Option Investor
Newsletter

Daily Newsletter, Thursday, 3/3/2016

Table of Contents

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

Market Wrap

Market Climbs On Data

by Thomas Hughes

Click here to email Thomas Hughes
The market climbed to new 2 month highs after a round of monthly macro data, but we're still waiting on the NFP.

Introduction

The market held steady in today's trading after a round of monthly macro data. Today's data was a bit mixed but supports the idea of slow and steady economic improvement, and does not appear to be strong enough to force the Fed into another rate hike at the March meeting. Even with this data, and data released during the week, the market is still waiting for tomorrow's NFP and unemployment report for cues on what the Fed may do.

International markets were mixed. Asian indices were mostly higher, led by the Nikkei, following two days of gains in the US markets. European indices began the day in positive territory but fell in late day trading as oil prices began to retreat, closing flat to slightly negative for the day.

Market Statistics

Futures trading indicated a flat to slightly lower open for the US markets up to and until the 8:30AM release of jobless claims, productivity and labor cost data. After the data futures spiked, briefly, only to fall back to flat line going into the opening bell. The open was positive, barely, but indices fell to break even and below within the first few minutes of trading. The morning was spent in negative territory, average intraday loss was near -0.5%, but those losses were nearly erased heading into the 11AM hour.

The indices topped out just before 11AM and fell back to retest the early lows by 11:30. Bottom was hit and another bounce ensued, taking the indices back to break even level. By 1:30PM the market was testing resistance near the 11AM high and by 2PM most indices were moving higher, led by the transports. Once the early highs were reached and breached the indices drifted higher into the closing bell, leaving them at or near their highs for the day.

Economic Calendar

The Economy

Lots of data today, the Challenger Gray & Christmas report on planned lay offs was first on the list. According to them planned lay offs fell by -18% from January levels to 61,599, led by the energy sector. The energy sector announced 25,051 lay offs in Februay bringing the YTD total for the sector to 45,154, up 24% from the same period last year. The top three reasons for lay offs in February were oil prices, restructuring and store closings. The technology sector also has substantial gains in lay offs, up 143% YTD from last year, but were shrugged off in the report due to "heavy churn" in the sector related to start-ups, bankruptcies and a rapidly changing environment.

On a year over year basis February job cuts are up 22% from last year, on a year to date basis are up 32%. Backing out the effect of oil prices the way I like to do the month to month, YTD and YOY numbers improve significantly. Energy related job losses account for 40% of the February total and 33% of the YTD total. Based on comments from John Challenger it appears that the effect of low oil prices on job losses is not spilling over into other areas of the economy.

"Shockingly, we have not seen a precipitous rise in unemployment in the many cities that were benefiting from the recent oil boom, suggesting that the job losses are contained to the energy sector, for the moment,"


Initial claims for unemployment climbed 6,000 from last week's not revised figure to hit 278,000. This is slightly above the estimates which called for a drop of -1,000 but does not change the fact that claims are trending near long term lows and consistent with ongoing labor market recovery. The four week moving average of claims fell -1,750 to 270,250.

On a not adjusted basis claims rose by 7.1% versus an expected gain of 4.9%. On a year over year basis not adjusted claims are now down -15.5% from last year, a gap that has been growing over the past few weeks to its widest level in about 10 months. On a state by state basis Massachusetts and Missouri posted the largest increases in claims, +3268 and + 1012, while California and New York posted the largest decreases, -5515 and -1282.


Continuing claims for unemployment rose 3,000 on top of a 1,000 upward revision to last week to hit 2.257 million. The four week moving average of continuing claims fell -750 to hit 2.257 million. The number of continuing claims remains steady near 2.257 million as it has for the past two months. This figure is off of its long term low but remains consistent with ongoing labor market health.

The total number of Americans receiving unemployment benefits fell -48,512 to 2.659 million. This is the lowest level since hitting the post holiday peak and is -5% from last years levels. The total claims date remains consistent with historical trends and labor market health. Based on the historical data we may expect to see total claims hold near this level for another 2 to 3 weeks and then begin to fall off going into the spring hiring season.


The final data for 4th quarter productivity and unit labor costs was also released at 8AM. Productivity fell -2.2%, not good, but is better than the -3% first estimated and the -3.3% expected by economists. On a year over year basis productivity in the fourth quarter was up about 0.5%. Labor cost rose 3.3% versus the expected +4.7% on a rise in hours worked, +3.2%. Total out put is up 1%.

Factory orders and ISM services index were both released at 10AM. Factory orders rose 1.6% versus and expected gain of 2%. Within the report shipments rose 0.3%, unfilled orders rose 0.1% and inventory declined -0.4%.

The ISM services index fell -0.1% to 53.4% and shows continued expansion within the services sector. Within the report data shows an increase in business activity, up 3.9% to 57.86%, new orders fell -0.1% to 55.5% and employment fell -2.4% to 49.7%. Employment falling below the expansionary 50 level is a concern but when taken in perspective not as much as it could be, this is the first month in 2 years that the employment segment has fallen below 50. Looking forward, businesses surveyed are generally optimistic about the economy.

Tomorrow is the all important NFP and unemployment data. Consensus is in the range of 200K for NFP and 4.9% for unemployment. Based on my read on the employment data I think this could be light but so long as it is not overly strong should not negatively impact FOMC rate hike outlook.

The Oil Index

Oil prices were once again volatile as traders weigh the supply/demand imbalance against outlook for production, demand growth and the effects of an OPEC/Russian production cap. WTI hovered just below yesterday's $34.80 settlement price for most of the morning before a spike sent it up over $35 to its highest level since late January. The spike in prices was met by sellers who drove it back below $35 but only just. Even with the volatility today's action was relatively calm when compared to the past few months and left prices flat for the day. I still think it's too soon to say oil has reversed but it does looks like a bottom is in.

The Oil Index gained about a half percent in today's session, extending its move above resistance and the break out which began yesterday. The index is moving higher on higher oil prices and its impact on oil sector profits but the move higher is yet to be confirmed. Price action over the past two days is promising and supported by the indicators but not yet showing real strength. MACD momentum and stochastic are both moving higher but both are also still weak. If oil prices are able to hold near $35 the index could move higher with a target near 1,100 but I would also expect to see a retest of support before any kind of longer term move higher. Support target is now the 1,000 level and the short term moving average which is just below.


The Gold Index

Gold prices moved higher all day and gained more than 2% to trade above $1260. Today's action was supported by the economic data which on the one hand shows steady labor markets, expanding services and positive factory orders but on the other is still weak enough to keep FOMC rate hikes in March off the table. Gold is still below the most recent intraday high, near $1265, but appears to be moving higher with an upside target near term target of $1300. Risk include tomorrow's NFP and unemployment, next week's ECB meeting and the FOMC meeting the week after. I see gold moving higher so long as data remains in the Goldilocks range and the ECB doesn't surprise the market with more QE than expected.

The gold miners are loving the uptick in gold prices regardless of how long it lasts. The price of gold is about 20% higher than it was at the end of last quarter and will equate to higher earnings for this quarter as well as a mark up to physical gold held in reserve. Today the Gold Miners ETF gained more than 3.5% to set a new 9 month intraday and closing high. The indicators have weakened over the past few weeks and recently turned bearish but in light of the uptrend and its relative strength may not be the red flag they would be in a non-trending market. Generally, a decline in indicators of this type while prices remain high is a good sign and setting the ETF up for additional gains. Support is just below $19 with an upside target near $21.


In The News, Story Stocks and Earnings

The Dollar Index fell today on economic data. The data, while promising, was not strong enough to spur FOMC rate hike fears. Fed funds futures now indicate a less than 2% chance there will be a rate hike in March, down 6% from Monday when there was an 8% chance. Based on the information provided by the CME Fed Watch tool there is less than 40% of chance of another rate hike going out until September. December is has the highest probability and that is just over 50%. Expectations for rate hikes in all months have come down drastically over the past 30 days.

With the probability so low I think the only risk for a rising dollar comes with unexpectedly hot data, and the ECB meeting next week. The ECB is expected to do some form of QE'ing next week but will need to at least meet the markets expectations in order to significantly move the euro, and they have a history of doing unexpected things and not exactly matching expectations.


Kroger released earnings this morning before the opening bell and failed to meet expectations. The company beat on the earnings side but revenue fell short, mostly due to low gas prices. Comp store sales ex-fuel rose 3.7%. Guidance may have been what caused investors to sell, 2016 guidance is in line with estimates and only expects to see 3% comp store sales growth. The stock dropped more than 6% pre-opening and then moved lower from there. Shares closed with a loss greater than -7% on more than 3 times average daily volume.


Shares of Barnes & Noble gained nearly 7% today not on good news, but on less-bad news. Earnings, released before the bell, showed revenue in line with expectations with a $0.02 miss on earnings. Earnings of $1.04, while below expectations, are more than 230% better than the same quarter last year and reflect slower declines in Nook use and fewer store closings than expected. Sales were led by strength in adult coloring books, toys and music and helped increase comp sales by 1.3%.


Smith & Wesson reported after the bell. The firearm and outdoor lifestyle company reported earnings and revenue well above estimates and provided next quarter guidance above consensus estimates. The news sent shares shooting higher in after hours trading and temporarily triggered a halt to trading. Shares jumped more than 7% and are now trading at a new high.


The Indices

The entire market moved higher today but the hands down winner was the Dow Jones Transportation Average. The transports gained about 1.15% in a move that extended the break above resistance which began a few days ago. The index appears to be moving higher and this move is confirmed by the indicators which are both moving higher. There may be some resistance near 7,760 but once that is broken next upside target is about 500 points higher near 8,300.


The next biggest gainer, the S& 500, advanced nearly 0.35% and closed at the high of the day. The broad market has broken above the 1980 resistance line, set a new 2 month high and looks like it is going higher. The indicators are both pointing higher, consistent with a rising market, and both are convergent with this new high. Today's action also crossed the 150 day moving average. Next resistance target is near 2,015 -2,020 and may be strong enough to precipitate a pullback or consolidation. First target for support is now 1,980 with next target just below that near 1,965.


The third largest gain was posted by the Dow Jones Industrial Average, about 0.25%. Today's action moved up to the bottom of the long term up trend line and the bottom of the 150 day moving average which could provide enough resistance to pause or reverse the rally. The indicators are bullish and pointing higher so I would expect to see at least a test of resistance if not a break. A break above the trend line could attract new money and help drive the index higher with resistance targets near 17,250 and 17,600. Support target should the index fall from this level is 16,600.


The laggard in today's session was the NASDAQ Composite which gained only about 0.09%. Despite the small gains the index closed at the high of the day and at a new 2 month with bullish and convergent indicators. The index appears to be moving higher with at least a little room to run. Next upside target is near 4,800 with 4,650 as support should it decide to pull back.


The indices are moving higher on what appears to be a run of Goldilocks data and a handful of other positive factors. The data points have all been either better then expected, better than last year or, as in the case of labor, just plain decent while at the same time weak enough to keep rate hikes off the table. On top of this China driven turmoil is absent from the market, oil prices are rising and lifting the oil patch and gold prices are rising and lifting the miners. All in all a perfect storm of positive, if not bullish, factors.

My biggest concern, that of earnings and declining earnings outlook, remains. The good news though is that with oil prices rising the sector with the largest negative impact on earnings outlook should begin to see at least a stabilization of outlook, if not improving outlook. I am bullish but will remain cautious and skeptical while earnings projections continue to decline. When they begin to rise I think it'll be time to get more aggressive.

Until then, remember the trend!

Thomas Hughes


New Plays

Lining Up Bidders

by Jim Brown

Click here to email Jim Brown
Editor's Note

This company hired Morgan Stanley to find a buyer. With multiple companies possibly interested there could be a bidding war. While a bidder may not appear the odds are pretty good something will happen.


NEW BULLISH Plays


CUDA - Barracuda Networks - Company Profile

This is going to be a simple play description because the main objective is to be long CUDA when the buyers begin making offers.

Barracuda Networks designs and delivers security and storage solutions for clouds and corporate data centers. They protect against unwanted intrusions, malicious activities, they provide spam filtering to prevent phishing schemes to gain access to the internal networks. They are especially active in protecting websites from hackers and providing load balancing solutions for high volume websites.

Shares have been declining since June at $40 to trade under $10 in January. The company promised some new initiatives and restructuring that has not worked out to investor satisfaction.

On February 1st, Bloomberg reported that Barracuda had retained Morgan Stanley to "seek potential buyers" citing unnamed sources. While the process is ongoing BWS Financial reported there could be a number of companies interested in the Barracuda brand. BWS also said a complete turnaround if no buyers emerged would take 1-2 more quarters but it would be completed as subscribers transition to a cloud based product. They have a $20 price target on the shares.

Ahmet Okumus, Okumus Fund, reported in a 13G a couple weeks ago they had established a new position in CUDA of 3.73 million shares or 7.03%. Apparently they believe a bidder will appear.

Shares have rallied from $10 to $14 over the last four weeks. With the share price near $20 in early January any acquisition price would likely be in that range. If a bidding war emerges it could be higher. There is always the possibility that no bidder emerges and Barracuda continues on its restructuring path.

Earnings are April 25th and I would plan on exiting before that report. I am not recommending any options because the spreads are too wide.

The high on Thursday was $14.11 and I am putting a $14.25 entry trigger to open the position. If by chance we are late to the party the position will not be opened.

With a CUDA trade at $14.25

Buy CUDA shares, initial stop loss $12.65




NEW BEARISH Plays


No New Bearish Plays




In Play Updates and Reviews

Market Calm, Portfolio Hot

by Jim Brown

Click here to email Jim Brown

Editors Note:

Thursday's market action was rather calm despite an 11 point drop on the S&P at the open. The afternoon rebound came on low volume but enough to return the indexes to positive territory. Fortunately that did not impact our portfolio because we had a good day!

DWRE, GME and CDW all gained over $1 and LGF was close at 81 cents. The problem child was Bunge, which was stopped out as expected this morning. The unexpected dividend announcement was the kiss of death for that short play.

The market was calm ahead of the Nonfarm Payrolls on Friday but I do not know what investors were worried about. Since 2001 and covering 182 monthly payroll reports the market has finished up only 50% of the time or basically a coin flip. The average gain/loss for a payroll Friday is +0.1% or practically flat.

Analysts claim traders are worried that a strong jobs report will put the Fed back into play for a June rate hike. According to the CME there is only a 1.9% chance of a rate hike at the March meeting. That rises to only a 29% chance for June but that number will fluctuate after the payroll report.

Futures are flat on Thursday after the extended session so calm still prevails.

The S&P has risen to right below resistance at 1995-1999 and it may take a serious catalyst to break through those levels.




Current Portfolio





Current Position Changes


BG - Bunge Limited

The long put position in BG was stopped out at $51.85.


AMLP - Alerian MLP ETF

The long position in AMLP was entered at the open at $10.40.


HDP - Hortonworks

The long position remains unopened until HDP trades at $12.35.


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


ACAT - Arctic Cat - Company Profile

Comments:

Still waiting for that next big move higher after 4 days moving sideways at $18. That level is proving to be tough resistance.

Original Trade Description: February 24th

Arctic Cat makes snowmobiles, all terrain vehicles (ATVs) and recreational off-road vehicles (ROVs). They reported a bad quarter because of the exceptionally warm weather and lack of snow. Sales declined -14.3%. Of that 4.9% was due to the strong dollar. The brand is one of the most wildly recognized brands of off-road equipment.

Arctic Cat has been in a restructuring program for several quarters to revamp their dealer network, eliminate debt, reduce inventory and produce new cutting edge vehicles.

In Q4, they reduced long-term debt by $15.8 million. They suspended the quarterly dividend to save $6.5 million in cash for the restructuring. Inventory decreased -$25 million sequentially. They generated approximately $27 million in free cash flow.

The company expects to see the benefits of their restructuring in the next two quarters with sales expected to rise +40% in the current quarter. New models and new products coming out this summer are expected to boost sales as well. They are announcing a new "single ski" snow bike at the snow dealer show in March.

While the outlook is far from exciting the company shares have rebounded from the low of $9 on January 28th to $16.45 today. The stock momentum is strong and it reached primary resistance at $16.50 this week. If the stock breaks through this resistance it could trigger additional short covering with the next resistance at $22.25. I am recommending a long position on a resistance break and an exit before we reach that higher resistance at $22.

Earnings are May 12th.

Position 2/26/16 with an ACAT trade at $17.25

Long ACAT shares @$17.25, see portfolio graphic for stop loss.

Optional

Long June $20 call @ $1.70, see portfolio graphic for stop loss.



AMLP - Alerian MLP ETF - ETF Profile

Comments:

Decent +2.6% move for a $10 stock. I expect the ETF will continue minor gains as long as oil prices to not crash again. The 11.4% yield on the dividend is a powerful attractant for dividend investors.

Original Trade Description: March 2nd.

The MLP sector has been trashed along with the producers even though they have almost no risk. A pipeline MLP is a toll collector. They get paid a fee for every barrel of oil or cubic foot of gas that travel through their pipelines.

The vast majority of the pipelines in the country are full. They are so full that producers are having to resort to truck and rail shipments to get their oil to market. The pipelines are not in any material danger of a sudden drop in petroleum products flowing through their pipelines. Many contracts are take or pay. Producers commit to ship a certain amount of product and they pay for that commitment.

I am recommending the Alerian MLP ETF. This is an ETF that owns an entire basket of MLP securities and they all pay dividends. The AMLP is currently yielding 11.4%. They have raised their dividend every quarter since Q1-2012. They are not likely to break that string and if they did I suspect it would only be by a small amount. The Q1 dividend they announced on Feb 10th was 29.9 cents, payable on February 18th.

There are analysts that believe the MLP model is at risk. They believe the cost of capital will rise with the Fed rate hikes and the crash in the oil market. That means existing MLPs will have to pay more for new assets. That does not affect existing MLPs that already have their assets in place. They do not have to grow in the current energy environment. They can be content to sit on their assets and continue to pay dividends on their existing pipelines.

AMLP Holdings

I believe the risk at the current price level is minimal. The MLP panic has run its course with several cutting their dividends and causing the sharp drops in the ETFs. Now that oil prices are firming and expected to firm even more beginning in April when inventories begin to decline, the MLP ETF buyers will return. Just a year ago AMLP was trading over $20 and could be there again by this time next year.

There is no scenario where oil prices remain low long term. This is a normal boom/bust cycle and they will recover and will trade significantly higher in the years ahead.

This is a LONG-TERM position. Oil prices should rebound starting this summer and then rise sharply in 2017 and you need to be content to collect the 11.4% while we wait for those prices to move higher.

You do not have to hold long term. My initial target would be $14 and that would be a 40% return and we could see that by July.

Position 3/3/16:

Long AMLP shares @ $10.40. No stop loss.

Optional

Long July $12 call, entry 55 cents. No stop loss.



CDW - CDW Corp - Company Profile

Comments:

On Wednesday CDW consolidated the big gain from Tuesday and dropped back to use the prior resistance at the 200-day average as support for the intraday rebound. On Thursday that rebound appeared to push it over $40 with a nice gain.

Original Trade Description: February 29th.

CDW distributes IT solutions in the U.S. and Canada through its website CDW.com. They offer hardware and software products to integrated IT solutions including mobile, security, data center optimization, cloud computing, virtualization and collaboration. They offer a full line of IT products of every size, shape, brand, model and configuration. They also offer customization, installation, warranty and repair services as well as infrastructure as a service. This is the IT distributor for the home office, company datacenter or the datacenter as a service for those companies that do not have an extensive IT staff.

CDW has more than 250,000 corporate customers and 1,000 supply partners.

They reported Q4 earnings of 73 cents that rose +23% and matched estimates on revenue that rose +12.1% to $3.42 billion, which beat estimates slightly. For the full year they earned $2.35 on revenue of $12.99 billion.

They also announced a quarterly dividend of 10.75 cents to be paid on March 10th to holders on Feb 25th.

Shares rebounded from the earnings and are trading at $39.50. CDW has a very clear relationship with moving averages, especially the 200-day and the 300-day. Every break of either average has resulted in a significant move. On Monday CDW closed 9 cents above the resistance of the 200-day after trading between the 200-300 for the last two weeks. A breakout over that 200-day should target the $43 level if not higher.

CDW shares posted a 77-cent gain today in a weak market.

The high today was $39.76 and I am going to use an entry trigger at $39.85. That will mean the option price could be a little higher than expected since I am using the $40 strike. The $45 strike is too far away and has no open interest.

Position 3/1/16 with a CDW trade at $39.85

Long CDW shares @ $39.85, initial stop loss $37.85.

Optional

Long Apr $40 call @ $1.50, no initial stop loss.



DWRE - Demandware - Company Profile

Comments:

Looks like sellers ran out of stock on DWRE with a $1.33 gain today and a break over prior resistance from the 29th.

Original Trade Description: February 22nd

Demandware provides enterprise-class cloud based digital commerce solutions in the U.S., Germany, UK, and internationally. The Demandware Commerce platform enables customers to establish complex digital e-commerce strategies including multi-brands, multi-site, omni-channel and in-store operations.

Everything is integrated including payment systems, email marketing, campaign management, personalization, taxation, ratings, reviews and social commerce.

Demandware shares were caught in the Tableau Software disaster on February 5th when Tableau warned they saw enterprise spending slowing. Shares crashed from $44 to $30 on the Tableau news.

Demandware reported earnings on the 9th of 38 cents that beat street estimates for 23 cents. Revenue of $75.6 million also beat estimates for $72.3 million. They guided for full year revenue in the $295-$305 million range. Shares dropped at the open the next day because the street was expecting $302.26 million. It was a very minor guidance blink but shares dropped $2 the next day. That was the low for the month.

Shares have rebounded from that $26.50 low to $33.50 because they are not Tableau Software. They did not report any weakness in their earnings and revenue but they were punished for the Tableau guidance prior to earnings.

I believe Demandware will return to the $44 level where the close before Tableau dumped on the cloud software sector.

The high today was $33.97. I am putting an entry trigger on this play of $34.15 to get us over that level just in case the market takes a turn for the worse. If we do get some broad based profit taking, I will modify this play to take advantage of any new dips.

Earnings May 5th.

Position 2/26/16 with a DWRE trade at $34.15

Long DWRE shares @ $34.15, see portfolio graphic for stop loss.

Optional

Long April $35 call @ $2.70, see portfolio graphic for stop loss.



GME - Gamestop Corp - Company Profile

Comments:

Gamestop exploded higher with a $1.42 gain after the company said they had rolled out the ship-from-store process to all 4,100 stores. Activated only 10 days ago Gamestop said the service contributed an additional 10% to sales over that period. That is a monster win and it is just getting started. Customers have access to merchandise at any store and it can be shipped the next day. If something is moving slow in one part of the country, customers can purchase it from a region where demand is higher.

Original Trade Description: February 26th.

Gamestop was originally a reseller of used video games. As the business model matured they moved into new games, game consoles and recently into smart phones, tablets, MP3 players, headphones and manner of consumer electronics. They are a certified Apple consumer electronics reseller, an authorized AT&T reseller and Cricket Wireless seller of prepaid cell phones. As of January 31st, they operated 7,100 stores in 14 countries.

Gamestop's death has been reported prematurely numerous times and they just keep reinventing themselves in the expanding market. When more games became downloadable rather than cartridge or CD based everyone thought that was the death knell for the company. Instead they ramped up their sales of consoles and consumer electronics to increase their customer base and store traffic.

Recently they even ramped up their quarterly dividend to 37 cents ($1.44 annually) to yield 5%. Very few companies paying a 5% dividend are in danger of going out of business. The current dividend will be paid on March 22nd to holders on March 9th.

Gamestop will report earnings March 24th after the close and hold a conference call at 5:PM ET. They will also host an investor conference on April 13-14 and feature presentations from the leadership team and tours of the retail brand family. They are doing everything possible to be recognized as a growing business. They are a Fortune 500 and S&P 500 company.

All of these initiatives are foiling the plans for those traders holding the 37.7% short interest. That represents 39.5 million shares and the average daily volume is 1.69 million. That equates to a very bad week for the shorts if prices were to suddenly spike higher.

Other traders have been selling puts on GME at a record rate. Selling puts on a stock is a bullish strategy with expectations for the stock to go higher. On one day last week, more than 4,000 March $28.50 puts were sold at $1.40 each. Two days later another 4,000 $29.50 puts were sold at $1.38 on average.

There is resistance at $30.85 and I am going to recommend an entry at $31.10 because there may be some new traders waiting to sell at that $31 level. Once the stock moves over that resistance level we could see a flood of short covering.

Position 3/1/16 with a GME trade at $31.10

Long GME shares @ $31.10, see portfolio graphic for stop loss.

Optional

Long April $32 call @ $1.40, see portfolio graphic for stop loss.



HDP - Hortonworks Inc - Company Profile

Comments:

HDP did not get off to a good start. The 26 cent decline today broke the uptrend but did found support at the lows from the 29th. It needs to bounce from here or I will cancel the recommendation.

The play remains unopened until HDP trades at $12.35.

Original Trade Description: March 2nd.

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

Whether or not you have heard about this platform is immaterial because it is the up and coming thing for big data users. Hortonworks and Hewlett Packard Labs announced a collaboration this week to enhance Apache Spark. Hewlett & Hortonworks

They also announced new streaming analytics capabilities utilizing Hortonworks DataFlow (HDF) powered by Apache Kafka, Storm and NiFi. I hope you know what that means because I do not. DataFlow HDF

I could go on with dozens of new features and functions but the point I am making is that Hortonworks is not dormant and they are a bleeding edge software provider for big data customers.

In the Q4 earnings release they reported subscription revenue growth of +146% and a doubling of customers to more than 800. HDP was founded by a group of ex Yahoo engineers. Revenue in the quarter nearly tripled to $37.4 million. They guided for full year 2016 to revenue of $188 million and gross billings of $261 million.

This is a small company but one that is likely to explode higher or be acquired. Since their earnings on Feb 11th the uptrend has been steady with almost no volatility. Shares are currently at resistance at $12. A move over $12.25 should trigger some short covering as investors project the next resistance at $16.

Earnings are May 12th.

With a HDP trade at $12.35

Buy HDP shares, initial stop loss $10.85.

I am not recommending an option because of wide spreads.



LGF - Lions Gate Entertainment - Company Description

Comments:

No weakness here with a 3.7% gain for the day. That intraday dip two days ago is long forgotten.

Target $24.75 to exit.

Original Trade Description: February 17th.

Lions Gate reported earnings on the 5th and dropped like a rock from $26 to $16 on ten times normal volume. Adjusted earnings of 45 cents missed estimates for 47 cents. Revenue of $670 million missed estimates for $767 million.

Lions Gate earnings are always lumpy. As a film maker with 2-3 major motion pictures a year the quarter with a big release always spikes and the quarters without a release crash. In the latest quarter the Hunger Games Mockingjay Part 2 had a huge audience but it was sandwiched between James Bond's Specter and the Martian. Those big films sucked up the available screens and pushed Mockingjay out of the headlines. Even with the competition the film grossed more than $650 million.

The studio has three movies for the first half of 2016 but none are expected to be blockbusters. Lions Gate also has a sizeable portfolio of TV shows like Orange is the New Black, Nashville, The Royals, The Wendy Williams Show and Casual, with more than 75 others across 40 networks. They have contracted future revenue from those shows of $1.3 billion at the end of December. They have a library of more than 16,000 motion picture and television titles.

One of the reasons the stock fell so sharply was the expectations for LGF to acquire a lot of other "free radicals" as John Malone calls them. Those are smaller studios that could help add to the LGF franchise. However, as a Canadian company they are prohibited from acquiring anyone bigger than themselves. When their market cap dropped from $7 billion to $3 billion after earnings it meant their potential acquisition candidates shrunk significantly. They were also rumored to be considering a merger with the Starz Network. That also played into the stock drop mix because owning their own TV network could present problems for selling their content to the other 40 networks they partner with. STRZA shares dropped from $31 to $20 on the earnings because it suggested there would be no merger.

Update 2/24/16: LGF and MGM have taken an equity position in Asian based Fifth Journey, a company founded by former executives from LucasArts, Universal Pictures and Gameloft. The company develops next-generation Hollywood games and interactive entertainment. The partnership and equity stake will allow LGF and MGM to break into the highly lucrative Asian gaming market with an eventual translation into Asian movies.

Now that the smoke has cleared LGF shares are rising again. They closed just under $21 on Wednesday. They are heavily oversold and heavily shorted. The combination in a positive market could continue to push the shares higher.

The lumpy earnings will be forgotten and the stock will recover. It was trading at $41 back in November before the merger news appeared. If that is no longer an option we could see a swift rebound.

I am putting an entry trigger at $21.25, just over the $21.09 high for today. We will only enter the position on a continued move higher.

Position 2/24/16 with a LGF trade at $21.25

Long LGF shares @ $21.25, see portfolio graphic for stop loss.

Optional

Long June $23 calls @ $1.50, see portfolio graphic for stop loss.



SGI - Silicon Graphics Intl - Company Profile

Comments:

The Morgan Stanley Technology conference definitely provided a delayed boost with a 4.6% gain today. After the bell Broadcom/Avago (AVGO) rallied $13 on strong earnings and this could help SGI shares again on Friday.

Original Trade Description: February 19th

Silicon Graphics is a leader in high performance supercomputing. They build server components that handle compute intensive, fast algorithm workloads, such as Computer Assisted Engineering (CAE), genome assembly and scientific simulations. For instance, the SGI UV-3000 scales from 4 to 256 CPU sockets, utilizing multiple CPU cores per socket and up to 64 terabytes of shared memory. UV-3000 Description That description may be jibberish to readers without a tech background. I started working in computers since 1967 and I can assure you this is thousands of times more powerful than the computers NASA used to send men to the moon and 1,000 times more powerful than your desktop computer today.

SGI surged last week after Hewlett Packard Enterprise (HPE) said they were going to utilize the SGI platform in their new HPE Integrity MC990 X Server. This is a large business server that supports heavy workloads. This strategic partnership with SGI will greatly extend the reach of SGI technology. It is also a confirmation of the stability and high performance of the SGI platform and could lead to additional acceptance by other manufacturers.

In late January, SGI reported adjusted earnings of 14 cents compared to estimates for 5 cents. Revenue of $152 million beat estimates for $145 million. However, shares plunged from $7.80 to $5.20 the next day after the company filed a shelf registration for $75 million in new shares. The company market cap is only $200 million.

Shares remained volatile around $5 until the 12th and the full impact of the Hewlett Packard partnership was understood. They closed at $5.85 on Friday and a four-week high.

I believe the worst is over and the shelf registration forgotten in light of the partnership news.

I am recommending we buy SGI shares with a trade at $6.05 and target $7.35 for an exit. That would be a 21% gain. I am not recommending an option on this position but they do exist. The June $6 call is 95 cents and the $7 call is 60 cents. If you buy the option, I would plan on holding it longer than the stock position and hope that shares move over resistance at $7.40.

Earnings are April 27th.

Position 2/26/16 with SGI trade at $6.05

Long SGI shares @ $6.05, see portfolio graphic for stop loss.



SKX - Skechers - Company Profile

Comments:

Inch by inch. Another minor gain but it is still a gain. Eventually the sellers will run out os stock. We need one more big gain to break free.

Original Trade Description: January 21st.

Skechers designs, develops, markets and distributes footwear for men, women and children, as well as performance footwear for men and women under the Skechers GO brand. They currently operate more than 1,340 retail stores.

On Wednesday, the company was named the Brand of the Year for the second consecutive year by the Footwear Industry Awards. They were also named Ladies Brand of the Year.

In the 25,000 runner LA Marathon on February 14th, performance athlete "Meb" finished second in the event wearing the custom Skechers GOmeb Speed 3 shoe. Meb secured his place in the 2016 Olympics with the second place finish. The first place finisher, Weldon Kirui, was also wearing the Skechers GOmeb Speed 3 shoes.

They reported Q4 earnings of 20 cents that matched estimates. Revenue rose +27% to $722.7 million and easily beat estimates for $648 million. The CEO said they saw high single digit sales gains in the domestic business and a 41% increase in the international business. The goal is to grow sales 50% over the next couple of years.

The positive earnings and continued positive headlines lifted shares from the $26 level two weeks ago to $33 today. The $33.25 level is strong resistance. If SKX can close above $33.50 they should be off to the races, pardon the pun.

The next material resistance is near $46.

Position 3/1/16 with a SKX trade at $33.55

Long SKX shares @ $33.55, see portfolio graphic for stop loss.

Optional

Long April $35 call @ $1.10, see portfolio graphic for stop loss.



USO - US Oil Fund ETF - ETF Description

Comments:

WTI was basically flat for the day so that translated into no movement in the USO. The NYMEX reported that long positions in crude futures are at record highs. Every day that passes brings us closer to April and the end of the crude oil inventory build cycle.

This is a long term position so be prepared to see lots of volatility before the final long-term rally begins.

Original Trade Description: January 27th

The USO ETF attempts to reflect the performance of West Texas Intermediate crude oil. The ETF invests in futures contracts for oil, diesel, heating oil, gasoline, natural gas and other fuels traded on the Nymex in an effort to track WTI and avoid futures roll over bleed.

Typically, a futures oriented ETF buys forward contracts. As those contracts expire, the funds are rolled over into the next series of futures contracts at higher prices. This causes a disconnect between the actual price of the underlying commodity.

The USO attempts to reduce that as much as possible by spreading the terms and types of futures contracts it holds.

If you are still reading this you are probably wondering why I am recommending a somewhat perishable ETF on oil when we all expect oil prices to go lower. Good question!

Yes, oil prices "should" go lower as inventories build over the next two months. However, the entire world of professional investors understands this but prices have spiked twice in the last week on rumors of a Russian - OPEC agreement to cut production. If such an agreement was actually reached, we could see prices back over $50 very quickly.

I am proposing we try to buy the USO on the next dip on the chance that an agreement will eventually be reached. Last week it traded down to $7.92. When oil was $38 in December the USO was $11. If we can buy it in the $8.50 range we could see a 30% gain on any deal announcement and even more once oil prices reacted to the change in production dynamics.

Obviously, we cannot predict that a deal will happen. Saudi Arabia and Russia are enemies. However, they both have the same problem and that is they are hemorrhaging cash. In July 2014 when oil prices were $105, Saudi Arabia was taking in about $1.06 billion a day in revenue. Today at $30, they are receiving $303 million. That is a loss of $757 million a day, every day, and the kingdom is suffering from it. Russia is losing about $650 million a day. They both have millions of reasons to put their differences aside and reach an agreement.

While we cannot guarantee this will happen the headline chatter is growing daily. They may not be ready to call a truce just yet but together they are losing more than $1.4 billion a day. That is a huge incentive to do something. The next regular OPEC production meeting is early June. I am recommending we buy the USO on the next dip and hold it until July. I cannot imagine OPEC continuing the madness past the June meeting and they are likely to hold an emergency meeting earlier if crude drops back into the $20s again.

Typically, prices rise when inventories begin to decline in late April as refiners ramp up production for the summer driving season. Even if Russia and OPEC do not reach an agreement, we should see a rise in prices starting in May or earlier.

I am not going to try to buy the bottom because we may not see it again. I am recommending we buy the USO at $8.50 and hold it with no stop loss because it could go lower. I believe we will be rewarded over the next few months and with the right set of circumstances, we could be very well rewarded.

2/1/16: Position entered with a USO trade at $9.00:

Long USO shares @ $9.00, no stop loss.

Optional:

Long USO July $10.00 calls @ $.85. No stop loss.




BEARISH Play Updates


BG - Bunge Limited - Company Profile

Comments:

We were stopped out of the BG put position at the open when the stock traded at $51.85 for a $1.10 loss. The company confirmed they had resold the problem wheat to Spain. That and the unexpected dividend announcement on Wednesday killed the short position.

Original Trade Description: February 18th

Bunge is an agricultural business and food company. They sell food, commodities and fertilizer on a global basis to more than 40 countries. Last week they reported earnings on February 11th and they were not good. Earnings came in at $1.49 compared to estimates for $1.56. Revenue of $11.1 billion missed estimates for $11.6 billion and that was well below the year ago quarter at $13.2 billion.

The company guided lower saying the strong dollar was weighing on revenues and declining economic conditions in countries like Brazil are limiting the available funds to import food. Pricing power is falling as commodity prices continue to decline worldwide.

Adding to Bunge's problems was a cargo of French wheat that was rejected by Egypt because of what they claimed was excessive levels of the ergot fungus. The generally accepted level for fungus is 0.05% and apparently, Egypt decided the content was higher than the standard. Since it is impossible to halt the naturally occurring fungus entirely, it exists in every load. Egypt made the unusual statement that they would have "zero-tolerance" for fungus in the future. If Egypt can get away with that qualification then other countries could try to change their rules as well. Bunge is suing Egypt and the cargo of wheat is still parked off the Egyptian port of Damietta. Egypt subsidizes bread for its population of 88 million.

Reportedly Bunge is trying to resell the wheat but it may be difficult since the rejection has tainted the cargo. The decision by Egypt for zero-tolerance has pressured the prices for wheat to $179 per ton and a five-year low. This hurts future sales by Bunge to any other country.

To recap, Bunge missed on earnings and revenue, guided lower for 2016 and has seen future commodity sales threatened by the Egyptian move and the falling prices of their various commodities.

Shares fell sharply after earnings from $58 to $46. An instant rebound appeared to $53 but that is now fading as the bad news sinks in and the outlook for Bunge's earnings dims even further. I believe that we could see the stock price return to those lows from last week, if not lower. Shares had already been declining since last June.

With a BG trade at $49.75

Closed: Long April $47.50 put @ $1.80, exit .70, -$1.10 loss.

Previous position:
BG shares @ $49.75, exit $51.75, -1.50 loss.



VXX - VIX Futures ETF ETF - ETF Description

Comments:

Another minor drop thanks to the afternoon rebound in the S&P. If we can just get 2-3 more days of market gains, even small gains, as long as there are no triple digit losses in the middle, we could see a return to $20.

The exit target is 19.50 to close the position.

Original Trade Description: August 24, 2015

The U.S. stock market's sell-off has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on a long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Second Position 9/2/15:

Short VXX @ $29.01, no stop loss.

Trade History
11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82





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