Option Investor
Newsletter

Daily Newsletter, Thursday, 4/28/2016

Table of Contents

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

Market Wrap

Icahn Moved The Market

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market seemed to shrug off a pair of central bank meetings and weak GDP data until late day selling drove it lower. Early action was driven by news and data, late day trading by a sell off in Apple sparked by comments from Carl Icahn. His comments? That he had sold out of Apple due to earnings and the China question.

The BOJ decided to leave interest rates unchanged which was surprising enough by itself. Kuroda took things a step further when he said that negative interest rates were not on the table although more QE may still be needed. Asian markets were hit hard by the news after expecting some form of QE to be unveiled. The Japanese Nikkei fell more than -3.5% followed by smaller declines in mainland Chinese indices and other markets in the region. EU markets were similarly affected but were able to rise in late day trading. Early losses on the DAX were in the range of -1.5% but this was turned into a small gain by the close of the day.

Market Statistics

Futures trading indicated a weak opening all morning. Indicated losses ranged from about -0.75% at the low to about -0.5% by the open. Losses were muted in part by positive earnings reports and a flurry of M&A activity but losses persisted into the opening bell. After the bell the indices quickly fell to the morning low but just as quickly reversed course. By 10AM the SPX was near break even levels and by 11AM it was trading in positive territory, moving up to set a high for the day. Another high was hit shortly before noon and from there it was down again to eventually retest the low of the day, and it did not hold. Just after 3PM the SPX reached the early low, and went right through it. Selling accelerated until hitting support targets just before 3:30. A small bounce formed but it did not carry the indices very far, by the closing bell they were back near the low of the day.

Economic Calendar

The Economy

Weekly jobless claims figures remain near long term lows although GDP figures were the headline of the morning. The first read on 1st quarter GDP was much weaker than expected, only 0.5%, helping push back expectations for FOMC rate hikes to later in the year. Consensus was in the range of 1% but had been coming down in recent weeks. This is only the first read, we can expect two more revisions so it may not be as bad as it looks. Regardless, this is the slowest pace of growth since the first quarter of 2014,due to deceleration in positive contributions including PCE and residential real estate.


Initial claims rose by 9,000 from last week's upward revision of 1,000 to hit 257,000. The four week moving average fell by -4,750 to 256,000, the lowest level it has seen since 1973. On a not adjusted basis claims rose by 1.2%, faster than the expected decline of -2.7%. On a state by state basis Massachusetts and Connecticut led with increases of 1,653 and 1,105 while Pennsylvania and Texas led with declines in claims of -4,270 and -2,539. Claims remain at historic low levels and trending lower in the long term, consistent with labor market health and contrary to economic slowing as indicated by the GDP data.


Continuing claims fell -5,000 from a downward revision to last weeks data to hit 2.130 million, the lowest level since November, 2011. The 4 week moving average also fell, shedding -10,000 to hit its lowest level since November, 2011. This data helps confirms health in the labor market as indicated by the initial claims data as it too is trending to new lows over the long term. Together these numbers indicate strength in jobs availability and declining unemployment levels so next week's NFP/unemployment data should be good.

The total number of jobless claims fell -69,811 to 2.255 million. This is the lowest level since November last year, -7.5% below last years level and consistent with seasonal trends as well as the long term down trend in unemployment. Based on the historical data we can expect the current slide in claims to continue for about 6 more weeks with an expected target near 2 million.


Tomorrow's economic calendar is pretty full. Personal income and spending data is rounded out by the Employment Cost Index, Michigan Sentiment and Chicago PMI. Next week is the turn of another month so ADP, Challenger, NFP and Unemployment data are all on tap along with auto sales, construction spending and factory orders.

The Dollar Index

The Dollar Index moved down to retest the 6 month low near $93.60. The index is being pushed lower by both the euro and the yen in the wake of yesterday's FOMC meeting, and today's BOJ. The FOMC appears ready to hike, but still dovish in terms of when. The BOJ is still in easing mode, but not quite as desperate as thought. Together, with the ECB's pause to easing, has provided a back drop in which both the euro and yen are firm and/or firming against the dollar while the dollar itself is weakening. Support may be at $93.60 but a break below this level will likely take the index down to $93. The indicators are rolling over in the line with the prevailing down trend so a test of support is likely.


The Oil Index

Oil prices persist in moving higher despite evidence of oversupply and over production. WTI flirted with 2016 highs day, driven more by a weakening dollar than anything else. Yesterday's US storage data, all time record highs, along with global production levels and demand outlook do not really support bull market conditions. There is sign of declining production, US daily production has fallen by about a half million BPD over the past year, but on a global level production remains well above demand with really no hope of a coordinated effort to curb it. We may get a rebalancing of the market by 2017 as many predict but that is a long way off. Until then I remain wary of oil prices at these levels and expect we'll see some of form of correction before then.

The Oil Index fell in today's session after trying to move higher. Today's candle shows signs of resistance with the long upper shadow and may indicate a peak has been reached. MACD is bullish but divergent from the new 5 month high while stochastic is overbought, leaving it susceptible to correction. Price needs to remain above 1,170, now support, to maintain a bullish outlook. ConnocoPhillips reported before the bell today, beating earnings and revenue expectations, adding support to the sector. Exxon reports tomorrow and could also produce better than expected results. Better than expected earnings is a good thing but with the bar set so low for this sector I'm not sure it matters if earnings decline -100% or -105% from the first quarter of last year.


The Gold Index

Gold prices got support from two central banks over the course of the past two days and saw prices jump more than 1.25%. A dovish toned Fed and less than ultra-dovish toned BOJ combined to send the dollar lower and gold higher. Spot price gained more than $16.00 to trade above $1265 and near the top of the 3 month trading range. It looks like prices will be supported by central banks into the next month to 6 weeks so it's time to turn to the data for cues. Upside target is near $1280 for now, unless data begins to come in hotter than expected. A move above $1280 could go to $1200-$1215. Support remains in the $1225 to $1235 region.

The gold miners surged to new highs today as gold prices firmed and the miners begin to report. GoldCorp reported yesterday, better than expected, and reversed losses experienced in the first quarter of last year. The company also reaffirmed full year guidance. Royal Gold also reported better than expected results yesterday, a 26% increase in revenue driven by higher realized prices and increased production. The gold miners ETF GDX jumped more than 4.25% and reached a new 19 month high. The indicators are both confirming the break to new highs with bullish crossovers although it looks like the three month uptrend may be losing strength. Upside target is now $26.70, the 78.6% retracement line which provided resistance in 2014.


In The News, Story Stocks and Earnings

M&A was almost a bigger story than earnings, data or central banks. So many deals were announced I lost count but the one garnering the most attention was Abbot's takeover of St. Jude. The deal is worth $25 in cash and stock and is aimed at strengthening Abbot's presence in the cardio-vascular arena. Together the two companies will be able to compete with Boston Scientific and Medtronic in just about every aspect of cardiac care. Abbot expects to close the deal later this year and begin to see the resulting increase in revenue soon after, pending regulatory approval. Shares of St Jude gained more than 25% in response to the offer, shares of Abbot fell nearly -10% in pre-opening action but regained some of the loss during the open session.


Ford reported earnings before the bell and delivered solid results. Earnings and revenue reached new record highs on cost saving initiatives and strength in global car sales. Boosting results was a near doubling of operating margin driven by solid results in the three top performing regions; US, EU and Asia. Along with this guidance was reaffirmed to be at least as good if not better than last year. Based on today's results and outlook for car sales this year it looks like this will be easily met. Shares of the stock jumped more than 3.75% on the news and are moving up from the lower end of a long term trading range. Today's move is accompanied by bullish indicators which are both rising and indicative of higher prices. Next upside target is near $14.50 with an additional catalyst due next week, auto sales figures. Positive auto sales data could attract new buyers and add momentum to the sector.


Facebook jumped more than 10% today after releasing better than expected earnings yesterday. The company proved yet again that it can monetize its assets and it is being rewarded for it. Amazon reported after the bell and blew away the expectations. The company reported top and bottom line beats that were well above projections driven on a 28% increase in 1st quarter sales. Shares of the stock jumped more than 10% on the news although guidance was only in line with forecast.


The Indices

Icahn's Apple comments may have been the spark that started the afternoon sell-off but there are many factors at play, not least of which is weak growth. Weak growth trumps no rate hike, especially if outlook dims. Today's action was led by the Dow Jones Transportation Average which lost a little more than -1.55%. Even with today's decline the index remains near the four month high. The index could continue to trend at this level into the near term although signs of weakness persist. Divergences in the indicators are confirmed today with bearish crossovers in both MACD and stochastic Support target on a pull back has a first target at the short term moving average near 7,775 and then next target 7,750.


The NASDAQ Composite was the second biggest lower in today's session, shedding -1.19%. The tech heavy index was caught in a tug of war between positive and negative earnings reports, succumbing to Icahn's opinion in the end. Today's action created the largest black candle in two months, and fell below the short term moving average. This move confirms bearish crossovers in the indicators which formed earlier in the week but the index has yet to break below support targets. Support appears to be 4,785, just below today's close, and likely to be tested.


The Dow Jones Industrial Average made the third largest decline in today's session, -1.17%, the biggest daily decline in about two months. Today's action is a move down from resistance, confirmed by bearish crossovers in both indices, that may lead the market into mild correction. First down side target is the short term moving average, just above 17,600, with next target should this one fail near 17,250.


The S&P 500 made the least decline in today's session, only about -0.9%. The broad market created a medium bodied black candle that closed near the bottom of the range, just above the short term moving average, and appears set to move lower. Today's action confirms resistance set by last week's 5.5 month high and bearish crossovers in the indicators. First target if selling sets in is near the short term moving average, if this does not hold prices will likely retreat to 2,050 -2,025.


The market has weathered several storms this week and it looks like the skies are clearing but this does not mean we've gotten the all clear for rally. Earnings are better than expected, yes, and the FOMC is in no hurry to raise rates, yay, but growth remains slow, earnings remain weak and earnings growth is still at least two quarters away. Bottom line, the bull market is intact but the chance for near term correction remains and this is backed up by the charts. The indices are cresting 3 month rallies just beneath all time high levels with increasingly weak technicals, divergences and signs of topping that add up to a weak market ripe for correction. I remain cautious for the near term, anticipating correction and opportunities for bullish entries.

Until then, remember the trend!

Thomas Hughes


New Plays

No Risk

by Jim Brown

Click here to email Jim Brown
Editor's Note

At the low today, the Dow was -371 points off last week's high. That is not bullish. The Nasdaq closed at a four-week low and the Nasdaq 100 closed at the lowest level since March 11th. It appears the market has finally begun to roll over.

Amazon, Baidu, Linkedin and Expedia all posted strong earnings beats after the bell and shares soared in afterhours. Amazon was up $75 in the afterhours session. Linkedin gained +8. Expedia gained +11 and Baidu +8. Unfortunately, the Nasdaq futures are down -4 as I type this, suggesting the market may open lower instead of higher. The S&P futures are also down despite those individual gains.

The Asian markets opened lower after the drop in the U.S. markets. Japan's Nikkei was down -3.66% last night after the BOJ failed to modify its monetary policy. The Nikkei is closed tonight for a holiday.

While anything can happen before morning, it appears the market has shaken off the afterhours bullishness and is turning negative. After today's -210 point Dow drop and -58 on the Nasdaq, any further declines could be aggressive.

I do not believe we should add any additional risk tonight until we see what Friday brings. There is always another day to trade as long as you have capital in your account.




NEW BULLISH Plays


No New Bullish Plays



NEW BEARISH Plays


No New Bearish Plays




In Play Updates and Reviews

Support Test

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market tried to rebound from the opening dip and actually made it back to the Wednesday highs before collapsing back to support. Wednesday's high on the S&P was 2,100. The S&P gapped lower to 2,086 before rebounding to 2,099.30 intraday. That level was solid resistance and when it could not push through after nearly 3 hours the index began to weaken.

Activist investor Carl Icahn was interviewed on CNBC a little after 1:PM and he said he had closed his Apple position because he was worried about the political climate in China and he was worried about the U.S. markets. That was the signal to sell and the S&P collapsed nearly 30 points to 2,071 at the lows. There was a minor bounce thanks to the buy on close orders but the index closed right on support at 2,075. That makes Friday a very important day. It is also month end.

Amazon posted blowout numbers after the bell and shares rallied $75 on the news. Linkedin also beat and shares were up +8. Expedia also beat and shares were up +11. Despite those Nasdaq winners the Nasdaq futures are only up +1 and the S&P futures are -1. That is not a good sign for the market on Friday. The evening is still young so anything can happen before the open.

With multiple Nasdaq stocks expected to spike at the open we could see a gap and cr*p where those spikes are sold as investors take profits ahead of the weekend event risk.




Current Portfolio





Current Position Changes


XRX - Xerox

The long position was entered at the open.


XLF - Financial ETF

Close the long call position at the open.


VXX - Volatility ETF

The long position remains unopened until the VXX trades at $16.75.


NTAP - NetApp

The short position remains unopened until NTAP trades at $23.95.


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


CONN - Conns Inc - Company Profile

Comments:

No specific news. Dropped with the market.

Original Trade Description: April 20th.

Conn's operates as a specialty retailer of durable consumer goods and related services in the USA. The company stores offer refrigerators, freezers, washers, dryers, dishwashers, ranges, furniture, mattresses, home office products including computers, tablets, desks, printers, etc. They also sell consumer electronics including TVs, home theater equipment, etc. They operate more than 100 locations and were founded in 1890. Conn's is like a Best Buy with furniture and appliances.

Shares fell -23% after reporting earnings in late March and bottomes on April 8th. Revenue rose 7% and same store sales rose 3.6% excluding categories the company exited during the quarter. The furniture section saw same store sales rise +15.2% while electronics sales decline -13.3%. They reported earnings of 11 cents compared to estimates for 28 cents. The sharp earnings miss was caused by a major increase in loan loss reserves on their customer financing programs. The 60-day delinquency rate rose to 9.9%. Conn's finances 80% of its sales through its own in house financing plans. This is a short-term problem that will pass as they tighten up credit standards on future sales. They plan to open 10-15 new stores in 2016.

Earnings are May 31st.

An insider bought 250,000 additional shares last week for roughly $3 million. That is a huge vote of confidence.

The sell off was overdone. Shares have now rebounded above the consolidation highs for the last four weeks where the sellers were exiting. Wednesday's close was a four-week high.

I believe we can take a long position in Conn's and ride it up to the $16 level or possibly higher.

Position 4/21/16 with a CONN trade at $13.80

Long CONN shares @ $13.80, see portfolio graphic for stop loss.

No options recommended.
The June $14 is $1.45 and I think that is too expensive if we are only targeting $17 on the long position.



DPLO - Diplomat Pharmacy - Company Profile

Comments:

Shares fell at the close after the company said they were acquiring TNH Advanced Specialty Pharmacy. The pharmacy is oncology focused and generated $400 million in revenue in 2015. TNH is concentrated in California and Texas. There are 3.7 million Medicaid patients in Texas that can be served by TNH. Terms were not disclosed. The acquisition will be funded with cash on hand and available credit facilities. It is expected to close in 30-60 days and will be immediately accretive.

The company scheduled an investor day for May 18th.

Original Trade Description: April 15th.

Diplomat Pharmacy operated as an independent specialty pharmacy in the USA. The company stocks, dispenses and distributes prescriptions for various biotechnology and specialty pharmaceutical manufacturers. A specialty pharmacy does more than just dispense pills. The provide other services for the patients like infusion, patient financial assistance, risk evaluation and medication strategies. Many of their patients are on complex programs with multiple high dollar drugs. The company has 16 locations and was founded in 1975.

DPLO had a rough six months. The Valeant problem with specialty pharmacy Philidor put a cloud over the entire sector. After DPLO reported robust earnings back in March, JP Morgan downgraded them saying they could decline 15%. The company guided below expectations but remained bullish. The analyst said he could not bridge the gap between the guidance and management bullishness. Shares dropped from $36 to $26 on the downgrade.

Fortunately, that was the bottom and shares have been moving up steadily. They accelerated last week after the company announced the availability of a new Lilly drug for Plaque Psoriasis. This confidence in DPLO by Lilly seemed to encourage investors.

Earnings are May 9th.

Shares are just over $30 with resistance at $35. With the potential for a market meltdown on Monday if the OPEC meeting in Doha does not go well, I am putting an entry trigger on the position.

Position 4/18/16 with a DPLO trade at $30.35

Long DPLO shares @$30.35, see portfolio graphic for stop loss.

No options because of wide spreads.



KKD - Krispy Kreme - Company Profile

Comments:

Still holding at the highs after addition to the S&P-600. No specific news.

Original Trade Description: April 18th.

Krispy Kreme operates as a branded retailer and wholesaler of doughnuts, coffee, treats and packaged sweets. Who would have thought that Krispy Kreme Donuts would be impacted by falling oil prices and currency translation issues? They are a donut store headquartered in the USA. Unfortunately, not all their stores are in the U.S. KKD only has 297 stores in 41 states but they have more than 825 stores in 25 other countries.

There are 105 stores in Saudi Arabia, 136 in Mexico, 19 in the UAE, 14 in Kuwait and 12 in Russia. All of those countries have been impacted by the drop in oil prices and spike in the dollar.

In the last quarter sales at locations outside the U.S. fell -7.1% and expectations are for a continued decline in sales. The strong dollar caused revenue to decline -3.4% to $7.4 million in last quarter.

In late March they warned earnings would be in the range of 87-91 cents and analysts were expecting 93 cents. Shares fell -10% on the news. However, within four days the stock had rebounded to more than the level before the warning and have continued higher. Monday's close was an 8-month high.

They are running promotions to boost sales in the U.S. and they appear to be succeeding. On April 1st they gave away a free donut to anyone walking in their door, no purchase necessary. The stores were packed.

KKD only has $11 million in debt and $51 million in cash. They bought back 2.8 million shares in 2015. They have an authorized buyback for up to $144 million in shares for 2016.

Earnings are June 21st.

I am recommending we buy KKD shares with a trade at $16.50, just over today's high using a tight stop loss.

Position 4/20/16 with KKD trade at $16.50

Long KKD shares @ $17.05, see portfolio graphic for stop loss.

Optional:

Closed 4/27/16: Long May $17 call @ .30, exit .65, +.35 gain



TRN - Trinity Industries - Company Profile

Comments:

Very minor decline in a weak market. No specific news. We have a July call option so plenty of time.

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 April 21st.

Position 3/21/16:

Long July $20 call @ $1.50, no stop loss.

Previously Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss.



VXX - VIX Futures ETF - ETF Profile

Comments:

The VIX continued to decline at the open to a new low at 15.10 but spiked in the afternoon sell off. If the market drop continues we could be triggered on Friday.

This position remains unopened until the VXX trades at $16.75.

Original Trade Description: April 25th.

The VXX ETF tracks one-month futures contracts on the Volatility Index of $VIX. The VXX is actually less volatile than the VIX but travels in the same direction. The VXX is highly liquid with average volume of roughly 75 million shares.

The VXX or any volatility ETP or leveraged ETF should not be held for long periods of time because the futures roll over every month will reduce the value of the position. However, it is suitable for short-term tactical trades. We closed a short on the VXX a couple weeks ago for a decent profit.

With the potential for another bout of market volatility I am recommending we go long the VXX this time. Long the VXX is the equivalent of a short position since it rises with a decline in the market.

Last Tuesday the VXX declined to 15.56 and the lowest level since August 10th. We had been long the VXX and that stopped us out of the position.

Since then the market has failed at resistance and spent several days in decline. With Apple's earnings likely to disappoint, it could cement the decline and lead us into the sell in May cycle.

Keith Bliss of the Cuttone Company, said research back to 1957 showed that last week was normally the best week of the entire second quarter. After last week the markets tended to "ebb" into June as the sell in May cycle takes hold as the earnings cycle wanes.

This year we have the Brexit vote in June, a likely Fed rate hike in June, the possibility for riots at the Republican convention in July, and many other factors that could weigh on the market.

I am proposing we get long the VXX and hold it because it is only a matter of time before we see another bout of volatility that could push it back to the 26-30 level. This means we could see some short-term bouts of calm if the markets try to make a new high again. Therefore, I am putting a stop loss on the position but I plan to reenter it the instant it appears volatility is starting to heat up. Hopefully the first long will be the only long we need.

Historically, there is very little long term risk with the VXX because the market will always have volatility spikes, but because it is a futures product there is a premium bleed if the ETF is held for a long time. If it were a regular stock we could just hold it until an event occurred. Since it is futures related, we have to have a stop loss.

With a VXX trade at 16.75

Buy VXX shares. Initial stop loss $15.00 and a new historic low.



WIN - Windstream Holdings - Company Profile

Comments:

No specific news. Minor decline from the new 52-week high.

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 @ .38 cents.(Adjusted) NO STOP LOSS

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



XRX - Xerox - Company Profile

Comments:

No specific news. Shares dipped with the market but rebounded off the lows to close only 5 cents below the open.

Original Trade Description: March 27th

Xerox has grown into a global services company that also provided document management solutions. The services segment provides business outsourcing services, customer care, transaction processing, finance and accounting, human resources, communication and marketing, consulting and analytics. The hardware segment produces copiers and printers of all sizes, capabilities and combinations.

The company announced in January they were going to split into two companies. One would be hardware and the other business services. They did this because they were under attack by activist shareholders. Carl Icahn was awarded three seats on the board. Shares rose from the February low at $8.50 to the April high at $11.50.

When they reported earnings this week the stock crashed back to $9.50. They missed on earnings and provided weaker guidance. Earnings of 22 cents missed estimates for 23 cents. Revenue fell -4% to $4.28 billion but beat estimates for $4.24 billion. The strong dollar caused a 4% decline in revenue.

The company also reported higher costs as a result of the current restructuring. They expect the restructuring to cost $220 million but provide more robust earnings growth starting in Q2. They incurred $126 million of those costs in Q1. The CEO said they were accelerating the cost reduction efforts and would begin to see results in Q2. In light of the restructuring costs they are delaying additional stock buybacks until 2017. The company reaffirmed its full year guidance.

Shares held at the $9.75 level for three days before rising to close at $10 today and the three-day high. Normally when a company goes through this process the current holders bail on the earnings news and a new set of investors buy the dip in expectations for the improvement in earnings in future quarters plus the added incentive of the split. We see it constantly where companies report a bumpy quarter, the stock crashes and a couple days later a rebound begins that propels the stock higher than the pre earnings levels.

I think the risk has been removed from Xerox. I believe we can buy it here at $10 and ride the rebound towards the "improved" Q2 results. Because of the recent low, our risk is minimal.

Position 4/28/16

Long XRX shares @ $9.95. Initial stop loss $9.50.




BEARISH Play Updates


NTAP - NetApp - Company Profile

Comments:

No news. Minor decline but still a decline. Support at $24 holding. Resistance at $24.75 is firm. If we are not triggered on Friday, I will drop the recommendation.

This position remains unopened until NTAP trades at $23.95.

Original Trade Description: April 5th.

NetApp provides software, systems and services to manage and store computer data worldwide. Data ONTAP storage operating system that delivers integrated data protection, comprehensive data management, and built-in software for virtualized, shared infrastructures, cloud computing, and mixed workload business applications; E-Series storage systems for storage area network workloads (SAN); all-flash arrays that deliver input/output operations per second and ultralow latency to drive speed, responsiveness, and value from the applications that control key business operations; and hybrid arrays for mainstream business applications.

About two weeks ago the stock trend turned negative and has started accelerating downward after Sterne Agee and Macquarie both downgraded from neutral to sell. Sterne Agee said the downgrade came after the Q1 IT survey. The survey showed weakness in end-user budgeting for storage systems and upgrades. Spending had declined 10% year-over-year and was negatively weighted towards incumbent vendors. Agee said they did not expect revenue from ONTAP8 and SolidFire to offset enough share loss potential over the next year. The analyst said valuation appears compressed and the stock should underperform its peers.

Another analyst said deteriorating net income would keep the stock depressed.

Earnings May 25th.

Based on the chart shares may not find support until $21. The last two days shares have stalled the decline at just over $24. I am recommending we short NTAP with a trade at $23.95 and target $21 for an exit.

With a NTAP trade at $23.95

Sell short NTAP shares, initial stop loss $24.95

Optional

Buy long June $24 put, currently $1.25, initial stop loss $24.95.



XLF - Financial ETF - ETF Profile

Comments:

Down in a weak market. This ETF reacts to the markets just as much as it does to financial news.

I am recommending we close the call position just in case the market continues lower. We have a minor gain in the call and time is expiring. Leave the put side open in case the market tanks.

CLOSE THE CALL POSITION

Original Trade Description: April 11th.

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slowly and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Position 4/12/16

Long May $23 call, @ 19 cents, no stop loss.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.





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