After three days of 200+ point gains, the Dow is only 71 points below critical resistance at 18,000. The odds are very slim we are going much higher over that level. This is major resistance along with the 2,100 level on the S&P and that index closed at 2,099.
The factors that lifted the market over the last three days are gone. The quarter-end window dressing by equity funds is over. The pension funds rebalanced their bond/equity ratios at the end of June and analysts said that created an influx of $18 billion into equities at month end. Volume was very high again at 8.8 billion shares and without those quarter end buying pressures it could fall off a cliff on Friday and again next week.
The real question today is whether traders/investors will buy or sell heading into the long three day weekend with the potential for terror attacks in the USA. The S&P futures are down -3 tonight but that could be erased in an instant with a positive headline.
Next week begins the summer doldrums between July 4th and Labor Day. Volume will evaporate and with the lingering uncertainty in Europe, weak earnings, rising dollar, falling pound and weak economics, there is little in the way of fundamentals to support the market. I would be careful about holding too many long positions over the next few weeks.
There is nothing to prevent the market from moving higher but little to provide lift.
Current Position Changes
ATHM - Autohome
The short position in ATHM shares was opened at $20.50.
Check the graphic above for any profit stops in green.
We need to always be prepared for a profit exit at resistance.
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.
BULLISH Play Updates
EXAS - Exact Sciences - Company Profile
No specific news. Major 8.5% gain and that was still $1 below the intraday high.
Original Trade Description: June 25th.
Exact Sciences Corporation, a molecular diagnostics company, focuses on developing products for the early detection and prevention of various cancers. The company develops the Cologuard, a non-invasive stool-based DNA screening test for the early detection of colorectal cancer and pre-cancer. Its Cologuard test includes a protein marker to detect blood in the stool, utilizing an antibody-based fecal immunochemical test. The company has a collaboration, license, and purchase agreement with Genzyme Corporation, as well as with MAYO Foundation for Medical Education and Research for developing tests to detect lung, pancreatic, and esophageal cancers.
Shares of EXAS fell from $18.50 to $7 in October after the U.S. Preventative Services Task Force, an independent panel of health care experts, issued preliminary screening test recommendations that did not include Cologuard as a recommended product. The draft listed Cologuard as an "alternative" screening test. Exact Sciences protested strongly about the classification.
On June 14th, the same task force issued its final cancer screening recommendations and clarified the inclusion of Cologuard. The information was accidentally leaked and the panel had to release the report earlier than the planned June 21st date. With the final recommendation for Cologuard the company has begun advertising strongly and sales should increase. Cologuard is now an A-rated preventative service under the Affordable Care Act.
Earnings July 26th.
Shares have broken out of their 9-month consolidation base and could close the gap back to $18 in the coming weeks.
Long EXAS shares @ $11.50, stop loss $9.45.
No options recommended.
HPE - Hewlett Packard Enterprise - Company Profile
Oracle was ordered by a California jury to pay HPE $3 billion in damages in a case over HP Itanium servers. Oracle had a contract to support the software on the Itanium servers and it told HP it was dropping support in 2011. The jury found the contract to be valid and awarded the damages. Oracle said it would appeal.
Original Trade Description: June 2nd.
Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.
HPE reported adjusted Q1 earnings of 42 cents and in line with estimates. Revenue of $12.711 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.419 billion.
For the current quarter, HPE guided to earnings of $1.10 to $1.14. For the full year, they expect $1.85-$1.95 and that was more than analysts expected at $1.89. They increased free cash flow +101% to $1.1 billion for the quarter.
The good news came from their plans for the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. They are receiving $2 billion from the Tsinghua transaction which closed in early May and the money will be used for share repurchases. In 2016, HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.
This means over the next couple of months we should see significant share activity as funds position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016. $2.5 billion of that is in an "accelerated" buyback program. The board authorized another $3 billion in buybacks to bring the current authorization to $4.8 billion.
They also announced a tax-free spinoff of their services division to Computer Sciences Corporation (CSC), which is expected to close in March 2017. This will produce another $8.5 billion in value to HPE shareholders in the form of $4.5 billion in equity in the combined company and $1.5 billion in a cash dividend and the removal of $2.5 billion in debt from HPE.
Earnings Aug 23rd.
HPE shares have shaken off their May weakness and closed today at a historic high. I am recommending we buy this stock in anticipation of additional fund investors moving in ahead of future dividends, buybacks and the spinoff.
Position 6/28/16: Long HPE shares @ $17.50, see portfolio graphic for stop loss.
Position 6/3/16: Long August $20 call @ 40 cents. No stop loss.
Previously closed 6/24/16: Long HPE shares @ $18.40, exit $18.61, +.21 gain
SCTY - Solar City - Company Profile
SCTY gave back 36 cents and then declined slightly after the close on news Tesla was under investigation in a fatal accident while a Model S was on autopilot. Tesla shares fell $6 after the close. Musk said it was the first fatality in a Model S while on autopilot after 130 million miles of operation.
Original Trade Description: June 27th.
SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; mypower loan agreements; grid control/energy storage systems; zep solar mounting systems; and proprietary software, including SolarBid sales management platform, SolarWorks customer management software, PowerGuide proactive monitoring solutions, and Energy Designer, a proprietary software application used by field engineering auditors to collect site-specific design details on a tablet computer. It also sells electricity generated by solar energy systems to customers.
SolarCity has had a troubled past with the rise and fall of solar based on the whims of governments and the on again-off again investment credits and tax rebates. SolarCity is still humming right along and building up their base of installed systems into one giant annuity that will pay for decades to come. The problem is that it takes cash to build and install those systems that they sell to customers. Cash up front for a long and profitable payout.
SolarCity was co-founded by Elon Musk. He also started Paypal, SpaceX and Tesla. Last week he (Tesla) offered to buy SolarCity, where he is the largest stockholder and Chairman of the board, for $26-$28. Tesla shares cratered. SolarCity shares spiked for one day then fell back again. Numerous analysts were against the plan. Now shares are rising again.
Elon Musk believes he can marry his battery business with the solar business and have a winning combination. He already makes battery backups for your home but they run off regular utility company power. With SolarCity he can power those battery systems with solar and it makes a lot more sense for customers.
Shares have established a base at $21 and with the $26-$28 offer under consideration along with "other strategic alternatives" it would appear there is limited downside.
Earnings August 8th.
Long SCTY shares @ $23.40, see portfolio graphic for stop loss.
BEARISH Play Updates
ATHM - AutoHome - Company Profile
No specific news. Shares closed at a new low and the trend has not changed.
Original Trade Description: June 29th.
Autohome Inc. operates as an online destination for automobile consumers in the People's Republic of China. The company, through its Websites, autohome.com.cn and che168.com, delivers comprehensive, independent, and interactive content to automobile buyers and owners, including professionally produced content that comprises automobile-related articles and reviews, pricing trends in various markets, and photos and video clips; automobile library, which includes a range of specifications covering performance levels, dimensions, powertrains, vehicle bodies, interiors, safety, entertainment systems, and other unique features, as well as manufacturers suggested retail prices; new and used automobile listings, and promotional information; and user forums and user generated content. Autohome Inc. also offers advertising services for automakers and dealers; dealer subscription services that allow dealers to market their inventory and services through its Websites; used automobile listings services, which allow used automobile dealers and individuals to market their automobiles for sale on its Websites.
In April, Telstra Corp, which owns 55% of Autohome, said it was going to sell a 48% stake to Ping An Insurance Group for $1.6 billion. CEO James Qin is now leading a revolt against his previous benefactor that helped launch the company and get it listed on the NYSE. There is a suit and Qin is launching a rival bid. When the company needed startup capital Telstra was the investor. Qin and other minority shareholders representing 11% of the outstanding shares have lodged a petition with the Grand Court of the Cayman Islands where the company is registered. The suit claims Telstra's representatives on the board of Autohome allegedly acted in bad faith and breached the rules. Qin is trying to form a coalition with multiple private equity firms to launch a competing bid. Qin made a firm offer of $31 a share in April including a bank letter of credit to finance the deal and it was rejected. The next day Telstra said it was selling its shares for $29.55 to Ping An. Qin's group countered at $31.50 that caused a peak in Autohome shares at $32.15 in expectations for a bidding war that never appeared.
The board is deeply divided and Telstra will not provide any supporting documents for the "purported" sale to Ping An. Telstra has 5 directors on the board and there are 5 independent directors. On May 13th Telstra convened a board meeting to approve the deal. The 5 independent board members refused to show up so there was no majority. The 5 Telstra directors appointed a 6th director on the spot, completely against the corporate rules, and the 6 directors approved the deal. The group aligned with Qin filed the petition with the court to put a hold on any acquisition until the proper documents are submitted and the full board can review the documents vote on the matter. Telstra still refuses to provide any documentation and the fight continues.
Meanwhile shares are crashing. On Monday, the company reported the CEO Qin and the CFO had been replaced and five new directors had been appointed. The company stated the sale of 47.4% of the outstanding shares to Ping An had been completed on June 22nd. It appears the hostile takeover has been completed but the court fight is ongoing.
On Wednesday, shares closed at a historic low at $20.54. This company appears broken and normal shareholders are fleeing to the exits. There was no bounce on either is the last two days when the markets were up big.
Zacks changed their rating to Strong Sell. Credit Suisse changed their rating to Sell.
Earnings August 3rd.
Short ATHM shares @ $20.50, initial stop loss $22.15.
QURE - UniQure - Company Profile
No specific news. QURE looks like it is trying to form a bottom at $7. Maintain the current stop loss. If the market weakens that support may evaporate.
Original Trade Description: June 20th.
UniQure is a biopharmaceutical company, engages in the discovery, development, and commercialization of gene therapies in the Netherlands. The company offers Glybera, a gene therapy product for the treatment of patients with lipoprotein lipase deficiency. They have multiple drugs in development for a variety of illnesses.
In their recent earnings they reported a loss of 92 cents that missed estimates for a loss of 82 cents. Revenue of $4.3 million did beat estimates for $2.9 million. This is a very small company and since the ASCO conference their shares have been in crash mode.
Losses appear to be accelerating and they lost $22.69 million in Q1. Their market cap is only $204 million.
There was no gap open today despite the major gap higher in the market. They closed at a historic low at $8.20. They have only been public for 2 years and from the chart today it looks like they are going significantly lower. Normally when a stock hits the prior historic low there is a rebound or at least a pause. Neither occurred and that suggests it will go lower.
Position 6/21/16 with a QURE trade at $8.00
Short QURE shares @ $8, initial stop loss $9.25.
No options recommended.
VXX - Ipath VIX Short Term Futues ETN - ETN Profile
The bullish market and the futures roll over are taking their toll. I removed the secondary entry recommendations. If it does spike back up I will reconsider them later. We are probably going to be in this position for a long time as it declines to new lows under $13 this summer.
Original Trade Description: June 22nd.
The VXX is a ETF type product that is based on the Volatility Index futures. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.
We have played the VXX before with big gains. The object is to short it on a bounce and then hold the position until the volatility fades again.
On the big declines last week the VXX spiked to $17. Back in January and February is spiked to $30 on the market corrections. While I do not expect that to happen from this lower level, I do expect some volatility to appear regardless of the vote outcome.
I am recommending we enter a short position with a return to $17. If it continues higher I would add to that short at $20 and again at $25 and then we wait for the post event decline in the volatility and the return to $13 or lower.
Because this is a flawed product it will always go lower. It has already had several 1:4 reverse splits to keep it from being delisted back in November 2010, October 2012 and November 2013. If it falls under $10, they will do another reverse split and start the decline all over again.
6/24/15: With a VXX trade at $17, now short VXX @ $17, no stop loss.
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