Option Investor
Newsletter

Daily Newsletter, Thursday, 3/31/2016

Table of Contents

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

Market Wrap

Resistance Reminder

by Jim Brown

Click here to email Jim Brown

Strong overhead resistance we have been watching for weeks held again and could be a preview of things to come.

Market Statistics

The Dow crashed into the resistance barrier on Wednesday with a very short term high at 17,790 on the opening gap. The Dow closed 76 points below that high. Today the Dow barely managed to edge over that 17,750 resistance level by only 5 points intraday before selling off again. I continue to believe that this will be major resistance. The range from 17,750 to 18,165 may only be 415 points but it is going to be a major roadblock to further gains.


The economic reports today did not help the bullish case. The Challenger Employment for March was slightly improved with layoffs declining from 61,599 in February to 48,207 in March. That March number is an improvement but it is still 32% higher than March 2015. For the entire first quarter, there were 184,920 announced job cuts, which was also 32% higher than the same period in 2015.

It was no surprise that energy layoffs the second highest sector at 7,747 with retail at the top with 8,490. Healthcare products cut 6,236, entertainment/leisure 6,212 and information technology at 5,003.

The weekly jobless claims rose +11,000 from 265,000 to 276,000. That is the third consecutive weekly gain. This could be a sign that job growth is slowing. The ADP Employment report on Wednesday showed a gain of 200,000 jobs, down slightly from the 214,000 in February.

The Nonfarm Payroll report on Friday is expected to show a gain of 205,000, down from 242,000 in February. That consensus number rose by 5,000 after the ADP report. March has a history of missing estimates by about 63,000 on average over the last decade. If the report did come in at 142,000 in line with the average miss, that would not be market friendly. In this case, bad news would actually be bad news now that the Fed is on hold until later in the year. A serious miss of the estimates would suggest the economy is declining and a recession is likely.

I am not expecting that large of a miss if there is a miss at all. The job market has been the strongest economic area for many months, even if most of the jobs are only part time service jobs.

The economy is declining as evidenced by the Atlanta Fed GDPNow real time GDP forecast for Q1. As of Monday the forecast is for +0.6% growth in Q1. That is down from 2.7% estimates in the middle of February. The forecast will be updated again on Friday after the payroll report and I will provide the update in the weekend commentary.

Minimal growth at 0.6% means the Fed will be on hold for a long time, at least until the second half of the year. Yellen's speech indicated the Fed would me more gradual in their rate hikes because of multiple factors in the U.S. economy and overseas.


Also on the calendar for Friday is the ISM Manufacturing Index for March. The estimate has risen back into expansion territory at 51 from the prior forecast of 49.5 from last week. Unfortunately, construction spending has declined from +0.2% to flat at 0.0% over the last week and Consumer Sentiment estimates have fallen -1.0 points to 90.5. All of these factors will weigh on the GDP forecast.


It was a disappointing day for Starwood Hotels (HOT). After two weeks of bidding on the acquisition of Starwood, the Anbang consortium withdrew their $14 billion all cash offer for the hotel chain. Starwood immediately reaffirmed their $13.3 billion deal with Marriott (MAR). The transaction will create the largest hotel chain in the world. The acquisition is expected to create $250 million in cost synergies and significant revenue synergies as the two firms cross-pollinate their existing customer lists and rewards programs. Starwood will hold a special shareholder meeting on April 8th to approve the sale.

The last Anbang offer was for $82.75 and all cash. There were growing concerns about their ability to raise the cash and whether or not they could get government approval for a Chinese consortium to own hotels outside U.S. military and government locations. There were growing concerns the internet and WiFi connections could be compromised to the benefit of Chinese owners. Current shareholders will receive a combination of cash and stock equal to $77.94 per share. Separately, they will receive shares in Interval Leisure Group (IILG) common stock when the entity is spun off from Starwood. That is currently valued at $6.13 per Starwood share making the total price to shareholders about $84.07 per share. Starwood has 1,300 properties in 100 countries. Shares declined -$3.50 in afterhours to $80.


Tesla (TSLA) shares were up strongly intraday but faded at the close on a sell the news trade. Tesla is unveiling the Model 3 tonight, which will sell for $35,000. Thousands of people have been waiting in line outside Tesla dealerships for days to put down a refundable $1,000 deposit and be first in line for the new cars. These are expected to begin delivering late in 2017. There is also a federal $7,500 tax credit for buying an electric car and some states offer credits as well. The unveiling is scheduled to occur at 8:30 PT tonight. Customers can also order online starting at 7:30 PT, an hour earlier than planned because of the strong demand. If the car is even halfway decent, Tesla could see major demand and waiting periods of a couple years.

It is not too late for Apple to buy Tesla and jumpstart their smart car project. Tesla's market cap of $30 billion is pocket change compared to Apple's cash hoard of $215 billion. They could pay a premium and still have $160 billion left. Elon Musk has had conversations with Apple in the past.


Target (TGT) was downgraded from buy to sell at Barclays and the price target was cut from $90 to $70 after Wednesday's close at $83.60. The analyst said Target guidance on same store sales and margin expansion are overly optimistic while it faces extreme competition from general merchandise stores and online competitors. Numerous analysts disagreed with the Barclay's downgrade. Last year Target had revenue of $73.8 billion with a 34% increase in e-commerce sales in Q4 alone. Operating margins were 7% and the highest level since 2013. Management is expecting 2.5% same store sales growth in 2016 compared to +0.5% at Walmart. Earnings are expected to grow 11-15% to $5.20-$5.40 per share. Target is expected to grow earnings at 11% a year for the next five years. Shares declined -$1.32 on the news but once they move over resistance at $84 I would be a buyer.


Medivation (MDVN) says it has no plans to sell but has hired JP Morgan (JPM) to handle inquires from potential buyers and suggest defensive measures. Medivation only has one drug on the market, prostrate drug Xtandi, and Bernie Sanders warned the drug was developed with government money and could be taken from the company and marketed at a lower price. That is not likely to happen. The company does have a pipeline of drugs that are expected to do well. One is a breast cancer drug and the other a blood cancer drug. A Jefferies analyst said a best case for a Medivation buyer would be in the $51-$54 per share range. However, if the company can hold out until it gets approval for its current drugs that jumps to $71-$75 per share. Shares spiked 23% on the news.


The first quarter is over and the Dow managed its biggest quarterly comeback since 1933. The S&P gained a measly 0.8% in Q1 and the Dow added +1.5%. However, that was a +14% rebound from the February lows. Since the Feb 11th low at 15,503 to Wednesday's high at 17,790 the Dow added +2,287 points.

The Nasdaq lost -2.8% for the quarter despite a 6.8% rebound thanks to the crash in biotechs. Gold had its best quarter since 1986 with a 16.5% rally. Crude oil rallied from a low of $26.05 to a high of $41.90 in late March for a 61% rebound. You can thank the rebound in oil for much of the gains in the Dow and S&P.

You can also thank the drop in the dollar for the rebounds in oil and gold. The dollar suffered its worst quarterly drop in five years. That means it takes more dollars to buy an ounce of gold or barrel of oil.


The $38.50 level on oil is prior resistance and it is acting as a price magnet ahead of the April 17th OPEC meeting in Doha Qatar. Crude prices have been fading since it is now clear Iran and Libya will not be a part of any agreement. Also, any agreement will not have any effect on the current oil glut. A decline in oil after the meeting could prevent the equity markets from rising through current resistance.


The yield on the ten-year declined -2.4% today to 1.78% and nearing a multiyear low. Yellen's cautions about economic conditions here and overseas caused a flight to quality that could continue for some time. A weak nonfarm payroll number on Friday could accelerate this decline. While recession fears have abated over the last month, they still exist.


We are rapidly heading into earnings season with earnings expected to decline -8.7% according to FactSet. However, Tom Lee of Fundstrat Global Advisors believes there is a rally ahead. Lee believes the pessimism is vastly overdone. When those estimates were being produced earlier in the quarter and companies were issuing guidance, oil was under $30 and the dollar was a lot higher. With the dollar a major impact to corporate earnings, most companies were projecting continued dollar strength into their guidance. Since January 29th the Dollar Index has declined -5.1% with the dollar closing at a five-month low today.

Lee believes estimates are too bearish and when companies begin beating those earnings there will be a race to buy stocks. He also pointed to the more than $1 trillion in short positions as rocket fuel once prices begin to rise again. That is more stocks short than in March of 2009 at the height of the market crash. Lee expects a new high on the S&P by the end of May. Let's hope he is right. The last high of 2,130.82 was on May 21st last year.


April is actually a bullish month for the markets. Typically, stocks rise ahead of earnings as investors make bullish bets on earnings reports. Over the last ten years, there has not been a loss for the month for the Dow. The average Dow gain is 2.8% in April and the S&P averages +2.62%. Since 1945, the Dow has been positive 69% of the time with an average 1.41% gain. Since past performance is no guarantee of future results, you have to take those statistics with a dose of reality. We are facing major resistance in a hotly contested election cycle with U.S. economics declining and Q1 earnings results in doubt. All of those factors could become bricks in a wall of worry for the market to climb or they could become weights to hold the market back.

Markets

The S&P has not yet reached the strong resistance that begins at 2,075, with 2,072 the high on Wednesday. The index is facing strong resistance and we will need a significant catalyst to push through the various levels. It is not impossible but it should be difficult. My problem is that I do not see a material positive catalyst on the horizon other than the potential for better than expected earnings. With economic estimates declining we could also rally if that situation were to improve but it will take more than one report to change the outlook. It will take several weeks of positive economic news to suggest a real improvement.

On the positive side, the Chinese markets are improving. That suggests economic conditions are also improving although we do not have confirmation of that just yet. While the Shanghai Composite is rebounding, it faces several resistance tests. The ECB is preparing to kick off a larger round of QE and that could depress rates further and force more money into equities.


In the U.S., the markets were slipping to their lows for the day at 3:00 when a flood of market on close buy orders appeared to the tune of $1.2 billion. The losses were erased and the indexes turned positive until just before the close when a surge of sell orders erased that buy imbalance. That could have been quarter end adjustments by funds or any number of events. We should not judge the market by the last 30 min of trading on the last day of the quarter.

The payroll report in the morning should not be a market mover. The Fed is on hold. Unless the number is off significantly in either direction, it should be ignored. Actually, the goldilocks number would be around 200,000 and that would not bring the Fed back into the picture or suggest the economy was weakening further.

The S&P would have to gain 15 points just to reach that initial resistance at 2,075. That suggests we are not going to break into that resistance band on Friday. Making large investments ahead of a weekend is rarely a good idea. There will be plenty of time on Monday to put quarter end funds to work.


The Dow benefitted from an upgrade on IBM by Morgan Stanley. The broker raised the price target to $168. That was good for a $3 gain on IBM and +23 Dow points, which prevented an even bigger loss at the close.

The Dow has touched resistance at 17,750 for the last two days and each day resulted in selling when that number was touched. It will take a significant catalyst to punch through that initial resistance level.



The Nasdaq is facing significant resistance at the 4,900 level but once through it has a clear shot to 5,100-5,160 and the historic highs. Whether that will happen or not probably depends on the Biotech Index. The $BTK gained +3% today and the Nasdaq barely closed positive.



The biotech sector could be poised for a rebound. The index rebounded to resistance at 3,000 once again after touching support at 2,800 on Tuesday. Since the sector is heavily shorted, any breakout over 3,000 could be powerful.


The Russell 2000 actually moved to a higher high today with a close at 1,114. Resistance is 1,120 and the 50% Fib retracement level. The 200-day is 1,141 and major resistance waits at 1,161. However, the index is moving with the support of the biotech sector and a rally in biotechs would push the Russell much higher. The relative strength oscillators have both improved.


I am not expecting much from the market on Friday. Next week could produce some fireworks as the quarter end money is put to work but it will be interesting to see how the indexes react to the various resistance levels. I would love to believe Tom Lee and see us set new highs in May but that is just a remote hope today. There are far more analysts that believe the resistance will hold and we will head lower into the summer. That does not mean we are not going higher over the next couple weeks. It may be choppy and on low volume. The super low volume over the last two weeks demonstrates a lack of conviction by traders on both sides. I seriously doubt that conviction is going to improve suddenly but I would be thrilled if it did.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Standing Aside

by Jim Brown

Click here to email Jim Brown

Editors Note:

Friday morning is another coin toss for direction. With significant resistance just overhead and the payroll report and ISM Manufacturing the two major headlines the market could go in either direction or do nothing at all depending on the economic numbers.

Our portfolio is firmly weighted to the upside and with strong resistance on the Dow being tested daily and holding, there is a decent chance Friday will be a profit-taking day. While I cannot guarantee that, I would rather wait until the weekend to add new plays.

There is always another day to trade if you have cash in your account. We should only trade if we have a better than 50:50 chance on being successful.


NEW DIRECTIONAL CALL PLAYS


No New Bullish Plays



NEW DIRECTIONAL PUT PLAYS


No New Bearish Plays




In Play Updates and Reviews

Resistance Confirmed

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P failed to reach the highs from yesterday with 2,068 the most it could muster on the last day of the quarter. The Dow only gained 5 points past resistance at 17,750 before rolling over to close at 17,687. Resistance has been confirmed and it could be a real challenge to move higher.

We have been watching the 17,750 and 2,075 levels for several weeks and they appear just as strong as we anticipated. If we do not get a big gain after Friday's Nonfarm Payroll report, we may have just seen the high for the first half of the year.

However, April is the second best month of the year for the Dow with an average 2.8% gain over the last decade. If by chance we were to get that average gain in April that would lift the Dow to 18,180 and almost exactly the top of the current resistance range at 18,165. It may be a cold day in h*ll before the Dow reaches that level.



Current Portfolio




Current Position Changes


SRCL - Stericycle

The long call position was opened at $78.00.


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

Comments:

No specific 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, see portfolio graphic for stop loss.


AKAM - Akamai Technologies - Company Description

Comments:

No specific news. Shares are still flat but I believe we will see a breakout in the near future. The key is whether it will make the move before out April option expires.

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

Comments:

No specific news. Minor decline after nearly hitting our exit on Wednesday.

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.


DLPH - Delphi Automotive - Company Description

Comments:

No specific news. New three month high close.

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.


HCA - HCA Holdings - Company Description

Comments:

Minor loss with resistance at $78.50. No news.

Original Trade Description: March 29th.

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

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

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

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

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

Earnings are April 28th.

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

Position 3/30/16

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


N - NetSuite - Company Description

Comments:

Shares spiked to within 23 cents of our exit target. Rather than try to squeeze another 23 cents out of the trade, I am recommending we close the position at the open on Friday. The longer we are in the trade the more likely we are struck by lightning and lose part of our gains.

EXIT POSITION AT THE OPEN ON FRIDAY.

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

Comments:

No specific news. Trading at the top of its recent congestive resistance range.

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

Comments:

First decline in two weeks. No complaints here. No news.

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, see portfolio graphic for stop loss.


PKG - Packaging Corporation of America - Company Description

Comments:

New two-month high close. 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

Comments:

Minor decline after closing at the top of current resistance on Wednesday. No news.

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.


SRCL - Stericycle - Company Description

Comments:

No specific news. Dead stop on resistance at $126.

This play remains unopened until SRCL trades at $126.75.

Original Trade Description: March 30th.

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

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

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

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

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

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

Earnings are April 28th.

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

With a SRCL trade at $126.75

Buy May $130 call, currently $2.55, initial stop loss $122.65.


SWHC - Smith & Wesson - Company Description

Comments:

No specific news. Zacks reiterated a strong buy and called it the Zack's Bull of the Day because S&W is branching out into other segments including apparel, police gear, camping equipment, etc.

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

Comments:

Big decline intraday to $26 after the FTC sued Endo for paying two generic drug companies to delay sale of their generic drugs. That is an antitrust violation for restraining consumer access to cheaper drugs. The two companies were Impax Labs and Watson Labs. Reportedly Endo paid Watson hundreds of millions of dollars to delay generic Lidoderm patches. Endo also agreed not to sell an authorized generic that would compete with Watson's version for 7.5 months.

Shares rebounded from the $26 level to close at $28.15 and a new three-year low. This suit should continue to weigh on shares as it becomes well known.

Original Trade Description: March 28th.

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

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

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

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

Earnings are May 9th.

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

Position 3/29/16:

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


SPY - S&P 500 ETF - ETF Description

Comments:

The SPY rallied to $206.41 at the high and just shy of our next entry point at $207.

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, See portfolio graphic for stop loss.

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




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