Option Investor

Daily Newsletter, Monday, 4/11/2016

Table of Contents

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

Market Wrap

Turbulence Ahead

by Thomas Hughes

Click here to email Thomas Hughes


Earnings season is underway and expectations are falling, there could be some turbulence ahead. Monday trading posted gains for the major indices but market action was light and largely without direction. Hopes for earnings growth later in the year is helping to support trading while we wait for reports from the big banks later this week, and a long list of economic releases that are sure to affect FOMC and GDP outlook. If either disappoint the market could be in for a fall.

Asian markets were mixed in Monday trading. The Japanese Nikkei fell as the yen strengthened further versus the dollar, a move that spurred comments from the BOJ. Kuroda and colleagues say they are ready to act should the yen strengthen further, no targets were mentioned. Chinese indices managed to move higher. No news came from that quarter. In Europe stocks were up driven on earnings from the banking sector and a rise in oil prices. The DAX led with gains greater than 0.6%.

Market Statistics

Futures trading indicated a positive open from the earliest portion of the electronic session. The US indices were shown with gains in the range of +0.35 to +45%, these levels held throughout the morning. There was little in the way of pre-opening news to more the market however anticipation of this week's events is high. The open was as expected, the indices posted small gains and then moved marginally higher before hitting today's resistance. Oil prices were able to make a move back above $40 but were unable to spark a major rally on their own.

After hitting intraday high, about 10:10AM, the indices fell back to break even levels and then wallowed into the afternoon. A little after 2:30PM it looked like a rally might form but it didn't, resistance was met again, this time much lower, gains were capped only a few points above the day's open. Shortly after the second attempt at rally the market took a decided turn lower, quickly shedding the day's remaining gains and moving into negative territory where it remained until the close of trading.

Economic Calendar

The Economy

No economic data today but the calendar is full this week. Tomorrow is light again, only import/export prices, but Wednesday things get more interesting. Wednesday is the release of the Fed's Beige Book, business inventory, retail sales and the Producer Price Index. Thursday is jobless claims and the Consumer Price Index. Friday wraps it up with Empire Manufacturing, Michigan Sentiment, Industrial Production and Capacity Utilization. In my opinion the CPI and PPI will be the most heavily watched, as will the Beige Book, all three having the most effect on FOMC rate hike outlook.

Moody's Survey Of Business Confidence gained another half point this week. The index put on 0.5 to hit 31.7, the highest level January 11th. The index has been slowly rising since hitting bottom, indicating some improvement in responses, but still near recent lows and well off the euphoric levels seen last summer. Mr. Zandi says there has been steady recovery in business sentiment as global tensions subside. According to him the most notable improvement has been in responses to questions about business conditions. Conditions are seen to be improving.

According to data from FactSet expectations for 1st quarter earnings growth are still in decline. The blended rate (includes projected and actual data from companies that have reported earnings) is now -9.1%, the lowest level of the series and down from near +15% last summer. The decline is due to revisions in all 10 sectors, so far the bulk of those reporting have beaten earnings estimates at a rate of 85%. There have been 22 reports so far this season.

Looking further out, expectations in the short term is still in decline as well although there is growing sign of stabilization and expansion of expectations in the long term. Projections for the 2nd quarter have shed a tenth to -2.7%, 3rd quarter projections gained a tenth and have been steady for three weeks near 3.8%, 4th quarter projections held steady for the 2nd week at 13.5%. On an annualized basis 2016 is expected to see growth of 2.1%, down a tenth, while 2017 is expected to see growth of 13.5%, up a tenth. It is still early but positive improvement in forward earnings expectations is very bullish in my view and will lead the market higher once nearer term declines have been weathered.

The Oil Index

Oil prices proved their volatility and connection to near term news events with today's action. In early trading fundamental supply/demand issues weighed on prices, driving them down by about a half percent. Later in the day a report that Russia would likely have flat production growth in 2017, following an increase in 2016, sent prices up by 1.75% to trade above $40. The news is not exactly bullish but was enough to draw in support for prices, the caveat is that flat 2017 production in Russia does nothing to alleviate the +1 MILLION barrel per day over supply situation. Oil prices may rise, a weaker dollar is also helping, but until supply/demand come back into line the risk in oil prices is to the down side.

The Oil Index moved higher on the rise in oil prices but is showing signs the move does not have much support. The index closed the day with gains near +0.10% after moving up by more than a full percent, creating a small bodied spinning top with upper wick in indication of resistance. The indicators are beginning to roll into a bullish signal so this move could continue higher to potentially test resistance. Resistance is near the 1,125 and the recent high although a shift in oil prices could bring it sooner.

The Gold Index

Gold prices saw their biggest gain in about 2 weeks today, rising more than 1.16%, to trade just shy of $1260. The move is driven by a weaker dollar and expectation of slow Fed rate hikes. It looks like gold is on the way to test recent highs near $1280, a move that could be affected by this week's data. PPI, Beige Book and/or CPI could be catalyst for additional upside or provide resistance.

The gold miners are in favor with the market. Gold prices may not be at their high but they are high enough to inflate earnings expectations for the miners, and maybe expectations for special dividends, increased dividends, buy backs or other value enhancing maneuvers. Today the miners ETF GDX gained more than 6.2% to trade at a 16 month high. The move extends a break above resistance which began last week and is supported by the indicators. Both indicators are moving higher following bullish crossovers, in line with the reversal confirmed in January. Based on technical projections this new break out could go as high as $29 in the long term.

In The News, Story Stocks and Earnings

The Dollar Index fell to a new low today, shedding another -0.28%. The index has now broken through support targets at $94.30 and appears to be heading for a full retracement of the 2015 FOMC/ECB/BOJ driven rally.

Hertz issued an earnings warning for the 1st quarter and full year 2016. The company warned that excess global supply is hurting business and may impact revenue and earnings. Despite the warning the company also reaffirmed full year earnings and revenue guidance. In the report execs also stated that they believe pricing pressures will improve going into the peak US season. The worry is that, along with a saturated market, ride sharing companies like Uber are providing competitions and cutting into demand. Shares of the stock fell more than -10% in today's session.

The big banks are the biggest hurdle on the earnings front this week. The schedule is relatively light, if packed with three of the largest most influential banks in the US; JPMorgan, Wells Fargo and Citigroup. JPM reports on Wednesday, WFC on Thursday and C on Friday; expectations are high and so are fears. Weak economic growth and global financial turmoil may have taken their toll on the banks earnings in the first quarter. Poor first quarter earnings will not be good, more important however is outlook for the coming quarters. The XLF Financial Sector SPDR managed to eek out a gain in today's session but only barely. The ETF closed with a gain of 0.5% but does not appear to be moving higher. The indicators have both rolled over into bearish signals, are moving lower, and pointing to lower prices. Support appears to be $22, a break below here could take it down to $21.

Rail carrier CSX reports earnings tomorrow. The company is expected to report $0.37, in line with previous, and could have more impact on the market than the banks. An uptick in earnings among the rail carriers would boost the transports and by extension the broader market, a downtick in earnings or expectations the opposite. Today the stock lost about -1%, creating a spinning top at the one month low. Support is just below today's levels, near $24, a break below here bearish for the stock.

Alcoa reported earnings after the bell. The company was expected to report earnings of $0.02 per share and beat with $0.07. Although the company beat on the EPS end, revenue was short. Aluminum pricing played a role in revenue but outlook for a 2016 aluminum deficit should help that down the road. Plans for the split into two aluminum companies are still in place. Shares of the stock fell more than -3.5% after the release.

The Indices

The bulls tried to rally today but were not able to hold their ground. Earnings season is at hand, hopes are high and so is the potential for disappointment. It is no surprise the market was indecisive, it will likely remain so until we get a good look at how the earnings cycle is actually going to play out. Today's big loser was the Dow Jones Transportation Average which lost only -0.48%. The candle is small, the third in a small consolidation pattern that appears to indicate resistance at he 7,700 level. The indicators are both bearish and moving lower, consistent with an index moving below resistance. A break below this level could take it down to 7,500 with next target just below 7,250.

The NASDAQ Composite posted a small loss but created a slightly more ominous candle stick. The tech heavy index shed -0.36% and appears to be confirming resistance at 4,900. The fall from resistance is confirmed by the indicators, both of which have rolled into bearish signals. Stochastic %D has also fallen below the upper signal line, a sign of market weakness. If the index continues to fall next downside target is near 4,750, a break below that level could take it down to 4,650.

The next largest loss was posted by the S&P 500. The SPX fell -0.27% in a move that looks set to retest support. The indicators are moving lower after confirming resistance, consistent with a test of support if not a move lower. Resistance is near 2,050, support is near 2,020 consistent with the neck line of a possible H&S reversal and the short term moving average. If 2,020 is broken a move to 1,950 is likely. A bounce from 2,020 is likely to find resistance at 2,050.

The Dow Jones Industrial Average made the smallest decline in today's session. The blue chips fell -0.12% creating a spinning top candle with long upper shadow indicative of resistance. The indicators continue to weaken as the index approaches support, consistent with a test of that support, and may lead to a more pronounced correction. A move below support, near 17,400, would be bearish and could carry the index lower with downside targets near 17,250 and lower. A bounce from support may find resistance near 17,750.

The indices are winding up for a move but it is still unclear what, exactly, that move will be. With earnings expectations for the 1st quarter so low, and economic growth still so tepid, it looks to me like a move lower is on the way, in the near term at least. This quarter will be the largest decline in year over year earnings growth the S&P 500 has seen for many years, and the deepest decline since the earnings recession began, so there is little reason to think a rally is at hand. The bright side and mitigating factors include the chance for a better than expected earnings season and positive outlook for longer term earnings growth.

Alcoa's report was promising, it showed earnings growth and bullish outlook, but the warning from Hertz and a few others gives reason for concern, not to mention that shares of Alcoa fell in the face of positive results. Even if earnings don't cause a major correction, a simple reshuffling of portfolios in response to earnings trends could cause the indices to move lower and retest support levels. Regardless, earnings season is likely to cause some turbulence in the weeks to come. I remain bullish in the long term but incredibly wary of the near.

Until then, remember the trend!

Thomas Hughes

New Plays

Bank Week

by Jim Brown

Click here to email Jim Brown
Editor's Note

All the major banks with the exception of Goldman Sachs report earnings this week. Goldman reports the following Tuesday. While we do not know what they will report the overall perception is for lowered earnings. We are going to try and capitalize on that move.


No New Bullish Plays


XLF - Banking ETF - ETF Profile

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slow and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Buy May $23 call, currently 16 cents, no stop loss.
Buy May $22 put, currently 50 cents, no stop loss.
Net debit 66 cents.

In Play Updates and Reviews

Only a Short Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

Everyone would like to think today's gains were the start of a new rally but today was only a short squeeze, not a sudden surge of buyers. However, most long-term rallies begin with a short squeeze so Wednesday will be a key pivot point. If we continue higher the S&P still has to travel 14 points just to get to major resistance at 2,075.

The big spike in crude prices caused a rebound in the energy sector and the financial sector because there is less fear of banks facing loan defaults with higher oil prices. That situation could reverse in an instant if oil prices rolled over on some new headline out of the Middle East.

The morning drop in the Nasdaq to 4,809 knocked us out of Stericycle and the afternoon rebound in the index lifted BBBY, TWTR and ENDP but only slightly.

The S&P rebounded to the resistance highs we saw over the prior five days at 2,060 and that is where the sellers have been appearing. The Dow came very close to the strong resistance starting at 17,750 with a high of 17,744 before fading into the close.

If we move to resistance at 17,750 and 2,075 and fail once again I would expect a decent decline. If we move into that major resistance band over those levels and then hold the gains then the market direction may be changing.

The Dow will be driven by earnings from Dow component JP Morgan at the open on Wednesday.

Current Portfolio

Current Position Changes

BBBY - Bed, Bath & Beyond

The long put position was opened at $46.65.

PKG - Packaging Corp

The long call position was closed at the open on Tuesday.

OA - Orbital ATK

The long call position was stopped out at $85.50.

SRCL - Stericycle

The long call position was stopped out at $125.65.

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

ADBE - Adobe Systems -
Company Description


Minor gain after FBR raised the price target from $110 to $115. The analyst said the transition from one time software sales to a subscription model was a more attractive business model.

Original Trade Description: April 4th.

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content.

For years they sold their Photoshop software and assorted tools as boxed software on a CD with a license key. Once you bought it you own it and Adobe never received any further revenue unless you upgraded to a newer version at some later date.

All that has changed with the move to the cloud. The new product is called the Creative Cloud and is a subscription based product where you pay and pay and pay for as long as you continue to use it.

Moving to the cloud model has a lot of inherent problems. Once you quit selling your boxed software that big chunk of retail revenue goes away. In the case of Adobe their software sold for many hundreds, if not thousands of dollars. That meant the one time revenue disappeared in exchange for a $19 to 49 a month subscription fee. Over the long term the revenue is stable and eliminates the volatility of the single sale model.

Earnings for the quarter reported in March were 66 cents that beat estimates for 61 cents. Revenue rose 25% to $1.38 billion also beating estimates for $1.34 billion. They signed up a whopping 798,000 new subscribers to the Creative Cloud suite service. They guided for earnings of 64-70 cents for the current quarter and above analyst estimates for 65 cents.

Earnings are June 21st.

Shares spiked to $98 on the news before pulling back to consolidate at $92 for over a week. Over the last several days they crept up to $96 and then sold off in the weak market on Monday. I believe this market weakness is a buying opportunity for Adobe.

I would like an entry point closer to $92 but there is no guarantee we are going to get it. The S&P futures are down hard tonight at -6.50 and the market is likely to open lower on Tuesday. I am suggesting we buy the option 5 min after the open. That will give the prices time to evaporate in a falling market. Hopefully ADBE will gap down a couple dollars.

Position 4/5/16

Long May $95 call @ $2.48. No initial stop loss.

CSC Computer Sciences Corp - Company Description


No specific news.

Original Trade Description: April 6th.

CSC is an information technology and profesional services Fortune 500 firm that provides solutions in North America, Europe, Asia and Australia.

On February 11th the Supreme Court of Victoria, Australia, approved the acquisition of WXC Limited for (AU)$427.6 million. CSC believes the acquisition of UXC will strengthen their global commercial business by adding the UXC platform to the CSC cloud, cyber and big data offerings. Back in August CSC acquired two other companies, Fruition Partners, a service-management technology provider and London-based Fixnetix, a provider of front-office managed trading software for capital markets.

They are also acquiring Xchanging, a UK company that provides software and outsourcing services for the insurance industry for $697 million. That deal is currently going through the regulatory approval process.

The point here is that CSC is a leading provider of information technology and they are growing rapidly through acquisitions. They are moving towards a mix of cloud based higher margin products that will be beneficial over the long term. They are also buying back stock with a new authorization in January. They paid a special dividend of $10.50 when they spun off the public sector business in Q4. That accounts for the $10 drop in the stock price at the end of November.

Earnings for last quarter were 71 cents that beat estimates for 69 cents. However, revenue declined -10.2% to $1.75 billion missing estimates for $1.859 billion. Shares fell to $24 on the news. However, the reduced revenue came from a switch to cloud products, which have a long term subscription revenue rather than a short term one time sale. Adobe had the same problem when they went from software sales to software as a service. There is always a drop in revenue during the switch but long-term revenue rises and is more stable.

Total company bookings rose +21% to $2.7 billion. Operating income rose +9.2% to $190 million.

Earnings are May 17th.

Shares rebounded from that post earnings low in February to pass resistance at $33 last week. The market decline this week took some of the bloom off the stock and deflated the option premiums. Prior resistance became support and shares started to tick higher on Wednesday afternoon. This is a relatively slow mover but it has been steady since the rebound began.

I am recommending a June option but we will exit before earnings in May. Using a June option the premium will still have some earnings expectations premium when we exit.

Position 4/7/16:

Long June $24 call @ $1.50, see portfolio graphic for stop loss.

HCA - HCA Holdings - Company Description


No specific news. Another five-month high.

Original Trade Description: March 29th.

HCA provides health care services in the USA. They offer general, acute care, intensive care, cardiac care, diagnostic, emergency and outpatient services. They operate 164 general and acute care hospitals with 43,275 licensed beds. They also operate 3 psychiatric hospitals and 116 freestanding surgery centers. They were founded in 1968.

In their Q4 earnings they reported $1.69 per share compared to estimates for $1.39. Revenue rose 6.4% to $10.25 billion also beating estimates for $10.14 billion. They guided for the full year to earnings of $6.00-$6.45 and revenue in the range of $42 billion.

In October, the company had warned on Q3 for the first time since 2013. The entire health care market was shaken by the warning because everyone assumed the revenue and profits would always continue to grow. This is the largest company in the healthcare space and is seen as a bellwether for the sector. HCA rectified the problems by Q4 and the CEO assured everyone on the call that all was well and HCA was "well-positioned for continued success."

One of the problems in Q3 was retaining qualified staff. There is an extreme shortage of nurses and the company has to pay premium wages to keep nurses from being lured away to other hospitals. The CEO said they have a plan in place and they view it as an opportunity for 2016.

Shares sank from the October warning through the market washout in January. After they reported earnings the shares rebounded but were hit again in the February decline. Since the February market lows the stock has risen steadily and has reached initial resistance at $78. Once through this level it could be clear sailing to $86-$88 depending on the market.

Earnings are April 28th.

I am recommending an inexpensive $80 strike for May that should still have some expectation premium left when we exit ahead of earnings. The risk is the resistance at $78.50.

Position 3/30/16

Long May $80 call @ $2.50, see portfolio graphic for stop loss.

OA - Orbital ATK - Company Description


OA dropped to $85.34 at the open before rebounding back into positive territory. That was enough to stop us out at $85.50 and the raised stop from Monday. We exited with a minor gain. The bid/ask spread was 60 cents wide intraday and that bit us on the exit. The news was good with the company announcing a new deal with Intelsat as an anchor customer.

Original Trade Description: March 19th.

Orbital ATK was created in 2015 by the merger of Orbital Sciences and Alliant Techsystems. The company develops and produces aerospace, defense and aviation related products for the U.S. Government, allied nations, prime contractors and other customers in the U.S. and internationally.

The currently have a contract to convert the four segment Space Shuttle Solid Rocket Booster into a five segment booster for the new Space Launch System that will carry astronauts back into space. They are working on a new rocket booster to replace the boosters the U.S. is currently buying from Russia. They also develop satellites for commercial, scientific and security applications. They also produce the Cygnus spacecraft that delivers cargo to the International Space Station and returns with completed experiments.

The Defense Systems Group provides tactical missiles, defense electronics and medium to large caliber ammunition, fuzed warheads, etc. The Flight Systems Group produces the Pegasus, Minotaur and Antares launch vehicles.

One of their newest projects is the Mission Extension Vehicle or "space tug." When an existing satellite develops a problem and engineers believe it can be repaired, the space tug would go get the satellite and push it towards the International Space Station where it can be repaired and the tug would then push it back into orbit where it belongs. Since these satellites cost from hundreds of millions to billions of dollars each, having the capability to repair them would save a lot of money.

Sometimes the satellite has simply been active for so long that its orbit has degraded. The space tug would attach itself to the satellite and then lift it back into an orbit that would give the old satellite several more years of useful life. Then the tug would disconnect and repeat the process with a different satellite. The tug could also push dead satellites into a descending orbit where they will burn up reentering the atmosphere. That would essentially remove the trash from what is becoming an increasingly crowded orbital space. The first space tug is expected to have enough fuel to keep it active for up to 15 years. They plan to launch 5 by 2020 and with dozens of very expensive communication satellites running low on fuel every year, it will be a very profitable venture. Clients are already entering into discussions on how the tug can help their satellites.

These are just some of the hundreds of thing Orbital ATK has in the works. They were also named a subcontractor on Northrop's new $120 billion B-21 stealth bomber program.

In early March Orbital reported earnings of $1.45 that beat estimates for $1.09. Revenue of $1.137 billion beat estimates for $1.11 billion. Order backlogs were over $13.5 billion. They guided for the full year to earnings of $5.25-$5.50. Shares crashed from $87 to $74 the next day after they filed a statement with the SEC saying the financial statements covering the Q2-Q3 in 2015 were not accurate due to an accounting error that occurred when the two companies merged. It was a non-cash error covering long-term contracts that were accounted for using different accounting methods in each company. There was no material impact from the restatement but shares always crash when an "accounting error" is disclosed.

After two weeks, shares began to rise again one the smoke cleared. Shares hit resistance at $82.60 on Friday and pulled back only slightly. I am recommending we buy a breakout over that resistance with a target at $90.

Earnings May 30th.

Position 3/21/16 with an AO trade at $82.80

Closed 4/12/16: Long May $85 call @ $2.80, exit $3.40, +.60 gain.

PKG - Packaging Corporation of America - Company Description


We closed this position at the open and unfortunately shares gapped down at the open to cost us about 30 cents but we still exited with a nice gain of $3.40.

Original Trade Description: March 7th.

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 20th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Position 3/11/16:

Closed 4/12/16; Long April $55 call @ $2.20, exit $5.70, +$3.50 gain

SRCL - Stericycle - Company Description


No specific news. Shares dropped under support at $126 and stopped us out at $125.65 for a minor loss.

Original Trade Description: March 30th.

Stericycle provides regulated and compliance solutions to the healthcare, retail and commercial businesses in the U.S. and internationally. They collect and process regulated and specialized waste for disposal as well as personal and confidential records for destruction.

Everyone knows that doctors and hospitals produce tons of medical waste every month and that waste can be infected with all kinds of bacteria and viruses that can be contagious. You cannot just throw those bloody surgical gowns and blankets in the trash. They have to be disposed of in an environmentally safe way.

We also hear all the time about some food company recalling hundreds of tons of a particular food product because it was contaminated with ecoli or some other bad bacteria or foreign substance. Where does that food go? It goes to Stericycle and they dispose of it safely.

In Q4 they acquired Shred-It for $2.3 billion in order to expand into the confidential records destruction business. Stericycle sees Shred-It as an excellent opportunity for cross selling. Less than 20% of Stericycle's current customers use a document shredding service.

In their recent Q4 earnings they reported $1.11 per share that beat estimates for $1.08. However, revenue of $888.3 million missed estimates slightly of $889.1 million. Revenue was hampered by a $26.9 million hit from the strong dollar. Gross margins were 42.9%.

In 2016 earnings are expected to grow +20.3% to $5.26-$5.33 with revenue up +21% to $3.6-$3.67 billion.

Earnings are April 28th.

Shares have crept up to resistance from November at $126 and a breakout here could run to $140 or higher.

Position 4/1/16 with a SRCL trade at $126.75

Closed 4/12/16: Long May $130 call @ $2.70, exit $1.95, -.75 loss.

SWHC - Smith & Wesson - Company Description


The support of the 100-day average failed with a minor decline today that came within 4 cents of our stop loss at 22.25. The average was also pierced for one day back in August. Because this is a June option and there is support at $22, I lowered the stop loss to $21.75. The gun manufacturers have been getting a lot of positive press from the analyst community and S&W "should" bounce here.

Original Trade Description: April 5th.

I am reloading the prior play on Smith & Wesson. Shares failed to decline any further today after being crushed on Monday. The triple downgrade by Cowen, CL King and BB&T Capital markets after the March NCIS background check data declined slightly was unreasonable. March checks declined -3% from February but they were sill up 25% over March 2015. The 3% decline was just noise in the greater outlook.

S&W shares declined to exactly the 100-day average on Monday and that has been support for a long time. I believe we should take advantage of this decline and the shrinkage of the option premiums.

Prior play description: Smith & Wesson was founded in 1852 and manufacturers firearms in the U.S. and internationally under many different brands but primarily Smith & Wesson.

Gun sales are booming. Sportsman's Warehouse said gun sales rose +34% in Q4 alone. With every terrorist attack or mass shooting more consumers rush out to buy guns for self defense. With the potential for additional attacks in the U.S. this trend is not going to slow. However, sales are cyclical. They surge after attacks like San Bernardino or after speeches by politicians about gun control. President Obama has been the best gun salesman we have ever had. Every push by the administration to get more laws passed results in millions of new gun sales.

In their Q4 earnings where there was a surge in gun sales after San Bernardino, the company reported earnings of 59 cents that beat estimates for 41 cents. Revenue rose +61% to $210.8 million and easily beat estimates for $182.3 million. The company guided significantly higher for the current quarter to revenue of $210-$215 million compared to estimates for $196 million. Earnings are expected to be 51-53 cents. That is a 13.7% increase in revenue and 20% increase in earnings. For the full year they guided to earnings for $1.68-$1.70 and analysts were expecting $1.42. This was also higher than the company's prior forecasts for $1.36-$1.41 from January.

The company said inventories were depleted because of the high demand and they were focused on increasing production rates to keep up with demand.

Earnings are June 16th.

Shares rocketed higher after the earnings in early March and they were already up strongly since December. I hesitated to buy the top since it was making new highs every week.

I am recommending a June call because it expires after earnings and should retain some expectation premium when we exit before earnings. Buying a May option would be subject to accelerated premium decay.

Position 4/6/16:

Long June $24 call @ $1.80, no initial stop loss.

XBI - SPDR Biotech ETF - ETF Description


The sector was mildly positive today with most of the attention going to the energy sector. Support at $54 held.

Original Trade Description: April 2nd.

The S&P Biotech ETF attempts to match the performance of the Biotech Select Industry Index. The ETF holds 90 stocks in the biotechnology and pharmaceutical sector.

The biotech sector has been in free fall since its high last July at 4,400 on the $BTK Index. The index hit 2,575 in early February and rebounded to trade in a narrow range between 2700-3000 for the last two months. On Friday, the index closed at 3,037 and a two month high. The rebound over 3,000 could be the beginning of a major breakout.

Biotech and pharma stocks have beenunder pressure because of attacks by political candidates claiming they would lower the prices on drugs if they are elected. This caused the sector to collapse most notably in January from 3,900 to that 2,575 level.

If a candidate is elected and did choose to follow through on a promise to lower drug prices it would take a long time, assuming they had the votes in the House and Senate to get a bill passed. I believe the selloff in the biotech sector has been overdone and I have been waiting for a sign there may be a rally in our future. The close over 3,000 on the $BTK could be that sign. The $BTK gained 5.7% last week suggesting buyers are returning.

The XBI gained 2.9% on Friday to cap off a week of gains. The ETF has resistance at $54 and again at $56.50. However, short interest in biotech stocks is so high that any further move higher in the $BTK could cause significant short covering.

I am recommending we buy the June $55 call, currently $3.40. If we get a breakout over $56, it could easily run to $70, which is significant resistance. Obviously that assumes a positive market as well.

A rebound in the biotech sector would lift the Russell 2000 and the S&P and that would help support a positive market.

Position 4/4/16

Long June $55 call @ $3.50, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

BBBY - Bed, Bath & Beyond - Company Description


Shares rebounded slightly after two days of steep declines. Wednesday will be a key for direction.

Original Trade Description: April 11th.

BBBY operates a chain of retail stores selling a range of domestics merchandise for bedrooms, bathrooms, kitchens and home furnishings. They also offer health and beauty aids, giftware and infant and toddler merchandise. The currently operate 1,530 stores.

In the age of Amazon can a retail store still exist and be expected to grow their profits? The company posted earnings of $1.91 compared to estimates for $1.80. Revenue of $3.42 billion also beat estimates for $3.38 billion. For the full year they reported earnings of $5.10 and revenue of $12.1 billion.

On the surface that would appear to be a great operation. Revenue increased 2.4%. In the year ago quarter they reported earnings of $1.80. However, same store sales at 1.7% were below the 3.7% increase in the comparison quarter. Online sales increased 25%. They repurchased $1.1 billion in stock in 2015 and declared their first ever dividend of 12.5 cents along with the earnings report. This would seem like a recipe for a rising stock price.

Unfortunately, the post earnings spike of 6% lasted about 2 hours and shares closed negative. BBBY has been in a long-term decline and the February rebound was already fading when the earnings were announced. Analysts believe Amazon will eventually spell the end of profits for large retail chains like BBBY.

Earnings are July 6th.

Shares closed at a six-week low on Monday, only two days after the earnings beat. The chart suggests the stock is going back to the January lows at $41 with today's close at $46.

With the retail sales report on Wednesday likely to disappoint we could see an acceleration in the downward trend.

Position 4/12/16:

Long May $45 put @ $.98, no initial stop loss.

ENDP - Endo Intl Plc - Company Description


Endo posted a minor rebound after a big drop to a new 3-year low on Monday.

Original Trade Description: March 28th.

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $96 last April to $28 today. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also lowered guidance at the Barclay's Healthcare Conference on March 15th. The company lowered guidance to revenue of $928-$972 million for Q1 and analysts were expecting $1.03 billion. Earnings guidance was $1.02 to $1.08 and analysts were expecting $1.19.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are May 9th.

Shares have flat lined at the $28.50 level for more than a week and I believe we are about to see another leg lower. Today was the lowest close since January 2013.

Position 3/29/16:

Long May $25 put @ $2.10. See portfolio graphic for stop loss.

SPY - S&P 500 ETF - ETF Description


The energy short squeeze lifted the S&P back to 2,061 but remains well under strong resistance starting at 2,075. This was just a short squeeze. No real buying.

I am recommending we add to this position when/if the SPY trades up to $210.

Original Trade Description: March 16th.

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

Position 3/23/16 with SPY trade at $204.11

3/23/16: Long June $200 put @ $4.77 with SPY trade at $204.11
4/01/16: Long June $200 put @ $3.26 when SPY traded at $207.

If the market continues higher add to that position again at $210.
See portfolio graphic for stop loss.

TWTR - Twitter - Company Description


Only a 6 cent gain in a positive market. We do not care which way it moves, just as long as it moves a lot.

Original Trade Description: April 9th.

Twitter operates as a global platform for public self expression and conversation in real time. I am pretty sure everyone knows what Twitter is so I am not going into depth in this explanation.

Twitter has become the bet of the year. Analysts either think it is going to single digits or going to the moon. The highest price target is $36 and the lowest is $11 with the average at $20.86 across a total of 27 brokers.

Twitter has trouble keeping users because the learning curve is steep and Twitter spam is increasing daily. Twitter bots can be programmed to spread tweets and make it appear there is a huge volume of interest in a specific subject. Andres Sepulveda, a Latin American political operative used custom software to direct 30,000 Twitter bots to create false enthusiasm for candidates and spread rumors about the opposition. Sepulveda said the tactics gave him "the power to make people believe almost everything." The man responsible for his operations said two American presidential candidates had contact him and one of those was Donald Trump.

Unfortunately, Twitter has been having trouble monetizing all the traffic regardless of whether it is real or fake. Their monthly active users include a lot of churn and barely any growth. While nobody expects Twitter to go out of business they are losing faith in the business model.

CEO Jack Dorsey is also CEO of Square and that carries mixed emotions. Some want him replaced and others want him full time. Almost nobody wants him to continue the dual role.

There are constant rumors that Twitter will be bought by someone like Google or Apple. If that were to occur it would carry a huge premium to the current $16 stock price.

Twitter has been earnings challenged for a long time and the stock has declined from $55 to the current $16 level on a lack of confidence they will turn the company around.

Earnings April 26th.

The stock is either going to single digits or it will be back well over $20 soon. It is not likely to continue moving sideways at $16.

I am recommending we do a strangle on Twitter using the June options. Regardless of the stock or market direction we should be able to profit. Because Twitter is $16 and stagnant the options are relatively cheap. I want to buy them now and hold over earnings because that is likely to be a volatility event. We could also get some market moving news with the earnings release.

You could use the $18 call and $15 put for a net debit of $2.22 if you want a cheaper option.

Position 3/11/16

Long June $17 call @ $2.07, no stop loss.
Long June $16 put @ $1.45, no stop loss.
Net debit $3.52.

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