Option Investor

Daily Newsletter, Wednesday, 4/6/2016

Table of Contents

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

Market Wrap

FOMC Bounce

by Keene Little

Click here to email Keene Little
Either shorts were covering or bulls were buying the market today in anticipation of a positive response to the FOMC minutes, which were released at 14:00. The initial reaction following the release of the minutes was selling but as we've seen so often, buy programs kicked in and kicked the bears to the side again. Now we wait to see if there will be follow through to what might have been just an FOMC-inspired rally (again).

Today's Market Stats

The market got a nice bounce off yesterday's low and it continued higher right into the FOMC minutes, released at 14:00, but then sold off some. The rally might have been more short covering than real buying since the shorts have learned you can't hang around long in short positions in this market. But following the release of the minutes the bears were satisfied that they're right and they jumped back into short positions, driving the indexes back down in the afternoon. However, they were forced out again once buy programs kicked in to drive the indexes back up in what appears to be a "Fed save" as we've seen many times before. These post-FOMC saves often get reversed the next day so we'll see if that pattern holds true on Thursday. Today's trading volume was less than what we've seen during the days of selling.

There was very little to distract the market today since economic reports were minimal and had no impact. Overseas news reports were also benign and oil's rally following this morning's crude inventory report (an unexpected drawdown) helped the stock market rally. Following the decline from last Friday it appeared there was profit taking today as the shorts covered (bought back) their positions and that lifted the market up. But the FOMC minutes did not shed any new light on what we already know and it's not exactly market friendly.

While the market likes the idea that the Fed has backed away from raising interest rates there is concern now about why the Fed is backing away. The minutes showed the Fed heads debated whether or not to raise rates in April but it was clear that the consensus opinion was that the global economic slowdown warranted a cautious approach to rate increases. They recognized that there were too many downside risks to the growth expectations. Combining the Fed's cautious approach, reflected in the minutes, with the continuing reports of a slowing economy, including downgrades to GDP growth, investors are starting to get more nervous about what that might mean for the stock market (although today certainly did not reflect any concern).

While the FOMC minutes reflect the desire to raise rates at least twice more in 2016 (down from an expected 4 times that we were told back in December), and we're hearing from Fed heads since the last meeting saying we should expect more rate increases, most are starting to believe the Fed will not have the wiggle room needed to raise rates again. Many are now saying it won't be until 2017 before they'll be able to raise rates further (I think it will be well beyond 2017 since they'll be into negative rates and beaucoup QE by then). There's been a shift in Fed opinion about the state of the market and it's not good.

Adding to the Fed's worries, there are more signs of an economic slowdown, which in turn has created a less desirable stock market in which to take companies public. In the continuing drumbeat of downbeat economic news (it really is more fun to talk about growth but reality is the opposite), the U.S. IPO market is not looking so good at the moment. Bringing IPOs to market is a reflection of how well the companies (including the big banks behind the IPOs) believe they can do in the market.

When the companies and the banks behind them are not feeling good enough about the market support they will simply pull back and wait for better times before going public. Nervous investors tend not to support new IPOs and that's what makes these a leading market indicator. It tells us whether the current bull market is healthy or if instead it's finishing its run. At the moment the IPO market is saying the bull is dying of old age.

The chart below shows the number of IPOs that came to market each year since 2006. The significant decline in 2008 was of course followed by a very bad year for the stock market. The bounce into May 2008 was accompanied by a significant slowdown in the IPO market and that high led to the market crash into the end of the year. The number of IPOs topped in 2014 and it's been dropping since then. The lower number in 2015 was accompanied by a choppy flat year for the stock market. The number has been dropping steadily since last October and so far this year, as reported by VentureBeat, only 24 companies have filed for IPOs this year. The data for 2016 is obviously only the first quarter but only 8 IPOs shows us the rate has significantly decreased and is on par with 2008.

We know the market has ignored fundamental reasons to be cautious and the above information is just another one to throw into the pile of "warnings" that could be ignored for a long time. However, with a tired bull market and many signs of an economic slowdown (recognized by the Fed as well), it's difficult to make an argument for higher prices. The market could certainly continue higher but I think it's a much riskier bet today to bet on the long side. Upside potential is dwarfed by downside risk and once we get through what might be a bullish April it's going to be hard not to agree with the sell-in-May crowd. The more immediate question is whether or not April will be bullish.

The price pattern for the indexes is not clear enough to argue strongly for either side. I could make the argument that we've only seen another corrective pullback from last Friday's highs, which points to a continuation higher. But with plenty of bearish divergences at the last high and daily oscillators rolled over it's hard to argue for higher prices. It looks like it would be safer to bet on the short side but we know how well that's been working for the bears (wink). Let's see what the charts are telling us.

S&P 500, SPX, Weekly chart

Last week SPX broke its downtrend line from November-December 2015 and appears to have its sights set on the downtrend line from July-November 2015, near 2092. This week it pulled back to its 2015 closing high near 2043 and today's rally keeps it in the green for the year. If SPX does make it up to its downtrend line from last year, it will be important to see how price behaves there. At the moment the weekly candle is a hanging man doji, which could be a reversal in the making but would only be confirmed with a red candle for next week. It's opex next week, which is typically bullish (but also typically very bearish if it's not bullish) so there could be some volatility between here and 2092. It would be more bullish above 2100.

S&P 500, SPX, Daily chart

The SPX daily chart below shows the price action around the downtrend line from November-December after breaking above it on March 30th. Yesterday it broke its uptrend line from February 24 - March 24, as well as back below its broken downtrend line, but bounced back up today to the broken uptrend line. It could result in a bearish kiss goodbye if it sells off on Thursday. But if the buyers can keep the bears away, we could see a rally at least up to the downtrend line from July-November 2015, near 2092.

Key Levels for SPX:
- bullish above 2100
- bearish below 2022

S&P 500, SPX, 60-min chart

The 60-min chart below shows how well SPX has been holding price-level support near 2043 so that it stays in the green for the year. Clearly some computer programs are set to buy that support level. As a possible pattern that I'm watching, two equal legs up from March 24th points to 2092.28, which is right on top of the downtrend line from July-November 2015. That's another reason to watch price action carefully if that level is reached.

S&P 500, SPX, Weekly cycles chart

The SPX weekly chart below is to show a cycle study, which points to another reason bulls should be careful this week. A 23-week cycle has identified multiple tops, even if they're followed by only a small pullback. This cycle study says we're due for a top this week (+/- a week or two so last week's high could have been it or we might see a final high next week).

Dow Industrials, INDU, Daily chart

The Dow has been fighting to stay above its May-November 2015 downtrend line, which it had broken above on March 30th. It closed below it yesterday and above it today and there's upside potential to the 18K area if it's to test its November high (17978). If it does make it up there I suspect it will show further bearish divergences on the oscillators, which are already showing a reversal (and MACD has broken a shelf of support it's been holding for the past month). I see upside potential but it's not something I'd be comfortable betting on.

Key Levels for DOW:
- bullish above 18,000
- bearish below 17,399

Nasdaq Composite index, COMPQ, Daily chart

Last Friday's rally for the Nasdaq stopped at its downtrend line from December as well as price-level S/R at 4920. This S/R level goes back to July 2015 and on January 4th it gapped down below this support level. How many traders are now thankful just to get out of positions they felt they were stuck in since January? It's for this reason why support often turns into resistance so we'll see if resistance still holds. A little higher, near 4955 is the top of a rising wedge, which will be near 4970 by next Monday. That level is where the Naz would also retrace 78.6% of its December-February decline so it could be tough resistance. By the same token, a rally above 4970 would be more bullish. The bears need to see a break below Tuesday's low near 4839 to suggest a top is in place, which would be better confirmed with a drop below the March 24th low near 4735.

Key Levels for NDX:
- bullish above 4970
- bearish below 4734

Russell-2000, RUT, Daily chart

The RUT's struggle has been around its H&S neckline (uptrend line from October 2014 - September 2015), near 1100. It first tried to break above the line on March 7th, pulled back and then tried again on March 18th, pulled back and then climbed above the line on March 29th. It has pulled back to the line (closing slightly below it yesterday) and from a bullish perspective it's a bullish back-test of the line now that it's been recovered. It's also back-testing its 20-dma, currently near 1093. If support holds we could see another leg up to its downtrend line from June-December 2015 and its 200-dma, near 1137. Above 1140 would be a bullish breakout but with oscillators showing bearish divergence it's hard to bet on the upside here. A drop below 1090 would be bearish and below 1065 would confirm the leg up from February completed.

Key Levels for RUT:
- bullish above 1140
- bearish below 1065

10-year Yield, TNX, Daily chart

Treasury yields look like they'll be heading lower (bond prices rally), which supports the idea that the Fed will not be raising rates. If yields do continue lower it will likely reflect a rotation out of stocks and into the perceived safety of bonds so keep an eye on the 10-year yield (TNX) here. It dropped below its uptrend line from July 2012 - January 2015, near 1.77 and as long as it stays below that level it will remain bearish (bullish for bond prices). I haven't changed my opinion, held for the past several years, that we'll see TNX below 1% (and TYX, the 30-year, below 2%) before yields bottom.

Transportation Index, TRAN, Daily chart

The Trannies topped out on March 21st and while the other indexes continued to press higher they did it without the TRAN following, which at the moment is bearish non-confirmation. The TRAN was able to break its downtrend line from March-November 2015 on March 18th but held above it for only two more days before dropping back below the line on March 23rd. It tried again by poking above the line on an intraday basis on March 30th but it was rejected and has sold off since then. All of that is bearish price action around this key trend line. Dropping below its March 4th today, at 7726, should be an indication the leg up from January completed and now we're looking for at least a larger pullback before heading higher. The bearish wave count calls for the start of a stronger decline than the November 2014 - January 2016 decline.

U.S. Dollar contract, DX, Daily chart

The US$ has made it down to support at the top of a broken up-channel from 2008-2011, which supported previous pullbacks during the past year and is currently near 94.25. A little lower is the top of a broken up-channel from May 2011, near 93, which is where the bottom of its down-channel from last December will be located at the end of this month. So the dollar could find support here or about a dollar lower if it continues to chop its way lower this month. It's now very oversold on the weekly chart and showing bullish divergence on the daily chart so it's certainly setting up for a bounce back up to the top of its trading range (near 100).

Bloomberg Commodity index, DJUBS, Daily chart

It can be reasonably argued that much of the stock market rally off the February low had a lot to do with the rally in commodities. There was no real fundamental reason for the rally other than it came off a very oversold market and more buying simply ignited more short covering. Oil and the stock market have been more in synch than not since May 2015. Looking at the DJUBS daily chart below you can see the rally started off the January 20th low, the same as the stock market. It made a higher low on February 10th, one day before the stock market, and it peaked on March 18th, which is two weeks prior to the stock market high on April 1st. Did anything fundamentally change to support the big stock market rally? Not really and in fact it looked like it was rolling over with commodities following its March 22nd high. But then Janet Yellen promised to take care of the stock market, I mean economy, with fewer rate increases and that boosted the stock market to a new high.

The commodity chart shows a down-channel for the decline from April 2014 and the January-March rally stopped at the top of the down-channel. I could easily make the argument that the 3-wave a-b-c bounce off the January low will now be followed by another leg down to complete a larger 5-wave move down from April 2014. The bottom of the down-channel will be near 65 by mid-May. But there's still a bullish possibility here if it rallies from here. It needed to stay above the January 29th high at 77.25 to better support the idea that we'll get a 5-wave move up from January but the pullback hit a low of 76.80 yesterday and today and following EW (Elliott Wave) rules, that's a violation of the bullish impulsive wave count.

Turning a blind eye to the brief EW rule violation for the bullish wave count, if it rallies from here we could see a new high for the move (bold green depiction). The new high would likely be followed by a deeper pullback correction before continuing to rally into the summer so be careful chasing a new high. However, if the bounce into the March high completed a correction to the decline then we'll see a new low follow (bold red depiction). What commodities do from here should provide the clues we need for what the stock market will do and if DJUBS drops below today's low at 76.80 I would not look to be on the long side of the stock market of either commodities or the stock market.

Gold continuous contract, GC, Weekly chart

After gold reached the top of its down-channel from 2013 it has been pulling back but in a choppy fashion. Gold's moves tend to be choppy so I can't read anything into the short-term pattern but as long as it stays below 1250 I would stay bearish gold. Between 1250 and its March 11th high near 1288 would be no-man's land and above 1287 would be bullish (but watch for resistance at 1308).

Oil continuous contract, CL, Daily chart

There was a surprise crude inventory drawdown that was reported this morning at 10:30 (-4.937M barrels as compared to a +2.299M barrels buildup last week) and that gave oil a boost higher and it finished +5.2% today. Oil's rally helped the stock market rally as well. But follow through to today's rally will be key for oil bulls since today's high was 37.90, which at the moment is a back-test of price-level S/R near 38. You can see on its daily chart below how the $38 level has acted as support/resistance since the August 2015 low. It had broken above this level in mid-March, as well as its downtrend line from June-October 2015 (log price scale) and then hit the top of its parallel down-channel for the 2015 decline. It then dropped back below 38 last Friday so today could be the back-test. If it rolls back over following today's bounce it will confirm a sell signal with a bearish kiss goodbye. That's the setup so we'll see if oil bulls can thwart the bears here.

Economic reports

In a continuation of a slow week for economic reports this week, Thursday will only be the unemployment numbers in the pre-market session followed by natural gas inventories following the open and then consumer credit in the afternoon. Friday's report will only be wholesale inventories so the market will have to look overseas for trouble.


The short-term price pattern for the indexes supports the idea that we could see another push higher for what would likely be the completion of the leg up from February. Whether or not the market will hold up into opex week next week (typically a bullish week) is a big question mark at the moment. Last Friday's high might have been it for the blue chips but the tech indexes made new highs today and that has it looking like we should expect new highs for the other indexes. If they don't make new highs then we'd have bearish non-confirmation if the indexes drop back below Tuesday's lows.

We're seeing bearish divergences on the charts and with an overbought market showing waning momentum it's a risky time to bet on the long side. It might be early to try shorting this rally (for at least a deeper pullback) but I think the bear's turn is now very close.

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

Tracking Stock

by Jim Brown

Click here to email Jim Brown
Editor's Note

The terms M2M and IoT are tossed around in conversation almost daily but few people actually realize how many internet capable devices are actually already in existence. Many of those are tracking devices that report back locations, temperature, load status and dozens of other data points. Orbcomm is now the leading company for tracking these devices over cellular communications and with satellites.


ORBC - Orbcomm Inc - Company Profile

Orbcomm provides machine-to-machine (M2M) and internet of things (IoT) solutions in the U.S., South America, Japan, Europe and internationally. Customers are able to track and manage fixed and mobile assets. They also provide satellite automatic identification service (AIS) for vessel navigation. Orbcomm has its own constellation of 41 low earth orbit satellites. Communication can also be handled through terrestrial based cellular network services.

Basically, Orbcomm can track anything and communicate with anything that is Internet, Cellular or GPS enabled. Companies use Orbcomm devices to track refrigerated trucks and trailers while monitoring temperatures of those vehicles. Orbcomm can track and monitor engine performance, locations, operating time, etc on over the road trucks, earth moving equipment, trailers on trains, containers on ships, etc.

Orbcomm added 239,000 connected devices in Q4 alone. Total installed and billable communicators rose from 976,000 at the end of 2014 to 1,569,000 at the end of 2015. On December 21st Orbcomm successfully launched 11 second generation OG2 satellites from Cape Canaveral and after testing, all satellites went live on March 1st.

Large fleet customers are signing up for the Orbcomm service faster than the devices can be installed. Growth is accelerating faster than the 61% increase in 2015. Current high profile customers include Caterpillar, Hitachi Construction, John Deere, Komatsu, Volvo, C&S Wholesale, Canadian National Railway, Hub Group, KLM Transport, Marten Transport, Swift Transportation, Target, Tropicana, Tyson Foods, Walmart, Union Pacific Railroad, Werner Enterprises and hundreds more.

Earnings last quarter were only a penny because of the high cost of satellite launches. They also acquired three companies, Skywave, InSync and WAM Technologies.

Earnings are May 5th.

Shares of ORBC have been erratic over the last four months. As they announce successful satellite launches, new Fortune 100 customers, etc the stock spikes and then goes dormant for a week or two until the next announcement. Most traders have never heard of the company so every press release introduces ORBC to a new segment of investors. I know the stock looks over extended but I believe they are in a growth phase that will continue.

I am recommending we buy ORBC on a breakout over $10.50 with a stop loss at $8.75. One analyst last week was talking about $25 now that the satellite expansion phase was complete and the M2M and IoT applications were becoming a reality.

With ORBC trade at $10.50

Buy ORBC shares, initial stop loss $8.75

No options because of wide spreads.


No New Bearish Plays

In Play Updates and Reviews

Energy Drug

by Jim Brown

Click here to email Jim Brown

Editors Note:

The broad market received an injection of a powerful stimulant from the biotech sector. That stimulant was a 6% rebound in the biotech sector on the back of a powerful short squeeze. The cancelling of the Allergan/Pfizer deal left analysts wondering which biotech stocks would be bought next.

The cancellation of the $160 billion acquisition of Allergan by Pfizer puts them both back into the acquisition market. Allergan will have $34 billion in cash once it closes on the sale of the generic drug business to Teva in June. The CEO said they were going to be looking for any growth asset either in R&D or a company with marketed drugs. This powered the entire sector higher.

The biotech short squeeze lifted the S&P and Nasdaq but the latter was the only index to close over prior resistance. The S&P, Dow and Russell are all struggling and may not get over resistance in the near future.

The FOMC minutes were somewhat positive if you believe worries over global economic health are positive. That just means there will not be a rate hike in April but we could be approaching a recession.

Until the major indexes find enough conviction from traders to start pushing though resistance we are likely to be range bound in a choppy market.

Current Portfolio

Current Position Changes

CLDX - Celldex

The long position was opened at $4.75.

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

CLDX - Celldex Therapeutics - Company Profile


Nice rally to open the position thanks to the short squeeze in biotech stocks. No news. I will give it one more day before raising the stop loss probably to $3.95.

Original Trade Description: April 5th.

Celldex Therapeutics is a biopharmaceutical company that develops, manufactures, and commercializes novel therapeutics for human health care in the United States.

That could be the opening sentence for almost any biotech company in the USA. They have multiple cancer drugs in trials and they have a drug for breast cancer in a registration trials after already passing through the gauntlet of multiple clinical trials.

Earnings are May 4th.

The stock was starting to recover from a long-term decline until a brain cancer drug failed a clinical trial and shares collapsed from $8 to $3. Now after a month of consolidation shares are starting to move higher again.

In biotech stocks with bad news, traders tend to over sell the news. The stock crashes to some ridiculous low and then languishes there for a while until all the existing owners get fed up due to the lack of a bounce and leave. New investors seeing a bargain and the opportunity to get in at a ridiculous low begin to accumulate the stock. I believe that is what we are seeing now.

This is really a play on the potential for a rebound in the biotech sector rather than some outstanding CLDX quality. I believe the stock is oversold and it has been rising for the last four days along with the biotech sector. If the sector continues to rise as I expect we should see CLDX rise as well as the penny stock investors begin to load up on an oversold opportunity.

Shares hit $4.65 today before fading with the market. I am recommending we buy a trade at $4.75 with a stop at $3.25. I will raise that stop rapidly if the trade begins to stall.

Position 4/6/16 with a CLDX trade at $4.75

Long CLDX shares @ $4.75, initial stop loss $3.25.


Long May $5 call @ 50 cents. No stop loss.

DDD - 3-D Systems Corp - Company Profile


Minor gain but it was to an 8 month closing high. 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, See portfolio graphic for stop loss.

Long May $17 call @ $1.05, See portfolio graphic for stop loss.

FGEN - Fibrogen - Company Profile


Breakout to a new 3 month high on no news.

Original Trade Description: April 2nd.

FibroGen is a research-based pharmaceutical company that discovers, develops and commercializes therapeutic agents to treat serious unmet medical needs. They have multiple drugs in the pipeline and they have collaboration agreements with Astellas Pharma and AstraZenaca (AZN).

Some of the drugs in process include roxadustat, or FG-4592, an oral small molecule inhibitor of hypoxia inducible factor prolyl hydroxylases (HIF-PHs) that is in Phase III clinical development for the treatment of anemia in chronic kidney disease; FG-3019, a monoclonal antibody in Phase II clinical development for the treatment of idiopathic pulmonary fibrosis, pancreatic cancer, and liver fibrosis; and FG-5200 for the treatment of corneal blindness resulting from partial thickness corneal damage.

Fibrogen and its partners are currently conducting seven Phase 3 trials on roxadustat for registration in the US, EU, China and other countries. A Phase 2 study for FG-3019 is underway on patients with inoperable Stage 3 pancreatic cancer. The company has completed funding its portion of research on roxadustat and AstraZenaca and Astellas are responsible for all further expenses until the drug is approved. This reduces significantly the drain on cash from Fibrogen. Cash on hand at the end of the quarter was $337 million. Fibrogen has multiple pathways to success with the multiple drugs in progress.

Earnings are May 10th.

Shares plunged on January 1st with the biotech sector and have traced almost exactly the same chart pattern as the Biotech Index. Friday's close on FGEN was a two-month high. Resistance at $21 appears to be breaking.

I am recommending we buy FGEN shares on a move over Friday's high. Once over that level there is limited resistance until the $30 range.

Position 4/4/16 with a FGEN trade at $21.75

Long FGEN shares @ $21.75, initial stop loss $18.00.

The stop will be raised promptly on further gains.

No options due to wide spreads.

FTNT - Fortinet Inc - Company Profile


Very minor gain. Still holding the gains over resistance from Friday. Not a biotech stock and was left out of the short squeeze party today.

Close the position with a FTNT trade at $32.10.

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.

Position 3/29/16 with a FTNT trade at $28.75

Long FTNT shares @ 28.75, see portfolio graphic for stop loss.


Long May $31 call @ $1.10, see portfolio graphic for stop loss.

HPE - Hewlett Packard Enterprise - Company Profile


2% gain and back to $18. Hopefully the profit taking is over.

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.

SPXC - SPX Corporation - Company Profile


Minor gain because it was not a biotech stock. Tech stocks were left out of the rally.

Original Trade Description: March 30th

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.

Position 3/31/16 with a trade at $15.05

Long SPXC shares @15.05, see portfolio graphic for stop loss.

No options because of wide spreads.

TRN - Trinity Industries - Company Profile


2% rebound back over $18 thanks to the rebound in oil prices. We have a long way to go to get back over $20 but we have a July call option so plenty of time.

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 July $20 call @ $1.50, no stop loss.

Previously Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss.

WIN - Windstream Holdings - Company Profile


2.2% rebound and nearing resistance at $8 once again. 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

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

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

BEARISH Play Updates

GPRO - GoPro - Company Profile


Support at $11.50 still holding. No decline in a strong market. 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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