Option Investor
Newsletter

Daily Newsletter, Saturday, 4/2/2016

Table of Contents

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

Market Wrap

The Resistance Battle Begins

by Jim Brown

Click here to email Jim Brown

The Dow moved into its resistance band and the S&P pulled a little bit closer as positive economics and end of quarter retirement funds offset a sharp decline in oil prices.

Market Statistics

Friday Statistics

The Dow closed just slightly over initial resistance at 17,750 as a late day surge of short covering pushed the index higher. On the NYSE, there was $1.5 billion in buy on close orders that kept the index from rolling over at that resistance level as it had in the prior two sessions.

Friday's close at 17,792 was the first close in that resistance range but the S&P has yet to reach the strong resistance at 2,075.



The economic reports were mixed but traders took the good news and ignored the bad news. The good news came from the Nonfarm Payrolls and ISM Manufacturing. The bad news was a decline in construction spending and a sharp drop in March auto sales.

The March Nonfarm Payroll report showed a gain of +215,000 jobs, down from 242,000 in February. This was slightly above consensus estimates for 205,000 and could be considered a Goldilocks number. It was not too hot and not too cold. Revisions to the prior two months were minimal and totaled a loss of only -1,000 jobs.

The unemployment rate rose from 4.9% to 5.0% as more people entered the workforce. The labor force participation rate rose 0.1% to 63.0 and the highest since March 2014. New or returning workers added 396,000 people to the labor force. That means returning workers began looking for work again. However, the more accurate U6 unemployment/underemployment rate rose slightly to 9.8%.

The average hourly earnings rose +0.3% and erased the -0.1% decline for February. The services sector added 219,000 workers while manufacturing saw a decline of -29,000 jobs. That is the largest decline since December 2009.

Energy and mining lost another 12,000 jobs after losing -17,000 in February. The construction industry added 37,000 jobs thanks to the continued warmer than normal weather. The government sector added 20,000 jobs. Retailers added 48,000 jobs despite a constant stream of negativity regarding weakness in consumer activity. Healthcare added 44,000 jobs, leisure/hospitality 40,000 and professional/business adding 33,000.

Those taking part time jobs because they were unable to find full time work rose +135,000 to 6.12 million and the highest level since August. The number should be in the 4.5 million range in a healthy economy.


The manufacturing sector may be returning from the dead despite the loss of 29,000 jobs in March. The ISM Manufacturing Index rebounded from four months in contraction territory to post a solid 51.8 for March. New orders surged from 51.5 to 51.8 and backorders rose from contraction at 48.5 to expansion at 51.0. While only four components are still in contraction, compared to 9 in February, three of them improved for the month with only employment declining from 48.5 to 48.1.

Analysts believe the worst is over for the manufacturing sector as we move into spring and summer, which are normally positive as inventories build ahead of the holiday buying season.

One handicap was the sharp rise in prices paid from 38.5 to 51.5 indicating the cost of raw materials is rising. Another term for that is inflation. However, a lot of that was related to the $26 low for oil in February.



On the down side, the vehicle sales for March fell sharply from an annual run rate of 17.5 million to 16.57 million. This was well below expectations for 17.5 million and 3% below year ago levels. Analysts suggested part of the problem could be GM moving away from their heavily discounted fleet programs. Others said the early Easter might have shifted buying patterns. I think they are grasping at straws. With warmer than normal weather across the country there were plenty of shopping days but consumers were not shopping. The rapidly rising gasoline prices were more likely to blame. Gasoline prices were up 40% from the February lows. That is enough to scare consumers into keeping their existing cars. Another factor is the shrinkage of the subprime auto loans. After a year of pushing those loans, the banks are starting to pull back because of rising repossessions. Without financing the marginal buyer is only a dreamer.

GM sales rose only 0.6% compared to estimates for 6.0%. Ford sales rose 7.8% compared to estimates for 9.4%. Fiat Chrysler sales rose +8.1% compared to estimates for 14%. Honda saw a 9.4% increase compared to estimates of 16%. Volkswagen sales fell -10.4%. Toyota sales fell -2.7% compared to estimates for a 5.6% rise.

JD Power said there were "worrisome trends below the surface" with rising inventories at levels they have only seen once in the last 24 years. Used car prices were falling sharply. The company also said incentive spending on new vehicles has risen rapidly and is trending towards recession-era levels industry wide and has already exceeded recession-era levels on cars. Q1 sales incentives averaged 9.6% of MSRP. The increased incentives reduce future resale values and drives down trade-in values for the current transaction.

February construction spending declined -0.5% to $1.144 trillion compared to estimates for -0.1%. However, January was revised higher from 1.5% to 2.1%. The -0.5% decline was led by a -1.7% drop in public construction. Residential spending rose +0.9% to $448 billion. That jumps to 1.2% if you remove home improvement spending.

Consumer sentiment rose slightly from the first release but was down for the month. March sentiment rose from 90.0 to 91.0 compared to 91.7 in February. The present conditions component declined from 106.8 to 105.6 and the expectations component declined from 81.9 to 81.5. This is the third consecutive monthly decline in sentiment. You can blame this on gasoline as well. A 40% hike in gasoline prices produces a direct link to the consumer attitudes. Gasoline may be below $2 in most areas but that $1.50 we saw in many states in February was a powerful stimulant. Consumers are facing withdrawal symptoms as prices rise. In California, prices rose 10.1 cents per gallon over the last week to average $2.78 per gallon but prices are nearing $4 in some areas. No wonder California has more than 21% of all registered Tesla cars.


The various economic reports on Friday caused a 0.1% increase in the Atlanta Fed real time GDPNow forecast. They are now predicting 0.7% GDP growth for Q1. The construction spending report showing a rise in residential construction was responsible for the increase in the GDP forecast.

Despite the increase, this is still well below the 2.7% growth forecast in the middle of February. The outlook has decreased significantly. This is the main reason Janet Yellen was so dovish in her rate forecasts last week. They are not going to hike rates with the GDP so close to zero growth.


Overseas the Chinese PMI for March came in at 50.2 and well above the forecast for 49.3 from a Reuters poll. February's PMI was 49.0 and the lowest reading since 2011. All categories of the index showed improvement. New orders rose above 50 suggesting the government's stimulus measures have started to work. However, one month is not a trend. Analysts also said the stabilization of the yuan may have helped calm nerves and stimulate growth.

The economic calendar for next week is highlighted by the FOMC minutes on Wednesday and another appearance by Janet Yellen on Thursday. The Yellen event is actually an unprecedented round table discussion with Yellen, Bernanke, Greenspan and Volcker. I cannot imagine a discussion with four Fed Chairmen all at the same table. Their outlooks are dramatically different and there could be some fireworks to roil the market.

The other reports highlighted in green are important but not normally market movers.

Analysts will be scouring the FOMC minutes for clues about the next rate hike. A total of 6 Fed heads were talking about accelerating the hikes last week with the implication that April is a live meeting with rate hike potential. However, after Yellen's dovish comments there is almost zero chance of an April rate hike. The CME FedWatch Tool is showing only a 4.6% chance of a rate hike. June jumps up to 25%, July 40%, September 52%, November 55% and December 65%.



In stock news, BlackBerry (BBRY) reported an adjusted loss of 6 cents that beat estimates for a loss of 8 cents. However, revenue of $464 million declined -29.7% and missed estimates for $560 million. Hardware revenues contributed 39%, service fees 29% and 32% from software and licensing, which was up +106% in the quarter. BlackBerry said it won 3,600 enterprise clients in the quarter.

They generated $225 million in free cash flow and ended the quarter with $2.377 billion in cash. Long-term debt decreased from $1.707 billion to $1.277 billion. While they are not setting the world on fire they are reducing their debt and growing their software and licensing business, which the company has said will be their future business. They expect to grow that revenue by 30% for the full year. Shares declined -7.5% on the news.


Tesla's Model 3 debut event was a huge success with more than 232,000 orders received in the first 48 hours according to an Elon Musk tweet. That represents $232 million in deposits at $1,000 per car. Musk said the average selling price with options would be around $42,000 so that amounts to nearly $10 billion in sales. He said, even if you only bought the base model at $35,000 you would still have the finest car on the road for that price. The car features 0-60 in six seconds, 215 mile range, semi-autonomous driving, touch screen dashboard and seats 5 adults. Unfortunately, they will not begin to ship until late in 2017.

GM will begin selling the Bolt electric car with a 200-mile range later this year. Hyundai's Ioniq will have a 110-mile range and will match Tesla on price and goes on sale this fall. Unfortunately, for those companies, buyers are not lining up around the block at local dealers to buy them.

Shares were up +$17 intraday but fell back to prior resistance at the close. Short interest in Tesla shares is currently 25% or 32 million shares and an all time high. Tesla has 132 million shares outstanding. Apparently, a lot of people were expecting a sell the news event.


Regeneron Pharmaceuticals (REGN) shares spiked $45 after the company and its partner Sanofi (SNY) reported results from two Phase 3 trials using their experimental drug dupilumab for moderate to severe dermatitus. The trials showed that roughly 37% of the patients were able to clear up their skin lesions compared to only 10% that took the placebo. Using the Eczema Area and Severity Index, patients on the drug showed a 67-72% improvement in their rating. The number of adverse events for both trials were minimal suggesting the treatment was easily tolerated. The drug has already received a "breakthrough-therapy" designation by the FDA so the final approval should be favorable. The companies are going to submit the findings to the FDA in Q3.


Netflix shares gained +$3.47 after the FCC said it was not going to investigate the company for slowing download speeds to mobile subscribers on AT&T and Verizon. The FCC chairman said Netflix did not violate any laws because that was outside the net neutrality rules. Netflix admitted degrading picture quality to reduce download sizes because of data caps at those carriers. The company said it had been doing this for five years to "protect customers from exceeding their data limits." Netflix said last week they would soon introduce an app that would let users pick their video quality based on their current data limits.


Chipotle Mexican Grill (CMG) was not finding any love on Friday. Goldman Sachs (GS) cut them from buy to neutral and Wedbush went from hold to sell. A week earlier Jefferies, The Maxim Group and Deutsche Bank cut them from hold to sell. CMG said in March they expect to lose $1 a share because of declining comps and additional costs from the food contamination issues. Shares declined -$6 to $464.

The company applied to trademark the name "Better Burger" in what analysts believe is an effort to branch out in the fast food burger market to compete with Shake Shack, Five Guys and others. Chipotle already operates 13 Asian Kitchen restaurants and three Pizzeria Locale locations in a joint venture to test the concept.


Yahoo (YHOO) lost another executive ahead of their sale. Senior VP of Talent Acquisition and Development, Sandy Gould, resigned saying "leaving Yahoo is the hardest thing I have ever done." It was probably not as hard as recruiting new talent into a company that is about to be sold and dissected. In a statement she said, "It is time to take a break and decide my next adventure." She had only been at Yahoo for 3 years after working at Disney and RealNetworks. She is only one more in a long line of executives to flee the sinking ship.

Yahoo has reportedly received interest from as many as 40 groups interested in buying the core business. The company has given them until April 11th to submit preliminary bids. That is next Monday. It is hard to believe there may actually be a bidding war for Yahoo. I am guessing my $1,000 offer may be too low.


The equity markets disconnected from oil after a huge drop at the open. The Dow fell -119 points at the open and the S&P dropped -17 after oil prices collapsed 4.5% on events in the Middle East. The Saudi Arabian deputy crown prince said the kingdom would not freeze production unless Iran and all the other major producers freeze as well. That is contrary to what was implied a few days back when some producers said they would cap production even if Iran were not part of the agreement.

I have said for weeks that the agreement would never work and even if they agreed, it would not reduce the current glut and future production. The entire exercise was simply to lift prices by deceiving the uninformed public.

In other headlines, Saudi said they were planning on increasing production annually through 2020. The UAE said they were planning on increasing production from 3.1 mbpd to 3.5 mbpd by the end of 2017. Iran, Iraq, Libya, Nigeria and the UAE were always questionable about agreeing to a production freeze. Any OPEC producer with excess capacity coming online in the near future needs to sell that production to offset the loss of revenue from the low prices. The only producers that are really pushing for a freeze are the ones with declining production.

A UAE official said OPEC does not want oil prices to rebound to $50 because that would allow much of the shale drilling to be restarted. That is exactly what U.S. producers have been saying that a $45-$50 oil price would allow them to go back to work. It would appear that $40 could be a top for a long time unless U.S. inventories decline dramatically.

Crude prices fell to $36.63 at the close and I would seriously doubt that they will rise significantly in the near future. We are more than likely going back to the low $30s based on the fracture in the freeze coalition. Inventories and production are still rising. With 1-2 mbpd going into storage somewhere on the planet there is a point where a limit will be reached.

Inventories in the U.S. rose 2.3 million barrels last week to 534.8 million and a new historic high. Production declined 16,000 bpd to 9.022 mbpd and -588,000 bpd off the peak from last June.


Baker Hughes said the active rig count in the U.S. declined -14 to 450 with oil rigs falling -10 to 362 and gas rigs -4 to 88. Those are historic lows since records were started in 1949.


Markets

Since I have been saying the same thing for several weeks I will try not to bore you and repeat myself too much today. The Dow and S&P are over extended. The S&P is approaching major resistance that begins at roughly 2,075 and continues to the 2,132 level from the high last May. While it is entirely possible for the indexes to fight through this resistance and make a new high, it will not be an easy task.

With the big gains out of the February low, the Dow is up +14.7% over 7 weeks. The S&P has rebounded +15%. By any metric you care to use this is grossly over extended. Continuing to press through another 60 points on the S&P "should" be very difficult.

I reported on Thursday night that FundStrat guru Tom Lee is looking for better than expected earnings because the bar is set so low. With traders holding more than $1 trillion in existing short positions and the most since 2009, he believes the earnings beats will cause a short squeeze that takes us to new highs. I would love for that to happen but we need to be aware that it could be a tough battle to move higher.

The Williams %R indicator I added to these charts is a momentum indicator for determining overbought/oversold conditions. A number under 20 indicates overbought and a number over 80 indicates oversold. This indicator is used for determining entry and exit points for traders. For the S&P and Dow the indicator has been over 20 since late February. The last time the S&P was this overbought for this long was the rebound out of the October 2014 dip. The S&P topped out at 2,079 from that rebound, pretty close to where we are today, and then fell back to 1,972 over the next two weeks. The chart pattern for the rebound from October 2014 looked almost identical to the rebound from the September lows in 2015 where the S&P reached 2,116 before falling nearly 100 points back to 2,020.

Past performance is no guarantee of future results but patterns like this do tend to repeat. The longer the S&P remains overbought the bigger the correction when it finally happens.


The Dow chart is similar to the S&P chart with the same overbought conditions. The next 400 points on the Dow to return to a new high should be very tough to win. Consider it a Super Bowl equivalent of a goal line defense every 50 points. It is not just one resistance level but a series of resistance levels every 50 points.

Lately we have seen some rebounds from the dogs of the Dow like American Express, IBM and others that have been remarkable. The key question is will they continue higher after such big gains already. IBM has rallied 31% since the February low and American Express +21% in only 7 weeks. While they are short term overbought, they are both still well below their highs. Can they continue the sprint higher?

Because the Dow is only a 30 stock index the performance of only a handful of stocks can materially impact the index. If 6-7 stocks continued posting those strong gains the index would be dragged slowly higher.

I will be the first to admit that the Dow internals look very bullish. I went through the charts for each of the Dow stocks and 22 of the 30 were either bullish or extremely bullish. Only 8 stocks, JPM, GS, DD, PFE, NKE, DIS, XOM and CVX were not showing a bullish pattern. GS and JPM were on the verge of turning bullish.

Based on the individual analysis the odds of the Dow continuing higher are very good but remember, the Dow is only 30 stocks and the S&P is 500. The Dow could drag the other indexes higher if the individual performances continue.

That does not mean the index is just going to plow through those major resistance levels. It should be a fight and prior winners could see profit taking at any time.



The Nasdaq has a much easier road ahead. There is significant resistance at 4,926 and psychological resistance at 5,000 but those are just stepping stones on the way to major resistance at 5,165. The major Nasdaq challenge is the biotech sector and that is showing signs of recovery. The biotechs have keep the Nasdaq from rebounding as strongly as the Dow and S&P but should that anchor turn positive we could see the Nasdaq sprint to catch up with its big cap brothers.



All of the indicators on the biotech index are turning positive. The $BTK closed over 3,000 on Friday after making two higher lows in March. The biotech struggle is not over with the political candidates bashing them on a weekly basis but the damage to Valeant (VRX) is fading and it will no longer have a material impact to the sector. There were some positive drug trials announced last week and that caused investors to reevaluate their risk profile to see if it was safe for them to go back into the sector. It may not be clear sailing for the sector yet but the worst may be over and a choppy rebound could begin.


The Russell 2000 was the second best gainer for the week with a 3.5% move. However, the last three days saw minimal moves with the index locked under the strong resistance at 1,120. If the biotech recovery continues, the Russell could move higher but declining oil prices could blunt that move. There are a lot of energy stocks in the Russell and they could act as a brake on the gains. The Russell is far from the same overbought levels of the big cap indexes and could really energize the broader market if the rally continues over 1,120.


This could be a pivotal week for the markets. This is the only week between now and the start of earnings the following week. If traders want to position themselves for a potential earnings rally, they need to do it this week. If they want to capture some profits from the seven-week rally and then move into some earnings positions then this is the week. There could be a positive bias early in the week from funds putting end of quarter retirement contributions to work. That could be offset from any window undressing that could occur later in the week.

The economic calendar is devoid of market movers other than the FOMC minutes on Wednesday and Yellen's roundtable on Thursday. To summarize this could be a volatile week with a slight upward bias. The direction the next week will depend on how the earnings play out.

Friday was April Fool's Day. Hegeye released this cartoon of an April Fool in the form a bullish trader. Do you think there is a message here?



If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Random Thoughts


Saudi Arabia is fed up with being dependent on oil revenues for their future. The Saudi deputy crown prince wants to establish a $2 trillion sovereign wealth fund to generate income for the kingdom for the next century. This could greatly exceed the $880 billion fund held by Norway, which is currently the largest.

In order to kickstart this fund the prince wants to take Saudi Aramco public in 2017 in what would be the largest IPO ever. Since Aramco is owned by the government and shrouded in secrecy, it would mean an extremely high volume of public disclosures including reliable third party estimates on the amount of oil reserves in each field, actual production and depletion and remaining expected life of the field. These numbers are as classified as the exact specifications for making a hydrogen bomb. No OPEC nation has released this data in more than 40 years. In OPEC, size does matter and everyone can claim they have reserves of any size in a fight for position amongst themselves but going public with an IPO requires opening the accounting tent for the world to scrutinize. They may find out that the level of pain and embarrassment is simply too high and cancel this plan before it ever gets to the IPO stage.

Several of their largest fields are thought to be nearly exhausted and disclosing that to the world in official documents could be detrimental to their standing inside OPEC. Saudi Arabia is operating 128 rigs today, compared to the 104 in July 2014 when the oil crash began.


As many as 1 million Americans will stop receiving food stamps this year as a 20 yr old law goes back into force. The 1996 law required able-bodied adults without dependent children to work a minimum of 20 hours a week to qualify for food stamps. Some states suspended the law during the financial crisis but it went back into effect on January 1st with a 90-day grace period for recipients to find a job. That grace period expired on April 1st. Some analysts are blaming that law on the surge of new part time jobs over the last three months. The number of food stamp recipients without children and without a disability has increased from 1.7 million in 2007 to 4.7 million in 2014. Thousands Losing Food Stamps


The AAII Investor Sentiment Survey was a real surprise this week. Bullish sentiment declined -6.6% despite the rally. Neutral sentiment rose +4.6% to more than 47% while bearish sentiment actually went up. Apparently, some investors are actually looking at the charts.



Professional April Fool's jokes.

Election Insurance from ESurance

Quilted Northern Rustic Weave

Donald Trump Campaign Announcement

Spray on TV Screens

Kars for Kids, Get your Kid Today

Google Reality Headset

Google Self Driving Bicycle

OpenTable Lickable Food Photos

Velcro car seats from Lexus


NBC, a unit of Comcast, said it has sold more than $1 billion in ads for the Summer Olympics in Rio de Janerio. With most games occurring in prime time for the USA the audiences should be huge. The games start August 5th and last for 17 days. The EVP of advertising said we still have four months of sales ahead of us and advertisers will become more focused as the event draws near. NBC agreed to pay $7.65 billion for the rights to air six additional games between 2022-2032 and no other companies got to bid.


I wrote about the Carlucci Indicator several weeks ago. In theory the combination of indicators on a weekly basis represent a market timing tool that some claim was the best ever invented.

Only one thing needs to happen for this indicator to give a buy signal. The percentage of S&P-100 stocks trading over their 200-day average has to exceed 65% and it closed at 63% on Friday.

The other requirements have already been met. According to Carlucci only two of the following three have to be met but as of Friday all three were positive.

The weekly RSI is over 50.
The weekly Slow STO black line is over the red line.
The weekly MACD black line is over the red line.


The problem with hard coded technical indicators is they do not take into account the calendar, resistance levels, external events, fundamentals like earnings, economics, etc. While the setup suggests entering long positions today there is no relationship to external events. Market technicians will tell you that the market has already factored in all the external events to get to this level. Time will tell.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt. People must again learn to work instead of living on public assistance."

Cicero , 55 BC

Apparently, we have learned NOTHING over the past 2,069 years.
 


New Plays

Biotech Rebound

by Jim Brown

Click here to email Jim Brown
Editor's Note

Biotech stocks appear to be rebounding and shares have room to run if the rally continues. The biotech sector is improving with a two-month high close on Friday and a 6% gain for the week. The close was above strong resistance and that could provoke additional short covering next week.


NEW BULLISH Plays


FGEN - Fibrogen - Company Profile

FibroGen is a research-based pharmaceutical company that discovers, develops and commercializes therapeutic agents to treat serious unmet medical needs. They have multiple drugs in the pipeline and they have collaboration agreements with Astellas Pharma and AstraZenaca (AZN).

Some of the drugs in process include roxadustat, or FG-4592, an oral small molecule inhibitor of hypoxia inducible factor prolyl hydroxylases (HIF-PHs) that is in Phase III clinical development for the treatment of anemia in chronic kidney disease; FG-3019, a monoclonal antibody in Phase II clinical development for the treatment of idiopathic pulmonary fibrosis, pancreatic cancer, and liver fibrosis; and FG-5200 for the treatment of corneal blindness resulting from partial thickness corneal damage.

Fibrogen and its partners are currently conducting seven Phase 3 trials on roxadustat for registration in the US, EU, China and other countries. A Phase 2 study for FG-3019 is underway on patients with inoperable Stage 3 pancreatic cancer. The company has completed funding its portion of research on roxadustat and AstraZenaca and Astellas are responsible for all further expenses until the drug is approved. This reduces significantly the drain on cash from Fibrogen. Cash on hand at the end of the quarter was $337 million. Fibrogen has multiple pathways to success with the multiple drugs in progress.

Earnings are May 10th.

Shares plunged on January 1st with the biotech sector and have traced almost exactly the same chart pattern as the Biotech Index. Friday's close on FGEN was a two-month high. Resistance at $21 appears to be breaking.

I am recommending we buy FGEN shares on a move over Friday's high. Once over that level there is limited resistance until the $30 range.

With a FGEN trade at $21.75

Buy FGEN shares, initial stop loss $18.00, which will be raised promptly on further gains.

No options due to wide spreads.




NEW BEARISH Plays


No New Bearish Plays




In Play Updates and Reviews

Small Cap Weakness

by Jim Brown

Click here to email Jim Brown

Editors Note:

Despite the rally in the big cap indexes the Russell only gained +3 points on Friday. Since our portfolio consists of small cap stocks there was little upside movement. Hewlett Packard is our big cap play and it gained nearly 4%.

We were stopped out of DEPO as the biotech sector gained another 2.6% on Friday. We were stopped out of EGHT on a very minor gain that was probably carried over from their patent news on Thursday.

We need the Russell to catch fire and break over the 1,117 high it has posted for the last three days. Friday was a 3-month high close but you could hardly call it bullish.

It was strange that the 2.65% gain in the biotech sector did not translate into additional Russell gains since there are hundreds of small biotech stocks.

I am not convinced this rally is going to stick so I raised a lot of the stop losses.




Current Portfolio





Current Position Changes


DEPO - Depomed

The short position was stopped out with a DEPO trade at $14.25.


EGHT - 8x8 Inc

The short position was stopped out with an EGHT trade at $10.25.


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


AMLP - Alerian MLP ETF - ETF Profile

Comments:

After the news from Saudi Arabia and the Middle East on Friday, I am giving up on AMLP. While I have no doubt that it will rise long term it may be REALLY long term and I want to use the capital in some other play. I am recommending we close the position.

The Saudi Arabian oil minister said they would not be a part of the production freeze to be discussed in Doha Qatar on April 17th unless everyone was part of it. Since Iran, Libya, Nigeria and even the UAE have said they would not cap production that killed the potential agreement. They may continue to talk about a potential agreement in hopes of keeping prices from crashing but there will not be any positive impact on production.

Saudi Arabia said they were planning annual production increases through 2020. The UAE is raising production by 400,000 bpd by the end of 2017. Iran is adding 1.0 mbpd by the end of 2017. Libya is expected to add 400,000 bpd by the end of 2017. Oil prices may remain lower for longer than anyone thought.

CLOSE THE POSITION.

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. See portfolio graphic for stop loss.

Optional

Long July $12 call, entry 55 cents. See portfolio graphic for stop loss.



DDD - 3-D Systems Corp - Company Profile

Comments:

3D still fighting resistance at $15.45. No news.

Original Trade Description: March 29th.

3D Systems provides 3D printing products and services worldwide. The printers use input from 3D design software, CAD software and other design tools using a range of print materials including plastic, metal, nylon, rubber, wax and composite materials.

3D crashed and burned after a couple of horrific earnings reports in 2015 and shares declined from $33 to $7 at the January lows. The entire sector saw a reset of stock prices and expectations.

For Q4 3D posted earnings of 16 cents that blew away estimates for 3 cents. 3D is the industry leader and appears to be roaring out of the darkness that enveloped the sector in 2015. Three-dimensional printing revenues are expected to grow from $3.07 billion annually in 2013 to $12.8 billion in 2018 and $21 billion by 2020 with a consolidated average growth rate of 34%.

On Monday 3D Systems announced several new software products that overcome prior limitations weighing on all printer companies. The product suite called Geomagic Freeform has multiple products that will power a jump forward in the 3D technology capability and greatly reduce the time needed to go from concept to printed article.

Under Armour (UA) just announced it used 3D Systems selective laser-sintering technology to produce the UA Architech shoe. This is the world's first performance training shoe with a 3D-printed midsole that is available to the general consumer market. Under Armour plans to release an entire line of 3D printed shoes in 2016. Late last year New Balance also partnered with 3D to make a commercially available running shoe with a 3D-printed midsole.

DDD shares are rallying on the multiple announcements and the appearance that all is well in 3D land. Resistance is $15.45.

Earnings are May 5th.

Position 3/30/16 with a DDD trade at $15.60

Long DDD shares @ $15.60, See portfolio graphic for stop loss.
Optional

Long May $17 call @ $1.05, See portfolio graphic for stop loss.



DRII - Diamond Resorts Intl - Company Profile

Comments:

No specific news. Alternating gains and losses for five days.

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.



FTNT - Fortinet Inc - Company Profile

Comments:

Another nice gain on no news. The next resistance is $32.15. I am recommending we close the position at $32.10.

Close the position with a FTNT trade at $32.10.

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.

Position 3/29/16 with a FTNT trade at $28.75

Long FTNT shares @ 28.75, see portfolio graphic for stop loss.

Optional:

Long May $31 call @ $1.10, see portfolio graphic for stop loss.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

Outstanding gain to a new historic high. Hewlett Packard is off to the races. Don't forget there is $2 billion in dividends and buybacks coming in June.

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.



KS - KapStone Paper - Company Profile

Comments:

Still fighting resistance at $14. No news.

Original Trade Description: March 26th.

KapStone manufactures and sells containerboard, corrugated Products and specialty paper products in the U.S. and internationally. They are the 5th largest producer in the USA. The purchased Victory Packaging L.P. and its subsidiaries for $615 million back in June. As a result of the acquisition revenue for 2015 rose from $2.3 billion to $2.8 billion thanks to $582.9 million in revenue from Victory.

They own four paper mills, 21 plants and 65 distribution centers.

Earnings were a challenge for Q4 due to a 12-day strike at one of their paper mills. This reduced revenue because of a lack of product. Shares dropped from $14 to $9 on the news on February 10th. Shares have recovered from that dip and were up 70 cents on Thursday in a weak market. They failed to sell off earlier in the week when the market was down.

On March 10th they announced a 10 cent quarterly dividend payable April 13th to holders on March 30th. Earnings are May 2nd.

Shares are in a pretty decent uptrend and closed at $13.20 on Thursday. Resistance is $15.20. The high in November was $25. I believe they will at least reach resistance at $15 and with a decent market will move through that level to $17.

Position 3/28/16:

Long KS shares @ $13.15, see portfolio graphic for stop loss.

No option because of wide strikes.



SPXC - SPX Corporation - Company Profile

Comments:

Nice follow on move. The next resistance is $16.75, then $18.50.

Original Trade Description: March 30th

SPX provides specialized heating, ventilation and air conditioning (HVAC) solutions worldwide. They also provide instrumentation, detection and measurement for industrial markets. They offer detection and inspection equipment for underground pipes and cables, specialty lighting products, communications technologies and bus fare collection systems. Their power segment provides all types of equipment and technology for the power generation, transmission and distribution market.

As part of a companywide restructuring process in December they agreed to sell their dry-cooling tower business. On the Q4 conference call they also announced plans to sell portions of the power division. They hired an outside advisor to provide strategic alternatives as they sell off the low margin and poorly performing portions of the business. They spun off the flow food and power portion into a new company SPX Flow (FLOW) in September.

They reported earnings of 52 cents that missed estimates of 57 cents. However, shares rebounded on the news of the various restructuring efforts. Shares rallied to resistance at $14.85 at the close today. A break over that resistance could hit $17 in the days ahead.

Earnings are May 26th.

Position 3/31/16 with a trade at $15.05

Long SPXC shares @15.05, see portfolio graphic for stop loss.

No options because of wide spreads.



TRN - Trinity Industries - Company Profile

Comments:

No specific news. Minor decline on the drop in oil prices. Weak oil means weak orders for tanker cars and related equipment.

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, see portfolio graphic for stop loss.

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:

No specific news. No stop loss on the option.

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

Previously closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.




BEARISH Play Updates


DEPO - Depomed - Company Profile

Comments:

Shares finally spiked above $14 to stop us out at $14.25 on the 3% gain in the biotech sector.

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

Exit 4/1/16: Short DEPO shares @ $13.11, exit $14.25, -1.14 loss

No option recommendation because of wide spreads.



EGHT - 8X8 Inc - Company Profile

Comments:

EGHT only posted a 13-cent gain but that was enough to stop us out at $10.25. The four new patents announced on Thursday were the likely reason for the move back over $10.

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

Closed 4/1/16: Short EGHT shares @ $9.80, exit $10.25, -.45 loss.



GPRO - GoPro - Company Profile

Comments:

Another minor loss in a positive market. Hopefully the trend will remain our friend. Maintain the stop loss at $12.55.

Original Trade Description: March 28th

GoPro develops hardware and software solutions associated with capturing, managing, sharing and enjoying engaging video content. Basically they make action cameras and had the market cornered for several years. That is no longer the case.

Analysts expect GoPro sales to decline -16% in 2016 compared to 15% growth in 2015 and 41% growth in 2014. The company has made numerous mistakes in execution and competitors caught up with them and some have passed GoPro in technology. The company expects to fix their sagging sales by discontinuing three cheaper models in 2016 and introduce the new Hero 5 camera sometime this year. They will also release the Karma drone and the Omni VR rig later this summer.

However, Kodak, Nikon, Ricoh, Nokia and 360Fly have already launched similar devices at cheaper prices than GoPro normally charges. Analysts claim the streamlined cameras from those manufacturers make GoPro cameras look bulky and clumsy. Nokia is selling an 8 camera VR device for $60,000 to professional filmmakers. GoPro is trying to market a 16 camera setup for $15,000 but the software is clunky and hard to use.

The bottom line here is that GoPro had the lead spot in the market and is in danger of losing it to major, well-funded competitors. Secondly, many analysts say the action camera market has become saturated and anyone that wanted one now has one.

Shares fell 7% today on the Nokia VR news. The closed at $11.50 with support at $10. That looks like a done deal given the choppy market and the downward trajectory on GoPro shares. With competition mounting, I would not be surprised to see GoPro set a new low.

Earnings are April 28th.

Position 3/29/16 with a GPRO trade at $11.40

Short GPRO shares @ $11.40, see portfolio graphic for stop loss.

Optional

Long May $11 put @ $1.17, see portfolio graphic for stop loss.





If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now