Option Investor

Daily Newsletter, Saturday, 2/20/2016

Table of Contents

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

Market Wrap

Best Week since November

by Jim Brown

Click here to email Jim Brown

The short squeeze rebound from the prior week's 1,810 low on the S&P powered the Nasdaq to a 4% gain and the best S&P weekly gain since November.

Market Statistics

Friday Statistics

The rebound started off as a major short squeeze after the S&P put in what appeared to be a double bottom at 1,810. The squeeze powered the Dow back to resistance at 16,500 but the S&P fell 20 points short of reaching major resistance at 1,950. Volume on the rebound was decent at an average of just under 9 billion shares per day for the first three days. Volume declined to 7.6 billion shares on average for Thr/Fri suggesting there was no conviction in the weak market.

The biggest plus came from the lack of selling the rally. Since early January, every rally has been sold and so far, the sellers have been absent. There was minimal profit taking over the last two days and each dip was bought. The Dow fell -135 points at the open on Friday but the dip was instantly bought to end with only a -21 point loss thanks to a big drop in Boeing shares.

Positive economics helped lift spirits and slightly hawkish comments from Loretta Mester, president of the Cleveland Federal Reserve, failed to deter the markets on Friday. Mester said the economic fundamentals remain strong and she expects the Fed to continue on its "gradual" pace of rate increases. "Oil prices cannot decline forever, nor can the dollar appreciate forever. At some point both will regain some stability and the impact on inflation will dissipate." She expects the Fed members to have a "lively" discussion about rates at the March meeting but she expects the Fed to continue hiking.

Her comments were offset to some extent by a better than expected reading on the January Consumer Price Index. The headline number came in at zero compared to estimates for a -0.1% decline and a -0.1% decline in December. The headline number was impacted by a -2.8% decline in energy. The core rate, which excludes food and energy, rose +0.3% to 2.2% over January 2015.

However, much of the gain came from an increase in "owner's equivalent rents" with a +0.2% gain. That component is now up +3.7% over the last year. That is one of those components that rarely goes down because rent and housing prices rarely go down. It also has little to do with actual consumer prices.

Apparel prices rose +0.6% and the first gain since August. Footwear prices rose +1%, thank you Nike, and the largest gain since 2006. Jewelry prices rose +3.2% because the price of gold is up +$130 since the beginning of January. On the downside fuel prices declined -4.8% and heating oil fell -6.5%. Energy commodities fell -4.8%. Egg prices fell -1.8% as the impact of the bird flu problem in 2015 faded.

This report could pressure the Fed on further rate hikes because the core inflation at 2.2% year over year is over their 2.0% threshold. However, the headline inflation is up only 1.3% in the same period. This was a good news, bad news report that will send mixed messages to the Fed.

Next week has a lot of reports with the Richmond Fed Manufacturing Survey on Tuesday and GDP on Friday the most watched. The Richmond Fed survey spent three months in contraction from Sept-Nov before recovering slightly while the majority of the other regional reports are still in contraction. If Richmond falls back into contraction for February, it will propagate the recession fears. The Kansas Manufacturing Survey on Thursday has been in contraction since February 2015 and posted a -9 for the last two months and the lowest level since May.

The GDP on Friday is expected to be revised only slightly higher to +0.8% growth, up from +0.7% in the first release.

In a surprising reversal of trend, the Atlanta GDPNow forecast for Q1 GDP rocketed from 1.2% at the end of January to 2.6% growth as of February 17th. That is significantly higher than the consensus estimates at 2.1%. This is the first time in a long time that the GDPNow has been above the consensus.

Stock news was pretty sparse on Friday with the earnings cycle almost over and not much happening in the headlines other than Apple and politics. Apple (AAPL) had a bad couple of days after the FBI served them with a court order demanding that they hack into the iPhone belonging to the San Bernardino shooter Syed Farook. Actually, the phone did not belong to him but to the county. He was a county employee. The city was in agreement with the FBI in the pursuit of the information stored on the phone.

The iPhone has a safeguard system that erases the phone if the wrong password is entered too many times within a certain period. The FBI is demanding that Apple create a workaround that will allow the FBI to access the data without being forced to login using the correct password. Apple refused. CEO Tim Cook published an open letter saying it would violate privacy laws to unlock the phone even though the terrorist is dead and the phones owner requested it. The debate swirled for two days and Apple stock declined. On Friday, the Justice Department filed a motion to compel Apple to unlock the phone. The White House also weighed in saying unlocking the phone was a top priority and called for Apple to do the right thing and cooperate with the FBI.

Some lawmakers were discussing passing a bill that would have certain penalties for a company that failed to comply with a lawful order to unlock a secured device. Those penalties could be as simple as a daily fine or as drastic as a prohibition on further sales or criminal charges against the corporate officers for refusing a lawful order.

The Federal judge issuing the original order gave Apple a fixed length of time to unlock the phone. Apple's official response is due next Friday and a hearing is set for March 22nd. This will not go away.

Deere & Co (DE) reported earnings of 80 cents that beat estimates by 9 cents. However, revenue of $5.53 billion missed estimates. Agricultural revenue declined -12% and construction equipment revenue declined -23%. The company forecast another 10% decline in revenue in 2016, which was more than the prior forecast of -7%. Sales in the current quarter are expected to decline -8%. Shares of Deere fell -4% on the news.

Apparel maker VF Corp (VFC) reported earnings of 95 cents that missed estimates by 6 cents. Revenue declined -5% to $3.41 billion and missed estimates for $3.64 billion. The company said the collapse of the energy sector, warm weather and the strong dollar impacted sales. VF markets North Face, Timberland, Vans, Kipling, Napapijri, Jansport, Reef, Smartwool, Eastpak, Lucy, Eagle Creek, Wrangler and Lee brands. The warm weather caused lower sales in the North Face and Timberland outerwear clothing. The company forecast sales growth for 2016 in the mid single digit range and analysts were expecting 8%. Q1 sales and earnings are expected to be flat and also short of estimates. Shares fell -4.4%.

Nordstrom (JWN) reported earnings of $1.17 that missed estimates by 5 cents. Revenue also missed estimates. Same store sales declined -3%. Inventory levels rose +12%. Heavy promotions drew buyers but at lower prices and smaller margins. Analysts claim this problem exists for all retailers. Shoppers are buying less apparel and more items like Fitbits, iPhones and video games. Shares fell -7% on the news.

Applied Materials (AMAT) reported earnings of 26 cents that beat by a penny. Revenues of $2.26 billion declined -4.3% but still beat estimates for $2.4 billion. The company guided for sales to increase 5-10% in the current quarter with earnings of 30-34 cents. They paid dividends of $115 million and repurchased 35 million shares for $625 million. Shares rallied +7% on the upgraded forecast.

Truecar (TRUE) reported a loss of 6 cents that missed estimates for a loss of 4 cents. Revenue of $63.3 million also missed estimates for $65.43 million. On the plus side a record 750,108 cars were sold through the system in 2015. However, the company guided to revenue in Q1 of $60-$62 million and full year of $270-$275 million. Analysts were expecting $69 million and $309.8 million. Shares crashed -13% on the news.

Best Buy (BBY) shares fell -3% after Goldman Sachs downgraded them from buy to neutral saying weakness in mobile phone/computing sales would offset sales gains in TVs. Goldman took Best Buy off its "Americas Buy" list.

Valeant Pharmaceuticals (VRX) shares fell -10% after Wells Fargo initiated coverage with a sell rating citing "unanswered questions" about accounting methods and strategic direction. The analyst said, "The Valeant board and management have made decisions that may have put Valeant at significant business and reputational risk. While it is often noted that Valeant's management team has created a huge amount of value, our perspective is different: Valeant has lost approximately $60 billion of market value from its peak, yet its current market value is approximately $30 billion."

The analyst said Valeant had been using "lax" accounting and had deferred about $1.8 billion in tax obligations into future periods. He also warned about the use of "cash per share" earnings that seem somewhat arbitrary. He warned they also have about $30 billion in debt with $1.6 billion in interest expenses due in 2016. Valeant is due to report Q4 earnings but has not yet announced a date and that is another red flag. Wells put a target price on the stock of $67 and shares closed at $85. I looked at the put options but the premiums were extreme.

Starbucks (SBUX) coverage was initiated at Nomura with a buy rating and price target of $70. The analyst said the digital initiatives will maintain "robust" same store sales in the Americas. Nomura is very optimistic about the Mobile Order & Pay system. The bank said Starbucks has the highest customer frequency of all large North American retailers thanks to a low average check and expanding menus. Shares have had a rough time since the peak in October. Volatility has risen and even strong earnings have not helped the shares. I personally believe this problem is about over and we will see new highs in 2016.

Yahoo (YHOO) announced on Friday they were exploring "strategic alternatives" and had hired additional bankers to explore options. You would have to live in a cave without TV, Internet and newspapers to not know that Yahoo has been trying to sell all or part of itself for the last year. On February 2nd, CEO Marissa Meyer told the world in the earnings call and in several interviews that they were exploring sale options. By announcing they were adding to the stable of advisors to include JP Morgan, Goldman Sachs and Swaine & Moore it must mean that prior efforts to attract buyers had been unsuccessful. Since Verizon and private equity firm TPG had already expressed interest there must be some challenge that is causing buyer apprehension. With JPM and GS in the picture, I would expect an eventual offer but the price is going to be a problem.

Yahoo owns a $40 billion stake in Alibaba and the IRS will not let them spin it off in a tax-free transaction. That means the Yahoo parent company must be spun out if the assets are going to be separated. Yahoo is preparing to announce its slate of directors for the next shareholder meeting but activist shareholder Starboard Value LP has been considering waging a proxy fight in order to take control of the board. Starboard is frustrated with the pace of the reorganization process. This potential proxy war is probably the only reason Yahoo announced the formation of an independent investment committee to review strategic options. They have to show some progress or Starboard could incite enough shareholders to be successful in the proxy war.

Yahoo is the third most active website with more than 200 million unique visitors each month. Yahoo has value but any buyer will likely shed the dozens of unprofitable entities and efforts that Marissa and her predecessors added in hopes of attracting more users. Verizon wants to combine it with AOL and capture the traffic from those 200 million monthly users.

Yahoo has a market cap today of $28 billion and the Alibaba stake is worth $40 billion. The difference is the implied tax hit from selling the Alibaba portion. If the Yahoo business was split off from the Alibaba asset that would increase value for both parties because the remaining Alibaba portion would essentially become a tracking stock to Alibaba and the potential tax liability would go away.

While I can see on paper that an acquisition of Yahoo corporate separate from the Alibaba asset would increase value, there is the risk that any purchase price for yahoo alone could be very small. I would not be a buyer of Yahoo at this time. There is too much execution risk. It is not inconceivable that Yahoo shares return to $20 depending on who offers to buy them, under what structure and in what time frame.

It has been a rocky three weeks in the oil market. The nearly daily headlines about possible joint production cuts, production limits, surplus production, declining storage, etc, have seen prices vacillate from $35 to $26 and everywhere in between. Analysts are either saying "load up on energy stocks now" or "avoid energy" because the worst is yet to come. They are all right only the time frame is different.

Investors thought there was a deal to limit production last week but that was sabotaged by Saudi Arabia on Thursday. The foreign minister said, "If other producers want to limit or agree to a freeze in terms of additional production that may have an impact on the market but Saudi Arabia is not prepared to cut production" Also, "The oil issue will be determined by supply and demand and by market forces. The kingdom of Saudi Arabia will protect its market share and we have said so." Basically he was saying we will pump what we want, when we want in order to secure and/or increase our market share because that is what they have been saying for several months. Prices began to crash on his comments and closed at $29.86 on Friday.

March crude futures expire on Monday so we could see some additional volatility ahead of that expiration. The February expiration on January 20th saw prices fall to $26.19 and was credited with a lot of the decline in the equity markets at that time. I do not expect the same result on Monday. The April futures closed at $32 on Friday and that discrepancy will provide an artificial boost when they become the front month on Tuesday. That may only be temporary depending on the headlines from the Middle East.

The American Petroleum Institute (API) announced on Friday the U.S. had the most oil deliveries in 8 years in January at 19.4 mbpd and the most gasoline deliveries in 9 years at 8.8 mbpd. Crude inventories reached the highest level in 86 years at 502.7 million barrels. Refiners produced record amounts of gasoline in January leading to the current national average of $1.72 per gallon compared to $2.30 per gallon in February 2015. That amounts to a $224 million dollar a day savings for U.S. drivers. Last week we consumed 9.203 million bpd of gasoline.

The recent drop in oil prices to $26 finally knocked out a significant amount of U.S. production. In the last three weeks alone, we lost -115 active rigs. Production declined from a two month high of 9.235 mbpd to 9.135 mbpd, a decline of -100,000 bpd. With active rigs dropping that fast we can expect to see additional production declines in the weeks ahead. Producers are finally throwing in the towel and going into extreme cash conservation mode. This suggests we will see significantly higher oil prices by the end of 2016, possibly in the mid $40s.

While the worst may not be over for the energy sector, we should be nearing a bottom if it is not already behind us. Unfortunately, as many as 50 additional producers could file bankruptcy in 2016. Forty-two companies filed in 2015. Deloitte said last week that 175 global producers were at risk with 50 at extreme risk. However, companies like Exxon, Chevron, Pioneer Natural Resources and EOG Resources are not in that category. They should be bought today with the understanding there may be additional volatility before the final rebound begins.


I was glad to see the market rebound last week and I hope it continues. The lack of any material selling on Thr/Fri and the dip buying at Friday's open suggested we might have turned the corner. However, the charts are still telling a different story.

The correlation chart between the High Yield ETF and the S&P is still high and bearish. High yield bonds are still in decline and that should continue to weigh on the markets. We know that 15% of high yield debt is owed by the energy sector but that still leaves 85% that is not energy related. Historically the S&P follows the HYG as you can see in the chart below. The correlation today is 78% and rising.

The majority of the rebound was a short squeeze. The McClellan Oscillator (MO) was created in 1969 and measures the acceleration of the market by analyzing the advance/decline statistics. Basically, it calculates over bought and oversold levels. High numbers on the MO represent overbought and low numbers represent oversold. Note that we reached a high of +60 last week and the highest level since October. Also, note that the oversold reading from the prior Thursday only dipped to just below -40 and nowhere near the -90 readings from January.

In plain English, despite the dip to 1,810 on the S&P we were not as oversold as the January drop but we are now more overbought. Also, bear in mind that this measures market acceleration and tends to over compensate for high volume.

It does suggest we are overbought and due for some selling.

Despite the gains from last week, which was the best week for the S&P since November, the percentage of S&P stocks over their 50-day average rose to only 44%. The bulls would see that as a lot of bargains in the market today. The bears would see it as confirmation the rebound was lacking in duration and strength.

The percentage of stocks over their longer-term 200-day average rose to only 31% and still below their September rebound point. This means more stocks are still weak than improving.

Lastly, the Chinese markets came back strong after being closed for a week for the Lunar New Year. However, volume was still weak because a lot of investors were still on vacation. Volume should return to normal this week. The Shanghai Composite rebounded exactly to resistance and stalled. If those traders come back to work and decide to sell that February bounce this is exactly where it should happen. The decline in 2016 may not be over as investors continue to raise cash to take out of China to avoid future devaluation concerns of as much as 20%.

The S&P rallied more than 1% per day for three consecutive days and that has not happened since October 2011. It was a great short squeeze. However, the rally failed at the initial resistance at 1,927 and never made a convincing run for the stronger resistance at 1,950. If the rally were to continue next week that 1,950 level is going to be critical. A failure there would attract an avalanche of sellers while a breakthrough would cause another monster short squeeze. The three levels to watch are 1,950, 1,927 and 1,810 for obvious reasons.

The Dow rebounded exactly to strong resistance at 16,500 where it came to a dead stop. Friday's close was -108 points below that level. The financial stocks were alternately fuel for the rally and anchors for the decline. Boeing added about 80 points in the rally and subtracted about 19 points on Friday. Goldman Sachs added about 90 points in the rally and subtracted about 37 over the last two days.

With the Dow earnings cycle over, we are dependent on headlines and fundamentals to power the index next week. Resistance at 16,500 is going to be tough but a break through should trigger strong short covering. Initial support is back down around the 16,000 level followed by the prior week low at 15,500. A third test of that level would probably fail.

The Nasdaq Composite put in a firmer bottom over four days at 4,215 and that has given it greater relative strength. Traders took profits on Thursday but bought the opening dip on Friday at 4,455 to power the index 17 points higher to the 4,504 close. The FANG stocks with the exception of Netflix all posted gains on Friday.

The biotech stocks powered the gains from the prior week but something strange happened over the last three days. The Biotech Index ($BTK) went into hibernation on Wednesday and Thursday and half the day on Friday. Volume was very low and the intraday range was extremely narrow. This had to be an error somewhere but I could not find it referenced on the web. The biotech ETFs, XBI, IBB all had regular trading patterns.

Like the S&P the Nasdaq made a lower high but the move may not be over. The index made a dead stop at resistance at 4,540 on Wednesday. That becomes the line to watch next week followed by 4,620.

The Russell 2000 small cap index gained 4% last week and rebounded to 1,010 and back over the psychological resistance at 1,000. The light resistance at 1,007 was also broken. The next target is 1,035 followed by 1,050.

The rebound in the Russell was powered by substantial short covering in the small financials and energy stocks. The index gapped open on the 16th and 17th as shorts raced to cover.

The +5 point gain on Friday when the Dow and S&P were negative is a very positive sign. If this outperformance continues, it could provide some positive bullish sentiment. The 1,035 resistance equates to the 1,950 resistance on the S&P. Let's hope both indexes break through those levels this week.

Support would be the dip bottom from Friday at the 1,000 level.

I am confused about what to expect for next week. The charts are still negative until the Dow breaks over 16,500 and the S&P breaks 1,950 but sentiment seems to be changing. Negative economics and hawkish statements from Fed speakers did not deter the markets last week. Dips were bought and there was no material selling on Thr/Fri after a very strong gain.

However, the market has gone from oversold to overbought in a very short period of time. We could easily chop around at these levels for several days or even give back some of the gains without changing the outlook. I mentioned last week that Bank of America said cash levels were giving an "unambiguous buy signal" and apparently, some investors took their advice.

While Bank of America and JP Morgan both lowered their 2016 price targets from 2,200 to 2,000 that still represents a decent gain from the 1,810 lows but it does not represent a decent gain from our current level, which would be only 4%. Whether the increasing bearishness by the major brokers will weigh on the market long term is unknown. They were all exceedingly bullish last year and they were all wrong. They could be just as wrong this year only in the opposite direction.

We simply need to trade what the market gives us. That is very hard to do when the S&P moves in a 100-point range every week. If the S&P breaks through 1,950 that will be the all clear signal for the bulls and produce some major short covering. That should be our line in the sand. Until then I would recommend smaller and fewer positions. There is always another day to trade as long as you have money to invest.

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Random Thoughts

Your pockets may get a lot fuller if some lawmakers have their way. Former Treasury Secretary Larry Summers wrote in the Washington Post last week that the U.S. should consider eliminating the $100 bill. He would like a global agreement to stop issuing notes worth more than $50.

Summers based his article on other studies and analysis suggesting it would make it harder for the bad guys if cash took up a lot more space. This would make it harder for tax evaders that pay cash for everything, criminals, terrorists and those engaged in bribery. In Europe, they are considering dropping the 500-euro note for those reasons. A million euros in 500 euro notes weighs 2.2 pounds. A million dollars in $20 bills weighs 50 pounds. A million in U.S. one ounce gold eagle coins weighs 52 pounds.

In the U.S. the $100 bill is very popular. There are 10.8 billion in circulation compared to 11.4 billion $1 bills. Kill the $100 Bill?

The two largest counterfeiters of U.S. $100 bills are North Korea and Iran.

While I understand the reasoning behind the move, I view it as one more step in the removal of liberty for the U.S. citizen. Rather than actually catch the bad guys the good guys are punished. We are not deemed trustworthy enough to buy a big soda in New York because we might make ourselves fat. More than 200 million gun owners are penalized because a few bad guys might actually try to buy a gun legally. We cannot carry a wad of cash through the TSA security because we may have acquired it illegally. I am tired of lawmakers trying to turn the U.S. into a nanny state.

In June 2014, the IRS seized $153,907 from Ken Quran's business account because he made large cash deposits under $10,000. Quran runs a convenience store in a poor part of town where customers primarily pay in cash. There is a law that makes it a crime to make large cash withdrawals and deposits under $10,000. Transactions over $10,000 are reported to the IRS. However, if a bank computer recognizes a pattern of transactions under $10,000 they are required to report it to the IRS. The government seized the funds even though there was no evidence of wrongdoing and he had been making cash deposits for years. Now after nearly two years the IRS has decided to give it back. He was deprived the use of the money for inventory and expenses for two years. He would have gone bankrupt except that a bank loaned him $50,000 on a temporary basis. Somebody needs to reign in the watchdogs. They are out of control. Business Cash Seized

Twitter recently announced it had suspended more than 125,000 accounts linked to ISIS over the last 9 months. They hired extra workers to accomplish the task as those accounts multiplied.

Research determined there are only about 1,000 easily discoverable English speaking terrorist accounts at any given time. Each of the more visible accounts had an average following of about 400 people. Researchers monitored a list of ISIS supporter accounts for a period of four months. They found that each time Twitter deactivated an account it would pop up again under another name relatively quickly. However, the number of followers declined each time it was deactivated. They found that suspensions had a significant impact on shrinking the size of their networks even when they sometimes reappeared several times in one day. "Returning accounts rarely ever reached their previous heights, even when the pressure of suspension was removed." Twitter & ISIS

Investor sentiment for the week ended on Wednesday saw bullish sentiment rise +8.3% and bearish sentiment decline -10.9%. Since Wednesday was the end of the three-day rally, I am surprised the sentiment shift was not more pronounced.

Magellan's Global Equity Fund has beaten 99% of its peers over the last five years. The fund manager, Hamish Douglass, has boosted his cash position to 16% and the highest level since 2009. He has no immediate plans to buy stock. He believes stocks are overvalued and once the Fed continues raising rates the best-loved stocks are going to look even more overpriced. Once they correct he will be ready to buy. $9 Billion Fund in Cash

In the Iowa caucus, Clinton won 6 precincts by a coin toss. When the votes are tied they flipped a coin to determine the winner for that precinct. She won all six coin tosses. In the early reporting from Nevada she won precinct 307 by a cut of the cards. Yes, the votes were tied so they drew for high card and she won again.

Carl Icahn's, Icahn Enterprises (IEP) shares fell -11% on Friday after S&P put the company on credit watch with negative implications. The company is currently rated BBB and a downgrade would knock it into junk status. S&P said the declining value of the company's investments would likely push the firm into a 45% loan to value ratio. That is the threshold for a rating change. S&P said the company could initiate an equity raise to support the capitalization but that was not factored into the potential downgrade. Icahn owns 117 million shares or 91% of the company. Shares have declined nearly 50% over the last 12 months. Carl has made some really bad investment decisions over the last two years and they are coming back to haunt him. Icahn Going to Junk

Beware the end of February. Historically the stock market rebounds from early month lows to peak around the 11th trading day of the month, which would have been last Monday. Starting several days later the indexes fade going into month end. This is according to Jeff Hirsch from the Stock Trader's Almanac. February Mid Month Bounce Fades


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people."

Warren Buffett

New Plays

Dwarf Teams with Giant

by Jim Brown

Click here to email Jim Brown
Editor's Note

It is always nice to have a bigger friend to help you over all those tough spots in life. The same is true in the business world. Large partners can help you grow faster.

SGI has been waffling around in the $4-$6 range for the last year but the recent announcement about a strategic partnership with a $25 billion giant could be the deal that lifts them out of relative obscurity.


SGI - Silicon Graphics Intl - Company Profile

Silicon Graphics is a leader in high performance supercomputing. They build server components that handle compute intensive, fast algorithm workloads, such as Computer Assisted Engineering (CAE), genome assembly and scientific simulations. For instance, the SGI UV-3000 scales from 4 to 256 CPU sockets, utilizing multiple CPU cores per socket and up to 64 terabytes of shared memory. UV-3000 Description That description may be jibberish to readers without a tech background. I started working in computers since 1967 and I can assure you this is thousands of times more powerful than the computers NASA used to send men to the moon and 1,000 times more powerful than your desktop computer today.

SGI surged last week after Hewlett Packard Enterprise (HPE) said they were going to utilize the SGI platform in their new HPE Integrity MC990 X Server. This is a large business server that supports heavy workloads. This strategic partnership with SGI will greatly extend the reach of SGI technology. It is also a confirmation of the stability and high performance of the SGI platform and could lead to additional acceptance by other manufacturers.

In late January, SGI reported adjusted earnings of 14 cents compared to estimates for 5 cents. Revenue of $152 million beat estimates for $145 million. However, shares plunged from $7.80 to $5.20 the next day after the company filed a shelf registration for $75 million in new shares. The company market cap is only $200 million.

Shares remained volatile around $5 until the 12th and the full impact of the Hewlett Packard partnership was understood. They closed at $5.85 on Friday and a four-week high.

I believe the worst is over and the shelf registration forgotten in light of the partnership news.

I am recommending we buy SGI shares with a trade at $6.05 and target $7.35 for an exit. That would be a 21% gain. I am not recommending an option on this position but they do exist. The June $6 call is 95 cents and the $7 call is 60 cents. If you buy the option, I would plan on holding it longer than the stock position and hope that shares move over resistance at $7.40.

Earnings are April 27th.

With SGI trade at $6.05

Buy SGI shares, stop loss $5.25


No New Bearish Plays

In Play Updates and Reviews

Nickel Loss

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P 500 lost a nickel on Friday after the best weekly gain since November. That lack of material selling suggests the bears may have gone back into the forest.

Even more encouraging was the gain on the Russell 2000 on Friday of +5 points. With the Dow and the S&P negative, the Nasdaq and Russell were positive after big rebounds from the opening dip. We have not seen dip buying in 2016 and it was refreshing to see it return.

The S&P, Nasdaq and Russell all have room to run before hitting strong resistance at 1950, 4605 and 1035 respectively. The Dow came to a dead stop at strong resistance at 16,500 and that is going to be the challenge on Monday. If we can break over that level on the Dow we could see the other indexes move up to their respective resistance levels.

Current Portfolio

Current Position Changes

LGF - Lions Gate Ent

The long position in LGF remains unopened.

BG - Bunge Ltd

The short position in BG was opened when the stock traded at $49.75.

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

GPRO - GoPro - Company Profile


GoPro posted a big loss of a "penny" on Friday. After the big gains for the prior two days, holding at the $12.30 level is actually good relative strength.

Original Trade Description: February 8th

GoPro is the number one action camera maker and created the current market. They moved from a simple camera maker to a content creator over the last couple years. At least that is what they wanted people to believe so that their sky high PE would be based on something other than simply a hardware company.

Fast forward to 2015 and 5-6 companies began to compete with action cameras of their own. GoPro's market share began to dwindle. A botched roll out of a new model in Q3 and two prices cuts in Q4 has knocked their share price down from $65 in August to $9 on Thursday.

One of the problems that GoPro has been unable to conquer is the relatively hard method to recover, edit and publish videos produced by the cameras. They have promised new software for a couple years and it never seems to arrive or fails to satisfy when the updates appear. This is a drag on future camera sales because you have to be a geek to produce any quality videos.

News broke today that GoPro had licensed its video technology, certain file storage and other system technologies. While the details are still unclear this could be a Hail Mary pass to Microsoft for help with their software problems. If it is not related to that then there is something else going on that could provide a boost for GoPro in the future.

Lastly, the drop in market cap from $8 billion to $1 billion makes them a very attractive acquisition target for somebody like Sony or even Under Armour. Microsoft could buy them with their pocket change.

Shares appear to have bottomed at $10 but just in case we can buy a March $10 put as protection for 97 cents. This means we have unlimited upside and almost zero downside risk. If somebody makes an offer for GoPro I would expect it to be $15 or more simply because the company is not in financial trouble. They currently has no debt and $474 million in cash. They just need to get over this technical problem and they will be fine.

Position 2/9/16

Long GPRO shares @ $10.65, no stop loss.

Long March $10 put @ 99 cents, no stop loss

Net debit $11.64.

JBHT - JB Hunt - Company Description


No material decline. Still holding just below our exit target.

Target $78.50 for an exit.

Original Trade Description: February 10th.

While the majority of the transportation sector has been in decline in response to lower energy costs trucker JBHunt has been expanding its fleet, hiring new drivers and increasing load volumes across the country. In its most recent earnings report the company produced EPS in line with estimates but it is the internal data that is most promising.

JBHunt Transport services and its wholly owned subsidiaries is a diversified transportation and logistics company operating throughout North American. Operations are centered in the United States with some portions operating in Canada and Mexico. The company operates in the intermodal space using its own fleet and to some extent third party operators in 4 sub-segments.

Fourth quarter results were good. Earnings were in line with expectations on flat revenue but as mentioned, it is the internals that are most interesting. Q4 operating income was up 5% over the previous year with a 9% increase in EPS. Full year results include a 13% increase in operating income with a 16% increase in EPS. Full year revenue was flat, not something we necessarily want to see, but when taken in light of lower fuel surcharges is not the red flag it would seem to be. Remember, in recent years revenues among the entire transportation sector have been inflated due to surcharges related to what were then record fuel prices.

Three of the four business segments showed notable increases. The Integrated Capacity Solutions segment, management of third party transportation services, showed a 4% decline in revenue due to decreased spot market activity and lower revenue per load. The other three segments; Intermodal, Dedicated Contract Services and Trucking all showed notable increases in revenue of 1%, 2%, and 3% respectively for a total operating revenue increase of 9%.

Drivers of the gains, no pun intended, include increases in new customers, revenue realizations from previous rate increases, improved fuel economy, lower maintenance costs attributed to newer equipment, less reliance on third party shippers, increased fleet size and improving margins. These were offset by higher wages and increased costs of recruitment and retaining employees but those cost are ultimately a sign of ongoing improvement in the labor market and the consumer that will eventuall spill over into this and other segments of the economy.

Earnings results are all well and good but the reason why we really like this stock is two-fold; a recent dividend increase and a couple of analyst upgrades. The board of directors approved and announced a 5% increase to the dividend on January 28th. According to the board earnings and free cash flow warrant the increase. As for upgrades, there were two; one in early January and another just after the earnings report was released. The stock was upgraded from hold to buy at BB&T and from peer perform to outperform by Wolfe Research. Based on the average analyst target of $87.14 there is still a minimum upside potential of 16%.

Buy the May $80 call with a trigger price of $74.00.

Position 2/12/16 with a JBHT trade at $74

Long JBHT shares @ $74. See portfolio graphic for stop loss.


Long May $80 call @ $2.25, see portfolio graphic for stop loss.

LGF - Lions Gate Entertainment - Company Description


LGF gave back 50 cents but is holding at the $20 level. No change in play.

This position remains unopened until LGF trades at $21.25.

Original Trade Description: February 17th.

Lions Gate reported earnings on the 5th and dropped like a rock from $26 to $16 on ten times normal volume. Adjusted earnings of 45 cents missed estimates for 47 cents. Revenue of $670 million missed estimates for $767 million.

Lions Gate earnings are always lumpy. As a film maker with 2-3 major motion pictures a year the quarter with a big release always spikes and the quarters without a release crash. In the latest quarter the Hunger Games Mockingjay Part 2 had a huge audience but it was sandwiched between James Bond's Specter and the Martian. Those big films sucked up the available screens and pushed Mockingjay out of the headlines. Even with the competition the film grossed more than $650 million.

The studio has three movies for the first half of 2016 but none are expected to be blockbusters. Lions Gate also has a sizeable portfolio of TV shows like Orange is the New Black, Nashville, The Royals, The Wendy Williams Show and Casual, with more than 75 others across 40 networks. They have contracted future revenue from those shows of $1.3 billion at the end of December. They have a library of more than 16,000 motion picture and television titles.

One of the reasons the stock fell so sharply was the expectations for LGF to acquire a lot of other "free radicals" as John Malone calls them. Those are smaller studios that could help add to the LGF franchise. However, as a Canadian company they are prohibited from acquiring anyone bigger than themselves. When their market cap dropped from $7 billion to $3 billion after earnings it meant their potential acquisition candidates shrunk significantly. They were also rumored to be considering a merger with the Starz Network. That also played into the stock drop mix because owning their own TV network could present problems for selling their content to the other 40 networks they partner with. STRZA shares dropped from $31 to $20 on the earnings because it suggested there would be no merger.

Now that the smoke has cleared LGF shares are rising again. They closed just under $21 on Wednesday. They are heavily oversold and heavily shorted. The combination in a positive market could continue to push the shares higher.

The lumpy earnings will be forgotten and the stock will recover. It was trading at $41 back in November before the merger news appeared. If that is no longer an option we could see a swift rebound.

I am putting an entry trigger at $21.25, just over the $21.09 high for today. We will only enter the position on a continued move higher.

With a LGF trade at $21.25

Buy LGF shares, initial stop loss $17.85


Buy June $23 calls, currently $1.55, no initial stop loss.

SWHC - Smith & Wesson - Company Description


Resistance at $24 still haunting us with another retest on Friday.

I assigned an exit target of $25.25 just under the prior high.

Original Trade Description: January 21st.

Smith & Wesson is a gun manufacturer. Business has been very good but they announced this week they are looking for some acquisitions in other outdoor areas so their business is not so tied to the cycles in gun sales. Whenever an administration begins talking about more gun control measures their sales soar. When there are no politicians trying to ban guns we see sales decline.

The current administration has been the best for gun sales since the Clinton assault weapons ban. The FBI said the increase in the number of background checks for gun purchases has been so strong that their system is overloaded and they have had to halt appeals for denials until they can add some more personnel.

December saw a record of 3.3 million background checks, which was more than 500,000 above the prior record for December in 2012. On Black Friday alone there was a record 185,345 checks and a new single day record.

While this surge in gun sales has powered Smith & Wesson to record profits the company realizes that the election of a pro gun administration will slow those sales. For this reason S&W announced this week they were looking into getting into the $60 billion outdoor sporting goods market. They will likely be trying to acquire brands that they can add to their lineup that are not directly related to guns.

S&W said they were on the hunt for candidates but did not have any announcements at the current time.

This is a good move for S&W for obvious reasons. By branching out into other products, it will also help widen the S&W brand even if those new products have their own brand names.

Shares spiked to record highs over $26 when they reported earnings in early January. The post earnings depression appears to be over and shares dropped back to support at the 100-day average. This is a good spot for people to launch new long positions and once the current market weakness is over the small cap stocks like S&W with strong growth will be in demand.

Earnings March 8th.

Position 1/25/16:

Long SWHC shares @ $21.35, see portfolio graphic for stop loss.


Long June $23 call @ $1.75, see portfolio graphic for stop loss.

USO - US Oil Fund ETF - ETF Description


No material move with only an 11 cent loss ahead of futures expiration on Monday.

This is a long term position so be prepared to see lots of volatility before the final long-term rally begins.

Original Trade Description: January 27th

The USO ETF attempts to reflect the performance of West Texas Intermediate crude oil. The ETF invests in futures contracts for oil, diesel, heating oil, gasoline, natural gas and other fuels traded on the Nymex in an effort to track WTI and avoid futures roll over bleed.

Typically, a futures oriented ETF buys forward contracts. As those contracts expire, the funds are rolled over into the next series of futures contracts at higher prices. This causes a disconnect between the actual price of the underlying commodity.

The USO attempts to reduce that as much as possible by spreading the terms and types of futures contracts it holds.

If you are still reading this you are probably wondering why I am recommending a somewhat perishable ETF on oil when we all expect oil prices to go lower. Good question!

Yes, oil prices "should" go lower as inventories build over the next two months. However, the entire world of professional investors understands this but prices have spiked twice in the last week on rumors of a Russian - OPEC agreement to cut production. If such an agreement was actually reached, we could see prices back over $50 very quickly.

I am proposing we try to buy the USO on the next dip on the chance that an agreement will eventually be reached. Last week it traded down to $7.92. When oil was $38 in December the USO was $11. If we can buy it in the $8.50 range we could see a 30% gain on any deal announcement and even more once oil prices reacted to the change in production dynamics.

Obviously, we cannot predict that a deal will happen. Saudi Arabia and Russia are enemies. However, they both have the same problem and that is they are hemorrhaging cash. In July 2014 when oil prices were $105, Saudi Arabia was taking in about $1.06 billion a day in revenue. Today at $30, they are receiving $303 million. That is a loss of $757 million a day, every day, and the kingdom is suffering from it. Russia is losing about $650 million a day. They both have millions of reasons to put their differences aside and reach an agreement.

While we cannot guarantee this will happen the headline chatter is growing daily. They may not be ready to call a truce just yet but together they are losing more than $1.4 billion a day. That is a huge incentive to do something. The next regular OPEC production meeting is early June. I am recommending we buy the USO on the next dip and hold it until July. I cannot imagine OPEC continuing the madness past the June meeting and they are likely to hold an emergency meeting earlier if crude drops back into the $20s again.

Typically, prices rise when inventories begin to decline in late April as refiners ramp up production for the summer driving season. Even if Russia and OPEC do not reach an agreement, we should see a rise in prices starting in May or earlier.

I am not going to try to buy the bottom because we may not see it again. I am recommending we buy the USO at $8.50 and hold it with no stop loss because it could go lower. I believe we will be rewarded over the next few months and with the right set of circumstances, we could be very well rewarded.

2/1/16: Position entered with a USO trade at $9.00:

Long USO shares @ $9.00, no stop loss.


Long USO July $10.00 calls @ $.85. No stop loss.

WU - Western Union - Company Description


WU skillfully evaded our stop loss at $18 and closed off its lows. We need a new headline or a positive market to cause a retest of resistance at $18.60.

Original Trade Description: February 12th

Western Union is one of the more recognizable names in the market. Although the mode of transport has changed from stagecoach to digital the basic business model has remained the same for 165 years, the transfer of wealth. Western union is money transfer and payment solutions provider operating in 34 countries with 3 business segments; person to person, person to business and business solutions.

The company reported earnings earlier this week and results were good. Despite the negative impact of currency conversion, the company was able to meet expectations and provide forward guidance in line with expectations. Merely meeting expectations is not enough to get the market excited but the inclusion of a -$0.15 impact into the forward guidance and the recent decline in dollar value is reason enough to think guidance could be low.

Speaking of the dollar. I don't mean to completely discount the impact of currency conversion. Merly to point out that the projected impact for 2016 may be too high. Looking at the chart of the DXY it is clear that the dollar is declining in value and trending in the average range we saw in 2014. If it continues to fall back to the bottom of the range negative impact in 2016 should be no worse than 2015.

Results for the 4th quarter and full year 2015 were good. The company reported earnings of $0.42 on revenue of $1.38 billion; earnings were in line with estimates, revenue was short by 0.02 billion. In constant currency this is a 3% gain in revenue for the fourth quarter and a 4% gain for the full year. There were a couple of other red flags in the report but all related to currency conversion. One was margin. Margin improved from 20% to 20.9% in 2015 but is expected to fall back to 20% in the coming year.

Any reduction in earnings due to narrowing margin should be more than overcome by increased revenue. Economies in North America and Europe, the two largest segments by region totaling more than 40% revenue, are both strong and growing. Speaking solely of the US labor trends and earnings point to strength and should fuel person to person transactions, 80% of total business.

Another reason to expect revenue expansion is the expanding footprint. The company operates in over 200 countries, 34 added in the past year, including 100,000 kiosks and ATM's and is planning to continue expanding into 2016. At the same time the company is expanding its services and has recently added a 3rd payment solution, the WU Connect, which enables users to offer Western Union services on their platforms.

On a technical basis the stock looks like it is in reversal and heading higher. The stock is moving up off of a double bottom with increasing volume. Volume has been on the rise for the last month, the last week has been more than 2X average daily. Today the stock jumped 4% to break above the short term moving average. MACD momentum is bullish and on the rise, confirming the break. Stochastic is still weak but consistent with a signal early within a bullish movement. Today's action saw prices hover around $0.85 with a Delta of 0.48. The average analyst estimate for the stock is just over $18.79, not high, but the data pool is skewed to the upside with low outliers dragging down the mear. The high target is $24.

The option is cheap so I chose the May expiry to give the stock time to move.

Position 2/16/16 with WU trade at $18

Long WU shares @ $18, see portfolio graphic for stop loss.


Long May $18 call, entry .79, see portfolio graphic for stop loss.

BEARISH Play Updates

BG - Bunge Limited - Company Profile


The position was opened when BG traded at $49.75 this morning. The stock continued to decline for another $1. There was no news. We are off to a good start on BG.

Original Trade Description: February 18th

Bunge is an agricultural business and food company. They sell food, commodities and fertilizer on a global basis to more than 40 countries. Last week they reported earnings on February 11th and they were not good. Earnings came in at $1.49 compared to estimates for $1.56. Revenue of $11.1 billion missed estimates for $11.6 billion and that was well below the year ago quarter at $13.2 billion.

The company guided lower saying the strong dollar was weighing on revenues and declining economic conditions in countries like Brazil are limiting the available funds to import food. Pricing power is falling as commodity prices continue to decline worldwide.

Adding to Bunge's problems was a cargo of French wheat that was rejected by Egypt because of what they claimed was excessive levels of the ergot fungus. The generally accepted level for fungus is 0.05% and apparently, Egypt decided the content was higher than the standard. Since it is impossible to halt the naturally occurring fungus entirely, it exists in every load. Egypt made the unusual statement that they would have "zero-tolerance" for fungus in the future. If Egypt can get away with that qualification then other countries could try to change their rules as well. Bunge is suing Egypt and the cargo of wheat is still parked off the Egyptian port of Damietta. Egypt subsidizes bread for its population of 88 million.

Reportedly Bunge is trying to resell the wheat but it may be difficult since the rejection has tainted the cargo. The decision by Egypt for zero-tolerance has pressured the prices for wheat to $179 per ton and a five-year low. This hurts future sales by Bunge to any other country.

To recap, Bunge missed on earnings and revenue, guided lower for 2016 and has seen future commodity sales threatened by the Egyptian move and the falling prices of their various commodities.

Shares fell sharply after earnings from $58 to $46. An instant rebound appeared to $53 but that is now fading as the bad news sinks in and the outlook for Bunge's earnings dims even further. I believe that we could see the stock price return to those lows from last week, if not lower. Shares had already been declining since last June.

With a BG trade at $49.75

Short BG shares, stop loss $51.25


Buy April $47.50 put, currently $1.55, stop loss $51.85

VXX - VIX Futures ETF ETF - ETF Description


Despite the negative Dow & S&P the volatility is declining.

Be patient. The volatility will eventually die.

Original Trade Description: August 24, 2015

The U.S. stock market's sell-off has been extreme. Most of the major indices have collapsed into correction territory (-10% from their highs). The volatile moves in the market have investors panicking for protection. This drives up demand for put options and this fuels a rally in the CBOE volatility index (the VIX).

You can see on a long-term weekly chart that the VIX spiked up to levels not seen since the 2008 bear market during the financial crisis. Moves like this do not happen very often. The VIX rarely stays this high very long.

How do we trade the VIX? One way is the VXX, which is an ETN but trades like a stock.

Here is an explanation from the product website:

The iPath® S&P 500 VIX Short-Term Futures® ETNs (the "ETNs") are designed to provide exposure to the S&P 500 VIX Short-Term FuturesTM Index Total Return (the "Index"). The ETNs are riskier than ordinary unsecured debt securities and have no principal protection. The ETNs are unsecured debt obligations of the issuer, Barclays Bank PLC, and are not, either directly or indirectly, an obligation of or guaranteed by any third party. Any payment to be made on the ETNs, including any payment at maturity or upon redemption, depends on the ability of Barclays Bank PLC to satisfy its obligations as they come due. An investment in the ETNs involves significant risks, including possible loss of principal and may not be suitable for all investors.

The Index is designed to provide access to equity market volatility through CBOE Volatility Index® (the "VIX Index") futures. The Index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects market participants' views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. Owning the ETNs is not the same as owning interests in the index components included in the Index or a security directly linked to the performance of the Index.

I encourage readers to check out a long-term chart of the VXX. This thing has been a consistent loser. One market pundit said the VXX is where money goes to die - if you're buying it. We do not want to buy it. We want to short it. Shorting rallies seems to be a winning strategy on the VXX with a constant trend of lower highs.

Today the VXX spiked up to four-month highs near $28.00 before fading. We are suggesting bearish positions at the opening bell tomorrow. The market volatility is probably not done yet so we are not listing a stop loss yet.

Position 8/25/15:
Short VXX @ $21.82, no stop loss.

Second Position 9/2/15:

Short VXX @ $29.01, no stop loss.

Trade History
11/07/15 adjust exit target to $16.65
11/02/15 adjust exit target to $16.50
10/19/15 add an exit target at $16.25
10/15/15 planned exit for the October puts
10/14/15 if you own the options, prepare to exit tomorrow at the close
09/02/15 2nd position begins. VXX gapped down at $29.01
09/01/15 Double down on this trade with the VXX's spike to 6-month highs
08/25/15 trade begins. VXX gaps down at $21.82

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