War (#7) this December.

IMAX is rolling out new laser systems and they've signed long-term film deals with Disney and Warner Brothers. IMAX is currently growing at about 120 theaters a year. They're doing well in China. The Chinese movie box office is expected to eclipse the U.S. market by 2020.

Shares of IMAX look bullish with the stock trading at all-time highs. Currently the stock us hovering just below short-term resistance at $38.00. A breakout here could fuel some short covering. The most recent data listed short interest at 20% of the 58.6 million share float. We are suggesting a trigger to launch bullish positions at $38.25.

Trigger @ $38.25

- Suggested Positions -

Buy IMAX stock @ $38.25

- (or for more adventurous traders, try this option) -

Buy the SEP $40 CALL (IMAX150918C40) current ask $1.70
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:

In Play Updates and Reviews

Week Ends On An Up Note

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market delivered a very widespread bounce on Friday. Unfortunately the small caps underperformed. The Russell 2000 index only rose +0.6% versus the S&P 500's +1.0% and the NADSAQ's +1.29% gains.

SLH hit our stop loss. We want to exit our TSRA trade on Monday at the closing bell.

Current Portfolio:

BULLISH Play Updates

CDW Corp. - CDW - close: 38.67 change: +0.35

Stop Loss: 37.40
Target(s): To Be Determined
Current Gain/Loss: +0.1%
Entry on April 13 at $38.65
Listed on April 09, 2015
Time Frame: Exit PRIOR to earnings on May 7th
Average Daily Volume = 1.0 million
New Positions: see below

05/02/15: After slowly drifting lower last week shares of CDW look ready to resume its up trend. Let's hope it hurries. We only have a few days left. CDW will report earnings on May 7th and we plan to exit prior to their announcement.

No new positions at this time.

Trade Description: April 9, 2015:
Traders have been consistently buying the dips in information technology stock CDW. Now the stock is poised to breakout to new highs.

The company offers a broad range of hardware, software and integrated IT solutions to its clients. These include mobility, security, cloud computing, virtualization, data center optimization, and more.

Their website describes the company as "CDW is a leading provider of integrated information technology solutions in the U.S. and Canada. We help our 250,000 small, medium and large business, government, education and healthcare customers by delivering critical solutions to their increasingly complex IT needs. A Fortune 500 company, CDW was founded in 1984 and employs more than 7,200 coworkers. In 2014, the company generated net sales of more than $12.0 billion."

Earnings last year were healthy. CDW has consistently beaten Wall Street's earnings and revenue estimates for the last four quarters in a row. Revenues have been showing double-digit growth for the last year. Their most recent report was February 10th when CDW delivered its Q4 results. Analysts were expecting a profit of $0.53 a share on revenues of $2.95 billion. CDW reported $0.59 a share with revenues up +12.4% to $3.05 billion.

Analysts seem optimistic on CDW. Barclays has listed CDW as one of its top picks and noted that the company has very little exposure to Europe or Asia so the strong dollar shouldn't hurt it that bad. Another analyst, with RBC Capital Markets, believes that any softness in the consumer market will be overshadowed by strength in the enterprise market.

Technically the bullish trend of higher lows in CDW has been coiling more tightly. Now, with the stock up four days in a row, CDW is on the verge of breaking through resistance in the $38.00-38.50 area. Tonight we are suggesting a trigger to launch bullish positions at $38.65.

- Suggested Positions -

Long CDW stock @ $38.65

- (or for more adventurous traders, try this option) -

Long MAY $40 CALL (CDW150515C40) entry $0.90

05/02/15 plan on exiting prior to earnings on May 7th
04/29/15 new stop @ 37.40
04/13/15 triggered @ 38.65
Option Format: symbol-year-month-day-call-strike


Canadian Solar Inc. - CSIQ - close: 36.26 change: +0.86

Stop Loss: 34.75
Target(s): To Be Determined
Current Gain/Loss: -2.1%
Entry on April 28 at $37.05
Listed on April 23, 2015
Time Frame: Exit prior to earnings on May 7th
Average Daily Volume = 2.7 million
New Positions: see below

05/02/15: CSIQ recovered about half of Thursday's decline with its +2.4% bounce on Friday. Unfortunately we are running out of time. CSIQ has announced they will report earnings on May 7th. We do not want to hold over the report. That only gives us a few more days. Plan on exiting before Thursday.

No new positions at this time.

Trade Description: April 23, 2015:
The boom and bust trends in the solar energy industry have been severe. A few years ago there was a supply glut and prices on solar panels plunged by 2/3rds. Investors were fleeing the solar stocks and shares of CSIQ sank toward $2.00 a share. It's a different story today.

China has a HUGE air pollution problem. The country wants to move away from coal-fired energy. That's why China plans to build out 100 gigawatts of solar energy by 2020. India is in a similar bind. They also plan to build out 100 gigawatts of solar energy by 2022. These two countries alone will account for more solar energy production in the next several years than all previous years combined.

China recently announced they had completed 5.04GW of solar capacity in the first quarter of 2015. That puts the country on schedule to meet their 2015 goal of 17.8GW in new solar production.

One company that should benefit from this global build out of solar energy is CSIQ. They are in the technology sector and considered part of the semiconductor industry. According to the company, "Founded in 2001 in Ontario, Canada, Canadian Solar is one of the world's largest and foremost solar power companies. As a leading manufacturer of solar photovoltaic modules and provider of solar energy solutions, Canadian Solar has an industry leading and geographically diversified pipeline of utility-scale solar power projects as well as a track record of successful solar deployment boasting over 9 GW of premium quality modules installed in over 70 countries during the past decade. Canadian Solar is committed to providing high-quality solar products and solar energy solutions to customers around the world."

Their most recent earnings report was March 5th. CSIQ reported Q4 results of $1.28 per share. That missed analysts' estimates. However, revenues soared +84% to $956.2 million, which was above expectations. CSIQ full-year 2014 results saw a record $239 million in earnings with revenues hitting $2.96 billion. They shipped 3.1 gigawatts worth of solar panels. This year CSIQ expects to ship 4.3GW of panels, a +39% improvement.

CSIQ raised their 2015 Q1 guidance above Wall Street estimates, which helps explain the spike in the stock price. Currently the company's full-year guidance is still below street estimates. In spite of this divergence between forecast and analysts' estimates Wall Street is still bullish. All ten of the analysts who cover the stock have a buy rating on CSIQ. The average 12-month price target is near $46.00. The point & figure chart is more optimistic and currently forecasting a long-term target of $66.50.

Technically shares of CSIQ have been building on a bullish trend of higher lows. They're also appear to be breaking out past resistance in the $36.00 area. Further gains could spark some short covering. The most recent data listed short interest at almost 10% of the 41.2 million share float. Tonight I am suggesting a trigger to open bullish positions at $37.05. This will likely be a two or three week trade. CSIQ will report earnings in mid May and we'll plan on exiting prior to the announcement.

- Suggested Positions -

Long CSIQ stock @ $37.05

- (or for more adventurous traders, try this option) -

Long MAY $37 CALL (CSIQ150515C37) entry $2.05

05/02/15 plan on exiting prior to earnings on May 7th
04/28/15 triggered @ 37.05
Option Format: symbol-year-month-day-call-strike


Nucor Corp. - NUE - close: 49.00 change: +0.14

Stop Loss: 47.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on April -- at $---.--
Listed on April 28, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.5 million
New Positions: Yes, see below

05/02/15: NUE underperformed the broader market on Friday. Shares only gained +0.28%. On the plus side traders did buy the dip intraday and NUE looks poised to rally on Monday. We are waiting on a breakout past resistance. Our suggested entry point is $50.50.

Trade Description: April 28, 2015:
NUE's management is expecting steel prices to stabilize by the end of the year and that has provide hope for investors. The industry is still struggling with a "flood" of imports.

NUE is in the basic materials sector. According to the company, "Nucor and its affiliates are manufacturers of steel products, with operating facilities primarily in the U.S. and Canada. Products produced include: carbon and alloy steel -- in bars, beams, sheet and plate; steel piling; steel joists and joist girders; steel deck; fabricated concrete reinforcing steel; cold finished steel; steel fasteners; metal building systems; steel grating and expanded metal; and wire and wire mesh. Nucor, through The David J. Joseph Company, also brokers ferrous and nonferrous metals, pig iron and HBI/DRI; supplies ferro-alloys; and processes ferrous and nonferrous scrap. Nucor is North America's largest recycler."

Their 2015 Q1 results were hurt by a -5% drop in average selling price of steel. Wall Street was expecting earnings of $0.14 a share on revenues of $4.66 billion. NUE delivered $0.21, which was a -39% drop from a year ago, but significantly above its mid-March guidance in the $0.10-0.15 range. Revenues were down -14% to $4.4 billion.

NUE management commented on its quarter, "This lower performance is primarily due to lower selling prices and margins resulting from the exceptionally high level of steel imports flooding the domestic market. It is estimated that imports accounted for 33% of the finished steel market in the first quarter of 2015. Import levels in February and March were lower than the peak in January, but remain at the exceptionally high levels experienced during most of 2014. We anticipate selling prices to remain under pressure as the flood of imports continues in the second quarter of 2015. Global overcapacity built by foreign, state-owned enterprises continues to be a significant risk factor to our business."

The stock actually rallied on its earnings report thanks to somewhat optimistic guidance. The company said the automotive market remains strong. They continue to see improving demand in the nonresidential construction markets. NUE did note that the energy market is still troubled. The drop in crude oil and the decline in active rigs has cut demand for tubular goods products (drilling equipment), which has caused a glut of inventory in the sector.

NUE shared the following outlook, "Earnings in the second quarter of 2015 are expected to be somewhat improved from the first quarter of 2015. Although margins in the steel mills segment are expected to improve, they will remain under pressure during the second quarter of 2015 as selling prices have not yet fully stabilized and imports remain at exceptionally high levels. This pricing pressure is expected to mitigate the benefits of lower average raw materials costs in the second quarter. We expect much better performance in the downstream products segment in the second quarter of 2015. The performance of the raw materials segment is expected to decrease in the second quarter of 2015 due to a planned one month outage at our DRI facility in Trinidad. We anticipate an operating loss similar to the first quarter of 2015 at Nucor Steel Louisiana, which, due to the extended length of the time the facility was not operating, will work through higher cost iron ore inventory that was purchased in 2014. Performance in the second half of 2015 is expected to further improve on the strength of continuing improvement in nonresidential construction and its impact on our downstream products businesses and steel mills. Additionally, steel pricing is expected to stabilize and rebound as service center destocking runs its course."

It would appear that the market has priced in the industry's trouble with imports. Now investors are looking ahead toward improvement later this year. The stock has been consolidating sideways in the $46-49 range for several weeks. Shares rallied on its earnings report and now it's on the verge of breaking out from its trading range. The $50.00 level is round-number resistance plus it's strengthened by technical resistance with the simple 200-dma. A breakout past this area would be very bullish. Tonight we're suggesting a trigger to launch bullish positions at $50.50.

Trigger @ $50.50

- Suggested Positions -

Buy NUE stock @ $50.50

- (or for more adventurous traders, try this option) -

Buy the JUL $50 CALL (NUE150717C50)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike


BEARISH Play Updates

OvaScience, Inc. - OVAS - close: 25.32 change: +0.58

Stop Loss: 29.45
Target(s): To Be Determined
Current Gain/Loss: + 8.4%
Entry on April 28 at $27.65
Listed on April 27, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 725 thousand
New Positions: see below

05/02/15: The sell-off in OVAS accelerated last week. The stock is now down six weeks in a row. OVAS ended the week near potential round-number support at $25.00. I am not suggesting new positions. More conservative traders may want to lower their stop loss.

Trade Description: April 27, 2015:
A report published by Allied Market Research suggested the global in-vitro fertilization (IVF) market was about $9 billion in 2012. Demand is expected to grow the market to more than $21 billion by 2020. OVAS believes their AUGMENT treatment is a huge step in boosting a woman's ability to get pregnant.

Here's a brief description of the company, "OvaScience (OVAS) is a global fertility company dedicated to improving treatment options for women around the world. OvaScience is discovering, developing and commercializing new fertility treatments because we believe women deserve more options. Each OvaScience treatment is based on the Company’s proprietary technology platform that leverages the breakthrough discovery of egg precursor (EggPCSM) cells – immature egg cells found inside the protective ovarian lining. The AUGMENTSM treatment, a fertility option specifically designed to improve egg health, is available in certain IVF clinics in select international regions outside of the United States. OvaScience is developing the OvaPrimeSM treatment, which could increase a woman's egg reserve, and the OvaTureSM treatment, a potential next-generation IVF treatment that could help a woman produce healthy, young, fertilizable eggs without hormone injections."

Excitement over the company's prospects helped drive the stock from less than $10 in August 2014 to an all-time high of $55 in late March 2015. Unfortunately, the stock has reversed lower as the market tries to decipher the data on OVAS' progress. The FDA has prevented OVAS' treatment in the U.S. Critics complain that OVAS has not published any animal studies. There is concern that the procedure might endanger the child. Thus far the handful of tests done outside the U.S. look more like experiments than clinical trials.

Investors have decided to shoot first and ask questions later. That explains the sudden and sharp reversal lower in OVAS' stock. It's not just traders who have turned cautious. Zacks noted that multiple analysts have reduced their estimates on the company.

Technically OVAS is in a bear market with a -47% drop from its closing high. The point & figure chart is bearish with a long-term target at $7.00. The oversold bounce in early April failed and now OVAS is about to breakdown below technical support at its 200-dma. The next stop could be $20.00 if OVAS does close below support near $28.00.

Tonight we are suggesting a trigger to launch small bearish positions at $27.65. We want to limit our position size because this is a high-risk, more aggressive trade. Biotech stocks are normally risky since we never know when the next headline might send the stock soaring or crashing. Traders may want to use options to limit their risk.

- Suggested Positions -

Short OVAS stock @ $27.65

- (or for more adventurous traders, try this option) -

Long JUN $25 PUT (OVAS150619P25) entry $2.95

04/29/15 new stop @ 29.45
04/28/15 triggered @ 27.65
Option Format: symbol-year-month-day-call-strike


Tessera Technologies Inc. - TSRA - close: 37.08 change: +0.97

Stop Loss: 38.05
Target(s): To Be Determined
Current Gain/Loss: +0.9%
Entry on April 17 at $37.40
Listed on April 16, 2015
Time Frame: Exit PRIOR to earnings on May 5th
Average Daily Volume = 585 thousand
New Positions: see below

05/02/15: Semiconductor stocks were big winners on Friday. The SOX index surged +2.79%. TSRA tried to keep pace and bounced with a +2.68% gain. This erased most of Thursday's decline.

While the path of least resistance appears to be lower we are out of time. TSRA is scheduled to report earnings on Tuesday, May 5th. We need to exit on Monday, at the closing bell.

Please note I'm lowering the stop loss to $38.05 just in case the bounce continues.

- Suggested Positions -

Short TSRA stock @ $37.40

- (or for more adventurous traders, try this option) -

Long MAY $37 PUT (TSRA150515P37) entry $1.55

05/02/15 new stop @ 38.05
05/02/15 prepare to exit on Monday at the closing bell
04/29/15 new stop @ 38.45
04/17/15 triggered @ 37.40
Option Format: symbol-year-month-day-call-strike



Solera Holdings - SLH - close: 48.52 change: -0.38

Stop Loss: 49.45
Target(s): To Be Determined
Current Gain/Loss: -0.3%
Entry on April 27 at $49.30
Listed on April 20, 2015
Time Frame: Exit PRIOR to earnings on May 6th
Average Daily Volume = 536 thousand
New Positions: see below

05/02/15: It looks like the market's big bounce on Friday sparked some short covering in SLH. Shares sprinted higher at the open and rallied toward round-number resistance at $50.00. Our stop was hit at $49.45 pretty early on Friday morning.

- Suggested Positions -

Short SLH stock @ $49.30 exit $49.45 (-0.3%)

- (or for more adventurous traders, try this option) -

JUN $50 PUT (SLH150619P50) entry $2.85 exit $2.25 (-21.1%)

04/29/15 new stop @ 49.45
04/27/15 triggered on gap down at $49.30, trigger was $49.40
Option Format: symbol-year-month-day-call-strike