Option Investor

Daily Newsletter, Saturday, 2/27/2016

Table of Contents

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

Market Wrap

Hole in the Middle

by Jim Brown

Click here to email Jim Brown

It was a good week for the markets but it would have been a lot better without the hole in the middle. The Dow declined -499 points from Monday's high to Wednesday's low then rebounded +471 points into Friday's close. Without that hole, we could have been a lot higher today.

Market Statistics

Friday Statistics

The Dow hit 16,664 on Monday and then crashed to 16,165 at the low on Wednesday. The rebound that started at that low added 471 points to close at 16,636 or 28 points below the Monday high.

They midweek market flush cleared out all the stop losses and gave portfolio managers an entry point for new positions. Those managers were hesitant to buy the market at resistance but they jumped right in when the market dipped. The Dow is now up +1,133 points from the February 11th low at 15,503.

You can thank oil prices for the Friday fade. After spiking to $34.69 at 9:AM and a five week high, crude fell back to $32.84 at the close. The Dow opened at 16,795 on the strong oil gains and then fell back -159 points to close near the lows for the day.

The economics were actually positive for a change and you would have expected that to be a plus for the market. However, the worry that stronger economics could put the Fed back in play when they meet in two weeks was one factor in the decline.

The Q4 GDP revision came in much better than expected at +1.0% growth. That is up from +0.7% in the first release and significantly better than the +0.4% revision analysts expected. Consumer spending and residential investment provided an upward lift. Inventories, exports and nonresidential investment were a downward drag.

Spending added +1.38% while exports subtracted -0.25%, inventories -0.14%, nonresidential investment -0.24% and government -0.1%. The strong dollar continues to impact exports and tourist spending. Lower oil prices are good for consumer spending but they are a drag on spending by energy companies and the 150,000 workers that have been laid off by the crash.

Despite the recent positive economics, the Atlanta Fed GDPNow forecast for Q1 has taken a sudden negative turn to 2.1% growth. With two more months of data to impact the Q1 numbers, it may go a lot lower.

The final reading of Consumer Sentiment for February came in at 91.7 and up +1 point from the original reading of 90.7. The January reading was 92.0 so only a minimal decline.

The present conditions component rose from 106.4 to 106.8 and the expectations component declined from 82.7 to 81.9. Cheap gasoline prices probably had the biggest impact on the present conditions and the election politics the biggest impact to the expectations decline.

The Personal Income and Spending data for January were all positive. Personal income rose +0.5% after a +0.3% increase in December. Personal spending rose +0.4% after a +0.1% rise in December. The PCE Deflator, the Fed's preferred measure of inflation, rose +0.1% after a -0.1% decline in December. The core rate, excluding food and energy, rose +0.3%, up from only +0.1% in each of the prior three months. On a 12 month basis the headline number is up +1.3% and the core rate +1.7%. The Fed wants to see inflation in the 2.0% range. Energy was the biggest drag at -2.9% after a -3.0% drop in December.

The Fed is going to be challenged to hike rates with the GDP at only 1% and core inflation at 1.7%. While inflation is moving towards their goal, the GDP is actually growing at a subpar rate. Prior to December, the Fed has never hiked rates with a 1% GDP. The Fed will be forced to restate their policy at the March meeting and it will be interesting to see how they phrase it. Yellen has said, "If inflation comes back quicker, rates could go up faster."

The economic calendar for next week is very busy and this is payroll week. The ISM Manufacturing for February is expected to remain in contraction for the fifth consecutive month. The Beige Book on Wednesday is expected to show deterioration in economic activity in several regions because of the recession in the manufacturing sector. The ISM nonmanufacturing on Thursday needs to stay in expansion territory over 50 or the economic conversation will take a sharp turn for the worst.

The ADP Employment on Wednesday is expected to show another slowdown in job gains to 190,000 for February, down from 205,000 in January. The Nonfarm Payrolls on Friday are expected to show a rise in job gains from 151,000 in January to 193,000 in February. Some analysts believe the low number in January was a fluke onetime event while others believe it was finally stating correctly after the large Q4 adjustments for seasonal workers. Another low number for February will be very negative for the Fed's decision and their messaging. The next Fed meeting is in two weeks.

There are worries over the Super Tuesday election event next week. Twelve states hold their primary contests on Tuesday and historically it can be unsettling for the equity markets. Investors hate uncertainty and having a large field of candidates supplies that uncertainty. When the Super Tuesday contests deliver a clear winner with a strong chance of being the nominee the market tends to rejoice regardless of who that nominee may be. They view it as a point of certainty and they can plan their investments based on how that candidate will impact the market. When Super Tuesday produces a mixed field with no clear winner, the market tends to be volatile because of the potential for multiple diverging economic programs.

This year the potential for Clinton and Trump to surge ahead and produce an election that nobody wants could frustrate the market. Those two candidates may be leading in the delegate totals and the polls but they both have the highest level of dislike by the rest of the voters. A recent Gallup poll found that 51% of voters dislike Clinton while only 29% like her as a candidate. For Trump, it is worse with 60% of voters viewing him negatively and only 33% having a favorable opinion. The dislike for the front-runners has made party loyalty a negative for the voters. Only 29% of people polled will admit to being a democrat and only 26% will admit to being a republican.

Once we get past Tuesday, March has the third best record for the market on average since WWII according to Sam Stovall from S&P.

Friday was a relatively slow news day for stock news. Stamps.com (STMP) shares spiked +21% to $116 after reporting earnings of $1.57 compared to estimates for 95 cents. Revenue of $69.9 million blew away estimates for $58.4 million. They guided for the full year for earnings of $5.00 to $5.50 and analysts were expecting $4.33. That is a heck of a guide higher.

China's equivalent to Google, Baidu (BIDU), reported a 19.7% rise in earnings to $545.7 million on a 33% rise in revenue to $2.86 billion. Monthly active search users rose +21% to 657 million. Mobile search users rose +43% to 302 million. Gross merchandise volume rose +397% to $2.3 billion. Baidu Wallet activations rose +189% to 53 million.

If Bill Ackman is still short Herbalife (HLF), he had a very bad day on Friday. The company posted earnings of $1.19 compared to estimates for 92 cents. Revenue of $1.1 billion also beat estimates for $1.05 billion. They guided to earnings of $.97-$1.07 for Q1 and below estimates for $1.09. However, shares exploded higher after the company said it was approaching a resolution of the FTC investigation. They are in discussions with the FTC over a settlement. Herbalife said the potential outcomes of the discussions were a potential contested lawsuit, a settlement that includes a monetary payment or the closure of the regulatory probe without any action. Shares spiked 20% to $55 on the news.

Zoes Kitchens (ZOES) reported a loss of 3 cents compared to estimates for a loss of 6 cents. Revenue of $52.7 million beat estimates for 50.5 million. Same store sales rose +7.7%. The company has been on an extreme growth spurt. At the beginning of 2015, they owned 5 company-operated restaurants. As of December 31st, they owned 163 company-operated stores. That means they were opening an average of three per week. Obviously, there was a reason for them to post a loss for the quarter with all of the expansion costs.

A week ago Carl Icahn's, Icahn Enterprises (IEP), was on the verge of having its debt downgraded to junk. On Friday, shares rallied +11% after the company acquired the Trump Taj Mahal casino in Atlantic City. Trump Entertainment Resorts was in chapter 11 bankruptcy and was acquired by IEP. Trump forfeited his 10% ownership in the business with the acquisition by Icahn. The billionaire also acquired the Tropicana Casino in Atlantic City out of bankruptcy.

Biopharmaceutical company Tesaro (TSRO) reported a loss of $1.89 compared to estimates for a loss of $1.84. Revenue of $230,000 fell well short of estimates for $2.9 million. However, full year earnings were $6.38 or $251.4 million. Shares were up +14% after the company announced the sale of 4.4 million shares at $35.19 in a private placement to raise $155 million.

G-III Apparel Group (GIII) rallied 8% on Friday after announcing it had taken a 19% stake in the parent company of the Karl Lagerfield brand. G-III also holds a 49% stake in a North American joint venture that holds the rights to the Karl Lagerfield trademarks for consumer products. Lagerfield is the head designer for Chanel and Fendi as well as his own brand. G-III said the Lagerfield venture could generate $300-$400 million a year within five years. Earlier this month G-III signed a licensing deal with Tommy Hilfiger Licensing, which is owned by PVH Corp.

Berkshire Hathaway (BRK.A) reported earnings on Saturday. The company earned $4.67 billion in Q4 and $17.36 billion for the year. Earnings rose +32% to $3,333 per Class A share. Analysts were expecting earnings of $3,129 per share. That is up from $2,529 in the year ago quarter. Revenue rose 7% to $51.8 billion. Berkshire completed the Precision Cast Parts (PCP) acquisition in January for $32 billion for Berkshire's largest deal ever. Next week Berkshire will acquire Duracell for $3.8 billion in PG stock and $1.7 billion in cash.

In his annual letter to shareholders, Warren Buffett warned a major nuclear, chemical, biological or cyber attack was a "clear, present and enduring danger" and "there was no way for American corporation or their investors to shed this risk." This warning from Buffett come on the heels of the nuclear deal with Iran and the "satellite" launch from North Korea. See further comments in the Random Thoughts section below.

Foot Locker (FL) reported earnings of $1.16 that beat estimates for $1.12. Revenue of $2.1 billion matched estimates. Same store sales were up +7.9%. The company guided for mid single digit comp sales in 2016 and double-digit earnings growth. Despite the good earnings shares declined -4.3% on the news. This is just another example why we do not like to hold positions over an earnings report unless we are holding for the long term.

Under Armour (UA) is beating Nike on sales gains but Nike is still the overall winner in global sales. UA reported a 97.6% jump in sales for the week ended February 20th while Nike sales rose +8.2%, Adidas +28.3% and Skechers rose +18.5%. Reebok sales fell -51.9%. While UA reported the biggest percentage sales gain it was from a very small base. This is the equivalent of having sales rise from $1 million to $2 million for UA when Nike sales rose from $100 million to $110 million. The percentages can be misleading.

The earnings cycle is about over but the warnings are still flowing. On Friday, only one company issued positive guidance, 6 companies issued in line guidance and 11 companies warned about future earnings/revenue.

A study done last week suggested the quality of earnings was declining. We always report the "adjusted" earnings rather than GAAP earnings because the analysts forecast based on the adjusted numbers that do not include things like charges for restructuring, acquisitions and other onetime events. The theory is that adjusted earnings represent the true picture of the ongoing business without the major swings of the special items.

However, the survey showed that GAAP earnings for Q4 were 25% lower than adjusted earnings. That is the widest spread since 2009. Companies are stretching to classify everything possible in the GAAP side so the adjusted earnings are better. Analysts warn that we may not be looking at the true picture of corporate health because the adjustments are getting out of line.

FactSet said on Friday that 96% of the S&P-500 companies have reported Q4 earnings. Of those 69% beat on the earnings side while only 48% have reported revenue above estimates. The earnings decline for Q4 is now -3.3% and the first time we have seen three consecutive quarters of earnings decline since Q1-Q3 2009. Average revenue has declined -3.9% and that is the fourth consecutive quarter of declines.

For Q1 2016, 88 S&P companies have issued negative earnings guidance or 80% of those giving guidance and only 22 have issued positive guidance. Analysts do not expect the S&P to return to earnings growth until Q3. The current forecast for Q1 earnings is a decline of -7.4% and -1.6% for Q2, +4.7% for Q3 and +9.4% for Q4. The increase in Q3/Q4 is the result of very low comparisons to Q3/Q4 2015.

If the earnings forecasts continue as expected we will have an earnings recession that lasts five quarters and a six-quarter revenue recession. However, forward estimates more than one quarter in advance are notoriously inaccurate and normally overstated. That -1.6% decline for Q2 could be 4% off in either direction by the time the earnings are actually reported.

Crude oil rallied to $34.69 at the open on Friday on more headlines from the Middle East on the potential for a production freeze. The Nigerian oil minister said Russia and Saudi Arabia were on board and the other producing nations were coming into the agreement. He tried to continue hyping the potential for future action by saying a production freeze would establish a base line of cooperation that could be expanded on for a production cut at the June 5th OPEC meeting. The vast majority of analysts, company executives and OPEC oil ministers believe there is zero chance of a production cut in June but the headlines continue to flow and oil prices are rising. The Saudi Arabian oil minister specifically said there will be no cut during a speech in Houston last week. Whatever they say is the official position.

The Nigerian oil minister said oil prices would return to $50 by the end of the year. He said there was no technical or historical reason but prices would rebound to that level. Sounds like wishful thinking to me and he is trying to talk the price up with his comments.

The active rig count declined -12 to 502 rigs and -1,429 off the 2014 peak of 1,931. Oil rigs declined -13 to 400 and gas rigs rose +1 to 102. The Canadian rig count imploded with a -31 rig drop (-18%) to 175 rigs. Oil rigs declined -26 (-24%) to only 83 active rigs.

The Dow Transports have risen more than 16% from their January lows and supported the broader market rally. Some analysts believe this is the top in that rebound. The railroads have rallied on no change in fundamentals. Shipping in the energy sector continues to decline. The airline sector has been moving higher on the drop in oil prices and reduction in capacity. However, load factors are shrinking despite the changes. SkyWest (SKYW) reported revenue seat miles declined to only 77% meaning they had a lot of empty seats in January. They run multiple brands and function as a feeder airline into the larger carriers. Charts on the individual airlines show they have rallied into major resistance.

The Transport ETF (IYT) has rebounded to its 38% Fibonacci retracement level and analysts believe the $135 price point will be the end of this rally.

If the transport sector rolls over the broader market may follow. However, the transports began to decline in March 2015 and it was not until July that the broader markets followed. Some do not believe we will see that lag time if the transports decline again.


On a closing basis, the S&P cannot move above horizontal resistance at 1,950. That level needs to be broken to sustain a continued rally. On an intraday basis, the S&P rallied to exactly the 50% retracement level at 1,963 and failed. This is an 8.5% rebound off the 1,810 lows from February 11th but a 50% rebound from the -306 point decline from the November highs at 2,116. This is a natural resistance point and from the selling on Friday there were a lot of traders watching that level.

The next material Fibonacci resistance is 1,999 and the 61.8% retracement level. With the market moving from oversold to overbought in two weeks that makes the resistance at 1,963 a continued target for sellers. However, for the last two days the S&P has closed right at that 1,950 resistance level and suggesting that is where the battle will be fought.

The RSI at 56.04 is approaching resistance at 60 dating back to November. The MACD is still bullish and suggesting there could be more upside.

The point here is that we have reached some significant resistance levels and just getting over 1,950 intraday does not mean the battle has been won. That is one battle in a larger war.

The Dow chart has the same problem as the S&P chart. The 50% retracement level is 16,718 and the index was sold the instant it moved over that level on Friday. However, the 16,500 resistance has been broken and the index closed well above the 16,665 resistance at 16,696 on Thursday. Because the Dow is only a 30 stock price weighted index, it tends to be less respectful of technical indicators like the Fibonacci levels or moving averages. However, the 50% retracement level is a beacon flashing "sell me."

The defensive stocks including PG, KO, JNJ, HD, MCD, PFE and VZ sold off on Friday, which normally happens when investors are putting risk on rather than taking it off. Portfolio managers may be preparing to move into higher risk asset classes like small caps, banks, biotechs or techs in general. It is also possible these safety stocks have just run too far too fast. It produces a problem for investors because there is no clear direction for next week.

The Nasdaq has a ways to go before it reaches the 50% retracement level at 4,692. The decline in the biotech sector has retarded the Nasdaq rebound. The index still has decent resistance at 4,600 and that is where is failed on Friday. There are no leaders on the index with different stocks outperforming every day and different laggards.

The Russell 2000 was the best performing broad market index last week with a +2.69% gain compared to +1.58% for the S&P and +1.51% for the Dow. The small caps are coming back but they have a long way to go. The resistance at 1,035 is in play and the Friday close at 1,037 is an example of its influence. There is also resistance at 1,050 but we do not begin to get into the Fibonacci levels until 1,078 and 1,120. That would be a significant rebound from here.

The small caps were crushed in the decline thanks to drops in the financials, biotechs and energy stocks. Once those sectors begin to heal, we could see a rapid recovery. The bounce over the last two weeks is very encouraging but we have to get over those 1035-1050 levels to really get the ball rolling.

I would like to think that the stall at the current resistance levels is temporary and we are going higher next week. However, until we get through that resistance at 1,950 on the S&P, 1,035 on the Russell and 4,600 on the Nasdaq there may be a lack of confidence by investors. If we can close significantly over those levels, we could see an influx of money into the markets.

The earnings cycle is nearly over and we have six weeks before it starts again. The bad earnings news is now priced into the market and everybody knows the dollar is killing revenue. That is an old story now.

The holdup for next week could be the employment reports. However, we could be back in the bad news is good news scenario where weak jobs and weak manufacturing is seen as good news because it keeps the Fed on the sidelines longer. With the ECB likely to announce more stimulus on the 10th that could also weigh on the Fed and force them to wait until June or later for their next hike. Raising rates at the same time Europe, Japan and China are lowering rates just makes the dollar stronger and reduces exports and revenue even further and pushes the manufacturing sector further into recession.

We need to trade what the market gives us and watch those resistance levels especially on the Russell and S&P. Those are the road signs on the market road ahead.

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Random Thoughts

There have been numerous articles and warnings in recent weeks about the potential for an ElectroMagnetic Pulse (EMP) attack in the near future now that North Korea has the capability to launch a nuclear weapon into orbit over the USA. Officials believe a successful EMP attack could kill up to 75% of the U.S. population in the 12 months that followed "through starvation, disease, and societal collapse" according to Peter Pry, executive director of the Homeland Security EMP Task Force in congressional testimony last May. An EMP would destroy the electrical grid and take years to restore power. Electronic devices like cell phones, computers, televisions, cars, trucks, etc would be destroyed by the EMP. Without electricity, there would be no water, food, gasoline, medical care, credit cards, ATMs, stock markets, etc for months or even years. PDF on EMP Impact

The members at the G20 meeting in China this weekend were unable to agree on a joint plan for new economic stimulus measures. While the ECB and Japan are expected to add stimulus the rest of the G20 world decided to wait on further economic reports in the coming weeks before making independent stimulus decisions. Several finance ministers warned that a UK exit from the eurozone would be a powerfully negative geopolitical shock. The exit vote is June 23rd.

Investor sentiment for the week ended on Wednesday saw bullish sentiment rise +3.6% and bearish sentiment decline -6.4%. Since Wednesday was a major decline and even larger rebound, I am surprised the bullish sentiment was not higher. That dip/rebound must have confused some traders because neutral sentiment rose 2.8%.

Venezuelan state run oil company PDVSA is facing debt payments of $5.2 billion in 2016 with most of it in October and November. Since the government spent the last $1.5 billion in cash reserves last week the outlook for PDVSA is grim. The socialist government has confiscated all the cash from PDVSA, banks, utility companies and any entity they can seize in order to stave off economic collapse and their bank account is still empty.

PDVSA is going to be in trouble before their debt comes due because they have to import ultralight oil to blend with their heavy crude to make it saleable on the open market. Without cash to pay for that light crude we could see a sharp drop in the crude available for export and further crimping the cash flow. Suppliers are already seeing significant delays in payments and PDVSA is being forced to look for other sources where they do not already have a large balance due. Existing suppliers already worry they will never get paid.

Venezuela exports about 2.0 mbpd and the inability to import light crude for blending would reduce that by about 250,000 bpd initially and more as the problem grows worse. Most of the output from PDVSA is secured against long-term loans so PDVSA does not get to use all the money when it is received. PDVSA has asked Chevron and Rosneft to supply some additional light crude for blending and that may have to be done outside Venezuela in order to keep the cash proceeds from being seized.

Socialism is great until you run out of other people's money. (Margaret Thatcher)

Honeywell (HON) chairman and CEO David Cote sold $36 million in stock, half his position in Honeywell only 3 days before the company announced the offer for United Technology (UTX). Shares of Honeywell fell -10% on the news. David, answer your phone. The SEC is calling.

Some analysts are still bullish on 2016. Oppenheimer's John Stoltzfus reiterated his 2016 price target on the S&P at 2,300 on Friday. He said the economic worries are overdone and the negative earnings are already priced into stocks. Let's hope he is right.

Other recent S&P target revisions

2000 JP Morgan
2000 Bank America
2100 Goldman Sachs
2150 Citigroup
2175 Morgan Stanley
2175 UBS
2200 Deutsche Bank
2200 Barclays
2300 Oppenheimer

Americans are well on their way to being the most overweight and diseased population in history. The U.S. Census Bureau said Americans gained more than 582 million pounds in 2015. That 1% gain was the most since 2011.

The average American man weighs 196 pounds, up 3 pounds in 2015. The average woman lost 2 pounds to 155 on average. There are 322 million people in America totaling 56.4 billion pounds.

The American obesity rate rose to a historic high at 28%. More than 42% of men reported they weight more than 200 pounds, up from 36% in 2014.

More than 29 million people or 9.3% of the population have diabetes with an estimated 8.1 million people undiagnosed. They spend more than $245 billion a year on healthcare. More than 86 million are considered pre-diabetes or 1 in 3 adults. Diabetes is nearly 100% curable by diet alone. We are eating ourselves into an early grave.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Freedom is the last, best hope of earth. "

Abraham Lincoln.


New Plays

Most Shorted Stock

by Jim Brown

Click here to email Jim Brown
Editor's Note

When a stock has the highest short interest it is subject to huge short squeezes when the market direction turns positive. Gamestop has the highest short interest of 37.7% of the float. If the market were to continue its winning ways next week that could create a monster short squeeze.


GME - Gamestop Corp - Company Profile

Gamestop was originally a reseller of used video games. As the business model matured they moved into new games, game consoles and recently into smart phones, tablets, MP3 players, headphones and manner of consumer electronics. They are a certified Apple consumer electronics reseller, an authorized AT&T reseller and Cricket Wireless seller of prepaid cell phones. As of January 31st, they operated 7,100 stores in 14 countries.

Gamestop's death has been reported prematurely numerous times and they just keep reinventing themselves in the expanding market. When more games became downloadable rather than cartridge or CD based everyone thought that was the death knell for the company. Instead they ramped up their sales of consoles and consumer electronics to increase their customer base and store traffic.

Recently they even ramped up their quarterly dividend to 37 cents ($1.44 annually) to yield 5%. Very few companies paying a 5% dividend are in danger of going out of business. The current dividend will be paid on March 22nd to holders on March 9th.

Gamestop will report earnings March 24th after the close and hold a conference call at 5:PM ET. They will also host an investor conference on April 13-14 and feature presentations from the leadership team and tours of the retail brand family. They are doing everything possible to be recognized as a growing business. They are a Fortune 500 and S&P 500 company.

All of these initiatives are foiling the plans for those traders holding the 37.7% short interest. That represents 39.5 million shares and the average daily volume is 1.69 million. That equates to a very bad week for the shorts if prices were to suddenly spike higher.

Other traders have been selling puts on GME at a record rate. Selling puts on a stock is a bullish strategy with expectations for the stock to go higher. On one day last week, more than 4,000 March $28.50 puts were sold at $1.40 each. Two days later another 4,000 $29.50 puts were sold at $1.38 on average.

There is resistance at $30.85 and I am going to recommend an entry at $31.10 because there may be some new traders waiting to sell at that $31 level. Once the stock moves over that resistance level we could see a flood of short covering.

With a GME trade at $31.10

Buy GME shares, initial stop loss $29.10


Buy April $32 call, currently $1.15, no initial stop.


No New Bearish Plays

In Play Updates and Reviews

Shot Down on Friday

by Jim Brown

Click here to email Jim Brown

Editors Note:

One of our positions was eliminated on Friday when it reached a pivotal price point. Fortunately, that point was our exit target on Smith & Wesson and we ended the play with a nice gain of $3.90 on the stock.

On the old TV series, The A Team, they had a saying, "I love it when a plan comes together." Hopefully, our plan on S&W is just one of many exits in the weeks ahead where the plan comes together for a gain.

The market is going to have to cooperate and we are at critical resistance levels on the S&P, Nasdaq and Russell. If we can get past Super Tuesday and the payroll reports without a market crash we could see some decent gains before the earnings cycle brgines again in April.

The Fed meeting in two weeks will also be a hurdle but they cannot raise rates in the current environment so the meeting should function as a stepping-stone as the market moves higher.

I am looking forward to ticking off the various progress points for a continued gain in the weeks ahead but today each one represents significant hurdles to our progress as i laid out in my market commentary this weekend.

Current Portfolio

Current Position Changes

SWHC - Smith & Wesson

The long position in SWHC was exited on Friday when it hit our target at $25.25 for a $3.90 per share gain. The option was exited at $3.30 for a $1.55 per share gain.

SGI - Silicon Graphics

The long position in SGI was opened on Friday.

DWRE - Demandware

The long position in DWRE was opened on Friday.

ACAT - Arctic Cat

The long position in ACAT was opened on Friday.

SKX - Skechers

The long position in SKX remains unopened.

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

ACAT - Arctic Cat - Company Profile


Shares inched higher again but it was enough to trigger the position entry at $17.25. There was no news. We need ACAT to move a little farther over $17.25 to trigger short covering.

Original Trade Description: February 24th

Arctic Cat makes snowmobiles, all terrain vehicles (ATVs) and recreational off-road vehicles (ROVs). They reported a bad quarter because of the exceptionally warm weather and lack of snow. Sales declined -14.3%. Of that 4.9% was due to the strong dollar. The brand is one of the most wildly recognized brands of off-road equipment.

Arctic Cat has been in a restructuring program for several quarters to revamp their dealer network, eliminate debt, reduce inventory and produce new cutting edge vehicles.

In Q4 they reduced long term debt by $15.8 million. They suspended the quarterly dividend to save $6.5 million in cash for the restructuring. Inventory decreased -$25 million sequentially. They generated approximately $27 million in free cash flow.

The company expects to see the benefits of their restructuring in the next two quarters with sales expected to rise +40% in the current quarter. New models and new products coming out this summer are expected to boost sales as well. They are announcing a new "single ski" snow bike at the snow dealer show in March.

While the outlook is far from exciting the company shares have rebounded from the low of $9 on January 28th to $16.45 today. The stock momentum is strong and it reached primary resistance at $16.50 this week. If the stock breaks through this resistance it could trigger additional short covering with the next resistance at $22.25. I am recommending a long position on a resistance break and an exit before we reach that higher resistance at $22.

Earnings are May 12th.

Position 2/26/16 with an ACAT trade at $17.25

Long ACAT shares @$17.25, initial stop loss $15.00


Long June $20 call @ $1.70, stop loss $15.00

DWRE - Demandware - Company Profile


DWRE finally broke out of its congestion phase and over resistance at $33.50 to trigger the play entry at $34.15. There was no news.

Original Trade Description: February 22nd

Demandware provides enterprise-class cloud based digital commerce solutions in the U.S., Germany, UK, and internationally. The Demandware Commerce platform enables customers to establish complex digital e-commerce strategies including multi-brands, multi-site, omni-channel and in-store operations.

Everything is integrated including payment systems, email marketing, campaign management, personalization, taxation, ratings, reviews and social commerce.

Demandware shares were caught in the Tableau Software disaster on February 5th when Tableau warned they saw enterprise spending slowing. Shares crashed from $44 to $30 on the Tableau news.

Demandware reported earnings on the 9th of 38 cents that beat street estimates for 23 cents. Revenue of $75.6 million also beat estimates for $72.3 million. They guided for full year revenue in the $295-$305 million range. Shares dropped at the open the next day because the street was expecting $302.26 million. It was a very minor guidance blink but shares dropped $2 the next day. That was the low for the month.

Shares have rebounded from that $26.50 low to $33.50 because they are not Tableau Software. They did not report any weakness in their earnings and revenue but they were punished for the Tableau guidance prior to earnings.

I believe Demandware will return to the $44 level where the close before Tableau dumped on the cloud software sector.

The high today was $33.97. I am putting an entry trigger on this play of $34.15 to get us over that level just in case the market takes a turn for the worse. If we do get some broad based profit taking, I will modify this play to take advantage of any new dips.

Earnings May 5th.

Position 2/26/16 with a DWRE trade at $34.15

Long DWRE shares @ $34.15, initial stop loss $31.35


Long April $35 call @ $2.70, initial stop loss $28.75

LGF - Lions Gate Entertainment - Company Description


Minor rebound ahead of the weekend opening for the new movie "Gods of Egypt" and Monday's price action will be directly related to the movie's performance.

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.

Update 2/24/16: LGF and MGM have taken an equity position in Asian based Fifth Journey, a company founded by former executives from LucasArts, Universal Pictures and Gameloft. The company develops next-generation Hollywood games and interactive entertainment. The partnership and equity stake will allow LGF and MGM to break into the highly lucrative Asian gaming market with an eventual translation into Asian movies.

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.

Position 2/24/16 with a LGF trade at $21.25

Long LGF shares @ $21.25, initial stop loss $17.85


Long June $23 calls @ $1.50, no initial stop loss.

SGI - Silicon Graphics Intl - Company Profile


We saw a 35-cent move higher at the open to trigger the entry into the play at $6.05.

The company will present at the Morgan Stanley Technology conference on March 3rd. That could provide a headline boost.

Original Trade Description: February 19th

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.

Position 2/26/16 with SGI trade at $6.05

Long SGI shares @ $6.05, initial stop loss $5.25

SKX - Skechers - Company Profile


Skechers is still fighting resistance at $33.25 but there was no material decline with the market today.

The position remains unopened until it trades at $33.55.

Original Trade Description: January 21st.

Skechers designs, develops, markets and distributes footwear for men, women and children, as well as performance footwear for men and women under the Skechers GO brand. They currently operate more than 1,340 retail stores.

On Wednesday, the company was named the Brand of the Year for the second consecutive year by the Footwear Industry Awards. They were also named Ladies Brand of the Year.

In the 25,000 runner LA Marathon on February 14th, performance athlete "Meb" finished second in the event wearing the custom Skechers GOmeb Speed 3 shoe. Meb secured his place in the 2016 Olympics with the second place finish. The first place finisher, Weldon Kirui, was also wearing the Skechers GOmeb Speed 3 shoes.

They reported Q4 earnings of 20 cents that matched estimates. Revenue rose +27% to $722.7 million and easily beat estimates for $648 million. The CEO said they saw high single digit sales gains in the domestic business and a 41% increase in the international business. The goal is to grow sales 50% over the next couple of years.

The positive earnings and continued positive headlines lifted shares from the $26 level two weeks ago to $33 today. The $33.25 level is strong resistance. If SKX can close above $33.50 they should be off to the races, pardon the pun.

The next material resistance is near $46.

With a SKX trade at $33.55

Buy SKX shares, initial stop loss $30.85


Buy April $35 call, currently $1.15

SWHC - Smith & Wesson - Company Description


SWHC spiked to $25.30 at the open to hit our profit target at $25.25. We exited the play with a $3.90 per share gain on the shares and $1.55 gain in the option.

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, exited 2/26/16

Closed; Long SWHC shares, entry $21.35, exit $25.50, +$3.90 gain


Closed: Long June $23 call, entry $1.75, exit $3.30, +$1.55 gain

USO - US Oil Fund ETF - ETF Description


Big spike at the open on gain in WTI but oil rolled over to close with a minor loss for the day. Every day that passes beings us closer to April and the end of the crude oil inventory build cycle.

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.

BEARISH Play Updates

BG - Bunge Limited - Company Profile


Still chopping around over support at $48.75. No change in the position.

The long put is still open with a stop loss at $51.85.

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

Stopped 2/22/16: Short BG shares @ $49.75, exit $51.25, -1.50 loss.


Still open:
Long April $47.50 put @ $1.80, stop loss $51.85

VXX - VIX Futures ETF ETF - ETF Description


The VXX opened lower but rebounded when the S&P rolled over in the afternoon. We need a positive market all next week to really depress the volatility.

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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