Option Investor

Daily Newsletter, Saturday, 5/21/2016

Table of Contents

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

Market Wrap

Two Squeezes in One Week

by Jim Brown

Click here to email Jim Brown

Applied Materials reported earnings and said orders were at 15-year highs and the semiconductor sector exploded higher causing a Nasdaq short squeeze.

Market Statistics

Friday Statistics

The Semiconductor sector rallied 5% for the week and most of that (3.16%) was on Friday. The Biotech sector gained 2.2% on Friday and 4.5% for the week to close at a three week high. The Banking sector gained 4.24% for the week thanks to the FOMC minutes and the potential for a Fed rate hike in June.

The AMAT earnings triggered short squeeze caused a ripple effect in the Nasdaq and Russell 2000 stocks and the indexes both posted strong gains. The Russell 2000 was the biggest gainer of the broader indexes. The Russell gained 5 points in the last 30 minutes of trading that looked an awful lot like short covering before the weekend.

The only economic report of note was the existing home sales for April. The headline number rose from 5.33 to 5.45 million annualized and easily beat estimates for 5.40 million. The March number was revised up to 5.36 million. April sales were 6% higher than the 5.14 million pace in April 2015.

Sales rose +12.1% in the Midwest and +2.8% in the Northeast. Sales declined -2.7% in the South and -1.7% in the West. The median price for a home rose from $221,500 to $232,500. Months of supply rose from 4.4 to 4.7 and the highest since October.

Sales for homes prices $500K to $750K rose 15.9% from April 2015. Homes prices $250K to $500K rose 15.8%. Homes prices under $100K fell -5.1%.

The new home construction numbers earlier in the week dented the rising estimates for Q2 GDP. The housing starts, CPI and Industrial Production reports pushed the forecast back down from 2.8% to 2.5% for Q2. The Q1 GDP revision will be out next Friday and it is expected to rise from 0.5% to 0.8%. It is hard for me to believe that the Fed wants to raise rates with the prior three quarters of GDP declining. Q3 was 1.98%, Q4 1.39% and Q1 0.54%. We have a long way to go before the Q2 GDP is finalized and it could be a lot lower than the current forecast. Even if it did not change from the 2.5% estimate that would mean only a 1.6% growth rate for the last four quarters. That is really anemic and does not suggest the economy can withstand two more hikes this year.

The economic calendar for next week will be anchored by the Janet Yellen speech on Friday. She is the leader of the FOMC and what she says, normally happens. She will be the counterweight to the other Fed speakers. If she is dovish, the market will start breathing easier. If she is hawkish, the market will assume the worst and move lower. Actually, the key Yellen speech will be the one on June 6th. That is the last speech by a Fed head before the FOMC meeting. Whatever tone she sets in that speech is the tone we should expect from the Fed meeting.

The economic reports that matter are the Richmond Fed Manufacturing Survey and the GDP revision. The Richmond survey spiked from -4 to +22 from February to March and then declined to 14 in April. The Philly Fed Survey last week was expected to rise from -1.6 to +6.5 and it came in at -1.8. If the Richmond survey declines sharply as well, it could impact market sentiment and rate hike expectations.

The GDP will only be critical if it drops below 0.5%. That would indicate less chance of a rate hike and greater chance of a continued slow economy.

Applied Materials (AMAT) was the big news moving the market on Friday. The company reported earnings of 34 cents compared to estimates for 32 cents. Revenue of $2.45 billion also beat estimates for $2.43 billion. However, the actual earnings were not what moved the stock. They guided for sales to rise 14-18% in Q2 and for earnings in the range of 46-50 cents. Analysts were expecting 36 cents.

The CEO said, "We booked our highest orders in 15 years and we expect to deliver record earnings in fiscal 2016." Net sales in chips for LCD and OLED screens are expected to rise 70-90% to about $300 million. The shift to LED/OLED screens is causing strong demand from mobile-handset makers. The shift to OLED by many manufacturers increases our total available market by 300% according to the CEO. Overall orders rose 15.3% in Q1.

Shares spiked 14% to $22.66 and a new 52-week high. The other chip companies rallied from 3% to 8% causing the Semiconductor Index to gain 3%.

On the opposite side of the ledger, Campbell's Soup (CPB) shares fell -6% to $60 after posting disappointing earnings. Investors said Campbell's earnings were not mmm-mmm good. Adjusted earnings of 65 cents beat estimates for 64 cents but were below the 66 cents posted in the year ago quarter. Revenue declined -2% from $1.9 billion to $1.87 billion and missed street estimates. The company said they were facing a very challenging consumer environment. Really? It is soup. They have been making it since 1869. How much more experience do they need?

In all fairness, it was an extraordinarily warm winter with record temperatures. I am sure that slowed the use of soup as a hot meal to warm up consumers. The company raised full year guidance for earnings to increase 11-13% to $2.93-$3.00 per share. Prior guidance was for 9-12% growth.

Deere & Company (DE) reported a 28% decline in earnings from $2.03 to $1.56 but still beat estimates for $1.48. Revenue was $7.88 billion and well over expectations for $6.71 billion. While the earnings beat estimates, the guidance was ugly. Deere predicted sales in the U.S. would decline 15% to 20% and fall -5% in the Eurozone due to low commodity prices and stagnant farm income. The most expensive and highest profit tractors are the ones expected to see the biggest declines in sales. Economic and political turmoil in Brazil is expected to reduce sales by 15% to 20% in South America. Shares fell 5% on the news.

Footwear retailer Foot Locker (FL) reported earnings of $1.39 and missed estimates by a penny. Revenues increased 3.7% to $1.987 billion but missed estimates for $2.007 billion. Same store sales rose 2.9% and well below estimates for 4.5%. In the year ago quarter they rose 7.8%. The company opened 32 new stores during the quarter to end March with 3,396 stores. They repurchased 1.37 million shares for $88 million during the quarter.

The reason for the weak earnings came from basketball shoes. Nike shoes account for 60% of Foot Locker revenue. Foot Locker accounts for 20% of Nike revenue. Nike's basketball shoes for named players including LeBron James, Kobe Bryant, Kyrie Irving and Kevin Durant occupy the most shelf space at Foot Locker and sales of those high dollar shoes are slowing. I reported several weeks ago that Foot Locker was selling some of those shoes for 50% off in their online store. That is a clear sign of slow retail sales. This is not a good sign for Nike since they have a $1 billion lifetime endorsement contract with LeBron James. With his shoes not selling that is going to be a lifetime anchor for Nike.

Ross Stores (ROST) reported earnings of 73 cents that matched estimates but revenue of $3.09 billion missed estimates for $3.12 billion. Same store sales rose +2.0% and slightly below estimates for 2.5%. The blamed a slowdown in women's apparel for the weak results. The company guided for Q2 earnings of 64-67 cents and below estimates for 70 cents. Same store sales are expected to rise only 1% to 2%. For the full year, they are expecting $2.63-$2.72 and analysts were expecting $2.73. Shares fell -5% on the news.

Autodesk (ADSK) reported a loss of -10 cents compared to estimates for +14 cents. Revenue from licenses fell -43% to $185.9 million. They guided for Q2 to revenue of $500-$520 million and loss of 11-18 cents. Analysts were expecting $542 million and loss of 7 cents. The company added 132,000 subscribers to push active subscriptions to 2.71 million. They are in the midst of switching from a onetime sale model to a cloud subscription model and that always causes some pain from earnings. In the future, it will provide a more reliable forecast and higher earnings.

The earnings calendar for next week is highlighted by Costco, Hewlett Packard, Best Buy and Gamestop. Hewlett earnings typically signal the end of the earnings cycle like Alcoa (AA) is seen as the first major announcement to start the earnings cycle.

According to FactSet, 95% of the S&P has reported. Thirteen S&P companies report next week to raise that percentage closer to 98%. The blended earnings for Q1 is now expected to be -6.8%, up slightly from the -7.1% a week ago and the -8.8% estimate on March 31st. The decrease was due to the 10-cent beat by Walmart and 9-cent beat by Home depot.

Revenue has declined -1.5%. Some 73 companies have issued negative guidance and 30 companies have issued positive guidance. Because of the low expectations, 71% of companies have beaten earnings estimates. This is above the five-year average but it is the result of the dramatically lowered estimates. Only 21% have missed estimates for the same reason. Only 53% have beaten on revenues and 47% missed estimates.

Earnings from the energy sector have declined -107%, metals and mining -14.4% and financials -12.3% for top three losing sectors.

This is the fourth consecutive quarter of earnings declines and the fifth quarter of revenue declines. The corporate sector is in a profits recession. The strong dollar, weak consumer and weakness in energy prices were the top three reasons for the earnings decline.

The dollar rallied to a two-month high after the FOMC minutes. It was already climbing ahead of the release because of the almost daily headlines from Fed speakers that June would be a live meeting. The rising dollar is going to give the Fed something else to think about in June. If the dollar continues to rise ahead of the meeting, it will pressure commodities and corporate earnings as well as global trade. With the rest of the global economy limping along, allowing the dollar to rocket higher could be a negative for the Fed's decision.

A week ago the chance for a rate hike at the June meeting was about 3%. Over the last week that has risen to 26% according to the CME FedWatch Tool. That chance jumps to 43.2% for the July meeting.

The best guess today is that the Fed will use the June meeting to telegraph a rate hike at the July meeting. The reason the Fed may not move in June is the June 23rd Brexit vote. While the most recent surveys show that 55% of voters want to remain in the EU there is a very active effort by those that want to leave the EU. The UK Treasury released figures claiming an exit would cost each household 4,300 euros a year because roughly three million jobs are linked to EU trade and an exit would end those trade treaties. The migration problem is a big reason 51% of those surveyed said they want to exit the EU. They want to close the borders and protect the country. Apparently, some of those surveyed would still vote to remain in the EU because the numbers do not match.

Several of the Fed heads have said fear of a Brexit could weigh on their decision to hike rates in June. Obviously if the surveys show there is a solid majority planning on voting to stay in the EU, the Fed could go ahead and hike rates. It would have to be a strong majority for them to take the risk. A Brexit could be an economic disaster for Europe that would be felt in the global economy.

In order for the Fed to remain nonpolitical and cautious it makes sense they would wait until July rather than risk making a wrong decision.

The yield on the ten-year treasury rose from 1.70% the prior Friday to 1.85% this Friday on expectations short term rates are going to rise with a Fed hike. I think investors are jumping the gun a little since there is an entire month of economic reports before the meeting and there is always the possibility of waiting until July allows another month of economics that could be negative.

Yahoo (YHOO) offers are well below the asking price. The Wall Street Journal ran a story on Friday saying the offers for Yahoo were in the $2 to $3 billion range. Yahoo is reportedly asking in the $8 to $10 billion range. After the story broke another "source" said that was incorrect and they expected the final offer to be in the $4 to $5 billion range.

The problem is the context of the bids. Some bidders are reportedly not bidding on the entire business less the Asian assets. Others, like Verizon, are reportedly bidding on the entire business and could be closer to the $5 billion number.

There is another rumor circuit developing on whether CEO Marissa Myer will accept any of the bids or simply say they are all too low and we tried our best but Yahoo will remain independent. That is about the only way she could keep her high paying job. However, at this point, with a $55 million golden parachute and four new board members, it may be easier to just hand the office keys to the high bidder and go home.

You may remember that Microsoft actually offered $41 per share in mid-2007 in a private meeting with the Yahoo CEO. They could not come to terms and Yahoo shares declined. In late 2007, Microsoft went public with a $31 offer and it was rejected, twice. The rest of the story everyone knows but I am sure Microsoft CEO at the time, Steve Ballmer, is really glad that deal fell apart. Hindsight is always 20:20.

The next round of bidding is scheduled for the first week of June.

What happened to McDonalds (MCD)? Shares have lost $10 since the $132 high on May 10th. Did they quit serving breakfast all day? McDonalds shares are an example of what is happening in the market the last couple weeks. Stocks with major gains are being chopped down to size as investors take money off the table ahead of the Sell in May cycle and the summer doldrums. There are dozens of stocks like McDonalds that are suddenly crashing on no news. McDonalds was up 40% over the last 12 months so there was plenty of profit to be captured.

Crude prices rallied on a long list of production outages including the resurgence of the Canadian wildfires. The oil sands operators were preparing to restart until the fire turned north and put them in the path once again and facilities had to be evacuated. The best guess for the amount of Canadian production declines is between 1.1 and 1.3 million barrels per day.

Nigeria fell to 1.3 mbpd and a 22-year low as the Niger Delta Avengers escalated their attacks on oil facilities. Exxon said rebels had blocked staff from entering the 300,000 bpd Qua Lboe production terminal and the Nigerian media was reporting all but essential staff had been evacuated.

Venezuela has shortened the workweek to only two days as a power crisis cripples the country. Power is now shutoff for 4 hrs a day and analysts claim this is slowing oil production. Production was 2.53 mbpd in Q1 but is estimated to be less than 2.3 mbpd today and could get worse as the economic crisis accelerates and electricity becomes even scarcer.

Some analysts claim the global production outages have removed more than 3 million barrels per day from the market as we move into the high demand season. This is supporting prices but that $50 level is going to be tough to break. June futures expired on Friday at $47.67 and July futures will be the current month on Monday and they closed at $48.48 or only about $1 higher.

If the dollar continues to rise on rate hike expectations, the price of oil will decline and weigh on the equity market.

Active rigs declined by -2 for last week. Oil rigs were unchanged at 318 but gas rigs declined -2 to 85. The U.S. rig count is down -1,527 rigs from the peak in 2015. Oil CEOs are mixed on what price would convince them to put rigs back to work. Most say they want to see a sustainable level rather than just a spike to some magic number. The $65 level seems to be a common target but a couple firms said anything over $50 would allow them to put some rigs back online if the price was sustainable. Nobody wants to contract for rigs only to have the prices fall back into the $40s. A couple companies were targeting $75 for a restart in order to provide a downside cushion in case prices weakened again.

Last week I reported the five-week total of fund outflows from equities was $44 billion and the most since August 2011. This week Bank of America said the year to date equity outflows were approaching $100 billion ($98.5B). Hedge funds are at their lowest net long positions at 44% after hitting a record long position at 57% in early 2015 when the markets were setting new highs. Corporate buybacks are slowing dramatically after a near record in Q1. The second longest bull market in history could be coming to an end because of the outflow of funds.

With earnings negative for the fourth consecutive quarter and expected to be negative again in Q2, the Fed raising its rate hike bias and a contentious political campaign underway, investors are not feeling a need to be invested in stocks.

The bullish sentiment in the AAII Investor Sentiment Survey for last week fell to 19.3% and the lowest level since February and only the 9th time since 1990 that it has fallen below 20%. Bearish sentiment rose to 34.1% and the highest level since February 19th.


The short squeeze on Friday was much less energetic than the one on Monday and most of the gains were seen at the open. The S&P rolled over at 11:30 as the index hit the short-term downtrend resistance from May 10th. The 2,040 level continued to play an important role with the S&P refusing to close under that support.

However, every high is a lower high and every low is a lower low. The trend remains negative despite these one-day wonder rebounds. Some headline is going to appear that will force an S&P close under 2,040 and that would be such a clear signal we should see selling accelerate.

The S&P and the Dow have completed a head and shoulders pattern and while the Dow has already broken down the S&P is still fighting that neckline at 2,040.

The Dow closed below critical support at 17,500 on Thursday and then fought to retain that level on Friday's rebound. The index closed 50 points off its highs at 17,500 exactly. This is a crucial level that is not likely to hold. The drop on Thursday to 17,331 should have cleared out numerous sell stops and support at 17,400 should be weaker as a result. The next material level is 17,135 and then 16,500.

The leaders list was an unlikely bunch but there is a clear reason. The top five names had been heavily shorted and that made them the biggest gainers as shorts were forced to cover. We cannot expect these short squeezes to continue to rescue the indexes from a continued decline. Once shorts in particular stocks have covered, there is no additional reason for those unloved stocks to rally and they should return to their old direction. Those stocks with accumulated profits like Chevron, Exxon, Boeing and McDonalds were hit hard by profit taking last week.

The Nasdaq chart is not as ugly as the Dow and S&P but the support at 4,700 is just as critical. Friday's big short squeeze was just another lower high off a lower low so the trend is intact even though it looks like the index is moving sideways. Next support is 4,600.

Note the number of biotech stocks in the winners list. With the ASCO meeting in ten days the sector is finding buyers. The Biotech Index was up +2.2% on Friday. Once past ASCO the excitement will fade. The meeting is June 3-7th.

The Russell 2000 chart "looks" like a breakout of the multiple resistance levels but that green candle at the end is just the last 15 minutes of trading. I strongly suspect that was the last surge of short covering before the close ahead of the weekend. We will know on Monday if the index continues moving higher or instantly declines back under the 1,110 level.

I seriously doubt the Russell has suddenly decided to break that month long downtrend.

Despite Friday's positive close, it was the Dow's first four-week losing streak since October 2014. The index is breaking down and the S&P is clinging to the cliff edge by its fingernails. We have one more week in the Sell in May cycle and then we enter the summer doldrums where our already weak volume is going to shrink even further. Volume on expiration Friday is normally high but even with the short squeeze we only managed a very weak 6.6 billion shares. The volume on Wednesday's decline was 8.0 billion and Thursday's decline was 7.3 billion. Follow the volume. Those days with the heaviest volume indicate the real market direction.

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Random Thoughts

All week the topic on the news has been the long lines at the security checkpoints at various airports around the country. Some airports were warning passengers to arrive 3 hours early to avoid missing flights and then some flights were missed anyway. Chicago O'Hare was one of the worst offenders. This link is a video of the line at O'Hare. It is unbelievable. O'Hare Security

Here is the kicker. On Friday, the head of TSA and selected elected officials were scheduled to meet at O'Hare to discuss the lines and plans to reduce them. When the press and officials showed up there was NO LINE. There was nothing for reporters and news crews to take pictures of and use to blast the TSA head over the breakdown in management.

I can just hear the phone calls from management the day before. "I don't care how many people you have to call in and how much overtime you have to pay. There had better not be a line when we get there for the news conference on Friday or you will be looking for a new job." Where there is a will there is always a way.

Notable Quotes:

Keith Bliss, Senior VP at Cuttone & Co.

"Equity markets hate two things: decelerating earnings inside of their issuers and a rising interest rate environment. We're getting both right now so I'd be very cautious as we step into the summer."

Jack Bouroudjian, co-founder and director of UCX.

"The Street doesn't think the central bank will move and it certainly hasn't priced in two or three rate hikes. In fact, when the markets and gold moved lower, the dollar strengthened and all yields along the Treasury curve went up on the news of the Fed minutes, it was a warning signal that the market is not prepared. We are preparing, unfortunately, for a shock. This market is not ready. We could see a move lower in stocks and it could be a vicious move."

Rene Nourse, CEO and founder of Urban Wealth Management.

"Investors need to brace themselves in the coming months because things are going to get rocky for the stock market. This summer is going to be ugly. I've never been in the corner of 'sell in May and go away' but I've had to change my tune this year."

Goldman Sachs in a note to investors.

Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels. The firm is neutral on U.S. equities for the rest of the year.

Deutsche Bank.

"There is an old saying amongst market watchers that economic expansions do not die of old age. Rather, during the course of the business cycle dynamics emerge that threaten to become unacceptable from a policy perspective. In the context of economic expansion, that dynamic has been inflation. Recessions are effectively created by policymakers to counter otherwise accelerating inflation."

The Niger Delta Avengers (NDA) sound like a Marvel Comics group of super heroes. Unfortunately, for Nigeria, they are real rebels and they are mad. Between 2003-2009 a group militants called the MEND rebels, (Movement for the Emancipation of the Niger Delta) terrorized oil producers by blowing up pipelines and oil facilities and nearly brought Nigeria's oil production to a halt. The government ran out of options and bribed the MEND rebels to stop the attacks.

The government paid the rebels millions of dollars and contracted with them to protect the oil facilities. The leaders got a fat payday and the rank and file got a small bonus and the promise of vocational training. Everything was fine until the training never appeared and the leaders vanished with their cash and left the underlings to guard the facilities for pocket change.

You know where this is headed. The remaining rebels realized the government paid millions to their leaders once before and decided to repeat the process. They came up with a new name, which is a lot cooler than the old name, and recruited some new blood to help with the mischief.

They warned the government if they did not agree to their demands, they were going to stop oil production again. This time the government has no money because of low oil prices. Instead of renewing the protection contracts and paying the new bribe, the government sent the soldiers out to capture the rebels. However, as in any guerilla war, the militants are indistinguishable from the normal citizens. They work during the day and then attack at night.

They have been very successful in their attacks. They are not trying to harm or capture workers, but simply stop oil production by blowing up pipelines, oil wells and various facilities. Nigerian oil production has declined 800,000 bpd or roughly $32 million a day in revenue the government is no longer receiving. They have attacked facilities operated by Shell, Eni, Chevron and Exxon.

They claim they only want the protection contracts reinstated along with the amnesty provided by the government to the MEND rebels. I guess it is a sweet deal if they can get it. The amnesty was a massive payoff system and they want it reinstated.

President Buhari claims he has extended the amnesty program through 2017 but he also reduced the payouts significantly. He quit funding the original militant leaders and the trickle down payments to the rank and file ended.

The amnesty payoff system is doomed to failure. Nigeria's production is likely to decline because the NDA fighters are gaining the cooperation of the population and they are not likely to be rooted out. This battle could continue for a long time and neither side will win in the end.

What crude glut? The first picture below is a fleet of oil tankers anchored outside the entrance to Galveston and the Houston Ship Channel. The red triangles are tankers underway either to or from Houston. The red squares are tankers anchored outside the entrance waiting for the cargo owner to find a buyer or simply anchored as offshore storage while the owners wait for prices to rise. Those tankers cost $30,000 to $40,000 a day to sit and wait for instructions.

The picture below is the tankers anchored offshore Singapore where tens of millions of barrels of crude are sitting in floating storage waiting for a buyer or for prices to rise. These tanker farms are losing money. The cost to rent a tanker and have it sit for weeks or months requires a large difference in the price of the futures. With the current price of oil at $48.50 and the future price for December crude at $50.13 there is no profit. The owners of these cargoes are losing money every day but there is nowhere to put the crude. There are no buyers. Tanker prices are rising because the number of anchored tankers is growing. Eventually there will not be enough tankers available to actually transport oil from producing locations where they actually have buyers. When the pain becomes too great, the owners of these anchored cargoes will capitulate and lower their asking price to the point where a willing buyer will appear. When the capitulation event occurs, we could see a dramatic drop in crude prices because every owner will be trying to under bid every other owner.

With onshore storage near maximum levels, there is nowhere to put this oil and new storage tankers are added daily. There will be a capitulation event. Only the timing is unknown.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves."

Abraham Lincoln


New Plays

ASCO Excitement Rising

by Jim Brown

Click here to email Jim Brown
Editor's Note

The American Society of Clinical Oncology (ASCO) is famous for ground breaking news that can power the companies making the presentations to new highs. One of those companies hoping to get a boost is OncoMed Pharmaceutical.


OMED - OncoMed Pharmaceuticals - Company Profile

OncoMed Pharmaceuticals is a clinical-stage company focused on discovering and developing novel anti-cancer stem cell and immuno-oncology therapeutics. OncoMed has seven anti-cancer therapeutic candidates in clinical development, where each target key cancer stem cell signaling pathways including Notch, Wnt and R-spondin LGR. OncoMed is advancing its wholly owned GITRL-Fc candidate and an undisclosed immuno-oncology candidate (IO#2) toward clinical trials in the 2016-2017 timeframe. OncoMed has formed strategic alliances with Celgene Corporation, Bayer Pharma AG and GlaxoSmithKline (GSK).

OncoMed is making six presentations at ASCO related to six oncology drug candidates, including robust preclinical anti-tumor activity data for its wholly owned GITRL-Fc candidate and from clinical trials of vantictumab, ipafricept, demcizumab and tarextumab.

All of that is Greek to me but this is a cancer conference and OncoMed is an up and coming cancer drug company. They should be right at home and the notes I have read suggest several of their drugs are very promising. They have milestone payments coming from GSK, Bayer and Celgene coming in 2016-2017 of more than $270 million.

Shares have risen steadily since the earnings miss on May 5th. As a preclinical company they do not have retail revenues and depend on funding from their partners. They will have operating losses until their drugs are in the marketplace.

Shares spiked on the 28th after AbbVie said they were buying cancer drug company Stemcentrx for $10.2 billion. That company is in the same stem cell research sector as OMED.

Earnings August 4th.

With the ASCO meeting still 10 days away we could benefit from some of the building excitement and hopefully the company's presentations at the meeting will increase the interest in the stock.

Buy OMED shares, currently $12.72, initial stop loss $10.85

No options recommended because of wide spreads.


No New Bearish Plays

In Play Updates and Reviews

Nasdaq Short Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq rallied +57 points after Applied Materials spiked 14% and caused a massive short squeeze in the chip sector. AMAT only accounted for 3 Nasdaq points but their comments lifted the entire sector. QCOM, INTC, TXN, AVGO, MU, etc all spiked and the short squeeze carried over into techs stocks of all flavors.

The Dow rose +135 points but gave back 70 in the afternoon to settle at 17,500. That level was prior support and now it should be resistance. The trend is still down but these every 3-4 day short squeezes are keeping the indexes from actually taking the big dive.

There is just enough bullishness to keep our small cap shorts from falling. The Russell 2000 was up +1.6% and posted the biggest gain of any major index. The Russell paused all day at resistance at 1,110 but surged 5 points in the last few minutes of trading. That looked a lot like shorts covering before the weekend.

We were stopped out of Bloomin Brands by a 50-cent drop at the open but the stock rebounded back to positive territory almost instantly.

We were stopped out of Hortonworks after the stock gapped up at the open and ran for 12% on short covering before rolling over at resistance at $11. I am recommending we reload this at the open on Monday. This was purely short covering and it failed at resistance.

Current Portfolio

Current Position Changes

BLMN - Bloomin Brands

The long position was stopped out at $18.25.

HDP - Hortonworks

The short position was opened with at $10.18 and stopped out at $10.75.

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

BLMN - Bloomin Brands -
Company Profile


No specific news. Shares dipped 50 cents at the open to stop us out and then rebounded to close positive for the day.

Original Trade Description: May 9th.

Bloomin Brands owns and operates casual, upscale casual and fine dining restaurants primarily in the USA. Their brands include Outback Steakhouse, Carrabbas Italian Grill, Bonefish Grill and Flemings Prime Steakhouse & Wine Bar. They operate over 1,500 locations in 48 states and 22 countries.

They reported operating earnings of 47 cents that missed estimates for 50 cents. Revenue of $1.16 billion missed estimates for $1.17 billion. Same store sales in the U.S. declined -1.5%. Shares surged 9% despite the miss.

Despite the weak quarter the company reaffirmed full year estimates for earnings growth of at least 10%. The company blamed restructuring costs on the weak quarter and said that would not be a problem in future quarters. They had previously projected a strong second half of 2016. They also pointed to sales in the Brazilian Outback Steakhouse that rose 8.8%. During the quarter they also bought back $75 million in stock. Strong dollar currency translation issues also reduced earnings. The company also declared a dividend of 7 cents payable on May 19th to holders on May 6th. They entered into a sale leaseback transaction where they sold 41 restaurants for $141.4 million and used $87 million to pay down debt.

Shares spiked 9% after the earnings and continued moving higher over the last two weeks. They closed today at a 7-month high.

Position 5/10/16:

Long BLMN shares @ $19.71, exit $18.25, -1.46 loss.

SQ - Square - Company Profile


Shares sold off despite the market short squeeze. SQ gave back the 20 cents gain from Thursday.

Original Trade Description: May 7th.

Square develops and provides payment processing, point-of-sale, financial and marketing services worldwide. It provides Square Register, a point-of-sale software application for iOS and Android, which enables sellers to process credit cards for multiple items through their smart device.

The company was knocked for a 22% loss after reporting a Q1 loss of 14 cents compared to estimates for 9 cents. Revenue rose +51% to $379.2 million and beat estimates for $343.6 million. However, operating expenses rose +72% to $207 million. G&A costs rose from $28 million to $96 million because of a $50 million charge for a lawsuit against Robert Morley, who claims to be the creator of the Square card reader.

Square also has a share lockup expiration on Square on May 17th. About 64 million shares will be unlocked and the float will increase nearly three times. A lot of early investors including Visa, Starbucks, Sequoia Capital (5%) and Khosla Ventures (17%) will be able to sell their shares. Given the reduced guidance and rapid decline there may be a race to the exits.

According to the Wall Street Journal, a whopping 69.48% of the shares (14.6 million) are short as of March 15th. Currently the public float is only 21.01 million shares. Source

I was going to recommend shorting the stock into the lockup expiration but the short interest is too high. The cost to borrow the shares would be prohibitive and with that much short interest it could be explosive. Also, I have seen many lockup expirations that have turned into the bottom for the stock. Expectations are so bearish that the stock declines to a ridiculous price before the actual expiration and then there is no selling. Anyone with shares in the lockup could have already shorted the stock to protect those declining shares. When the lockup expires they use their unlocked shares to cover their shorts.

I am proposing we use a combination strategy. I am recommending we buy a May $10 put, which expires three days after the lockup expiration. At the same time I am recommending we buy a June $11 call in expectation for a sharp post lockup rebound. Remember, revenue increased 51% in Q1 and they raised guidance.

If the stock declines, we sell our put for a profit before expiration and that reduces the cost in the call.

Position 5/9/16:

Long Jun $11 call @ 55 cents. See portfolio graphic for stop loss.

Previously closed 5/17/16: Long May $10 put @ 60 cents. Exit $1.00, +.40 gain.

BEARISH Play Updates

AMAG - AMAG Pharmaceuticals - Company Profile


No specific news. Rebound from the new intraday low under $18 on Thursday but resistance at $19 held. Analyst meeting announced for June 1st.

Original Trade Description: May 14th.

AMAG Pharmaceuticals, Inc., a specialty pharmaceutical company, provides products and services with a focus on maternal health, anemia management, and cancer supportive care in the United States. They also own Cord Blood Registry. This company collects, processes and stores umbilical cord blood and cord tissue for use in fighting chronic diseases in later childhood.

In their recent earnings they reported 94 cents that beat estimates for 89 cents. However, revenue of $109.3 million missed estimates for $123 million. Service revenues at Cord Blood were $19.5 million. However, R&D expenses rose +103.6% to $14.2 million and SG&A expenses rose 96.7% to $63.2 million.

With revenue well under estimates and expenses rising dramatically, the outlook for earnings weakened. While the company reiterated guidance for full year revenue in the $520-$570 million range that would require a significant rise in drug sales from the $109 million in Q1. Shares were downgraded to hold by Raymond James.

Earnings August 2nd.

Shares are at a 52-week low and they did not rally on Friday when the entire biotech sector was up more than 1%. They also failed to rally on the 9th when the biotech sector was up +3%. Apparently investors are not convinced they are going to be able to meet their revenue targets and earnings are going to suffer.

Position 5/16/16:

Short AMAG shares @ $18.33, see portfolio graphic for stop loss.


Long August $17 put @ $1.08, see portfolio graphic for stop loss.

DB - Deutsche Bank - Company Profile


No specific news. DB was sued by the Boston Retirement Fund over collusion on fixing the prices on bonds. Shares were up because Europe was in rally mode on Friday. This dead cat bounce should fade.

Original Trade Description: May 14th.

Deutsche Bank AG provides investment, financial, and related products and services worldwide. The company operates through Global Markets; Corporate & Investment Banking; Private, Wealth and Commercial Clients; Postbank, Deutsche Asset Management; and Non-Core Operations Unit segments. It offers a range of financial markets products, including bonds, equities and equity-linked products, exchange-traded and over-the-counter derivatives, foreign exchange, money market instruments, and securitized products, as well as mergers and acquisitions, and debt and equity advisory and origination services; and commercial banking, advisory banking, and financial services. The company also provides investment and insurance, mortgages, business products, consumer finance, payments, cards and accounts, deposits, and mid-cap related products, as well as life and non-life insurance products, and corporate pension schemes; payments, financing for international trade, lending, trust, agency, depositary, custody, and related services; invests in a range of asset classes, including equities, fixed income, real estate, infrastructure, private equity, and hedge funds. As of December 31, 2015, it operated 2,790 branches in 70 countries. Deutsche Bank AG was founded in 1870. Unfortunately, DB may be in serious trouble. There are numerous rumors of financial problems of all types. The bank reported a record loss for 2015 and is being buried by a mountain of litigation related to subprime loans, manipulation of foreign exchange rates and gold and silver prices. They are under attack for rigging the Libor and Euribor interest rates used to set the prices for mortgage loans and derivatives. DB has paid more than $3 billion in fines already but that is a drop in the proverbial bucket compared to what is coming. There are numerous class action suits for multiple offenses, many of which DB has already admitted it committed.

DB debt yields are soaring as investors race to get out of positions before the bank crashes. Last week DB offered customers a 5% yield if they would deposit 10,000 to 50,000 euros and leave the money in the bank for 90 days. With the ECB willing to lend an unlimited number of euros to any European bank on almost any collateral, why is the bank offering customers 5% interest for 90 day money? It appears there is a massive liquidity squeeze underway and money is rapidly flowing out of DB accounts.

In the fine print on the offer DB says, "In case of bankruptcy or risk of bankruptcy of financial institution, the saver is at risk of losing their savings or may be subject to a reduction / conversion into shares (bail-in) of the amount of the claim that he has the financial setting on top of the amount covered by the double German guarantee scheme for deposits". I doubt savers are rushing to deposit money that can be confiscated by a bail-in for the bank like we saw in Greece.

Position 5/16/16:

Short DB shares @ $16.37, see portfolio graphic for stop loss.


Long July $16 put @ $1.10, see portfolio graphic for stop loss.

ENDP - Endo Intl Plc - Company Description


No specific news. John Paulson tripled his stake in the company saying it was deeply oversold.

Resistance is 15.85 to 16.15 and I recommend we stay with it until we see if that resistance will hold. The current stop loss of $16.45.

Original Trade Description: May 11th.

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 $26 last week to $14 today. The company slashed full year guidance by -11% on revenue and -23% on earnings. 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 disclosed they were being investigated by the U.S. Attorney's Office for its relationship with pharmacy benefit managers or PBMs. In light of the improper relationship between Valeant and Philidor the USAO is investigating to see if the same problems exist at Endo. In November, Novartis had to pay a $390 million fine to settle charges it paid specialty pharmacies for illegal kickbacks in exchange for inducing patients to refill certain medications.

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

Earnings are August 4th.

Even though shares are down significantly from the May 6th news, I believe they will continue falling and could go into single digits. The similarities to Valeant's pharmacy problems and the impact to Valeant's stock are too close and should weigh on Endo.

Position 5/12/16:

Short ENDP shares @ $13.81, see portfolio graphic for stop loss.


Long June $12.50 put @ $1.05, see portfolio graphic for stop loss.

FDC - First Data - Company Profile


No specific news. Shares spiked again thanks to the bounce in tech stocks. FDC missed our stop by a penny.

Original Trade Description: May 16th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions.

In their Q1 earnings, they grew revenue 3% and operating income rose from $185 to $220 million. Earnings of 24 cents were slightly above expectations for 21 cents. Revenue of $1.69 billion was below estimates for $1.71 billion. Unfortunately, FDC has $19 billion in debt compared to its $3 billion market cap. Interest expense in the first quarter was $263 million or more than $1 billion a year.

Global business solutions revenue declined in the quarter while financial solutions and security solutions showed only marginal growth.

Earnings July 21st.

While the company tried to put a positive face on the future by projecting revenue growth, it appears investors were not impressed. Shares have fallen from $13.50 to $10.50 over the last three weeks since earnings. FDC does not provide guidance and that is troubling to some investors.

I am anticipating a retest of the post IPO low at $8.50 or even worse, depending on the market.

Position 5/17/16:

Short FDC shares @ $10.69, see portfolio graphic for stop loss.


Long July $10 put @ $.60, no initial stop loss.

GPRO - GoPro - Company Profile


No specific news. GoPro spiked 30 cents on no news thanks to the Nasdaq short squeeze.

Original Trade Description: May 5th.

GoPro develops hardware and software associated with capturing, managing, sharing and enjoying engaging content. They offer cameras and all the accessories associated with affixing those cameras to any object in order to capture action videos.

GoPro soared onto the scene in late 2014 and shares ramped up to nearly $100 until the execution problems began to appear. After owning the action camera sector for several years they are now facing a growing onslaught of competitors with far deeper pockets and bigger teams of software engineers. GoPro cameras remain some of the higher priced in the sector because of their history but that is quickly changing.

They reported earnings on Thursday after the bell. They posted a loss of 63 cents missing estimates for a loss of 60 cents. However, revenue of $183.54 million beat estimates for $171 million BUT it was a -49.5% decline over the year ago quarter of $363 million and a profit. They shipped 701,000 cameras but that was a -47.8% decline from last year. They affirmed guidance for revenue of $1.35 to $1.50 billion for the full year BUT they are delaying one of their biggest revenue drivers for the year.

The Karma drone was supposed to be released in the first half of 2016 and was expected to provide a revenue boost for the company. In the earnings conference call, they said the release of the drone would be pushed out into the holiday season. How they are going to meet their prior revenue estimates after losing six month of drone sales is a mystery. When asked about it on the conference call the CEO basically said, "trust us." This is especially troubling when SZ DJI Technology is rapidly monopolizing the drone market. DJI has been called the Apple of the drone industry. They sold and estimated 70% of the consumer drones sold in 2015. Now they will have another six months to flood the market with multiple drone models before the GoPro Karma even gets off the ground.

Here is an interesting article on GoPro competitors. We could see this stock reach low single digits. GoPro Competition

Shares fell slightly in afterhours but I expect them to make a new low in the weeks ahead. They closed the afterhours session at $10.16 and the historic low is $9.01. The afterhours low was $9.57.

Position 5/19/16

Short GPRO shares at $8.75, see portfolio graphic for stop loss.

Previously Closed 5/13/16: Short GPRO shares @ $9.65. Exit $9.35, +.30 gain.

HDP - Hortonworks - Company Profile


We entered the position at $10.18 at the open but there was a monster short squeeze on no news. Shares ran up to $11 and then faded in the afternoon. We were stopped out at $10.75.

This short squeeze on no news was a one-day wonder. I am recommending we reload this at the open on Monday.

Short HDP shares, currently $10.70, stop loss $11.25

Original Trade Description: May 19th.

Hortonworks, Inc. focuses on the development, distribution, and support of Hadoop open source project in the United States and internationally. It offers Hortonworks Data Platform (HDP), an enterprise-grade data management platform that enables its customers to capture, store, process, and analyze increasing amounts of existing and new data types without the need to replace their existing data center infrastructure.

In March Hortonworks and Hewlett Packard Labs announced a collaboration to enhance Apache Spark. Hewlett & Hortonworks

Apparently, they are not setting the world on fire. They reported a Q1 loss of 68 cents that missed estimates by a penny. Revenue rose to $41.3 million and beat estimates slightly. They guided for the current quarter for revenue of $45 million that was in line with estimates.

Investors were not excited about the lackluster earnings and the prospect for continued losses. Shares fell from $12 to $10 after the earnings and after a small dead cat bounce back to $11 the trend has been lower. The stock closed at $9.89 today and a three-month low. The historic low is $7.12 and the odds are good it will be tested if the overall market remains weak.

Position 5/20/16:

Closed 5/20/16: Short HDP shares @ $10.18, exit $10.75, -.57 loss.

RELOAD the short at the open on Monday.

LOCO - El Pollo Loco - Company Profile


No specific news. Shares rebounded only 13 cents.

Original Trade Description: May 18th.

El Pollo Loco develops, franchises, licenses and operates quick service restaurants in the USA. The company offers individual and family sized chicken meals, Mexican inspired entrees and sides. They currently have 430 company owned and franchised restaurants. They are planning opening 16-20 additional stores in 2016.

The big spike on the IPO came on name recognition, a successful roadshow and a small number of shares initially offered. They later waived the lockup period and allowed insiders to sell their shares on November 19th, 2014, two months earlier than stated in the IPO documents. Shares crashed from $33 on the news and have never recovered that level.

The reported earnings on May 5th of 17 cents that missed estimates for 18 cents. Revenue of $94.4 million also missed estimates for $96.9 million. They guided for full year earnings of 70-74 cents, which was almost zero growth from the Q1 numbers. That suggests the competition is fierce and they are having trouble gaining market share. Earnings in 2015 were 71 cents.

Net income declined -19.8% in Q1. Same store sales declined -0.6% for company operated restaurants. That is not a good track record to use when selling new franchises.

Next earnings August 4th.

I think the crazy chicken is dying. Their moment in the sun is fading along with their stock price. Shares are rapidly approaching their post IPO low of $9.58 and once you break under that $10 level it is very hard to recover.

Position 5/19/16

Short LOCO shares @ $10.61, see portfolio graphic for stop loss.
No options recommended.

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