Option Investor
Newsletter

Daily Newsletter, Thursday, 9/8/2016

Table of Contents

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

Market Wrap

The Churn Goes On

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The stock market continues to churn, the ECB and Mario Draghi fails to inspire buyers and potential catalysts are running thin this week. Today's policy announcement and press conference with the ECB were the news of the day. The central bank held rates steady, as expected, but did not extend the duration of QE programs as expected. Also unexpected, a decrease in GDP forecast lowering 2017 and 2018 outlook to 1.8% each. The one ray of light was a mild upward revision to this years GDP outlook.

Mario Draghi says that "our program is effective and we should focus on implementation". He also says that interest rates will remain at present levels for some time. Asian market were not affected by this news, having closed long before the release. Markets in that region were mostly flat, mixed, on a day largely devoid of news. Trading in Europe was much different. Early action saw most indices hang around break even levels up to and until the policy statement. At that time the indices began a slide that shaved more than -1% off of yesterday's close. Some, but not all, of the loss was regained before the end of the trading day leaving the DAX down by about -0.6%.

Market Statistics

Futures trading was flat all morning, up to and until the ECB policy statement. At that time the trade slipped a few points indicating a mildly negative open for the US indices. This week's labor data did little to support prices although they show ongoing health in the sector. The indices opened with small losses, as much as -0.25% in some cases, and extended them into the first 45 minutes of trading. An early bottom was hit around 10:15AM at which time the bulls were able to stage a come back. The indices rose for the next hour but were not, in most cases, able to recover all of the day's loss. Resistance set in shortly after and held the market in check the remainder of the day. Today's range was once again very tight, volume was low and trading was without direction.

Economic Calendar

The Economy

Only one economic release today, jobless claims. Initial claims fell -4,000 from last week's not revised figured to hit 259,000. The four week moving average of claims fell -1,750 to hit 261,250. This is the 79th week of claims below 300K, the longest streak since 1970. On a not adjusted basis claims rose 1.5% versus an expected 2.8% to hit 218,000, -6% from this same time last year. New York and California led with increases in claims of 4,913 and 1,628. Michigan and Texas led with decreases in claims of -1,101 and -942. This week's data remains consistent with ongoing labor market health.


Continuing claims fell -7,000 on top of a downward revision of -8,000 to hit 2.144 million. The four week moving average shed -4,000 and is now slightly above 2.153 million. These figures continue to trend near long term lows and show no signs of changing. At these levels continuing claims remains consistent with ongoing labor market health.

Total claims fell -45,845 to hit 2.054 million, consistent with expectations, seasonal and historic trends. This number is now at a 9 week low and should continue to move lower over the next 6-7 weeks. At these levels total claims are just above the long term low of 1.881 million and consistent with ongoing labor market health.


There is only one release scheduled for tomorrow, Wholesale Inventories, and not much on the calendar until next Thursday. Next Thursday the calendar heats up with 10 distinct releases including Retail Sales, PPI, Philly Fed, Empire Manufacturing and Business Inventories.

The Dollar Index

The Dollar Index fell to, and bounced from, support on the heels of the ECB policy release. Draghi's comments at first strengthened the Euro but that strength faded during the press conference. The Dollar Index fell a half percent to test support levels just above $94.30, support was there and sent the index back up to regain of all the early loss and more. By end of day the index was up as much as 0.15% although the indicators suggest the test of support is not over. With so little on the economic calendar over the next week I expect to see the index continue to trend between $94.30 and $95.60, perhaps even up to the FOMC meeting scheduled for 9/21. Current probability of a rate hike as predicted by the CME Fed Watch Tool is about 24%.


The Oil Index

Oil prices surged today following inventory reports showing multi-million barrel draw on US stockpiles. Yesterday the API report forecast a 12 million barrel draw, today the EIA confirmed that and upped the number to over 14 million barrels. The caveat is that the decline is due primarily to shut downs of services related to last week's hurricane, we could easily see a build as big or bigger next week as gulf production resumes. WTI jumped more than 4% on the news to trade above $47. Momentum has turned to the upside and could take WTI back to retest recent resistance but beware, oversupply still plagues the market.

The Oil Index rose along with the underlying commodity, gaining just over 1.5% in today's session. Today's move brings the index up to the upper boundary of a 5+ month trading range and likely resistance. The indicators are showing a weak buy signal but otherwise remain consistent with range bound trading. Resistance is near 1,170 with a possible move to 1,200. A move above 1,170 may be bullish but just as likely a whipsaw provided oil prices do not make new highs. A move above 1,200 would be bullish.


The Gold Index

Gold prices held near $1350 for most of the morning but eventually succumbed to the dollar's rebound from support. By late day spot gold prices had fallen by -0.6% to trade closer to $1,340 but remains range bound nonetheless. Today's action confirms resistance at the $1,350, if not it's strength, but did not break below the mid-point of Tuesday's long white candle. The near term trend is up but upside potential is limited without some form of catalyst to push it above, or confirm, resistance. Resistance is in near $1,375-$1,385 and may be contingent on the upcoming FOMC meeting, funny how that always seems to work out. If the FOMC confirms the more hawkish line the dollar will likely strengthen and gold prices will fall, if they appear less sure of hiking rates the dollar could fall and gold could move up to and above resistance targets. Until then expect day to day action to be driven by headlines.

The gold miners fell in today's action, the Gold Miners ETF GDX shedding -2.5%. Today's move appears to confirm resistance at the short term moving average and could lead to a retest of recent support. The ETF is in a corrective phase, possibly now within a new trading range, and indicated to retest support by MACD. The last MACD peak is a bearish extreme, convergent with a low, which suggests that the low will be tested or exceeded. Resistance is near $28.50, the mid point of the potential range. Downside targets are $26.70 and $25, the bottom of the range.


In The News, Story Stocks and Earnings

Shares of Twitter fell nearly -6% as the board holds its annual meeting to decide the company's fate. Speculation is running wild, will the company sell itself? If they do who would want them? How much is it really worth and just how relevant to today's internet is it? Shares are falling from the top of a range in which they have been trading since February.


Bank Of America's CEO Brian Moynihan had some interesting things to say this morning during a televised interview. Without giving details he said that August was a very strong month for consumer banking and that the consumer is in good shape. He went on to talk about the company's health and cost cutting measures, citing a $20 billion in savings already realized and ongoing efforts to do more. Mobile services have helped to achieve that goal as it allows the bank to reduce the number of branches and employees. These savings will continue to accrue as more and more customers make the shift. Shares of Bank Of America were among today's top gainers, adding more than 1.2% to yesterday's close.


Barnes & Noble reported earnings before the bell and did not meet expectations. The company reported a narrower loss than last year but declining revenue did not match estimates. Revenue fell -6.6% year over year, comp stores sales fell -6% and Nook sales fell -24%. In the report softer than expected results are due to a "challenging" retail environment. It could be that buying new books is just really expensive compared to other alternatives. Shares of the stock fell more than -5% to test support near $11.50 and were able to bounce from that level to close with a lose of only -4%.


The Indices

The indices did nothing but churn today, moving within a very tight range and without true direction. One index did of course buck that trend, the Dow Jones Transportation Average. The transports gained 0.25% on day when all others posted losses, extending yesterday's gains and moving up toward a potentially strong level of resistance. Resistance is near 8,150, a 5 month high, and likely to hold without catalyst. The indicators support a move up to test resistance but are not strong, consistent with range bound trading. A break above 8,150 is potentially bearish but would face additional resistance just above near 8,250.


The day's biggest loser is the NASDAQ Composite which posted a decline of -0.46%. The tech heavy index created a small black candle moving down from the newly set high. Today's move lower was supported at 5,250, this level may hold but divergences persist and grow stronger suggesting an growing weakness within the market. First target for stronger support is near the short term moving average, near 5,200, and then near 5,000 should first target be broken.


The second largest decline in today's session was posted by the Dow Jones Industrial Average. The blue chips index fell -0.25% creating a very small black candle, yet another doji like spinning top. Today's action came to rest directly on the short term moving average but may fall through in favor of stronger support near 18,275. The indicators are mixed and directionless, consistent with range bound trading, so I would expect support to hold unless the bears come out in force. A break below support could take the index down to 18,000 or lower. Until then look for this index to continue trending sideways.


The S&P 500 made the smallest move in today's session, only -0.22%. The broad market created yet another tiny spinning top doji, within the recent consolidation/congestion band, and does not appear ready to move outside its trading range. The indicators are mixed in the near term and consistent with range bound trading, looking further out divergences persist suggesting underlying weakness in the market. Support is currently near 2,160, a break below this level would be bearish in the near term and could take the index down to 2,130 or lower.


The market continues its listless drift sideways while signs of underlying weakness persist. In order to move higher it will need a catalyst, and there is nothing in sight strong enough to spark a rally, not until the FOMC meeting in two weeks. And that is assuming they do or say something other than the same thing they've been saying. Until then I expect to see the market continue side-winding on whatever scraps of news or data it can get its hands on. After that it will only be about 2 more weeks until the next earnings cycle begins, about 4 weeks from now, and that I think will be what really drives longer term direction. I remain cautious, optimistically bullish, but very very cautious.

Until then, remember the trend!

Thomas Hughes


New Plays

Calm before the Storm?

by Jim Brown

Click here to email Jim Brown
Editor's Note

The market decline today was broad based but minimal. Was this just a hiccup or a warning of things to come? The advance decline ratio was 4:3 in favor of decliners. That is not a material imbalance but it also came on the highest volume of 6.83 billion shares since August 5th. The small, mid and large caps were all sold equally suggesting the portfolio managers are ramping up their restructuring as we get farther into September.

The ECB failed to extend the current QE program and that shocked analysts. With the Fed meeting on the 20th we may be reaching a tipping point where stimulus reverses from ultra lose to something a little tighter. The Chinese market is at a 10-month high and that could keep the PBOC from announcing any new plans. All of these factors count and while each is just a brick in the stimulus wall, a few of those bricks could be ready to crumble and it would weigh on the U.S. markets. I am not recommending any new plays until we see what Friday and the weekend headlines tell us.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Direction Change Ahead?

by Jim Brown

Click here to email Jim Brown

Editors Note:

With all the major indexes closing negative on higher volume could be a turn signal. When you are coming to a fork in the road where you plan to make a turn you normally slow down before that intersection. It is possible the broad market fade on Thursday could have been the portfolio managers tapping on the brakes before they change direction next week. Volume of 6.83 billion shares was the highest since August 5th and higher volume on a down day is not a good sign.

However, the declines we saw today were minimal. A 46 point loss on the Dow is a rounding error. The Nasdaq did lose 24 points but that is still not a lot. This may have just been a reaction to the ECB failing to announce an extension to QE. With the FOMC meeting on the 20th, there could be some hesitancy to press the long positions just in case the Fed does move in September.

We are starting to see some sharp and unexplained drops in individual stocks. This is probably portfolio managers locking in profits on winners and raising cash for a potential late September dip. Now is the time for us to be cautious in adding new positions.




Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


UNT - Unit Corp
The long position was entered with a trade at $13.38.


SQ - Square Inc
The long recommendation has been cancelled.


TWTR - Twitter
The long position was stopped with a trade at $18.75.


FOXA - 21st Century Fox
The short position was stopped with a trade at $24.65.


HUN - Huntsman
The long stock position was stopped with a trade at $16.65.



If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

CC - Chemours Co - Company Profile

Comments:

No specific news. Minimal 6 cent decline.

Original Trade Description: September 3rd.

The Chemours Company provides performance chemicals in North America, the Asia Pacific, Europe, the Middle East, Africa, and Latin America. It operates in three segments: Titanium Technologies, Fluoroproducts, and Chemical Solutions. The Titanium Technologies segment produces and sells titanium dioxide (TiO2) under the Ti-Pure brand name to deliver whiteness, brightness, opacity, and protection in various applications, such as architectural and industrial coatings, flexible and rigid plastic packaging, PVC window profiles, laminate papers, coated paper, and coated paperboard used for packaging. The Fluoroproducts segment provides fluoroproducts, such as hydrofluorocarbon refrigerants, and fluoropolymer resins and downstream products and coatings under the Teflon brand name. The Chemical Solutions segment offers industrial and specialty chemicals used in gold production, oil refining, agriculture, industrial polymers, and other industries in North America. This segment provides cyanides; and performance chemicals and intermediates, such as clean and disinfect chemicals, aniline, methylamines, glycolic acid, Vazo free radical initiators, and reactive metals. Company description from FinViz.com.

This company has had a hard life since going public. Back in June Citron Research released a report critical of Chemours saying it was a "zero" because of lingering liabilities they inherited when DuPont spun them off. According to Citron they had liabilities for the manufacture of PFOA while it was part of DuPont. Citron said the company was "designed for bankruptcy" to rid DuPont of those lingering liabilities. Chemours issued a strong rebuttal. Bloomberg researched the background and said Chemours might have $800 million to $1.5 billion in risk. Anyone suing for contamination has to sue DuPont first and they have deep pockets. Chemours agreed to share some of the risk in the event of a judgment. In any event, it will be years before there is any real liability to Chemours.

Shares collapsed but at the same time David Einhorn raised his stake from 5.44 million shares to 8.44 million. If Einhorn is not worried, we should not be worried for a 30-45 day trade. We will exit before earnings. Argus upgraded them to a buy saying they had a significant competitive advantage becaus of their size, vertically integrated structure and rapid cost cutting.

Earnings Nov 3rd.

When they reported for Q2 they earned 27 cents compared to estimates for 17 cents. Revenue was $1.38 billion and missed estimates for $1.42 billion because of the sale of a division. The company said it was delivering $350 million in cost reductions and add $150 million in adjusted EBITDA through 2017. The prior quarter they earned 6 cents compared to estimates for a penny. They have history for strongly beating estimates.

They announced the sale of their sulfur business for $325 million and the sale of the Clean and Disinfect business for $230 million. The company is shedding noncore assets to improve profitability.

Zachs said analysts they follow are raising estimates but they still believe Chemours will post another beat. Based on Sach's proprietary indicators companies with the Chemours profile beat 70% of the time. Over the prior week the 2016 consensus estimate rose from 63 cents to 77 cents. For 2017 the estimates rose from $1.10 to $1.27, which is 64% over 2015 levels.

A week ago, a large investor sold 2,000 October $10 calls for $2.90 and reinvested the gain into 4,200 January $15 calls for $1.

Position 9/6/16 with a CC trade at $13.75

Long CC shares @ $13.75, see portfolio graphic for stop loss.

No options recommended because of price. The Oct $15 is 65 cents but time is short. The next available series is January and very expensive.



FDC - First Data - Company Profile

Comments:

No specific news. Minor decline in a weak market.

Original Trade Description: August 10th.

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. They currently process 2,500 financial transactions a second across 118 countries.

First Data was taken private in 2007 for $26 billion by KKR. This debt ended up on the company's books and weighed them down for the last ten years. KKR helped them land a $3.5 billion private placement in 2013. That helped to reduce some of the high interest debt. KKR took them public again in 2015 and raised about $2.8 billion. That was the largest IPO of 2015. The company is still fighting the debt problem with $480 million in interest payments in the first half of 2016. Earlier this year we tried to short FDC because they were strangling under this debt. The situation appears to be improving.

In Q2 they reported adjusted earnings of 35 cents that beat estimates for 34 cents. It also beat the $26 million loss they took in the year ago quarter. Revenue rose 1.9% to $2.93 billion. Revenue in the global financial solutions division rose 12% to $395 million. This is their growth engine. They reduced their net debt by $300 million in the quarter.

Earnings Oct 26th.

Shares spiked from $12 to $13 after earnings and they are about to break over long-term resistance at $13.35. The weakness and volatility from the first six months of 2016 may be coming to an end. If FDC can move over that $13.35 level the next target would be around $16.50.

Position 8/23/16 with a FDC trade at $13.50

Long FDC shares @ $13.50, see portfolio graphic for stop loss.

Optional: Long Oct $14 call @ .50, no stop loss.



HUN - Huntsman Corp - Company Profile

Comments:

No specific news. Major 5% decline to stop us out of the long stock position at $16.65. The long call position is still open and will be transferred to the lottery play section this weekend.

Original Trade Description: August 23rd.

Huntsman Corporation manufactures and sells differentiated organic and inorganic chemical products worldwide. The company operates in five segments: Polyurethanes, Performance Products, Advanced Materials, Textile Effects, and Pigments and Additives. The company's products are used in various applications, including adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals, and dye industries. Huntsman Corporation was founded in 1970.

They reported Q2 earnings of 53 cents that beat estimates for 52 cents. Revenue of $2.54 billion matched estimates. They generated more than $350 million in free cash flow and made an early repayment of $100 million in debt. They also announced they were selling some of its European facilities and would use the proceeds to repay debt. They sold a manufacturing facility to Innospec Inc for $225 million and the transaction is expected to close in Q4. Huntsman will remain a raw materials supplier to the facilities once the transaction is completed.

They are also planning to close their titanium dioxide manufacturing (TiO2) facility in South Africa in addition to spinning off their remaining TiO2 business in early 2017. The closure/spinoff will save $200 million.

The earnings, restructuring and debt repayment plans have given the stock a positive bias. Shares broke over resistance on Tuesday to trade at a 52-week high. The next material resistance is $23.

Earnings Oct 26th.

Position 8/30/16 with a HUN trade at $17.65

Closed 9/8/16: Long HUN shares @ $17.65, exit $16.65, -$1.00 loss.

Optional:

Still open: Long Nov $19 call @ 54 cents. No initial stop loss.



NTCT - NetScout - Company Profile

Comments:

A -2% decline in a weak market on no news.

Original Trade Description: August 15th.

NetScout Systems, Inc. provides real-time operational intelligence and performance analytics for service assurance, and cyber security solutions internationally. The company offers nGeniusONE management software that enables customers to predict, preempt, and resolve network and service delivery problems, as well as facilitate the optimization and capacity planning of their network infrastructures; and specialized platforms and analytic modules that enable its customers to analyze and troubleshoot traffic in radio access and Wi-Fi networks. It also provides Intelligent Data Sources under the Infinistream brand name that provide real-time collection and analysis of data from the network. In addition, the company offers portable network analysis and troubleshooting tools to identify key issues that impact network and application performance. Further, it provides security solutions that enable service providers and enterprises to protect their networks against DDoS attacks; and threat detection solutions that enable enterprises to identify and investigate advanced threat campaigns that present tangible risks to the integrity of their networks.

In late July, NetScout reported adjusted earnings of 28 cents that beat estimates for 25 cents. Revenue od $278 million beat estimates for $275 million. They guided for full year earnings of $1.87-$2.12, up from $1.85-$2.10 with revenue of $1.20-$1.25 billion.

NetScout provides their services to the enterprise and service providers. Their products enable network monitoring to maintain continuous uptime and network availability while isolating bottlenecks and intrusions. Their network visibility switches were ranked number one in market share by IHS Network Monitoring.

They posted record attendance at the company's Engage 16 user conference in May. They released version 2.1 of their advanced security solution, Spectrum. They have a new range of products to be released in the coming months that will boost full year revenue for 2017.

Earnings Oct 27th.

Shares spiked on earnings in late July and then experienced the mandatory post earnings depression phase where they consolidated for two-weeks. On Monday they broke over resistance and closed at a 8-month high.

Position 8/19/16 with a NTCT trade at $28.85

Long NTCT shares @ $28.85, see portfolio graphic for stop loss.

No options recommended.



RDN - Radian Group - Company Profile

Comments:

No specific news. New 8-month high close. Shares have now reached resistance at $14 and we could see some weakness over the next several days.

Original Trade Description: July 30th.

Radian Group Inc. provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance, and Mortgage and Real Estate Services. The Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It offers primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment provides outsourced services, information-based analytics, and specialty consulting services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other asset-backed securities. This segment offers loan review and due diligence, monitoring of mortgage servicer and loan performance, valuation and component services, real estate owned asset management services, and outsourced mortgage services. Radian Group Inc. was founded in 1977.

With the new credit rules borrowers have to have more money down and a higher credit score to qualify for a home loan. Even then there is sometimes the requirement for credit insurance to allow the loan to be sold in the secondary market. Radian provides the insurance and does the due diligence required to write the insurance profitability. They continue to monitor the mortgage servicers to prevent the loans from going to deep into default by being proactive.

In their recent quarter, they reported earnings of 38 cents that missed estimates for 40 cents. However, shares went up because of the positive guidance. They are writing more insurance on better credits. They wrote insurance on $12.9 billion in loans, a 60% increase from the $8.1 billion in Q1. Of the loans written 57% of the borrowers have FICO scores over 740 compared to 26% in 2007. Only 7% of loans underwritten had loan to value greater than 95% compared to 24% in 2007. Some 86% of insurance in force is on new loans written after 2008. Because of the higher scores and the smaller loan to value on most loans they were able to reduce their loan loss reserves from $1.204 billion to $848 million.

They are paying off debt and redeemed a $325 million note. They had $718 million in liquidity at the end of the quarter. They authorized another $125 million share repurchase and the board authorized the early redemption of $196 million in senior notes due in 2017. In Q2 they also bought back $12.4 million of convertible notes due in 2019.

Earnings Oct 27th.

Despite the minor earnings miss, the company appears to be doing everything right. Shares have risen for two consecutive days after their earnings. Resistance is $13 and they closed at $12.90 on Friday. If they break over that resistance the gains could accelerate.

Position 8/12/16 with a RDN trade at $13.15

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

Optional:

Long Sept $14 call @ .15, no stop loss.



SQ - Square Inc - Company Profile

Comments:

No specific news. Square is moving in the wrong direction being dragged lower by Twitter and the constant talk about Jack Dorsey and his dual role. I am cancelling this recommendation.

Original Trade Description: August 31st.

Square is a mobile payment provider for small businesses, including individuals. Anyone can process a credit card transaction through their Square account using their mobile phone, tablet or laptop computer.

There are at lease 6-8 competitors to Square today. Paypal (PYPL) has offered a card reader for your mobile device for a longtime but they do not advertise it that much. This week Square announced alliances that would let restaurants and retailers to use the point of sale hardware from TouchBistro and Vend. The customers from those two providers will now have access to Squares growing portfolio of services including invoicing, analytics, quick deposits and lending services.

Apparently, Dorsey has discovered that partnering with his competition is the best way to corner the market on his services business.

The company recently announced a similar partnership with Upserve, another startup offering its own point of sale service and software for restaurants. Squares services division saw revenue rise 25% sequentially and +130% over the year ago quarter. Square's lending division is one of the fastest business drivers. They extended 34,000 business loans accounting for $189 million in Q2. That was a 23% increase sequentially and +123% from the year ago quarter.

Q2 revenue of $439 million beat estimates for $406 million. Gross payment value rose 42%. The company reported a loss of 8 cents compared to estimates for a loss of 11 cents. They guided for full year revenue of $1.63-$1.67 billion.

Shares spiked on the earnings news to $11.90 an then faded in a bout of post earnings depression. Recent analyst upgrades provided another boost to $12.50. On Tuesday, Stifel Nicholas upgraded the stock from hold to buy.

The last three days Square shares have been rock solid at $12 despite the market weakness. Once we get past Labor Day, if the market turns positive again, I believe Square will retest its highs at $16.

Recommendation cancelled



TWTR - Twitter - Company Profile

Comments:

Stifel Nicholas came out with a sell rating this morning and a $9 price target. The analyst said all the hype about a sale is just smoke because nobody will pay more than the current $20, which is already overvalued. Shares fell -6% to stop us out for a small gain.

Original Trade Description: August 29th.

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 implementing the concept with new deals with the NFL, NBA, MLB and NHL. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. 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 rose from the $14 low on June 10th to $21 on August 15th when rumors of a possible acquisition were making headlines. We exited a long play for a nice profit when the shares began to weaken.

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 shares appear to have found support at $18.50 as we move into the football season. With Twitter streaming the Thursday night games they will be attracting a lot of attention. I believe the selling is over and we could see a new move higher on improving fundamentals rather than takeover chatter.

Update 8/31/16: Twitter shares spiked on Wednesday after co-founder and board member Ev Williams said the company had to look at all options including a sale. When asked if Twitter can remain an independent company he said, "We are in a strong position right now but as a board member we have to consider the right options." The way he answered the question suggested they were listening to potential offers. He did not say we are not pursuing a sale or nobody has made an offer, or Twitter will continue to be a public company. He left the door open to a future announcement. By phrasing the answer the way he did, he actually invited other companies to make a bid saying we must consider all options.

Position 8/30/16

Closed 9/8/16; Long TWTR shares @ $18.59, exit $18.75, +.16 gain.



UNT - Unit Corp - Company Profile

Comments:

No specific news. The anomaly in EIA oil inventories at the open spiked all the energy stocks and Unit rose over resistance at $18.65 but I would doubt it will stick on the first attempt.

Original Trade Description: September 7th.

Unit Corporation, operates as an oil and natural gas contract drilling company primarily in the United States. The company operates through three segments: Oil and Natural Gas, Contract Drilling, and Mid-Stream. The Oil and Natural Gas segment acquires, explores, develops, and produces oil and natural gas properties primarily located in Oklahoma and Texas, as well as in Arkansas, Colorado, Kansas, Louisiana, Mississippi, Montana, New Mexico, North Dakota, and Wyoming. As of December 31, 2015, this segment had approximately 65 gross proved undeveloped wells. The Contract Drilling segment is involved in the contract drilling of onshore oil and natural gas wells for its own account, as well as for a range of other oil and natural gas companies primarily in Oklahoma, Texas, Wyoming, and North Dakota, as well as in Louisiana and Kansas. As of December 31, 2015, this segment had 26 operating rigs. The Mid-Stream segment buys, sells, gathers, transports, processes, and treats natural gas for third parties and for its own account. This segment operates 3 natural gas treatment plants, 13 processing plants, and 25 gathering systems, as well as approximately 1,464 miles of pipeline. Unit Corporation was founded in 1963. Company description from FinViz.com.

For Q2 the company reported an adjusted loss of 15 cents compared to estimates for a loss of 22 cents. Revenue was $138.3 million. They recorded record production of 97 million cubic feet per day from the Wilcox play, a 25% increase year over year and a 9% increase from Q1. Seven of eight of their highly features BOSS rigs were currently operating under contract to other producers compared to six in Q1. The Midstream segment volumes rose 15%.

Earnings Nov 3rd.

Since oil and gas prices have declined they have reduced drilling of new wells and used their rigs to recomplete existing wells to boost production. An example of the production increase came from four Wilcox wells that were producing 700 Mcfe per day before the recompletion and 17,000 Mcfe after the work over. They anticipate putting additional rigs to work on new wells in early 2017.

Unit has been using the weakness in oil prices to reduce costs and streamline operations rather than try to continue drilling new wells during glut conditions. They are poised to increase production on demand because they own their own fleet of rigs and are not paying high lease fees for drilling equipment.

Oil prices are in rally mode this week because of a unique agreement announced on Monday where Russia and Saudi Arabia will form a joint venture to stabilize oil prices among OPEC and non-OPEC producers. It remains to be seen if it will ever happen but prices are rising on the expectations.

Unit has been relatively calm during the ups and downs in oil prices in 2016 and are poised to break out to a new high for the year.

Position 9/8/16:

Long UNT shares @ $18.38, see portfolio graphic for stop loss.

No options recommended because of price.




BEARISH Play Updates

ACAT - Arctic Cat - Company Profile

Comments:

No specific news. Still chopping around the $14 level with the trend still negative.

Original Trade Description: August 20th.

Arctic Cat Inc. designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs), and recreational off-highway vehicles under the Arctic Cat and MotorFist brand names. The company also provides related parts, garments, and accessories. It offers accessories consisting of bumpers, cabs, luggage racks, lights, snow plows, backrests, windshields, wheels, track systems, and winch kits; shocks, attachments, and float avalanche airbags; and maintenance supplies, such as oil and fuel additives. In addition, the company provides snowmobile garments for adults and children under the Arcticwear brand, which include jackets, coats, pants, and casual sportswear. Its Arcticwear line of clothing also includes insulated outerwear, hats, mittens, helmets, boots, sweatshirts, T-shirts, and casual wear.

For Q2 the company reported a loss of 81 cents that was twice what analysts expected at 40 cents. Revenue of $104.9 million also missed estimates for $118.7 million. The company lowered guidance for the full year to a loss of 70 cents to $1 per share on revenue of $635-$655 million. Shares crashed from $18.25 to $14.33 on the news.

Earnings Oct 28th.

Since the July 29th earnings, analysts have been slashing estimates. Six analysts have cut full year estimates from a consensus loss of 19 cents to a loss of 92 cents. For the current quarter, five analysts have cut estimates from 41 cents to 62 cents.

Shares tried to rebound twice and failed. If the post earnings low fails we could see ACAT move into single digits.

I am recommending we short the stock if it makes a new August low. The current low is $14.33. It could take several days before this position it triggered.

Position 8/31/16 with a ACAT trade at $14.15

Short ACAT shares @ $14.15. See portfolio graphic for stop loss.



FOXA - 21st Century Fox - Company Profile

Comments:

News article about FOXA joining the Credit Suisse "Focus List" with a price target of $33 caused a spike in the shares to stop us out at $24.65 for a miniscule gain.

CLOSE THE CALL POSITION

Original Trade Description: August 23rd.

Twenty-First Century Fox operates as a diversified media and entertainment company in the United States, the United Kingdom, Continental Europe, Asia, Latin America, and internationally. It operates through Cable Network Programming; Television; Filmed Entertainment; and Other, Corporate and Eliminations segments. The company produces and licenses news, sports, movie, and general and factual entertainment programming for distribution primarily through cable television systems, direct broadcast satellite operators, telecommunications companies, and online video distributors. It also broadcasts network programming; and operates 28 broadcast television stations, including 11 duopolies in the United States.

Lately Fox News has been in the headlines after, Gretchen Carlson, a female news anchor, sued Fox and President Roger Ailes for sexual harassment. Within two weeks of the suit being filed, Ailes resigned from the network. In an internal investigation, more than 25 former and current Fox News employees reported incidents. The investigation revealed that a former Fox News staffer, Laurie Luhn, had been given a $3.15 million severance package after she complained about harassment by Ailes who forced her into a sexual relationship through threats and intimidation. Luhn implicated others in the support staff, several of which have moved into management positions with the Ailes departure.

This week Andrea Tantaros, former co-host of The Five and The Outnumbered, filed suit against Ailes and the network claiming the division "operates like a sex-fueled, Playboy Mansion-like cult, steeped in intimidation, indecency and misogyny." She claims other executives under Ailes aided in the cover-up and named names in the suit. She said Ailes actions were "condoned by his most senior lieutenants, who engaged in a concerted effort to silence Tantaros by humiliation and retaliation.

The law firm handling the original Ailes harassment investigation said they anticipate Fox being forced to settle with the women who have filed claims and the numbers of women are in "double digits."

This kind of news is not something Fox wants to report. While the settlements are likely to be in the millions, it is the damage to the brand that is the most important. Fox has been recognized as a pro-family conservative organization and these kinds of continuing headlines will tarnish that image.

Update 9/2/16: New headlines show that Roger Ailes had sexual harassment problems in two jobs before the FOX job. He harassed women into having sex, secretly filmed the events and then warned them later he would release the videos if they ever went public with the harassment. Nineteen women have come forward from prior jobs in addition to the 23 women from Fox.

Update 9/6/16: Fox announced it had settled with anchor Gretchen Carlson over the sexual harassment suit against Roger Ailes. The reported amount was $20 million. News over the weekend reported Carlson had taped conversations with Ailes in his office where he continually propositioned her and said it would be good for her career. Fox is still negotiating with 23 other women that had complained about unwanted advances by Ailes.

Shares have fallen to a 7-month low and are likely to continue falling until after the settlements and the headlines have passed.

Position 8/25/16:

Closed 9/8/16: Short FOXA shares @ $24.72, exit $24.65, +.

Optional:

CLOSE: Long Oct $24 put @ .60, no stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.





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