Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/23/2016

Table of Contents

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

Market Wrap

Bulls Blink

by Keene Little

Click here to email Keene Little
The stock market has been working hard to hold onto its gains from the rally off the February low but today's loss, while relatively small, showed signs of cracking in the support levels. Bulls can still save it here but with such an overbought market up against strong resistance it's looking like it could be time for at least a rest period for the bulls.

Today's Market Stats

The market has been working hard this week to hold onto the gains made since the February 11th low. By not giving up much it remains potentially bullish since it's easy to interpret this week's minor pullback as just a small correction within the larger rally pattern. But the problem for the bulls right now is an extremely overbought market, by several measures, and very high bullish sentiment. Both measures are at levels that marked trouble for bulls in the past. Price hasn't confirmed we've started a reversal back down but that's the risk for those holding onto long positions.

It was a quiet morning for economic reports and the only important one was new home sales, which at 512K was as expected. That was an improvement over January's 502K (revised upward from the originally reported 494K), but the bigger picture for housing is showing some signs of aging. For the past year new-home sales have essentially leveled off but as can be seen in the lower chart below, price appreciation has been slowing since 2013 and the latest report shows the 3-month average has dipped into negative territory (prices are declining). Despite historically low mortgage rates and banks easing their lending standards (there are many signs the banks are starting the same sub-prime lending that got them into so much trouble last time), making it easier and cheaper to get a mortgage, a lack of demand for houses has resulted in slowing price appreciation.

Exacerbating the declining demand for new houses is the decline in homeownership rate, which has now declined to a rate (near 63%) that hasn't been seen since the mid-1960s when records started. That's a near 50-year low and represents a strong headwind for new home sales. Part of the explanation is the loss of the middle class standard of living, which represents a whole slew of economic problems but that discussion could take pages of digital ink. Hint: it's one reason why Trump has become popular, much to the dismay of the establishment and those who don't understand the plight of the disappearing middle class.

New Home Sales and Prices

So much of our economy is dependent on the housing market and at the moment it's not looking as good as we'd like to see it. The stock market has done an outstanding job holding up in the face of deteriorating economic conditions and corporate earnings decline. The mountain of debt facing our country and businesses is a potential ticking time bomb (much worse than the situation prior to the 2008 collapse) but the stock market has held up despite all that. In spite of all the doom and gloom possibilities we've had a strong stock market and that's been bullish if only because the market hasn't declined. It hasn't gone anywhere since the Dow reached its current level in November 2014 but the bulls are happy it hasn't declined (and the bears have been frustrated to no end).

Consolidating sideways following a strong rally is actually bullish and that has to be respected by the bears. As I've been showing with the Dow's weekly chart (and updated below), we have a big sideways triangle pattern that says the bulls will be rewarded with a big rally in a few months. But at the same time, the deteriorating economic and corporate conditions, as well as the extreme debt levels, is a warning sign that should not be ignored by the bulls. All big moves start off small and what we need to try to figure out is what small pattern will provide clues for the larger pattern.

The market's price/time patterns rarely repeat exactly but the patterns do tend to be fractals. Just as you see repeating patterns in nature (such as Fibonacci ratios) so too do they repeat in the stock market. The reason we trade price patterns is because they tend to repeat. Think bearish rising and bullish descending wedges, triangles, flags, etc. There is currently an interesting price pattern that has played out like we saw from the August 2015 low into the November 2015 high. As this pattern has played out it has pushed indexes into potentially strong resistance. And while the price pattern has repeated we also have bullish sentiment repeating in lock step with price.

Jim alluded to this as well in his wrap last night. The Dow's pattern is a good example with its double bottom in August-September 2015 with the higher low in September. The rally from September into the November 3rd closing high was 25 trading days. The January-February 2016 double bottom, with a higher low in February, led to Monday's closing high (so far), which was 26 trading days from the February 11th low. BTW, March 21st was also the spring equinox, a date that is often seen accompanying market turns. Tuesday the Dow made a new intraday high and came within spitting distance of its downtrend line from May-November 2015, which considering how overbought the market is, should be strong resistance at least to the first attempt to get through it.

At the November 2015 high the Dow had retraced 93.5% of its May-August decline. At Tuesday's high the Dow was within 13 points of retracing the same 93.5% of its November-January decline. While the market doesn't necessarily repeat exactly, that's about as exact as you can get, in both time and price. While it doesn't mean the rally will top out right here, it does mean bulls need to be cautious about pressing for more; you need to ask yourself if you would initiate a new long position here and if the answer is "no" then the next question to ask if it's worth holding on for more. Is the profit:loss ratio in your favor? If not then get your stop up tight.

As mentioned above, the sentiment picture is also repeating. The CNN Fear&Greed index is a great indicator since it combines several sentiment measures into one indicator and as you can see on the chart below, it climbed above the level where it was last November. A turn back down from the high usually precedes a turn down in price (the market simply runs out of buyers as bullishness begins to wane) and as you can see on the chart, it has started a turn back down from near 80, a level that has always meant danger for bulls.

Another sentiment reading comes from Tom McClellan, as shown on the chart below. The difference between bulls and bears, as reported by Investors Intelligence, is at a spread that's now wider than where it was at the November-December highs. It is well above the top of a trading band and more extended above the top of the band than at any time prior to 2014. With price lower than the November-December highs we have investors feeling even more bullish than back then, which is usually not a healthy combination.

Investors Intelligence Bulls-Bears, chart courtesy mcosillator.com

Here's another sentiment measure, which uses the VIX. We all know VIX reflects sentiment through the price of SPX options. It is most often a direct inverse picture of SPX and therefore it's not exactly predictive (any more than the SPX indicators). But when you create a ratio with VXV, which is the 3-month average of VIX, you get some interesting signals, as can be seen on the chart below (the middle chart). I've highlighted those highs and lows (above 1.0 and below 0.8, resp.) that at the very least warned traders that the move had extended into reversal territory. The bottom chart is of the VIX and its Bollinger Band. Notice how few sell signals are offered vs. the VIX/VXV, especially compared to the number of buy signals (green circles). Due to higher emotions in a decline it's more common for the VIX to spike above the top of its BB rather than buying causing a spike below the bottom with a stock market rally. It takes a little time to study the chart below to identify where the signals work and just as important, where they don't work. Look for corresponding signals to get a better idea for where it paid to take the signal.

SPX vs. VIX/VXV vs. VIX, Daily chart

The top chart above shows how many market highs did not have a corresponding low VIX/VXV (below 0.8) and a VIX reading that was not down to the bottom of its BB. Some SPX lows did not have a corresponding high VIX/VXV reading (above 1.0) but most important price lows did have an accompanying VIX high above the top of its BB. But a combination of a signal from VIX/VXV and VIX gave reliable reversal signals and we currently have one that's strongly warning of an important price high here. Bulls ignore this warning signal at their own risk.

With that let's move to the charts to see what price patterns I'm watching. The Dow's weekly chart


Dow Industrials, INDU, Weekly chart

With the Dow's high on Tuesday, near 17649, it stopped only about 16 points shy of its downtrend line from May-November 2015. Considering all the warning signals mentioned above it was a very good setup to get short (if you practice good money and risk management) since it's an obvious line of resistance to anyone who can draw a trend line on a chart. The pullback since Tuesday could easily get reversed but again, it's a low-risk spot to play a reversal. As for what's next, assuming we'll start at least a deeper pullback, we could see just a pullback before heading higher or we could see a drop back down to the bottom of a bullish sideways triangle that the Dow has been in since May 2015. Triangles are typically whippy and choppy and so far that's what we've seen. The bearish interpretation of the pattern is looking for a very strong decline in a 3rd of a 3rd wave down and a break below the triangle would be the recognition phase of the move (failed patterns tend to fail hard). But we have plenty of time to figure out what the next pullback/decline is telling us.


Dow Industrials, INDU, Daily chart

The daily chart shows what looks like a perfect tag of its downtrend line followed by the pullback into today. Today's low was a test of its uptrend line from February 11th, near today's close. Closing at support left both sides wondering what will follow and if the market is not done yet putting in a final high for the leg up from February we'll see a bounce off support and potentially a break above the downtrend line, now near 17665. But if the high is place then support will likely be broken with a gap down Thursday morning. That's the way this market deals with support and resistance and which way it gaps over resistance or below support provides a valuable clue as to which direction offers the least resistance.

Key Levels for DOW:
- bullish above 17,670
- bearish below 17,140


Dow Industrials, INDU, 60-min chart

The Dow's 60-min chart below shows the test of the uptrend line from February and now we wait to see what follows. If it continues to rally and breaks its downtrend line from May-November 2015 I'd look for a move up to the top of a parallel up-channel for the portion of the rally from the March 10th low, so perhaps up to about 18K.


S&P 500, SPX, Daily chart

Tuesday's high for SPX was a test of its downtrend line from November-December 2015 and the reversal from there looks a little more bearish than the Dow because it broke its uptrend line from February 11th, currently near 2050. Regardless of whether the longer-term pattern from here is bullish or bearish (yet to be figured out), the short-term pattern calls for at least a deeper pullback. This is why I think playing the short side is now the better trade. Once you can give the trade a little breathing room you can then follow the trade lower with your stop. If the pullback turns into a corrective form (e.g., overlapping highs and lows in a bull flag) then I'll look for a setup to get long for the next big rally leg. But if the pullback turns into an impulsive move (steep and strong) then I'll know to look for bounces as shorting opportunities with the expectation that the January-February lows will break.

Key Levels for SPX:
- bullish above 2057
- bearish below 2024


Nasdaq-100, NDX, Daily chart

On Monday and Tuesday NDX had closed above its 62% retracement of its December-February decline and its 200-dma, at 4415 and 4419, resp. But today it closed back below both, which leaves the potential for a head-fake break. However, like the Dow, NDX held its uptrend line from February 11th, closing on it at 4402. The bulls need to start buying immediately on Thursday in order to prevent a trendline break.

Key Levels for NDX:
- bullish above 4450
- bearish below 4356


Russell-2000, RUT, Daily chart

The RUT has created a double top against its trend line along the lows from October 2014 - September 2015 (a H&S neckline). The first attempt to get through resistance was March 7th and then again last Friday. It made a high at 1103.62 on Tuesday, stopping about a point away from retracing 62% of its December-February decline and now today's decline looks like it should see follow through. This week's high is leaving a bearish divergence against the March 7th high and MACD has crossed back down from a high not seen since November 2014.

Key Levels for RUT:
- bullish above 1105
- bearish below 1040


20+ Year Treasury ETF, TLT, Daily chart

The bonds rallied today and that had TLT breaking out of a bullish descending wedge pattern today. If MACD makes it back above zero and TLT holds above its 50-dma, currently near 129, it should rally fairly quickly and get above its February 11th high (wedges are typically retraced faster than it takes to build them). A strongly rallying bond market, if that's what's coming, would likely be the result of a run to safety into bonds and out of the stock market.


KBW Bank index, BKX, Weekly chart

BKX made it up to price-level S/R near 66.50 with Monday's high at 66.47 (close enough for government work) and while the reversal from there is only a small pullback so far, the odds say it will continue the reversal back down. It's holding above its 200-week MA at 65 (today's low was 65.19) and if that holds as support we could see resistance at 66.50 broken. But again, in an overbought market I think it's a risky bet on the long side here.


Transportation Index, TRAN, Daily chart

The TRAN is one of the few bullish patterns that I'm watching at the moment. It made a bullish break last Friday when it rallied above its downtrend line from March-November 2015, near 7980, and today it made it back down to the broken trend line, as well as its 78.6% retracement of the leg down from November 2015, near 7940. Monday's high, at 8114, stopped short of its 62% retracement of its decline from November 2014 into the January 2016 low, near 8200, and is not showing us any bearish divergence at Monday's high. If the back-test of its broken downtrend line holds it could lead to a bullish kiss goodbye and another rally leg, one which would probably make it up to its November 2015 high at 8358. But the current back-test must hold otherwise it will leave a failed breakout attempt and failed breakouts usually reverse hard as those who bought the breakout bail en masse.


U.S. Dollar contract, DX, Weekly chart

This week's bounce for the US$ has it back up against a broken uptrend line from August 2015 - February 2016, near 96. I think the dollar will work its way a little lower, perhaps down to the 93-94 area, before heading back up inside its large consolidation pattern.


Gold continuous contract, GC, Weekly chart

Gold has now rolled over from the top of a parallel down-channel for its decline from August 2013. There's no definitive pattern yet for its pullback from the March 11th high so it could still press higher following the current pullback. Looking at short-term price projections based on its pullback pattern, it would turn more bearish below 1210 so below that level I'd get more defensive if you're a gold trader (vs. a long-term holder of the shiny metal). We could see a drop down to the bottom of its down-channel and price-level S/R near 1000 in a few months. Gold traders became way too bullish on the rally and for a healthier rally it at least needs to shake out the weaker holders (those not committed yet to the longer-term bullish possibilities).


Oil continuous contract, CL, Weekly chart

Today's report showed crude inventories spiked up in the past week, up 9.4M barrels and that sparked some selling, which dropped the price of oil -3.5% today. Tuesday's high at 41.90 was at the top of a parallel down-channel for the decline following its June 2015 high and MACD has made it back up to the zero line. A rollover from both would be bearish and then it will be a matter of figuring out if we're looking at just a pullback or a more significant decline that will take oil to the bottom of its down-channel. At the moment, based on its larger wave pattern and until proven otherwise I'm looking for oil to drop to a new low, perhaps down to the $21 area before setting up a longer-term bottom.


Economic reports

Other than the weekly unemployment numbers tomorrow we'll get the Durable Goods orders, which are expected to be flat (ex-transports) to about -3% (total goods).


Conclusion

Time and price have come together to suggest at the very least that bulls need to be thinking defensively. That might mean selling to some and/or hedging with short positions to others. Bullish sentiment and overbought indications also suggest the bears should soon have a turn at the feeding trough. Trading is a game of probabilities and right now I think the higher probability is for at least a deep pullback before the market will be able to head higher. The more bearish price pattern says the two big bounces, into the November 2015 high and the current high, are merely a result of a big battle within a rolling top pattern and when it breaks down next time it's going to be a hard break and well below the January-February lows.

We can't know yet whether we'll get just a pullback before heading higher or instead something more bearish but considering the downside risk I think it's a very good opportunity to trade the short side, which of course means get defensive if you're holding long positions. At least protect your big gains. If while in a short position we see the market chop its way lower, such as in a bull flag pattern then turn less bearish and get ready to buy the pullback. But that won't become clearer for at least another week or three so in the meantime think short and watch out for those short-covering rallies.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Plays

Avoiding Event Risk

by Jim Brown

Click here to email Jim Brown
Editor's Note

The coming three-day weekend could contain some event risk for the market. Typically the market is up on Thursday before a three-day weekend. This particular weekend could have some additional event risk because it is Easter and a Christian holiday. With the attacks in Brussels and ISIS claiming they sent 400 trained fighters to Europe to carry out attacks there could be some other events. Striking an Easter event either in Europe or in the U.S. could be something ISIS would plan.

I am not adding any new plays today. We will start a new slate on Monday.


NEW BULLISH Plays


No New Bullish Plays



NEW BEARISH Plays


No New Bearish Plays




In Play Updates and Reviews

No Damage

by Jim Brown

Click here to email Jim Brown

Editors Note:

Today's market decline failed to cause any serious damage but we need to be ready for a continuation. A one-day decline after five weeks of gains is nothing to worry about. However, should the decline continue we will probably lose several positions.

The portfolio is heavily weighted with bullish positions because the market has been moving higher. After a five-week rally of 13% on the S&P we should normally expect a 3-5% decline before the rally continues. However, because of the calendar and the market cycle, I do not expect that for 2-3 weeks or until we hit the stronger resistance just above us.

Normally the market is up on the Thursday before Good Friday but with the events overseas that 3 day weekend poses some event risk. I would be happy if the indexes just closed flat on Thursday without a big intraday decline. Volume should be very low.

The Dow stopped right at downtrend resistance and that could be a challenge if the end of quarter fund buying turns into selling instead.




Current Portfolio





Current Position Changes


FTNT - Fortinet

The long position remains unopened until FTNT trades at $30.50.


DWRE - Demandware

The long position was stopped out with a trade at $36.85.


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


AMLP - Alerian MLP ETF - ETF Profile

Comments:

AMLP will continue to rise and fall with the price of oil. Long term the trend will be up.

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.

Tuesday 3/8 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.

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:

Gave back last week's gains but still bullish. No news.

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.

Position 3/18/6 with a BBOX trade at $14.25

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

No options because of wide spreads.



CDW - CDW Corp - Company Profile

Comments:

Dropped back from a two month high and right back into the moving averages.

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, see portfolio graphic for stop loss.

Optional

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



DRII - Diamond Resorts Intl - Company Profile

Comments:

Another minor rebound but it was positive in a weak market.

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.

Position 3/10/16 with a DRII trade at $24.25

Long DRII shares @ $24.25, see portfolio graphic for stop loss.

No option recommended because of wide spreads and high prices.



DWRE - Demandware - Company Profile

Comments:

DWRE dropped below support at $36 and stopped us out at $35.85 for a $1.70 gain.

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

Closed 3/23/16; Long DWRE shares @ $34.15, exit $35.85, +$1.70 gain.

Optional

Closed 3/17/16: Long April $35 call @ $2.70, exit $3.60, +.90 gain



FTNT - Fortinet Inc - Company Profile

Comments:

FTNT dropped back 50 cents to $28.43 and remains under resistance at $30.

The position remains unopened until FTNT trades at $30.50.

Original Trade Description: March 22nd.

Fortinet provides cyber security solutions for enterprises, service providers and government organizations worldwide. They offer FortiGate physical and virtual appliance products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, web filtering, anti-spam, and wide area network accelerations.

Essentially they provide an enterprise level roadblock or firewall between the Internet and the organizations internal network and servers. If you can block the attacks at the primary entry into the network then the attackers cannot run rampant inside the network.

A couple weeks ago Fortinet signed a cyber security partnership agreement with NATO. We all realize NATO is facing cyber attacks all across Europe and the organization is a major target. Fortinet will help improve the cyber defense for the entire network. Implementing the Fortinet devices will raise awareness of the cyber threats to the network and allow early detection and elimination.

Fortinet has more than 210,000 enterprise customers worldwide including some of the largest and most complex organizations, corporations and governmental agencies.

This will be a short-term play because earnings are April 18th.

Shares are trying to break over resistance at $30 with the high at $30.36 today before the market rolled over.

With a FTNT trade at $30.50

Buy FTNT shares, currently $29.60, initial stop loss $28.50.

Optional:

Buy May $31 call, currently $1.70. Initial stop loss $28.50.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

Still holding at the highs with only a 5 cent decline. We need to be patient and let this pass.

Original Trade Description: March 14th.

Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.

HPE reported adjusted Q4 earnings of 41 cents compared to estimates for 40 cents. Revenue of $12.72 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.68 billion.

CEO Meg Whitman said, "We saw the progress that comes from being more focused and nimble. We delivered a third-consecutive quarter of year-over-year constant currency revenue growth, and excluding the impact of recent M&A activity, we saw revenue growth in constant currency across every business segment for the first time since 2010."

For the current quarter HPE guided to earnings of 39-43 cents. For the full year they expect $1.85-$1.95 and that was more than analysts expected at $1.87.

Earnings are boring. The really good news came from the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. Last year they returned $1.3 billion to shareholders in the form of dividends and share buybacks. In 2016 HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

In May they expect to close their previously announced deal with China's Tsinghua and that will provide an additional $2 billion in cash that HPE said it would use to repurchase shares.

This means over the next couple of months we should see significant share activity as fund position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016.

Earnings June 2nd.

HPE shares have shaken off their post spinoff weakness and are now trading at a four-month high. I am recommending we buy this stock in anticipation of investors moving in ahead of future dividends and buybacks. I am not recommending an option because they are too expensive.

Position 3/15/16:

Long HPE shares @ $16.36, see portfolio graphic for stop loss.



SGI - Silicon Graphics Intl - Company Profile

Comments:

Sharp drop back to support with our stop loss only 8 cents below the close. We have little risk at this point and the potential for a decent gain if the stock breaks out. No news.

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.



TRN - Trinity Industries - Company Profile

Comments:

Big decline on no news after a new four-week high on Tuesday. No news.

Original Trade Description: March 18th

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings May 30th.

Position 3/21/16:

Long TRN shares @ $19.15, initial stop loss $17.50

Optional:

Long July $20 call @ $1.50, no stop loss. Plan to keep it until June even if we are stopped out of the TRN shares.



WIN - Windstream Holdings - Company Profile

Comments:

One step forward and two steps back. Maintain that $7.10 stop and hopefully a rebound will appear.

Original Trade Description: March 11th

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.

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.

Position 3/11/16

Long WIN shares @ $8.22, initial stop loss $7.10

Optional

Long August $9.00 call @ .40 cents. NO STOP LOSS


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BEARISH Play Updates


DEPO - Depomed - Company Profile

Comments:

DEPO declined to $13.14. We need it to drop under $13 to accelerate the selling. Maintain the stop loss at $14.25 and we will exit quickly if the biotech trend changes.

Original Trade Description: March 21st

Depomed is a specialty pharmaceutical company engaged in the development, sale and licensing of products for pain and other central nervous system conditions in the USA.

The company reported adjusted earnings of 16 cents that missed estimates of 35 by a mile. Revenue of $111.2 million also missed estimates for $114 million. For the full year the company reported a loss of $1.26 per share or $75.7 million.

In late February the company reported the results of a 635 patient trial of pain drug GRT6005. While pain was reduced there were low levels of severe adverse events that were more frequent on higher doses of the drug. Shares declined on the news.

Shares have been trending lower since the 29th. There was a moderate short squeeze on the 11th that corresponded with a short squeeze in the entire biotech sector. Shares immediately rolled over and moved to new lows as soon as the sector index rolled over.

News flow has been very sparse on Depomed in March and shares are accelerating to the downside.

Earnings are May 10th.

Position 3/22/16 with DEPO opening trade at $13.11

Short DEPO shares @ $13.11, initial stop loss $14.25

No option recommendation because of wide spreads.



EGHT - 8X8 Inc - Company Profile

Comments:

Big opening dip but a rebound in the afternoon. A lot of times in down markets the stocks with the worst recent declines are bought by trades looking for an entry.

Original Trade Description: March 16th

8X8 provides voice over internet protocol (VOIP) technology and software as a service (SaaS) communication solutions in the cloud for small and medium businesses and mid-market enterprises. They offer VOIP to in office subscribers, mobile devices, a virtual contact center and virtual meeting across its SaaS platform.

They reported Q4 earnings of 5 cents compared to estimates for 3 cents. Revenue of $53.2 million also meat estimates for $52 million. This is not a widely followed stock and the post earnings bounce was brief.

The stock rallied on an earnings beat in October and spent all of Q4 and early Q1 in the $11 range. Those gains are fading. Shares closed at $9.90 on Wednesday in a positive market. Shares appear poised to give back all those October gains and decline to $8.00.

This is a technical trade rather than something bearish in their business model or results. The company is simply not generating any excitement and investors are selling.

Earnings are May 18th.

Insiders have been net sellers over the last six months and institutions have sold nearly 8 million shares in the last quarter for a 16% drop in fund ownership. I am recommending we short the stock under today's low of $9.87 and target $8.25 for an exit. No options because of distance from a strike.

Position 3/17/16 with a EGHT trade at $9.80

Short EGHT shares @ $9.80, initial stop loss $10.25.





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