Option Investor

Daily Newsletter, Saturday, 4/9/2016

Table of Contents

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

Market Wrap

Momentum Fading

by Jim Brown

Click here to email Jim Brown

The Dow and S&P both made another lower high on Friday as the early morning rally faded almost immediately. They remained in positive territory for the day but lost ground for the week.

Market Statistics

Friday Statistics

The Dow and S&P both failed to return to the highs set last Friday and Monday's open was the high for the week. Both set a lower low on Thursday and barely held above that low on Friday. The indexes are trapped in a congestion range below major resistance levels. Both indexes touched that resistance the prior Friday but it has been downhill ever since. Conviction is fading with volume barely over 6 billion shares on Friday and we are not even in the summer doldrums yet.

Thursday's decline was blamed on the Japanese Yen and the Yen carry trade blowing up. When the Yen is cheap hedge funds can borrow for almost zero interest and then buy U.S. and European stocks that pay hefty dividends or are in growth mode. When the Yen rallies it is like an interest rate hike on those loans and investors are forced to sell the stocks and pay back the loans.

Friday's rally was blamed on rising oil prices except oil gapped open to $39.50 and never declined below $39.25 to post a 6.4% gain for the day and close at $39.75. The equity markets gapped open with oil but then rolled over immediately and closed near the lows for the day. The Dow was up +153 at the open and closed with only a 35-point gain after trading in negative territory late in the session.

The talking heads on TV will blame market movement up or down on something every day. They will pick the easiest excuse and run with it all day. Whether or not that is the right reason is immaterial. It is a headline and gives them something to talk about and sound intelligent. It is better than saying, "the market is down triple digits and we do not know why."

On Friday, they could have blamed economics for the decline because the numbers are worsening nearly every day. The Wholesale Inventory report for February declined -0.5% after a previously reported +0.3% increase in January. However, that January increase was revised down to -0.4%. The February inventory number is the lowest since May 2015. Durable goods sales rose +1.2% but nondurable sales were down -1.6%. Sales declined -0.2% and the inventory to sales ratio declined from 1.37 to 1.36.

Moody's Chart

The sharp drop in inventories caused a sharp drop in GDP forecasts. The Atlanta Fed real time GDPNow forecast declined to only 0.1% growth for Q1. That was a drop of -0.3%. By comparison, Morgan Stanley is now predicting 0.3%, Barclays 0.3% and Moody's 0.1%. Historically the GDPNow forecast has been the most accurate. If the actual number comes in anywhere close to this it will be the fourth consecutive quarter of declining growth. Regardless of what the Fed says they are not going to raise rates with GDP growth at zero.

The Thursday night event with Yellen, Bernanke, Greenspan and Volcker was a bust. It had the potential to be filled with fireworks but came off as a yawner. About the only points worth repeating were Yellen and Bernanke claiming the U.S. economy was strong. Considering the GDP information in the prior paragraphs you have to think they are either delusional or flat out lying for reasons we do not understand. Yellen also said the rate hike in December was the right move. (Never admit you made a mistake)

For Yellen to claim the U.S. economy is strong she has to be comparing it on a relative basis to the rest of the world but even that is a weak comparison. With seven Fed heads now talking about rate hikes sooner rather than later it makes you wonder if they are pumping happy gas into the halls of the Federal Reserve. We do know that the Fed has resorted to Fedspeak in the past to create volatility in the bond market and keep interest rates elevated when they could not actually hike rates for economic reasons. I have to believe this is what we are seeing today in this new era of Fed communications. If the Fed is trying to hype rates they are doing a poor job and losing credibility. The yield on the ten-year treasury declined to 1.685% intraday on Thursday and nearing a three-year low.

This apparent hurry to hike rates is putting a cloud over the market and we have seen the impact over the last two weeks. It will only get worse if the economics continue to decline and the Fedspeak does not lighten up.

The calendar for next week has seven Fed speeches and a deluge of economic data from China. If that data is positive it could lift the U.S. markets but it would accelerate Fed action because Yellen emphasized they were watching China and the global markets as a threat to the U.S. economy. If China appears to be healing then the Fed could check them off the problem list. The Fed speakers could mention that in their appearances.

The Fed Beige Book on Wednesday is expected to show conditions are growing very slowly in the 12 Fed regions. If there is any worsening of those conditions the market could weaken.

Retail sales on Wednesday could also be a challenge after the Gap warned on Friday about rapidly slowing sales in the malls. The business inventories on Wednesday could push GDP estimates to zero or below if the numbers come in below expectations.

The Q1 earnings cycle begins this week with Alcoa on Monday, JP Morgan on Wednesday, Bank America and Wells Fargo on Thursday and Citigroup on Friday. With weakened expectations it will be interesting to see if the financial sector can exceed those low estimates or miss the already lowered bar.

Late Thursday the Fed sent out a notice of an "Advanced Notice of a Meeting Under Expedited Procedures." The meeting is scheduled for 11:AM on Monday and the topic is "discount rates." There was an uptick of alarm in the market but it quickly died. Apparently, these happen routinely but do not make the headlines. John Mauldin said there were five such meetings in March and the topics were, bank supervisory meeting, discount rate, monetary policy issues, bank supervisory matter, and discount rate again. These meetings are closed and not for public information.

Yahoo (YHOO) was in the news on Friday after they extended the deadline for bids from April 11th to April 18th. Verizon, Google and Time Inc are reportedly still planning on making offers. Private equity firms Bain and TPG are also reportedly preparing offers. However, AT&T, Comcast, Microsoft, SoftBank and Alibaba have all decided to pass on the auction. At this point, I would expect Verizon to end up as the winner but you never know if an unknown entity will surface with a surprise bid.

It was revealed on Friday that the financial documents given to the prospective bidders show Yahoo expects revenue to decline -15% and earnings decline by more than 20% in 2016. Apparently, Yahoo has not embraced the move to mobile and they are losing out on revenue from mobile consumers. Analysts said Yahoo has been buying traffic to keep up the popularity of its existing websites and that is costing them nearly as much as they are making on those sites. There is a distinct possibility of a "take under" instead of a takeover with earnings rapidly declining. Yahoo shares were down slightly on the news.

Ruby Tuesday (RT) reported earnings of 3 cents that missed estimates for 5 cents. Revenue fell -5.1% to $271.5 million and missed estimates for $283 million. Same store sales fell -3% and worse than the -0.3% decline in Q4. The company lowered full year guidance from 12-17 cents to 5-8 cents. They also announced the CFO would resign on Monday. It was not a good day for RT.

The Gap (GPS) soured the entire retail sector on Friday. The company said revenue for the five-week period ending on April 2nd fell -6.5% and a bigger drop than the -3.3% in February. Same store sales crashed with Gap stores -3%, Banana Republic -14% and Old Navy falling -6%. This was the 12th consecutive month of sales declines. The company said inventory levels were high and would depress margins. Markdowns would be heavy and earnings would suffer. The company said it suffered from some problems with fabrics that did not work and styles and fit that failed. In one assortment from the Banana Republic the average consumer could not get their arms through the arm hole. Gap said that was easy to fix by just removing the products and replacing with the next seasonal fashion but it will be an expensive mistake. Mall traffic was continuing to be a problem. Shares dropped 14% on the news.

Sometimes you just have to be in the right place at the right time. Ulta Salon (ULTA) was named to replace Tenet Healthcare (THC) in the S&P-500 at the close on April 15th. Tenet is moving to the S&P-400 Midcap where it will replace Jarden Corp (JAH) after it is acquired by Newell Rubbermaid (NWL). Tenet has declined from $6 billion market cap to $3 billion and fits the midcap index better than the large cap according to S&P. ULTA has a $13 billion market cap. ULTA rallied to a new high at $200 on the news.

Linkedin (LNKD) was downgraded from buy to neutral at MKM Partners because online job postings appear to have peaked. MKM said job growth was slowing and that had a direct impact on Linkedin. Online postings had risen since the market bottom in 2009 until 2016. Postings in Q1 declined for the first time in six-years. MKM cut sales and earnings estimates for 2016 and 2017. The broker said expectations are low and the value collapse was overdone but it could take multiple quarters for sentiment to improve.

Valeant Pharmaceuticals (VRX) has a new leader. Bill Ackman is only a board member but he appears to be speaking for the company. He said on Friday Valeant will not sell the Bausch & Lomb brand because it is a core asset and the company is not selling core assets. He said "we" are willing to break up the company but "we" are not willing to sell B&L. Sounds like he has taken control.

Valeant's market cap has fallen to only $10 billion and selling B&L could get them $10 billion to as much as $20 billion in cash. However, B&L has been growing rapidly and has generated up to 40% of the company's revenue. The company does not provide a brand breakdown of revenue but analysts are speculating since the business has grown significantly since Valeant acquired them for $8.7 billion in 2013. Valeant has $30 billion in debt so selling B&L would allow them to pay down a significant portion and improve their outlook.

A Stifel analyst has assigned a $65 breakup value to Valeant but a BMO analyst thinks the company is worth $118 per share using the sum of the parts method.

CEO Michael Pearson was under subpoena to appear before a Senate committee on Friday and he failed to appear to answer questions on drug pricing. Senator Susan Collins and Claire McCaskill said "it is our intent to initiate contempt proceedings against Pearson." Pearson's lawyer said the Friday hearing was unfair and he should not be required to give testimony without being advised in advance, about what topics and documents he will be questioned about. The company said Valeant has supplied "thousands of pages of documents." He is also under subpoena to appear on April 27th for another panel to discuss pricing. Valeant said he would appear at that committee hearing.

Alliance Fiber Optic Products (AFOP) shares spiked 19% to $18.45 after the company CEO sent a letter to employees saying Corning (GLW) intends to acquire all the outstanding shares for $18.50 in cash of $350 million. Corning has not yet made the offer but it is expected within the next 10 days and will be effective for 20 days.

Tesla (TSLA) shares gave back some of their gains on Friday after receiving more than 325,000 orders for the Model 3 in the first week alone. That represents a $325 million no interest loan for Tesla for the next three years. If all those deposits turn into completed sales that would equate to $14 billion in revenue. However, since inception Tesla has only built about 100,000 cars although it is on track to deliver about 85,000 in 2016. How will it produce 325,000 cars when its current pace is only about 85,000 a year? Elon Musk said they were rethinking their production plans and that could mean they will have to build an even larger manufacturing facility.

This also means we should expect another secondary offering in the next few months because ramping up to produce that many vehicles, in addition to the Model S and Model X production, will cost a lot of money. Tesla's current market cap is about $33 billion and Barclays thinks the automaker may need to raise another $3 billion to expand capacity and meet the surge in demand. Since they already have $2.64 billion in long-term debt, the obvious answer would be a secondary offering. They could easily justify going back to the equity market because of the extreme surge in demand for the Model 3.

Tesla bought the final assembly plant in Freemont, California that was initially owned by a joint venture by GM and Toyota. It has the capacity to build 500,000 vehicles annually. Analysts say the real question is whether Tesla buys/builds another assembly plant in order to guarantee production quantities of 500,000 cars a year by 2020. That is the volume Elon Musk is predicting. Making that many cars in multiple models would best be done in multiple facilities in order to have room for growth.

To raise another $3 billion Tesla would have to sell 12 million shares at the current price of $250 a share. Tesla has 132 million shares outstanding so that would be less than a 10% increase.

Top speed on a Model S is 155 mph.

The FactSet earnings estimates dropped again for Q1. The S&P-500 companies are now expected to see earnings decline -9.1% compared to -8.4% a week earlier. This will represent the fourth consecutive quarter of earnings declines and the first time since 2009. However, Citigroup is now claiming the estimates are too low and predicting a 4% beat over the lowered numbers. That is not a stretch of the imagination since the S&P has beaten earnings by 4% on average every quarter for the last four years.

This is the wildcard for this earnings cycle. Will a beat on extremely low estimates be seen as a beat or just "less bad" results. Assume a company reported 95 cents last year and was expected to report $1.00 in Q1 before the estimates were lowered to 85 cents. If they report 90 cents is that worthy of a rebound in the shares or is it still bad earnings? I view it as still a miss but we have seen earnings rallies on this type of cycle before.

Revenue is expected to decline -1.2% compared to estimates on Jan 1st for a 2.7% rise.

Crude prices spiked about 8% for the week to $39.66 on hopes for an agreement at the April 17th Doha meeting. You might as well believe in the tooth fairy. There is little or no hope that an agreement will be reached and zero hope that any potential agreement will have any impact on production. Apparently, traders are a gullible group.

Prices also rebounded this week after there was an unexpected 4.9 million barrel decline in U.S. inventories. The headlines were full of titles like "crude glut shrinking" and "production declines reduce inventories." Nothing could be farther from the truth but the press never lets the truth get in the way of a sensational headline.

The Doha agreement, if it happens, will likely not include Iran, Libya, Iraq or the UAE. All of those countries are raising production from current levels rather than freezing production. The UAE is expanding production from 3.1 mbpd to 3.5 mbpd by the end of 2017. Iraq has been producing an average of 3.494 mbpd so far in April. That is up from 3.286 mbpd on average in March. Iraq is expanding production to 6.0 mbpd by 2018. Libya has very little current production. They are trying to quell the fighting and make deals with the rebels in order to return to the 800,000 bpd they produced in 2014 on the way to the 1.6 mbpd they produced before Gaddafi was overthrown.

Saudi Arabia has 128 active rigs and they are planning on increasing annual production through 2020. Saudi Arabia and Kuwait agreed last week to restart production of 300,000 bpd from the disputed zone that has been halted for the last two years.

Iran is producing between 2.4 and 2.6 mbpd and is targeting 4.0 mbpd by the end of 2017.

Currently there is a minimum of 1.0 million bpd of excess production and probably more. Goldman Sachs said on Wednesday they expect OPEC production to rise 600,000 bpd in 2016 and another 500,000 bpd in 2017.

Given the facts I have outlined above any agreement to freeze production by the countries I did not mention will have zero impact on current production and future increases. A post meeting announcement that claims a production freeze may lift prices temporarily because the headline traders will think the problem is solved. Several days later reality will return and the entire three-month lead up to this event will be forgotten.

U.S. inventories declined for multiple reasons. Imports declined by 500,000 bpd last week after a -630,000 bpd drop the week before. Over the last two weeks total imports declined by -12.3 million barrels. Obviously, there is a reason. I research it and the Houston Ship Channel was closed because of fog for multiple days last week. I am assuming that was the problem the week before as well because there were 26 tankers outside the port waiting for permission to enter and make deliveries. If each only carried 1 million barrels that would be 26 million. Some may be smaller but I am sure there were some VLCC tankers (2.0 mb) in the mix.

That would have been enough to cause a serious drop in inventories but there was another problem last week. TransCanada shutdown the 590,000 bpd Keystone pipeline that moves crude oil to Cushing Oklahoma and Illinois. That was shut down last Saturday and it will be reopened this Saturday once approvals are received. That means another 2 to 3 million barrels did not make it to their destination this week. That suggests more volatility in inventory levels in next Wednesday's report. Canadian select crude was trading as much as $15 below WTI because of the outage and it was instrumental in boosting WTI prices late in the week.

Active rigs declined to another historic low dropping -7 to 443. Oil rigs declined -8 to 354 and gas rigs rose 1 to 89. U.S. production declined 14,000 bpd to 9.008 mbpd. We are likely to get a production number that starts with an 8 this week.

The Investors Intelligence Survey showed a 5% spike in bullish sentiment and -4.3% decline in bearish sentiment. Interesting that the bulls started getting excited just as the market started rolling over.


The overextended market conditions are starting to ease. Two weeks ago, the percentage of S&P stocks trading over their 50 day averages reached an eye-popping 95%. That has declined to 84.6% and still falling. Obviously, the high number was caused by the sharp decline in February that dragged the averages lower and then the rebound allowed stocks to pass those short-term averages on the way back up. The average is about 55-60% so just returning to the averages would mean 30% of stocks would move lower.

The percentage over the 200-day average rose to 63% and pulled back only slightly. This is the bottom range of what we would call normal as indicated by the first six months of 2015. This percentage has likely run its course and should also decline slightly as the January/February dips equalize.

The percentage of S&P stocks with a buy signal on a Point and Figure chart has also plateaued and should move sideways around the 70% level. This is neither bullish nor bearish but indicates the overbought market is equalizing.

The Wilshire 5000 Index has a troubling pattern on the quarterly chart. It shows 3 consecutively lower quarters with the April quarter starting our lower as well. The relative strength (RSI) is fading and the MACD is about to flash a sell signal. This is a long-term chart so it is not something you should run out and sell on Monday morning. This is just another cautionary indicator of a weak market and this index covers the entire market.

I have shown this monthly chart of the S&P before but I thought I would refresh it. The 10-month average has completed its close under the 21 month and this is a long-term technical sell. Because it is a monthly chart, it moves very slowly but the trending averages are good indicators of market direction. Past performance is no guarantee of future results but it has been flawless for the last 20 years.

What a difference a week makes. When I showed this chart last week the indicators were just starting to roll over and now all three are in decline. The S&P failed at 2,075 and support at 2,020 is now the target followed by 2,000 if the decline continues.

I think it is clearly evident that the weakness is accelerating and we could be looking at some rocky trading next week. However, it does not have to move straight down. It is more than likely going to be choppy with some alternating triple digit days like those that we saw last week.

The Dow chart is similar. The Dow tested resistance at 17,750 and immediately sold off. The indicators have all flashed sell signals and the next support level is 17,400 followed by 17,135.

The Dow will be heavily influenced by the financial sector next week. With all the major banks reporting and having already guided lower they could rebound on a minor beat of the lowered numbers or crash even lower if they miss their revised guidance. Goldman Sachs does not report until the following week but they will react to whatever JP Morgan reports on Wednesday.

The Nasdaq has not fallen as far into the selloff as the Dow and S&P thanks mostly to the rally in the biotech sector. That helped lift the Nasdaq almost to resistance at 4,926 and it traded over 4,900 for a couple days. The oscillators are finally starting to roll over and the target on any real decline is about 4,735.

The Biotech Index ($BTK) is fading from that monster short squeeze to 3,250. After trading there for two days the index has dropped back 100 points to 3,155 and the direction is unclear. Most of the decline came on the open on Friday and it was flat in the afternoon. This may be just a bit of profit taking before the weekend event risk and it could take off again next week. OR, the short squeeze could fade completely and we return to the prior range. There was no fundamental reason for the rebound other than it was severely oversold and several companies reported successful drug trials and the shorts began to get worried. The direction of the BTK should be a big influence on the Nasdaq next week.

The Russell 2000 came to a dead stop at that 50% retracement level of 1,120. After trading there for three days, the index rolled over to close back under 1,100 again. The oscillators are not as bearish as the Dow and S&P but they have turned negative. The key level here is 1,065 and it is not that far away. The 1,120 level should remain strong resistance.

I believe the market is showing a classic topping pattern and after three weeks of sideways movement, we are at risk of retesting support. That would be 17,400 on the Dow and 2020-2025 on the S&P. If earnings are better than expected we could see a bounce but they would have to be much better to push through resistance. Somewhere over the next three weeks there is probably a sell the news event where some key stock or stocks really disappoint and investors get a head start on the sell in May cycle.

If you like the market commentary 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.

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Random Thoughts

No Random Thoughts this weekend. Our power was out all day on Friday and I am too far behind today. This section will return next weekend.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"If freedom of speech is taken away, then dumb and silent we may be led, like sheep to the slaughter."

George Washington


New Plays

Volatility Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

We cannot predict market direction but we can predict approaching volatility. I think everyone will agree that we are not likely to just sprint higher and make new highs anytime soon. We have a much better chance of continuing to see a choppy market with a downward bias in the weeks ahead. I am recommending we add a bearish position in the VXX to capitalize on that volatility when it arrives.


No New Bullish Plays


VXX - VIX Futures ETF - ETF Profile

The VXX ETF tracks one-month futures contracts on the Volatility Index of $VIX. The VXX is actually less volatile than the VIX but travels in the same direction. The VXX is highly liquid with average volume of roughly 75 million shares.

The VXX or any volatility ETP or leveraged ETF should not be held for long periods of time because the futures roll over every month will reduce the value of the position. However, it is suitable for short-term tactical trades. We closed a short on the VXX a couple weeks ago for a decent profit.

With the potential for another bout of market volatility I am recommending we go long the VXX this time. Long the VXX is the equivalent of a short position since it rises with a decline in the market.

The VXX touched 17 last Monday and that was a seven-month low. I think the odds of the VXX returning to 21-22 are excellent and returning to 25 reasonably good. Going long the VXX will be a hedge against out long stock positions.

Buy VXX shares at the open on Monday. Initial stop loss $16.75.

In Play Updates and Reviews

Raise Stop Losses

by Jim Brown

Click here to email Jim Brown

Editors Note:

The triple digit intraday decline on the Dow means it is time to raise some stops. The Dow opened up +153 and declined to trade in negative territory just before the close. That is a sign of conviction evaporating. While it could have been just profit taking ahead of weekend event risk, I suspect it was frustration the markets could not retest the highs.

If the S&P drops back below Thursday's low it could open a trap door to significantly lower levels. Support is 2,025 and then 2,000 and that could happen in just a day or two if the 2,045 level breaks.

While I am not expecting a crash, I am expecting some choppy trading for the first 2-3 weeks of earnings and then a decline into the summer doldrums. An unexpectedly good earnings cycle could change that outlook but estimates are still declining rather than rising. Citigroup expects companies to beat the current low estimates by 4% but that would still mean a -5% earnings decline for the quarter.

We need to remain agile in the weeks ahead and I plan to shrink the bullish plays if the market continues to be weak. Friday was not a bad day with only minor declines in 3 positions but it was not a good day either. When the Dow rolled over all the early gains in our positions faded as well.

We did lose GoPro as a short when it spiked with the market at the open.

I raised the stop losses on FGEN and SPXC.

Current Portfolio

Current Position Changes

ORBC - Orbcomm

The long position remains unopened until ORBC trades at $10.50. High Friday was $10.25

GPRO - GoPro

The short position was stopped out then GoPro spiked with the market at the open.

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


No specific news.

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, see portfolio graphic for stop loss.


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

DDD - 3-D Systems Corp - Company Profile


No specific 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


Minor decline after the biotech short squeeze faded. No specific 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


No specific news.

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 26th.

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


No specific news. HPE cannot seem to escape that resistance at $18.

Do not 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.

ORBC - Orbcomm Inc - Company Profile


Minor uptick in a shrinking market. Still no material loss from the recent gains. Brown Integrated Logistics, a 65 yr old regional transportation company selected Orbcomm to provide trailer tracking connectivity for its fleet.

The position remains unopened until ORBC trades at $10.50.

Original Trade Description: April 5th.

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.

SPXC - SPX Corporation - Company Profile


New 7 month high. No specific news.

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


Still clinging to support at $18. 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


Edging up to resistance at $8. No specific news.

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 held and the intraday spike to $12.75 stopped us out 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

Closed 4/8/16: Short GPRO shares @ $11.40, exit $12.55, -1.15 loss.


Closed 5/8/16: Long May $11 put @ $1.17, exit .70, -.47 loss.

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