Option Investor

Daily Newsletter, Tuesday, 3/29/2016

Table of Contents

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

Market Wrap

Yellen Says Slow

by Thomas Hughes

Click here to email Thomas Hughes


The market floundered all morning, waiting on a speech from Janet Yellen, and then shot higher on here dovish stance. Yellen was today's headliner for sure, speaking on monetary policy before the Economic Club Of New York, but she was not the only Fed member to speak today and not the only one this week.

San Francisco Fed president Williams made some comments on TV early this morning to the effect that the FOMC should stay on track (referencing a gradual pace of rate increases as has been telegraphed time and time again), that the US economy was on track and that international growth or lack of growth should not be a driver of future policy decisions. Also on tap today were not one, but two, speeches from Fed President Kaplan with additional speeches from other members scheduled for tomorrow and Thursday.

Market Statistics

International markets appear to be hanging on every word from the FOMC and its members, just like we are. Asia and European markets were all flat ahead of Yellen's speech despite another decline in oil prices.

Futures trading on the US indices was also flat and unaffected by data or earnings. When the opening bell sounded the indices made a quick dive, the SPX lost about 5 points, only to have near term support step in. Most indices held near break even up to the lunch time hour, the odd man out was the NASDAQ Composite which got a boost from Apple. Shares of Apple rose 1.5% in the wake of the DOJ dropping the case against it after the FBI was able to unlock Farook's phone on its own.

The market seemed to like what Yellen had to say, which was basically a reiteration of the FOMC policy statement of two weeks ago; as she took the podium indices began to move higher. She basically toed the line of gradual increases, citing research supporting the use of slower increases and the ability of the FOMC to increase the pace if the economy needs it. Following the speech the indices took a half hour or so to digest the statements and then began a steady march higher.

Economic Calendar

The Economy

Not much in the way of economic data today, just the Case-Shiller real estate price index and Consumer Confidence. The Case-Shiller 20 City Index shows that, on a not-adjusted basis, prices for homes in the 20 largest metropolitan areas rose 5.7% on a year over year basis. On an adjusted basis prices rose only 0.7% (not sure how seasonal adjusting affects housing prices but apparently it does). The central cause of rising home prices is a lack of inventory, according to the report there is only about 4.5 months of supply available at this time.

Consumer Confidence was released at 10AM and gained 2.2% from last month's reading. Confidence rose to 96.2% in March, reversing a similar drop last month. Confidence in present conditions fell -1.5% while expectations for the future rose 5.8%. The change in confidence is due, according to the report, to a decrease in financial market turmoil, consistent with evidence provided by the Moody's Survey Of Business Confidence.

According to the CME's Fed watch tool there is still only a 7% chance of a rate hike at the April meeting. The chances only rise to 31% in June, 46% in July and only barely move above 50% in September.

The Oil Index

Oil prices took a dive today, falling more than -3.5% at the days low. Over supply, low demand, high storage and a lack of certainty over the upcoming meeting to supposedly cap production combined to pressure prices lower. There was a slight rebound late in the day, due to a weakening dollar in response to Yellen's comments, but not enough to regain today's losses. WTI broke below $38.50 today and is now trading at the lowest level in two weeks. Oil prices may consolidate near this level into the near term unless another catalyst emerges. This could be renewed interest in production caps, Iran joining the fight to prop up prices or other; without reason to move higher supply and demand outlook may push prices back to $35 or lower.

The Oil Index fell about -1% to test support near 1,050 and the short term moving average before bouncing and moving higher on Yellen's comments. The index is still tied to oil prices but today's action was a little different as a weaker dollar helped to support the sector, if not the underlying commodity. The indicators continue to weaken and point lower, suggesting additional testing of support and/or a break below the moving average. Support is along the 1,050 level at this time, a break below here could take the index down to 1,025 or 950 depending on how far, or if, oil prices continue to fall.

The Gold Index

Gold prices got a nice little boost from Ms. Yellen. Her stance, that of the FOMC, that policy changes would be gradual at best, that growth targets were falling and that there was still "scope for accommodation" served to weaken the dollar and drive spot gold higher. Today gold prices rose by about 1.75% on her comments and appears to be heading back to the top of the recent range. First upside target is $1250 with a chance of moving up to $1280.

The Gold Miners ETF GDX also moved higher on Yellen's comments. The ETF gained nearly 5.5% in a move that confirms support along the short term moving average and appears set to retest recent highs near $21. The risk at this time is that the indicators remain weak and could lead to further correction should the data, and there is still a lot due out this week, lead the market to fear a rate hike despite what the FOMC is indicating.

In The News, Story Stocks and Earnings

The dollar continued to fall today as Yellen's speech backed up what the FOMC said two week's ago. The pace of rate hikes will be gradual, more gradual than first thought, targets for growth and inflation have fallen and there are still risks to the economy. The Dollar Index itself fell more than -0.8% in a trend following move that appears set to retest recent lows near $94.50. The indicators are rolling over into what could become a bearish trend following signal but have not yet completed the move. Regardless, the dollar is likely to remain weak relative to the December high up to and until a shift in fundamentals occurs.

Homebuilder Lennar reported before the bell and delivered better than expected results. EPS was $0.63, $0.11 better than expected and up 26% from last year. Deliveries of homes rose 12%, new orders are up 10%, back log orders are up 13% and revenue is up 21%. The market like the news and sent the stock up by more than 2% to trade at a near 3 month high. Based on today's Case-Shiller report, yesterday's Pending Sales and other housing data that blames low inventory on weak sales and high prices it looks like strong performance can be expected from this and other home builders into the next few quarters at least.

Specialty food maker McCormick reported earnings this morning as well. The company reported earnings better than expected and guided full-year 2016 results in-line with estimates. Sales in the first quarter were reported up 2%, 7% discounting the impact of currency conversion, resulting in EPS of $0.74. This is up $0.04 from this same time last year and a nickel ahead of analyst estimates. The stock responded favorably to the news, and comments to the effect that currency conversion would have less impact this year, and climbed to a new all-time high. The indicators are rolling into a bullish trend following signal, the stock looks set to continue its move higher.

The VIX made a nice move lower today, shedding close to -9% in today's session. The volatility index is now trading near its recent low and below the $14 level and heading for a 5 month low. Today's statements from Janet Yellen have gone a long way toward relieving fear in the market, fear of rate hikes anyway, but leave the door open for other fears... namely reduced growth expectations and inflation targets which are the cause for FOMC dovishness.

The Indices

Today was a tale of two markets. Early trading, pre-Yellen speech, was a wash. Trading was flat, lack luster and without much volume. Trading post-speech was much different. The indices moved higher, consolidated and moved higher still, all on increased volume. The day's leader was the NASDAQ Composite which got a boost from Apple as well as from Yellen's speech. The tech heavy index gained more than 1.65% in a move up from near term support. Today's candle is long and white, an indication of some strength, although the indicators remain mixed; momentum has ticked higher with today's action, stochastic is still strong in the upper signal zone but pointing lower. The index also set a new high for the rally and looks like it will continue higher, at least until reaching next resistance target near 4,880. A break above this level could take it up to 5,000.

The next strongest move in today's session was in the transports. The Dow Jones Transportation Average made a gain just over 1.18%, made a medium bodied white candle with lower shadow, and erased all of yesterday's losses. The move appears to confirm support below yesterday's close and could lead to further upside. The indicators remain strong but persist in showing signs of reversal, namely bearish crossovers, that could limit the amount of upside we get. First upside target is near 8,100, a break above this level could take it up to 8,400. Support remains below today's low, near 7,725.

The S&P 500 was the third biggest gainer in today's session, rising about 0.9% by end of day. The broad market created a long white candle, moving up from support, and set a new high for 2016. The indicators are mixed, both are showing near term weakness, but consistent with a rising market. Toda's moves appears to be the start of another move higher with upside target near 2,075.

Today's laggard was the Dow Jones Industrial Average which gained a little more than 0.55%. The index created a medium bodied white candle with lower shadow present, confirming support at the 17,500 level. Today's move is bullish and set a new high but just barely. The indicators are mixed in that momentum is waning but are still showing strength by trending high in overbought territory. This move could continue higher with upside target near 18,000 but I remain wary.

Janet Yellen, the FOMC, did it again. A fed induced rally driven by easy money policy has sparked a rally and taken the market higher. In the near term this is good news but the signals are mixed. While easy money policy is still the name of the game, and rate hikes are still the plan, the economy has weakened since the December meeting and have raised concerns over growth and inflation going forward. Not only that, it seems as if the committee is less on the same-page than ever before, not something to inspire confidence in our regulators ability to keep the economy on track.

Hopefully today's speech has taken some fear out of the market, it certainly seems so based on the VIX, but risks for equities remain. Not only is there a lot of data due out between now and the next FOMC meeting we are on the cusp of a fourth quarter of earnings declines. I can't help but fear a correction driven by poor earnings and remain cautious in my stance because of it. As for the data, I expect to see it continue to support the idea of slow recovery, healthy labor markets and the path of normalized fiscal policy, no matter how gradual it may be.

Do not forget about this week's data. Tomorrow is ADP employment but Friday will be the big market mover with NFP, unemployment and hourly earnings.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Recovering Nicely

by Jim Brown

Click here to email Jim Brown

Editors Note:

Hospitals have been out of favor since Q3 but HCA Holdings is rebounding from a long consolidation cycle. More than 62 hedge funds own HCA.


HCA - HCA Holdings -
Company Description

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.

Buy May $80 call, currently $2.25, initial stop loss $74.75


No New Bearish Plays

In Play Updates and Reviews

Yellen Delivers

by Jim Brown

Click here to email Jim Brown

Editors Note:

Yellen's speech delivered the balance in outlooks the market wanted. Not too hot, not too cold. Just right. Yellen said the Fed needed to be more gradual in its rate hike plans and that contradicted the comments from the four Fed heads last week that were talking about a potential April rate hike.

The market rallied on the speech and into the close. However, it was subdued. In past Fed rallies we have seen the market move 200-300 points at times and that makes today's 97 point gain somewhat lethargic.

The Nasdaq gained +1.6% and was the strongest big cap index. The Russell 2000 soared 2.7% as the short squeeze spread into the biotech sector.

We lost the CRM position at the open with an unexplained dip below $71 on high volume. Shares rebounded to $72.69 and a gain but we were already out. We lost the Shake Shack position on a 6% short squeeze that was well out of character with the recent activity. I contemplated reloading it but decided to see what the market does on Wednesday.

Despite the 18 point gain on the S&P the index did not get back to resistance at 2,050. This appears to be more of an overall short squeeze and probably some window dressing than the start of a new move higher.

Current Portfolio

Current Position Changes

ADSK - Autodesk

The long call position was opened when ADSK traded at $58.05.

ENDP - Endo Pharma

The long put position was opened at $28.29 this morning.

CRM - SalesForce.com

The long call position was closed when CRM dipped to $70.71 at the open.

SHAK - Shake Shack

The long put position was closed when SHAK rallied $2 on short covering.

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

ADSK - Autodesk -
Company Description


ADSk rebounded to resistance thanks to a positive Nasdaq. No news.

Original Trade Description: March 22nd.

Autodesk operates as a design software and services company worldwide. Their software is used to design buildings, design equipment, machines, products, etc. The software is licensed directly and through a network of resellers. Autodesk goes beyond 3D imaging and allows 3D printing of the design using the Moldflow process in the software.

Autodesk is the premier software of this type in the market today. There are competitors but Autodesk is the largest by far. Competitors are Adobe, Ansys Inc and Dassault Systems. Mattel announced in February it was introducing 3D toy printing at home with the "Thingmaker" in cooperation with Autodesk.

In February the company said it was going to lay off 10% of its workforce or about 925 jobs as it transitioned to the cloud.

Shares collapsed with the market in January but began to rebound in February after the cloud announcement. The company said revenue will increase long term because the cloud model is subscription based. In Q4 they added 190,000 subscribers to the cloud product.

They reported adjusted Q4 earnings of 21 cents compared to estimates for 10 cents. Revenue of $648 million beat estimates for $636 million. They guided for a loss of 12-17 cents for Q1 on revenue of $500-$520 million because of their restructuring process. They are taking an $85 million charge for the layoffs. As part of the movement to the cloud they are going to end sales of their software suite that was previously sold direct by Autodesk and by resellers. That willdepress revenue in the short term but increase it significantly in the long term.

By the end of 2017 they are going to terminate all the existing "perpetual licenses" and force current users into the cloud model. Apparently "perpetual" means different things to different people.

Autodesk had been under fire from two activist shareholders and they resolved that last week when they added three directors to the board. Sachem Head and Eminence Capital agreed to certain standstill and voting provisions to get the board seats. Joining the board are Scott Ferguson from Sachem, Rick Hill, chairman at Tessera Technologies and Jeff Clark, CEO at Kodak.

Shares rallied on the news of the new board members are appear ready to break over current resistance at $58 to retest the December highs at $65.

Position 3/29/16 with an ADSK trade at $58.05

Long May $60 call @ $2.45, initial stop loss $54.25.

AKAM - Akamai Technologies - Company Description


Still clinging to $55. Minor gain. No news. I would close it but this is an April option and the premium has evaporated. We are only $2 from the money so this could still end up a winner if the stock moves up slightly.

Original Trade Description: February 26th.

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

Position 3/2/16 after an AKAM trade at $55.75

Long April $57.50 call @ $1.63, See portfolio graphic for stop loss.

AOS - AO Smith - Company Description


No specific news. Less than $1 away from our exit target.

Target $77.65 for an exit.

Original Trade Description: February 18th.

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 19th market crash and had been moving steadily higher. The market took it lower again to retest that bottom on February 9th. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade at $70.45.

Position 2/23/16 with an AOS trade at $70.45

Long April $75 call @ $1.88. See portfolio graphic for stop loss.

CRM - SalesForce.com - Company Description


CRM dipped below $71 at the open to stop us out at $70.85 before rebounding. No specific news.

Original Trade Description: March 14th.

Salesforce.com provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide. They provide an entire menu of applications tailored to various industries with an emphasis on sales force automation and customer resource management.

The last six analysts ratings changes have been upgrades with four new analysts initiating coverage with a buy. Salesforce is growing quickly with revenues growing 24% in 2015 to $6.67 billion. Subscription and support revenues rose to $6.21 billion and accounted for 93% of all revenue. These fees continue from quarter to quarter and should continue growing.

Morgan Stanley said customer demand for applications software was expected to remain quite strong and Salesforce.com was positioned to make the most of this development.

The Salesforce.com CEO said sales efforts to enterprise customers were becoming more time consuming because of the greater complexity of the large enterprises but once sold they became very profitable long term assets. Once a large enterprise invests in Salesforce.com and trains its thousands of employees there is a huge inertia factor that prevents them from leaving. That subscription revenue becomes repeatable for a long time.

These longer sales and implementation cycle means that Salesforce.com has a lot of delayed revenue that it will recognize in future quarters in addition to the current revenue for those quarters. This is the equivalent of a snowball rolling down hill. Future revenue is growing even though it is not readily apparent. In Q4, the company reported deferred revenue of $4.29 billion and its unbilled deferred revenue was $7.1 billion.

For Q4 Salesforce reported earnings of 19 cents that matched estimates but revenue of $1.81 billion beat estimates for $1.79 billion. The company guided higher for 2016 and shares rose 8% on the news.

The next earnings are May 18th.

Shares moved sideways from the earnings spike for three weeks and are just now starting to move higher. Given a positive market, I think they will retest the highs in the weeks ahead.

I am recommending the May $75.00 call even though it is a little farther away from the money and slightly more expensive than the April $72.50 call. With only 32 days left in the April cycle we are reaching the point where premium decay will accelerate. If we hit a soft patch in the market the April premiums may not have time to recover. The May premium will cover the earnings on May 18th so when we exit before earnings there will still be some expectation built into the premium.

Position 3/14/16

Closed 3/29/16: Long May $75 call @ $2.75, exit $1.98, -.77 loss .

DLPH - Delphi Automotive - Company Description


Rallied to two-month high thanks to the Nasdaq short covering. No specific news.

Target $76.75 to exit.

Original Trade Description: March 5th.

Delphi manufacturers vehicles components and provides electrical and electronic, powertrain and safety technology solutions to the automotive and commercial vehicle markets worldwide. Whether you are buying a new car or repairing an old one the odds are very good you are using Delphi parts.

Vehicle sales in February were 17.54 million units on an annualized basis. As we move farther into spring and summer those numbers are going to rise sharply. Cheap gas means consumers are going to buy more new cars and upgrade their rides to the SUV category when possible.

Delphi reported earnings of $1.39 and beat consensus estimates for $1.37. Revenue of $3.88 billion rose +11% and also beat estimates for $3.79 billion. The company guided for full year earnings of $5.80-$6.10 and revenue of $16.6 to $17.0 billion.

Shares rallied after earnings and broke through resistance at $68 last week to close at $71.53. The next significant resistance is $77.25. Earnings are April 28th.

I am recommending we buy the May $75 calls at $2.40 so there will still be some earnings expectation premium in them when we exit before earnings. April options expire on the 15th so premiums will deflate significantly before we ever get to the earnings event. I am recommending an entry point at $72.50 and just over Friday's high. If the market does take profits early in the week we can lower the strike price and entry target depending on what happens to Delphi shares.

Position 3/17/16 with a DLPH trade at $72.50

Long May $75 call @ $2.50. See portfolio graphic for stop loss.

N - NetSuite - Company Description


2% gain on no specific news thanks to the Nasdaq tech rally.

Target $68.85 for an exit.

Original Trade Description: February 19th.

NetSuite provides cloud based financials/enterprise resource planning (ERP) and omnichannel commerce suites in the U.S. and internationally. They also offer customer relationship management (CRM) and professional services automation (PSA). NetSuite OneWorld manages various companies or legal entities across multiple countries with different currencies, taxation rules and reporting requirements.

NetSuite reported adjusted earnings on January 28th of 5 cents compared to expectations for 4 cents. Revenue of $206.2 million rose +33% and beat estimates for $205 million. They reported several new accounts including Snapchat, American Express Global Business Travel and Lucky Brand to name a few. They added 616 new customers in the quarter and replaced SAP in 17 accounts. Recurring revenues rose +30% and now make up 80% of revenue. Nonrecurring revenue of $41.7 million rose +34%. They ended the quarter with $379 million in cash.

Revenue for 2016 is expected to rise 28-31% with earnings growing 80% to 100% to a range of 40-45 cents.

NetSuite was upgraded by Canaccord Genuity from hold to buy after earnings.

Not many companies are growing annual revenue by 30% and earnings by 100%. This is NOT Tableau software but it was punished for Tableau's weakness.

Earnings are April 21st.

Position 2/22/16 with a trade at $56.50

Long April $60 call @ $2.40, see portfolio graphic for stop loss

NTAP - NetApp - Company Description


No specific news. Closed above resistance but not far enough to prevent a relapse.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Long May $28 call @ 99 cents, no initial stop loss.

OA - Orbital ATK - Company Description


Excellent relative strength again. Company won a $750 million contract for improved M224A1 mortars, which are 20% lighter.

Target $88.85 to exit.

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

Long May $85 call @ $2.80, initial stop loss $76.15.

PKG - Packaging Corporation of America - Company Description


Adding to its gains with a new two-month high. No news.

Target $64.25 for an exit.

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 25th.

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:

Long April $55 call @ $2.20, no initial stop loss.

QSR - Restaurant Brands Inc - Company Description


No specific news. Still in congestive resistance but finally has a pulse.

Original Trade Description: March 7th.

QSR is the new name for the Burger King and Tim Hortons brands. Both have been serving customers for more than 50 years. QSR currently operates more than 19,000 restaurants in 100 countries with more than $23 billion in sales. The name change and rebranding came a year ago when Burger King bought the Tim Hortons chain.

QSR has been flying under the radar for the last year with all the news about McDonalds all day breakfast and Starbucks expanded menu. They reported earnings of 35 cents that beat estimates of 31 cents.

Same store sales rose +5.6% at Tim Hortons and 5.4% at Burger King.

Burger King sales are accelerating because of a flood of new menu items. They have Chicken Fries, which are fries dipped in fried chicken batter and fried. They have Jalapeno Chicken Fries. On February 23rd they introduced the Whopper Hot Dog. This is a foot long hotdog flame grilled and served with whatever you want on them.

Burger King received tons of free press when the new hot dog was delivered. Some food aficionados are calling the hot dog a "culinary calamity." Others called is a "disgusting disgrace" but customers are waiting in line to order them.

Franchisees claim the demand has been "overwhelming" and while only a couple weeks old they are selling over 100 a day and rising rapidly as more customers realize they are available. Americans eat more than 20 billion hotdogs a year.

Earnings are May 27th.

QSR shares are currently $37.85 and a breakout over resistance at $37.65 is in progress. I am recommending we buy the April $39 call, currently $1.10, and plan on exiting at $41 if that higher level of resistance slows the rally.

Position 3/9/16 with a QSR trade at $38.15

Long April $39 call @ $1.15. See portfolio graphic for stop loss.

SWHC - Smith & Wesson - Company Description


No specific news.

Original Trade Description: March 26th.

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.

The New York public advocate, Letitia James created an excellent buying opportunity in a stock that normally refuses to go down. James sent a letter to the SEC demanding they investigate Sturm Ruger (RGR) because their guns are used in crimes. She did the same thing to Smith & Wesson back on December 15th. Seriously? Guns are used in crimes? Who does not know that?

James believes investors in these companies could suffer "reputational risk" if people find out they own shares of SWHC or RGR. She also urged Toronto Dominion Bank (TD) to stop financing the firearms manufacturer. She threatened the bank with the possibly loss of "millions of dollars in contracts" from New York City if they continue to finance gun manufacturers. I wonder if she is going to attack auto manufacturers next for people injured in accidents?

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. The hatchet job by James has given us a buying opportunity.

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 3/28/16:

Long June $28 call @ $1.95, no initial stop loss.

BEARISH Play Updates (Alpha by Symbol)

ENDP - Endo Intl Plc - Company Description


No specific news. Minor short covering but still near the recent low.

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, initial stop loss $32.50.

SHAK - Shake Shack - Company Description


Major short covering in SHAK with a 6% rebound. The 1.7% rebound in the Nasdaq had shorts covering everything. The spike stopped us out at $34.25.

Original Trade Description: March 21st.

Shake Shack owns, operates and licenses Shake Shack restaurants in the U.S. and internationally. The currently operate more than 50 domestic stores and 30 international stores. The stock started off with a bang because the majority of their stores in early 2015 were in the Northeast and traders and investors were familiar with the brand. Shares rocketed to a market cap of about $2 billion despite only having about 50 stores at the time.

After topping out at $97 in May of 2015 shares have fallen to just over $30. The bloom is off the rose and the brand has become just another hamburger stand with plenty of competition from stores like Five Guys, an improved McDonalds, an aggressive Burger King, Jack in the Box with its Qdoba Mexican unit, Good Times, Wendy's, etc.

The reported earnings in early March and shares dropped -17% even though they beat earnings and revenue estimates. The problem came from guidance. They forecast same store sales for all of 2016 of 2.5% to 3.0% growth compared to 13.3% growth in 2015. Analysts have lost the love for the SHAK. There are ten analysts that follow the stock. Only one has a buy rating, 7 have hold ratings and 2 have sell ratings. The consensus price target has declined to about $35, which is where it is trading now.

Even worse eight insiders combined to sell more than $30 million in shares last week with officers and directors dumping a lot of their shares. With a PE of -52 the stock is not growing its fundamentals.

Earnings May 12th.

Position 3/22/16 with SHAK trade at $33.80

Closed 3/29/16: Long May $32.50 put @ $2.60, exit $2.15, -.45 loss

SPY - S&P 500 ETF - ETF Description


The SPY rebounded to initial resistance at $205 and stalled.

I am recommending we add to this position when/if the SPY trades up to $207 and again at $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

Long June $200 put @ $4.77, initial stop loss $213.

If the market continues higher add to that position at $207 and again at $210.

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