Option Investor
Newsletter

Daily Newsletter, Thursday, 10/20/2016

Table of Contents

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

Market Wrap

ECB Stands Pat, No Taper

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The ECB held rates steady and gave no indication QE would be increased, decrease or ended; the market didn't seem to care. The statement and press conference was a dud; Draghi revealed no new information, gave no hints to the banks direction and confirmed ongoing slow, sluggish economic recovery. In light of earnings season, today's economic data, the upcoming FOMC meeting and the election it is no surprise the market reacted the way it did. Add in the fact that tomorrow is OP-EX and there was plenty of reason for traders to sit back and wait.

Asian indices were mixed but largely positive in the overnight session, driven by positive US earnings. Japan led with a gain near 1.4% while indices in Hong Kong and China were more flat than not. European indices finished the day in positive territory after a choppy session. Anticipation for the ECB kept the indices near flat-lined for most of the day, until the release of the statement that is, at which time a quick dip to test for support was followed by a short rally which left them with gains in the range of 0.3% to 0.5%.

The ECB held rates unchanged and made no adjustment to their QE policies. At the press conference Draghi seemed to indicate both an end and no end to easing, saying first that "(current fiscal) policy can't stay in place forever" and then hedging that with comments to the effect that no discussion of ending QE or tapering QE has taken place, that is very unlikely there will be an abrupt halt to QE and that the bank stands ready to take whatever action is necessary to support the economy. In terms of outlook, he says inflation is still expected to rise at a gradual pace.

Market Statistics

Futures trading indicated a flat to positive open during the earliest hours of the electronic session but that changed following the ECB announcement and today's early data dump. By 8:45AM the indices were indicated to open with small losses in the range of -0.15%. Downside pressure persisted into the open of today's session, and into the session itself, driving the indices down by -0.3% in the first 15 minutes of trading. The next saw a bit of volatility, the bulls pushed the indices up and into positive territory shortly after 10AM but were not able to hold their ground. The market sold off again and fell to a new intraday low near -0.45% around 11AM. Those lows held, the market rebound from there and then hovered near break even the remainder of the day.

Economic Calendar

The Economy

There was a fair amount of economic data released today. First off, weekly jobless claims. Initial claims rose a little more than expected, +13,000, to hit 260,000. Last weeks figures were revised higher as well, up 1,000. The four week moving average of claims gained 2,250 to hit 251,750. On a not adjusted basis claims fell -2.3% versus an expected drop of -7.2% and are now up 1.3% versus this same time last year. More than likely not adjusted claims will fall back below last years levels as it has each this year it has risen above them. Regardless, this weeks data remains consistent with long term trends and ongoing labor market health.


Continuing claims rose by 7,000 to hit 2.057 million. Last weeks number was revised higher by 4,000. The four week moving average of continuing claims fell nearly -13,000 to 2.058 million, a new low dating back to July, 2000. All in all these number remain healthy, just off the long term 43 year low, and consistent with improving labor market health.

The total number of Americans on unemployment benefits continues to fall. This week the total fell -34,022 to hit 1.747 million, a new low. Based on historical and seasonal trends we can expect this number to fall for another week or two before hitting bottom. Later this fall expect to see the total number begin to creep higher as staffing levels get adjusted going into the end of the year. The data should peak out in late December/early January with a total near 2.6 million.


The Philadelphia Federal Reserve Manufacturing Business Outlook Survey was released at 8:30AM as well, indicating growth continues but at a slower pace from the previous month. The headline reading of 9.7 is the third month of expansionbut down from last month's 12.8. Within the report New Orders and Shipments both made sunstantial comeback's from the previous month, up 14.9 and 24 respectively. New Orders came in this month at 16.3, shipments at 15.3 although Deliveries, Unfilled Orders and Inventories all remain in contraction. Employment improved slightly but remains negative at -4.0. The 6 month outlook remains positive but fell -4.9 to 32.6.


Existing Home Sales and Leading Indicators were both released at 10AM, neither did much to bring support into today's market despite their bullish tone. Existing home sales rose more than expected, by 3.2% month to month and 0.6% year over year, although data within the report is less rosy. Average home prices rose once again, due to low inventory and high demand, while inventories fell. Economists at the National Association of Realtors are becoming more and more concerned about inventory levels describing them as poor and not improving. The worry at this time is that without an increase in new home construction home prices will continue to rise, inventories will continue to shrink and the existing homes market will crumble.

The Index of Leading Indicators gained 0.2% in September, reversing the -0.2% decline in August. On a trailing 12 month basis the Index is up 1.4% on balance. Economists at the Conference Board say the index is pointing to modest economic growth through the early part of 2017 at least. This months reading was largely influenced by employment and housing permit data. The Index of Coincident Indicators rose by 0.2% as did the Index of Lagging Indicator.


The Dollar Index

The Dollar Index gained some more ground today as the ECB confirms that, at least for now, it remains on a different path than the FOMC. The ECB is at the least maintaining QE while the FOMC is clearly through with it and on the verge of tightening policy for the 2nd time. The index gained close to a half percent in today's session and appears to have broken out of the flag pattern I highlighted yesterday. First upside target is just above $98.50 although targets derived from the flag pattern and flag pole put a target of $100.50 on this move. The indicators are bullish and consistent with rally, the one red flag I see at this time is that momentum is waning. Looking out over the next couple of weeks this move could easily continue so long as economic data does not completely derail rate hike expectations.


The Oil Index

Oil prices fell more than -2.25% today, reversing yesterday's gains and more. Nothing in the way of news came out today, the move driven on low expectation OPEC's deal will support oil prices longer term and profit taking. WTI fell nearly -$1.20 to hit $50.31. Prices may remain volatile going into November as there is some expectations OPEC will up the ante on it's production cap with an actual cut.

The Oil Index fell early in the day but managed to regain it by the close and post a small gain. The index gained 0.06% in a move up from the short term moving average and capped by the upper limit of the 7+ month trading range. The index is up at the top of the range on higher oil prices but capped by a lack of confidence in the long term bullish prospects; supply and production still outweigh demand. A break above the top of the range could be bullish but would require oil prices to remain at or near current levels at the least, if not rise. A simple move above 1,180 without strength or confirmation bears a high likelihood of being another whipsaw. The indicators remain consistent with an asset trading at the top of a range.


The Gold Index

Gold prices held relatively steady in today's trade, if a bit volatile. Spot prices were up in the early part of the session, about 0.25%, only to fall following the ECB decision on dollar strength. At end of session gold settled near $1267, down about -0.25%, and is likely headed lower under pressure from the rising dollar. Critical support at this time is near $1,250, a break of which could take gold down to $1,220 or lower.

The gold miners traded in similar fashion today, relatively steady if a bit volatile within the range. The miners ETF GDX created a very small spinning top doji just beneath resistance levels at the bottom of the October gap. The ETF may be setting up for another small move higher but resistance must be broken first. More likely it is consolidating below this resistance level, waiting to see which way the wind blows FOMC sentiment, the dollar, and gold prices. The indicators are bullish in the near term but also show an overbought ETF within a near term down trend. A fall from this level could take it down to retest support in the $25 range, a move higher would find next resistance at the top of the gap near $25.75.


In The News, Story Stocks and Earnings

Today was the biggest day for earnings so far this season, just shy of 100 reports were released and there were many top names on the list. Verizon reported before the bell, beating expectations but failing to impress investors. The company reported non-GAAP earnings of $1.01, 2 cents above consensus, and reaffirmed full year guidance above consensus, but investors were disappointed over declining year to year revenue and poor post-paid subscription growth. Shares of the stock fell more than -1% in the pre-opening session and extended that decline throughout the day.


The Walgreens Boots Alliance reported before the bell as well, delivering growth in both revenue and earnings but missing analysts expectations for both. Along with the miss the company gave full year fiscal 2017 guidance in a very wide range around the consensus estimate. Investors were cheered by the results nonetheless as future prospects for growth remain strong. Shares of the stock made a small gap higher at the open and then extended that gain to nearly 5% by the close of trading.


Dunkin Donuts also reported before the bell and delivered a mix bag of results. The company beat EPS expectations by a penny, missed on the revenue end, lowered full year revenue guidance, maintained full year EPS guidance, reported a 2% increase in US comp store sales, the opening of 115 new stores and a near -2% decrease in year over year revenues. Shares of the stock fell more than -5% in the pre-market session to open near $47.50 which has been confirmed as support.


After hours action was filled with market moving reports so expect to see some action tomorrow before the opening bell.

Paypal – Matched EPS expectations, revenue beat, customer counts up 11%, a credit card is on the way, guidance was positive but light. Shares fell -5%.

Microsoft - Beat EPS and revenue estimates driven by strength in the Azure segment which posted a 116% revenue increase. Guidance is favorable and the stock jumped 5.5% to hit a new all time high.

Boston Beer - Missed revenue and earnings estimates on accelerated slow down in the craft beer industry (I promise I'm doing my part to support it). Revenues fell shy by -14% on an 11% decline in barrels sold. Shares fell -3%. Sketchers - Missed revenue and earnings estimates despite 16% growth in global sales and 18% growth in global wholesales. The company is also predicting weak Q4 sales. Shares fell -15%.

Schlumberger - Beat EPS but missed on revenue. Shares held steady in after hours trading.

The Indices

The indices, they are still churning. Today's action was yet another day of listless, directionless sidewinding whose focus is fixed on events yet to happen. For the most part the market closed with little to no change, except for the Dow Jones Transportation Index which fell about -0.35%. The transports created a small black bodied candle wedged tightly between the top of the trading range and the short term moving average. The moving average may continue to support the index in tomorrow's session but the indicators are not strong so a break above the range does not look likely. The indicators remain consistent with range bound trading and are not showing signs of strength or direction. Resistance is near 8,150, support 8,000.


The Dow Jones Industrial Average fell -0.23% in a move that created a small spinning top doji within a narrow congestion band. The index is trapped between 18,000 and resistance in the range of 18,300 and is giving no sign of breaking out. The indicators are consistent with range bound trading and a market in balance with little to no momentum. This action could continue on into the near term while we wait to see what happens over the next few weeks.


The S&P 500 closed with a loss of -0.14%. The broad market created a medium sized doji candle, more spinning top than anything else, just below the mid-point of the September/October trading range. The index is also below the short term moving average which may act as resistance in tomorrow's session. The indicators are rolling over into a bullish signal but remain weak and consistent with range bound trading. Should the index move up above the moving average resistance would be at the top of the range, near 2,175. Support is near the bottom of the range along the 2,120 support line.


The NASDAQ Composite closed with a loss of -0.09%. The tech heavy index created a very small doji type spinning top candle sandwiched between the previous all time high and the short term moving average. The moving average has begun to move lower and may act as resistance tomorrow. The indicators are bearish and consistent with a weakening market, a break below support could take it down to 5,170 and last week's low. A break below that level would be more bearish and could take the index down as low as 5,000.


The Draghi/ECB catalyst has come and gone, delivering a dud, and is one more to check off the list as we await the upcoming election. Earnings, earnings outlook, economic data, the FOMC and rate hikes are all moot at this point. The election has shaped up to be a defining moment in US and global history, the results shaping our world for the next several DECADES if not longer. We've less than 3 weeks to go, and then the rest of our lives to live with the results. The market is scared, yet hopeful, not ready to commit to rally but not afraid enough to sell off. I remain cautious, hopeful, anticipating the next great secular signal.

Until then, remember the trend!

Thomas Hughes


New Plays

Sun Power

by Jim Brown

Click here to email Jim Brown
Editor's Note

There are dozens of solar companies but only a couple are worth buying. With tax incentives fading and utility companies becoming less excited about paying for excess power residential installations are putting back into the grid, the only way to go is the commercial grade companies.


NEW BULLISH Plays

CSIQ - Canadian Solar - Company Profile

Canadian Solar Inc., together with its subsidiaries, designs, develops, manufactures, and sells solar wafers, cells, and solar power products primarily under the Canadian Solar brand name. The company operates through Module, Energy Development, and Electricity Generation segments. Its products include various solar modules that are used in residential, commercial, and industrial solar power generation systems. The company also provides specialty solar products consisting of Andes Solar Home System, an off-grid solar system, designed to provide an economical source of electricity to homes and communities without access to grid; and Maple Solar System, a clean energy solution for families, as well as solar system kits, which are a ready-to-install packages, such as inverters, racking system, and other accessories. In addition, it develops, builds, and sells solar power projects; performs the engineering, procurement, and construction (EPC) work for the solar projects; and offers operation and maintenance services that include inspection, repair, and replacement of plant equipment, site management, and administrative support services. It offers its products to distributors, system integrators, project developers, and installers/EPC companies. Company description from FinViz.com.

Canadian Solar has a global pipeline of commercial and utility installations in progress of 2.4 gigawatts of power. Last week they bought a 49% stake in two 15 megawatt solar projects in Telangana India. The projects come with a 25 year power purchase agreement and a 5.54 rupee tariff per kilowatt hour.

This is just one more project for CSIQ as the continue to grow in scale and extend their reach around the world. They have installed more than 16 gigawatts across 90 countries since 2002 but this is their first project in India. Australia recently approved funding for two projects totaling 47 megawatts with a 20 year power purchase contract. The 17 Mw Longreach project will consist of 54,600 MaxPower2 solar modules and produce 39.0 gigawatts of power in the first year. The 30 Mw Oakey project will use 93,600 solar modules and produce 59.9 gigawatts of power the first year.

The company had $3.47 billion in sales last year with $171 million net profit. They are currently priced very cheaply at a PE of 11 times earnings. They have more than $500 million in cash and their market cap is only $900 million. Sales are growing at a rapid rate.

Earnings Nov 10th.

Shares have resistance at $16 and then clear sailing until $20.

With a CSIQ trade at $16.15

Buy CSIQ shares, currently $15.70, initial stop loss $14.35

Optional: Buy Nov $17 call, currently .65, no stop loss.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Holding at Resistance

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 small cap index closed at 1,219 and just below resistance at 1,222 for the second day. The -3 point loss was minimal and this is the third consecutive day the index has traded at the 1,222 level. In theory, this suggests a potential breakout ahead but in practice, we are seeing very light volume and a decline in the market internals.

While the chart may show a potential breakout ahead the lackluster market action is suggesting portfolio managers have not yet begun to window dress their portfolios for the end of their year on October 31st. Time is starting to run short but they may be waiting for Friday's expiration event as a trigger to begin buying next week.

I am still skeptical of the market and we need to be careful about being overly bullish.




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


FNSR - Finisar
The long stock position remains unopened until a trade at $30.15.



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Short term Calls and Puts on equities = Option Investor Newsletter

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Iron Condors = Couch Potato Trader



BULLISH Play Updates

ALRM - Alarm.com - Company Profile

Comments:

No specific news. Minor decline from a 2-month high in a weak market.

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.



CC - Chemours - Company Profile

Comments:

No specific news. Broke out to a new high.

Original Trade Description: October 17th.

The Chemours Company helps create a colorful, capable and cleaner world through the power of chemistry. Chemours is a global leader in titanium technologies, fluoroproducts and chemical solutions, providing its customers with solutions in a wide range of industries with market-defining products, application expertise and chemistry-based innovations. Chemours ingredients are found in plastics and coatings, refrigeration and air conditioning, mining and oil refining operations and general industrial manufacturing. Our flagship products include prominent brands such as Teflonâ„¢, Ti-Pureâ„¢, Krytoxâ„¢, Vitonâ„¢, Opteonâ„¢ and Nafionâ„¢. Chemours has approximately 8,000 employees across 35 manufacturing sites serving more than 5,000 customers in North America, Latin America, Asia-Pacific and Europe.

Chemours was spun off from DuPont in 2015. The company spent hundreds of millions of dollars developing hydrofluoroolefin (HFO)-based alternatives and blends with low global warming potential. These replace the hydrofluorocarbons (HFCs) that were used in air conditioners for decades and reportedly responsible for global warming.

The UN's Montreal Protocol calls for HFCs to be phased out and replaced. Chemours has created a replacement and expects more than 24 million vehicles to be on the road in 2016 using their HFO-1234yt (Opteon) product in their air conditioners. By the end of 2017 that number will rise to more than 50 million. They believe by 2025 the HFO-based solutions will have replaced 325 million tons of Co2 equivalents. The Opteon product line has been widely accepted and nearly every refrigeration manufacturer is moving in that direction.

For Q2 they reported adjusted earnings of 27 cents that easily beat estimates for 17 cents. Management delivered more than $100 million in cost reductions in the first six months of 2016.

Earnings Nov 3rd.

CC has been moving up steadily since August as analysts began coverage and the company beat on earnings on August 8th. Over the last 30 days consensus estimates for Q3 have risen from 26 cents to 30 cents. Full year estimates have risen from 77 cents to 84 cents. Rising estimates suggest the stock will continue higher.

After a $7 rally since the earnings, the stock pulled back last week and found support at $14.75. Shares were up today on the UN news since it means even more manufacturers will be forced to switch to the HFO products.

Position 10/18/16 with a CC trade at $15.45

Long CC shares @ $15.45, see portfolio graphic for stop loss.

No options recommended.



CLVS - Clovis Oncology - Company Profile

Comments:

No specific news. Shares rocketed +6% after more than a week of consolidation.

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.



FNSR - Finisar - Company Profile

Comments:

No specific news and no movement. Shares dipped at the open but recovered to close slightly positive.

This position remains unopened until a trade at $30.15.

Original Trade Description: October 19th.

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.

We entered a FNSR position on October 4th just as shares gapped open to $31. That turned out to be the peak for a three month rally. After a week of declines the shares could be ready to move higher.

The declines were sector related. The optical networking stocks were all slammed after some guidance warnings in the space. Finisar was riding the crest of a Goldman Sachs upgrade to buy on the 11th. That caused the peak in the stock just as the sector news appeared.

I am putting an entry trigger on this position to make sure the stock can get over recent resistance before we buy it.

With a FNSR trade at $30.15

Buy FNSR shares, currently $29.65, initial stop loss $28.75

No options recommended.



FTNT - Fortinet - Company Profile

Comments:

No specific news but a positive bias is forming.

Original Trade Description: October 15th.

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.

Position 10/17/16:

Long FTNT shares @ $30.92, see portfolio graphic for stop loss.



MENT - Mentor Graphics - Company Profile

Comments:

No specific news. Credit Suisse initiated coverage at outperform citing compelling valuation.

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

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.





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