Option Investor
Newsletter

Daily Newsletter, Monday, 10/10/2016

Table of Contents

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

Market Wrap

Calm Before The Storm

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

This week; a handful of earnings and a few economic reports. Next week nearly 20% of the S&P 500 reports earnings amid a flurry of important economic data. This is the calm before the storm. Even more so considering that earnings will be coming in hot for the next 3 to 4 weeks at least, and that the election and next FOMC meeting are only a month or so away as well. Most of today's talk not focused on earnings was centered around last nights presidential debate; Trump is an ass, Hillary a self-serving two-faced liar, they both suck chose your poison.

There was only 1 earnings report today, a small regional bank in Mississippi called First Bancshares which increased quarterly earnings by 22% but still failed to meet market expectations. There were no economic reports and none scheduled for Tomorrow, the only one of real importance Wednesday is the FOMC minutes. Thursday is weekly jobless claims and then Friday we'll some more substantial reporting; PPI, retail sales, business inventories and Michigan Sentiment.

Asian markets were mixed today but two, Hong Kong and Japan, were closed for holiday. European markets were open for business, rising about 1% on average and driven by rising oil prices.

Market Statistics

Futures indicated a positive open all morning although early indications were little more than hovering above break even. Later in the pre-opening session futures began to rise, indicating an open about a half percent above last week's close, and this held into the opening bell. The market opened with small gains, well within recent trading ranges, and moved slightly higher throughout the morning. The high was hit shortly before 10AM, about +1% for the SPX, and that was not broken the rest of the day. From that point on the market drift to the side and slightly lower, trading about a half percent above Friday's close, and held those levels into mid afternoon. Late day trading was more of the same, sideways drift that left the indices hanging around the +0.5% mark.

Economic Calendar

The Economy

No data today but still the Moody's Survey of Business Confidence release at 10AM. The index gained 0.2% to hit 25.2% and is holding steady at these levels. This is the 11th week the survey has been at or near this level since hitting bottom 3 months ago. Mr. Zandi says that business sentiment has held up rather well over the summer considering the series of global shocks the market sustained; the index shows a global economy expanding at a rate near its potential. Sentiment in the US is best, South America the worst although global sentiment appears to be catching up with the US. Businesses are cautious in the present but more optimistic and upbeat out to early next year.


Earnings season really gets started this week although there are only a few reports of importance on the schedule. Tomorrow kicks things off with Alcoa, after the bell, with a handful of the Big Banks scheduled for later this week. According to Factset the blended rate of earnings going into this week, for the 3rd quarter, is -2.1%, steady from last week. If the trend of all-index earnings beating expectations by roughly 4% holds true this may rise as high as +2% by the end of the cycle. If that happens full year 2016 earnings blended rate will move back into positive growth.


Looking forward the fourth quarter is still expected to see growth and expectations have risen in the last week. Estimates gained 0.3% to hit 5.9%, a 2.5 month high. If, and this is a big if, forward outlook continues to rise we will have entered a period of positive earnings growth with the tailwind of rising expectations. Full year 2016 outlook has risen to -0.1% and may soon turn positive. Full year 2017 outlook remains robust at 12.9% but has fallen by 0.1% once again.


The Dollar Index

The dollar is gaining strength on firming Fed rate hike outlook. There is still a low chance of rate hike this year but if data firms this month and next that chance could easily turn into a certainty. At this time the CME Fed Watch Tool shows only a 10% chance at the November meeting but a whopping 70% chance of at least a 25 bps increase by December. This week the FOMC Minutes and PPI data are the two events to watch. The Dollar Index gained about 0.5% today, confirming its break-out from the wedge pattern, but remains range bound longer term. Upside resistance is the top of the range near $97.50. A break above this level would be bullish and take the index up to 8 month highs.


The Oil Index

Oil prices are rising on hot air blowing out of OPEC. The cartel and its deal, dubiously supported by Russia, caps production at levels above those that contributed to the current oversupply situation and does nothing to alter the supply/demand imbalance. The conspiracy theorist in me has little doubt Russia and OPEC are somehow colluding to inflate prices. Regardless, prices are high and supported by talk so be careful. WTI gained more than 3% today to trade at the highest level since early July. On a technical note, today's WTI price action created an outside-day at the top of an uptrend and at/near resistance levels.

The Oil Index gained more than 1.5% today and may be breaking out of its range. The caveat is that the extreme top of the range dates back to late May, just before oil prices topped out, and is still above current price action. This level is near 1,190 and would need to be broken to get truly bullish on the sector. The indicators are bullish and moving higher but remain consistent with range bound trading. If oil prices are not able to sustain their rise neither will this sector.


The Gold Index

Gold prices rebound from long term low levels despite a rising dollar. Spot gold gained as much as 1% intraday to trade above $1,265 but remains well below previous support levels above $1,300. This move is likely a dead-cat bounce in light of the dollar's gains and move toward the top of its range. This week is likely to see more volatility regardless of direction simply because of the FOMC minutes, and possibly because of the PPI. Support target is $1,250, a break below here could go as low as $1,200.

The gold miners held steady in today's session, the miners ETF GDX gaining about 0.75% and creating a small doji spinning top. The ETF is in consolidation following last week's massive plunge and looks like it will at least test support in the near term. Support appears to be near the $22.50 level, just above the 50% retracement line I drew last week. The indicators are both bearish with stochastic crossing the lower signal line, indicative of lower prices, but MACD is already showing a peak and the peak is divergent from the new low so support at this level may hold. If broken a move down to $19.75 is likely.


In The News, Story Stocks and Earnings

No earnings to speak of but lots of business gossip making the rounds. The first bit was a tweet from Elon Musk, using his favorite method of investor communication, giving updates and teasers for Tesla. His message over the weekend said that the company would not need to raise more capital to make the Solar City purchase and that there was a new product coming from Tesla. In other news a coal mining big wig called Tesla a fraud during a televised interview. Shares of the stock were lifted by the first news, unaffected by the second, to trade just above $200.


Shares of Twitter fell hard today despite Elon Musk's use of the platform. Bidders for the company see to be drying up and that has left the market wondering what I always have, what's Twitter really for and why do I want to waste my time on it? Today's plunge shaved -13% off the stocks price leaving trading at a 2 month low. In the last 2 weeks shares of the stock have risen 35% and fallen 32%, a little bit of volatility I would say.


The VIX fell today but after opening with a small gain. By end of day the index was down about -0.52% but flat over the last 2 weeks. Even though volatility has settled back down it has done so above the previous low levels and looks like it might stick with us for a little while. The indicators are consistent with support at this level and have a bit of bullish bias. Another anything that scares the market could see this index spike back above 15 and hit 20 or 25 with a quickness.


The Indices

The market tried to rally today but couldn't get the indices out of the starting gates. Early gains of 1% (SPX) turned out to be the intraday highs, closing gains were closer to half that. Today's leader was the Dow Jones Transportation Average which made a nice attempt at breaking out of its trading range. The transports gained close to 1% in a move up to test resistance at 8,135 and the top of the now almost 8 month trading range. The indicators are consistent with resistance and the top of a range, both rolling over to form peaks although stochastic is showing a little strength by crossing the upper signal line. A break to new short term highs would be bullish but additional resistance is present just above.


The NASDAQ Composite made the 2nd biggest gain today, about 0.80%, and came within a point of hitting the current all time high. The index created a small bodied candle, an indecisive spinning top, and does not appear ready to break to new highs just yet. Price action is tentative and the indicatos continue to weaken so the chances of a surprise sell-off remain. Support is near the short term moving average and the 5,250 level, a break below here would be bearish in the near term at least and could go as low 5088 before finding support.


The S&P 500 and Dow Jones Industrial Average closed with nearly the same gain, about 0.5%, although the blue chips edged the broad market out of 3rd spot by a nose. The blue chips created a very small candle but one that moved up from the short term moving average and above the 18,250 support/resistance line. The bias has turned to the upside with this one but trading remains range bound, today's action is just above the mid point of the range. Prices may move up to test resistance at 18,500 but no break out is indicated at this time. Both indicators are weak, hovering at levels consistent with directionless trading, with no signs of strength or underlying momentum.


The S&P 500 closed with a gain near 0.45%, creating a small white bodied candle just above the short term moving average. The index remains range bound and is trading near the mid point of that range with indicators giving no sign of underlying direction. Near term support appears to be near 2,150, a break below that could go to 2,120 or 2,100. Resistance is near the current all time high, a break above that could go up indefinitely.


The market remains range bound, wound up and waiting. Waiting for earnings season, waiting on the election and waiting on the FOMC. The fundamentals are in place for a nice long rally, perhaps following a small correction, all we need is the green light to do so. This could be in the form of positive earnings outlook, a resolution to political uncertainty and a reduction of FOMC fears. One of those issues may get alleviated this week, more likely over the next few weeks, perhaps the other two will come into line as well. Until then I remain cautious in the near term, wary of correction, waiting and looking for my next great long term bullish entry.

Until then, remember the trend!

Thomas Hughes


New Plays

Ebola

by Jim Brown

Click here to email Jim Brown
Editor's Note

Some strains of Ebola have a 25% risk of death and some strains carry a 90% risk of death. It is not a disease you want to take lightly.



NEW BULLISH Plays

NLNK - Newlink Genetics - Company Profile

NewLink Genetics Corporation, a biopharmaceutical company, focuses on discovering, developing, and commercializing immunotherapeutic products to enhance treatment options for patients with cancer. Its portfolio includes biologic product candidates based on its HyperAcute cellular immunotherapy technology, which is designed to stimulate the human immune system; and small-molecule product candidates that are focused on breaking the immune system's tolerance to cancer by inhibiting the indoleamine-2, 3-dioxygenase pathway and the tryptophan-2, 3-dioxygenase pathway. The company's lead product candidate, algenpantucel-L, an investigational immunotherapy, is being studied in Phase III clinical trials for patients with pancreatic cancer; tergenpumatucel-L, is being investigated in Phase IIb clinical trial for patients with advanced non-small cell lung cancer(NSCLC), as well as Phase I/II clinical trial is evaluating the combination of indoximod and docetaxel for patients with advanced NSCLC; and dorgenmeltucel-L, is being investigated in a Phase II clinical trial for patients with advanced melanoma. It is also developing HyperAcute cellular immunotherapies for renal, prostate, and breast cancers. In addition, the company is developing IDO pathway inhibitors comprising indoximod and GDC-0919 for patients with advanced NSCLC, advanced melanoma, metastatic prostate cancer, and other cancers; NLG2101 for patients with metastatic breast cancer; NLG2102 for treating refractory malignant brain tumors; NLG2103 for patients with advanced melanoma; NLG2014 for patients with metastatic pancreatic cancer; and NLG2105 for pediatric patients with refractory malignant brain tumors. Company description from FinViz.com.

Newlink shares have been improving rapidly since late September for multiple reasons. They have an Analyst Day coming up on October 25th and they are expected to present a rosy picture.

Last Tuesday after the bell they announced a $25 million award from the U.S. Dept of Health and Human services to support advanced development of the V920 Ebola Zaire vaccine candidate. The award has an additional $51 million of additional contract options as results stages are met. DHHS has already funded $76.8 million for developing the manufacturing facility and manufacturing process activities along with additional clinical trials.

The FDA has already designated V920 as a breakthrough therapy and the European Medicines Agency (EMA) has given it PRIME (PRIority MEdicines) status.

The new contract will enable accelerated full-scale production of V920, once it is approved. Merck (MRK) has already licensed the drug from Newlink in order to help Newlink accelerate development using Merck's vaccine expertise. Merck will be responsible for distribution and regulatory approvals.

Having a big sugar daddy with deep pockets backing your efforts along with the Dept of HHS is a real plus. This vaccine is going to be produced and could save thousands of lives. In the last outbreak alone more than 9,200 patients died.

Earnings Nov 3rd.

Shares spiked again on the Ebola news and will likely continue rising. Shares closed at $16.41 with resistance at $20, which will be our target in this position.

With a NLNK trade at $16.55

Buy NLNK shares, initial stop loss $14.45

No options recommended due to wide spreads.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Trading Range Held

by Jim Brown

Click here to email Jim Brown

Editors Note:

While the big cap indexes broke over their prior range, the S&P-600 hit a brick wall at prior resistance. The small cap index came to an abrupt halt at 759 and exactly the same resistance that stopped the prior three rebounds. The Russell 2000 small cap index also failed to break through prior resistance and posted another lower high.

Our small cap positions were mixed with GPRO and PPC being stopped out. The other losses on the long positions were minimal and less than 10 cents each.

The Nasdaq 100 closed at a new high by 2 points and the Nasdaq Composite closed within 11 points of a new high. The S&P-500 broke out of its range intraday but fell back at the close.

I would be careful assuming today's rebound was the start of a big move higher because all the gains came at the open as a monster short squeeze. The Dow closed 70 points off its high and the S&P gave back nearly 50% of its gains.





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


GPRO - GoPro
The long stock position was stopped out at $15.85.


PPC - Pilgrim's Pride
The short stock position was stopped out at $20.85.



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

Short term Calls and Puts on equities = Option Investor Newsletter

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Iron Condors = Couch Potato Trader



BULLISH Play Updates

AAOI - Applied OptoElectric - Company Profile

Comments:

No specific news. Closing in on a new high again.

Original Trade Description: September 17th.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide. Company description from FinViz.com.

For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.

AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.

Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.

Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.

Earnings Nov 3rd.

Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

Position 9/19/16:

Long AAOI shares @ $22.10, initial stop loss $19.25



ALRM - Alarm.com - Company Profile

Comments:

No specific news. Holding the gains at a 2-month closing high.

Original Trade Description: October 1st.

Alarm.com Holdings, Inc. provides cloud-based software platform solutions for the connected homes in the United States and internationally. It offers multi-tenant software-as-a-service platform that allows home and business owners to intelligently secure and manage their properties, as well as remotely interact with an array of connected devices through a single intuitive interface. The company provides interactive security solutions, which offer intelligent security and awareness services through a dedicated, cellular, and two-way connection to the home or business; and intelligent automation solutions that connects, integrates, and controls the devices in the home or business, such as security systems, garage doors, lights, door locks, thermostats, electrical appliances, environmental sensors, and other connected devices. It also offers video monitoring solutions, which provide live streaming, smart clip capture, high definition continuous recording, and instant video alerts through its mobile app or on the Web; and energy management solutions that offer enhanced energy monitoring and management services. It has approximately 2.6 million residential and business subscribers. Company description from FinViz.com.

For Q2, the company reported earnings of 15 cents compared to estimates for 11 cents. Revenue rose 24% to $64.4 million and beat estimates for $58.6 million. Software as a Service (SaaS) revenue rose 23% to $42 million. The company guided for the ful lyear for earnings of 49-51 cents and revenue of $242.3-$245.8 million. Analysts were expecting 48 cents on $241.7 million.

Earnings Nov 8th.

Despite the strong beat and strong guidance shares crashed from the historic high close of $33 before the earnings were released. Shares were up +135% since the February low at $14 and traders took profits. The only ratings change was from Raymond James from outperform to market perform based on value because of the strong gains. At the same time Imperial Capital raised their price target from $24.50 to $30. Since shares closed the day before at $30 that was an implied neutral rating.

Shares collapsed back to $28 and here there for three weeks then fell sharply on September 6th on no news to bottom at $25. That bottom was quickly bought and Friday's gain lifted the shares back over resistance at $28.50.

There is no bad press for Alarm.com. Earnings and revenue are growing, subscribers are growing and shares are back over resistance. If the market is going to rally in late October this should be a tech stock that outperforms.

Position 10/3/16 with a ALRM trade at $29.05

Long ALRM shares @ $29.05, see portfolio graphic for stop loss.

No options recommended because of price.



BOX - Box Inc - Company Profile

Comments:

No specific news. Another minor loss after a 14-month high on Tuesday. Simple consolidation.

Original Trade Description: September 15th.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.



FLXN - Flexion Therapeutics - Company Profile

Comments:

No specific news. Minor gain over prior resistance.

Original Trade Description: October 4th.

Flexion Therapeutics, Inc., a specialty pharmaceutical company, focuses on the development and commercialization of anti-inflammatory and analgesic therapies for the treatment of patients with musculoskeletal conditions. It lead product candidate includes Zilretta, a sustained-release intra-articular steroid, which is in clinical trials to treat the patients with moderate to severe osteoarthritis (OA) pain. The company is also developing FX007, a preclinical, small-molecule TrkA receptor antagonist to address post-operative pain; and FX005, a sustained-release intra-articular p38 MAP kinase inhibitor for patients with end-stage OA pain. Company description from FinViz.com.

The FDA has recently said that results from one phase 4 trial can support a FDA application for approval. Recently, Flexion reported positive results of a trial for Zilretta. The drug is a ne wform of treatment for chronic knee pain caused by arthritis. Typically, once a patient can no longer get by on aspirin or Advil, the next solution is quarterly shots of a corticosteroid. As time passes these shots have less of an impact on the pain and patients are suffering significantly before the quarter is over.

Zilretta provided a 50% improvement in pain relief and the lack of pain lasted for the entire trial. With more than five million patients currently on the corticosteroid treatment there is a huge market just waiting to be tapped. This is expected to be a billion dollar a year drug.

Flexion is going to market the drug itself rather than sell it off to some larger partner. They have been storing up cash and currently have $119 million with another $44 million in short term investments. The company only has $16 million in debt so net cash it is debt free. The company's market cap is only $500 million so a billion dollar drug could easily double the stock price.

They plan on filing the FDA application over the next couple months and that will be a major milestone for the company and should lift the stock. The approval will not be until late 2017 but we will be out of the position before the November earnings. We are just playing the buildup to the application.

Earnings Nov 3rd.

The $20 level appears to be resistance and it was tested on Monday. I am putting an entry trigger on the position just over $20.

Position 10/5/16 with a FLXN trade at $20.15

Long FLXN shares, see portfolio graphic for stop loss.

No options recommended because of wide spreads.



FNSR - Finisar Corp - Company Profile

Comments:

No specific news. Sector weakness continuing after ACIA priced a secondary well under the market.

Original Trade Description: October 3rd.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Company description from FinViz.com.

Finisar shares rallied throughout the third quarter. In early September shares spiked after earnings and then leveled off but retaining a positive bias. They reported earnings of 38 cents that beat estimates for 30 cents. Revenue of $341.3 million also beat estimates for $334 million. The company guided for the current quarter for earnings of 44-50 cents on sales of $355-#375 million. Analysts were only expecting 32 cents and $344 million. The CEO blamed the soaring earnings on booming sales of certain transceivers and switches. China is in the middle of their upgrade to a 100 Gb infrastructure and the U.S. carriers like Verizon are just getting started.

Earnings December 8th.

Shares spiked from $23 to $27 on the news even after a big ramp up from $17 at the beginning of the quarter. Shares slowed their ascent but reached $30 last week. That is a five-year high. A move over that psychological resistance at $30 could start a new leg higher. The intraday high last week was $30.19. I am recommending we enter a position with a trade at $30.25.

Position 10/5/16 with a FNSR trade at $30.46

Long FNSR shares @ $30.46, see portfolio graphic for stop loss.



GPRO - GoPro Inc - Company Profile

Comments:

No specific news. Shares fell -4% to stop us out.

Original Trade Description: October 5th.

GoPro, Inc. develops and sells mountable and wearable cameras, and accessories in the United States and internationally. The company offers HERO line of capture devices, such as cameras; and mounts comprising equipment-based mounts consisting of helmet, handlebar, roll bar, and grip and tripod mounts that enable consumers to capture content while engaged in a range of activities, as well as mounts that enable customers to wear the mount on their bodies, such as wrist housings, chest harnesses, and head straps. It also provides LCD Touch BacPac, Battery BacPac, Smart Remote, and Floaty Backdoor accessories, as well as spare batteries, charging accessories, cables to connect its GoPro cameras to television monitors, video transmitters and external microphones, flotation devices, dive filters, and anti-fogging solutions. In addition, the company offers GoPro Studio, a video editing tool that allows users to create professional quality videos from their content; and GoPro App that allows users to control GoPro cameras remotely using a smartphone or tablet. Company description from FinViz.com.

Everybody knows the story of GoPro. They invented the action camera and the company was a smash hit. After they went public at $28 in 2014, shares rallied to more than $98 in the weeks that followed. They were making the talk show circuit almost weekly on CNBC, Bloomberg, etc. CEO Nick Woodman became a celebrity.

Then the problems started. The company's software was hard to use. New camera models did not work as expected. It was the perfect example of hyper growth without the growth of the infrastructure and products to support that growth. Competitors began to appear. Their cameras were cheaper and the software easier to use. The last model of the GoPro camera was flawed and the price was cut repeatedly.

The company promised great things ahead. It has been a long time since they released a product and they were faulted for that. However, rather than release another flawed product they took their time and made sure it was right.

This week they announced the new Hero5 camera and the smaller Hero5 Session camera. The big camera is $399 while the Session is $299. They have already exhibited the new cameras and given crowd demos and the excitement is growing. Both cameras are waterproof to 10 meters, capture 4K video at 30 fps. They have integrated voice control and microphones, with active noise cancellation. The Hero5 has a 12 megapixel camera and the Session has 10 megapixels. They Hero5 includes image stabilization, GPS capture and three stereo microphones.

The biggest news is an automatic upload feature to send content to GoPro's subscription based cloud making it easy to access, edit and share the content. They announced a new edit feature called Quik that allows users to instantly edit content on their phones and create short videos for sites like YouTube, Facebook and Instagram.

They also launched their Karma drone. It has been promised for two years and has finally arrived. When sold with the Hero5 it is $1,099 and $999 with the Session. The drone has received wildly enthusiastic reviews and should be a big seller.

The long time between model releases has nearly eliminated channel inventory and that means all the new production will go directly into revenue.

Earnings Oct 27th.

This will be a short fuse play with earnings co close. Shares are trying to break over resistance at $17.35 and we want to own the shares when that happens. However, the last two days has seen spikes over that level so we cannot use that as an entry trigger. We have to commit at the open tomorrow.

Position 10/6/16:

Closed 10/10/16: Long GPRO shares @ $17.06, exit $15.85, -1.21 loss.




BEARISH Play Updates

PPC - Pilgrims Pride - Company Profile

Comments:

That was depressing. After the big drop to a 10-month low on Friday on the news about the class action suit, shares rebounded nearly 4% today on no news. We were stopped out aof a 9 cent loss thanks to the tight stop.

Original Trade Description: September 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946. Company description from FinViz.com.

The chicken business is becoming a lot more competitive. The consumer movement to free range chickens with no antibiotics and growth hormones is squeezing normal high volume breeders and reducing their market share. When your chickens have been previously grown in one square foot cages the change to free range brings a lot of problems and a decline in volumes. They are also faced with the growing occurrences of various bird flu breakouts.

PPC sells a lot of meat internationally and the prohibitions are growing against antibiotics and growth hormones. When an entire country becomes suddenly off limits because of new restrictions that can be costly.

In order to combat these problems the company spent large sums of money in research and development and now that debt has become a new burden in a shrinking marketplace. Earnings are also sensitive to price movement in the agricultural community with the cost of soybeans, corn and other feed grains continually rising. The fluctuating dollar is also a problem with their international sales.

Earnings Oct 26th.

Shares are about to trade at a 10-month low when they fall under $20.65. That could accelerate the selling as investors give up on the stock.

Position 9/27/16:

Closed 10/10/16: Short PPC shares @ $20.94, exit 20.85, -.09 loss

Optional:

Closed 10/10/16: Long Nov $20 put @ 70 cents, exit .60, -.10 loss.



TASR - Taser Intl Inc - Company Profile

Comments:

No specific news. Shares posted a minor gain. There were a couple articles on the potential for a short trade after the breakdown last week. I hope they are right.

This position remains unopened until a trade at $20.25.

Original Trade Description: October 8th.

TASER International, Inc. develops, manufactures, and sells conducted electrical weapons (CEWs) worldwide. The company operates through two segments, TASER Weapons and Axon. Its CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The company offers TASER X26P and TASER X2 smart weapons for law enforcement; TASER C2 and TASER Pulse CEWs for the consumer market; and replacement cartridges. It also provides Axon Body, a body-worn camera for law enforcement; Axon Body 2 camera system; Axon Flex camera system that records video and audio of critical incidents; TASER Cam HD, a recording device; Axon Fleet, an in-car video system; Axon Interview, a video and audio recording system; Axon Signal, a body-worn camera; and Axon Dock, a camera charging station. In addition, the company offers Evidence.com, a cloud-based digital evidence management system that allows agencies to store data and enables new workflows for managing and sharing that data; Evidence.com for Prosecutors to manage evidence; and Evidence Sync, a desktop-based application that enables evidence to be uploaded to Evidence.com. Further, it provides Axon Capture a mobile application to allow officers to capture digital evidence from the field; Axon View, a mobile application to provide instant playback of unfolding events; Axon Five, a software application to enhance and analyze images and videos; Axon Convert, a software solution to convert unplayable file formats; and Axon Detect, a photo analysis program for tamper detection. The company sells its products to military forces, private security, and consumer personal protection markets, as well as to federal, state, and local law enforcement agencies and corrections through its direct sales force, distribution partners, online store, and third-party resellers. Company description from FinViz.com.

Taser shares were crushed last week when the NYPD chose VieVu instead of Taser for its supplier of more than 1,000 body cameras. The camera has become a larger market for Taser than the actual Taser weapon. When Taser sells a camera they also sell a 3-5 year subscription to Evidence.com, which is their video storage and retrieval application in the cloud. While a Taser sale may be in the hundreds of thousands of dollars per police department and the camera sale also in the hundreds of thousands, the subscription to archive the hundreds of thousands of hours of video footage costs millions of dollars.

The $399 camera is just the camel's nose under the tent. Each camera requires its own subscription to Evidence.com which costs $39 to $79 a month before quantity discounts. The 1,000 camera order for the NYPD would have been a minimum of $39,000 a month for five years or $2.3 million to $5.0 million in revenue.

The Safariland VieVu camera system is now deployed in more than 4,000 agencies in 17 countries. With Safariland the camera is holster activated and turns on when the officer's gun is drawn. This is a major competitor for Taser.

Another blow for Taser last week was a Supreme Court decision not to hear a case involving the death of a person stunned by a Taser. The court let stand a ruling that said Tasers amount to an unconstitutional use of excessive force and officers can only use Tasers if they are in immediate danger. This could negatively impact Taser sales, which is still the largest portion of their international revenue.

If Taser sales slow because of the ruling, then body camera sales could also slow since many times they are packaged together. That means Evidence.com subscriptions would also slow.

Earnings Nov 3rd.

Taser shares are in free fall after the dual blow last week. The Supreme Court decision is the one problem that will last.

With a TASR trade at $22.25

Sell short TASR shares, initial stop loss $24.05.

Optional: Buy Nov $22 put, currently $1.25. No initial stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

New historic low.

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.



ZOES - Zoes Kitchen - Company Profile

Comments:

No specific news. The company names Casey Shilling as Chief Marketing Officer and shares rebounded 51 cents. This was the second day of gains. It is possible the decline is over.

Original Trade Description: September 27th.

Zoe's Kitchen, Inc., through its subsidiaries, develops and operates a chain of fast-casual restaurants. It operates a range of restaurant formats, including in-line, end-cap, and free-standing restaurants. As of August 22, 2016, the company operated 191 owned and franchised restaurants in 20 states of the United States. Zoe's Kitchen, Inc. was founded in 1995 and is based in Plano, Texas. Company description from FinViz.com.

For Q2, ZOES reported earnings of 6 cents that matched estimates. Revenue of $66.3 million missed estimates for $67.3 million The earnings were not the problem.

Same store sales rose only 4% and that was due to a 3.1% increase in prices so the real rise was only +0.9%. This compares to +8.0% in Q1. They also cut their guidance for the full year from 4.5% to 6.0% down to 4.0% to 5.0% and remember that includes a 3.1% price increase so the real comparable numbers are 0.9% to 1.9% sales growth.

The company also cut its revenue guidance from $277 - $281 million to $277 - $280 million, which is not a big drop but analysts were expecting $280 million so the midrange $278 million would be another miss.

Earnings Nov 14th.

The market appears saturated with fast casual restaurants and "earnings were not bad" is not sufficient to propel the stock higher given the decline in same store sales.

ZOES closed at a historic low at $23.80 on Sept 20th. Shares rallied on short covering in the market rebound but are headed back to set a new low.

Position 9/28/16:

Short ZOES shares @ $23.95, see portfolio graphic for stop loss.





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