A buy program at 12:30 triggered a short squeeze that tripled the market's gains by the close.
The S&P was up +5 at 2,070 when a buy program hit the market and triggered a short squeeze that sent the index up to 2,081 and close with a 16 point gain. The Dow and Nasdaq followed a similar pattern.
The afternoon rally took the S&P to within 20 points of solid resistance starting at 2,100. Through Friday' slow the S&P had declined -48 points from Wednesday's high at 2,100. The Friday close at 2,065 narrowed that loss to 35 points and today's 16 point gain did not recover 50% of that decline.
The 2,100 level is critical because failing to reach that level again will produce another lower high and suggest the decline into summer has begun.
The afternoon was a big cap rally. The small cap Russell 2000 did gain 7 of its 11 points in the afternoon but the number of decliners in the small cap sector was high. A few stocks outperformed and that lifted the index.
For Tuesday, watch the S&P 2,100 level as a clue to market direction.
Current Position Changes
NAV - Navistar
The long position remains unopened until a NAV trade at $15.40.
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
KKD - Krispy Kreme - Company Profile
No specific news. Still holding at the highs but a minor 7 cent decline on a big cap rally day.
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.
Closed 4/27/16: Long May $17 call @ .30, exit .65, +.35 gain
NAV - Navistar - Company Profile
Minor decline on no news. The position remains unopened until it trades at $15.40.
Original Trade Description: April 29th
Navistar manufactures and sells commercial and military trucks, diesel engines, school and commercial busses and provides service on these products worldwide.
For the last several years, Navistar has been under a cloud. In 2010 the company said it had developed an advanced truck engine that would meet EPA certification requirements. In 2011 the engine failed to pass the tests for EPA certification. In 2012 after making some changes to the engine they reapplied for certification. The EPA staff objected saying there were "several serious concerns" that needed to be resolved before certification. Despite the objections the company released several statements characterizing the application as a "milestone" in development and was proceeding in a timely manner. The company planned to start production on the engine in 2012. It never happened and the SEC fined the company $7.5 million last week for improper statements in 2012. The CEO making those statements was forced to step down in 2012.
Fast forward to today and all those problems are behind the company now that the SEC finally reached a determination. Navistar is producing new state of the art trucks and engines and the stock is in rebound mode.
In their recent earnings they reported a loss of 40 cents that was significantly better than the estimate for a 77 cent loss. Revenue of $1.77 billion was short of estimates for $2.05 billion. However, the company guided for $9.0 to $9.25 billion for the full year.
Earnings June 2nd.
On Thursday, shares spiked to resistance at $16.50 and then retreated in the weak market on Friday. I believe they will break through that resistance level and test the next level at $20.
With a NAV trade at $15.40
Buy NAV shares, initial stop loss $12.95.
TRN - Trinity Industries - Company Profile
Trinity declared a quarterly dividend of 1 cents payable July 29th to holders on July 15th. Investors were underwhelmed even though it was their 209th consecutively paid quarterly dividend.
We have a July call option so we have time to wait for a rally.
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.
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
The VXX imploded from its 17.50 high on Friday to close at 15.80 thanks to the afternoon market rally.
For this position to be profitable, we need the market to continue lower. Obviously that means our long plays will lose money. This is a hedge against that decline.
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.
Position 4/29/16 with a VXX trade at 16.75
Long VXX shares @ $16.75. Initial stop loss $15.00 and a new historic low.
WIN - Windstream Holdings - Company Profile
No specific news. Earnings on Thursday. We will not be exiting the option position.
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.
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
No specific news. Support at $9.50 held.
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.
Long XRX shares @ $9.95. Initial stop loss $9.50.
BEARISH Play Updates
NTAP - NetApp - Company Profile
Brocade (BRCD) warned today on a downturn in enterprise business and weakness in the storage sector. Brocade said they were seeing the same weakness in IT spending as previously reported by their peers. Piper Jaffray, commenting on the Brocade weakness, said "demand checks also suggest NetApp's demand remained weak in the March quarter and likely contributed to Brocade's warning."
Original Trade Description: April 25th.
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.
Position 4/29/16 with a NTAP trade at $23.95
Short NTAP shares @ $23.95, initial stop loss $24.95
Long June $24 put @ $1.17, initial stop loss $24.95.
XLF - Financial ETF - ETF Profile
The XLF rolled over in the afternoon but still posted a small gain. Banks and financials are expected to weaken if the economic numbers continue to decline. American Express was weak in afterhours on results from the recent shareholder meeting. This could send financials lower on Tuesday.
This ETF reacts to the markets just as much as it does to financial news.
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.
Closed 4/29/16: Long May $23 call @ 19 cents, exit .58, +.39 gain.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.
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