Option Investor

Daily Newsletter, Thursday, 3/17/2016

Table of Contents

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

Market Wrap

In The Wake Of The Fed

by Thomas Hughes

Click here to email Thomas Hughes


The FOMC was positive on the economy but dovish on their inflation targets, the path of rate hikes spurring the market to new highs. The lack of interest rate hike was pretty much expected, what was not so expected was the dovish tone on future rate hikes and the time line for reaching inflation targets. The news sent the dollar crashing to new lows and has affected the markets around the world.

Indices around the world ended the day mixed as the FOMC statements send ripples through the currency world. In Asia Chinese indices were up while the Japanese Nikkei closed with a loss, weakening dollar means strengthening yen which is no good for Abe-nomics and Japans shaky recovery. The same was true in Europe; indices were mixed but mostly closed lower on the day. Rising oil and gas prices were not enough to overcome the effects of a strengthening euro.

Market Statistics

Trading here at home was quiet but not mixed. Early indications from the futures market showed a slightly negative open, unaffected by positive economic data, and that held true into the opening bell. The indices opened the day with mild losses, wavered around break even for the first half hour or so, and then began a steady climb that lasted into the lunch time hour and beyond. By 1PM the market was hitting 2016 highs and extended those gains into the late afternoon. Resistance was met in the 3PM hour and capped gains, paring some of today's advance, but left the indices near the high of the day at the closing bell.

Economic Calendar

The Economy

There was quite a bit of economic data today and all of it positive. Starting off with jobless claims the initial claims figure rose by 7,000 to hit 265,000. This is slightly above expectations but nothing to be alarmed about. Claims remain near the long term low, at levels conducive to ongoing labor market health and below 300,000 for the 54th week running (according to the BLS this is the longest streak below 300K since 1973). The 4 week moving average of claims rose by 750 but also remains near the long term low. On a not adjusted basis claims fell by -4.2% versus an expected drop of -6.6% and are -8.8% below levels at this same time last year. The biggest increases in claims were in Alabama and Texas, +732 and +707, while the biggest decreases in claims were in New York and California, -17,555 and -1288.

Continuing claims gained 8,000 on top of a +2,000 upward revision to hit 2.235 million. The four week moving average of continuing claims fell by -9,250 to hit 2.243 million, both numbers remain steady relative to levels we've seen over the past few months and consistent with ongoing labor market recovery.

The total number of claims fell by -72,124 and remain consistent with historical trends and ongoing labor market recovery. The total number of claims in this week's data is 2.648 million, the lowest level since the post holiday spike and down -7.4% from last year. Based on the historical data we should start to see a dramatic drop off in this figure within the next few weeks as the spring hiring season begins to pick up.

The Philadelphia Fed Manufacturing Business Outlook Survey was also released at 8:30AM. The survey index was expected to decline by -1% but posted a surprising gain of 12.4%, reversing 7 months of declines. Within the report all the individual gauges showed gains, most advancing into expansionary territory. New Orders rose 21 points, Shipments rose 20 points, Unfilled Orders rose 11 points, Employment rose 4 points but remains just shy of 0 and the Workweek rose 19 points entering expansionary territory. Output also increased, as did forward outlook. The 6 month forward outlook rose 11.5 points to 28.8 and a 4 month high.

The JOLTs and Leading Indicators were both released at 10AM. The JOLTs report shows that the number of available jobs increased by 260,000 to 5.5 million, just short of the record high. Within the report new hires and separations both declined marginally, as did the quite rate. The quits rate fell to 2.8 million but remain elevated and at levels consistent with labor market health.

The Index of Leading Indicators rose by 0.1%, reversing two months of declines. According to Conference Board spokesperson the index has shown a decline in the rate of growth over the past few months but the outlook remains positive with little chance of downturn. The Coincident Index gained 0.1% and the Lagging Index gained 0.4%.

The Oil Index

Oil prices shot higher today on a number of factors. One is that the OPEC/Non-OPEC meeting to discuss production freezes is back on, with or without Iran. Another is the peripheral affect of yesterday's Fed meeting; the more dovish outlook has weakened the dollar and that has helped to support prices across the commodities spectrum. Yet another reason why oil prices have moved higher are new signs of slowing US production. Today WTI crossed above $40 per barrel for the first time since January 4th. While the rally in oil appears to gaining momentum there are some things to be wary of. First, supply and production still outweigh demand. Second, US shale producers have said they would be ready to go back on-line when oil prices move above $40. Third, the meeting to discuss production freezes is still little more than smoke in the wind, when it happens and when they come to an agreement I will believe it.

The Oil Index gained a little more than 2% in today's session and set a new nearly 3 month high. Today's candle turned out to be a small but bullish spinning top and is now approaching a resistance target near 1,115. This target is the 61.8% retracement of the 2009-2012 bull market in oil and has provided support/resistance in the past. The indicators are bullish and pointing higher so it looks like this level will be tested at least although there is some divergence present. Divergences suggest that resistance may hold and at worst, provide a point of reversal, but are by no means a guarantee. A break above resistance could take the index up to 1,200 in the near to short term, first target for support is near 1,050 should the index reverse at resistance.

The Gold Index

The FOMC brought the market a pot of gold this St. Patrick's Day. The lack of rate hike and dovish posture has sent the dollar to new multi-month lows and helped gold regain much of the loss seen earlier this week, jumping more than $30 yesterday afternoon. Spot prices tried to extend yesterday's gains in today's session but were not able too, holding flat throughout the day, likely on profit taking. My view, with the dollar sinking to new lows and the prospect of even 2 more rate hikes in question the bias in gold is to the upside with targets near $1285 and $1300.

The gold miners touched a new high today as rising gold prices impact earnings expectations. The Gold Miners ETF GDX moved up by about 2% in the early part of the session only to hit my resistance targets near $21.25 and reverse today's gain. Sellers stepped in at this level and drove the index back to break even. Despite the move lower the indicators are rolling over into what could become a fairly strong bullish signal; MACD is near the 0 line and about to crossover, stochastic is forming a weak bullish crossover. Should the index break above resistance next target is near $23.

In The News, Story Stocks and Earnings

The Dollar Index fell about -1.15% in today's session and set a new 5 month low. The index is being driven down by a combination of the ECB's indication of no more QE, and the FOMC indication that rate hikes are going to come at a much slower pace than first thought. Today's action took it down below the $95 level with bearish indicators and appears to be headed for next support target near $44.25. Unless data starts coming in much hotter than expected, or the ECB gets back on the QE gas pedal, the dollar could continue lower with target near $96.50 and the long term low.

Michaels Companies, a retailer of arts and crafts supplies, announced earnings before the bell. The company reported top and bottom line beats, along with positive 2016 guidance. Earnings are up 16% from the same quarter last year on a 20% increase in revenue. While full year guidance is slightly above consensus first quarter guidance is a little on the weak side. Despite this the news was seen as favorable and helped to send the stock trading higher. Shares of the stock gapped up at the open, retreat to test support and then advanced roughly 10% for the day.

Nike revealed the first ever self tying shoe today. The technology, which relies on a sensor in the heel, tightens the shoe fit and can be adjusted by buttons on the side. While a neat invention it begs the question … why? What is the point of this and how durable is the technology? Are they going to provide service when the technology breaks down? I am sure that plenty of people will rush right out to get them as soon as they are available but I doubt I will be one, at best I see this as a novelty item. Regardless, shares of the stock gained more than 2.15% and are trading near a three month high.

Lots of retailers reported earnings this week. For the most part they have reported in line with expectations, some have beat, a few were weak, but the basic tone along with ongoing recovery in the labor market and consumer are helping to support the entire sector. Today the XRT Retail SPDR gained more than 1% and reached a new 4.5 month high. The move is promising, and comes on a massive wave of bullish momentum, but declining momentum and overbought conditions give reason for caution, especially with the onset of earnings season only a few week away. Based on earnings outlook the Consumer Discretionary sector is expected to see earnings growth near 10% in the first quarter, Consumer Staples -3%, so there could be some volatility among the retail subsector.

The Indices

The indices started today on uneven footing but that quickly changed. By the end of the first hour of trading the market was in rally mode and slowly moved higher for most of the day pushing the major indices to new highs and into positive territory for the year. The biggest gainer of the day by far was the Dow Jones Transportation Average which closed with a gain near 3%. The transports made a strong move higher, breaking past resistance at 7,720, and is accompanied by bullish indicators. Both MACD and stochastic are pointing higher, consistent with a rising market, although divergence is present. Today's move looks like it will continue moving higher with upside target near 8,350.

The Dow Jones Industrial Average made the 2nd biggest move in today's session, about 0.9% at days end. The blue chips extended their move above the long term trend line and accompanied by bullish indicators. Momentum strong and moving higher so this move could continue, with next upside target near 17,750 although there may be some resistance at 17,500. The caveat is that the index has now entered a previous congestion range which may bring the bear out to play. First target for support should the index pull back is near 17,250.

The S&P 500 made the 3rd largest gain in today's session, about 0.66%. The broad market extended its move above the 2020 resistance line, after testing it for new support, and closed with a new 2.5 month high. Today's candle is medium sized, not overly strong, and shows signs of both support and possible resistance with the upper and lower shadows. The indicators are bullish and moving higher although there are some signs the move may be running out of steam, namely divergence in MACD and overbought conditions in the stochastic. Next upside target is near 2090 with a chance of resistance near the 2050 level. First target for support is now 2020 with 2000 next should the first target not hold.

The NASDAQ Composite made the smallest gain today, only 0.23%, after spending much of the session in negative territory. Today's candle is relatively small and shows sign of resistance with the upper shadow but was able to hold and move up from the 4750 level. The indicators are bullish and pointing to rising prices although, like with the other indices, there are divergences present. Next upside target is near 4900.

The market seems to like the FOMC's new stance on the rate hike time line. The dovish tone has delivered a perfect storm of positive factors that should continue to support the market into the longer term. Aside from reduced fear of rising rates the policy statement provided an upbeat outlook on the US economy and a trifecta of reasons to expect earnings outlook to begin ticking higher; the weak dollar will alleviate the impact of currency conversions on international businesses, the weak dollar is helping to support oil prices which should begin to impact energy sector earnings outlook very soon, the weak dollar is helping to support gold prices which will are going to have a positive effect on the gold sector.

I'm still bullish on the market for 2016. Earnings growth is expected to return by the second half of the year and now, more than ever, I think we can expect to see projections begin to improve. My worry is the near term and the upcoming earnings cycle scheduled to begin in less than a month. The S&P is expected to show a decline in earnings growth greater than -8%, the deepest decline since the earnings recession began, and this will not be good for the market. I hate to say it but I think we're in for another dip down to support and the divergences I mentioned in the indices may be foreshadowing this move. The good news is that another dip and test of support will be good for the longer term health of the bull market and another entry point for bullish positions. Until then I'll be riding the rally to its peak, keeping a close eye on open positions.

Until then, remember the trend!

Thomas Hughes

New Plays

Fast Growing, No Debt

by Jim Brown

Click here to email Jim Brown
Editor's Note

How many semiconductor companies have no debt? That is a sign of good management and a strong business. This one even pays dividends.


HIMX - Himax Technologies - Company Profile

Himax is a fabless semiconductor company providing display and imaging technologies to consumer electronics worldwide. They operate in two segments including Driver IC (integrated circuits) and Non-Driver products. Their ICs are used in television controllers, laptops, monitors, mobile phones, tablets, digital cameras, car navigation and other consumer electronic devices.

The company reported earnings for Q4 of 3.6 cents that beat estimates on a 7.5% increase in revenue to $178 million. They raised guidance for the current quarter and the full year. They are debt free and had $148 million in cash compared to $126 million in the prior quarter.

The company said business was booming and demand from China was growing rapidly. The various new products shown by various manufacturers at CES in January were now going into production demand for the ICs was increasing. The demand for 4K TVs is increasing as the prices drop and Himax expects demand to double in Q1 over Q4 and triple over Q1 2015. Large panel ICs are expected to grow from 10% to the high teens in percentage in the current quarter.

Shares closed at a two-year high on Monday and then dipped with the market. They returned to close at that high again on Thursday just under $11. A move over $11 targets resistance at $14.50.

With a HIMX trade at $11.10

Buy HIMX shares, initial stop loss $9.85

No option recommendation because of pricing issues.


No New Bearish Plays

In Play Updates and Reviews

Good Things Come to Those that Wait

by Jim Brown

Click here to email Jim Brown

Editors Note:

We closed the VXX position today for a gain of nearly $10 per share. It was a bumpy ride. The volatility spike in Jan/Feb kept us in the position a lot longer than normal but it was worth the wait.

The markets rallied today with the exception of the Nasdaq 100 and the biotech sector, which declined once again. The Russell 2000 posted a big gain thanks to the rise in oil prices that overshadowed the decline in biotechs.

Friday is quadruple options expiration and there will be high volatility at the open and high volume at the close. After a big market rebound there could be a lot of traders taking profits in their option positions and a lot of shorts that have resisted the urge to sell in hopes of another decline to ease the pain. Those cross currents could inflate the volatility once again.

The S&P closed at resistance at 2,040 and only 3 points from positive territory for the year. The Dow managed to seal the deal and closed about 60 points into positive territory for 2016 at 17,481.

The Dow is racing headlong into serious resistance starting at 17,750 through 17,900. That would be a good place for a double top.

Current Portfolio

Current Position Changes

DWRE - Demandware

Call position was closed at the open.

VXX - VIX Futures ETF

The short recommendation were closed when the VXX hit $19.50

EGHT - 8x8 Inc

The short position was opened with a trade at $9.80.

BBOX - Black Box

The long position remains unopened until BBOX trades at $14.25.

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

AMLP - Alerian MLP ETF - ETF Profile


Up slightly thanks to the rebound in oil prices.

Original Trade Description: March 2nd.

The MLP sector has been trashed along with the producers even though they have almost no risk. A pipeline MLP is a toll collector. They get paid a fee for every barrel of oil or cubic foot of gas that travel through their pipelines.

The vast majority of the pipelines in the country are full. They are so full that producers are having to resort to truck and rail shipments to get their oil to market. The pipelines are not in any material danger of a sudden drop in petroleum products flowing through their pipelines. Many contracts are take or pay. Producers commit to ship a certain amount of product and they pay for that commitment.

I am recommending the Alerian MLP ETF. This is an ETF that owns an entire basket of MLP securities and they all pay dividends. The AMLP is currently yielding 11.4%. They have raised their dividend every quarter since Q1-2012. They are not likely to break that string and if they did I suspect it would only be by a small amount. The Q1 dividend they announced on Feb 10th was 29.9 cents, payable on February 18th.

There are analysts that believe the MLP model is at risk. They believe the cost of capital will rise with the Fed rate hikes and the crash in the oil market. That means existing MLPs will have to pay more for new assets. That does not affect existing MLPs that already have their assets in place. They do not have to grow in the current energy environment. They can be content to sit on their assets and continue to pay dividends on their existing pipelines.

AMLP Holdings

I believe the risk at the current price level is minimal. The MLP panic has run its course with several cutting their dividends and causing the sharp drops in the ETFs. Now that oil prices are firming and expected to firm even more beginning in April when inventories begin to decline, the MLP ETF buyers will return. Just a year ago AMLP was trading over $20 and could be there again by this time next year.

There is no scenario where oil prices remain low long term. This is a normal boom/bust cycle and they will recover and will trade significantly higher in the years ahead.

This is a LONG-TERM position. Oil prices should rebound starting this summer and then rise sharply in 2017 and you need to be content to collect the 11.4% while we wait for those prices to move higher.

You do not have to hold long term. My initial target would be $14 and that would be a 40% return and we could see that by July.

Tuesday 3/8 comments: AMLP declined -6.7% after a court verdict appeared to allow bankrupt Sabine Energy to renegotiate contracts with midstream transporters of natural gas. U.S. Bankruptcy judge Shelly Chapman in Manhattan said Sabine should be able to reject the current transmission contracts with HPIP Gonzales Holdings and Nordheim Eagle Ford Gathering LLC, an affiliate of Cheniere Energy. AMLP was not involved in the case.

Despite the judges comments she also said she did not want to decide an underlying legal dispute in a binding way. The problem is that companies contract with the owner of gathering systems for a field that can consist of tens of thousands of acres with production coming from a dozen different producers. Those producers contract for 10 years or more with the gathering system to ship their gas/oil through the gathering pipeline to a larger pipeline, rail car loading facility, refinery, etc.

For Sabine to reject the contract to ship its gas through the gathering system makes no sense. They have no other way to get it to market. Sabine admitted they were having to flare all their gas because HPIP was not accepting it for nonpayment of the agreed fees. Sabine said they were not paying because HPIP never completed construction of the pipelines. HPIP said Sabine never paid them the agreed construction fee.

The pipeline operators claim that once they contract with a group of producers to construct a system of pipelines to gather production that those contract rights and obligations pass from owner to owner if the leases are sold. Sabine wants to void its portion of the gathering agreement.

All the midstream MLPs were down on the judges comments because it has always been understood that once a pipeline is in place in a field that operator has the right to collect and transport the gas/oil from that field regardless of who owns it.

The judges comments are not law. She called the attorneys to her chamber after the court event and told them to "come to a commercial resolution of your issues" because she did not want to be put in a position of having to rule on the legality of the broader issue that could impact the entire pipeline sector in the USA.

While this does not have any immediate impact on AMLP and an adverse ruling may not impact them for years into the future, the stock was down because the sector recoiled in horror at the possibilities. I suspect calmer heads will prevail in the days to come.

Position 3/3/16:

Long AMLP shares @ $10.40. No stop loss.


Long July $12 call, entry 55 cents. No stop loss.

BBOX - Black Box Corp - Company Profile


Support at $13 held again and the 5% rebound put shares right back at resistance at $14. Eventually we are going to see a breakout from this range and it could be strong. Only the direction is unknown. No news.

The position remains unopened until BBOX trades at $14.25

Original Trade Description: March 9th.

Black Box is a leading technology solutions provider dedicated to helping customers build, manage, optimize and secure their IT infrastructure. They operate globally with more than 3,500 team members.

Black Box provides data centers, control rooms, contact centers, networking infrastructure while maintaining the highest security protocols and real time monitoring. With 70% of businesses reporting security breaches over the past 12 months it is critical to have somebody that understands the risk to manage your IT assets in all areas. The average security breach costs $3.5 million to repair and recover.

Shares rallied after they reported earnings on January 26th of 37 cents that rose +9% and beat estimates. They reported revenue of $222.5 million. They guided for the current quarter for earnings in a range of 25-30 cents and revenue of $220 million.

The company declared an 11-cent dividend payable April 14th to holders on March 31st. The company also increased the share buyback program by 1 million shares with $7 million to be purchased in March.

BBOX shares are undervalued to their peers by about 50%. The price to book multiple is .68 compared to the peer average of 2.06. They trade at a negative PE of -1.73.

This is a simple play. BBOX rallied from $8 to $13 in the days following earnings. Shares have plateaued at the $13.50 level with a slight upward trajectory. Recent intraday highs over the last two weeks have been from $13.85 to $14.11. When an eventual breakout occurs we could see a spike to $2-$3 as shorts cover and others add to their positions.

I am recommending we buy BBOX shares with a trade at $14.25 and target $16.25 for an exit.

Earnings are May 5th.

With a BBOX trade at $14.25

Buy BBOX shares, initial stop loss $12.85

No options because of wide spreads.

CDW - CDW Corp - Company Profile


Still fighting the moving averages but the short-term trend is still intact. The down trending 100-day has joined the 150-day with resistance at $41. Any further gains would be a breakout. There is a nice pattern of higher lows over the last week. The size of the candles are shrinking and that suggests we are getting closer to a breakout.

Cisco recognized CDW with three Cisco Partner Summit Global Awards, the Global Commercial Partner of the Year and the Global Marketing Innovation Partner of the Year.

Previous: The interesting factoid is that the stock came to rest almost exactly on the 150-day average at $40.90 for the third consecutive day. There must be a high frequency trading program that is focused on CDW because the almost perfect respect for each of the moving averages is too precise for a day trader to manipulate the stock. Volume is 800,000 a day so it has to be a computer program. I looked at the time & sales and the vast majority of the trades, probably 85% or more are even 100 share lots. There are dozens of sequential trades with only a penny difference and sometimes less than a penny. Then dozens of trades a penny higher. That repeated all day long. That suggests a break over the 150-day average will run to the 100-day at $41.32.

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.

DRII - Diamond Resorts Intl - Company Profile


Minor decline to support at $24.25 but rebounded 75 cents off the lows. This was just a consolidation of Wednesday's big gain.

Original Trade Description: March 10th.

Diamond Resorts is rumored to be planning to take itself private in a leveraged buyout as the result of a previously announced strategic review. Analysts are expecting a deal price in the $32-$35 range. The company has a network of 375 vacation destinations in 35 countries. The firm hired Centerview Partners to evaluate all strategic alternatives after two major shareholders requested the board take action including an outright sale. Marriott Vacations Worldwide and Wyndham Worldwide could be suitors. More than 23% of DRII shares are sold short.

The company recently announced its 10th straight quarter of record financial performance and issued guidance for 2016 calling for another record year. Despite the record performance the share price had declined -25% in 2016. Apparently, this caused two large shareholders to turn up the heat and tell the company to get something done to increase the share price.

Starwood Hotels recently sold its timeshare business to Interval Leisure Group for $1.5 billion or 12 times trailing Ebitda. Diamond Resorts is only trading at 9.5 times with a forward multiple of 6.2 times or significantly undervalued to the Starwood sale. This suggests someone could pay $30 for Diamond and still be accretive to earnings in 2016 without accounting for synergies.

The Diamond CEO is also the founder and he owns 25% of the company. That suggests a LBO might be the most likely option so he can keep his stake.

Earnings May 25th.

Position 3/10/16 with a DRII trade at $24.25

Long DRII shares @ $24.25, initial stop loss $20.50.

No option recommended because of wide spreads and high prices.

DWRE - Demandware - Company Profile


DWRE posted a nice rebound of 3% and right back to resistance. The call position was closed at the open for a 90-cent gain.

Target $43.25 for an exit on the stock position.

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.


Closed 3/17/16: Long April $35 call @ $2.70, exit $3.60, +.90 gain

HPE - Hewlett Packard Enterprise - Company Profile


Dead stop at $17.25 again but once over that level shares could accelerate higher.

Original Trade Description: March 14th.

Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.

HPE reported adjusted Q4 earnings of 41 cents compared to estimates for 40 cents. Revenue of $12.72 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.68 billion.

CEO Meg Whitman said, "We saw the progress that comes from being more focused and nimble. We delivered a third-consecutive quarter of year-over-year constant currency revenue growth, and excluding the impact of recent M&A activity, we saw revenue growth in constant currency across every business segment for the first time since 2010."

For the current quarter HPE guided to earnings of 39-43 cents. For the full year they expect $1.85-$1.95 and that was more than analysts expected at $1.87.

Earnings are boring. The really good news came from the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. Last year they returned $1.3 billion to shareholders in the form of dividends and share buybacks. In 2016 HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

In May they expect to close their previously announced deal with China's Tsinghua and that will provide an additional $2 billion in cash that HPE said it would use to repurchase shares.

This means over the next couple of months we should see significant share activity as fund position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016.

Earnings June 2nd.

HPE shares have shaken off their post spinoff weakness and are now trading at a four-month high. I am recommending we buy this stock in anticipation of investors moving in ahead of future dividends and buybacks. I am not recommending an option because they are too expensive.

Position 3/15/16:

Long HPE shares @ $16.36, see portfolio graphic for stop loss.

SGI - Silicon Graphics Intl - Company Profile


Another weak gain. I am continuing to stick with this position and any material dip will take us out with a minor profit. We have little risk at this point and the potential for a decent gain if the stock breaks out. No news.

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.

WIN - Windstream Holdings - Company Profile


WIN spiked to resistance at $8.00 and held most of its gains. Maintain that $7.10 stop and hopefully the decline is over.

Original Trade Description: March 11th

Windstream provided network communications and technology solutions for consumers, businesses and enterprise organizations. They provide high-speed internet access, hosted web services and cable TV to a combined total of 1.6 million residential and business customers. They have more than 125,000 miles of high-speed fiber optic cable with speeds up to 500 gbps along their main corridors. They have 11 major data centers providing web hosting, cloud services, etc.

In the Q4 earnings, WIN reported adjusted earnings of $1.41 that crushed estimates for a loss of 48 cents. Revenue of $1.427 billion missed estimates slightly for $1.433 billion. The major earnings beat came from a spinoff of some of its telecom assets into a REIT. The cash received from the spinoff will allow some major network improvements in the months ahead.

The company declared a 15-cent quarterly dividend payable April 15th to holders on March 31st. That equates to a 7.3% annual yield.

WIN shares have been moving higher since they reported earnings on February 25th. Shares are at resistance at $8.25 and could breakout this week. The next resistance would be $11.85.

While we are not playing the stock for a takeover there is always the chance that somebody like Verizon or even Google could decide the $750 million market cap was chump change for 125,000 miles of high-speed fiber, cable TV and data center business.

I am going way out on the option to August because it is cheap and it will make a good lottery play even if we close the stock position early.

Position 3/11/16

Long WIN shares @ $8.22, initial stop loss $7.10


Long August $9.00 call @ .40 cents. NO STOP LOSS

BEARISH Play Updates

EGHT - 8X8 Inc - Company Profile


The position was opened with a trade at $9.80 and shares continued to fall. We are off to a good start.

Original Trade Description: March 16th

8X8 provides voice over internet protocol (VOIP) technology and software as a service (SaaS) communication solutions in the cloud for small and medium businesses and mid-market enterprises. They offer VOIP to in office subscribers, mobile devices, a virtual contact center and virtual meeting across its SaaS platform.

They reported Q4 earnings of 5 cents compared to estimates for 3 cents. Revenue of $53.2 million also meat estimates for $52 million. This is not a widely followed stock and the post earnings bounce was brief.

The stock rallied on an earnings beat in October and spent all of Q4 and early Q1 in the $11 range. Those gains are fading. Shares closed at $9.90 on Wednesday in a positive market. Shares appear poised to give back all those October gains and decline to $8.00.

This is a technical trade rather than something bearish in their business model or results. The company is simply not generating any excitement and investors are selling.

Earnings are May 18th.

Insiders have been net sellers over the last six months and institutions have sold nearly 8 million shares in the last quarter for a 16% drop in fund ownership. I am recommending we short the stock under today's low of $9.87 and target $8.25 for an exit. No options because of distance from a strike.

Position 3/17/16 with a EGHT trade at $9.80

Short EGHT shares @ $9.80, initial stop loss $10.25.

VXX - VIX Futures ETF ETF - ETF Description


After a long and bumpy ride the VXX finally hit our exit target at $19.50 and the play is closed. The Jan/Feb volatility that actually started in December prevented us from achieving the original target at $16.25 and we had to hold the position much longer than originally planned. However, all that matters is the gain at the end.

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:
Closed 3/17/16: Short VXX @ $21.82, exit $19.50, +$2.32 gain.

Second Position 9/2/15:

Closed 3/17/16: Short VXX @ $29.01, exit $19.50, +$9.51 gain.

Trade History
02/27/16 adjust exit target to $19.50
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

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now