Option Investor
Newsletter

Daily Newsletter, Wednesday, 7/13/2016

Table of Contents

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

Market Wrap

Bulls Hoping for More All-Time Highs

by Keene Little

Click here to email Keene Little
The Dow and SPX have made it to new all-time highs and made new highs again today. But they're alone in doing so and they were the only indexes to hold in the green today. While this can be viewed as bearish non-confirmation, the stock market is bullish until proven otherwise.

Today's Market Stats

For the past three days we've seen the stock market gap up, thanks to an overnight or pre-market rally in the futures, but then chop mostly sideways for the rest of the day. This is frustrating for traders on both sides since there's been very little to trade during the day. It's much easier (cheaper) to manipulate the market higher with overnight futures than it is during RTH (regular trading hours). Holding long positions is obviously the winning position but the risk is what could happen if the big spike up suddenly loses support, especially if this week's rally is more about opex than "real" buying. It's looking like an effort to get SPX above 2150 for a settlement price (assuming it doesn't start back down before Friday morning).

Many are questioning how the stock market could possibly be rallying so strong on what appears to be very weak fundamentals. Since the spike down into the June 27th low (post-Brexit reaction) there's been much speculation that the central banks panicked and injected a lot of liquidity into the markets to prevent a selloff. After all, this has been their mission for quite some time, now readily admitted by them. They certainly succeeded at their mission (again) with the big spike back up this month.

Citi Research published a chart, shown below, showing central bank asset purchases since 2009 and this year's spike in purchases should put to rest any questions about their involvement in the markets, especially by the ECB and BOJ, both of which have been looking for alternative asset purchases and have made it known that they are buying stocks (ETFs, index funds, etc.).

As the chart below shows, CB asset purchases have risen to their highest level since 2013 and have more than compensated for the withdrawals by EM (Emerging Markets, via reserve liquidations). The spike in asset purchases this year (bold black line on the chart) has clearly helped lift stock markets and can be credited for the new all-time highs for the Dow and SPX (CB asset purchases have been focused on big-cap blue chip stocks). The bond market has also rallied and that's driven yields lower. Knowing the CBs have no intention of relaxing their purchases (look for a big announcement from Japan before the end of this month), this will likely be a bullish factor for some time to come (bears beware).

The global banking system is at risk of a systemic failure and there are a few high-profile banks that are being watched carefully. European bank stocks in particular have been pummeled as investors shy away from the fact that many big banks are already insolvent (like the central banks themselves) and they're too big to bail. Look for more bail-ins like what happened in Greece. The threat is that one big failure, like Lehman Brothers in 2007, could lead to a domino effect since the derivative exposure links many of the banks together. Whether it's banks in stronger Germany or banks in weaker Italy, the result is the same. Italy's banks now have about 17% of their loans that are non-performing (NPL), amounting to about $220B and the number is climbing every month.

There's been an effort to paper over the problem by having the banks simply carry the loans as performing ones. Covenant violation? I don't see no covenant violation and I ain't afraid of no ghosts. Many of these banks, including in the U.S., have less than 3% assets vs. liabilities, which was the position Lehman Brothers was in. A 3% decline in value of their assets basically wipes them out and we have a systemic problem with the amount of debt these banks hold and the increasing level of NPLs. This is one reason why the central banks have opened up the fire hoses of liquidity. Unfortunately their policies are hurting banks by driving yields into negative territory (the amount of negative-yielding government bonds has skyrocketed this year).

So it's a natural question by bears as to why the stock markets around the world are rallying. The question of course requires a logical answer and we know there isn't one, other than liquidity of course. The money goes looking for a home that provides at least some return and is relatively safe. The U.S. fits the bill and could attract money for some time to come. As traders we simply have to go with the flow but it's also important to recognize when the flow could reverse. Our best tool, as deficient as it is many times, is the chart of price action. It's kind of like Churchill's description of democracy -- a chart is the worst tool to use, except for all the others. So let's take a look and see what they're telling us.


S&P 500, SPX, Weekly chart

The big celebration this week is the new all-time high for SPX (and the Dow) and if we view the big sideways consolidation since the April 2014 low and May 2015 high the breakout above 2135 could easily be interpreted as a bullish breakout. Certainly bears would be foolish to short this just because it shouldn't be breaking out. Never trade your bias unless you have some evidence, such as a chart pattern, to support it. I can speculate here that the breakout will turn into a fake-out as a throw-over finish to the big consolidation pattern. But at the moment there isn't any evidence (only suspicion) that the breakout will fail. Back below 2135 would be worrisome for bulls but as long as that level holds it will remain bullish. But bulls cannot afford to get complacent here.

The reason I mention complacency and why the bulls can't afford to be smug with the breakout above 2135 is that there are presently a lot of believers in the bullish case. And when too many believe in something, and place their money on that bet, it oftentimes marks the end of a move (the rally runs out of buyers or a decline runs out of sellers). Looking at the CNN Fear & Greed index, it printed 88 yesterday and 86 today. A high level doesn't mean the top will form here and now but it does offer a reason to be cautious rather than complacent about the rally. The FNG index hasn't been this high since July 2014.

CNN Fear & Greed index

A story by Charles Del Valle, Editor, Strategic Investment, had this to say about some other sentiment measures:

"And a major survey by Investors Intelligence (II) found that more than half of all newsletter investment writers are bullish. That hasn't happened since early 2015. More importantly, the number of folks calling for a major correction has dropped to the lowest level in two years. II concluded that 'the bulls have entered the danger-higher risk zone' and noted that sentiment was likely to shift soon."

The VIX is difficult to judge during opex week because of the influence of expiring options along with opex hedging. But the VIX is another reason for caution now that it has dropped down to the 13 area and is again testing its uptrend line from July 2014 - July 2015 (and here we are in July again). We still have two days before the weekly candle finishes but if it forms a small doji at trendline support it could be the middle candle of a reversal pattern (confirmed with a white candle next week). It can always drop lower but as a trader, is that a bet you'd be willing to take here, especially with the significant bullish divergence at the current low? Just be cautious, that's all this chart and sentiment measures are recommending.

Volatility index, VIX, Weekly chart

SPX made it up to 2155 yesterday and 2156 today and there are two reasons why I'm watching the 2154-2156 area very closely for possible trouble for the bulls. One is a Gann Square of Nine level and the other is a Fibonacci extension level. On the Gann Sof9 chart, a portion of which (lower right corner) is shown below, shows the relationship (on the same radial) between 1810-1812 and 2154-2156. The 1812 and 1810 numbers are the January and February lows, respectively, and 2154-2156 are said to "vibrate" off numbers on the same radial and often mark turning points. Therefore a top to the move off those lows could be 2154-2156. Today's high was 2156.45

Gann Square of Nine chart, bottom right portion

The other reason why 2156 could be important has to do with a Fibonacci extension, which I show on the SPX daily and 60-min charts below.


S&P 500, SPX, Daily chart

A 127% Fibonacci extension of a previous move oftentimes marks a reversal level. The previous move in this case is the June 8-27 pullback and the 127% extension of that move points to 2155.60, which is shown on the next two charts but it's easier to see on the 60-min chart further below. The 127% extension only provides a warning of a possible reversal but it's common enough to pay close attention, especially since this one coincides with the Gann level. Tuesday's high was 2155.40 and today's high was 2156.45. At the same time it's back-testing its broken uptrend line and it left a small doji for today's candle. A red candle for tomorrow would create a reversal pattern but it could continue to "ride up" underneath the trend line before letting go. This has been very common but at the moment it's another reason for bulls to be careful about chasing this higher.

Key Levels for SPX:
- bullish above 2156
- bearish below 2108


S&P 500, SPX, 60-min chart

With the rally from June 27th achieving the 127% extension of the 3-wave move down from June 8th we have a possible bearish EW pattern that calls for a sharp decline to complete a larger 3-wave move down from June 8th. The c-wave of this move would be expected to achieve 162% of the first leg down (June 8-27), which points to about 1948. This would result in a test of the February 1st high at 1947. I show the potential for the rally to continue into tomorrow, potentially up to 2175-ish, and maybe higher into next week (they could gun the market tomorrow to get a 2175 settlement price Friday morning for SPX). As long as it holds support at or above 2135 it will remain bullish. But an impulsive decline below 2135 would give us a bearish heads up.


Dow Industrials, INDU, Daily chart

A similar 127% extension discussed for SPX, but starting from the April high for the Dow, is at 18468. It too could ride up underneath its broken uptrend line from February-May, currently near 18440, as it holds up for opex. A close at or below 18470 into the end of the week would have me feeling bearish into next week (but recognizing that all it will take is a Sunday night rally to jump over resistance Monday morning). A rally that holds above 18470 would be reason enough for bears to go home.

Key Levels for DOW:
- bullish above 18,470
- bearish below 18,000


Nasdaq-100, NDX, Daily chart

Today the NDX created a small bearish engulfing candlestick (for an outside down day with a new high and lower close). Today's high was near 4590 and just shy of price-level resistance near 4600 and only in hindsight will we know if this was a good setup for a reversal back down. A drop below its June 6th high near 4536 would be a bearish heads up since that level should now act as support if there are higher prices ahead of us.

Key Levels for NDX:
- bullish above 4600
- bearish below 4453


Russell-2000, RUT, Daily chart

The RUT is battling its December 2015 high at 1205. It rallied above that high yesterday and today with highs at 1211.77 and 1210.38, respectively, but has been unable to hold those highs and today it closed back below 1205. It's another example of a failure to follow through on a bullish break and it's cause for some concern. But it's not clear yet whether we're seeing just a consolidation near the highs, to be followed by another push higher or if we're seeing the RUT top here and now. The first bearish indication would be an impulsive decline below its uptrend line from June 27th, currently near 1183. But for now the bulls rule.

Key Levels for RUT:
- bullish above 1215
- bearish below 1161


10-year Yield, TNX, Weekly chart

Bonds prices had pulled back off their July 6th highs, which created a bounce for yields, but that reversed today. It's too early to tell if the larger trend will resume (down for yields) but that's the potential as I see it. TNX bounced off support at its July 2012 low at 1.394% (it made an intraweek low at 1.336%, which was an all-time low) and I continue to see the potential for TNX to drop below 1% and perhaps down to 0.5% as global bond yields continue to decline. The more outside investors choose U.S. bonds it will continue to drive their prices higher and yields lower. I know the bond king (Bill Gross) and many very well respected investors disagree with me on this, which makes me nervous, but I'll become a believer in the end of the bull market in bonds when the charts tell me so.

One reason why I think bond yields will continue to decline is because the bond market continues to forecast deflation and not inflation like the central banks want (and are desperately fighting for with all their money creation). As much as the central banks want inflation (it helps pay back longer-term debt with cheaper dollars) it's been a losing battle for them since 1997 when money velocity started slowing. No matter how hard the Fed pushes on that string they can't get people to spend more money. Corporations aren't spending except on themselves with share buybacks and other companies. People are living on less and they haven't significantly increased their debt load since 2007 (as opposed to corporations and governments which have exploded their debt levels) and they're not spending as much. The result, as the chart below shows, is a longer-term slowing in money velocity and once it dropped below the historical average of 1.74, in 2010, it has been one of the surest signs of deflation. Stock markets don't do well in times of deflation but you certainly wouldn't know that, yet. The Fed has been papering over the problem with massive QE and cheap money but it hasn't stopped the slide in MV (nor will it for at least a couple more years). When all of this will catch up with the stock market is the big question.

Money Velocity, 1990-2015, chart courtesy St. Louis Fed and Hoisington Investment Management


KBW Bank index, BKX, Weekly chart

The banks have outperformed SPX off the July 6th lows but BKX has significantly underperformed SPX since July 2015 and especially since the end of May. It will be interesting to see what BKX does with price-level resistance at 66.50, a level that has been S/R since 2013. Along with 66.50 S/R it has its 200-week MA at 66.64 just above. Not shown on the weekly chart, BKX is currently struggling with its downtrend line from June 2nd, where it closed today at 66.12, and its bounce off the June 27th low achieved two equal legs up at 66.21 (yesterday's high was 66.35 and today's was 66.43), for the possible completion of an a-b-c bounce correction. I'll be more impressed with its bounce if it can hold above 66.64.


Transportation Index, TRAN, Weekly chart

The TRAN has had a strong bounce off its June 27th low and has made it up to its June 8th high at 7950 with today's high at 7952. At the same time it's now testing its downtrend line from February 2015 - April 2016, currently near 7930, where it closed today. It has a long way to go to confirm the Dow's new all-time high (its November 2014 high was 9310) but it would be at least bullish if the TRAN can break above its April high at 8149 and following a 3-wave pullback from April it at least has a good shot at another rally leg. That would lend credence to the current rally and it would be a strong reason for bears to go back into hibernation.


U.S. Dollar contract, DX, Daily chart

The US$ hasn't done much for the past three weeks but the sideways consolidation is more bullish than bearish. However, on the daily chart it's overbought and showing bearish divergence against its June 27th high so it's possible we're going to see a deeper pullback before heading higher. I'm assuming it will head back up to the top of its 2-year consolidation range and I expect a lot of choppy price action for the rest of this year.


Gold continuous contract, GC, Daily chart

This week we've seen a reversal of last week's rally in gold but there's no confirmation yet that we might have seen the high, although that's the risk as I see it for those chasing gold higher. As noted last week, I see upside potential to its downtrend line from September 2011 - October 2012, which is near the 1417.50 projection for two equal legs up from December 2015. It would be more bullish above that level. Many gold bulls are bullish gold for fundamental reasons, primarily as a hedge against inflation and/or as an alternate currency. I want to be a gold bull for exactly the same reasons and while I own some gold as a currency hedge I'm not ready yet to dive into a big position. As explained earlier, I think we're still in a deflationary environment, contrary to what the Fed wants, and that we'll likely see lower gold prices if that's true. I'm hoping to become a very long-term bull at the next low (end of the year or in 2017).


Silver continuous contract, SI, Weekly chart

Looking to silver to see if there's a different message for the precious metals, I see the potential for a top for silver following last week's spike into a high. It could press a little higher but I see risk in the 20.27-20.93 area. Two equal legs up from December 2015 is at 20.27 and the 2nd leg of a larger 3-wave move up from December 2014 is 162% of the 1st leg at 20.63 (note the 162% projection for the 2nd leg, which is the same pattern, in reverse, that I'm suggesting we might have for the blue chips). And then a 62% retracement of the decline from August 2013 is at 20.93. This 20.27-20.93 area is likely to be strong resistance but would also mean silver would be more bullish if it can hold above 21.


Oil continuous contract, CL, Weekly chart

Oil's pullback from the high on June 9th has been choppy and could indicate it's just a corrective pullback before heading higher. A rally above 51 would be a bullish move but until that happens I think we're seeing the start of the next leg down for oil, one that could drop it below 20. There's lots of time between here and there to help figure out whether or not it could make a new low or simply consolidate sideways for the rest of the year (kind of like the dollar).


Economic reports

There a couple of economic reports Thursday morning, including PPI numbers, and then a bunch more on Friday, including CPI numbers. Friday we'll get several reports that will indicate how the economy is doing but the market is already showing it doesn't care about the economy. As long as the central banks are shooting drug money directly into the markets' veins it's happy.


Conclusion

The central banks blinked and the markets win again. There's a lot of speculation about how the market was "allowed" to decline significantly following the Brexit vote so as to scare the central banks into injecting massive amounts of money and then the big players got to put that money to work buying stocks at cheaper prices. We know the market is massively manipulated and these "conspiracy theories" tend to look a lot more like real stories than they did for most people less than 10 years ago.

But whatever the reason, the stock market has blasted higher and the blue chips have made new all-time highs. There's some concern that the new highs have not been made with high volume and nor have they seen much follow through. There's a lot of disparity between indexes and bullish sentiment has shot up through the roof. All of these things don't prove a market top is right around the corner but we have enough reasons to be cautious and question why just the blue chips are making new highs.

There is money pouring into the riskier stocks, like small caps, but they have a long way to go to catch the blue chips at new highs. Like we saw back in 2007, the new highs in October, following the ones in July, were being led by techs and small caps. They're suspiciously absent this time. Likely the reason is because the central banks are buying blue chip indexes and ETFs, which adds credence to the idea that the new highs are more central bank driven than "normal" buying. How long that can continue is anyone's guess, and certainly a reason for bears to back off until we see better evidence of a top in place. Keep in mind that we could be in the process of finishing the rally with a blow-off top that could go MUCH higher. You don't want to stubbornly hang onto a short position if that happens.

If the rally is being brought to us courtesy of the central banks, the more funny money that props up the market the more vulnerable it becomes to a disconnect to the downside. A major bank failure and a systemic financial system breakdown could be more than even the central banks can contain. Both sides need to trade very carefully here.

Good luck and I'll be back with you next Thursday (Tom and I will be switching Wednesday-Thursday).

Keene H. Little, CMT

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


New Plays

Analysts in Denial

by Jim Brown

Click here to email Jim Brown
Editor's Note

When all the analysts covering a stock have a strong buy rating and the stock continues to fall there is a failure to communicate. That is the case with Jinko Solar. Shares are about to break support but analysts are in denial.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

JKS - Jinko Solar - Company Profile

JinkoSolar Holding Co., Ltd., engages in the design, development, production, and marketing of photovoltaic products in the People's Republic of China and internationally. The company operates through two segments, Manufacturing and Solar Power Projects. It offers solar modules, solar cells, silicon ingots, silicon wafers, and recovered silicon materials. The company is also involved in the solar power generation activities; engineering, procurement, and construction of solar power projects; connecting solar power projects to the grid; and operation and maintenance of the solar power projects, as well as provides solar system integration and processing services.

For Q1 the company reported earnings of $1.68 that easily beat estimates for $1.11. revenue of $848 million also beat estimates for $714 million. Shares spiked to a new two month high and immediately began to slide and that slide is continuing. Operating expenses rose 80.3% to $91.8 million. Interest expenses rose +101% as the company took on more debt to finance projects.

Only 4 analysts have current recommendations on JKS. Those are Jefferies, Roth capital, Morgan Stanley and Zacks. All are strong buys. The consensus price target is $31. If they begin to change their recommendations because of the falling stock price that should cause further declines.

Earnings August 18th.

In theory Jinko is positively positioned to continue growing. However, solar capacity in China is very over supplied. Selling prices are falling and new processes constantly make old manufacturing techniques outdated and overly expensive. Constant upgrading to new manufacturing requires capital and time that constrains output from the old processes.

Short interest is over 15% on JKS. Shares appear poised to break below support at $19. They traded as low as $14 last August. I am suggesting we short JKS but buy an August $21 call option just in case the analyst recommendations suddenly cause a reversal in the trend. If JKS shares do break under $19 we will recover the 75 cents paid for the option very quickly. If the stock reverses sharply we have upside protection.

With a JKS trade at $19.35

Short JKS shares, initial stop loss $20.40.

Buy long August $21 call, currently 75 cents, no stop loss.




In Play Updates and Reviews

Losing Traction?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market momentum appeared to slow on Wednesday with the Dow and S&P barely adding to their gains. The Dow added only 24 points and the S&P only added a quarter point. The Nasdaq was significantly lower at -17. The Biotech Index lost -2% to qualify as the biggest loser. The Russell 2000 lost -5 points.

There are some serious headline risks this weekend and early next week surrounding the start of the Republican convention. Numerous entities including the Democratic party have vowed to fund protests and demonstrations to disrupt the process and give the appearance of voter uproar. There will likely be violence.

The new UK PM, Theresa May, said she may not file the required Article 50 notice to start the 2-yr countdown clock on leaving the EU until next year. That dashed the hopes of many who wanted to rip the band aid off and get the process completed quickly. This could further weigh on the European economy.

The closer we get to the weekend the more likely profit taking will begin. The indexes are very overbought from the two week post Brexit rebound.




Current Portfolio





Current Position Changes


No Changes


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

DDD - 3D Systems - Company Profile

Comments:

No specific news. Very minor loss after a $1 gain on Tuesday.

Original Trade Description: July 9th.

3D Systems Corporation, provides 3D printing products and services worldwide. The company's 3D printers transform data input generated by 3D design software, CAD software, or other 3D design tools into printed parts using a range of print materials, including plastic, metal, nylon, rubber, wax, and composite materials. It offers various 3D printing technologies, such as stereolithography, selective laser sintering, direct metal printing, multijet printing, colorjet printing, and plasticjet printing. The company also develops, blends, and markets various print materials, such as plastic, nylon, metal, composite, elastomeric, wax, and Class IV bio-compatible materials. It offers its printers under the Accura, DuraForm, LaserForm, CastForm, and VisiJet brand names. In addition, the company provides digital design tools, including software, scanners, and haptic devices, as well as products for product design, mold and die design, 3D scan-to-print, reverse engineering, and production machining and inspection. Further, it offers proprietary software and drivers that provide part preparation, part placement, support placement, build platform management, and print queue management; and 3D virtual reality simulators and simulator modules for medical applications, as well as digitizing scanners for medical and mechanical applications.

The 3D printing sector crashed and burned in 2014 when the expectations for the technology got way ahead of reality. Shares of DDD peaked at $97.28 before starting the long slide to $6 in January 2016. Shares recovered from that low as the sector began to actually provide some amazing technology. Shares rebounded to $19.50 in April before another round of weakness pushed them back to $12. After chopping around in the $12-$14 range they appear ready to breakout.

The new CFO was given a compensation package of $2.1 million a year. He must be really good. If the stock rises to $30 and maintains that level for 90 consecutive days he can exercise options to buy shares at $12.92, which will give him $10.4 million if sold. If the stock prices rises to $40 for 90 days he has another bonus that would give him shares he could sell for a $8.9 million profit. Another bonus awards him $9.4 million if shares reach $30 in year one of his contract and $40 in year two and holds it for 90 days. He has an extreme incentive to get that stock price moving higher.

Hardly a week goes by that 3D does not announce some new process or software enhancement that comes closer to achieving the original expectations for the 3D printing technology. The ability to print parts out of metal has revolutionized the manufacturing environment. Many large corporations are buying printers by the dozens to print parts that previously had to be ordered from the source with long lead times.

Earnings August 3rd.

Shares closed at $14.12 on Friday and that is a two-month high and slightly over resistance. The next resistance level is the April highs at $18.25. If DDD is about to breakout like it did in Feb/Mar then we want to go along for the ride.

Position 7/11/16 with a DDD trade at $14.25

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

No options recommended. Aug $15 call is 74 cents.



EXAS - Exact Sciences - Company Profile

Comments:

Minor decline after the big gain on Tuesday. Somebody bought 8,000 July $13 calls compared to open interest of 2,295. That is a big bet with only 2 days left until expiration. Rumor making the rounds that Illumina (ILMN) may be considering making an offer for the company.

Original Trade Description: June 25th.

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.

Position 6/27/16:

Long EXAS shares @ $11.50, stop loss $9.45.

No options recommended.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

No specific news. Resistance at $19.85 is holding.

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

Position 6/28/16: Long HPE shares @ $17.50, see portfolio graphic for stop loss.

Position 6/3/16: Long August $20 call @ 40 cents. No stop loss.

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



SCTY - Solar City - Company Profile

Comments:

No specific news. Shares still clinging to resistance at $24. More analysts are questioning the value of the offer from Tesla, suggesting it should be higher.

Original Trade Description: June 27th.

SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; mypower loan agreements; grid control/energy storage systems; zep solar mounting systems; and proprietary software, including SolarBid sales management platform, SolarWorks customer management software, PowerGuide proactive monitoring solutions, and Energy Designer, a proprietary software application used by field engineering auditors to collect site-specific design details on a tablet computer. It also sells electricity generated by solar energy systems to customers.

SolarCity has had a troubled past with the rise and fall of solar based on the whims of governments and the on again-off again investment credits and tax rebates. SolarCity is still humming right along and building up their base of installed systems into one giant annuity that will pay for decades to come. The problem is that it takes cash to build and install those systems that they sell to customers. Cash up front for a long and profitable payout.

SolarCity was co-founded by Elon Musk. He also started Paypal, SpaceX and Tesla. Last week he (Tesla) offered to buy SolarCity, where he is the largest stockholder and Chairman of the board, for $26-$28. Tesla shares cratered. SolarCity shares spiked for one day then fell back again. Numerous analysts were against the plan. Now shares are rising again.

Elon Musk believes he can marry his battery business with the solar business and have a winning combination. He already makes battery backups for your home but they run off regular utility company power. With SolarCity he can power those battery systems with solar and it makes a lot more sense for customers.

Shares have established a base at $21 and with the $26-$28 offer under consideration along with "other strategic alternatives" it would appear there is limited downside.

Earnings August 8th.

Position 6/28/16:

Long SCTY shares @ $23.40, see portfolio graphic for stop loss.



SHLD - Sears Holding - Company Profile

Comments:

No specific news. Shares fell back -5% to $14.05 only a day after breaking over resistance at $14.50. It was a mixed market and Nasdaq stocks were depressed.

Original Trade Description: July 11th.

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. As of October 31, 2015, this segment operated 735 Sears stores.

I probably did not need that big company description paragraph because everybody knows about Sears. They have fallen on hard times in recent years but they are struggling back. Sears is charging forward with "brand extensions" of its existing brands including Kenmore, Craftsman, DieHard, etc. What is a brand extension? Everybody knows about Kenmore appliances. They have been around for 75 years. But soon you will see Kenmore sinks, facets, and many more items carrying that name. Sears is preparing to market a DieHard line of tires because the DieHard brand is the leading brand for batteries. They are also reducing the store count and selling some real estate. They are also moving to stores within a store. This is where brand name companies rent a certain amount of floor space to sell their products. Sears gets a commission and does not have to order or inventory any products. This reduces overhead and allows for better management of the individual product sections.

Whether it will work or not remains to be seen but it appears they have stopped the bleeding and are now focusing on rebuilding the business.

Shares bottomed at $10 in May and Monday's close at $14.48 was a two-month high. Next resistance is around $18.50.

Earnings are August 18th.

Position 7/12/16 with a trade at $14.65

Long SHLD shares @ $14.65, see portfolio graphic for stop loss.

Optional

Long Sept $16 call @ .88, no stop loss.



TWTR - Twitter - Company Profile

Comments:

YUM Brands announced you can now order Pizza Hut pizza from your Twitter account. The Pizza Hut ordering capability will be available in August through Twitter and the Conversable app.

Original Trade Description: July 6th.

Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.

Twitter's monthly active users have flat lined for many months with almost no growth. New users come into the system, get confused and overwhelmed and then leave just as quickly. There was nothing "sticky" to keep them on the system unless they were a news junkie or addicted to the next wild comment from Donald Trump.

Twitter is trying to change that with Twitter Live. They are testing the concept this week with a live twitter video feed from Wimbledon. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. Twitter has already announced several live events they are going to stream. They paid $10 million to the NFL to stream 10 of the Thursday night games. Live news stories are also being tweeted.

Analysts have been pleasantly surprised and claim "this may actually be something useful from Twitter." If they can successfully transform themselves from a 140 character shorthand rant site into a site with thousand of live streams of everything under the sun then they may actually avoid obsolescence.

Shares have been rising since the $14 low on June 10th and appear poised to break over resistance at $18. By reinventing themselves as a live stream video portal they open up a significant advertising opportunity and could actually attract some big money buyers looking for a social media acquisition. Apple and Google are the permanent favorites constantly mentioned as possibly having interest. If they see that Twitter is suddenly becoming relevant again, they could pull the trigger.

This time last year Twitter was trading around $38 and their historic high was around $75 so even without an acquisition offer they could rebound significantly.

Twitter has been a slow mover even though it is up $3 in three weeks. If it were to move over that $18 resistance it could pick up speed as investors come back for a second or third look and realize the company is evolving.

Do not buy this with expectations for a quick bounce and out. If you enter this position, you should look for a slow move to $20 and then reevaluate the position. Over $20 could trigger some real short covering.

Earnings July 26th and we could hold over the event depending on the news flow and stock level.

Position 7/7/16:

Long TWTR shares @ $17.24, see portfolio graphic for stop loss.

I am not recommending an option because of the recent history of slow movement. However, a long-term option may be the correct way to play this position. Your risk is known in advance and the cost of entry is very low. Here are some examples.

Sep $19 Call $1.04
Dec $20 Call $1.51
Jan $20 Call $1.64




BEARISH Play Updates

VXX - Ipath VIX Short Term Futues ETN - ETN Profile

Comments:

The VXX closed under $12 at a new historic low.

We are probably going to be in this position for a long time as it declines to new lows well under $12 this summer. Around $10 and they will do another reverse 1:4 split. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

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.





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