Option Investor
Newsletter

Daily Newsletter, Saturday, 3/12/2016

Table of Contents

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

Market Wrap

Market up Four Consecutive Weeks

by Jim Brown

Click here to email Jim Brown

Over the last four weeks the Dow has gained 1,239 points, S&P +157, Nasdaq +410 and Russell 2000 +116. It has been a good four weeks considering the volatility over that same period.

Market Statistics

Friday Statistics

Friday capped off a volatile week in the markets with the S&P spiking +32 points to close at 2,022 and exactly at another level of strong resistance. After a week of fighting the resistance at 1,999 Friday's gains were explosive as shorts covered on the breakout.

Obviously, the next question is what will happen on Monday. Will that 2,020 level prompt another week of choppy trading or will we blast through that level to test resistance at 2,078. I am betting we make it though the 2,020 level but you will have to read the rest of the commentary to find out why.


The market roared back from Mario Draghi's sell the news comment that he did not expect any further rate cuts. Draghi definitely over delivered with his changes to ECB policy and once investors realized the market acted inappropriately they bought the dip and the rest is history.

However, next week we three more chances for irrational behavior. The Bank of Japan will announce its rate decision on Tuesday. The FOMC will announce its rate decision on Wednesday and the Bank of England will announce their decision on Thursday. Janet Yellen will host a press conference at 2:30 on Wednesday and she will try to avoid a sell the news comment similar to Draghi's. After watching the Dow crash -309 points after he spoke on Thursday I would bet she will be watching her words very carefully.

Friday was nearly devoid of any economic reports with only the Import and Export Prices for February. Import prices fell only -0.3% in February after a -1.0% drop in January. Analysts were predicting a -0.7% decline. Helping to produce a stronger number was petroleum prices, which fell only -4% in February after a -14.3% decline in January. The recent rise in oil prices has analysts revising their inflation numbers based on higher than expected crude prices.

February was the first time since July 2014 that capital goods prices did not decline. They were unchanged so don't breakout celebratory champagne just yet.

We definitely have a full calendar for next week and plenty of headline risk. Other than the various central bank events, the Philly Fed Manufacturing Survey on Thursday is the most important. The report has been in contraction for the last six months and it is expected to stretch to seven with a reading of -3.1. The Philly Fed Survey is a proxy for the national ISM report that comes out in the first week of the month. If the Philly report remains in contraction, the ISM is likely to remain in contraction as well.

The next most important is the Retail Sales for February that comes out on Tuesday. Sales are expected to be flat after three months of minimal gains of +0.2%. The warm weather and rising dollar in February are expected to have had a detrimental impact on sales.


In stock news Ulta Salon Cosmetics (ULTA) was the best performer with a 17% spike of +$28. Ulta posted earnings of $1.69 that easily beat estimates for $1.54. Revenue of $1.27 billion also beat estimates for $1.24 billion. Revenue rose +21%, earnings +25% and same store sales +13%. Digital sales rose +44%. The company guided to earnings of $1.25 to $1.30 for the current quarter and analysts were expecting $1.22. Same store sales are expected to rise 9% to 11%. They plan to open 100 new stores in 2016 after opening 100 in 2015. They currently operate 874 stores. The company is doing everything right as evidenced by their PE of 41. That is too high for most analysts to recommend and I would expect some cautious ratings comments in the next couple of weeks.


Fiber optic subsystems and component company Finisar Corp (FNSR) reported earnings of 25 cents compared to estimates for 22 cents. Revenue of $309 million matched estimates. The company guided to revenue of $317 million and earnings of 25 cents for the current quarter. Analysts were expecting $314.7 million and 21 cents. The company said it was seeing a lot of growth in China.


Chevron (CVX) closed out the week with a minor gain of 64 cents but that came after $6 of gains in the prior four days. Goldman Sachs upgraded Chevron from a sell to neutral after the company held an analyst meeting and said keeping the dividend safe through 2017 was a top priority. Credit Suisse raised the price target from $86 to $94 after Chevron cut their capex from $26.6 billion in 2016 to a range of $17-$22 billion in 2017 and 2018. They are shipping their first load of LNG from the $54 billion Gorgon project in Australia with two more trains to come online in 2017. The Chevron CEO said total production would increase in 2016 and 2017 despite the decline in capex spending.


Bojangles (BOJA) was getting a lot of coverage after shares jumped +23% after reporting earnings of 22 cents that beat estimates for 19 cents. Revenue of $128.8 million also beat estimates. Same store sales only rose +0.6% but that was better an analysts expected. It was the 23rd consecutive quarter of sales growth. The company guided to full year earnings of 86-90 cents with its operated store base to increase by 8% with same store sales in the low single digits. Bojangles had been heavily shorted and was down 50% since its IPO.


El Pollo Loco (LOCO) saw the opposite reaction after posting earnings of 15 cents that beat estimates for 13 cents. Revenue of $86.3 million missed estimates for $88.1 million. Same store sales rose +1.8%. They guided to full year earnings of 70-74 cents and analysts were expecting 74 cents on revenue of $395.6 million. They plan on opening 18-22 new company stores in 2016 and 10-15 franchised stores. Shares declined -8% on the weak guidance.


Zumiez (ZUMZ) reported earnings of 53 cents that beat estimates of 49 cents and revenue of $242.43 million that beat estimates for $241.1 million. However, same store sales fell -8.6% for the 11th consecutive month of declining sales. The company guided to a loss of 7-11 cents in the current quarter with same store sales expected to decline 5% to 7%. Analysts were expecting a loss of 1 cent. Shares fell -13%.


Kyle Bass, who started the Coalition for Affordable Drugs, has challenged a drug patent from biotech company Acorda. On Friday the US Patent and Trademark Office announced it was instituting an "inter party review" over the patents surrounding the drug Ampyra. The CEO of Acorda said the company had extensive clinical development programs resulting in new and important discoveries relating to using the drug to treat MS. The patents in question expire in 2025 and 2027. Bass has used his wealth and power to attack multiple companies under the guise of trying to make drugs cheaper. He shorts the stocks and then challenges the patents. He wins regardless of the outcome. I have no objection to somebody challenging a patent but there should be a financial penalty paid to the patent holder if you lose. The patent holders are being forced to pay tens of millions of dollars in court costs to defend what is legally theirs.


Crude prices continued to rise with a 65-cent gain on Friday to $38.49 but that level is turning into significant resistance. Even if that breaks the $40 level is going to be serious psychological resistance for traders. Once a 4 handle appears on the price there is going to be a flood of sellers. With long contracts on WTI futures at record levels and only five trading days before contract expiration there is a very good chance of a decline in the days ahead.


The proposed March 20th meeting in Moscow for OPEC and non OPEC producers is rapidly evaporating. With Iran claiming they are not going to honor a freeze and all the other countries saying everyone must agree or there will not be a deal, the agreement is falling apart. The Russian energy minister said a firm date has not been set and "could be from March 20th to April 1st" if everyone agrees. Officials from multiple countries said there was no reason to have the meeting if Iran did not agree to a freeze.

Reportedly, Iran has been offered an output cap at 2.93 mbpd but Iran wants a cap of 4.0 mbpd, their pre sanctions production number. Iran is currently producing about 2.6 mbpd. So, if everyone agreed to a production freeze and Iran got the 4.0 mbpd cap, actual oil production could rise another 1.4 mbpd assuming everyone else was frozen at their current levels. That is going to be really hard to sell to the rest of OPEC.

Multiple producers have warned that holding a meeting before everyone agreed meant the meeting could fail and the negative press from that event could send oil prices significantly lower.

In reality, any agreement that involves Iran having a higher cap is worthless. It is just a publicity stunt to try and lift oil prices higher. Any agreement will actually allow production to increase by a significant amount. Eventually uninformed investors will finally understand and oil prices will decline.

We are rapidly approaching the end of the inventory build season in early April and refiners will ramp up production of gasoline and diesel for the summer driving season and inventories will fall. That should have a positive impact on crude prices but we are still several weeks away.

Goldman Sachs reiterated their view that crude prices could fall sharply in the coming weeks because of record inventory levels offsetting production declines.

Active rigs declined -8 to a 67-year low of 480. Records were started in 1949 and the lowest level of active rigs was 488 in April 1999. The U.S. only produced 5.5 mbpd in 1999. Active oil rigs declined -6 to 386 and active gas rigs declined -3 to 94.


Anadarko (APC) announced last week they were going to operate only FIVE rigs in 2016, down from an already reduced level of 25 at the end of 2015. There are only 33 active rigs in the Bakken today. That is down from 207 a year ago. Continental Resources (CLR), one of the largest producers in the Bakken, has halted fracking on any new wells. They have cut their active rigs down to 4 but they are not going to complete any new wells they drill. Continental is cutting capex spending for 2016 by 65% to $920 million and expects to cut production by 10%. Multiply this across all the shale producers and production is going to drop significantly by the end of 2016. Crude prices should rise to $50 by the end of December. Saudi Arabia is not going to allow any agreement where prices rise too soon and a shale sector revival.

Markets

I am not going to trash talk last week's rally despite the three days of uncertainty in the middle. Any week that ends with a gain of +206 points for the week is ok with me even if all those points came with the +218 point gain on Friday. It does make it fairly difficult to pick plays given the wild triple digit swings.

Friday's close on the S&P at 2,022 was the high close for 2016. We are still -21 points down for the year with the 12/31 close at 2,043. I am betting if the BOJ/BOE/FOMC do not do something stupid we will close over that 2,043 level by next Friday.

I have an ace up my sleeve. That ace is the pre Fed rally that occurs in the 36 hours prior to the Fed announcement. Historically we see a decent gain on Tuesday and sometimes on Wednesday morning. If the Fed or more specifically Janet Yellen avoids the temptation to say something tricky on Wednesday then we could go higher. The CME FedWatchTool is showing a 96.1% chance of the Fed funds rate remaining 50 basis points after the March meeting. That means almost zero chance of a rate hike.


The wild card is of course how the Fed phrases the outlook for future hikes. With the chance of a recession fading, a strong jobs report even if they are only part time jobs and the market heading back to its highs, the Fed is going to want to stick a pin in this euphoria balloon and bring everyone back to reality. However, with the ECB, PBOC and BOJ still cutting rates it is going to be a tough task to tightrope walk future guidance in a way that does not tank the market.

There is a significant confluence of resistance at 2020-2022 with downtrend resistance, horizontal resistance and the 200-day average. That means it is target for every short seller with any cash left. It also means that a break through that level will cause some significant short covering.

I would expect some profit taking on Monday depending on what happens in the Asian markets on Sunday night. I would expect any potential dip to be bought and that 2,020 resistance to fail on Tuesday as the S&P pushes higher ahead of the Fed.

That is my roadmap and we will check in on that forecast on Tuesday evening. I know there are a lot of traders betting that 2,020 level is going to hold and predicting a return to 1,950 or even lower.


The Dow benefitted from the rebound in financials, healthcare, mining and energy stocks to punch through the same 200-day moving average that is currently threatening the S&P. However, downtrend resistance is a little higher at 17,300. On the positive side the prior resistance around 17,000-17,017 should now be support. The MACD and RSI are growing more oversold as each day passes but they have room to run.



The Nasdaq also closed at a two-month high at 4,748 but it may still be in the grasp of the 50% retracement at 4,700. The Nasdaq benefitted from a major +3% short squeeze in the biotech sector on Friday. That sector has not been able to mount any kind of consecutive gains in months. The index is well below its retracement levels and struggling just to get back to 3,000. I do not think the BTK rebound is going to stick but I hope I am wrong.

The BTK declined -41.8% from its high of 4,431 in July to the low of 2,575 on February 9th. It has rebounded +13.4% from that low but it has a long way to go and the sector remains under pressure from politicians and people like Kyle Bass. Some analysts claim it will not be investable until after the elections and maybe long after depending on who wins.

As long as the BTK remains stuck in the mud the Nasdaq is going to have a tough time moving higher.




The Russell 2000 was again the percentage leader on Friday thanks to biotechs and energy stocks. The +2.21% gain was second only to the Dow Transports at +2.32%. The Russell is back in the retracement brackets but will remain at the mercy of oil and biotechs. With oil prices due to crack at any time, the Russell could be an anchor next week.


Next week depends on two events. The first is obviously the Fed and the hope they do not mess things up trying to be cute with their guidance for future rate hikes. The second is oil prices. With crude threatening to fail at resistance at $38.50 with even stronger resistance at $40, a breakdown in WTI ahead of the futures expiration could grease the skids for a market decline. Whether the typical pre Fed rally can offset a drop in oil prices remains to be seen.

Should oil prices inexplicably rise over $40 we could have a major market blowout when coupled with the pre Fed rally. While I am not predicting that, it is always a possibility.

I do expect the market to try and move higher. Whether it is successful depends on a lot of factors with the Fed the pivotal event.

Clocks spring forward Sunday morning with the arrival of Daylight Savings Time.


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Random Thoughts


Amazon (AMZN) said it signed a deal to lease 20 Boeing 767 widebody freighter aircraft to ensure capacity to fulfill its promise of one and two-day deliveries in the USA. The rapid growth of its Prime subscription service with free two-day shipping is prompting Amazon to bulk up its delivery capability. Handing those packages off to UPS at the warehouse with two-day requirements is expensive. However, if Amazon can deliver those packages to UPS at the closest major UPS/FDX hub city the cost is a lot more reasonable.

If Amazon can fill these planes with prime packages every day and deliver them overnight to the major UPS/FDX hubs then regular ground shipping can get them delivered in two days.

Amazon tested the concept by utilizing planes owned by Air Transport Services Group (ATSG) over the last several months. Apparently, it worked well enough to commit to leasing 20 of the giant freighters for 5-7 years. They will begin operations on April 1st. Amazon also has the right to buy up to 19.9% of ATSG stock over the next five years at $9.73 per share. That stock closed at $14.32 on Friday.



Private equity firm Apollo Global Management is reportedly nearing a deal to acquire Fresh Market (TFM) for $1.3 billion. That would be about a 30% premium over the company's market cap at the close on Friday. The cash offer is $28.50 a share with the Friday close at $23. If you have access to a time machine, you could go back to February 11th when it was under $18 just prior to announcing Kroger had expressed interest in the chain. Sources claim Kroger lost out in the bidding in the auction that followed.



Bearish sentiment is dropping fast with a -4.9% decline for the week ended on Wednesday. Bullish sentiment rose +5.3% and those timid sheep in the neutral camp barely budged with a -0.5% decline.



Comedian Jerry Seinfeld picked the wrong time to sell expensive cars. Seinfeld auctioned off 18 of his cars on Friday for a total of $22.2 million. While that sound like a lot the pre auction estimate was $28-$32 million. The expected star of the show was the 1973 917/30 Porsche Can-Am Spyder that was expected to sell between $5 to $7 million. Instead, it was a fight to lift the bidding to the final price of $3 million. Seinfeld bought the car in 2012 for $4.4 million. Even millionaires sometimes take a hit when their ego gets in the way of reality and they just have to own something special.


Overall, six cars sold above estimates and seven cars set new price records for their models. A 1974 911 Carrera 3.0 IROC RSR sold for $2.3 million and a new record. A 1955 550 Spyder sold for $5.3 million. His VW Beetle sold for $120,000 and a new record. Seinfeld goes home with $20 million in his pocket after commissions and a lot more space in his garage.


Barbie celebrated her 57th birthday last week and she does not look a day over 16. It was not a fun party because sales are dropping fast despite all the new models. Annual sales are the lowest in 12 years at roughly $900 million after peaking in 1997 at $1.8 billion. In the 1990s girls ages 3 to 11 had to own at least one Barbie and most had several. Today girls in the upper end of that age bracket want an iPhone.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Make yourselves sheep and the wolves will eat you."

Benjamin Franklin Nov 1, 1773


 


New Plays

Unknown Communications Leader

by Jim Brown

Click here to email Jim Brown
Editor's Note

I would bet the majority of investors have never heard of this fortune 500 company. Windstream Holdings is a Fortune 500 company but it only has a market cap of $750 million. For a leader in the communications field that is chump change.


NEW BULLISH Plays


WIN - Windstream Holdings - Company Profile

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

Network map

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Buy WIN shares, currently $8.22, initial stop loss $7.10

Optional

Buy August $9.00 call, currently .40 cents. NO STOP LOSS




NEW BEARISH Plays


No New Bearish Plays





In Play Updates and Reviews

Bullish Setup

by Jim Brown

Click here to email Jim Brown

Editors Note:

With the S&P closing at the highest point in 2016 the market is poised for further gains if the Fed does not develop foot in mouth disease. The biggest threat to the market this week will be the Janet Yellen press conference at 2:30 on Wednesday. We saw what Mario Draghi did to the market with one careless statement on Thursday. The Dow dropped -309 points from its highs intraday. Yellen will be pressed about the Fed's future plans and we really need a dovish response rather than some cleverly crafted bit of Fedspeak that tanks the market.

In reality whether the Fed hikes rates or not the long term impact to the market would be negligible from a quarter point hike. It is the outlook for future hikes that could upset the market. With some Fed heads saying the Fed should accelerate their rate hike plans that kind of guidance would put a cloud over the market.

The day before a FOMC decision is normally positive so Monday could see some profit taking ahead of the decision.




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.


DDRI - Diamond Resorts

The long position was entered at the open at $24.25.


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:

Arctic Cat was downgraded from hold to sell before the open and shares dropped -10%. You cannot anticipate these events or the marker reaction to the news. We lost $1.00 on the stock and the option.

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

Stopped 3/11/16: Long ACAT shares @$17.25, exit $16.25, -1.00.

Optional

Stopped 3/11/16: Long June $20 call @ $1.70, exit .70, -1.00 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:

BBOX rallied back into the uptrend channel to close at its recent high. 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. The down trending 100-day is about to join the 150-day with resistance at $41. That could be a serious hurdle.

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 with a nice rebound today. Support at $5 was solid and we could reach the entry point at $5.75 next week.

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

Buy CMRX shares, initial stop loss $4.75.



DRII - Diamond Resorts Intl - Company Profile

Comments:

DRII broke through resistance at $24 with a decent gain of 83 cents. Now that the stock is above resistance we could see further short covering next week. With 23% of the shares sold short there could be a significant rally.

SunTrust Robinson Humphrey will host a "discussion with management" in a webcast at 2:PM ET on Monday. That could either be the trigger that launches DRII higher or kills the current rally depending on how the discussion goes. The CEO-Founder and CFO will be the features participants. You would hope they would be smart enough to avoid any comments that could tank the stock.

Original Trade Description: March 10th.

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.



DWRE - Demandware - Company Profile

Comments:

Decent rebound but still down -$1.50 from the Monday high. 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:

No gain in a strong market. I am recommending we close this position at the open on Monday. The movie stocks have a tendency to act erratically around a movie opening and there is a major event on Thursday. While we could see further gains into the opening, I prefer to take our profits and avoid the uncertainty. The movie "Allegiant" begins on March 17th.

Close the position at the open on Monday.

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. I am recommending we close this position. WTI is very overbought and could correct at any time. It has stalled for five days at the $38 level and any negative news could see a monster drop. Current month futures expire in a week and that could send prices sharply lower since we have a record number of longs in the futures market.

Close the position at the open on Monday.

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:

All markets up on Friday helped slam the VXX lower. We only need a couple more positive days without any extreme volatility to hit the exit target.

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
02/27/16 adjust exit target to $19.50
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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