The market indexes all declined to strong support and skidded to an abrupt halt. This "could" be a market bottom or it could be just a pause to take a breath before continuing lower. The key point for me is that nothing has changed in Europe. It was just a vote. Prime Minister Cameron will not leave office until October and his replacement will be the the person that begins the exit process. Even then it could take up to two years for the transition.
The market reaction came after a false rally the day before that had everyone leaning in the wrong direction. That made the surprise result an even bigger surprise for the markets.
I could be wrong but I expect some further weakness on margin selling on Monday and then a rebound as fund managers put their excessive cash hoards back to work before the end of the quarter on Thursday.
NEW DIRECTIONAL CALL PLAYS
IWM - Russell 2000 ETF - ETF Description
The Russell 2000 ETF attempts to track the investment results of the Russell 2000 Index composed of small-capitalization U.S. equities.
The Russell indexes were "reconstituted" at the close on Friday. Unlike an S&P-500 rebalance where only the weightings change, the Russell indexes have additions and deletions that impact all the weightings and constitution.
The Russell company sorts all the U.S. stocks by market cap and the top 1,000 become the Russell 1000 and the next 2,000 become the Russell 2000 Index. Stocks that grew over the last year can shift out of the R2K and into the R1K. Stocks that saw their market cap shrink can move from the R1K to the R2K. Stocks that were acquired are eliminated and new stocks take their place in the overall order. Stocks that saw their market cap shrink enough to place them far enough down the list to miss the 3,000 stock cutoff are removed from the indexes. It is a complicated procedure and funds that follow the indexes have a lot of restructuring to accomplish in a single day.
The Russell 2000 Index normally has a positive bias in the week after the rebalance as fund managers clean up their portfolios and balance the positions correctly. With a 3,000 stock universe in the Russell 1000, 2000, 3000, it is next to impossible to get it all completed on Friday. Managers know which stocks were dropped and those were sold at the close. Getting the weighting right on the remaining stocks and the new stocks added to the indexes is a little more complicated.
This means managers are buying stocks in small amounts for most of next week until the weightings match the index and their benchmarks. This produces the slight upward bias.
Whether that bias can overcome the negative Brexit sentiment is unknown but remember, nothing changed in Europe. At this point, the Brexit is just a headline. The actual changes will be many months if not years in the future.
Current support for the IWM is down in the $109 range with some congestion around $110. I am going to recommend two entry points. If we rise on Monday, I want to enter the position with an IWN trade at $113. If the market goes lower, I want to enter the trade at $110. If there is volatility and the $113 entry is made first, I still want to add to it with a trade at $110. If we move lower and the $110 entry is made first then the $113 entry recommendation is cancelled.
This will be a short term position for a couple weeks just to capture a rebound and the potential to return to resistance at $118-$120.
With an IWM trade at $113 buy August $115 call, currently $2.05. No initial stop loss.
With an IWM trade at $110 buy August $115 call, currently $2.05. No initial stop loss.
If $113 is hit first the $110 trade recommendation remains active.
If $110 is hit first the $113 trade recommendation is cancelled.
SWHC - Smith & Wesson - Company 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 again. 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 Orlando 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. The constant gun headlines over the last two weeks have lifted S&W to 3-month highs.
In their Q4 earnings where there was a surge in gun sales after San Bernardino. In their recent Q1 earnings there was no mention of the Orlando shootings because the shooting was only 4 days before their earnings. The Q1 results did not have any sales bump from that event.
In their Q1 report, they posted earnings of 63 cents compared to estimates for 54 cents. Revenue of $221 million also beat estimates for $214 million. They guided for the full year for revenue between $740-$760 million and analysts were expecting $723 million. They guided for full year earnings of $1.83-$1.93 and analysts were only expecting $1.66. Q1 sales rose +22% and the CEO said demand was strong. They forecast current quarter revenue at $190-$200 million and analysts were only expecting $162 million. That is a massive improvement.
Since the Orlando shooting there has been nonstop headlines about gun control. Gun stores are reporting four times the volume in traffic and many stores are having trouble keeping guns in stock. This is going to be a banner quarter for S&W.
Earnings August 25th.
Shares have been in constant rebound since the earnings on June 16th erased fears about slowing sales. The stock gained 51 cents on Friday despite the severely negative market.
Buy Sept $27 call, currently $1.70, no initial stop loss due to volatile market.
NEW DIRECTIONAL PUT PLAYS
No New Bearish Plays