Option Investor
Newsletter

Daily Newsletter, Saturday, 6/25/2016

Table of Contents

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

Market Wrap

Sell the News

by Jim Brown

Click here to email Jim Brown

On Thursday, investors bought the rumor UK would remain in the EU. On Friday, they sold the news when that rumor proved untrue.

Market Statistics

Friday Statistics

There are not enough adjectives to describe the abrupt market decline when the Brexit vote did not turn out as expected. On Thursday, the Dow rallied +230 points and the S&P gained +28 after multiple polls suggested the tide had turned for the remain camp and citizens were not likely to vote for the exit. Even as late as Thursday afternoon with the vote underway there were still polls giving the edge to the remain camp. After the close on Thursday another poll was released showing the remain voters would prevail. The S&P futures spiked another +13 points in the afterhours session at 6:PM. Within an hour that had reversed 27 points to a decline of -14 and the carnage had begun. The futures eventually lost -87.50 for the day on Friday.

Those betting on a remain vote lost a lot of money while those betting on a Brexit were well rewarded. Even the bookies in London had it very wrong with odds showing an 81% chance of staying in the UK. They said the betting was very heavy with hundreds of millions of pounds wagered on the outcome. The number of bets were heavily favoring an exit but the big money bettors were heavily favoring a remain vote. The big money bettors are rarely wrong but this was one of those times.

The Dow fell -611 points to close at 17,400 and near the lows for the day. The S&P lost -76 points to close at 2,037. The Nasdaq Composite lost -202 points to close at 4,707. I am sure everyone noticed that each of those levels was strong support. The market crashed but critical support levels from May held.

You would think a decline of that magnitude that stopped exactly on critical support levels, would probably bounce the following day. However, as Art Cashin so eloquently put it, "Monday could be a baby and bathwater day."

I believe it will be margin call Monday. Everyone that was over leveraged on margin that did not have stop losses or continued to hold in hopes of a bounce, will get a margin call saying deposit more money or your account will be liquidated. Selling from those events normally comes at 10:AM and 2:PM. Tuesday would be the best bet for a rebound but that does not prevent institutions from buying that support on Monday while thinking any further declines will be manageable.

The damage from the Brexit vote was global. Markets all around the world plunged and currencies soared. The British pound fell -8% to lows not seen in more than 30 years.

The Japanese Nikkei was the biggest loser in the list below but some indexes not in the list fell even harder including Italy -12% and France -8%. They fell harder because of politicians promising an exit vote in their countries. Scotland is likely to vote for independence and the Netherlands is expected to schedule their own Nexit vote.




I want to remind everyone that NOTHING has changed in the UK. Prime Minister David Cameron said he was tendering his resignation. He was strongly in favor of staying in the EU. The PM is not voted on by the people. In the UK he is chosen by the party with the most votes in Parliament. His conservative party is the majority party and they will choose a successor. However, that may not occur until their conference in October. Boris Johnson, has already positioned himself as the potential replacement. British analysts claim the exit discussions will not begin until a new PM is chosen to lead the UK through the exit process. Some analysts believe the UK will not file an Article 50 notice of intent to leave until the new PM assumes office. That Article 50 notice would then start the two-year countdown clock.

However, there is no requirement that a notice be filed. Also, the public vote is nonbinding on Parliament and the MPs would have to ratify the document. Currently there are 463 MPs who do not want to leave the EU and 150 MPs that voted to leave. It may be a challenge to get the referendum or the notice ratified into law. It may be a long time before the UK actually leaves the EU.

As I have written before, the biggest challenge for the EU is not the UK but the desire of other countries to leave the EU as well. All day long on Friday, there was constant chatter about who will be the next to leave. Ireland and Scotland are expected to schedule their own votes to leave the UK after both countries voted to remain in the EU. Italy, Spain, Portugal and the Netherlands are also candidates to schedule votes to leave the EU.

If the UK does file an Article 50 request to exit the EU, it must be approved by 72% of the remaining 27 countries with a minimum of 65% of the population. It must also be approved by the EU Parliament by a simple majority. The UK has a long and winding road to travel before it can be independent again.

The Brexit will have an impact on the U.S. markets in the months ahead. The 2% rise in the dollar, 8% drop in the pound and 2.7% drop in the euro will make it harder for U.S. multinational companies to sell in Europe and the UK. There will most likely be plenty of earnings warnings over the next couple of quarters because of the currency translation issues.

On the positive side for equities is that the Brexit probably took the Fed out of play for the rest of 2016. There is now only a 1% chance of a rate hike in July and a 7% chance for a rate cut. September is showing identical numbers. November is showing a 1.9% chance of a hike and 7.0% chance for a rate cut. December is showing a 5.3% chance of a cut and 23.7% chance of a rate hike according to the CME FedWatch Tool. Instead of one and done for 2016 it is now looking like "none and done." The Fed cannot risk pushing the dollar higher when the European currencies are already plunging. If the dollar continues to spike they may be forced to cut rates to maintain currency stability.

Economics

There were some economic reports on Friday. The Durable Goods Orders for May fell -2.2% compared to a 3.4% rise in April. Analysts were expecting a -0.5% decline. Total shipments declined -0.2% and inventories fell -0.2%. Core capital orders fell -0.7% and shipments fell -0.5%. Orders for autos fell -2.8% and defense orders fell -28%.

Consumer Sentiment for June fell from 94.3 to 93.5. That is down from 94.7 in May. The present conditions component rose from 109.9 to 110.8 but the expectations component fell from 84.9 to 82.4. Analysts blamed it on the weak jobs numbers and rising gasoline prices. I blame it on the outlook for the elections with both candidates having record unfavorables with Trump at 70% and Clinton at 55%. There is not a lot there to get excited about.


The calendar for next week is relatively light. There are lots of reports but the ISM on Friday is the only one that could move the market. The GDP report on Tuesday is not expected to change much but a drop into negative territory would be a market mover.

Yellen speaks again on Wednesday and now that Brexit is behind us, she may have a different tone. The Richmond Fed surveys on Tuesday are informative but not something that traders really watch.

The following week we will get the June payroll data and that could be the final nail in the July rate hike coffin if the numbers come in weak.


There was also one earnings report. Finish Line (FINL) reported earnings of 23 cents that beat estimates for 22 cents. Revenue rose +2.3% to $453.5 million. The CEO praised Adidas for a "ton of momentum" saying the excitement around that brand is global, not just in the USA. He also said the basketball business has been challenging but Stephen Curry's sneakers have been a bright spot. He said basketball sneaker prices are too high and many styles are missing on fashion. That was a dig on Nike, which represents 70% of Finish Line's sales. He did say the Nike running shoes were still strong. Nike (NKE) shares closed at a 10-month low after the comments and the market crash. Finish Line shares gained +22% on short covering after the earnings beat. That is tough to do in Friday's market.


Headphone maker Skullcandy (SKUL) agreed to be acquired by privately held consumer technology company Incipio for $177 million. The company agreed to pay $5.75 in cash representing a 29% premium over the closing price on Thursday. Skullcandy will have a month to shop for a better deal. More than 8.29 million shares traded, much more than the average daily volume of 223,000 shares. Back on June 8th, the company said it was considering a "Go-Private" transaction where the founder, Richard Alden, would buy some or all of the company's stock. Alden owns or controls about 15% of the stock. Apparently, he decided against that plan.


Goldman Sachs (GS) lost 7% and was the biggest drag on the Dow with an $11 drop because 26% of their revenue comes from the UK. Banks like Goldman will have to decide whether to move to another major European city like Paris or Berlin in order to remain in the EU and face potentially onerous banking rules. The UK could suffer significant penalties for leaving the EU and one of them could be limitations on its European banking business. If the EU does enforce additional rules all the major banks could move a significant portion of their business.

JP Morgan gets 15% of its revenue from the UK and has 16,500 employees there. CEO Jamie Dimon was actively campaigning for the UK to remain in the EU in order to retain the open EU banking rules. He told his employees he did not want to move outside the UK but could be forced to move if the breakup was not peaceful.


The European banks were crushed because of the currency issues surrounding the Brexit vote. Credit Suisse (CS) lost -16%, Royal Bank of Scotland (RBS) declined -27%, UBS Group (UBS) declined -13%, Deutsche Bank (DB) -17% and Barclays PLC (BCS) -20%. RBS is headquartered in the UK and does most of its business in the area. These banks are going to be hit the hardest on any new rules affecting banking between the UK and EU.


Priceline (PCLN) lost -$158 or -11% on the Brexit vote. Expedia (EXPE) lost -7% and TripAdvisor (TRIP) lost 6%. Priceline derives a significant amount of revenue from Europe with its Booking.com hotel reservations unit based in the Netherlands. That service is heavily used in Europe. Priceline gets 85% of its revenue from international markets primarily in Europe.


Amazon (AMZN) shares fell -3% to close under $700 for the first time in a month on UK concerns. Amazon has about 10 distribution centers in the UK and 20 smaller centers that sort packages before they are delivered to local post offices and shippers. That is only a small portion of the 300 distribution centers globally but the UK is a shipping hub for Amazon. The company stores inventory for sellers and any restrictive cross border shipping rules imposed on the UK by the EU could be a major challenge. Without the unrestricted passage between EU countries they enjoy today, it could add delivery delays as well as tariffs.


The biotech sector completed a round trip to and from the ASCO conference. The stocks began to rally in mid May and rallied into the conference before immediately rolling over and retracing all their gains in the last three weeks. The sector is very close to a new 52-week low. The Brexit vote is not expected to impact the sector but shares of the IBB fell -5% anyway. When you have to raise money fast you sell everything.


Volume was extremely high on Friday because of the sell off and the Russell index rebalance at the close. More than 15.2 billion shares were traded. The CME said they traded more than 30 million contracts, more than twice normal volume. However, the selling was orderly despite the heavy volume. There were no trading halts and the Volatility Index ($VIX) actually declined 4 points intraday after spiking to 24 at the open. By 10:AM it had declined to 19.48 but it began to rise slowly the rest of the day as investors bought puts to protect against a continued decline. When the market began to accelerate lower at 2:PM the VIX began to accelerate higher. At 25-30 it is at a level that is normally associated with a strong buy signal.



Crude prices fell -5% to $47.57 on worries over slower demand growth as the UK tries to work through it the Brexit. Mostly, the decline was due to the sharp rise in the dollar. There were no specific factors impacting oil prices for the week.


Active rigs declined -3 to 421. Oil rigs fell -7 to 330 and gas rigs rose +4 to 90. It was an uneventful week in the sector. However, after three weeks of rebounds in active oil rigs they gave up most of those gains with Friday's -7 rig decline. Oil prices will have to stay over $50 for several weeks before we see a real increase in rig activity. Producers are scared of incurring the expense of putting rigs back to work only to have prices decline again.




Markets

S&P said more than $830 billion was lost in the U.S. markets and more than $2.1 trillion globally. Friday was just the first day and losses could continue if the currencies continue to decline. The Bank of England and Bank of Japan both said they were ready to intervene in the currency markets to halt the declines. That may not be as easy as it sounds given the severity of the event.

However, this was a government created event not an economic event. It was well telegraphed for months in advance and the actual economic impact could be more than two years away. As one analyst said, it was catalytic not cataclysmic. The initial market impact should be brief.

What made it worse was the pre vote, buy the rumor, rally that lifted the Dow +230 points on Thursday. That boosted spirits and lured investors who had been cautiously waiting on the sidelines for the event to pass, back into the market. The results were disastrous.

Fortunately, the weakness should be short lived. Funds were sitting on near record amounts of cash approaching 6%. With the end of the quarter only four days away, they will need to put some of that cash to work. That suggests there could be a substantial buy the dip rally in the coming days.

The 15.2 billion shares of volume may have been a new record. I could not find a day with more volume but I could only look back a couple years. Decliners beat advancers 6,142 to 1,234. Declining volume was 13.2 billion to 1.9 billion of advancing volume or 6:1. On Thursday up volume was 5:1 over down volume but only 6.4 billion shares were traded.

The S&P closed at 2,037 with a loss of -76 points or -3.6%. This is just under strong support at 2,040 from May and just over support at 2020-2025. Last week I suggested a dip to the 2,040 level would be a buyable event. I am sticking with that recommendation. While we might dip to that 2,020 level, I do think cooler heads will prevail and the dip will be bought. The rebound could be strong now that the initial uncertainty about the event has passed.


The Dow crashed back to major support at 17,400 with a -610 point loss. On Thursday, the Dow closed at 18,008 and this makes the second time in June the Dow has failed at that level. All Dow components were negative some may remain negative. Those are the banks, energy companies, Caterpillar, IBM, UTX and Boeing. They have significant revenue in Europe and the currency issues are going to be a challenge. One you would not expect is Coke. They have a very large business in the UK and they could warn on currencies when they report earnings.

The Dow could remain weaker than the S&P because the majority of the Dow stocks will have currency issues. The only difference is the degree of impact. The international S&P companies derive about 50% of their revenue from Europe but I do not know how much of that is from the UK. Only about 50% of the S&P companies have any material exposure to Europe. This will insulate that index to some extent compared to the Dow.

Resistance is so far above it is not material to this discussion. We could have a challenge at 17,600, which was prior support.



The Nasdaq Composite crashed back to support from May at 4,700. This produced an immediate halt for the decline with the low at 4,698.42. That was momentum that carried it through support. There was a rebound of about 32 points from that level but selling returned at the close.

The Nasdaq has light support at 4,600 and again at 4,500. However, any material decline under that 4,700 level could turn into a rout. The Nasdaq composite was the weakest of the major indexes with a -4.1% decline. You can thank the 5.1% decline in the Biotech Index ($BTK) for the added momentum.

This was the Nasdaq's fourth consecutive weekly loss and it is on track for its second consecutive quarterly loss. That would be the first time since 2011 that has happened.



The Nasdaq 100 ($NDX) lost -4.1% as well and closed exactly on support at 4,285. Having all the major indexes close right at support tends to lend credibility to my expectations for rebound next week. With all the big cap techs losing big bucks I am surprised the drop did not continue.


The Russell 2000 closed at 1,127 with a 3.8% drop and there is no support anywhere close. The next support level would be the band from 1095-1110 where it has bounced before. However, the week after a Russell rebalance the R2K is normally bullish as funds clean up their Friday stock switch with new buys of the stocks added to the index. Whether that will happen this time in light of the external events is unknown.


I would pay a fortune for an accurate crystal ball this weekend. With the indexes at support, it suggests a rebound next week. With funds sitting on piles of cash ahead of the quarter end, they should be putting that to work. However, in normal years June tends to close at the lows. We can check that box off now because we are at the lows. Any rebound will not negate that trend.

We are headed into a period of seasonal weakness but as I showed last week, the markets are about evenly split between 8-12% moves over the summer months. Some are down and some are up. Right or wrong, I plan on buying the dip on Monday with the knowledge we could dip lower before a rebound appears. Markets rarely bottom on Fridays. When I say buy the dip, I do not mean just blindly buy something in the middle of a decline. I should say "buy the rebound" because I like to see a bounce first before I commit to the entry.

My friend Art Cashin suggested waiting until 11:AM on Tuesday to buy the dip. With margin call selling at 10:AM that gets us past the potential weakness. That would be a relatively safe plan if there were such a thing as a safe plan.

 

INDEPENDENCE DAY SPECIAL!

Welcome to our mid-year Independence Day Subscription Special. Save 50% or more on your subscription!

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see until December! There isn’t a minute to spare.  Order now.

Renew for as little as $249
for six months,
ONLY $1.38 per day


 


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


Brexit Do-Over?

After markets and currencies all around the world collapsed on the Brexit vote, many Britons are asking for a do-over. A petition was started on the House of Commons website early Friday and in just a couple hours it had over 200,000 signatures requesting a new vote. By Friday evening, it had 527,000 signatures. They want any vote invalidated if it does not win with a 60% majority. The Brexit vote passed with a 52% majority. The volume was so high it crashed the House website hosting the document. The House of Commons said it had seen "high volumes of simultaneous users on a single petition, significantly higher than on any previous occasion." UK citizens are suffering from voter's remorse. In the 12 hours after the vote Google reported a surge in searches for "what happens if the UK leaves the EU." Apparently, quite a few voters were stunned by a result they had never considered.


Bullish sentiment declined -3.4% to 22.0% for the week ended on Wednesday. The survey ends on Wednesday so the Thursday/Friday moves are not in the numbers. Neutral sentiment jumped 5.7% to 42.8% and bearish sentiment declined -2.3% to 35.2%. If the market does not rebound early in the week it will be interesting to see what the numbers look like next Wednesday with the Brexit crash included.



Dozens of seminar attendees at a Tony Robbins event in Dallas, suffered burns after trying to walk across hot coals. The "Unleash the Power Within" three day event encourages attendees to "storm across a bed of hot coals" in order to "overcome the unconscious fears that are holding you back. Once you start doing what you thought was impossible, you will conquer the other fires in your life with ease" or so Robbins claims.

Unfortunately, "dozens" suffered burn injuries after attempting the feat. At least five people ended up hospitalized after five ambulances were called to treat the injured. A Robbins spokesperson said more than 7,000 attendees successfully participated in the fire walk while a few had to be hospitalized. She said, "We always have a few people with some discomfort afterwards and we do our best to take care of them." About 1% experience "hot spots" which are similar to a sunburn and can be treated with Aloe. She said the injured "may" have been trying to take selfies as they walked across the coals. Source

Personally, I think they need psychological treatment if they are willing to walk across hot coals.


An Illinois man named Gambles won the lottery for the second time using the same five numbers. He plays the daily Lucky Day Lotto and has bought a $1 ticket every day for the last nine years. On June 7th on his second win, he won more than $1 million. The prior win was 9 years ago. At $1 per day, he has spent more than $4,000 over nine years. That is a pretty good return on his investment. He says he has played the same five numbers every day. They are the numbers for his jerseys from football and basketball when he was in high school. He is planning on setting up annuities for his daughter and granddaughter. He said he will continue to play the same five numbers every day until "I can't play anymore." Source


Why did UK voters decide to leave the EU. There were multiple reasons but immigration and regulation were high on the list. UK citizens did not like being told they had to accept hundreds of thousands of Syrian refugees as mandated by the EU. The UK had to pay the EU 20 billion euros a year for the privilege of being governed by the EU parliament.

The EU government was going overboard in their regulations and it angered UK citizens on a daily basis. Other EU rules included:

Bananas must be nearly straight. A 1994 regulation specified that bananas must be "free from abnormal curvature." Cucumbers must be perfectly straight. Any curves were not allowed. This law was overturned by voters 3 years ago.

Fruit like apples, oranges, lemons, etc, must be a certain diameter to be sold in retail markets. Small fruit was banned. For instance, a kiwi is required to weigh a minimum of 62 grams. Kiwis under that weight could not even be given away.

The size, shape, wattage and type of light bulbs were specifically regulated.

Vacuum cleaners could not be over a certain power rating in order to reduce electrical usage across the EU. There were plans to extend the regulations to cover hair-dryers, toasters and other appliances but the changes were tabled amid fears it would influence the Brexit vote.

Water bottles could no longer be labeled "improves hydration" after a 2011 law that claimed there was no evidence to suggest drinking water stops dehydration. This regulation was also overturned.

Diabetics taking insulin could lose their drivers license if they ever had an attack of hypoglycemia.

A 2009 law banned eating horses after lawmakers realized more than 2 million horses were eaten in the EU every year. Now all horses, ponies, donkeys and related animals must have a "horse passport."

A law passed in 2010 stated that a fruit preserve must contain at least 60% sugar to be called a jam. Anything less had to be relabeled to be called a "fruit spread" while a low-sugar jam with less than 50% sugar was named a "conserve."

A 2013 law required bottles of olive oil on restaurant tables to be non-refillable.

Balloons must contain a warning text printed on the latex itself saying injuries and death could result from their use. Children under 6 were not allowed to blow up balloons without adult supervision.

Party buzzers, the kind made out of rolled up paper that unrolls and makes a sound when blown, are illegal for children under 14.

The EU ruled there was insufficient evidence to establish a cause and effect relationship between the consumption of prunes and normal bowel function and they could not be referenced as a laxative.

Eggs and other food products could no longer be sold by quantity as in a dozen eggs or a bag of 10 apples. All food products had to be sold by weight.

There was a constant barrage of stupid laws coming from the EU that touched every facet of human life. More than 400 new regulations have been passed since 2010. The bureaucrats or "eurocrats" as they were called in the UK were running wild and multiplying in astonishing numbers. There were reportedly 40,000 in the UK alone.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"You can lead a human to knowledge but you can't make him think."

Unknown



New Plays

Ignoring the Market Crash

by Jim Brown

Click here to email Jim Brown
Editor's Note

Sometimes when markets crash they expose the stocks with really strong relative strength. That was the case on Friday when the biotech sector fell -5% and the Nasdaq -4% but Exact Sciences actually gained 45 cents. Posting gains in a weak market suggests they will post bigger gains in a bullish market.


NEW BULLISH Plays


EXAS - Exact Sciences -
Company Profile

Exact Sciences Corporation, a molecular diagnostics company, focuses on developing products for the early detection and prevention of various cancers. The company develops the Cologuard, a non-invasive stool-based DNA screening test for the early detection of colorectal cancer and pre-cancer. Its Cologuard test includes a protein marker to detect blood in the stool, utilizing an antibody-based fecal immunochemical test. The company has a collaboration, license, and purchase agreement with Genzyme Corporation, as well as with MAYO Foundation for Medical Education and Research for developing tests to detect lung, pancreatic, and esophageal cancers.

Shares of EXAS fell from $18.50 to $7 in October after the U.S. Preventative Services Task Force, an independent panel of health care experts, issued preliminary screening test recommendations that did not include Cologuard as a recommended product. The draft listed Cologuard as an "alternative" screening test. Exact Sciences protested strongly about the classification.

On June 14th, the same task force issued its final cancer screening recommendations and clarified the inclusion of Cologuard. The information was accidentally leaked and the panel had to release the report earlier than the planned June 21st date. With the final recommendation for Cologuard the company has begun advertising strongly and sales should increase. Cologuard is now an A-rated preventative service under the Affordable Care Act.

Earnings July 26th.

Shares have broken out of their 9-month consolidation base and could close the gap back to $18 in the coming weeks.

Buy EXAS shares, currently $11.54, stop loss $9.45.

No options recommended. The August $13 call is $.85.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Not Over Until it is Over

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes fell to strong support levels but that does not mean the drop is over. The Dow stopped exactly at 17,400 and the S&P just a hair under critical support at 2,040. There will more than likely be some follow through selling on Monday after the margin calls go out over the weekend.

Our portfolio weathered the storm very well. We only lost two positions and one still escaped with a minor gain. The short positions all declined, which is not normal in a big market drop. Normally the previously beaten up stocks rebound in declines as investors favor them as having less risk. The previously strong performers are the ones hurt the worst as traders take profits.

I lowered some stops on the short positions to avoid giving back the gains.




Current Portfolio





Current Position Changes


HPE - Hewlett Packard Enterprise
The long position in HPE was stopped out at $18.61 on the gap lower.

UIS - Unisys
The long position in UIS was stopped out at $7.94 on the gap lower.


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


CSII - Cardiovascular Systems -
Company Profile

Comments:

No specific news. Only a 30-cent loss. Excellent relative strength.

Original Trade Description: June 13th.

Cardiovascular Systems, a medical technology company, develops, manufactures, and markets devices to treat vascular diseases in the United States. It offers peripheral arterial disease products, including Stealth 360° Peripheral Orbital Atherectomy System (OAS), Diamondback 360 Peripheral OAS, Diamondback 360 60cm Peripheral OAS access device, and the 4 Diamondback 360 French 1.25 Peripheral OAS access device products for treating a range of plaque types, such as calcified plaque, in leg arteries both above and below the knee and address many of the limitations associated with existing surgical, catheter, and pharmacological treatment alternatives, as well as Diamondback 360 Coronary OAS, a catheter-based platform to facilitate stent delivery in patients with coronary artery disease.

In the last quarter revenues rose 7%, gross margin rose from 77.8% to 80.4% and operating expenses decline -5%. They expect to reduce expenses by another 7% in the current quarter. Coronary revenues rose +31%.

With more than 18 million Americans suffering from Peripheral Artery Disease (PAD), which is the accumulation of plaque in the peripheral arteries, their market is booming. Coronary Artery Disease is a leading cause of death in the USA. With more than 40% of the population already diagnosed and probably another 20% undiagnosed the market for their products is also growing rapidly. With the baby boomers retiring and these health problems becoming more life threatening as they age the number of "interventions" as my cardiologist calls them is growing rapidly. Stenting any patient with any symptoms of heart disease is becoming more common than tonsillectomies for children. More than 600,000 Americans die from heart disease annually. That is equivalent to 6 jumbo jet crashes every day.

In Q1, Broadfin Capital added a 1.46 million share stake in CSII or 4.47%. Point72 Asset Management added 102,000 shares. Shares have broken out of resistance at $16 and continue to creep higher.

Earnings are August 3rd.

Position 6/14/16:

Long CSII shares @ $18.16, see portfolio graphic for stop loss.

No option recommended because of wide spreads.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

No specific news. HPE suffered a whopping -7.5% decline. We were stopped out of the stock position but the call option does not have a stop loss. I am going to add HPE back in as a new play Monday night. I expect further selling on Monday and a rebound later in the week.

Original Trade Description: June 2nd.

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 Q1 earnings of 42 cents and in line with estimates. Revenue of $12.711 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.419 billion.

For the current quarter, HPE guided to earnings of $1.10 to $1.14. For the full year, they expect $1.85-$1.95 and that was more than analysts expected at $1.89. They increased free cash flow +101% to $1.1 billion for the quarter.

The good news came from their plans for the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. They are receiving $2 billion from the Tsinghua transaction which closed in early May and the money will be used for share repurchases. In 2016, HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

This means over the next couple of months we should see significant share activity as funds position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016. $2.5 billion of that is in an "accelerated" buyback program. The board authorized another $3 billion in buybacks to bring the current authorization to $4.8 billion.

They also announced a tax-free spinoff of their services division to Computer Sciences Corporation (CSC), which is expected to close in March 2017. This will produce another $8.5 billion in value to HPE shareholders in the form of $4.5 billion in equity in the combined company and $1.5 billion in a cash dividend and the removal of $2.5 billion in debt from HPE.

Earnings Aug 23rd.

HPE shares have shaken off their May weakness and closed today at a historic high. I am recommending we buy this stock in anticipation of additional fund investors moving in ahead of future dividends, buybacks and the spinoff.

Position 6/3/16:

Closed 6/24/16: Long HPE shares @ $18.40, exit $18.61, +.21 gain

Optional:

Long August $20 call @ 40 cents. No stop loss.



NVAX - Novavax - Company Profile

Comments:

No specific news. Minimal decline. Remained over support.

Original Trade Description: June 14th.

Novavax, Inc., a clinical-stage vaccine company, focuses on discovering, developing, and commercializing recombinant nanoparticle vaccines and adjuvants. The company produces its vaccines using its proprietary recombinant nanoparticle vaccine technology. Its product pipeline includes respiratory syncytial virus (RSV) vaccine candidates for elderly and maternal immunization that are in Phase III clinical trials, as well as pediatric RSV candidate, which is in Phase I clinical trial; seasonal quadrivalent influenza and pandemic H7N9 vaccines, which are in Phase II clinical trials; vaccine candidate against Ebola Virus that is Phase I clinical trial, as well as combination respiratory vaccine candidate and seasonal influenza vaccine candidate that is in pre-clinical trial; and rabies G protein vaccine candidate, which is in Phase I/II clinical trial. The company also has pre-clinical stage programs for various infectious diseases, including the Middle East respiratory syndrome coronavirus; and develops technology for the production of immune stimulating saponin-based adjuvants.

Novavax is using a new proprietary model for vaccines that does not require the long incubation time and the annual reformulation. They are far along in their trials compared to other companies and these vaccines can be given to children.

The top line State III data for the RSV F vaccine is due out in Q3 and they already have a fast track designation from the FDA. The drug could be commercially available by mid-2017. This drug could generate $1 billion in sales. While there is always the potential for a trial to fail, this initial drug has already progressed through all the early and mid stage trials. Novovax also has $434 million in cash so plenty of liquidity to continue the process.

Earnings August 9th.

Analysts are predicting a 100% gain for NVAX over the next year and that is attracting new investors today. With their advanced pipeline they could be an acquisition target. Shares only pulled back about 50 cents in the market weakness over the last three days and they posted a gain in today's weak market.

Position 6/15/16:

Long NVAX shares @ $6.65, see portfolio graphic for stop loss.

No options recommended because of price.



UIS - Unisys Corp - Company Profile

Comments:

No specific news. We were stopped out of the stock position on the market drop. I am recommending we close the option position at the open on Monday.

Original Trade Description: June 6th.

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segments product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. The company serves commercial, financial services, public sector, and the U.S. federal government through direct sales force, distributors, resellers, and alliance partners.

Unisys has morphed in its 143 years of operation into a global cloud, IT and infrastructure services company. That is a long way from the original company that produced the first commercially viable typewriters and adding machines under the name Burroughs, Sperry and Remington Rand.

Today one of their main products is Unisys Stealth for protection of digital and physical assets. Stealth Mobile protects secur emobile applications and Stealth Cloud expands that protection to the cloud.

Just before their recent earnings they announced a deal with Mitel to provide the Unisys stealth technology to protect their 60 million mobile and enterprise customers. Business is booming but it has been a long time coming. In Q1 revenue declined -3% and services declined -2%. However, the company said its "lumpy" quarter-to-quarter strategy was changing with a stronger focus on the Stealth products and their rapid wide scale adoption. They expect the amount of money spent on cybersecurity to more than double from the $75 billion in 2015 to more than $170 billion in 2020. The cost of data breaches will rise to $2.1 trillion annually by 2019 and more than four times the cost in 2015.

Unisys has been a stealth company for the last year with shares declining from $30 to $7. With their new products and the rapid acceptance of those products their stock is rebounding off the three month consolidation pattern.

Earnings July 28th.

Shares moved over resistance at $8.25 last week and are preparing to move higher. The big decline in March was a $190 million offering of convertible senior notes due 2021 with a conversion price of $9.76. That was a 20% premium to the stock price post announcement.

If the current rebound continues the next material resistance is $12.

Position 6/7/16:

Closed 6/24/16: Long UIS shares @ $8.47, exit $7.94, -.53 loss.

Optional:

Long October $9 call @ 80 cents. No stop loss.




BEARISH Play Updates

GOGO - Gogo Inc - Company Profile

Comments:

The gains from Thursday were erased by the Friday crash. However, the stock showed some relative strength after the Thursday upgrade so I lowered the stop loss.

Original Trade Description: June 11th.

Gogo provided communication services to the commercial and business aviation markets in the U.S. and internationally. They provide in-flight connectivity and wireless digital entertainment solutions to commercial airline passengers to and from North America.

Gogo has had a rough few months as airlines complained about the service and some removed the Gogo service and replaced it with a competitor.

On May 23rd Gogo announced the pricing of $525 million in senior secured notes. On May 26th the stock spiked 20% after the company filed a notice with the SEC saying an unspecified airline had requested a proposal for service to cover its large domestic fleet. Under the proposal Gogo would provide Wi-Fi to a "meaningful" portion of the domestic fleet that is is currently serving. Gogo cancels the $525 million debt sale.

On June 3rd shares plunge as the unspecified airline turns out to be American Airlines and the proposal is far less than expected. American picked ViaSat (VSAT) to provide internet access on 100 new Boeing jets. Gogo updates its SEC filing to say it would provide service on 140 American planes and continue service on 400 others. However, American retained the option to remove Gogo equipment on any American planes at any time. Gogo said it now expects American to remove its equipment on the "mainline" planes over the next several years. American said it was planning on upgrading the service on its planes but had not picked a successor. That means the 100 ViaSat planes will be a live test and will likely replace Gogo. ViaSat provides 12 mbps of bandwidth to each seat while Gogo provides 70 mbps for the entire plane and that bandwidth has to be shared by all passengers. There is a significant difference.

On June 9th Gogo reinstates the $525 million debt offering and priced it at 12.5% after Moody's rated it a B3-PD (Probability of Default) credit.

Earnings Aug 4th.

The future is not bright for Gogo. They are trying to produce a faster service through satellite connections rather than ground based systems but the testing and roll out is not going smoothly. Several years of hostility between passengers and carrier over the slow bandwidth has poisoned the relationships and ViaSat appears poised to take over the market.

Shares closed at a historic low on Friday at $8.97 and the downward trend is likely to continue.

Position 6/13/16:

Short GOGO shares @ $8.99, see portfolio graphic for stop loss.

I am not recommending an option but the August $8 put is $75 cents.



INSY - Insys Therapeutics - Company Profile

Comments:

No specific news. Back to the lows but refuses to break below $12.50. I lowered the stop loss.

Original Trade Description: June 18th.

Insys Therapeutics, Inc is a specialty pharmaceutical company that develops and commercializes supportive care products. The company markets Subsys, a sublingual fentanyl spray for breakthrough cancer pain in opioid-tolerant cancer patients in the United States. Its lead product candidate is Syndros, an orally administered liquid formulation of dronabinol. The company is also developing Cannabidiol Oral Solution, a synthetic cannabidiol for childhood catastrophic epilepsy syndromes; and other product candidates, including other dronabinol line extensions and sublingual spray product candidates.

Two former employees were arrested on June 9th for allegedly participating in kickback schemes involving doctors who prescribed the company's main drug, Subsys, a pain medication containing fentanyl. This is the drug that killed Prince, Joan Rivers and Michael Jackson. The two employees paid doctors thousands of dollars to participate in sham educational programs in order to induce the doctors to prescribe millions of dollars worth of the Subsys product. In 2014 alone the employees paid one doctor $147,000 and another $112,000 in speaker fees to give a talk at one of their "educational" programs. Those doctors were two of the largest prescribers of the drug in the USA. The scheme was discovered in November 2015. Subsys revenue in 2015 was $330 million. In 2014 a record 28,000 people died from subscription opioid addiction.

Earnings August 4th.

Clearly, this will have a long-term impact on Insys since there will be liabilities associated with the revenue generated from the scheme. The company is under attack by Preet Bharara, U.S. Attorney for New York. He has brought down dozens of other companies over the last several years for various types of misdealing.

Position 6/20/16:

Short INSY shares @ $13.06, see portfolio graphic for stop loss.

No options recommended because of wide spreads and high prices.



JBLU - JetBlue - Company Profile

Comments:

No specific news. New 17-month closing low on worries about exposure to the UK.

Original Trade Description: June 15th.

JetBlue Airways Corporation, a passenger carrier company, provides air transportation services. As of December 31, 2014, the company operated a fleet of 25 Airbus A321 aircrafts, 130 Airbus A320 aircrafts, and 60 Embraer E190 aircrafts. It also served 93 destinations in 28 states in the United States, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and 19 countries in the Caribbean and Latin America.

Business was good until all the airlines began adding capacity at the same time. The discount airlines were particularly aggressive. In order to fill that extra capacity they increased the number of discount seats and overall pricing went down. Now they have plenty of passengers but their revenue per mile has declined. They are still making money but with rising fuel prices they are going to have to raise ticket prices and that will dampen demand.

Last week JetBlue said May traffic measured in revenue passenger miles of (RPMs) rose +10.7% from 3.47 billion to 3.84 billion. Over the prior 12 months available seat miles (ASMs) rose 12.1% to 4.54 billion. The load factor or the percentage of seats filled by passengers declined from 85.7% to 84.6% because the rapid expansion of capacity outweighed the traffic growth generated by the discount tickets. That means the revenue per available seat mile (RASM) declined -7%.

The airline lowered guidance for RASM to decline 7.5% to 8.5% for Q2 compared to prior guidance for a 7% decline. They also lowered ASM growth from 8.5%-10.5% to 8.0% to 9.5%. They do not need to add additional capacity if they cannot fill the seats they already have.

Factor in the strong dollar, rising fuel prices and the increased terrorist activity and the outlook for profits is declining. Since the Belgium airport attack airline traffic has slowed. People do not want to be blown up while waiting in a security line. Add in the Zika virus that has disrupted traffic to Latin America and the Caribbean and that is another reason seats are empty. On the positive side JetBlue was accepted by the DOT to operate scheduled flights to Cuba. However, compared to their total capacity those few weekly flights will not move the needle.

Earnings July 26th.

JBLU shares have already declined significantly. They fell sharply in early May when they reported April traffic numbers. When the numbers did not improve in May they declined again starting on June 10th. JBLU was a rocket ship when it rallied from $5 to $24 in 2015 but we are headed for a round trip with shares back at $16.66 today. It has been a series of disappointing events one after another. I think we will see single digits again soon because of all the events impacting traffic and earnings I discussed above.

Position 6/16/16 with a JBLU trade at $16.50

Short JBLU shares @ $16.49, see portfolio graphic for stop loss.

Optional

Long September $16 put @ $1.15, no initial stop loss.



QURE - UniQure - Company Profile

Comments:

No specific news. New 52-week low.

Original Trade Description: June 20th.

UniQure is a biopharmaceutical company, engages in the discovery, development, and commercialization of gene therapies in the Netherlands. The company offers Glybera, a gene therapy product for the treatment of patients with lipoprotein lipase deficiency. They have multiple drugs in development for a variety of illnesses.

In their recent earnings they reported a loss of 92 cents that missed estimates for a loss of 82 cents. Revenue of $4.3 million did beat estimates for $2.9 million. This is a very small company and since the ASCO conference their shares have been in crash mode.

Losses appear to be accelerating and they lost $22.69 million in Q1. Their market cap is only $204 million.

There was no gap open today despite the major gap higher in the market. They closed at a historic low at $8.20. They have only been public for 2 years and from the chart today it looks like they are going significantly lower. Normally when a stock hits the prior historic low there is a rebound or at least a pause. Neither occurred and that suggests it will go lower.

Position 6/21/16 with a QURE trade at $8.00

Short QURE shares @ $8, initial stop loss $9.25.

No options recommended.



VXX - Ipath VIX Short Term Futues ETN - ETN Profile

Comments:

The VXX spiked to $17.20 and just enough to trigger the initial short position at $17. I am leaving the secondary recommendations open to short it again at $20 and $25 if it reaches those levels.

Original Trade Description: June 22nd.

The VXX is a ETF type product that is based on the Volatility Index futures. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

We have played the VXX before with big gains. The object is to short it on a bounce and then hold the position until the volatility fades again.

On the big declines last week the VXX spiked to $17. Back in January and February is spiked to $30 on the market corrections. While I do not expect that to happen from this lower level, I do expect some volatility to appear regardless of the vote outcome.

I am recommending we enter a short position with a return to $17. If it continues higher I would add to that short at $20 and again at $25 and then we wait for the post event decline in the volatility and the return to $13 or lower.

Because this is a flawed product it will always go lower. It has already had several 1:4 reverse splits to keep it from being delisted back in November 2010, October 2012 and November 2013. If it falls under $10, they will do another reverse split and start the decline all over again.

Position:

6/24/15: With a VXX trade at $17, now short VXX @ $17, no stop loss.

With a VXX trade at $20, short the VXX again, no stop loss.
With a VXX trade at $25, short the VXX again, no stop loss.

If we are successful in entering all three positions our average entry price will be $20.66 assuming you shorted an equal amount in each transaction. I would have no problem with increasing the quantity on the second and third position because it will always go down with the exception of short-term spikes on market corrections.




Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible.

These positions are only updated on the weekend.


FDC - First Data - Company Profile

Comments:

No specific news. Nice decline on Friday put it back at $11 and we have a $10 put. We still have a lot of time.

We were stopped out on the stock short on 5/23 there was no stop loss on the option and that position remains open. At the current 10-cent price that is a lottery ticket that the headlines will fade and the original direction will return. This is a July option so plenty of time for a disaster to appear.

Original Trade Description: May 16th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions.

In their Q1 earnings, they grew revenue 3% and operating income rose from $185 to $220 million. Earnings of 24 cents were slightly above expectations for 21 cents. Revenue of $1.69 billion was below estimates for $1.71 billion. Unfortunately, FDC has $19 billion in debt compared to its $3 billion market cap. Interest expense in the first quarter was $263 million or more than $1 billion a year.

Global business solutions revenue declined in the quarter while financial solutions and security solutions showed only marginal growth.

Earnings July 21st.

While the company tried to put a positive face on the future by projecting revenue growth, it appears investors were not impressed. Shares have fallen from $13.50 to $10.50 over the last three weeks since earnings. FDC does not provide guidance and that is troubling to some investors.

I am anticipating a retest of the post IPO low at $8.50 or even worse, depending on the market.

Position 5/17/16:

Long July $10 put @ $.60, no stop loss.

Previously closed 5/23/16: Short FDC shares @ $10.69, exit $11.55, -.86 loss.



TRN - Trinity Industries - Company Profile

Comments:

No specific news. Trinity closed at an 8-week high on Thursday and was knocked back for a 4% loss on Friday.

We have a July call option that is worth 16 cents today. I would bet $16 that it will recover by late July.

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.



WIN - Windstream Holdings - Company Profile

Comments:

WIN closed at a 52-week high on Tuesday but was knocked back in Friday's weak market.

We have an August $9 call and it could end up in the money because that is well into the future. With the option worth only 35 cents today, there is no value in closing it. This is a lottery play that WIN will be above $9 by August.

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.

Update 5/5/16: Windstream reported a much smaller loss than expected. The company reported an adjusted loss of 23 cents compared to estimates for 54 cents. Revenues declined slightly to $1,373.4 million and missed estimates for $1,378.8 million. However, product revenues rose 11% to $32.4 million. WIN bought back $75 million in shares in Q1. The company ended the quarter with 1,430,700 household subscribers.

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.





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