Option Investor
Newsletter

Daily Newsletter, Thursday, 3/10/2016

Table of Contents

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

Market Wrap

ECB Fires Both Barrels

by Thomas Hughes

Click here to email Thomas Hughes
The ECB exceeded expectations but may have fired their last shot in the war on sluggish economic growth.

Introduction

The market went on a wild ride today, first up, then down and then up again. Driving today's action was the ECB policy decision, Mario Draghi's comments during the press conference, news out of of OPEC and a wild swing in oil prices.

The ECB exceeded expectations with today's policy announcement but hinted more QE is not to come. The news first sent the euro crashing, then soaring, as traders weigh the effects of the new policy versus comments from Mario Draghi and expectations for the FOMC meeting next week. The news initially sent indices in both the EU and here at home shooting higher until Draghi's comments cooled the market off, and other news from the oil patch sent the oil price plummeting.

The ECB move is seen by many analysts as a last gasp in the stimulus efforts and leaves the bank little room, if any, to do more to spur growth. Today's changes include lowering the refi rate to 0%, the deposit rate to -0.4%, an increase of 20 billion euros to the monthly asset purchase plan and an extension of the QE timeline to March of 2017. Mr. Draghi effectively gave the market what it wanted while negating the effects of it at the same time; you can have your QE but don't expect any more.

Market Statistics

Asian indices ended their day mixed; the Nikkei gained the Chinese markets fell as they awaited the news from Europe. European indices were first flat, then skyrocketed by nearly 4% after the policy announcement only to fall back to break even and lower on nullified expectations of even more QE and falling oil prices. EU markets closed with losses in the range of -2%.

Futures trading on the US indices indicated a flat open for much of the morning until the ECB policy announcement, at which time they gained nearly 1.5%. This held more or less steady until the open despite news from OPEC the March meeting in Russia was likely to be 86'd. The open was positive but action was mild, the indices moved higher in the first 30 minutes but only posted gains in the range of 0.5% versus the gains seen in futures trading.

The morning high was hit shortly after 10AM at which time the bears stepped in and drove the indices lower. The mid day sell off was slow and steady, pushing the indices lower by about -1% at the low of the day. The low was hit shortly after 1PM and was followed by a rally which took the indices back to break even levels by the close of trading.

Economic Calendar

The Economy

Not much economic data today, only the jobless claims, and they were good. Surprisingly the news was largely overlooked by the media in the face of the ECB decision and volatility in the oil patch. Initial claims fell by -18,000 versus an expected drop of only -2,000 to hit 259,000. This is the lowest level in nearly 5 months and very near the long term low set last fall. The four week moving average also fell, by -2,500, to hit its lowest level in 4 months. On a not adjusted basis claims fell by -6.7% versus an expected drop of only -0.1% and are now -10.1% lower than last year at this time. The states with largest increase in claims are New York and California with gains of +17,920 and +4,346. The states with the largest decline in claims are Massachusetts and Michigan with declines of -3,413 and -1,054.


Continuing claims also fell shedding -32,000 to hit 2.225 million. The four week moving average of continuing claims fell -4,500 to hit 2.252 million. Continuing claims are at their lowest level in about 2 months but basically holding steady around the 2.250 million level, as is the moving average. Based on the initial claims data these figures are likely to fall further over the next couple of weeks. Regardless, continuing claims remain stable near the long term lows and consistent with ongoing labor market recovery.

The total number of claims for unemployment benefits rose by +60,535 to hit 2.719 million, the highest level in 4 weeks. This rise remains consistent with historical trends and below the post holiday peak set the first week of January and is -6% lower than this same time last year. Based on the historical trends and the initial and continuing claims data this figure should begin to fall in the next 3-4 weeks.


There is very little data on tap for tomorrow, only the import/export prices figures. Next week is another big week for data and could move the market on a number of levels. The big event will be the FOMC meeting at which, according to the CME's Fed Watch tool, there is 0% expectation for a rate hike. Also on tap next week are reads on CPI and PPI along with retail sales, several reads on the state of manufacturing, business inventories, housing starts and building permits. The overshadowing theme next week will be what the Fed does, what they say about the future and how the data fits into the outlook.

The Oil Index

Oil prices got hit by rumor/news once again. Early trading saw WTI move higher to trade above $38 only to have remarks concerning the March meeting to discuss output caps send prices lower. The latest news is that the meeting between Russia and OPEC at large is likely not going to happen due to Iran's lack of support for output caps. The news sent WTI heading lower, at least during the first half of the day, with intraday losses in the range of -2.5% at the low of day. Support stepped in around $37.50 and sent prices back to break even going into the close of trading. Supply and demand is still out of balance, in the favor of supply, so there is a distinct possibility oil prices could fall further.

The Oil Index fell about -1.5% in the early part of today's session but regained most of the loss by end of day. Today's candle is more of a spinning top than anything else but does help confirm support at or near the 1,050 level. The indicators are convergent with the high set on Monday so I would expect to see this high retested although near term indications are pointing lower. If broken next support is along the 1,025 level, aided by the short term moving average, and may be retested depending on which way the oil news points tomorrow morning. A break below this level could see a retest of 950. Upside will be dependent on the supply/demand outlook, and also upon which way the news is pointing.


The Gold Index

Gold prices got a boost today, not because Draghi increased QE but because of his outlook for more QE. Now that hopes for increasing QE in Europe has been quashed the FOMC and low expectations for US rate hikes are dominating the dollar, sending it lower and helping to boost gold. Spot prices initially dipped on the ECB policy statement then made a $25 turnaround on the press conference for a gain of $15 over yesterdays prices. Gold is now back above $1270 and likely to go higher provided the FOMC remains dovish on rate hike outlook into the end of the year.

The Gold Index rose along with the underlying commodity to gain a little more than 4.5%. The index is approaching the $20.50 resistance level and highs set over the past two weeks but may be halted there. The indicators are a bit mixed, they are pointing lower, but in light of the strong uptrend could just as easily be setting up another entry for bullish positions as indicating reversal. I am still bullish on gold with the caveat that data and the FOMC could pressure it lower. In terms of earnings the miners are expected to see robust increases over the next quarter or so due to higher realized prices and that alone could help support the index. Resistance is near $20.50, first target for support is now near $19 with next target near $18.


In The News, Story Stocks and Earnings

The Dollar Index fell today even though the ECB exceeded market expectations. The driving factor turned out not to be the policy changes or the extent of policy changes but the fact that Mario Draghi has taken further QE off the table. This move firmed the euro which, along with dovish FOMC expectations, weakened the dollar. The index moved up about 1.25% on the policy statement, and then reversed the gains for a loss near -1.25% on the outlook. The DXY set a new one month closing low in today's session with downward pointing indicators and looks set to retest support near $95.50.


Dollar General released earnings before the bell. The discount retailer announced record quarterly and full year results beating top and bottom line estimates. The company guided in-line for the current year and also raised the dividend. The dividend was raised by 14% to $1.00 per share and is part of the company's plan to increase shareholder returns over the next year. In addition to the new dividend execs also announced a roughly $1 billion stock buy back plan for 2016. Results were driven by strength in candy, snacks, perishables and tobacco products. Shares of the stock gapped up at the open and closed with a gain near 9%, setting a new all time high on 3X average daily volume.


Bojangles, maker of delicious spicy fried chicken and biscuits, reported after the bell. The fast food chain reported better than expected top and bottom line results despite a slight miss on comp store sales. Guidance for the coming year is in line with estimates but may be low considering the addition of 16 new stores opened during the past quarter. Shares of the stock traded flat during the day and then popped more than 2.5% in after hours trading.


The Indices

Today's action was wild to say the least. The indices climbed, fell and climbed again driven by ECB policy, Draghi's comments and more rumor from the oil patch. By days end the market was basically flat on the day, led by a small gain in the broad market. The S&P 500 closed with a gain of 0.02% after making a near 2% swing from the high of the day to the low. Today's candle is a doji of significant size that appears to be confirming support at the 1980 level. The indicators remain bullish but continue to weaken so caution is due, especially with next week's big data push and FOMC meeting.


The Dow Jones Industrial Average closed near to flat with a loss of only -0.03%. The blue chips also created a significant looking doji candle but where the S&P action appears to confirm support this one appears to confirm resistance. Today's action tested the underside of my up trend line near the 17,100 level. The indicators remain bullish but are showing nearer term weakness so there could be additional downside, testing of support or consolidation. Support target is near 16,750.


The Dow Jones Transportation Average closed with a loss of -0.14% and created a doji like spinning top candle. Today's action confirms near term support along the 7,500 level and the bottom of a possible consolidation range I mentioned on Monday. This range could hold for the next few trading days at least while we wait on data and the Fed meeting. Upside limit is near the 7,700 level, downside limit appears to be at 7,500. The indicators remain bullish as with the SPX and DJI but also shows nearer term weakness, consistent with Monday's touch to resistance and today's move down to support.


The NASDAQ Composite made the largest decline today, about -0.26%, and created the most bearish looking candle although it too shows a significant amount of lower shadow, indicative of support. Today's action tested support at the 4,600 level and confirmed, closing above 4,650. This index is within a consolidation range, between 4,600 and 4,750, and looks likely to remains so for the next few trading days. The indicators remain bullish but are showing the same near term weakness as the others.


Today's action was wild but all in all I would say is at least promising, if not positive. Neither Draghi's surprising comments or the swing in oil prices was able to derail the market. To me this shows some resilience in the market, in the very least it shows indecision ahead of the Fed meeting and that traders are focused on the FOMC for cues on what to expect moving forward.

For now it appears as if the bounce from February lows remains intact, whether or not that remains true will come down to what happens next week. So long as the data remains in the sweet spot, not too hot and not too cold, the FOMC is likely to keep normalization on hold. This may be enough to keep the market moving higher but that is yet to be seen. Any indication another rate hike will be soon could spook the market.

Oil prices remain a major driver of day to day action in the market as well. If not for the ECB meeting today's news from the oil patch could easily have been the talk of the day and resulted in a much larger swing in oil prices, and the broader market.

I remain bullish for the longer term, into the end of the year and next, but cautious in the near term. The bounce may continue higher but I think the next few days are better for watching the market, and waiting for signals, than entering new positions.

In my opinion it will come down to earnings. Expectations for the coming season remain weak and in decline; that fact alone could easily drive the market back to test longer term, stronger, support levels before any significant move higher is seen. Once we finally exit the earnings recession and expectations begin to brighten I think we will see another extended period of rising stock prices.

Until then, remember the trend!

Thomas Hughes


New Plays

Going Private?

by Jim Brown

Click here to email Jim Brown
Editor's Note

DRII is reportedly considering going private with a leveraged buyout but at the same time, they are open to other strategic alternatives. Shares are fighting off market weakness and could be about to break out over resistance at $24.


NEW BULLISH Plays


DRII - Diamond Resorts Intl - Company Profile

Diamond Resorts is rumored to be planning to take itself private in a leveraged buyout as the result of a previously announced strategic review. Analysts are expecting a deal price in the $32-$35 range. The company has a network of 375 vacation destinations in 35 countries. The firm hired Centerview Partners to evaluate all strategic alternatives after two major shareholders requested the board take action including an outright sale. Marriott Vacations Worldwide and Wyndham Worldwide could be suitors. More than 23% of DRII shares are sold short.

The company recently announced its 10th straight quarter of record financial performance and issued guidance for 2016 calling for another record year. Despite the record performance the share price had declined -25% in 2016. Apparently, this caused two large shareholders to turn up the heat and tell the company to get something done to increase the share price.

Starwood Hotels recently sold its timeshare business to Interval Leisure Group for $1.5 billion or 12 times trailing Ebitda. Diamond Resorts is only trading at 9.5 times with a forward multiple of 6.2 times or significantly undervalued to the Starwood sale. This suggests someone could pay $30 for Diamond and still be accretive to earnings in 2016 without accounting for synergies.

The Diamond CEO is also the founder and he owns 25% of the company. That suggests a LBO might be the most likely option so he can keep his stake.

Earnings May 25th.

With a DRII trade at $24.25

BUY DRII shares, initial stop loss $20.50.

No option recommended because of wide spreads and high prices. However, you could buy the shares and sell a covered call with the May $25 call @ $2.90.




NEW BEARISH Plays


No New Bearish Plays





In Play Updates and Reviews

Monster Volatility

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow only changed direction twice today compared to the 9 changes on Wednesday. However, the 309-point intraday swing was extreme. I warned the ECB decision would be a pivotal boom or bust event and it turned out to be both. The initial decision was a boom for the markets but the press conference was a bust when Mario Draghi said he did not expect any further rate cuts. That sent the market into a panic with the euro rising +2% intraday and the dollar crashing from its opening high.

The Dow surged +130 at the open on the initial news then crashed to a low of -179 after the Draghi comments. It was not a day for those that get motion sickness easily.

Fortunately we only lost one position to the big market swing and that was Barracuda Networks. Shares were already weak on Wednesday and I raised the stop loss last night just in case and we were hit for a 75-cent loss.




Current Portfolio





Current Position Changes


CMRX - Chimerix

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


BBOX - Black Box

The long position remains unopened until BBOX trades at $14.25.


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:

Big spike at the open to nearly $20 before fading with the market to close with a 51 cent gain at $18.43.

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.

Optional

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



AMLP - Alerian MLP ETF - ETF Profile

Comments:

No news and no movement with oil trading flat.

Tuesday comments: 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.

Optional

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



BBOX - Black Box Corp - Company Profile

Comments:

The minor uptrend channel was broken by the big market drop but horizontal support at $13 remains unbroken.

The position remains unopened until BBOX trades at $14.25

Original Trade Description: March 9th.

Black Box is a leading technology solutions provider dedicated to helping customers build, manage, optimize and secure their IT infrastructure. They operate globally with more than 3,500 team members.

Black Box provides data centers, control rooms, contact centers, networking infrastructure while maintaining the highest security protocols and real time monitoring. With 70% of businesses reporting security breaches over the past 12 months it is critical to have somebody that understands the risk to manage your IT assets in all areas. The average security breach costs $3.5 million to repair and recover.

Shares rallied after they reported earnings on January 26th of 37 cents that rose +9% and beat estimates. They reported revenue of $222.5 million. They guided for the current quarter for earnings in a range of 25-30 cents and revenue of $220 million.

The company declared an 11-cent dividend payable April 14th to holders on March 31st. The company also increased the share buyback program by 1 million shares with $7 million to be purchased in March.

BBOX shares are undervalued to their peers by about 50%. The price to book multiple is .68 compared to the peer average of 2.06. They trade at a negative PE of -1.73.

This is a simple play. BBOX rallied from $8 to $13 in the days following earnings. Shares have plateaued at the $13.50 level with a slight upward trajectory. Recent intraday highs over the last two weeks have been from $13.85 to $14.11. When an eventual breakout occurs we could see a spike to $2-$3 as shorts cover and others add to their positions.

I am recommending we buy BBOX shares with a trade at $14.25 and target $16.25 for an exit.

Earnings are May 5th.

With a BBOX trade at $14.25

Buy BBOX shares, initial stop loss $12.85

No options because of wide spreads.



CDW - CDW Corp - Company Profile

Comments:

Still fighting the moving averages but the short-term trend is still intact.

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.

Optional

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



CMRX - Chimerix - Company Profile

Comments:

Still holding over support. If shares break under support at $5.00 I will cancel the recommendation.

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

Comments:

CUDA broke support at $13.65. I raised the stop loss yesterday to $13.50 and we were taken out of the position for a 75-cent loss today.

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

Stopped 3/10/16: Long CUDA shares @ $14.25, exit $13.50, -.75 loss.



DWRE - Demandware - Company Profile

Comments:

Another minor decline in a weak market but the uptrend is still intact. The stop loss is $35.65 so any further decline will stop us out.

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.

Optional

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



LGF - Lions Gate Entertainment - Company Description

Comments:

Nice 3% gain in a weak market. Bernstein labeled it their top pick in the media space with a target of $34. 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.

Optional

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



SGI - Silicon Graphics Intl - Company Profile

Comments:

SGI cannot make up its mind. Up one day, down the next, repeat. Zacks labeled it their "bull of the day" on Wednesday because of the earnings beat by 100% over estimates and the first earnings since June 2013. They had posted smaller than expected losses in each of the last 5 quarters.

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.



USO - US Oil Fund ETF - ETF Description

Comments:

The rise in oil prices lifted the USO very close to our exit target. One more good day should do it. We will then look for a dip to reenter.

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.

Optional:

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




BEARISH Play Updates


VXX - VIX Futures ETF ETF - ETF Description

Comments:

With a 309 point range on the Dow from the opening high of +130 to the afternoon low of -179 you would have expected volatility to post a big spike. Having the S&P close in positive territory helped push the VXX lower.

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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