Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/15/2017

Table of Contents

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

Market Wrap

Bulls Tacking On New Highs

by Keene Little

Click here to email Keene Little
It's been slow steady progress for the bulls as they make the rally 11 days in a row and new all-time highs 5 days in a row. There seems to be little in the way of higher prices, except for perhaps the level of complacency creeping into the market. But clearly the bulls rule for now.

Today's Market Stats

While the past 11 trading days haven't seen big rallies they've been enough to consistently tack on more points and keep the bulls fully in control. Resistance levels have been swept aside as sellers remain absent. The bears are in shock and the bulls are gleeful. When that sentiment will reverse is anyone's guess but for now we no indications that a top is nearby.

As I'll show in the review of the charts, the current rally looks like it could continue into a possible blow-off top. But at the very least, price action keeps the market bullish and it's a dangerous time to be thinking about shorting it. The rally could have finished today or it will finish in the next day or the next week or month but for now we're seeing a steady rise higher with only small corrections, and that's a bullish pattern. There's a lot of hope in the air and that will always goose the market higher.

But just because the market is looking bullish now, and could continue to look bullish for weeks to come, it's not a time to be complacent about the upside. If you have high confidence in this rally and practically no worries about the downside then you'd be part of the bullish crowd and from a contrarian perspective it's not a time to throw caution to the wind and join the bullish party.

Investors Intelligence (II) has a proprietary measure of bullishness vs. bearishness of 100 financial newsletter writers and the recent readings should make us concerned about the life of this rally. The sentiment reading is now the most bullish it's been for the past 10 years. From a contrarian perspective that means it's time for caution.

The II reported last week that optimistic newsletter writers climbed to 62.7%, the highest it's been since 2004. That means even into the 2007 market peak we didn't have this many optimistic newsletter writers. The reading tends to peak ahead of a market top while it bottoms at market bottoms. For a gauge, above 55% is a time to be cautious since it typically signifies a market top is forming. According to II, when the reading gets above 60%, where it is now, "it is time to start taking defensive measures."

Assuming the II reading will still be above 55% after this week it will have been 3 months above 55% and so far it's been above 60% for the past 4 weeks. So it's clearly not a market timing tool but it does give us another reason to be cautious instead of giddy about this rally.

There are more than a few sentiment indicators and they all suggest the same thing -- there's a great amount of hope right now that the Trump administration will make a big difference in our economy and to the bottom line of many corporations. The danger is that so much of this rally has been built on hope rather than results and we still don't know how much success Trump's team will have implementing these changes.

If the immigration Executive Order is any gauge, the changes will be tough to make. A rally built on hope is a dangerous rally because sentiment could turn on a dime and the big air pocket below us could be filled quickly. At this point I'd say enjoy the ride if you're long but keep your eyes and ears open and trail your stops up behind you. You want to be one of the first ones out the door when the market turns.

Another challenge for the market, although you wouldn't know it with the rally we're seeing, is how consumers are tapped out. They're not the ones joining this rally. Americans are filing bankruptcy at the fastest rate in years and rates for December and January increased, which makes it the first time we've seen a month-to-month increase in bankruptcy rates in 7 years.

More companies are also starting to declare bankruptcy and rising interest rates are not helping. In an era with abnormally low interest rates, and all the borrowing that went along with that (isn't that what the Fed was trying to prompt?), we have over-indebted consumers and companies, as well as the Federal government, but at least they can print their way out of it, for a while. Destruction of debt will create a headwind for the Fed since it will add to the deflationary pressures, which we see in the continued decline in the velocity of money.

A consequence of the level of debt for consumers, with the decline in their income/cost ratio, is that they're not the ones participating in the current rally. Corporate buybacks (they continue to borrow heavily and use profits to fund their buybacks instead of investing in capital growth projects) support the market. Add in the hopes and dreams of success with the expected (hoped for) Trump changes and we have reasons for the rally but leaving out the consumer is not a good recipe for longer-term success.

I'll start tonight's chart review with a longer view of the SPX monthly chart to show the pattern since the 2000 high and then work my way in with closer views.


S&P 500, SPX, Monthly chart

There are a couple of things to point out on the SPX monthly chart below. First is the "simple" way to stay with the trend -- long when the 21-month MA (blue) is above the 8-month MA (red) and short (or out) when the MAs reverse. Other than getting shaken out prematurely with the decline in the January/February 2016 lows, and then back in in August 2016, it's been an easy way to ride the trend. This method will keep you in or out of the bulk of the move and help you avoid losses in major downturns while keeping you in the uptrend for as long as possible.

The second thing to point out is the broken uptrend line from 1990-2002 (bold green), which was back-tested in 2015 and is now currently near 2425. It will be near 2500 by the end of May. That gives us an upside target, in time and price, if the bulls can keep this going for another couple of months. It might also be accompanied by another test of the downtrend line for the lower RSI peaks since 1996.

The rally from January/February 2016 can be counted as the 5th wave of the rally from 2009 and if that's correct then we'll be due at least a large pullback correction of that move in the next year or two. If we're in the next secular bull market off the 2009 low we could get a pull back to support near 1550 before heading higher. But if we're still in the secular bear, which I believe we are, the next leg down in this megaphone pattern will be a doozy, one that will make the 2007-2009 decline look like just a small correction.


S&P 500, SPX, Weekly chart

Since the 2009 low there's been a 23-week cycle that has done a good job identifying market turns, mostly highs. The next one due is the week of February 19th, which is next week. Interestingly, at the same time this cycle is calling for a turn we can see SPX has made it up to the top of a parallel up-channel (arithmetic price scale) for the rally from 2009.

SPX made it above the top of the up-channel in 2014, remained above the channel for the most part into 2015 and then dropped back into and down to the bottom of the channel with the decline from May 2015 into the January/February 2016 lows. Now it's back up challenging the top of the channel when the next 23-week cycle date is arriving. It can of course continue to press higher but this chart says be very careful about those expectations.


S&P 500, SPX, Weekly chart

In my "normal" weekly chart of SPX you can see this week's break above the trend line along the highs from April-August 2016, currently near 1332. This break is bullish because it's a breakout from a rising wedge pattern and that's to be respected by the bears. Never challenge a breakout, especially if a pullback finds support at the top of the wedge and continues higher from there. What we can't know yet, and must be watchful for, is whether the breakout will be a 1-week break that leads to drop back into the wedge (leaving a fakeout breakout with a throw-over finish) or if it will continue higher next week. A drop back inside the pattern, with a drop below 1332, would create a sell signal. But at the moment this has to potential to run much higher.


S&P 500, SPX, Daily chart

The daily chart below shows the breakout yesterday above the top of its rising wedge (broke out on Monday if looking at the top of the wedge as the trend line along the highs from August-December 2016) and how it simply added to the breakout today. This is what looks bullish and it remains bullish as long as it doesn't drop back into the wedge with a decline below 2332.

Key Levels for SPX:
- bullish above 2333
- bearish below 2285


S&P 500, SPX, 60-min chart

There is a dangerous sign on the 60-min chart and that is the parabolic move for this rally. Whenever you can draw 4 steepening uptrend lines, as I've done for the rally from December 30th, it's a sign of exuberance that typically does not end well. A break of the 4th uptrend line, near today's close at 2349, would be a warning signal and a break of the 3rd uptrend line, currently near 2340, would be a good indication that a high is in place.

Keep in mind that parabolic rallies tend to retrace to their starting point (the December 30th low at 2253) and that a rising wedge retraces more quickly than it took to build it (back down to the start of the shorter-term rising wedge at the November low near 2084 and then the larger rising wedge that started from the February 2016 low at 1810).


Volatility index, VIX, Daily chart

Speaking of wedges, the VIX has been building a descending wedge since its peak in November and is showing bullish divergence since the end of November. It's hard to trust movements in VIX during OPEX week but there was a big jump today (up +11.5%), which could indicate there are some non-believers in this week's rally. Does someone know something? Is big money getting ready for a big reversal? It's too hard to tell but it does add one more item in the "worry" column, especially with a rally that's going parabolic.


Dow Industrials, INDU, Daily chart

The Dow has also broken above its trend line along the highs from April-December 2016, currently near 20,500. As long as the Dow stays above that level it remains bullish, especially if a back-test of that level holds as support. Below 20,500 would leave a failed breakout attempt.

Key Levels for DOW:
- bullish above 20,500
- bearish below 20,015


Nasdaq-100, NDX, Daily chart

With today's rally NDX has also bullishly broken above its trend line along the highs from April-August 2016, currently near 5280. I've drawn steepening uptrend lines for its rally since November as it too is going parabolic. It could run a lot higher but the higher it goes the more vulnerable it becomes.

Key Levels for NDX:
- bullish above 5285
- bearish below 5168


I'll first show the RUT chart and then some comparisons to other charts to point out how the RUT can still be used as a sentiment indicator.

Russell-2000, RUT, Daily chart

The RUT has finally joined the bullish party by making new highs this week. Last Friday it broke out of the bull flag pattern off its December 9th high and now it looks like it might finally be able to make it up to the trend line along the highs from 2007-2015, currently near 1412. This is a longer-term trend line and marks what could be the top of a large megaphone pattern that I've shown on its weekly chart in the past. We could easily see a throw-over above the line so I wouldn't use it as a hard resistance level. But over the next couple of weeks it's going to be very important to see how price behaves around this trend line.

Key Levels for RUT:
- bullish above 1415
- bearish below 1349


At the beginning of the report I discussed sentiment and another measure of sentiment is to see what the RUT is doing. When small-cap stocks rise faster than large stocks, it's a sign that investors are willing to take on more risk in the market. It often leads to higher stock prices across the board. But when small caps lag behind large-cap stocks, it shows that investors may be getting worried and a correction/decline could soon follow.

One way to measure the strength of the RUT is with a relative strength (RS) chart, which is shown below. Since the December highs for the indexes the RUT has underperformed SPX. Off last Wednesday's low the RUT has joined in the rally and while this week it has finally been able to join in with new highs, it remains weak relative to SPX.

Relative Strength of RUT vs. SPX, Daily chart

Notice the RS of the RUT off the November low -- the RUT was outperforming SPX and that's exactly what you want to see in a rally. But since the December high the RUT has been underperforming SPX, including today, and that's a warning sign that the market's participants are not feeling as bullish as the broader indexes would have us believe. It's a warning sign but not a show stopper.


SPX vs. Relative Strength of TRAN vs. UTY and XLY vs. XLP, Daily chart

There are a number of ways to check on the underlying strength (or weakness) of the market and I noticed a parallel between the RS of the Transports (TRAN) vs. Utilities (UTY) and Consumer Discretionary (XLY) vs. Consumer Staples (XLP), which is shown on the chart below.

The first comparison, TRAN vs. UTY, shows us whether or not the market is feeling bullish about the economy, and investing in the transportation stocks, or if they're feeling more defensive and investing in dividend-paying utility stocks.

The second comparison shows us whether consumers are feeling flush and optimistic and spending more on discretionary items (flat screen TVs, recreation, etc.) or if they're pulling in their horns and spending on what they have to (toothpaste, toilet paper, etc.). The consumer is once again saddled with enormous debt, as are corporations and our governments and it will likely show up in less spending.

The TRAN is underperforming UTY since December and Consumer Discretionary is underperforming Consumer Staples, both of which tell us the market is turning defensive (not that you'd know it by price action in the big indexes.

I found it interesting that the two RS charts track each other closely, as can be seen on the bottom chart below. And they both have been in decline since December while SPX has continued to make new highs. For now it's just another warning sign but one worth noting.

There are other signs that the rally is occurring on the backs of fewer and fewer stocks, which is typically seen as a market forms a top, not in the middle of a larger rally. As an example, the advance-decline line and new 52-week highs are both putting in lower highs as the broader averages make new highs. The rally looks good on the surface but underneath the hood we see some problems developing.


10-year Yield, TNX, Weekly chart

The short-term pattern for Treasury yields is not clear enough to make a higher-odds prediction for the next move but I think yields will either head lower from here or after one more new high. There's a possible sideways triangle forming since the December 15th highs and the triangle would look complete with one more pullback before heading higher.

As shown on the TNX weekly chart below, there's an upside projection at 2.687% if there's a little more upside left. A drop below the January 17th low at 2.313 would be a heads up signal that a top is already in place. The flip side says a rally above the December 15th high at 2.621 would suggest the higher target could be achieved sooner rather than later.


KBW Bank index, BKX, Weekly chart

Like the RUT, the banking index finally broke out of its consolidation off the December 8th high. Today's high for BKX met a price projection at 97.07, with a high at 97.25, where the 5th wave of the rally from 2009 equals the 1st wave. But there are higher projections, including one at 102.19 where the 5th wave of the rally from June 2016 would equal the 1st wave. Coinciding with the 97.07 projection is a projection at 97.21 where the 5th wave of the rally from June 2016 is 62% of the 1st wave. As long as BKX stays above the top of an expanding triangle for its consolidation pattern from December, near 94.80, it will stay bullish. But at this point there are enough pieces in place to call a top at any time.


Transportation Index, TRAN, Daily chart

Today's rally created a new high for the TRAN as well, which is obviously bullish even if it is underperforming the broader averages. It has now met a price projection near 9534, with today's high at 9566, where the 2nd leg of the rally from June 2016 is 162% of the 1st leg. The bulls need to keep this rally going in order to prevent a triple top against its December and January highs, especially seeing the bearish divergence at the new price highs.


U.S. Dollar contract, DX, Daily chart

The US$ got the bounce I expected to see off its February 2nd low and while the bounce could make it further I think it has accomplished what it needed to and is now ready for a continuation lower. Today's rally made it back up to the top of a parallel up-channel from May 2016, which it dropped back inside of in January, and in doing so it climbed above its 50-dma at 101.33. But it was unable to hold the day's rally and dropped back down into negative territory for the day and closed below its 50-dma. The shooting star candlestick looks like a reversal candle and a down day for the dollar on Thursday would confirm it.


Gold continuous contract, GC, Daily chart

If the dollar starts back down it could help give gold a lift higher and for the moment I'm showing the potential for gold to bounce up to 1273.20 where it would achieve two equal legs up from December 15th. It has met the minimum expectation, at 1237, where the 2nd leg up is 62% of the 1st leg up so it's possible it will head lower from here. A drop below the uptrend line from December, near the 20-dma at 1219, would signal a top for the bounce could already be in place and below 1180 would confirm that. But first we'll see if gold can at least challenge its broken 200-dma near 1265.


Silver continuous contract, SI, Daily chart

Looking to silver for some guidance, it too has a little more upside potential to 18.32, where it would achieve two equal legs up from December 20th. But currently it's fighting to get through resistance at its broken 200-dma at 17.94 and its downtrend line from July 2016, near the same level. It would be short-term bullish above Tuesday morning's high at 18.09 and more bullish above 18.32 but at the moment it's vulnerable to a reversal back down from here. Watch for gold and silver to be in synch otherwise it's difficult to trust the direction for either.


Oil continuous contract, CL, Daily chart

Since the high at 54.51 on December 12th at 54.51 oil has been consolidating sideways in a tightening range. The consolidation pattern can be viewed as a bullish ascending triangle, which portends a breakout and rally to new highs for the bounce off the August 2016 high. A projection for a new rally leg would be the top of a parallel up-channel for the rally from August 2016, which will be near 57.25 by the end of the month. It would be confirmed bullish above 55.

But if oil drops below price-level S/R near 51 it would be bearish, in which case I'd look for a test of its 200-dma, currently at 48.17, and then the bottom of its up-channel, perhaps near 46 in March. The longer-term pattern and the corrective bounce structure off the August 2016 low suggests the entire bounce pattern will be retraced.


Economic reports

There were a slew of economic reports this morning and they were mixed. CPI data confirmed Tuesday's PPI data that shows inflation on the rise. It has many wondering if the Fed will try to head inflation off at the pass or let it rise past their goal in an effort to help the government pay back its debt with inflated dollars.

Retail sales and the Empire Manufacturing index were stronger than expected and that helped the bulls this morning. But Industrial Production declined more than expected, into negative territory, so that's not a good sign for our economy.

Thursday morning we'll get the unemployment claims data, housing starts and permits and Philly Fed index, none of which are likely to be market moving.


Conclusion

We have a plethora of signals that tell us the stock market's rally should not be trusted. We have multiple signs of deteriorating market internals while bullish sentiment runs high. We have multiple signs that show us the rally is occurring on the backs of fewer and fewer stocks and that important sectors are weakening relative to SPX. The rise in VIX is telling us smart money could be preparing for a reversal. With a very low VIX and the contraction in price volatility it's a dangerous time to be complacent about the upside.

The S&P 500 hasn't had a 1% intraday move since December 14th, which is the longest it's been this quiet in the history of record keeping. Quiet periods like this are always followed with a much bigger move (volatility) and from here that begs the question about which direction the big move will be. Will we see an acceleration higher or will it turn down sharply?

The most important indicator to follow is price, which means all of the cautions mentioned above are meaningless as long as prices keep heading higher. Price is king. But what we have are reasons to keep your eyes and ears open for the possibility of a nasty surprise. The rally is extended (overbought on multiple time frames), overloved and running on fumes (fewer participating stocks) and while none of that is a rally killer they are reasons to be cautious from here.

Don't get complacent and then get walloped some morning with a big gap down. It's a time for caution (peel off profits on long positions you're most worried about) and if you're a bear itching to get into the game, I suspect your time is coming very soon but not yet. There are no indications of a top yet and no reason to step in front of all the rising knives.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT


New Plays

26 Straight Earnings Wins

by Jim Brown

Click here to email Jim Brown
Editor's Note

They say follow the trend until it ends. This trend ended. However, it was not the company's fauly and investors are starting to figure that out.


NEW BULLISH Plays

UA - Under Armour - Company Profile

Under Armour, Inc. together with its subsidiaries, develops, markets, and distributes branded performance apparel, footwear, and accessories for men, women, and youth primarily in North America, Europe, the Middle East, Africa, the Asia-Pacific, and Latin America. The company offers its apparel in compression, fitted, and loose types to be worn in hot, cold, and in between the extremes. It provides various footwear products, including football, baseball, lacrosse, softball and soccer cleats, slides, performance training, running, basketball, and outdoor footwear. The company also offers accessories, which include headwear, bags, and gloves; and digital fitness platform licenses and subscriptions, as well as digital advertising, as well as licenses its brands. It primarily provides its products under the UA Logo, UNDER ARMOUR, UA, ARMOUR, HEATGEAR, COLDGEAR, ALLSEASONGEAR, PROTECT THIS HOUSE, and I WILL, as well as ARMOURBITE, ARMOURSTORM, ARMOUR FLEECE, and ARMOUR BRA trademarks. The company sells its products through wholesale channels, including national and regional sporting goods chains, independent and specialty retailers, department store chains, institutional athletic departments, and leagues and teams, as well as independent distributors; and directly to consumers through a network of brand and factory house stores, and Website. Company description from FinViz.com.

UA posted 26 consecutive quarters of +20% revenue growth. For Q4 that fell to 12%. That was a major blow for the stock. They also announced the CFO was leaving immediately for personal reasons. Could it be because he missed so badly on guidance?

They guided for 2017 for revenue growth of 11% to 12%. That is significantly lower than the 20% bar they have been reaching for the last 9 years.

However, Q4 was a really bad quarter for retailers. Traffic was down everywhere and overall sales only rose 1.4%, Under Armour gets 85% of its revenue from the U.S. and 60% of its revenue from retail stores. Under Armour supplied the products but retailers were unable to attract any traffic. It was not a shoe problem but a retailer problem.

To be fair there was a shoe problem as well. The super high dollar famous player shoes were discounted heavily because of the lack of retail customers. Foot Locker was having 50% off sales on their website because shoes were not moving. The lack of buyers was due to a weak retail season rather than a specific drop in UA products.

Earnings May 2nd.

Shares fell from $25 to $18 on the earnings and after two weeks in the dungeon they closed at a two week high on Wednesday.

I am going to recommend a distant option because the stock is $19.86 at the close making the $20 call "at the money" with an inflated premium of $1.20 for April. The $22.50 option is only 40 cents but it is 12% out of the money or $2.64 away from the strike. However, we have 65 days and if UA cannot move $2.64 in 65 days, I picked the wrong play.

Buy UA shares, currently $19.86, initial stop loss $18.35

Optional: Buy April $22.50 call, currently 40 cents, no stop loss.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Russell Breakout

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell finally caught fire to breakout over 1,400 after trading negative much of the morning. This may be the signal the rest of the market needed. The Russell 2000 small caps exploded higher at exactly 12:00 to gain 11 points over the next 3 hours. There was a minor bit of selling at the close but the index still ended at 1,402 and over that psychological level.

The Dow and Nasdaq sprinted higher after Yellen failed to drop any bombs in her second day of testimony. The Nasdaq is the most overbought since July 2014 so while this has been a fun ride, there are some bumps ahead.





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


GNC - GNC Holdings
The short position was closed at the open.



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

AKS - AK Steel - Company Profile

Comments:

No specific news. The steel sector was flat again today.

Original Trade Description: February 4th

AK Steel Holding Corporation, through its subsidiary, AK Steel Corporation, produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled, and hot-rolled carbon steel products; and specialty stainless and electrical steels in sheet and strip forms. The company also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial, and construction markets; buys and sells steel and steel products, and other materials; and produces metallurgical coal from reserves in Pennsylvania. It sells its flat-rolled carbon steel products primarily to automotive manufacturers and to customers in the infrastructure and manufacturing markets, including electrical transmission, heating, ventilation and air conditioning equipment, and appliances; and coated, cold-rolled, and hot-rolled carbon steel products to distributors, service centers, and converters. The company sells its stainless steel products to manufacturers and their suppliers in the automotive industry; manufacturers of food handling, chemical processing, pollution control, and medical and health equipment; and distributors and service centers. It also sells electrical steel products to manufacturers of power transmission and distribution transformers, as well as for use in the manufacture of electrical motors and generators. Company description from FinViz.com.

Shares spiked from $5 to $11 after the election on hopes for a surge in infrastructure projects, lower regulations and a growing economy. AK shares peaked early and traded sideways for a month. The week before earnings they began to decline as analyst said the market gains were overdone.

The reported earnings of 25 cents on January 24th that beat estimates for 7 cents. Revenue of $1.42 billion was slightly lower than estimates for $1.43 billion. Shares spiked on the earnings news and collapsed on guidance that shipments to automakers had declined in Q4. The next day a spokesman clarified that saying the "decline in shipments compared to 2015 was primarily the result of a 41% decline in shipments to the distributor and converters market as the company intentionally reduced sales of commodity products." In other words, AK wanted to focus its efforts on the higher margin products and reduce exposure to low margin products.

Shares quit declining after the clarification and bottomed just under $8. Friday's close was right on the verge of a 7-day high. One more positive day and we could see a rebound begin.

Earnings April 25th.

The optional option position is for a longer-term holder with a June expiration. Very limited risk in terms of dollars invested and could be a decent winner if AKS returns to the $11.25 highs or higher on infrastructure stimulus headlines.

Position 2/6/17:

Long AKS shares @ $8.18, see portfolio graphic for stop loss.

Optional long-term option:

Long June $10 call @ 59 cents. No stop loss.



BOX - Box Inc - Company Profile

Comments:

No specific news. Minor gain but enough for a new 52-week high.

Original Trade Description: January 21st.

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

Box is rapidly growing its customer for document management for companies with a global workforce. They are competing with other companies for cloud collaboration and access. More than 69,000 companies worldwide now use Box. They have broken into the media sector and now many production companies use Box for storing and distributing their production content. This has given Box a new niche in the market. Box has partnered with Salesforce.com, IBM and Microsoft in the cloud space. Their goal is to partner and grow with them rather than compete with those giants.

The company reported a smaller than expected loss for Q3 and expect to post an even narrower loss for Q4. Their guidance for Q4 is a loss of 13 cents on revenue of $109 million. That is better than the 26 cents loss in Q4-2015.

Earnings March 1st.

Shares broke out to a new 52-week high on January 12th before pulling back slightly with the market. They closed 5 cents below a new 52-week high on Friday.

Position 1/23/17 with a BOX trade at $17.10

Long BOX shares @ $17.10, see portfolio graphic for stop loss.



BRKS - Brooks Automation - Company Profile

Comments:

No specific news. Only a minor gain but a new high close.

Original Trade Description: February 13th

Brooks Automation, Inc. provides automation and cryogenic solutions for various applications and markets. It operates through two segments, Brooks Semiconductor Solutions Group and Brooks Life Science Systems. The Brooks Semiconductor Solutions Group segment offers critical automated transport, vacuum, and contamination controls solutions and services. This segment's products include atmospheric and vacuum robots, robotic modules, and tool automation systems that provide precision handling and clean wafer environments; automated cleaning and inspection systems for wafer carriers, as well as reticle pod cleaners and stockers; and vacuum pumping and thermal management solutions for use in critical process vacuum applications. This segment also provides support services, including repair, diagnostic, and installation, as well as spare parts and productivity enhancement upgrades. The Brooks Life Science Systems segment provides automated cold storage systems; consumables, including various formats of racks, tubes, caps, plates and foils; and instruments used for labeling, bar coding, capping, decapping, auditing, sealing, peeling, and piercing tubes and plates. This segment also provides sample management services, such as on-site and off-site sample storage, cold chain logistics, sample relocation, bio-processing solutions, disaster recovery, and business continuity, as well as project management and consulting. In addition, this segment offers sample intelligence software solutions and customer technology integration; and laboratory work flow scheduling for life science tools and instrument work cells, sample inventory and logistics, environmental and temperature monitoring, and clinical trial and consent management, as well as planning, data management, virtualization, and visualization services. The company sells its products and services in approximately 50 countries. Company description from FinViz.com.

Brooks reported earnings of 25 cents that beat estimates for 20 cents. Revenue of $160 million also squeezed by estimates for $159.7 million. For the current quarter they guided to earnings of 24 to 27 cents and revenue from $165 to $170 million.

The company provides automation and cryogenic solutions for various markets. Their expected growth rate for 2017 is 105% compared to the industry rate of 19.5%. Consensus estimates for the current year rose from 82 cents to 96 cents over the last 30 days. Estimates for the current quarter rose from 21 to 24 cents and the company guided for 24 to 27 cents.

Shares spiked from $17.50 to $21.00 on the earnings beat on February 1st. After three days of consolidation and profit taking, shares have started to rise again. They closed at a new high on Monday. I know this chart is over extended but the strong earnings, guidance and expected growth rate suggests they can continue climbing, market permitting.

Earnings May 3rd.

Position 2/14/17:

Long BRKS shares @ $21.58, see portfolio graphic for stop loss.

No options recommended because of wide spreads.



FEYE - FireEye - Company Profile

Comments:

No specific news. The company presented at the Goldman Sachs Technology and Internet Conference this morning. There was a minor post event decline.

Original Trade Description: February 11th

FireEye, Inc. provides cybersecurity solutions for detecting, preventing, analyzing, and resolving cyber-attacks. The company offers vector-specific appliance solutions that provide threat protection from network to endpoint for inbound and outbound network traffic that may contain sensitive information. It also offers Central Management System that provides cross-enterprise threat data correlation to identify and block attacks across multiple attack vectors; and Threat Analytics Platform to identify and respond to cyber threats by correlating enterprise-generated security event data from any security product with real-time threat intelligence, as well as Malware Analysis System to manually execute and inspect advanced malware, zero-day, and other advanced cyber-attacks embedded in files, email attachments, and Web objects. In addition, the company offers Network Forensics Platform that helps in detecting threats and view specific packets and sessions before, during, and after the attack to confirm what may have triggered a malware download or callback; Investigation Analysis System, a centralized analytical interface to the Network Forensics Platform; and Mandiant Intelligent Response that enables remote investigation of endpoints and allows security teams to collect targeted forensic data to identify attacker behavior, tools, and techniques. Further, it provides cloud-based subscription services; Security-as-a-Service; and incident response, compromise assessments, and related consulting, as well as training and professional, and customer support and maintenance services. Company description from FinViz.com.

FireEye is transitioning from a firewall appliance vendor to a cloud service and as always happens when companies go this route, the revenue slows temporarily. They reported Q4 results of a loss of 3 cents. Analysts were expecting a loss of 16 cents. This compares to a loss of 55 cents in the year ago quarter. Revenue of $184.7 missed estimates for $191.1 million.

For the current quarter the company guided to earnings of 26 to 28 cents and revenue of $160-$166 million. Analysts were expecting $177.5 million.

The company said several large deals had been expected to close in Q4 and they were pushed into Q1 versus being "lost."

They added 330 net new customers during the quarter. They closed 34 deals for more than $1 million each, including one of their largest SaaS deals ever. They announced a new product called Helix and more than 250 customers have already signed up to get the product as soon as it is released.

Other onetime negatives from the earnings release was news the CFO was leaving to pursue another opportunity and Chairman David Dewalt resigned from the board.

Earnings May 4th.

Cisco (CSCO) recently acquired AppDynamics and that is expected to start a flurry of acquisitions in the cybersecurity space. The space is fragmented today and highly competitive with each player commanding its own niche. The quickest way to expand your product offerings is to acquire somebody else that is a leader in their niche. FireEye is a leader in intrusion detection and tracking. Their recent fall from grace should make them an attractive target with only a $2 billion market cap.

Regardless of whether an acquisition cycle has begun, the stock decline to support is a buying opportunity.

Position 2/13/17:

Long FEYE shares @ $11.75, see portfolio graphic for stop loss.

No options recommended because of price.




BEARISH Play Updates

GNC - GNC Holdings - Company Profile

Comments:

The company has earnings on before the open on Thursday. The earnings outlook is negative because of recent marketing changes that will have reduced sales significantly. I recommended we close the position at the open today to avoid a post earnings gap higher.

Original Trade Description: January 28th

GNC Holdings, Inc., together with its subsidiaries, operates as a specialty retailer of health, wellness, and performance products. The company operates through three segments: Retail, Franchise, and Manufacturing/Wholesale. Its products include vitamins, minerals, and herbal supplement products; and sports nutrition products, diet products, and other wellness products. The company sells its products under the GNC proprietary brands, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, Beyond Raw, GNC Puredge, GNC GenetixHD, and Herbal Plus, as well as under third-party brands. It operates a network of approximately 9,000 locations under the GNC brand worldwide. The company sells its products through company-owned retail stores; Websites, including GNC.com and LuckyVitamin.com, as well as Drugstore.com; domestic and international franchise activities; third-party contract manufacturing; and e-commerce and corporate partnerships. Company description from FinViz.com.

On January 19th GNC was cut to a sell by Goldman saying the already reduced earnings estimates were still too optimistic. GNC tried to sell itself last year and the deal fizzled. Then they announced a restructuring of the brand and the store format. As part of the relaunch of GNC they slashed prices across half their product line and discontinued many products entirely. The company also ended its Gold Card loyalty, which had been in effect for more than a decade. Six million members were paying $15 a year in exchange for discounted prices.

The GNC CEO said "the new GNC leaves the old, broken model behind" but we know "it will take time for the changes to take hold and translate into improved financial results." That is an implied earnings warning for the next couple quarters.

Earnings Feb 9th.

With earnings in two weeks this will be a short-term position. After looking at the cart I doubt many investors will want to hold the stock into the earnings event and that should cause a further decline next week.

Updare 1/31/17: The NFL rejected GNC's proposed advertisement. The NFL said they had a standing policy not to promote supplements. The NFL said GNC was on a list of prohibited companies because they promote products banned by the league.

FOX has been getting an average of $5 million per 30 seconds of airtime and that is a fee GNC will no longer have to pay but the ad was supposed to be a kickoff of their new marketing campaign.

Position 1/30/17:

Closed 2/15/17: Short GNC shares @ $8.77, exit $8.20, +.57 gain.



IWM - Russell 2000 ETF - ETF Profile

Comments:

This position will expire on Friday. This was a bet on the historical trend for stocks to decline in January. The Trump rally negated that trend and even though the Russell was the weakest index over the last month, it has not declined enough to make a difference. With the market breaking out, the odds of seeing $134 again are very slim.

Original Trade Description: December 10th

The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.

The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.

I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,150 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.

Dow - January 2016

We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.

I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.

There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.

Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.

The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.

Position 12/12/16 with an IWM trade at $137.00

Long Feb $134 put @ $3.38, see portfolio graphic for stop loss.





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

subscribe now