Option Investor

Daily Newsletter, Wednesday, 3/30/2016

Table of Contents

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

Market Wrap

Market Adds to Bullish Reaction to Yellen's Statement

by Keene Little

Click here to email Keene Little
Following the bullish reaction to Yellen's statement on Tuesday there was a rally in overseas markets and that boosted U.S. futures, giving us a gap-up start to the day. While nothing more was added to the gap-up start, it did give us another positive day. Thursday is the end of the quarter so we'll see if the bulls can hang on.

Today's Market Stats

The bullish reaction by the U.S. market to Yellen's comments on Tuesday was a bit strange if you try to analyze it logically (you know of course that a logical stock market is an oxymoron). The reaction told us that investors are happier about not having another 1/4-point rate increase than they are worried about a slowing economy and slowing corporate earnings. Apparently the fact that the Fed is recognizing the global economy is turning south, which will likely put negative pressure on the U.S. economy, is a good thing for stock prices.

The Dow rallied almost 300 points from midday Tuesday, just before Yellen spoke, to this morning's high. If ever you wondered about the disconnect between the stock market and reality, that 300-point rally should have caused you to wonder no more. The Fed's thoughts/actions drive this market more than any fundamental issues and that continues to be a little frustrating for those of us who remember the market before we had an activist Fed. But it is what we trade and we must trade what we see and not what we expect a "logical" market to do.

The one caution about a positive reaction to a Fed statement is that these reactions are having less and less of an effect on the market as the market begins to understand that the Fed and other central banks are simply trying to do more of the same that hasn't worked. If Keynesian economic policies are working the economists will tell you to do more of the same. If the policies are not working the same economists will tell you need to do more of the same to get it to work. Before this is all over those economic theories, which are practiced by nearly all of today's economists, will be completely debunked.

The one benefit of course from all these central bank policies has been asset inflation and that's been good for investors but most are beginning to recognize that the inflated prices will not be able to hold up in the face of a deteriorating economy that's coming off the slowest economic recovery in our history. This recognition is showing up in the shorter-term positive effects from Fed statements and policy changes. My sense is that smart money is trading the trend but they have one foot holding the exit door open so that they can be one of the first out the door when someone yells "SELL!"

It can of course only be speculated about how vulnerable the market is here but I was discussing this same thing at the previous high in December and worried about a disconnect to the downside as sell orders do not get matched up with buy orders. The withdrawal of bids can create a big hole into which many investors and traders fall when trying too late to get out of positions. Limit stop orders can be jumped over and many find out at the end of the day that their stop orders did not trigger. This is a very risky time, again, to be complacent about the long side. It's too late to buy and too early to short but I prefer nibbling short here than trying to hold long and this is especially true now that we've had the ramp up into the end of the quarter.

Last Wednesday I showed some sentiment measures that had moved into bullish extreme territory and while the bullish sentiment has backed off a little, that's actually the first sign of an impending reversal. Oftentimes tops are formed from simply a lack of buyers and other than the fund managers pushing the indexes higher in order to get their higher management fees (higher assets under management, AUM, gives them higher 2% fees), I wonder if the buying pressure will disappear after tomorrow (maybe after the first of April). So the backing off of bullish sentiment is an indication that many investors are no longer buying the rally.

In addition to the sentiment measures shown last week, the VIX option prices are also flashing a warning signal. VIX options are European-style, which means they can't be exercised prior to expiration and it's easier to see distortions between the call and put prices. This in turn provides clues which way traders are leaning. The VIX has dropped back down below 14, which is where it was last October, just before it rallied above 30 into January.

Currently, with the VIX closing at 13.56, the April 14 calls, which are $0.44 out of the money, cost $2.20 (all time premium and for only 20 days). In the meantime, the April 14 puts, which are $0.44 in the money, can be purchased for just $0.25. Traders are willing to pay nearly 10 times as much for an OTM call option than an ITM put option for a bet that the VIX will be higher by April opex. This is a similar pricing situation that we had at last October's low for VIX and it's another similarity between the patterns between last August-November and this January-March. Time, price and sentiment are telling us the bulls are pressing their luck here and bears should soon have a turn at the feeding trough.

I've mentioned in the recent past how close the patterns relate between the August 2015 low and November 2015 high. It was a 3-wave move up from August and the rally from September into the November high lasted 25 trading days. It's been a 3-wave move up from January and the rally from the February low into the March 22nd high lasted 27 trading days. Some of the indexes are now pressing to minor new highs and the next similar timeframe is this Friday, which is 50 trading days from the January low. That was the number of trading days off the August low into the November high. The market doesn't usually repeat exact patterns but if often rhymes, which means the patterns tend to be very close since they're a measure of human reactions and we tend to react the same way to the same stimuli.

With that let's jump into tonight's charts to identify some key levels to watch and where to watch for support and resistance.

Dow Industrials, INDU, Weekly chart

Yesterday's rally brought the Dow right up to its downtrend line from May-November 2015, near 17650, and this morning it gapped up over the line (the way this market likes to deal with resistance and support levels). That was a bullish break and while the Dow wasn't able to add to its initial rally it at least held above the line and that keeps it bullish. If the buying can continue and/or use the broken downtrend line as support on a pullback we could see the Dow challenge its 2015 highs (November - 17978, May 18351). But if the Dow drops back below the downtrend line it would leave a failed breakout attempt. A failed attempt usually leads to a fast reversal so be careful with long positions if the Dow closes back below 17650. Both the bullish and bearish wave patterns call for at least a deeper pullback and only after we see what kind of pattern develops (corrective vs. impulsive) will we have a better sense for which larger pattern is playing out.

Dow Industrials, INDU, Daily chart

The daily chart shows today's break above its downtrend line from May-November 2015 but the pullback from this morning's initial high left a candlestick that looks a little like a shooting star, which could turn into a reversal candlestick if Thursday finishes with a red candle and closes below 17650. It takes a drop below the March 24th low at 17399 before a top will be confirmed in place. In the meantime the bears need to respect the potential for additional upside. But the reverse is also true -- bulls need to be careful that an end-of-quarter run will simply stop because fund managers stop driving it higher (to get their higher AUM in order to maximize their management fees). This is what happened with the run into the end of the last quarter, where the December 29th high was followed by strong selling into January.

Key Levels for DOW:
- bullish above 17,670
- bearish below 17,399

S&P 500, SPX, Daily chart

SPX remains bullish above its March 22nd high, near 2057, but the rally could be in trouble if it drops back below its broken downtrend line from November-December 2015, near 2051. There's upside potential to about 2080-2092 to complete the leg up from March 24th, which in turn would very likely complete the leg up from February. That projection zone is based on the wave pattern for the rally, the December 29th high near 2082 and then a back-test of its broken uptrend line from February, near 2092 by the end of the day Thursday. Above 2092 would target the December 2nd high at 2104 and then the November high at 2116. But a drop back below its March 24th low near 2022 would confirm the leg up from February completed and then we'll have to see what kind of pattern develops for the larger pullback/decline.

Key Levels for SPX:
- bullish above 2057
- bearish below 2022

S&P 500, SPX, 60-min chart

On the 60-min chart below I'm showing an expectation for a leg up Thursday, potentially up to the 2090 area, before completing the rally from February. At that level, by midday on Thursday, the broken uptrend line from February 11 - March 10 crosses the trend line along the highs from March 4-18. It could instead fail from here, stop at the 2080 price projection mentioned above or even continue to rally above 2100 but the completion of a 5-wave move up from March 24th would be a nice completion pattern.

Nasdaq-100, NDX, Daily chart

NDX made a bullish jump over resistance this morning by gapping above its 200-dma and the trend line along the highs from March 4-22, both near 4863, and then above its broken uptrend line from February, near 4875. Following its gap up it completed its rally in the first 15 minutes of trading and then pulled back below its broken uptrend line from February. That leaves a possible back-test and bearish kiss goodbye and any further selling Thursday morning would be a bearish sign. But the bears need to drive NDX below its March 24th low near 4735 to prove the leg up from February has finished. Another push higher Thursday morning would be able to test its downtrend line from December, which crosses its broken uptrend line February near 4902 on Thursday. Above price-level S/R at 4920 would be more bullish.

Key Levels for NDX:
- bullish above 4920
- bearish below 4734

Russell-2000, RUT, Daily chart

The bullish break by the RUT is the rally above its H&S neckline, which is the uptrend line from October 2014 - September 2015 (bold purple line), currently near 1100. But the RUT was the weaker index today and today's candlestick is a potentially bearish gravestone doji and a red candle for Thursday, especially if it closes back below 1100, would indicate a high is probably in place. In the meantime there's bullish potential to its downtrend line from June-December 2015, currently near its 200-dma at 1141.

Key Levels for RUT:
- bullish above 1105
- bearish below 1065

Transportation Index, TRAN, Daily chart

The TRAN again tried to break its downtrend line from March-November 2015, currently near 7965 (log price scale), which is where it closed today. Today's candlestick is a bearish gravestone doji at this line of resistance so the bulls need to prevent a red candlestick on Thursday. The bears need to see a break below its 200-dma at 7823 and then follow that with a breakdown from its up-channel from January with a drop below 7795. Coinciding with a break of its up-channel, if it happens from here, would also be a break of its 20-dma, which has supported the rally since January. There's lots of bullish potential if the bulls can prevent selling this week.

U.S. Dollar contract, DX, Daily chart

Thanks to Yellen's dovish comments on Tuesday the US$ took a nose dive on Tuesday and dropped further today. If the dollar continues to drop to the bottom of its down-channel that it's been in since the December high, it will make it down to about 93 by the end of April where it would meet the top of its old up-channel off the May 2011 low. A closer support level is the top of a parallel up-channel for the rally off the April 2008 low, currently near 94 (bold blue line). The tops of both channels were broken in December 2014 and January 2015 with the big ramp up from May 2014 and you can see how the top of the channel from 2008 has held as support since the March 2015 high. A drop below 93 would be more bearish for the dollar but the corrective pullback since last December suggests the larger consolidation pattern off the March 2015 high will continue for several more months before heading higher, as depicted on my chart (bold green).

Gold continuous contract, GC, Weekly chart

After trying to get above its down-channel that gold has been in since August 2013, currently near 1250, the weekly oscillators for gold has it looking like it will at least pull back further before potentially heading higher. A typical pullback correction would be back to its 50-week MA, currently near 1150. You can see how this MA acted as resistance since gold broke below it back in February 2013. So a drop below the 50-wma would be a bearish signal but until that happens we can't know yet if we'll get just a pullback or a drop down to the bottom of its down-channel, which will be near 2008-2009 price-level S/R near 1000 by the end of July.

Oil continuous contract, CL, Weekly chart

Last week I had pointed out how oil reached the top of its down-channel that it's been in since the January 2015 low. It started a pullback from its March 22nd high and the weekly oscillators are starting to roll over. Similar to gold, it's still very early in its reversal, which could easily be just a small pullback before continuing higher. Above 42 would be more bullish for oil, in which case the next upside target would be its 50-week MA, currently at 44.62. But for now the bearish setup is for oil to drop back down to the bottom of its down-channel, which will be near 21 by the end of June, especially if support near 38 does not hold.

Economic reports

Thursday's economic reports include unemployment claims data and the Chicago PMI, which is expected to improve slightly from February's sub-50 of 47.6 with a climb up to 50.3. Considering all the other signs of a slowing economy I would not be surprised to see a reading below 50 again. But hey, that's good news right? It means the Fed will continue to back off on their threats to raise rates. What a bizarro world in which we trade. The big report will be Friday's pre-market NFP report and that could have Thursday either trading sideways as it consolidates and waits or it could cause some profit taking in front of a potentially risky report. After Friday's open we'll also get the ISM Index, Construction spending and the final number for Michigan Sentiment.


There's been an obvious push to get the indexes as high as possible for quarter-end in a pattern that has often repeated. Fund managers make a push to get end-of-month and especially end-of-quarter settlement numbers as high as possible so that they can maximize their management fees with high AUMs. Once the quarter ends there is less buying pressure supporting the market and in fact there's often liquidation of inventory as those same hedge fund managers hope to sell high and then buy back the stocks at a lower price later in the quarter to do the same thing. The end of last December was followed by a strong selloff into January which then led to a strong rally into March. So maybe selling into April-May and then a strong rally in June?

Yellen's assurance that the Fed is backing away from their plan to raise rates tells us they're more worried now about the economy than they let on in the past six months. I'm not sure how that's bullish and I suspect further indications of a slowing economy will not help the bull's cause. Fed statements are also having a shorter and shorter positive effect on the market. The positive reaction the past two days, with the end of the quarter on Thursday, might be all they'll get.

There's a lot of profit with the extended rally off the February low and at some point soon there's going to be a reason to take profits. Whether that will be in front of Friday's NFP report or if instead it will be the result of some other news can't be known. But in any case the market is vulnerable here to at least some stronger profit taking and with the potential for a more serious decline I think it continues to be a risky time to bet on the upside. The bears already know it's a risky time to bet on the short side (wink) but I think their turn is coming in the next few days if not next few hours.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Plays

Breaking Up is Easy to Do

by Jim Brown

Click here to email Jim Brown
Editor's Note

Over time, some companies grow into different areas of operation that eventually flounder because they are a departure from the core business. Some companies never deal with the situation and the poorly performing divisions drag down the earnings of the overall company. Others understand the cancer for what it is and take steps to cut it off and focus on the high margin core business. In this case breaking up is not hard to do. You just have to make the decision.


SPXC - SPX Corporation - Company Profile

SPX provides specialized heating, ventilation and air conditioning (HVAC) solutions worldwide. They also provide instrumentation, detection and measurement for industrial markets. They offer detection and inspection equipment for underground pipes and cables, specialty lighting products, communications technologies and bus fare collection systems. Their power segment provides all types of equipment and technology for the power generation, transmission and distribution market.

As part of a companywide restructuring process in December they agreed to sell their dry-cooling tower business. On the Q4 conference call they also announced plans to sell portions of the power division. They hired an outside advisor to provide strategic alternatives as they sell off the low margin and poorly performing portions of the business. They spun off the flow food and power portion into a new company SPX Flow (FLOW) in September.

They reported earnings of 52 cents that missed estimates of 57 cents. However, shares rebounded on the news of the various restructuring efforts. Shares rallied to resistance at $14.85 at the close today. A break over that resistance could hit $17 in the days ahead.

Earnings are May 26th.

With a trade at $15.05

Buy SPXC shares, initial stop loss $13.25

No options because of wide spreads.


No New Bearish Plays

In Play Updates and Reviews

Limited Follow Through

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq managed only a 22 point gain and finished -30 points off its highs of 4,899. The S&P posted a similar intraday fade to close 10 points off its high with a gain of only 9 points.

The Dow finally touched that solid resistance band from 17,750 to 17,925 and the selling was immediate. The Dow closed -74 points off its high with a gain of +83.

I would take those gains every day but the fade from resistance was expected. Even with Janet Yellen's blessing, it is going to be difficult for the Dow to make it through the 18,000 level.

Current Portfolio

Current Position Changes

DDD - 3D Systems

The long position was opened with DDD trade at $15.60.

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


AMLP will continue to rise and fall with the price of oil. Long term the trend will be up.

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. See portfolio graphic for stop loss.


Long July $12 call, entry 55 cents. See portfolio graphic for stop loss.

DDD - 3-D Systems Corp - Company Profile


3D pushed through resistance at the open but faded in the afternoon. No news.

Original Trade Description: March 29th.

3D Systems provides 3D printing products and services worldwide. The printers use input from 3D design software, CAD software and other design tools using a range of print materials including plastic, metal, nylon, rubber, wax and composite materials.

3D crashed and burned after a couple of horrific earnings reports in 2015 and shares declined from $33 to $7 at the January lows. The entire sector saw a reset of stock prices and expectations.

For Q4 3D posted earnings of 16 cents that blew away estimates for 3 cents. 3D is the industry leader and appears to be roaring out of the darkness that enveloped the sector in 2015. Three-dimensional printing revenues are expected to grow from $3.07 billion annually in 2013 to $12.8 billion in 2018 and $21 billion by 2020 with a consolidated average growth rate of 34%.

On Monday 3D Systems announced several new software products that overcome prior limitations weighing on all printer companies. The product suite called Geomagic Freeform has multiple products that will power a jump forward in the 3D technology capability and greatly reduce the time needed to go from concept to printed article.

Under Armour (UA) just announced it used 3D Systems selective laser-sintering technology to produce the UA Architech shoe. This is the world's first performance training shoe with a 3D-printed midsole that is available to the general consumer market. Under Armour plans to release an entire line of 3D printed shoes in 2016. Late last year New Balance also partnered with 3D to make a commercially available running shoe with a 3D-printed midsole.

DDD shares are rallying on the multiple announcements and the appearance that all is well in 3D land. Resistance is $15.45.

Earnings are May 5th.

Position 3/30/16 with a DDD trade at $15.60

Long DDD shares @ $15.60, initial stop loss $13.50

Long May $17 call @ $1.05, initial stop loss $13.50.

DRII - Diamond Resorts Intl - Company Profile


No specific news. Gave back some of yesterday's gains.

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, see portfolio graphic for stop loss.

No option recommended because of wide spreads and high prices.

FTNT - Fortinet Inc - Company Profile


Minor gain but still a gain. No news.

Original Trade Description: March 22nd.

Fortinet provides cyber security solutions for enterprises, service providers and government organizations worldwide. They offer FortiGate physical and virtual appliance products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, web filtering, anti-spam, and wide area network accelerations.

Essentially they provide an enterprise level roadblock or firewall between the Internet and the organizations internal network and servers. If you can block the attacks at the primary entry into the network then the attackers cannot run rampant inside the network.

A couple weeks ago Fortinet signed a cyber security partnership agreement with NATO. We all realize NATO is facing cyber attacks all across Europe and the organization is a major target. Fortinet will help improve the cyber defense for the entire network. Implementing the Fortinet devices will raise awareness of the cyber threats to the network and allow early detection and elimination.

Fortinet has more than 210,000 enterprise customers worldwide including some of the largest and most complex organizations, corporations and governmental agencies.

This will be a short-term play because earnings are April 18th.

Shares are trying to break over resistance at $30 with the high at $30.36 today before the market rolled over.

With a FTNT trade at $28.75

Buy FTNT shares, currently $28.53, see portfolio graphic for stop loss.


Buy May $31 call, currently $1.30, see portfolio graphic for stop loss.

HPE - Hewlett Packard Enterprise - Company Profile


No specific news. New closing high. Don't forget there is $2 billion in dividends and buybacks coming in June.

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.

KS - KapStone Paper - Company Profile


Yesterday was a 7.7% gain! Today a -2.8% decline. I will take that every time.

Original Trade Description: March 26th.

KapStone manufactures and sells containerboard, corrugated Products and specialty paper products in the U.S. and internationally. They are the 5th largest producer in the USA. The purchased Victory Packaging L.P. and its subsidiaries for $615 million back in June. As a result of the acquisition revenue for 2015 rose from $2.3 billion to $2.8 billion thanks to $582.9 million in revenue from Victory.

They own four paper mills, 21 plants and 65 distribution centers.

Earnings were a challenge for Q4 due to a 12-day strike at one of their paper mills. This reduced revenue because of a lack of product. Shares dropped from $14 to $9 on the news on February 10th. Shares have recovered from that dip and were up 70 cents on Thursday in a weak market. They failed to sell off earlier in the week when the market was down.

On March 10th they announced a 10 cent quarterly dividend payable April 13th to holders on March 30th. Earnings are May 2nd.

Shares are in a pretty decent uptrend and closed at $13.20 on Thursday. Resistance is $15.20. The high in November was $25. I believe they will at least reach resistance at $15 and with a decent market will move through that level to $17.

Position 3/28/16:

Long KS shares @ $13.15, see portfolio graphic for stop loss.

No option because of wide strikes.

TRN - Trinity Industries - Company Profile


No specific news.

Original Trade Description: March 18th

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings May 30th.

Position 3/21/16:

Long TRN shares @ $19.15, see portfolio graphic for stop loss.


Long July $20 call @ $1.50, no stop loss. Plan to keep it until June even if we are stopped out of the TRN shares.

WIN - Windstream Holdings - Company Profile


No specific news. No stop loss on the option.

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

Closed 3/29/16: Long WIN shares @ $8.22, exit $7.10, -1.12 loss.


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

BEARISH Play Updates

DEPO - Depomed - Company Profile


Shares came within 22 cents of our stop loss. There is decent resistance at $14.

Maintain the stop loss at $14.25.

Original Trade Description: March 21st

Depomed is a specialty pharmaceutical company engaged in the development, sale and licensing of products for pain and other central nervous system conditions in the USA.

The company reported adjusted earnings of 16 cents that missed estimates of 35 by a mile. Revenue of $111.2 million also missed estimates for $114 million. For the full year the company reported a loss of $1.26 per share or $75.7 million.

In late February the company reported the results of a 635 patient trial of pain drug GRT6005. While pain was reduced there were low levels of severe adverse events that were more frequent on higher doses of the drug. Shares declined on the news.

Shares have been trending lower since the 29th. There was a moderate short squeeze on the 11th that corresponded with a short squeeze in the entire biotech sector. Shares immediately rolled over and moved to new lows as soon as the sector index rolled over.

News flow has been very sparse on Depomed in March and shares are accelerating to the downside.

Earnings are May 10th.

Position 3/22/16 with DEPO opening trade at $13.11

Short DEPO shares @ $13.11, see portfolio graphic for stop loss.

No option recommendation because of wide spreads.

EGHT - 8X8 Inc - Company Profile


Came within a nickel of our stop loss at $10.25. This would be a good time for a seller to appear. No news.

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, see portfolio graphic for stop loss.

GPRO - GoPro - Company Profile


GoPro posted another minor rebound in a positive market. Lots of selling on the intraday candles above $12.15. Maintain the stop loss at $12.55.

Original Trade Description: March 28th

GoPro develops hardware and software solutions associated with capturing, managing, sharing and enjoying engaging video content. Basically they make action cameras and had the market cornered for several years. That is no longer the case.

Analysts expect GoPro sales to decline -16% in 2016 compared to 15% growth in 2015 and 41% growth in 2014. The company has made numerous mistakes in execution and competitors caught up with them and some have passed GoPro in technology. The company expects to fix their sagging sales by discontinuing three cheaper models in 2016 and introduce the new Hero 5 camera sometime this year. They will also release the Karma drone and the Omni VR rig later this summer.

However, Kodak, Nikon, Ricoh, Nokia and 360Fly have already launched similar devices at cheaper prices than GoPro normally charges. Analysts claim the streamlined cameras from those manufacturers make GoPro cameras look bulky and clumsy. Nokia is selling an 8 camera VR device for $60,000 to professional filmmakers. GoPro is trying to market a 16 camera setup for $15,000 but the software is clunky and hard to use.

The bottom line here is that GoPro had the lead spot in the market and is in danger of losing it to major, well-funded competitors. Secondly, many analysts say the action camera market has become saturated and anyone that wanted one now has one.

Shares fell 7% today on the Nokia VR news. The closed at $11.50 with support at $10. That looks like a done deal given the choppy market and the downward trajectory on GoPro shares. With competition mounting, I would not be surprised to see GoPro set a new low.

Earnings are April 28th.

Position 3/29/16 with a GPRO trade at $11.40

Short GPRO shares @ $11.40, see portfolio graphic for stop loss.


Long May $11 put @ $1.17, see portfolio graphic for stop loss.

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