Option Investor

Daily Newsletter, Monday, 2/29/2016

Table of Contents

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

Market Wrap

Stocks Pull Back Ahead Of Data

by Thomas Hughes

Click here to email Thomas Hughes


The market pulled back from resistance in today's session, but basically held steady near last week's high, ahead of a big week of economic data. It is once again time for the monthly blast of macro-data including the Fed's Beige Book, auto/sales, unemployment rate and non-farm payrolls. Low expectation for another interest rate hike, rising oil prices and rising gold prices helped add support.

Market Statistics

Action in the international markets was mixed, Asian indices got slammed by negative sentiment following the G20 summit (no plans to boost global growth were unveiled) and that sentiment spilled over into the European markets. Asian indices were led lower by the mainland Chinese Shang Hai index (-2.87%) but losses may be reversed on news from the PBOC. The PBOC announced, after the close of the Chinese trading day, that they were lowering the capital reserve requirements for banks in hopes of further stimulating their slowing economy.

European indices began their day with losses in the range of -2.5 to -3% but regained most of those losses by end of day on the PBOC news, and another positive headline out of the oil patch.

Early action in the futures market indicated a flat to negative open for the US market during the earliest part of the morning. Trading turned positive by 8:45AM, by 2 to 3 points for the SPX, and held that level into the opening bell. Trading after the open was choppy for the first hour, testing support and resistance in a very narrow range around last weeks closing prices, until about 10:40 when oil prices started to climb. From 10:45 to 11:45 the market steadily rallied, adding about 10 points to the SPX from the morning low.

The next two hours saw the market sell-off in the same slow steady manner as it rose, leaving the indices at or near break-even levels for the day. By 2PM the bears were back in control, breaching break-even levels and sending the indices marching lower for the rest of the day. By 2:30 the morning lows were broken, by 3:00 the SPX was down by -10 points and by the close of trading nearly -16.

Economic Calendar

The Economy

There was not a whole lot of data out today although the calendar for the week is packed full. Today we got reads on pending home sales and Chicago PMI along with the weekly Moody's Survey, all out at 10AM. The Moody's Survey of Business Confidence gained a half point to hit 38.5. This is the second week of advance since hitting a multiyear but leaves the index very near to that low. In the near term declining business sentiment is driven on global financial market turmoil and uncertainty over China's economic outlook. Outlook for the future remains a bit more positive with signs, according to Mr. Zandi, that sentiment is stabilizing.

The Chicago PMI came in at 47.6 versus the expected 52 reversing gains made last month. Within the report 4 of the 5 gauges of activity were negative led by an -18 point drop in production. The only positive reading was for delivery marking a continued draw down in inventories. Inventories have been in contraction for 4 months, negative in the near term but a positive for the long term as those inventories will need to be rebuilt at some point. Employment has contracted for 5 months now and is at the lowest levels since 2009, for the manufacturing sector.

Pending home sales fell by -2.5% from December to January, December data was revised higher making this month's decline a wash. On a year over year basis January sales are up 1.4% making it the 17th month of year over year sales increases. NAR economist Lawrence Yun says that weather conditions had some effect on slowing sales but the real problem is higher prices driven by low inventory.

This week's economic calendar: On Tuesday auto sales, ISM index, and construction spending. Wednesday ADP employment is released in the early morning, followed by the Beige Book later in the day. Thursday is weekly jobless claims, Challenger report on planned layoffs, productivity, unit labor costs, factory orders and ISM services index. Friday wraps it up with average work week, hourly earnings, the unemployment rate and the NFP.

According to Factset 96% of the S&P 500 have reported earnings, 11 companies are scheduled to report this week. Of those who have already reported 69% have beat earnings expectations while only 48% have beaten revenue expectations. The blended rate of earnings growth is now -3.3%, much better than the low of -6% forecast at the end of January but a far cry from positive. This is now the 3rd month of negative growth and we will likely see at least 1 more if not 2.

The energy sector remains the biggest drag on earnings growth, the sector is posting a -72% earnings growth rate so far this season. Oil will continue to drag on growth for the next few quarters. First quarter projections have the energy sector posting a -92% growth rate as of this week's esimates and that does not improve substantially until late in the year. Earnings in the sector should start growing again in 2017 and are forecast to expand in the range of 143%.

Projections for the 1st quarter and full year 2016 continue to decline although on a quarter to quarter basis begin to improve starting with the 2nd quarter. Full year 2016 earnings growth is now forecast at 2.8%, positive but well off the highs set last summer near 15%. First quarter earnings projections have fallen to -7.4% and a new low.

Looking out to the 2nd, 3rd and 4th quarters of 2016 projections are in decline but turn positive in the third quarter and expand into the 4th. Second quarter growth is forecast at -1.6%, 3rd quarter forecast if 4.7% and 4th quarter is 9.4%.

The Oil Index

Oil prices jumped more than 3.5% to close near $34. Driving the move was a variety of factors that help support the idea that oil prices have bottomed. Last week rig counts were reported down for the tenth week in a row adding to the idea US production is on a declining path. Russia is having a meeting of its oil chiefs tomorrow in an effort to prepare for the upcoming meeting between it and OPEC. In addition to this a statement from the Saudi cabinet and January output data raises the chances an actual curb to output to could be on the way.

From the Saudi Cabinet . . . "The kingdom (of Saudi Arabia) seeks to achieve stability in the oil markets and will always remain in contact with all main producers in an attempt to limit volatility and it welcomes any cooperative action," . The Reuters poll shows that output held steady in Saudi Arabia from December to January although overall OPEC production fell. The two largest and offsetting factors are a decline in Iraq due to violence in the region and rising output from Iran.

A new shot was fired from the shale drillers that will have an impact on oil prices into the future. They say that they are ready to ramp up production as soon as oil hits $40 a barrel.

In the near term oil is rising and will likely test its recent high near $36, longer term supply and demand are still out of balance. Oil may have bottomed but I think it too soon to call a reversal, at best we may see some stabilization which is in itself a good thing. Stable oil prices will undoubtedly help stall declines in earnings and earnings projections. This week's data could help move oil but I think it is going to come down to demand. Supply and production are still very high, demand is only tepid and the OPEC/Russia curb won't change that situation.

The Oil Index fell in today's session, counter to the rise in oil prices. The index remains range bound between 950 and 1000 with little sign of impending break out. The indicators are bullish but with waning momentum and stochastic looking like it is about to rollover the range appears to be confirmed. A break to the upside is unlikely without some strong catalyst, a move lower more likely with a possible break below 950 to retest support near 900.

The Gold Index

Gold prices rose more than 1.59% or nearly $20 in today's session to trade near $1240. Gold continues to consolidate between $1200 and $1250 with a bias to the upside. Safety seekers, fund inflows, physical buying and low expectations for an FOMC rate hike are all providing support. It looks like gold is prepping for a big move, most likely centered on the FOMC meeting, that could take it $200 in either direction. Spot price is now $200 off of its lows, if gold breaks to the downside it could easily retest lows, if it breaks to the upside $1450 is a potential target. This weeks data could move gold prices, if too strong data will lead to FOMC rate hike speculation, rising dollar value and lower gold.

The gold miners continue to benefit from higher prices and lower oil prices. The Gold Miners ETF gained more than 3.5% and is trading near its 8 month high. The ETF has been trading around the $19 level for over 10 days on a wave of strong momentum. MACD is in decline at this time, from its extreme peak, but as yet has not led to a decline in prices. Stochastic remains strong above the upper signal line. Upside target is near $21 at this time with risk present in the economic data, the ECB meeting next week and the FOMC next week. First target for support should the sector pull back is $18 with next target near $17.

In The News, Story Stocks and Earnings

The Dollar index tried to add to Friday's GDP driven rally but couldn't hold today's gains. The index created a doji candle midway between the 38.8% and 23.6% retracement levels and may be more supported by ECB expectations than FOMC. The ECB is meeting next week and there is some hope they will increase QE, weaken the Euro and strengthen the dollar although hopes are not that strong. According to the CME's Fed watch futures are pricing in an 8% chance of rate hike at the next meeting, up from 6% last week, giving little reason to expect the dollar to strengthen much in the near term.Adding to this idea is the fact that the yen keeps gaining against the dollar on flight to safety trades, a move that sent the USD/JPY down by 1% today. If the ECB fails to meet expectations the DXY could sink back below $97.50.

Valeant Pharmaceuticals had another rough day today. First off, their CEO came back to work after months spent recuperating from pneumonia, that was good news. Other than that the company is suffering from a delayed earnings reporting and withdrawn guidance, in order to fix accounting errors, and an announced investigation by the SEC. No details into this new investigation are available yet. Shares of Valeant fell more than -16% in today's session.

Taser delivered a stunning report, beating on the top and bottom line with record revenues, up 19.7% over this same time last year. The performance was driven by improving sales and improving margins and is expected to continue into the coming year. The news was well received and helped send the stock up by more than 10%.

Lumber Liquidators reported a much bigger loss than expected. The company's sales have not recovered from the laminate flooring scandal and the latest news from the CDC are not going to help. Much of the loss is due to decreased margin in relation to the write-off of Chinese sourced laminate flooring. Shares tested support and set a new intraday low in today's trading but finished the day with a gain near 2%.

The Indices

The indices tried to hold at Friday's closing levels but were not able to. Today's action was bearish, but not too strong, and not overly concerning considering the amount of data due out this week. Today's action was also fairly broad, no one index made significantly more than another, led by a -0.81% decline in both the S&P 500 and the Dow Jones Transportation Average. The trasnsports created a small bodied black candle just below resistance at the 7,500 level. Momentum is declining but strong, and stochastic is strong and moving higher within the upper signal zone so it looks like resistance could be tested again. A break above this level would be a bullish sign and could lead to a move up to 8,000 in the near term. Support is near the moving average.

The S&P 500 made a slightly larger black candle but also moving down from resistance. Resistance is at the 1950 level and if broken, could precipitate a move up to 1980 or higher. The indicators are bullish although MACD appears to have peaked, consistent with resistance. Stochastic is showing some strength crossing the upper signal line with today's action and suggesting a retest of resistance.

The Dow Jones Industrial Average made the next biggest decline, about -0.74%. The blue chips created a medium bodied black candle with a bit of upper shadow, falling from resistance. Resistance is near 16,700 and may hold the index back in the near term although the short term moving average appears to be giving support. Support may be tested over the next couple of days but the indicators are bullish, stochastic is showing strength, so I would expect to see resistance tested again, if not broken.

The NASDAQ Composite made the smallest decline in today's session. The tech heavy index fell only -0.71% creating a small black candle with moderately sized upper shadow. The candle is indicative of resistance near 4,600 although its strength is yet to be seen. The indicators are bullish and indicate a rising index so I think we can count on resistance being tested again. Further, the index is supported by the short term moving average and the 4,550 support line so any pull back is likely to be muted provided no bad or badly perceived news hits the market. A break above resistance could take it up to 4,750, a break below support may find next support near 4,500.

The indices bounced from their lows and have moved higher. They are supported by rising oil prices, rising gold prices, better than expected earnings (not good earnings) and low expectation of an FOMC rate hike. They are now at resistance waiting on economic data and two central bank meetings. This week is going to be about the data.

Today's round of data shows that the economy has cooled off a bit from December, yet remains steady to positive from year ago levels. I think what we need to see the rest of the week is confirmation that the economy is still growing, but not growing so fast as to push the FOMC into raising rates. Basically, Goldilocks numbers. The most important piece, at least the piece with the most attention paid to it, will be the NFP.

Until then, remember the trend!

Thomas Hughes

New Plays

Need an IT Department?

by Jim Brown

Click here to email Jim Brown
Editor's Note

The concept of a growing IT department for a new business is sometimes overwhelming. Servers, racks, routers, network switches and the associated software is daunting to most small business owners. There is an answer. CDW.com will do it for you.


CDW - CDW Corp - Company Profile

CDW distributes IT solutions in the U.S. and Canada through its website CDW.com. They offer hardware and software products to integrated IT solutions including mobile, security, data center optimization, cloud computing, virtualization and collaboration. They offer a full line of IT products of every size, shape, brand, model and configuration. They also offer customization, installation, warranty and repair services as well as infrastructure as a service. This is the IT distributor for the home office, company datacenter or the datacenter as a service for those companies that do not have an extensive IT staff.

CDW has more than 250,000 corporate customers and 1,000 supply partners.

They reported Q4 earnings of 73 cents that rose +23% and matched estimates on revenue that rose +12.1% to $3.42 billion, which beat estimates slightly. For the full year they earned $2.35 on revenue of $12.99 billion.

They also announced a quarterly dividend of 10.75 cents to be paid on March 10th to holders on Feb 25th.

Shares rebounded from the earnings and are trading at $39.50. CDW has a very clear relationship with moving averages, especially the 200-day and the 300-day. Every break of either average has resulted in a significant move. On Monday CDW closed 9 cents above the resistance of the 200-day after trading between the 200-300 for the last two weeks. A breakout over that 200-day should target the $43 level if not higher.

CDW shares posted a 77-cent gain today in a weak market.

The high today was $39.76 and I am going to use an entry trigger at $39.85. That will mean the option price could be a little higher than expected since I am using the $40 strike. The $45 strike is too far away and has no open interest.

With a CDW trade at $39.85

Buy CDW shares, initial stop loss $37.85.


Buy Apr $40 call, currently $1.50, no initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Market Out of Balance

by Jim Brown

Click here to email Jim Brown

Editors Note:

Every quarter some financial services firm like S&P, Russell, MCSI or others will rebalance their indexes to delete underperforming stocks and add new performers. Today was one of those days.

The MCSI Indexes were rebalanced at the close and to account for additions and deletions along with reweighting the current components. This created a serious market order imbalance ahead of the close. That imbalance began to appear after 2:PM and the market declined from decent midday gains.

This rebalance had nothing to do with the individual stocks in our portfolio but all stocks decline when the elevator descends regardless of who pushed the buttons.

I was encouraged by the early gains in the Russell 2000 to trade at 1,045 and well over resistance at 1,035. Unfortunately, the rebalance knocked it back below that 1,035 level at the close.

The Asian markets were down overnight but the U.S. markets still rallied at the open. That is a positive sign that we are disconnecting from the Asian declines.

Current Portfolio

Current Position Changes

GME - Gamestop

The long position in GME remains unopened.

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 spiked to $18.37 at the open after the company announced a new marketing promotion called "Race and Ride" where the winner will get to ride along in an Arctic Cat Wildcat with Robby Gordon during a Stadium Super Truck race in Costa Mesa Ca.

Shares faded with the market from the opening spike by still posted a 32 cent gain.

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, see portfolio graphic for stop loss.


Long June $20 call @ $1.70, see portfolio graphic for stop loss.

DWRE - Demandware - Company Profile


DWRE gave back some of their gains from Friday but it was a minor decline and it did close over prior resistance. 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, see portfolio graphic for stop loss.


Long April $35 call @ $2.70, see portfolio graphic for stop loss.

GME - Gamestop Corp - Company Profile


Gamestop rallied to $31.09 and missed our entry trigger at $31.10 by a penny. The stock still posted a gain and a positive market should cause an entry on Tuesday.

Original Trade Description: February 26th.

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.

LGF - Lions Gate Entertainment - Company Description


Minor rebound despite a weak opening for the new movie "Gods of Egypt" which only scored only $14 million in the weekend opening. The movie had been downplayed for a couple months because the main characters were white Europeans rather than people of color that could have actually been from Egypt. In reality the movie was not as bad as some expected and several critics said it was fun. It was not filmed as a serious movie and it was targeted towards teen audiences. Critics believe moviegoers will eventually go see the film because of a weak calendar ahead of the summer releases.

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, see portfolio graphic for stop loss.


Long June $23 calls @ $1.50, see portfolio graphic for stop loss.

SGI - Silicon Graphics Intl - Company Profile


Minor gain after spiking to $6.24 at the open. Shares faded at the close with the market.

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, see portfolio graphic for stop loss.

SKX - Skechers - Company Profile


Skechers is still fighting resistance at $33.25 but there was no material decline with the market today. The high was $33.30 and just under our entry point at $33.55.

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

USO - US Oil Fund ETF - ETF Description


WTI posted a gain for the day and that translates into a gain for the USO. The headlines continue to be positive about the OPEC production freeze. Every day that passes brings 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 wandering 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, see portfolio graphic for stop loss.

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 for 2-3 consecutive days 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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