Option Investor
Newsletter

Daily Newsletter, Saturday, 10/15/2016

Table of Contents

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

Market Wrap

Halfway

by Jim Brown

Click here to email Jim Brown

We are halfway through October and the next two weeks have a historically bullish bias.

Weekly Statistics

Friday Statistics

While there is no guarantee a historical trend will repeat, the next two weeks are normally bullish. The trend did repeat for the first two weeks of October with the markets coming very close to new lows for the second half of the year.

For the S&P the 2,114.74 intraday low on Thursday was the lowest point since July 8th and a three-month low. While technically that is not the low for the second half it only missed it by five trading days. As historical trends go that one certainly qualifies.


Friday saw a large opening bounce with the Dow spiking +163 points in the morning on some positive economics but fading to close at the lows with only a 39-point gain. The S&P and Nasdaq both ended with fractional gains of less than one point and all the rest of the indexes closed in negative territory. This is hardly the way to improve bullish sentiment for the second half of October.

The markets spiked early Friday afternoon after Janet Yellen seemed to say there was no rush to hike rates. She said it is useful to consider the benefits of a "high-pressure economy." She said the U.S. central bank normally stands vigilant over price pressures. However, the post-financial crisis period has pushed policymakers into "reconsidering the dynamics of inflation."

She pointed out that the economy has seen an unusual tendency of weak demand against strong supply, making it reasonable "to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a 'high-pressure economy,' with robust aggregate demand and a tight labor market." She said the financial crisis has forced central bankers to re-think their approach to monetary policy.

The spike was only temporary and the indexes faded into the close.

The morning opened with retail sales for September rising +0.6% compared to a -0.2% decline in August and expectations for a +0.6% rise. This lifted the year over year comparison to +2.7%. Sales excluding autos rose +0.5% and excluding autos and gasoline only +0.3%. Motor vehicles and parts rose +1.1%, furniture +1.0%, building materials +1.4%, gasoline stations +2.4% thanks to rising gasoline prices, sporting goods +1.4% and +0.8% for food service and bars. The only two categories to post declines were electronics and appliances at -0.9% and a -0.4% decline for general merchandisers like Walmart.

Spending slowed in Q3 from the Q2 pace but core sales were up +3.4% year over year. Department stores and malls are closing in near record numbers as online shopping becomes more commonplace. Job gains are slowing and energy prices could rise if OPEC actually cuts production. That will remove excess cash from consumer wallets as fuel prices rise.

At the same time the Producer Price Index for September rose +0.3% and the biggest gain since June. Expectations were for a +0.2% gain after zero gain in August and a -0.4% decline in July. However, 30% of the rise in prices came from higher gasoline prices. The headline number is now up +0.7% over year ago levels. That is hardly a disaster and gives the Fed plenty of leeway in being patient on rate hikes.

Consumer sentiment for October fell -3.3 points to 87.9 and the lowest level in over a year. The present conditions component rose slightly from 104.2 to 105.5. However, the expectations component declined sharply from 82.7 to 76.6 and the lowest since September 2014. Rising gasoline prices were said to be a contributing factor. Worries over the presidential election outcome were also blamed for the sharp decline. Consumers in both parties are very worried over what would happen to the nation if the other party's candidate were to win. With the political campaigns going lower than ever before, we can expect sentiment to decline even more in the weeks ahead.


Business inventories rose +0.2% in August and matched expectations. Manufacturing inventories rose +0.16%, retail inventories +0.63% and wholesale inventories declined -0.18%. The inventory to sales ratio remained flat at 1.39 for the third month.

There is a flurry of economic reports next week with the Philly Fed Manufacturing Survey on Thursday and the Fed Beige Book on Wednesday the two key reports. The Philly Fed report surged from 2.0 to 12.8 last month and is expected to give back a lot of that gain to show a 7.0 reading and mildly expansionary. The Philly Fed report is a proxy for the national ISM Manufacturing report due out in two weeks.

The Beige Book is a report on activity in each Fed region and it has been neutral recently with "moderate" the most overused adjective. Webster defines moderate as "average in amount, intensity, quality or degree." I have another word for our economic growth and that is "lackluster" and definitely not worthy of a rate hike.

On Thursday morning, Mario Draghi will hold the post ECB monetary policy meeting press conference. This could be a trouble spot for the U.S. markets depending on the outcome of that policy meeting.


Twitter (TWTR) was left standing at the altar by the last potential acquirer. Salesforce.com walked away from the deal on Friday saying it was not the "right fit" at this time. That means all the deep pocket bidders have all taken a hike and left Twitter to go it alone. The rumored asking price was $29 with no flexibility and that would have been a good deal for Twitter. However, most analysts believe the real price is more in the $14-$15 range because of the uncertainty over how to monetize Twitter users in the future. If the platform was growing the user base by a couple million a quarter, they could have gotten a better price. However, barely breaking even and always on the verge of losing users, is a problem nobody wanted to assume. Shares fell -5% to a two-month low at $16.88.


Bernie Sanders tweeted about a drug company on Friday and the stock fell -15%. Ariad Pharmaceuticals (ARIA) was under attack by Sanders in a tweet that said, "Drug corporation greed is unbelievable. Arian has raised the price of a leukemia drug to almost $199,000 a year." The drug is lclusig and it is used to treat chronic myeloid leukemia (CML) and Philadelphia chromosome positive acute lymphoblastic leukemia. Both are rare blood and bone marrow diseases. The company has raised prices on the drug four times in 2016. This is Ariad's only drug on the market and they only had revenue of $32.6 million over the last 12 months. Any material discount to the new price will dramatically reduce that revenue and limit future research.


The bigger problem is the damage to the biotech sector as a whole. With Sanders tweeting his outrage, Clinton is sure to pick up the pace of her drug price rhetoric on the campaign trail in order to appeal to Sander's voters. The biotech sector has been in freefall since the $50 gap lower on Illumina on Tuesday. Support at 3,250 failed and it appears to be headed to 2,800. This is a problem for both the Nasdaq and the Russell 2000 because of the high number of biotech stocks in each index.


Samsung continued to take blow after blow on the now discontinued Galaxy Note 7. The company said it will take a $5 billion loss on the phone and it still does not know why it is blowing up. The U.S. Dept of Transportation banned the phones on any commercial airliner starting at noon on Saturday. They cannot be taken on board or included in any luggage. I seriously doubt any owner would want to do that and risk crashing the plane with them on it. Several airlines have now acquired burn bags that will hold a burning phone or laptop and are rated up to 3,200 degrees. I just do not understand how they are going to pick up an explosively burning phone to put it in the bag.

Shares have taken a hit since the peak on Oct 7th but are not down as much as you would expect. Samsung has $69 billion in cash so the hit is painful but not life threatening.


Friday was bank earnings day with several of the big banks on the schedule. JP Morgan (JPM) reported a whopping $6.3 billion profit on an 8.4% rise in revenue. Earnings of $1.58 per share were actually down from $1.68 in the year ago quarter when they got a boost from $2.2 billion in tax benefits. Revenue was $25.5 billion and beat estimates for $24.2 billion. Fixed income trading revenue rose 48% to $4.33 billion. Equities trading revenue only rose 1% to $1.41 billion. They credited the Brexit vote for the monster spike in bond and currency trading revenues. Core business loans rose 14%. Provisions for bad loans rose 86.4% to $1.27 billion because of delinquencies and charge offs in the oil and gas sector. Shares rallied at the open but faded with the market.


Citigroup (C) saw earnings decline -11% to $1.24 but they still beat estimates for $1.15. Revenue fell -5% to $17.8 billion but beat estimates for $17.3 billion. Fixed income trading revenue rose 35% to $3.47 billion while revenue from equity trading fell -23% to $663 million. Total trading revenue rose 16% to $4.13 billion and beating guidance for a mid single-digit increase.


Wells Fargo (WFC) reported earnings of $1.03 that beat estimates for $1.01 per share. Revenue of $22.33 billion rose only 2% and barely beat estimates for $22.24 billion. The bank announced late Thursday that CEO John Stumpf had retired, effective immediately, and COO Tim Sloan had replaced him. Wells beat earnings estimates by reducing the amount of money being held for bad loans to $805 million from the $1.31 billion estimate. Total loans rose 6.4% to $961.33 billion.


PNC Financial (PNC) reported earnings of $1.84 compared to estimates for $1.78. Revenue of $3.83 billion rose only 1% and barely beat estimates for $3.82 billion. Commercial loans rose 5% to $138.2 billion.


Infosys (INFY) shares sank -6% after cutting fiscal year revenue forecasts to growth of 7.7-8.5% compared to 10-11.5% in prior guidance. In Q3 the company saw a 3.4% rise in revenue. This was the second time the company reduced guidance in the last three months. I am skipping the earnings and revenue numbers quoted in rupees.


Yahoo (YHOO) is teetering on the brink of a crash as it waits to see if Verizon is going to pull the plug on their $4.8 billion offer for the core company. Verizon and none of the other bidders were told about the cyberhack of more than 500 million accounts during the bidding process. Therefore, the later disclosure constitutes a material adverse change or MAC that allows a company to back out of a deal with no penalty. The bidders were told there had been attacks but only casually as if it was no big deal.

Now Verizon lawyers are said to be discussing a price closer to $3 billion or pulling out of the deal completely. Yahoo cannot give Verizon a dollar value on the potential liability because they do not know and may not know for a couple years. There are multiple class action suits being formed and there could be a giant penalty if the consumers can prove security was nearly nonexistent and the resulting attack was gross negligence. If the penalty were $20 per person in a class action suit representing the 500 million accounts that would be $10 billion dollars and more than twice the reported sales price.

Yahoo announced on Friday they would not have a conference call or webcast after earnings because of the intense negotiations with Verizon. I guess if you do not want to answer hard questions from analysts, you just cancel the call.


Amazon Web Services and competitor VMware announced a strategic alliance to build and deliver a seamlessly integrated hybrid offering that will give customers the full cloud experience from the leader in the private cloud, running on the world's most popular, trusted and robust public cloud. At least that is what the press release said. The VMware Cloud running on AWS will enable customers to run cloud instances anywhere and in any scale. It will be delivered, sold and supported by VMware as an "on demand, elastically scalable service." Giving customers the ability to run VMware instances on AWS is a win for both companies. AWS has 35 "availability zones" across 13 international geographic regions with more than one million active customers already running in the Amazon cloud. In the case of VMware, if you cannot beat Amazon, join them.

Gartner (IT) says Amazon has 50,000 to 80,000 servers in each of the 35 zones with more than two million active servers in total. By comparison, RackSpace has 100,000 servers across six datacenters. Google has three regions with eight datacenters. Microsoft has 17 regions. Steve Ballmer said Microsoft had more than one million cloud servers and Google had more than Microsoft.

In a Cycle Computing presentation, the company said Amazon regularly allows companies to rent and run monster programs on 10,000, 20,000 or even 100,000 computer cores at one time. Western Digital (WDC) used a program that ran on 70,000 cores to model the relationship between fluid dynamics and magnetism within its disk drives. The amount of computing power available on demand is beyond normal human comprehension.

Amazon is Skynet.


With 7% of the S&P already reported, 76% have beaten on earnings and 62% have beaten on revenue. The blended earnings projection by Factset is a -1.8% decline. If earnings for Q3 do end up with negative growth it will be the first time there has been six consecutive quarters of declines since Factset began collecting the data.

Factset warned that Q4 earnings could come in lower than expected because of the decline attributed to Hurricane Matthew. Businesses and restaurants were closed for several days and some are still closed. Banks and insurance companies are expected to report hits to earnings. After hurricane Sandy earnings declined significantly because of business closures and insured losses.

The Q3 earnings cycle gets underway with a bang next week. IBM and NFLX kickoff the tech cycle on Monday. They are followed by INTC, EBAY, YHOO and MSFT. There are 11 Dow components reporting and they are shaded in pink. This week has a little bit of everything from tech, biotech, energy, financial, industrial, transportation, etc.


The -4.9 million barrel decline in crude inventories managed to keep prices in the $50 range despite numerous articles questioning the potential for an actual production cut by OPEC. The Putin comments that Russia was ready to cooperate with OPEC in stabilizing prices also helped to keep prices level. Almost nobody expects a cut to actually occur and everybody expects OPEC countries to cheat even if they do formalize a production cut. For now, everyone is content to continue talking about the plans for a cut and talk is all it will ever be.


There was a large 15-rig addition to the active rigs last week but only 4 were oil rigs. Eleven of them were gas rigs. Analysts believe it will take a sustained rate of adding at least ten oil rigs a week to lift oil production significantly. In the most recent inventory numbers U.S. production fell by 20,000 bpd to 8.45 million bpd and the lowest level in the last eight weeks. Imports at 7.86 million bpd are also running about 1.0 million below levels we were seeing two months ago. Some of that decline is related to tankers that were delayed by two weeks because of Matthew blocking the entrances to the Gulf of Mexico. We should see imports increase in the coming weeks.


 


 

Markets

The second week of October is over. It was a holiday-shortened week in the bond markets and volume remained low despite the triple digit moves. Friday's volume was only 6.0 billion shares. The first two weeks of October normally have a negative bias and we saw that with losses for both weeks. The next two weeks typically have a bullish bias and start the best six weeks of Q4. Let's hope that trend continues.

However, the election is getting in the way. The market was hoping for a Clinton win and the republicans holding the house and senate. That would have meant continued gridlock for four more years. The Trump implosion has some analysts projecting a potential democratic sweep of the house, senate and the presidency. The market will panic if that becomes an eventuality.

For Clinton to have control of both houses, analysts believe it would mean higher taxes, more regulation, more deficit spending, drug price controls and the potential for major recession and a bear market.

Fear of this event could increase next week unless Trump was to pull a miracle out of his coat pocket during the last debate on Wednesday. If it were anybody else but Trump running against Clinton, it would be a landslide given all the negative material dumped on the Clinton campaign over the last month. Just the last week has seen enough revelations that any normal candidate would be 20 points down. Fortunately, for Clinton she is running against Trump and he is self-destructing.

That will more than likely be bad for the market. We already saw the sharp drop in consumer sentiment over the last three weeks and it will only get worse. In the equity markets, the small cap indexes are normally considered the sentiment indexes for the markets.

The Russell 2000 declined -2% for the week and the most of the major indexes. Support at 1,232 failed and support at 1,210 is in danger. If we get another big downdraft, the support at 1,200 could be in danger and a failure there would remove support from the rest of the market. There is a lot of white space on the chart under 1,200.


The S&P briefly penetrated critical support at 2,120 on Thursday and then closed at the low for the day on Friday. A failure at 2,120 could easily retest 2,040 or even 1,990. When markets decide to move directionally they can move quickly as we saw in that -123 point crash in late June from 2,113 to 1,990. That only took two days.

The S&P has been moving sideways since mid July and that is a lot of pent up stress. The three-month low on Thursday is a warning sign that we may not be going to follow the normal late October trend higher. I really hope I am wrong about the risk. The first two weeks of October normally scare investors and makes them nervous. The aggressive ones get short. When the end of October window dressing arrives, everyone races to cover and those in cash begin to throw money at the market.

Investors bought the dip on Thursday and were rewarded with a +161 point spike at Friday's open. When that spike evaporated it probably put a little fear back into those traders and anything is possible next week.


The Dow has 11 components reporting earnings next week. With the majority of the component charts already showing bearish patterns, we need some strong earnings and strong guidance to reverse the negativity or we will be retesting some lows once the post earnings depression kicks into gear.

The Dow has critical support at 18,100 and again at 18,000 and both levels were penetrated temporarily on Thursday. If it were not for the dip buyers, we would be having an entirely different conversation this weekend.

The preliminary earnings from a scattered selection of big cap stocks have not been pretty. The banks did ok but the earlier reporters including HON, DOV, PPG and others have not been encouraging. Revenue is declining, earnings were weak and guidance was negative. That is especially true for tech guidance with networking and cybersecurity stocks guiding lower.

The big caps are going to be guiding based on the recent highs in the dollar and lows in the British pound. That is going to be a stiff headwind. Rising oil prices are also going to be an increase in costs.

The Dow has strong resistance at 18300-18400 and weakening support at 18100-18000. That is not a recipe for a rally unless the earnings provide a significant upside surprise.



The Nasdaq remains the strongest index but the weakness in the biotechs is an anchor that has not yet found a bottom. The Nasdaq has strong support at 5,200 but that was broken intraday on Thursday. If the tech earnings next week are not strong, we could be looking at a drop that could be significant. Ironically, the Nasdaq 100 made a new historic high on Monday and I would hate to see it turn into the start of a material decline, a sort of sell on the news event.

IBM is not a Nasdaq stock but they report earnings on Monday and their comments will be critical for the tech sector. Netflix is also a major tech event on Monday and their recent earnings events have been disasters because of slowing subscriber growth.



Historically, the next two weeks are supposed to be positive as fund managers window dress their portfolios for their October 31st fiscal year end. With the election in a state of flux, they may not have a clear idea how they want to accomplish that this year. That means they could simply throw some money at large cap techs and industrials and avoid biotechs. Once into November, they can quickly reverse those trades and return to cash if the market is reacting negatively to the election outcome.

I really hope the next six weeks, which are normally the best six weeks in Q4, hold to that seasonal trend. Unfortunately, hope is not a valid trading strategy. We need to trade what we see and not what we want to see.

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now



Random Thoughts


The sudden decline in bearish sentiment we saw last week was quickly reversed. Bullish sentiment at 25.5% is well under the historical average of 38.5%. Even some of the gains in neutral sentiment were reversed with investors fleeing back into a bearish posture.

Everyone knows that the market will normally do whatever investors least expect. That would be a strong rally given the nearly 75% neutral/bearish sentiment. However, sometimes the herd is right.



Short interest in Amazon has reached a record high at $5.3 billion in stock value. Since Amazon has risen +170% since early 2015 it is not surprising that technical traders are betting there is a dip in our future.

The average short interest value has been $2-$3 billion between 2012 and 2015. In 2015 that rose to $4 billion on three occasions. Now in late 2016 it has reached $5.3 billion. Anyone that has bet against Amazon since February has lost a lot of money.

Amazon hit a high of $696 in late December and crashed back to $475 in February. That is a monster drop and the stock does have a habit of selling off as the holiday shopping ends. In January 2014, shares dropped from $408 to $338 in a two-week period. On Black Friday in 2014, shares hit $341 and then declined to $285 in January.

With shares at $825 after a $325 point run since February, it only makes sense to expect a seasonal bout of profit taking. Expectations are very high with multiple price targets in the $1000 range. Amazon is currently hitting on all cylinders and while I can see the lure in the short scenario, I would be very cautious about putting it into practice.



The number of stock buybacks in September were the lowest since 2011. Microsoft and American Express accounted for the majority of September's volume. Dividend growth over the last two quarters was the lowest level since late 2009 and early 2010. The data came from TrimTabs.com research.

Buybacks and dividend have been a major factor in powering the last seven years of the bull market. Now those factors are evaporating. Buybacks rise when corporations are feeling good about the business and cash flow is strong enough to support them. When cash flow shrinks and/or the outlook turns sour, the buybacks dry up.

In Q3, announced buybacks fell to $115 billion and more than a two-year low. Only 29 buybacks were announced in September and the lowest number since January 2011. This follows an eight-quarter low for buybacks in Q2. Two-thirds of September's announced volume came from a $40 billion announcement from Microsoft.

With buybacks and dividend hikes providing a significant portion of market movement over the last several years, the decline in both is a warning sign for the year ahead. Source


Two trillion is a huge number but it is just a fraction of a much larger number. Scientists reported last week that using the most up to date methods for counting galaxies that there are more than two trillion galaxies in the observable universe. That sounds like a lot but here is the catch.

A galaxy is a collection of stars and planets. The Milky Way is a galaxy. According to Wikipedia, the Milky Way contains between 200 and 400 billion stars and at least 100 billion planets. Link

You can easily see that trying to calculate the number of stars and planets in the entire universe assuming two trillion galaxies and even using a low number like 50 billion items in each galaxy would be a number the human mind cannot comprehend. That would be 1 followed by 23 zeros and that is on the low end of the estimates for heavenly bodies.
That is 100,000,000,000,000,000,000,000 or 100 sextillion.

One very small cross section of the Milky Way


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

Politicians creed, "It's easier to fool people than to convince them that they have been fooled."

Mark Twain


 


New Plays

Playing it Safe

by Jim Brown

Click here to email Jim Brown
Editor's Note

Buying stocks after a destructive headline sometimes insulates you from future market declines because the stock has already dropped and now it looks like a safe port in a market storm.



NEW BULLISH Plays

FTNT - Fortinet - Company Profile

Fortinet, Inc. provides cyber security solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and virtual appliances products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which provides a single point of network log data collection. It also offers FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; and FortiDDos and FortiDB database security appliances. Further, it offers security subscription, technical support, training, and professional services. Company description from FinViz.com.

Fortinet released preliminary earnings numbers on the 11th and the stock was crushed in the afterhours market. The company said earnings would be in the range of 15-16 cents compared to prior guidance of 17-18 cents. Revenue would be in the range of $343-$348 million compared to guidance of $372-$376 million.

This is not the end of the world but shares fell from $34 to $29. They blamed the guidance miss on lengthening deal cycles saying enterprises were becoming more strategic in their purchasing decisions and buying with less urgency than last year. They also admitted to "sales execution challenges" in North America as the result of a new sales force in that market. They just recently expanded into North America. There were also "macro" issues in Latin America and the U.K. that they did not explain.

Despite the guidance cut they are still positive about Q4 and 2017 saying the "competitive-differentiating and market-leading security fabric" was intact and they remain confident in the underlying strength of the business. They will release their actual earnings on October 27th. Normally, when a company warns in advance, they report better earnings than their guidance in the warning.

Shares are already rebounding because multiple brokers immediately reiterated their buy ratings. Wunderlich said buy with price target of $42. Doughtery said buy with a price target of $35. RBC Capital reiterated a sector perform rating with a price target of $37.

I believe there is very little risk in taking a position in FTNT at this level. The damage has already been done.

Buy FTNT shares, currently $31.01, initial stop loss $29.65.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Buyers Shrinking

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 closed at the low for the day with a -3 point loss as small cap buyers appear to be shrinking. All the indexes closed at the lows with the S&P and Nasdaq posting only fractional gains of less than one point. The Dow gave back its +131 point opening bounce to close with only a 39 point gain.

The decline in the small cap indexes is especially troubling since they function as the market sentiment indexes. If small caps are being sold, the big caps will eventually follow. This was the end of the second week in October and next week begins the six best weeks of the year. Let's hope the trend remains firmly in place.




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.




Lottery Ticket Plays


Current Position Changes


TASR - Taser Intl
The short position was closed at $23.15.


MENT - Mentor Graphics
The long stock position was opened at $28.54.



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

ALRM - Alarm.com - Company Profile

Comments:

No specific news. Nice gain to a two-month 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.



CLVS - Clovis Oncology - Company Profile

Comments:

No specific news. Drifting back to support on biotech weakness.

Original Trade Description: October 12th.

Clovis Oncology, Inc., a biopharmaceutical company, focuses on acquiring, developing, and commercializing anti-cancer agents in the United States, Europe, and internationally. It is developing three product candidates, which include Rociletinib, an oral epidermal growth factor receptor and mutant-selective covalent inhibitor that is under review with the U.S. and E.U. regulatory authorities for the treatment of non-small cell lung cancer; Rucaparib, an oral inhibitor of poly polymerase, which is in advanced clinical development for the treatment of ovarian cancer; and Lucitanib, an oral inhibitor of the tyrosine kinase that is in Phase II development for the treatment of breast cancers. Company description from FinViz.com.

Clovis has been rising on the prospects for the drug Rucaparib. They reported in September the FDA was not planning on holding an advisory committee meeting to discuss the new NDA application. The FDA has accepted the company's NDA for accelerated approval and granted it a priority review. The FDA response is expected to be positive and is expected by Feb 23rd.

However, on October 7th the company released data on a Rucaparib trial that appeared to show it was less effective than a competing drug already on the market from AstraZeneca. Shares were crushed for a $10 drop at the open. Analysts were quick to come to their defense saying there are many trials and making a decision by just one trial with a very narrow patient subset was comparing apple to oranges. Shares immediately rebounded.

Clovis has several anti cancer drugs in final stages and the outlook is very positive. Just seeing that CLVS shares have not declined with the sector over the last couple of days is a very strong indication that portfolio managers are buying and holding.

Earnings Nov 3rd.

Position 10//13/16:

Long CLVS shares @ $31.97, see portfolio graphic for stop loss.

No options recommended because of price.



MENT - Mentor Graphics - Company Profile

Comments:

No specific news. We got a bad fill on the entry with shares spiking 60 cents at the open only to decline 40 cents for the day. That would not have been my preferred way to enter the position but now it is behind us.

Original Trade Description: October 13th.

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.

Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.

Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott' s game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.

Earnings Nov 17th.

A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.

Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.

Position 10/14/16:

Long MENT shares @ $28.54, see portfolio graphic for stop loss.

Optional:

Long Jan $30 call @ $1.35, no stop loss.

We will hold the option as a lottery ticket play is the long stock position is stopped.




BEARISH Play Updates

TASR - Taser Intl Inc - Company Profile

Comments:

Coverage was initiated by Imperial Capital at outperform and the minor short squeeze that followed, stopped us out. The analyst called it the "razor and blade" model. They sell the Taser guns and the buyers have to keep coming back to buy the electronic cartridges. They sell the cameras but they have to buy the Evidence.com subscription to retain the video as evidence. More than 17,000 law enforcement agencies own 105,000 weapons and 36,000 cameras were purchased in 2015 alone.

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.

Position 10/11/16 with a TASR trade at $22.25

Closed 10/14/16: Short TASR shares @ $22.25, exit 23.15, -.90 loss

Optional:
Closed 10/14/16: Long Nov $22 put @ $1.25, exit .85, -.40 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.




Left Over Lottery Tickets

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

These positions are only updated on the weekend.


FDC - First Data - Company Profile

Comments:

No specific news. Shares are holding at prior support at $13. This position expires next Friday.

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 Oct $14 call @ .50, no stop loss.

Previously closed 9/9/16: Long FDC shares @ $13.50, exit $13.75, +.25 gain.



HOV - Hovnanian Enterprises - Company Profile

Comments:

No specific news. Shares are breaking down and closed 2 cents above our stop loss. I am recommending we just close the long stock position and keep the February call open.

Original Trade Description: July 27th.

Hovnanian Enterprises, Inc. is a builder of residential homes. The Company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments. It markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. The Company has two distinct operations: homebuilding and financial services. The Company, excluding unconsolidated joint ventures, is offering homes for sale in 196 communities in 34 markets in 16 states throughout the United States. The Company's financial services operations provide mortgage loans and title services to the customers of its homebuilding operations.

Prior to the financial crisis HOV was an active buyer of land and had extensive holdings when the crash appeared. The decline in home buying and the change in the mortgage business caused them to be very over extended as a result of the crash. Since 2009 they have liquidated a lot of land holdings, built out and sold a lot of properties and have consolidated their efforts and reduced costs significantly.

For Q2 they reported a loss of 6 cents, which was less than half the 13-cent loss in the year ago quarter. Revenues rose 39.6% to $654.7 million. For the first 6-months of the fiscal year revenues rose 34.5% to $1.23 billion. The $7.9 million loss was well below the $25.2 million loss in the year ago quarter. The number of active contracts rose +0.9% to 1,812 homes with the value of the contracts rising 16% to $1.4 billion. The number of contracts in the first six months of fiscal 2016 rose 7.3% to 3,343. The total contract backlog at the end of the quarter was $1.58 billion, up 27.8% from the $1.23 billion at the end of fiscal Q2 2015. As of April 30th, they controlled 34,997 lots.

They paid off $233.5 million in debt over the prior two quarters and ended the period with $125.6 million in liquidity. Since the end of the quarter liquidity has risen $75.1 million due to closings and joint venture funds received. They also paid off another $86.5 million in debt that matured in May.

CEO Ara Hovnanian said, "While our revenue grew 40% and Adjusted EBITDA increased over 220%, as we said last quarter, we remain focused on deleveraging our balance sheet and maximizing our profitability rather than on additional growth. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017. We are certain that we are taking the correct steps that will best position our company for future success. While it is discouraging to report a loss for the first half of fiscal 2016, it is nevertheless a significantly reduced loss, and we anticipate our profitability in the second half of the year will more than offset this loss."

With the low mortgage rates and the rising number of home sales, I do expect HOV to return to profitability by the end of the year. It has been a long 7 years but they are finally getting rid of the accumulated debt and are riding the wave of new home buyers.

Stocks typically begin to rise about 6-months before widely predicted events. If HOV expects to post profits in Q3/Q4 now is the time to buy the stock. At $1.87 per share I look at it as a LEAP option that does not expire. This is not going to be a rocket stock. This is a buy it and forget it position until year end. Once we are in the position I will track it in the Lottery Play portfolio each weekend. Shares traded at $7 in 2013-2014 and could easily return to that level once they post those profits.

Update 9/9/16: HOV reported Q2 earnings of zero compared to estimates for 6 cents. Revenue rose +32.6% to $716.9 million. For the full year the company guided to revenue of $2.7 to $2.9 billion and analysts were expecting $2.75 billion. The sold or joint ventured 21 communities to reduce their active selling communities from 214 to 193. This impacted revenue as the older communities were culled from the active business. They sold 1,467 homes in Q2 and slightly less than the 1,658 in the same period in 2015, also the result of selling some communities. Their order backlog rose 7.7% to $1.48 billion. There are 3,232 homes currently contracted to be built. They delivered 1,574 homes in the quarter, a +11.8% rise. After paying off $320 million in debt their cash position was $187.7 million. They acquired about 900 lots in the quarter in 20 different communities. They guided for a solid profit in the current quarter of $32-$42 million before some expenses including land acquisitions.

Do not back up the truck on this position just because the stock is cheap. Unexpected events do happen. Just buy a few hundred shares and we will shoot for a return to $6 or a 400% gain.

Position 7/28/16

Long HOV shares @ $1.86, no stop loss.

Optional:

Long February $2 call @ 20 cents. No stop loss.



HUN - Huntsman Corp - Company Profile

Comments:

No specific news. Shares continuing to rebound but the progress is slow.

We were stopped out of the long position on HUN shares on Sept 8th. We have a left over November $19 call.

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

Long Nov $19 call @ 54 cents. No stop loss.

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



NAVI - Navient - Company Profile

Comments:

No specific news. This position expires next Friday.

Shares are still stuck at resistance at $14.50 but eventually a breakout will appear and it could be strong.

Original Trade Description: August 6th.

Navient Corporation provides financial products and services in the United States. The company offers Federal Family Education Loan Program (FFELP) Loans, Private Education Loans, and Business Services. It holds the portfolio of education loans insured or guaranteed under the FFELP, as well as the portfolio of private education loans. The company also provides asset recovery services for loans and receivables on behalf of guarantors of FFELP loans, and higher education institutions, as well as federal, state, court, and municipal clients. They also offer business processing services on behalf of municipalities, public authorities, and hospitals. Navient was spun off from Sallie Mae in April 2014.

Adjusted earnings for Q2 rose 17.5% to 47 cents and beat estimates for 45 cents. Helping produce the earnings beat was a 44.4% decline in provisions for credit losses to $110 million.

During the quarter Navient acquired FFELP loans of $623 million bringing their total under management to $92.6 billion.

The private education loan segment reported earnings of $57 million. During the quarter Navient acquired another $23 million to bring their total under management to $24.7 billion. The spread on the private loans was stable at 3.66%. The charge off rate was only 2.2%.

During the quarter they retires $255 million in senior unsecured debt and they completed three ABS placements totaling $2.278 billion to raise liquidity. They repurchased 13.6 million shares for $175 million and had $360 million outstanding under the current authorization.

Earnings Oct 18th.

Although Navient is not a high flying investment like Apple or Netflix it is a good solid business. Friday's close at $14.50 was a 52-week high and a breakout over prior resistance. The next resistance will be a gap fill around $17 from last July.

Position 8/8/16:

Long Oct $15 call @ 50 cents. No initial stop loss.

Previously closed 8/12/16: Long NAVI shares @ 14.57, exit $13.35, -1.22 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