Option Investor

Daily Newsletter, Tuesday, 3/8/2016

Table of Contents

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

Market Wrap

China Triggers Profit Taking

by Jim Brown

Click here to email Jim Brown

Terrible economic numbers out of China knocked the Dow for a -152 point loss at the open but the dip buyers were waiting. Unfortunately, for the Russell 2000 the short squeeze in commodities may be over.

Market Statistics

The Dow recovered intraday much like the Asian markets recovered from a huge drop at the open to end only slightly lower. Overnight China reported a 25.4% decline in exports in February, while imports declined -13.8%. Analysts had expected a 12.5% drop in exports compared to an 11.2% decline in January.

According to Reuters, the decline in exports was the steepest since May 2009. China's trade surplus fell to $32.50 billion in February compared to analyst expectations for $50.1 billion.

Analysts blamed the weak numbers on the timing of the Lunar New Year. In 2015, the holiday fell later and that pushed all the pre-holiday orders into February, which saw an unusually large spike in exports of 48.9%. This caused exports to decline -14.6% in March 2015. That means the March 2016 numbers will have a more favorable comparison and should show gains.

Last week China's leaders predicted GDP growth in 2016 of 6.5% to 7.0% and said they were willing to spend more on the economy to boost consumption. The PBOC also cut the reserve rate for the 5th time in a year to boost lending.

The U.S. markets opened lower and the Russell 2000 failed to rebound like the Dow. The Russell had been the strongest index over the last two weeks because of the short covering in oil, commodities, financials and the biotech sector. That all came to an abrupt halt today when oil prices gave back -4.4% or -$1.66 to close at the low for the day.

After the close the API inventory report showed a gain of 4.4 million barrels for the week ended on Friday. Crude prices after the report were flat. Traders are waiting to see if the EIA inventory numbers on Wednesday confirm the rise.

Commodity prices follow oil prices and the entire commodity complex declined today, with the exception of corn and lumber. That meant energy stocks and mining stocks gave back some of the 50% gains over the last week in the most heavily shorted companies.

The biotech sector lost more than 3.75% meaning all the biotech stocks in the Russell also gave back their gains.

Financials gave back -1.6% because the weakness in China should push further Fed rate hikes farther out into the future. Yields on treasuries declined with the yield on the ten-year falling to 1.83% or a -3.7% drop for today. Declines in financial stocks also weighed on the Russell.

Unfortunately, the Russell 2000 is the sentiment index for the broader market. The sharp decline in the Russell helped keep the other indexes in negative territory. The afternoon decline in the Russell blunted the Dow rebound to drag it lower at the close.

There was only one economic report of interest for today. The NFIB Small Business Survey for February declined from 93.9 to 92.9. The headline decline was the least troubling part of the report. In the internals, the employment component declined from 11 to 10 and earnings trends fell from -18 to -21 suggesting competition is heating up or sales are declining. Respondents planning to raise prices fell from 16 to 14 and those planning to raise compensation fell from 15 to 12. Those expecting the economy to improve remained flat at -21 and those expecting sales to rise fell from 3 to zero.

This is a report that reflects the optimism in the small business community and conditions are worsening.

Moody's Chart

There is only one material economic report on the calendar for Wednesday and that is the Wholesale Trade. The big news for the week will come from the ECB on Thursday morning. Expectations are high so there is a strong potential for market disappointment.

Goldman Sachs was active in the market today with multiple calls causing trouble. Goldman said the recent commodity spike was not sustainable. They said the short squeeze in oil was counterproductive and unsustainable. Inventories are still rising and the headline triggered rebound would run its course with oil prices sinking back again. I completely agree and I have said that multiple times in these pages.

Kuwait, an OPEC country that produces 3 million barrels per day said they would only freeze production if all the other major producers cooperate, including Iran. They are not the first to make that claim. That is a problem because Iran has said multiple times they are not going to freeze production and will be adding 700,000 bpd over the rest of 2016.

There was a headline on Monday that Latin American producers were planning to meet on Friday to discuss production levels and that helped boost oil prices on Monday. Since Mexico is the biggest Latin America producer and their production is declining already and their budget is in serious trouble as a result of the oil crash, it is not likely Mexico will agree to anything that costs them more money. However, if your production is already falling then agreeing to a freeze in hopes of lifting prices with a new headline would be a temporary strategy.

Goldman said rising oil prices only delay the inevitable because producers will cling to the lifeline of being able to hedge some production at a higher number but in the short term, the prices will decline. Any material rally would only entice producers to put more rigs back to work to increase production in a market that already has 2 mbpd of excess supply. Nothing good would come of that.

Everyone is producing every barrel they can. North Sea production is now above 2.0 mbpd for the 8th consecutive month and April will likely be a four-year high.

The IEA said demand growth in 2016 is likely to increase by only 80,000 bpd, down from their prior forecast of 110,000. China said vehicle sales in February declined -3.7% and that suggests China's oil demand growth will also slow. On the positive side February imports did rise +19.1% to 8 mbpd as they fill their strategic reserves. However, that 19.1% growth number compares against a holiday impacted February in 2015.

The S&P Oil Exploration ETF declined -8% as sellers raced to take profits on their big gains.

Lumber Liquidators (LL) dropped -15% after hedge fund manager Whitney Tilson said he had renewed his short on the company. Tilson profited from a major short position in early 2015 after he revealed the products LL was importing from China had high levels of cancer causing chemicals. He entered the short around $65 and exited the short in late 2015 at $14. He said today he just reentered the short at $12. He now believes there is a 50:50 chance the company will go bankrupt.

The reason he reentered the short at such a low level was based on a new report by the CDC saying people with these laminate floors from China were three times more likely to get cancer than previously estimated. Tilson said he had information from his "most reliable source" that LL's sales had fallen off a cliff in recent weeks. Tilson said knowing products have formaldehyde is one problem but knowing customers are three times more likely to develop cancer is a business killer. Over one million people have laminate floors from LL.

Dicks Sporting Goods (DKS) reported earnings of $1.13 that missed estimates by 2 cents. Revenue of $2.24 billion also missed estimates for $2.28 billion. Same store sales declined -2.5%. The company guided to full year earnings of $2.85-$3.00 and analysts were expecting $3.23. Same store sales are expected to rise +2%. For Q1 the company expects earnings of 48-50 cents with analysts expecting 54 cents. Dicks said they were hurt by the warm winter as sales of winter clothing slowed. Shares dropped sharply at the open but rebounded to close fractionally positive.

Dicks said they were going to pursue the customers of Sports Authority, which filed bankruptcy last week. The chain said it was planning to close or sell about a third of its 463 stores. Sports Authority was the largest sporting goods retailer several years ago. Dicks said about 100 of its locations overlap with 140 Sports Authority stores. The liquidation sales from those stores will hurt sales at DKS until the other stores close.

Navistar International (NAV) reported a loss of 40 cents compared to expectations for a loss of 77 cents. Revenue of $1.77 billion fell well short of estimates for $2.05 billion. They blamed the weak performance on the weak economy in Brazil and the ending of the Blue Diamond Truck joint venture. That was responsible for 25% of the revenue decline. Navistar guided for full year revenue of $9.0 to $9.5 billion with EBITDA of $600-$650 million. The company reiterated its guidance to be profitable and cash-flow positive by the end of 2016. The company did say demand for commercial trucks was declining.

Chipotle (CMG) cannot catch a break. Four employees at a store in Billerica Mass became ill on the job and the store closed voluntarily to undergo a full sanitation. The company said they do not know what caused the illness but after recent problems, they were taking no chances. Shares declined -$24 in afterhours.

Blue Buffalo (BUFF) reported earnings of 16 cents that beat estimates for 14 cents. Revenue of $265 million beat estimates for $259.8 million. The company guided for the full year for earnings of 72-74 cents on revenue of $1.12-$1.14 billion. Analysts were expecting 70 cents and $1.13 billion. Shares rallied 9% to $21 in afterhours.

Citigroup initiated coverage of Boston Beer (SAM) with a sell rating and price target of $186. The analyst said craft beers are taking market share from the big brewers. This was an echo of what the chairman, Jim Koch, said when they reported earnings a couple weeks ago. He said Boston Beer was losing market share as craft brewers enter the market and existing brewers expand their territories.

CSLA downgraded SAM from outperform to underperform, the same as a sell rating, with a price target of $200. The analyst pointed to "ongoing weakness in its flagship brews." Shares of SAM fell -12% to $175.

JetBlue (JBLU) warned that revenue per available seat mile (RASM) declined by 10% in February and they believe RASM will decline by 7% to 8% for all of Q1. The company said "load factors remain solid but yields are lower." That means the discounting required to fill those seats is taking a toll on profits. JetBlue also said their capacity rose 19.6% over year ago levels.

Southwest Airlines (LUV) said its load factor in February declined from 79.9% to 79.0%. Southwest said capacity rose 14.7% over the same period.

The Dept of Transportation said the average airfare declined -6.2% to $372 and the lowest since 2010. So far in 2016 there have been six attempts to raise fares with the most recent on March 2nd instigated by American on 460,000 routes. On March 3rd, Delta and United had matched the increase but on March 4th, United began rolling them back and by 4:PM all three airlines had cancelled the price hikes.

Autonation (AN) was cut from neutral to sell by Goldman Sachs. The broker said they saw pricing pressure on used vehicles plus limited upside from additional spending on marketing. Shares fell -6% on the downgrade.

Citigroup (C) warned that equity and fixed income revenue would be down -15% in Q1 and that was the good news. They also warned that investment-banking revenue would decline -25%. The CFO announced this at the RBC Capital Markets Financial Conference in New York. JP Morgan warned about similar weakness in trading income a couple weeks ago. It is not going to be a good quarter for the banking sector. Citi shares fell -4%.


We knew there would be a day of reckoning, we just did not know when. The S&P failed at the 1,999 resistance level for two consecutive days and S&P futures were already weak last night when the news broke about Chinese exports falling 25.4% in February. Futures immediately tumbled into a double-digit decline but improved slightly after the Asian markets recovered from an ugly open.

The Shanghai Composite is down another 2% tonight but the S&P futures are mildly positive. Let's hope that carries over through Wednesday's open.

The S&P declined -22 points to close at 1,979. The closest technical support is the 50% retracement level at 1,963.

Jeffery Gundlach, of DoubleLine Capital, was quoted after the bell as saying that the S&P has 2% risk to the upside and 20% risk to the downside. He said it would be "really dicey" for the Fed to hike rates next week. He also said it would be difficult for oil prices to move over $38. He believes stocks will likely fall but the U.S. will not drift into recession.

Gundlach is very well respected and when he speaks, investors listen. However, I do not see a 20% risk for the S&P from here. I believe we have risk to 1,950 but the double bottom in Jan/Feb at 1,810 is the bottom. That means investors should be looking for a dip to buy.

The dip we got today was meaningful and the S&P closed on the lows. On the way up to 1,999 the S&P created some support in the 1969-1979 range and that is exactly where we stopped at the close at 1,979. While that does not mean we cannot move lower, I believe it would take another catalyst to push us significantly lower. Like China on Monday night, it would have to be something unexpected.

However, the ECB rate decision on Thursday morning is a risk. Mario Draghi has implied additional stimulus too many times to take a pass here. It would be market negative.

I would look to buy a dip on Wednesday if one appears, just in case the ECB does what the market expects and we move higher. If the ECB disappoints I would be looking for a dip to 1,950 to buy. Under 1,950 the next support is 1,927.

Obviously, I would love to see the S&P positive from the open tomorrow and move back up to resistance at 1,999.

The Dow fell -109 points at the close after being down -152 at the open and rebounding to only -8 at 2:PM. The Dow was handicapped by the financials and the energy stocks with oil in crash mode. The index is still stuck to resistance at 17,017 despite the slightly lower close. That level has an attraction for the Dow and I would expect it to gravitate back to that level.

This is the 61% Fib retracement of the January decline and is such an easy target for investors that it is likely to be in play again this week. The 100-day average at 17,044 is also a confusion factor. The Dow is rarely observant of moving averages but it has been for the last six months. Worst-case support is back at 16,179.

The Nasdaq spent six days flirting with resistance at 4,691 before finally crashing away today. The -59 point drop was material but the opposite of yesterday. The FANG stocks all sold off on Monday and they all rallied intraday on Tuesday although Amazon fell $11 right at the close to lose -$2.

The biotech sector was the anchor for the Nasdaq with the $BTK losing -4% for the day. This tanked the Nasdaq and the Russell 2000. The biotechs cannot seem to hold a gain. The resistance at 3,000 on the $BTK was too much to conquer.

Support on the Nasdaq should be around 4,576 or 72 points below where we closed. Resistance remains that 4,691 level where we failed today.

The Russell 2000 was being supported by the short squeeze in energy, financials, commodities and biotechs. All of those sectors were crashing today and that knocked -26 points off the Russell or -2.4%. The Russell has support at the 1,050 level followed by 1,035.

Buy a dip to those support levels I outlined above but I would be cautious about buying a positive open. I find it hard to believe the three weeks of gains were all resolved with only one day of profit taking. I will not complain if the market goes higher but I understand the overbought conditions may not have been resolved.

Beware the ECB announcement on Thursday morning. That could provide a boost or a bust and therefore a potentially pivotal event.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Three Strikes, Your Out

by Jim Brown

Click here to email Jim Brown
Editor's Note

The last three Tuesdays have each experienced significant declines and each saw the dips bought. There is definitely no guarantee that will happen this week. Betting on a three-peat could be a risky proposition.

Today the S&P futures are fractionally positive but the Chinese markets are worsening as the night progresses.

The S&P failed at resistance on Friday and Monday with a lower high on Monday. Today's decline was sharp but I am not sure it was sharp enough to fully compensate for the three weeks of gains.

I did recommend in my commentary tonight to buy a dip to known support levels but I cautioned about buying a positive market at the open. I would not be surprised to see a positive open that turns negative.

We should only launch new plays when we have a reasonable chance of success. For that reason I am not recommending any new plays tonight.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Fell Off the Cliff

by Jim Brown

Click here to email Jim Brown

Editors Note:

Yesterday we were walking on the edge of a resistance cliff and today the market fell off that cliff. The S&P finally failed at that 1,999 resistance thanks to the terrible economics in China. The Dow dropped -152 at the lows. I do not believe the decline would have been so drastic in the Russell 2000 and Nasdaq if it were not for China.

We saw the Russell 2000 decline -26 points or -2.4% and close at the low for the day. The Russell had been supported by the short covering in the energy, financials, commodity and biotech sectors. All of those were down hard today with energy down the worst as the short covering faded.

We were stopped out of three positions and we are close on a couple of others. If the market does not rebound at the open on Wednesday we will be holding a lot fewer positions.

The three week of gains allowed us to accumulate a lot of long positions. It only takes a couple days of market weakness to give them all back.

Current Portfolio

Current Position Changes

HDP - Hortonworks

The long position was stopped out when HDP traded at $10.85.

GME - Gamestop

The long position was stopped out when GME traded at $30.25.

SKX - Skechers

The long position was stopped out when SKX traded at $32.35.

CMRX - Chimerix

The long position remains unopened until CMRX trades at $5.75.

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

ACAT - Arctic Cat - Company Profile


ACAT traded down to $17 at the open after Polaris announced the acquisition of Taylor-Dunn, a business vehicle manufacturer. However, the $17 level was prior resistance and now appears to be support and shares rebounded sharply. Selling reappeared later in the day in a weak market but ACAT is still holding its gains from the last four weeks.

Target $21.45 for an exit.

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.


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

AMLP - Alerian MLP ETF - ETF Profile


AMLP declined -6.7% after a court verdict appeared to allow bankrupt Sabine Energy to renegotiate contracts with midstream transporters of natural gas. U.S. Bankruptcy judge Shelly Chapman in Manhattan said Sabine should be able to reject the current transmission contracts with HPIP Gonzales Holdings and Nordheim Eagle Ford Gathering LLC, an affiliate of Cheniere Energy. AMLP was not involved in the case.

Despite the judges comments she also said she did not want to decide an underlying legal dispute in a binding way. The problem is that companies contract with the owner of gathering systems for a field that can consist of tens of thousands of acres with production coming from a dozen different producers. Those producers contract for 10 years or more with the gathering system to ship their gas/oil through the gathering pipeline to a larger pipeline, rail car loading facility, refinery, etc.

For Sabine to reject the contract to ship its gas through the gathering system makes no sense. They have no other way to get it to market. Sabine admitted they were having to flare all their gas because HPIP was not accepting it for nonpayment of the agreed fees. Sabine said they were not paying because HPIP never completed construction of the pipelines. HPIP said Sabine never paid them the agreed construction fee.

The pipeline operators claim that once they contract with a group of producers to construct a system of pipelines to gather production that those contract rights and obligations pass from owner to owner if the leases are sold. Sabine wants to void its portion of the gathering agreement.

All the midstream MLPs were down on the judges comments because it has always been understood that once a pipeline is in place in a field that operator has the right to collect and transport the gas/oil from that field regardless of who owns it.

The judges comments are not law. She called the attorneys to her chamber after the court event and told them to "come to a commercial resolution of your issues" because she did not want to be put in a position of having to rule on the legality of the broader issue that could impact the entire pipeline sector in the USA.

While this does not have any immediate impact on AMLP and an adverse ruling may not impact them for years into the future, the stock was down because the sector recoiled in horror at the possibilities. I suspect calmer heads will prevail in the days to come.

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.


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

CDW - CDW Corp - Company Profile


Only a minor decline with shares stuck between the 150-200 day averages while we wait for the market to recover.

Previous: The interesting factoid is that the stock came to rest almost exactly on the 150-day average at $40.90 for the third consecutive day. There must be a high frequency trading program that is focused on CDW because the almost perfect respect for each of the moving averages is too precise for a day trader to manipulate the stock. Volume is 800,000 a day so it has to be a computer program. I looked at the time & sales and the vast majority of the trades, probably 85% or more are even 100 share lots. There are dozens of sequential trades with only a penny difference and sometimes less than a penny. Then dozens of trades a penny higher. That repeated all day long. That suggests a break over the 150-day average will run to the 100-day at $41.32.

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.


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

CMRX - Chimerix - Company Profile


Chimerix declined only 9 cents in a weak market and was positive for part of the day.

This position remains unopened until CMRX trades at $5.75.

Original Trade Description: March 7th

Chimerix is a pharmaceutical company that discovers, develops and commercializes oral antivirals to address unmet needs in the USA. Their drug farthest along in testing was brincidofovir otherwise known as CMX001, which was planned for adult transplant patients to treat adenovirus infection. The drug did no better than a placebo in state 3 trials and they were cancelled.

However, there are other uses for that drug and they have multiple other drugs under development. This recommendation is not based on some super drug in their pipeline.

This is a technical trade based on the probability of either a sharp rebound or an acquisition.

As of today's close CMRX has a market value of about $250 million. At the end of Q4 they had $221 million in cash and $159 million in investments. The company has an estimated shareholder equity of $8.50 per share with no active drugs. With multiple drugs in the pipeline and continued research underway they represent a cheap acquisition for anyone who believes their drugs have promise. Because of their cash and investments that means any active acquisition would have to command a premium over that intrinsic $8.50 value. They do have a poison pill in place to prevent a hostile takeover but they would be open to a friendly acquisition.

They reported earnings on Feb 29th that were a loss of 82 cents compared to estimates for 68 cents. The company also said they were cutting 20% of the workforce (25 workers) in order to be "prudent with their capital."

Earnings are May 9th.

Shares traded to a low of $4.41 post earnings on the 29th and have risen steadily over the last five days with a 5% gain on Monday alone. I am recommending we buy the shares with a trade at $5.75 with our first exit target around $7.60 if no news appears. That would be a 32% gain if we exited there.

I am not recommending any options but the May $7.50 call is 65 cents.

With a CMRX trade at $5.75 (just over Monday's high)

Buy CMRX shares, initial stop loss $4.75.

CUDA - Barracuda Networks - Company Profile


CUDA only declined 67 cents after gaining almost $5 in the prior 4 weeks. Considering the Nasdaq sold off this minor decline was very positive.

Original Trade Description: March 3rd

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.

Position 3/4/16 after a CUDA trade at $14.25

Long CUDA shares @ $14.25, see portfolio graphic for stop loss.

DWRE - Demandware - Company Profile


Up +1.60 on Monday down -1.82 today. No big deal and it takes the pressure off the need for profit taking. There was no news for DWRE.

Target $43.25 for an exit.

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.


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

GME - Gamestop Corp - Company Profile


GME continued to decline in a weak market and we were stopped out at $30.25 for an 85 cent loss on the stock and 29 cent loss on the option.

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

Stopped 3/8/16: Long GME shares @ $31.10, exit $30.25, -.85 loss


Stopped 3/8/16: Long April $32 call @ $1.40, exit $1.11, -.29 loss.

HDP - Hortonworks Inc - Company Profile


HDP normally traded about 600,000 shares per day. By 12:30 today more than 600,000 shares had already traded and the stock sank to exactly $10.85 and our stop loss. About 30 min later somebody bought a block of 399,000 shares at $10.98 and the stock rebounded but faded back to $10.78 at the close. After the close another 26,000 shares were bought to push the price back to $12.27 in after hours.

The bad news is that we were stopped 7 cents above the low for the day and shares are back at the highs on no news. We lost 1.50 on the position.

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.

Position 3/7/16 with a HDP trade at $12.35

Stopped 3/8/16: Long HDP shares @ $12.35, exit $10.85, -1.50 loss.

LGF - Lions Gate Entertainment - Company Description


Only a minor decline in a weak market. The movie "Allegiant" begins on March 17th. I want to be out of this position before that opening. LGF is poised for a run to $26 but I recommend we exit early.

Target $25.25 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.


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

SGI - Silicon Graphics Intl - Company Profile


SGI plunged at the open but recovered much of the losses. This was profit taking in a weak market.

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


Skechers continued its decline and we were stopped out at $32.25 for a $1.20 loss on the stock and 55-cent loss on the option. Ironically Skechers was named the official shoe of the Ironman in Europe this morning.

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

Stopped 3/7/16: Long SKX shares @ $33.55, exit $32.35, -$1.20 loss


Stopped 3/7/16: Long April $35 call @ $1.10, exit .55, -.55 loss.

USO - US Oil Fund ETF - ETF Description


The short covering in WTI faded and crude lost -4.4% and that translated exactly into a 4.5% decline in the USO. We should expect continued volatility until the inventory build cycle ends in April.

Target $10.50 for an exit.

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.


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

BEARISH Play Updates

VXX - VIX Futures ETF ETF - ETF Description


Market down, VXX up. If the market rebound continues on Wednesday, the decline in the VXX should reappear. However, it may take several days for the profit taking to end.

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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