Option Investor

Daily Newsletter, Tuesday, 3/1/2016

Table of Contents

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

Market Wrap

Super Tuesday!

by Jim Brown

Click here to email Jim Brown

Last Tuesday we saw a +221 Monday gain nearly erased by a -189 point decline. Today we saw a -123 point Monday drop erased by a +348 point rebound to put us over recent resistance.

Market Statistics

The big gain came from an overnight rebound in Asia and Europe along with some better than expected economic numbers in the USA. Oil prices rose to more than $34 after China lowered the bank reserve rate on Monday and hopes for a successful production freeze in the Middle East. Reports from some U.S. producers said they were cutting production to conserve cash flow rather than produce at a loss.

The February Manufacturing ISM rose from 48.2 to 49.5 and almost back into positive territory. This is the fifth month in contraction for the sector. The new orders were flat at 51.5 but backorders improved from 43.0 to 48.5 but still in contraction. Production rose from 50.2 to 52.8 and employment improved from 45.9 to 48.5.

Imports declined from 51.0 to 49.0 and export orders declined from 47.0 to 46.5. Overall this was a "less bad" report but still in contraction. Analysts were beating the drum because the headline number had risen for two consecutive months up from 48.0 in December and 48.2 in January. While that is positive, I think they are grasping at straws. Still the market celebrated the improvement in the sector.

Construction spending soared +1.5% for January and well over the 0.4% estimate and the +0.1% gain in December. That was the biggest gain since May. Private construction spending was $831 billion, public spending $309 billion and total spending at $1.141 trillion. Public construction spending rose +4.5% with private spending up +0.5%. Spending on highways and streets rose +14.7% for the month to severely distort the headline number. Total spending is now up +10.4% over January 2015.

Auto sales for February continued at a 17.54 million annual pace. This is down slightly from the 17.6 million pace in January. These are outstanding numbers since January and February are the two slowest months of the year. Auto sales were on pace for 7.4 million and light trucks/SUVs at 10.1 million.

Ford's sales rose +20%, with its SUV rising +28% thanks to the low fuel prices. Car sales rose +19% with the Ford Focus compact up +4.7%. GM said overall sales declined -1.5%. Sales to rental companies declined -16,500 from 2015. Toyota said sales rose +4.1% and Chrysler +12% thanks to Jeeps and Ram trucks. Honda sales rose +13% and Nissan +10.5%.

Despite the market reaction to a better than expected ISM and Construction Spending report the Atlanta Fed GDPNow real time forecast declined -0.2% to +1.9% growth because of a markdown in real consumer spending growth from 3.5% to 3.1% because the continued contraction in the ISM.

The calendar for Wednesday has the first major jobs report from ADP and the Fed Beige Book with a recap of activity in all Fed regions. The Nonfarm Payroll report on Friday is the biggest report for the week and could weigh on the market depending on what the ADP report shows. A weak ADP report could suggest a weak Nonfarm report. A really strong Nonfarm could put the Fed back in play for their meeting on the 16th.

In stock news, Dollar Tree (DLTR) reported earnings of $1.01 that missed estimates for $1.04. Revenue of $5.365 billion rose +116.7% thanks to the acquisition of Family Dollar but still missed estimates for $5.425 billion. They now operate more than 14,000 stores. The company guided to full year revenue of $20.76 to $21.11 billion. Revenue for Q1 is expected to be $5.05 to $5.12 billion. Same store sales are expected to grow in the low single digits. Earnings are projected to be 75-83 cents for Q1 and $3.35 to $3.65 for the full year. Analysts were expecting 81 cents for Q1 and $3.78 for the full year. Shares dipped $2 at the open but rebounded to gain $2.

Medtronic (MDT) reported earnings of $1.06 and revenue of $6.93 billion that matched analyst estimates. However, they reiterated full year estimates for $4.36-$4.40 per share before seeing low double digit to mid teens earnings growth in 2017. Analysts were expecting $4.38 and the mid range of those forecasts. However, the company expects revenue to decline 5.0 to 5.5% in 2016 because of the strong dollar. The foreign currency impact is expected to be -$200 million in the current quarter. Analysts and investors saw the earnings as lackluster and shares declined -5%.

Autozone (AZO) reported earnings of $7.43 per share and 15 cents above estimates. Revenue was $2.26 billion and matched estimates. Gross profits were a whopping 52.7% of sales. Same store sales rose +3.6%. They opened 30 stores in the U.S. to bring their total to 5,193 and 5,676 stores globally. Autozone said low gas prices had produced more miles driven and therefore more wear on auto components. Shares rallied $16 on the news.

Kate Spade (KATE) reported earnings of 32 cents that missed estimates by a penny. Revenue rose +7.6% to $429 million but also fell short of estimates for $443.9 million. However, same store sales spiked 14% or 9% excluding e-commerce sales. Analysts expected 10.8%. The company lowered full year earnings guidance to the range of 70-80 cents and revenue of $1.39-$1.41 billion a rise of 14 to 16%. Investors apparently liked what they heard with shares up +11%. That probably translates into a lot of short covering after KATE broke through resistance at $21.

United Technology (UTX) shares fell after Honeywell (HON) said it was it was no longer pursuing the $90 billion acquisition. Honeywell said it strongly disagreed with United's position that the deal would have a tough time being approved by regulators. CEO David Cote said, "We made a full and fair offer that would have greatly benefitted both sets of shareholders. However, continuing to try and negotiate with an unwilling partner is inconsistent with our disciplined acquisition process." RBC upgraded UTX saying the company is "now in play" despite its rejection of the Honeywell offer. RBC did not say who might be considering an offer but there could be several candidates.

Tesla Motors (TSLA) shares fell after short seller Citron Research tweeted that "Citron shorting TSLA. Supply and demand problems should take the stock down to $100 by the end of 2016. News flow all around does not look good for the stock." Citron is notorious for picking on high flyers and causing significant pain for shareholders. Tesla has had some manufacturing challenges on the Model X

Valeant Pharmaceuticals (VRX) rebounded from an intraday dip to $60 after a $26 drop over the last three days on multiple headlines. The company was downgraded by RBC to neutral after news of a new investigation by the SEC. Hillary Clinton released a new campaign ad specifically naming Valeant and citing "predatory pricing" and pledging to fix those kinds of problems with prescription medicines.

The SEC is investigating VRX for financial misrepresentation surrounding its relationship with Philidor. Yesterday Valeant said it was postponing its earnings because of accounting errors surrounding Philidor. Today the company said it would not meet the regulatory deadlines for its quarterly filings.

Citron attacked Valeant several months ago questioning their accounting and helping to cause the massive drop in the stock price.

After the close Weatherford International (WFT) announced a secondary offering of 80 million shares with the proceeds to be used for general corporate purposes including the repayment of debts. Shares were $6.18 at the close. This is one more oil company resorting to the last option available to them to avoid defaults and bankruptcy. In late January, Pioneer Natural Resources (PXD) floated 12 million shares at $117. Earlier this week Marathon Oil (MRO) announced a 145 million share offering at $7.65. Duke Energy offered 9.25 million shares at $74. AEP Resources (QEP) offered 33 million shares at $10. Newfield exploration (NFX) offered 30 million at $23.

The bigger companies are surviving by cutting their dividends and selling assets. The smaller companies with weaker balance sheets are selling shares and diluting existing shareholders. We can expect more of this in the months to come.

Oil prices rose today but after the close the American Petroleum Institute (API) reported an inventory build of 9.9 million barrels for the week ended on Friday. That was the biggest build in 11 months and well over expectations for a gain of +3.6 million barrels. Cushing Oklahoma, the WTI futures delivery point was already within 3 million barrels of capacity and they added 1.8 million to pretty well max them out.

Crude futures declined to $33.90 after closing at $34.43. If the EIA report on Wednesday confirms this build, I am sure we will see lower prices. I have warned for weeks that the inventory build season does not end until the end of March or early April. Once refineries begin to draw down inventories, the prices should begin to stabilize at a higher level.


Everybody loves a short squeeze unless of course if you are short. The factors combining to cause today's squeeze included month end fund flows, rebounds in Europe and Asia, better than expected economics, rising oil prices and the idea that Super Tuesday sometimes produces bottoms in the market depending on the outcome of the vote. Having a lot of sellers pile on to the MSCI rebalance decline on Monday did not hurt either. They just added more fuel to the fire today.

In 1996 the market declined -2.9% the week before Super Tuesday. Bob Dole swept the contests to seal his nomination and the market rallied +2.3% the next week. In 2012 the S&P dropped -2% in the five days prior to Tuesday, Mitt Romney had a solid win and the market rose 4% over the next week. The key is a strong winner. If the contests end up with a mixed result, the markets tend to continue lower because of the lingering uncertainty.

Whatever the reason for the rally I am thrilled. The rally lifted the major indexes well above prior resistance and hopefully high enough that we will not have to revisit those levels. The strong gain also suggests the worst is now behind us and we are not likely to retest the lows.

Volume on Tuesday was 8.8 billion shares and relatively heavy. Advancing volume was 3:1 over declining volume. Advancers were a little more than 3:1 over decliners at 5,533 to 1,585. On a big +348 point day, we would have liked to see those numbers a little more lopsided in favor of the advancers.

The S&P surged past resistance at 1,950 and the 50% retracement level at 1,963 to close at 1,978. It would take some serious selling to return us to 1,950 but that 1,963 level is in play. In theory, those levels should now be support on any future decline.

You know there is a decline in our future. We cannot soar 348 points without some profit taking. Whether it is a little or a lot remains unknown and a lot of it revolves around the Asian markets tonight, payroll reports, Fed Beige Book and Fed speaker comments.

The next resistance is the 1,999 retracement level and the psychological hurdle of 2,000.

The Dow industrials were powered higher by short covering in more than half of the components. The banks were the leaders because the better than expected economics suggested the Fed could hike sooner rather than later and rising interest rates are good for banks. Apple rallied after the law enforcement lost a case in New York to unlock an iPhone in a non-terrorist investigation. FBI Director Comey and the attorney for Apple gave testimony in the House and it appeared Apple won the day but maybe not the war.

The Dow surged through the 50% retracement level at 16,718 and closed 150 points over that level. This was a strong day and also suggests we will not be going back to retest any lows.

The Nasdaq could be the problem child. The Nasdaq composite rose to exactly the 50% retracement level at 4,691 and came to a dead stop. It was a +131 point gain of +2.88% so we really cannot complain. What this means is that we could have some backing and filling on the Nasdaq before it moves over that 50% retracement level. Apple was a main supporter but Amazon, Priceline, Google and even Netflix contributed to the rally.

Prior resistance at 4,600 should be support but that would be a 90-point decline and I really hope we do not see that level again.

The index I am most happy about is the Russell 2000, which broke through not only 1,035 but 1,050 as well. If the Russell can hold its gains, we could be off to the races. The semiconductor, financial, energy and even biotech sectors all posted gains that supported the Russell. Keep your fingers crossed.

Regardless of who wins the Super Tuesday contests I expect some retracement of the gains. It is only natural. The real key will be how far back we drop and whether investors buy the dip.

I would not be looking to add to any positions on Wednesday. I would be raising stop losses on any position with profit you do not want to lose. As we have seen in recent weeks, the market can take back its gains even faster than it produces them. I would look to buy any decent dips.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Pause to Refresh

by Jim Brown

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Editor's Note

We had a decent day in the portfolio with all stocks gaining but several only posted minor gains. We have ten positions and the biggest gain was 77 cents despite a good day on the Russell 2000. That is telling me that the big cap short covering powered the markets higher and the low volatility, low beta stocks were left behind.

That may or may not continue on Wednesday but we need to see where the market is going before we add any new positions. The odds of some profit taking after a monster short squeeze rally are very good. I am sure there are shorts that did not cover and are sitting dumbfounded while staring at their charts tonight. That suggests we could have another spike at the open that runs into heavy selling.

I would rather not add another long only to get filled at the high of the day. Since I also believe market sentiment has changed for the positive I do not want to add a bearish play until the post spike volatility has faded.

We need to take a deep breath and just watch the markets on Wednesday. There are a lot of macro and geopolitical forces in play and the traffic could be heavy. It is better to wait for a "fat pitch day" than swinging blindly at every pitch that is thrown.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Instant Reversal

by Jim Brown

Click here to email Jim Brown

Editors Note:

The -123 point drop on the MCSI index rebalance on Monday was instantly reversed with a monster +348 point Dow gain. I will take that trade every time. I am sure every reader would also like to see several weeks of similar two day trends.

The best part about today was the dramatic break over resistance by the major averages. This was not 3-5 point gains barely over resistance. They all broke out convincingly and even if we do give some back this should have been a pivotal day in the markets.

Current Portfolio

Current Position Changes

GME - Gamestop

The long position in GME was opened with a trade at $31.10.

SKX - Skechers

The long position in SKX was opened with a trade at $39.85.

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 posted a gain after a drop at the open but it was not a big gain. The trend is still higher and it did move over resistance at $17.

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.

CDW - CDW Corp - Company Profile


CDW sprinted out of congestion on what appeared to be short covering. The gain stopped at resistance at $40.22 but appears poised to move higher. The spike over the 200-day average was what I expected. That had been strong resistance.

Original Trade Description: February 29th.

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.

Position 3/1/16 with a CDW trade at $39.85

Long CDW shares @ $39.85, initial stop loss $37.85.


Long Apr $40 call @ $1.50, no initial stop loss.

DWRE - Demandware - Company Profile


DWRE posted a minor gain but with other cloud stocks moving higher as well they should drag DWRE along with them.

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 is struggling with that resistance at $30.85. Shares closed over that resistance level but it remains sticky and there was no breakout.

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.

Position 3/1/16 with a GME trade at $31.10

Long GME shares @ $31.10, initial stop loss $29.10


Long April $32 call @ $1.40, no initial stop.

LGF - Lions Gate Entertainment - Company Description


LGF rallied 91 cents in regular trading but gave back 90 cents after the close. This is an error. Only 172 shares traded and apparently some idiot put in a market order in afterhours and somebody else took advantage of him. NEVER use a market order in afterhours trading. This will correct at the open on Wednesday.

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


The resistance at $6 is now officially broken. A 4% move does not seem like much but it is still a gain.

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 finally inched up to hit our trigger point at $33.55 but only barely. The high was $33.68. The stock closed over resistance but is still caught in the lingering gravity of that level. We need one more big gain to break free.

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.

Position 3/1/16 with a SKX trade at $33.55

Long SKX shares @ $33.55, initial stop loss $30.85


Long April $35 call @ $1.10, initial stop loss $30.85.

USO - US Oil Fund ETF - ETF Description


WTI was up at the open on various headlines but could be down on Wednesday on a monster build in inventories. 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


Finally a breakdown below support at $24. If we can just get 2-3 more days of market gains, even small gains, as long as there are no triple digit losses in the middle, we could see a return to $20.

I raised the exit target to 19.50 to close the position.

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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