Option Investor

Daily Newsletter, Monday, 3/28/2016

Table of Contents

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

Market Wrap

Struggling For Gains

by Thomas Hughes

Click here to email Thomas Hughes

The market struggled for gains today as we wait on a round of monthly data, comments from FOMC members and the end of the 1st Quarter 2016. Market volumes were very light today, domestically and abroad, as many investors are still on Easter holiday. On tap this week, two scheduled appearances by FOMC members, Janet Yellen tomorrow and Dudley on Thursday, and lots of economic data. The big event of the week will likely be the NFP report on Friday although there are several releases with market moving potential.

International markets were fairly quiet. Asian indices ended their day mixed, the Nikkei was able to make gains on a weaker yen while indices in China closed with small losses. The major mover of those markets today was uncertainty towards the FOMC; the official statement said rate hikes would be slow in coming, Fed-speak last week seemed to be contrary to that position. Most European indices were closed today due to the Easter holiday.

Market Statistics

Futures trading was quiet this morning but tended to point to a higher opening for the US markets. There was little news out of the international sector and very little in the way of earnings but there was a bit of economic data, namely personal income and spending, to help support the trade. Going into the opening bell the S&P 500 was indicated to open with a gain of about 0.2% and this is what happened. There was a brief surge in the opening minutes that took the SPX up by about 5 points but the bears stepped in almost immediately to cap the move and send the index back to break even. The rest of the day saw the indices hover around break even levels, up a little down a little, into the close of trading.

Economic Calendar

The Economy

There was some economic data today, much more than we usually get on a Monday, but none was strong enough to move the market in one direction or another. The first release was Personal Income and Spending at 8:30AM; personal income rose by 0.2% while spending increased by 0.1%, both as expected. What was not expected was the downward revisions to January figures which shaved -0.4% off of the PCE.

Pending Homes sales was released at 10AM and came in much better than expected. Pending sales increased by 3.5% in February although January figures were revised down to -1.5%. The February figures are the highest level of signed contracts to buy homes in 7 months and the 18th month of positive year over year gains.

Moody's Survey of Business Confidence gained 0.2% this week to reach 30.7%. Business confidence seems to have stabilized since hitting bottom earlier this year but remains depressed compared to the highs hit last summer. In his commentary Mr. Zandi says that although the index is down from the high confidence is high by historic standards and indicates an economy expanding above potential. He also says that responses have firmed up a bit and that responses to all questions have seen improvement.

According to FactSet 10 S&P 500 companies have reported 1st quarter 2016 results so far. Of those 9 have beaten earnings estimates while only 5 have beaten revenue estimates. The blended rate for Q1 earnings is now -8.7%, down a few tenths from last week, due to downward revisions in all 10 sectors. Energy remains the weak spot and is estimated to post negative earnings growth near 99%.

Estimates for the full year continue to decline as well although there is some sign that 3rd and 4th quarter estimates may be bottoming. 2nd quarter estimates fell by -0.2% to -2.4%, 3rd quarter estimates fell by only -0.1% to 3.9% and 4th quarter estimates held steady at 9.0% for the third week running. While not an overly bullish sign this may be indicative the end of the earnings recession we've all been waiting for could be at hand.

Slightly more bullish is projections for 2017 earnings growth, up 0.1% to 13.4% and the third week of increase. We've still got at least one more quarter of weak earnings growth to contend with but it is looking more and more like the 2nd quarter will be the last quarter of negative growth, and could even be the first quarter of positive growth.

Due out later this week is Consumer Confidence, ADP employment, Challenger Job Cuts, weekly jobless claims, PMI, Auto Sales, NFP, unemployment, Hourly Earnings, ISM and Construction Spending. Job creation is expected to remain steady to strong this month with NFP in the range of 200K to 225K and unemployment holding pat at 4.9%.

The Oil Index

Oil prices fell -1% in today's session but held above $39. Supply and demand fundamentals are still decidedly bearish there is support from a weaker dollar and hopes for production cuts and/or supply/demand rebalancing. Also impacting today's trade were a couple of warnings from banks such as Barclay's and Maquarie which warned that prices could return to the mid $30's or lower. The upcoming meeting between OPEC and non-OPEC members to discuss production caps could lend support to the market but this may be a buy the rumor, sell the news scenario unless an actual change to the fundamental outlook is achieved.

The Oil Index fell about -0.85% on the fall in oil but remains above target support levels. Today's action took the index down to the 1065 level with weakening indicators. Both MACD and stochastic have turned bearish and point to at least a testing of support along the 1050 level if not a move lower. A break below 1050 and the short term moving average could take the index to next support target near 1020 or lower, to the most recent up trend line near 950.

The Gold Index

Gold prices hit a one month low this morning on the heels of last week's confusing Fed-Speak, and bounced from that low. Last week, multiple members of the FOMC, many of whom are non-voting members I might add, made the case for more aggressive rate hiking, contrary to the “official” FOMC policy and sent the dollar shooting higher. Today's data did not support that view, income and spending increases were tepid and offset by downward revisions to previous data, and helped to depress the dollar and support gold prices. Today's trading saw spot gold hover around $1218 and above the $1200 support level.

The Gold Miners ETF GDX fell nearly -2% with weakening indicators but remains above $19 and the short term moving average. The ETF appears to be consolidating in the range between $19 and $21while waiting on cues for the future. This week's data could be a big mover of gold, particularly if it does not lead the market to anticipate aggressive rate hiking this year. A break below $19 would be bearish and could take it down to the $17 level, first target for resistance is near $21.

In The News, Story Stocks and Earnings

The Dollar Index fell today, tepid data seemed to trump rate-hike expectations inspired by last week's Fed-Speak. Today' action saw the index fall about -0.3% from resistance in a move that appears to be trend following. The near to short term trend is down, driven by a less-dovish than expected ECB and a more-dovish than expected FOMC, with a down side target near $94.50. Later this week there will be at least 2 speeches given by Fed members and a lot of data. Any upward move driven on Fed Speak will likely be short lived unless the data supports the view of aggressive rate hiking.

Egg producer Cal-Maine reported earnings this morning, beating earnings but falling short on revenue. Earnings rose by 26% on higher egg prices in the wake of last years avian flu epidemic. The epidemic devastated producer flocks, flocks that have not yet recovered. The revenue shortfall was due to egg prices coming down from a peak set last fall. The company has not yet been impacted by the epidemic, centered in the upper midwestern region, except in increased costs of monitoring for the disease. Within the report specialty eggs, cage free etc, made up more than 25% of volume and 31% of revenue. Shares of the stock responded well to the news, jumping nearly 10%, but are still trading near the middle of a 9 month trading range.

The battle for the future of Yahoo! took on a new twist this weekend as Microsoft added their 2 cents to the conversation. The internet and PC giant has said that it will help back any company interested in making a deal for Yahoo although it does not want to purchase the ailing search engine itself. The move is thought to be a bid to ensure that whomever does purchase Yahoo will remain favorable to Microsoft once the deal is done. Shares of MSFT fell by about -1% while shares of Yahoo gained about 1%.

There will be some changes made to the S&P 500 after the closing bell tomorrow. Hologic, maker of medical devices, will move up from the Mid-Cap 400 to the S&P 500 replacing Pepco. Pepco was bought out by Exelon. Pepco is, or was, an energy holding company so this replacement will alter diversification in the S&P 500. Also being added to the SPX is Centene, a company which provides managed care for Medicaid recipients, replacing Ensco. Ensco, another energy company, will be moved down to the Mid Cap 400. Expect to see some buying in both Hologic and Centene tomorrow and the following day as managers and ETF's move to make adjustments in their portfolios.

The Indices

The market was mostly flat in today's low volume thin trading session, with one exception; the Dow Jones Transportation Index. The transports fell by nearly a full percent, -0.92%, and created the largest candle in 5 trading sessions. The index appears to be falling back to support near 7,700 and this level could be easily reached. The indicators are mixed, momentum is on the rise but rolling over while stochastic is on the rise but making a bearish crossover, so the strength of the pull back is yet to be seen. A break below 7,700 would be bearish in the nearer term and could lead to a test of the 7,500 level.

Today's other declining index was the NASDAQ Composite which lost only -0.07%. The tech heavy index created a small bodied candle with weakening indicators that point to a test of the 4,750 level. The indicator have been showing weakness all month in the form of divergences that may be setting the index up for correction. A move to 4,750 may create a bounce, if not and support is broken next target for support is near the short term moving average at 4,690. Both indicators are rolling over, not necessarily a bearish signal during a rally but definitely one that bears watching, as well as tight stops.

Two indices were able to post gains today, however small, led by the S&P 500. The broad market eeked out a gain of 0.09%, creating a very small spinning top type doji candle. Today's candle is indicative of a directionless market, today caused by low volumes and anticipation of a heavy weak of data. The indicators are bullish but appear to be rolling over into bearishness, not surprising given the 13.5% gain the index has made over the past month, and could lead to a test of support. First target for support is near 2,020 with next target near 2,000 and the short term moving average.

The Dow Jones Industrial Average made the smallest gain in today's session, about 0.06%, and also created a small spinning top doji candle. Today's action held the 17,500 level but the indicators are weakening and point to a possible pull back to stronger support levels, both MACD and stochastic are rolling over into what could become a bearish signal. First target for support, should 17,500 fail, is near 17,200 with a second target near 17,000 and the short term moving average.

Trading was quiet today due to light holiday volumes but even without that I think market action would've been directionless, what with the end of the quarter in two days and the massive round of data scheduled to come out this week. Regardless, it looks like the market may be topping out, or has at least reached a point of consolidation, after the rally we've seen over the last month. The indices have made some substantial gains in that time and profit taking is surely on the minds of fund managers, and anybody else active in the market.

Additionally, earnings outlook may also be setting us up for another pull back to stronger support levels. Nearer term outlook, Q1, is for another decline in earnings growth, a decline that I just don't see sparking a rally. The flip side is that once we get past this cycle the earnings outlook picture begins to brighten and could easily bring the bulls back to market.

I remain bullish for the long term, cautious in the near, and waiting for earnings growth to return to the market.

Until then, remember the trend!

Thomas Hughes

New Option Plays

New Lows Follow New Lows

by Jim Brown

Click here to email Jim Brown

Editors Note:

Stocks making new lows tend to continue to make new lows despite company's doing everything in their power to reverse the trend. Sometimes nothing they can do will induce investors to come back into the shares. In the current environment where biotech stocks are expected to be under pressure until after the election, these companies are carrying an extra weight in the form of uncertainty.


No New Bullish Plays


ENDP - Endo Intl Plc -
Company Description

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $96 last April to $28 today. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also lowered guidance at the Barclay's Healthcare Conference on March 15th. The company lowered guidance to revenue of $928-$972 million for Q1 and analysts were expecting $1.03 billion. Earnings guidance was $1.02 to $1.08 and analysts were expecting $1.19.

Endo is also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector.

Earnings are May 9th.

Shares have flat lined at the $28.50 level for more than a week and I believe we are about to see another leg lower. Today was the lowest close since January 2013.

Buy May $25 put, currently $2.05, initial stop loss $32.50.

In Play Updates and Reviews

Never Short a Dull Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

Today was a very dull market after a week of dull markets. We are still waiting on a catalyst to spark a move. Unfortunately the only catalysts on the horizon could be negative.

Today was very slow with the major indexes seldom straying from the flat line on very low volume. Some traders were still out for the Easter holiday and you could really tell. The normal end of quarter window dressing was noticeably absent and the intraday range on the Dow was only 90 points. Only one Dow stock moved more than $1 in either direction and that was 3M with a gain of $1.82.

The stocks in the portfolio, with the exception of Orbital ATK were ridiculously flat with fractional gains and/or losses. I feel like we are watching a fuse burn down ahead of some major event. Everyone has taken cover and we are just waiting for the bang.

I considered closing several of the positions that have gone perfectly sideways for the last week but we really cannot blame the stocks because the market has traded sideways for the last week with the exception of the drop on Wednesday.

I checked all the stop losses again and everything is where it should be while we wait. The fortunate thing about these dormant periods is that they normally end with a bang. Thus the phrase, "never short a dull market." The unfortunate reality is that sometimes traders get tired of waiting for the bang and decide there is a market problem and run to the exits rather than wait.

I am hoping there is some window dressing on Tuesday but the two payroll reports could be clouding the outlook. Janet Yellen speaks at 11:30 on Tuesday and that could be our catalyst if she rebuts her fellow Fed heads and again suggests rate hikes will be gradual and farther out in the year.

The Atlanta Fed real time GDPNow forecast for Q1 took another dive this morning to only +0.6% growth, down from +2.3% just two weeks ago and down nearly -1% since march 24th. This should be VERY Fed negative and should convince Yellen to try and assure the markets there will be no rate hike in April.

The S&P refuses to rebound from the 2,020 dip on Friday. There was no follow through today and it is looking more as if the next move could be lower if Yellen does not support the market.

Current Portfolio

Current Position Changes

ADSK - Autodesk

The long call position remains unopened until ADSK trades at the new trigger of $58.05.

SWHC - Smith & Wesson

The long call position was entered at the open at $27.15.

Profit Targets

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

ADSK - Autodesk -
Company Description


No material move. Stock was named one of five with the best upside potential by Credit Suisse.

The long call position remains unopened until ADSK trades at $58.05.

Original Trade Description: March 22nd.

Autodesk operates as a design software and services company worldwide. Their software is used to design buildings, design equipment, machines, products, etc. The software is licensed directly and through a network of resellers. Autodesk goes beyond 3D imaging and allows 3D printing of the design using the Moldflow process in the software.

Autodesk is the premier software of this type in the market today. There are competitors but Autodesk is the largest by far. Competitors are Adobe, Ansys Inc and Dassault Systems. Mattel announced in February it was introducing 3D toy printing at home with the "Thingmaker" in cooperation with Autodesk.

In February the company said it was going to lay off 10% of its workforce or about 925 jobs as it transitioned to the cloud.

Shares collapsed with the market in January but began to rebound in February after the cloud announcement. The company said revenue will increase long term because the cloud model is subscription based. In Q4 they added 190,000 subscribers to the cloud product.

They reported adjusted Q4 earnings of 21 cents compared to estimates for 10 cents. Revenue of $648 million beat estimates for $636 million. They guided for a loss of 12-17 cents for Q1 on revenue of $500-$520 million because of their restructuring process. They are taking an $85 million charge for the layoffs. As part of the movement to the cloud they are going to end sales of their software suite that was previously sold direct by Autodesk and by resellers. That willdepress revenue in the short term but increase it significantly in the long term.

By the end of 2017 they are going to terminate all the existing "perpetual licenses" and force current users into the cloud model. Apparently "perpetual" means different things to different people.

Autodesk had been under fire from two activist shareholders and they resolved that last week when they added three directors to the board. Sachem Head and Eminence Capital agreed to certain standstill and voting provisions to get the board seats. Joining the board are Scott Ferguson from Sachem, Rick Hill, chairman at Tessera Technologies and Jeff Clark, CEO at Kodak.

Shares rallied on the news of the new board members are appear ready to break over current resistance at $58 to retest the December highs at $65.

With a ADSK trade at $58.05

Buy May $60 call, currently $2.85, initial stop loss $54.25.

AKAM - Akamai Technologies - Company Description


Still clinging to $55. No news.

Original Trade Description: February 26th.

Akamai Technologies provides cloud services for delivering, optimizing and securing online content for business applications on the internet. They are best known for their download delivery solutions for games, videos and audio files.

One of the things Akamai is famous for is archiving web content in centralized data centers geographically located to reduce the time and bandwidth needed to view those files. If you have a website that is visited by millions of viewers, Akamai can continuously monitor that website for changes and then replicate those changes in multiple locations so that viewers near those locations experience fast load times. For instance, a company in Kansas may have a high volume website viewed by people around the world. Akamai can replicate that website in cloud data centers in Los Angeles, New York, Miami, Dallas, London, etc, so a viewer close to one of those locations can get an immediate response time rather than having to pull the content from Kansas where bandwidth and server limitations could slow the response. If you have a million viewers a day all hitting the Kansas server from all over the world the lag time is going to be terrible.

Akamai also offers security solutions for web-hosted content thereby reducing infrastructure costs and increasing productivity.

Akamai reported Q4 earnings of 72 cents that easily beat estimates for 62 cents. Revenue of $579 million also beat estimates for $567 million. They announced a $1 billion buyback of 12.5% of their outstanding shares. CEO Thom Leighton said he was purchasing $10 million personally. The company guided to Q1 earnings of 61-64 cents and analysts were expecting 62 cents. Revenue is expected to rise +8%.

Performance and security revenues rose +16.4% to $286 million as demand for the cloud security products increased. Service and support revenues rose +17.8% to $46 million. Cash flow from operations was $218 million or 38% of revenue. Cash at the end of the quarter was $1.5 billion.

Akamai shares rallied 17% after the earnings on February 10th and reversed a four-month decline. Share barely consolidated after the spike and are continuing higher. Shares inched over resistance at $54.85 on Friday and could be poised to make a new leg higher.

Earnings are April 26th.

I am recommending an entry if AKAM traded at $55.75 and just over the Friday high of $55.55. Shares appear to be consolidating that post earnings run and the intraday ranges have been shrinking, which suggests the buyers are gaining ground.

Position 3/2/16 after an AKAM trade at $55.75

Long April $57.50 call @ $1.63, See portfolio graphic for stop loss.

AOS - AO Smith - Company Description


No specific news.

Target $77.65 for an exit.

Original Trade Description: February 18th.

A.O. Smith manufacturers water heaters and boilers for distribution around the world. They also sell water treatment systems that are in high demand in emerging market economies.

They reported earnings last week of 90 cents that beat estimates for 85 cents. Revenue rose +2% to $639.4 million but missed estimates because of weakness in the housing sector in the USA. North American sales declined -3.9% to $413.7 million.

However, operating earnings rose +37.2% to $92.2 million because of higher pricing, higher overall demand and lower steel costs. Overall segment revenue of $1.7 billion rose +5%. This was due to higher commercial demand for boilers.

Sales in the rest of the world rose +14% to $232 million. That was powered by a 15% increase inwater heater demand, water treatment and air purification products in China. That is definitely a country that needs water treatment and air purification.

Very few companies are successful in selling to China but AO Smith is one of them.

The company bought back 329,000 shares in Q4 leaving 2.59 million to buy under the current buyback program. The company had $324 million in cash at the end of the quarter.

They guided for 2016 to earnings of $3.40-$3.55, which would be a 10% growth rate in earnings. They kept the 15% growth rate target for China in 2016.

Earnings are April 29th.

The stock bottomed on the January 19th market crash and had been moving steadily higher. The market took it lower again to retest that bottom on February 9th. Resistance is currently $70 followed by $79 from the December highs. I am recommending we enter a long call position with a trade at $70.45.

Position 2/23/16 with an AOS trade at $70.45

Long April $75 call @ $1.88. See portfolio graphic for stop loss.

CRM - SalesForce.com - Company Description


No specific news.

Original Trade Description: March 14th.

Salesforce.com provides enterprise cloud computing solutions, with a focus on customer relationship management to various businesses and industries worldwide. They provide an entire menu of applications tailored to various industries with an emphasis on sales force automation and customer resource management.

The last six analysts ratings changes have been upgrades with four new analysts initiating coverage with a buy. Salesforce is growing quickly with revenues growing 24% in 2015 to $6.67 billion. Subscription and support revenues rose to $6.21 billion and accounted for 93% of all revenue. These fees continue from quarter to quarter and should continue growing.

Morgan Stanley said customer demand for applications software was expected to remain quite strong and Salesforce.com was positioned to make the most of this development.

The Salesforce.com CEO said sales efforts to enterprise customers were becoming more time consuming because of the greater complexity of the large enterprises but once sold they became very profitable long term assets. Once a large enterprise invests in Salesforce.com and trains its thousands of employees there is a huge inertia factor that prevents them from leaving. That subscription revenue becomes repeatable for a long time.

These longer sales and implementation cycle means that Salesforce.com has a lot of delayed revenue that it will recognize in future quarters in addition to the current revenue for those quarters. This is the equivalent of a snowball rolling down hill. Future revenue is growing even though it is not readily apparent. In Q4, the company reported deferred revenue of $4.29 billion and its unbilled deferred revenue was $7.1 billion.

For Q4 Salesforce reported earnings of 19 cents that matched estimates but revenue of $1.81 billion beat estimates for $1.79 billion. The company guided higher for 2016 and shares rose 8% on the news.

The next earnings are May 18th.

Shares moved sideways from the earnings spike for three weeks and are just now starting to move higher. Given a positive market, I think they will retest the highs in the weeks ahead.

I am recommending the May $75.00 call even though it is a little farther away from the money and slightly more expensive than the April $72.50 call. With only 32 days left in the April cycle we are reaching the point where premium decay will accelerate. If we hit a soft patch in the market the April premiums may not have time to recover. The May premium will cover the earnings on May 18th so when we exit before earnings there will still be some expectation built into the premium.

Position 3/14/16

Long May $75 call @ $2.75. See portfolio graphic for stop loss.

DLPH - Delphi Automotive - Company Description


No specific news.

Original Trade Description: March 5th.

Delphi manufacturers vehicles components and provides electrical and electronic, powertrain and safety technology solutions to the automotive and commercial vehicle markets worldwide. Whether you are buying a new car or repairing an old one the odds are very good you are using Delphi parts.

Vehicle sales in February were 17.54 million units on an annualized basis. As we move farther into spring and summer those numbers are going to rise sharply. Cheap gas means consumers are going to buy more new cars and upgrade their rides to the SUV category when possible.

Delphi reported earnings of $1.39 and beat consensus estimates for $1.37. Revenue of $3.88 billion rose +11% and also beat estimates for $3.79 billion. The company guided for full year earnings of $5.80-$6.10 and revenue of $16.6 to $17.0 billion.

Shares rallied after earnings and broke through resistance at $68 last week to close at $71.53. The next significant resistance is $77.25. Earnings are April 28th.

I am recommending we buy the May $75 calls at $2.40 so there will still be some earnings expectation premium in them when we exit before earnings. April options expire on the 15th so premiums will deflate significantly before we ever get to the earnings event. I am recommending an entry point at $72.50 and just over Friday's high. If the market does take profits early in the week we can lower the strike price and entry target depending on what happens to Delphi shares.

Position 3/17/16 with a DLPH trade at $72.50

Long May $75 call @ $2.50. See portfolio graphic for stop loss.

N - NetSuite - Company Description


No specific news.

Target $68.85 for an exit.

Original Trade Description: February 19th.

NetSuite provides cloud based financials/enterprise resource planning (ERP) and omnichannel commerce suites in the U.S. and internationally. They also offer customer relationship management (CRM) and professional services automation (PSA). NetSuite OneWorld manages various companies or legal entities across multiple countries with different currencies, taxation rules and reporting requirements.

NetSuite reported adjusted earnings on January 28th of 5 cents compared to expectations for 4 cents. Revenue of $206.2 million rose +33% and beat estimates for $205 million. They reported several new accounts including Snapchat, American Express Global Business Travel and Lucky Brand to name a few. They added 616 new customers in the quarter and replaced SAP in 17 accounts. Recurring revenues rose +30% and now make up 80% of revenue. Nonrecurring revenue of $41.7 million rose +34%. They ended the quarter with $379 million in cash.

Revenue for 2016 is expected to rise 28-31% with earnings growing 80% to 100% to a range of 40-45 cents.

NetSuite was upgraded by Canaccord Genuity from hold to buy after earnings.

Not many companies are growing annual revenue by 30% and earnings by 100%. This is NOT Tableau software but it was punished for Tableau's weakness.

Earnings are April 21st.

Position 2/22/16 with a trade at $56.50

Long April $60 call @ $2.40, see portfolio graphic for stop loss

NTAP - NetApp - Company Description


No specific news.

Original Trade Description: March 11th.

NetApp provides software, systems and services to manage and store computer data worldwide. They provide data protection and data management for virtualized, shares infrastructures, cloud computing and business applications. Their hot product is a storage area network (SAN) that is all flash memory and not spinning disk drives. This delivers super high performance without the mechanical delays and hardware problems associated with disk drives.

JP Morgan is going to host a moderated "Tech Talk" at 10:AM ET on Tuesday regarding the new SolidFire all-flash array architecture. NetApp acquired SolidFire for $870 million in cash in December in order to increase penetration into the high speed storage market. SolidFire was named the "All-Flash Systems Product of the Year" by Storage Magazine in late February.

NetApp reported Q4 earnings of 70 cents that beat estimates by 2 cents. However, that was down slightly from the year ago quarter. They announced a restructuring program to reduce costs as they focus development on the new SolidFire products. NetApp said they were cutting about 1,500 of their 12,810 employees. They guided for current quarter earnings of 55-66 cents that was below estimates for 72 cents. They expect to take some significant charges on their restructuring effort.

Shares crashed on the earnigns news to $21 but the press has been kind to NetApp and share have rebounded to $27 over the last four weeks. I expect shares to continue to rise to initial resistance at $31 and possibly a new high at $35. The momentum is increasing on the NTAP rebound.

Earnings May 25th.

Position 3/14/16:

Long May $28 call @ 99 cents, no initial stop loss.

OA - Orbital ATK - Company Description


Excellent relative strength again. Nice gain in a weak market. OA Cygnus spaceship successfully docked with the ISS over the weekend.

Original Trade Description: March 19th.

Orbital ATK was created in 2015 by the merger of Orbital Sciences and Alliant Techsystems. The company develops and produces aerospace, defense and aviation related products for the U.S. Government, allied nations, prime contractors and other customers in the U.S. and internationally.

The currently have a contract to convert the four segment Space Shuttle Solid Rocket Booster into a five segment booster for the new Space Launch System that will carry astronauts back into space. They are working on a new rocket booster to replace the boosters the U.S. is currently buying from Russia. They also develop satellites for commercial, scientific and security applications. They also produce the Cygnus spacecraft that delivers cargo to the International Space Station and returns with completed experiments.

The Defense Systems Group provides tactical missiles, defense electronics and medium to large caliber ammunition, fuzed warheads, etc. The Flight Systems Group produces the Pegasus, Minotaur and Antares launch vehicles.

One of their newest projects is the Mission Extension Vehicle or "space tug." When an existing satellite develops a problem and engineers believe it can be repaired, the space tug would go get the satellite and push it towards the International Space Station where it can be repaired and the tug would then push it back into orbit where it belongs. Since these satellites cost from hundreds of millions to billions of dollars each, having the capability to repair them would save a lot of money.

Sometimes the satellite has simply been active for so long that its orbit has degraded. The space tug would attach itself to the satellite and then lift it back into an orbit that would give the old satellite several more years of useful life. Then the tug would disconnect and repeat the process with a different satellite. The tug could also push dead satellites into a descending orbit where they will burn up reentering the atmosphere. That would essentially remove the trash from what is becoming an increasingly crowded orbital space. The first space tug is expected to have enough fuel to keep it active for up to 15 years. They plan to launch 5 by 2020 and with dozens of very expensive communication satellites running low on fuel every year, it will be a very profitable venture. Clients are already entering into discussions on how the tug can help their satellites.

These are just some of the hundreds of thing Orbital ATK has in the works. They were also named a subcontractor on Northrop's new $120 billion B-21 stealth bomber program.

In early March Orbital reported earnings of $1.45 that beat estimates for $1.09. Revenue of $1.137 billion beat estimates for $1.11 billion. Order backlogs were over $13.5 billion. They guided for the full year to earnings of $5.25-$5.50. Shares crashed from $87 to $74 the next day after they filed a statement with the SEC saying the financial statements covering the Q2-Q3 in 2015 were not accurate due to an accounting error that occurred when the two companies merged. It was a non-cash error covering long-term contracts that were accounted for using different accounting methods in each company. There was no material impact from the restatement but shares always crash when an "accounting error" is disclosed.

After two weeks, shares began to rise again one the smoke cleared. Shares hit resistance at $82.60 on Friday and pulled back only slightly. I am recommending we buy a breakout over that resistance with a target at $90.

Earnings May 30th.

Position 3/21/16 with an AO trade at $82.80

Long May $85 call @ $2.80, initial stop loss $76.15.

PKG - Packaging Corporation of America - Company Description


Still holding at resistance. No news.

Target $64.25 for an exit.

Original Trade Description: March 7th.

PKG manufactures and sells containerboard and corrugated packaging products in the US, Europe, Mexico and Canada. They produce shipping boxes, display packaging and protective packaging. They also produce packages for meat, fresh fruit, processed food, beverages and other industrial and consumer products. They also produce papers for the office environment and for specialty printing. They are the fourth largest producer of containerboard and corrugated packaging in the USA.

They reported earnings of $1.08 that beat estimates for $1.03. However, revenue of $1.39 billion missed estimates for $1.42 billion because of the strong dollar. For the full year profit was $4.47 to give them a current PE of 12.

The company announced an additional $200 million stock buyback program at the end of February. They bought back 1.7 million shares in the last 5 months of 2015 and 1.9 million shares YTD in 2016. The company said its "substantial operating cash flow" gave it an "excellent opportunity" to continue buying back its stock and return value to shareholders.

They also announced a 55-cent quarterly dividend payable April 15th to holders on March 15th which equates to a 4% yield.

Next earnings are April 25th.

After reporting earnings the shares rebounded from a sector downgrade on IP in January. PKG has rebounded from $45 to $54 and could continue higher to as much as $65 before hitting significant resistance.

With recent economic reports suggesting the economy is improving slightly this might be the right time to speculate in companies that will profit from a summer recovery.

Shares dipped slightly on Thursday after hitting as 6-week high on Wednesday. This gives us an opportunity to buy a close to the money option relatively cheaply. There is no entry trigger.

Position 3/11/16:

Long April $55 call @ $2.20, no initial stop loss.

QSR - Restaurant Brands Inc - Company Description


No specific news.

Original Trade Description: March 7th.

QSR is the new name for the Burger King and Tim Hortons brands. Both have been serving customers for more than 50 years. QSR currently operates more than 19,000 restaurants in 100 countries with more than $23 billion in sales. The name change and rebranding came a year ago when Burger King bought the Tim Hortons chain.

QSR has been flying under the radar for the last year with all the news about McDonalds all day breakfast and Starbucks expanded menu. They reported earnings of 35 cents that beat estimates of 31 cents.

Same store sales rose +5.6% at Tim Hortons and 5.4% at Burger King.

Burger King sales are accelerating because of a flood of new menu items. They have Chicken Fries, which are fries dipped in fried chicken batter and fried. They have Jalapeno Chicken Fries. On February 23rd they introduced the Whopper Hot Dog. This is a foot long hotdog flame grilled and served with whatever you want on them.

Burger King received tons of free press when the new hot dog was delivered. Some food aficionados are calling the hot dog a "culinary calamity." Others called is a "disgusting disgrace" but customers are waiting in line to order them.

Franchisees claim the demand has been "overwhelming" and while only a couple weeks old they are selling over 100 a day and rising rapidly as more customers realize they are available. Americans eat more than 20 billion hotdogs a year.

Earnings are May 27th.

QSR shares are currently $37.85 and a breakout over resistance at $37.65 is in progress. I am recommending we buy the April $39 call, currently $1.10, and plan on exiting at $41 if that higher level of resistance slows the rally.

Position 3/9/16 with a QSR trade at $38.15

Long April $39 call @ $1.15. See portfolio graphic for stop loss.

SWHC - Smith & Wesson - Company Description


No news after the attack by NYC public advocate last week.

Original Trade Description: March 26th.

Smith & Wesson was founded in 1852 and manufacturers firearms in the U.S. and internationally under many different brands but primarily Smith & Wesson.

Gun sales are booming. Sportsman's Warehouse said gun sales rose +34% in Q4 alone. With every terrorist attack or mass shooting more consumers rush out to buy guns for self defense. With the potential for additional attacks in the U.S. this trend is not going to slow. However, sales are cyclical. They surge after attacks like San Bernardino or after speeches by politicians about gun control. President Obama has been the best gun salesman we have ever had. Every push by the administration to get more laws passed results in millions of new gun sales.

The New York public advocate, Letitia James created an excellent buying opportunity in a stock that normally refuses to go down. James sent a letter to the SEC demanding they investigate Sturm Ruger (RGR) because their guns are used in crimes. She did the same thing to Smith & Wesson back on December 15th. Seriously? Guns are used in crimes? Who does not know that?

James believes investors in these companies could suffer "reputational risk" if people find out they own shares of SWHC or RGR. She also urged Toronto Dominion Bank (TD) to stop financing the firearms manufacturer. She threatened the bank with the possibly loss of "millions of dollars in contracts" from New York City if they continue to finance gun manufacturers. I wonder if she is going to attack auto manufacturers next for people injured in accidents?

In their Q4 earnings where there was a surge in gun sales after San Bernardino, the company reported earnings of 59 cents that beat estimates for 41 cents. Revenue rose +61% to $210.8 million and easily beat estimates for $182.3 million. The company guided significantly higher for the current quarter to revenue of $210-$215 million compared to estimates for $196 million. Earnings are expected to be 51-53 cents. That is a 13.7% increase in revenue and 20% increase in earnings. For the full year they guided to earnings for $1.68-$1.70 and analysts were expecting $1.42. This was also higher than the company's prior forecasts for $1.36-$1.41 from January.

The company said inventories were depleted because of the high demand and they were focused on increasing production rates to keep up with demand.

Earnings are June 16th.

Shares rocketed higher after the earnings in early March and they were already up strongly since December. I hesitated to buy the top since it was making new highs every week. The hatchet job by James has given us a buying opportunity.

I am recommending a June call because it expires after earnings and should retain some expectation premium when we exit before earnings. Buying a May option would be subject to accelerated premium decay.

Position 3/28/16:

Long June $28 call @ $1.95, no initial stop loss.

BEARISH Play Updates (Alpha by Symbol)

SHAK - Shake Shack - Company Description


Opened slightly higher but faded into the close.

Original Trade Description: March 21st.

Shake Shack owns, operates and licenses Shake Shack restaurants in the U.S. and internationally. The currently operate more than 50 domestic stores and 30 international stores. The stock started off with a bang because the majority of their stores in early 2015 were in the Northeast and traders and investors were familiar with the brand. Shares rocketed to a market cap of about $2 billion despite only having about 50 stores at the time.

After topping out at $97 in May of 2015 shares have fallen to just over $30. The bloom is off the rose and the brand has become just another hamburger stand with plenty of competition from stores like Five Guys, an improved McDonalds, an aggressive Burger King, Jack in the Box with its Qdoba Mexican unit, Good Times, Wendy's, etc.

The reported earnings in early March and shares dropped -17% even though they beat earnings and revenue estimates. The problem came from guidance. They forecast same store sales for all of 2016 of 2.5% to 3.0% growth compared to 13.3% growth in 2015. Analysts have lost the love for the SHAK. There are ten analysts that follow the stock. Only one has a buy rating, 7 have hold ratings and 2 have sell ratings. The consensus price target has declined to about $35, which is where it is trading now.

Even worse eight insiders combined to sell more than $30 million in shares last week with officers and directors dumping a lot of their shares. With a PE of -52 the stock is not growing its fundamentals.

Earnings May 12th.

Position 3/22/16 with SHAK trade at $33.80

Long the May $32.50 put @ $2.60, initial stop loss $36.75.

SPY - S&P 500 ETF - ETF Description


No material move. Market is not showing any end of quarter strength.

I am recommending we add to this position when/if the SPY trades up to $207 and again at $210.

Original Trade Description: March 16th.

All good things must come to an end. The market appears poised to rally and produce a new leg higher. However, there is serious resistance starting at 2,075 on the S&P and continuing through 2,100. The odds are very slim that a rally will make it through that resistance ahead of the earnings cycle and assuming earnings for Q1 are as bad as the guidance we have been getting then it is even more likely the market rolls over into the "Sell in May" cycle.

Nobody can accurately pick turning points in the market on a routine basis. There are far too many things that can push and pull the indexes but at critical resistance levels we can normally anticipate at least a little reaction to those levels.

The S&P has strong resistance beginning at 2,078, which equates to $208 on the SPY. That resistance runs from 2,078 to 2,105 or roughly $211 on the SPY. I am proposing we buy puts on the SPY starting at $207 with a stop loss at $213.

The S&P may never hit those levels or it could hit them next week. The close after the Fed decision was 2,027, which means it would still have to rally 50 points to hit our initial entry point. Once it reaches that level it will have rebounded for +268 points and would be extremely overbought when it reached that 2,078 level. That makes it even more likely it will fail when it gets there.

I am going to recommend the June $200 puts. They should cost about $4 when the SPY reaches the $207 level. I want to use June because we may not reach that resistance for a couple weeks, if at all, and once we do hit that level I want to be able to profit from any sell in May decline.

This position could go for several weeks without being triggered and there is a good chance we will not get to play it with numerous analysts calling for a failure at 2,040 and 2,050 along the way. There are analysts calling for a retest of the 1,900 level this summer with some projecting significantly lower levels. If you look hard enough you can probably find someone projecting targets a couple hundred points higher or lower than the ones discussed.

Morgan Stanley's Adam Parker slashed his price target for the S&P from 2,175 to 2,050 yesterday. Most of the major banks are in the 2,050 to 2,100 range so the expectations for a major rally from here are pretty slim.

Position 3/23/16 with SPY trade at $204.11

Long June $200 put @ $4.77, initial stop loss $213.

If the market continues higher add to that position at $207 and again at $210.

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