Option Investor

Daily Newsletter, Monday, 4/18/2016

Table of Contents

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

Market Wrap

The Saudis Sandbag Doha

by Thomas Hughes

Click here to email Thomas Hughes


There was no deal in Doha, oil prices fell and the market rallied. The fact that the Doha meeting fell apart is no surprise, neither is the drop in oil prices. What is a surprise is that the market rallied on the news, a move that perhaps confirms the notion the market had little confidence the Doha meeting would bear fruit.

Asian indices mostly fell on the news, led by the Japanese Nikkei. The Nikkei was down nearly -3.5% on the close due to a second earthquake on the Island of Kyushu. The quake led to a disruption of infrastructure for companies like Toyota, Honda and Sony which shut down operations until later in the week. European indices began the day lower, about -3%, but moved higher throughout the day. The DAX was trading near break even at the open of our markets and moved into the green by the close of the day.

Market Statistics

Early trading indicated a lower open for the US indices all morning. The futures were down by a half percent at the start of the electronic session but moderated to about half that by 8:30AM. Earnings reports, a cut to US growth outlook from Citigroup and comments from several Fed presidents all had some affect on early trading, as did a fall in oil prices, but none enough to really drive the market. At the open the indices fell as expected but unexpectedly found support within the first 7 minutes of trading. From that point until about 12:30 the market rose, the SPX gaining nearly 12 points, until settling into a trading range that lasted 2 hours. A little after 2:30PM the bulls gathered their strength, broke above resistance and set a new highs in many of the indices. Rally persisted into the end of the day, leaving the indices at or near their highs at the close of trading.

Economic Calendar

The Economy

Only one economic release today, Home Builder Sentiment, and it remained unchanged from last month. Sentiment came in at 58, the third month of unchanged data, positive but mild and characterized as optimistically cautious. Within the report sales fell by 2 points while traffic and future activity each gained 1. Analyst had expected home builder sentiment to gain a point to 59.

Moody's Survey Of Business Confidence jumped 2 points to hit 33.7 this week. This is the largest gain in a year and the highest level in 4 months. Within the report responses to all 9 questions are seeing improvement with emphasis on sales, financing and pricing. According to Mark Zandi the strongest responses are to sales and the availability of financing.

Despite the banks mostly beating expectations earnings for the broader market are coming in worse than estimated. According to FactSet the blended rate for Q1 2016 earnings is now -9.3%, down -0.2% from last week due to lower estimates in 6 sectors. To date, only 7% of the index has reported with 71% of those beating earnings estimates and 60% beating revenue estimates.

Full year 2016 projections have fallen as well. 2016 is now expected to see earnings growth of only 2.0%, down a tenth, as all three remaining quarters are revised lower. The silver lining is that earnings are expected to return to growth in the 3rd quarter and expand into the 4th, followed by more robust growth in 2017. Full year 2017 estimates continue to rise, gaining a tenth to 13.60%.

This week is fairly light on data but still important. Throughout the week will be housing data including starts, permits and existing home sales. Later in the week is the Philly Fed and Leading Indicators and of course the weekly jobless claims.

The Oil Index

No deal in Doha was a headline from more than one news service. The deal fell apart apparently on a shady shift in terms perpetrated, allegedly, by the Saudi's. According to reports terms of the agreement were not dependent on Iran's involvement Saturday night, and then on Sunday morning they were. The news caused an expected decline in oil prices, about -5% for WTI, but did not spark a massive reversal in prices, at least not yet. Fundamentals remain skewed to the supply side but signs persist the balance is coming back into line naturally, if very slowly, which is helping provide some support. WTI fell below $38 in early trading but closed $2 higher, just shy of $40. Where it is going next is hard to say but we may get a clue this week.

The Oil Index fell more than -3% in the pre-market and opened with a gap lower, just above the short term moving average. It then proceeded to move higher all day and close with a gain of nearly 1.65%. Despite the gain the index remains below resistance at the 1,120 level with weak, if bullish, indicators. The index may continue to test resistance and may break through with next resistance near 1,150. Support appears to be along the short term moving average, near 1,070.

The Gold Index

Gold prices were up in early trading on the Doha news but fell back to break even by late in the day. Spot price held near $1235, near the middle of recent ranges, likely tied to economic data, and a meeting of the ECB later this week. The bank is not expected to make any changes to policy but the comments could sway sentiment. At the last meeting Draghi indicated that there would likely be no additional QE in Europe, if he holds this line again the euro will likely strengthen, weaken the dollar and support gold.

The gold miners tried to move higher but were not able to hold the gains. The miners ETF GDX opened with a gain near 1% but closed with a loss. The index is trying to extend a bounce from support but so far has made little progress. The move is likely tied to central bank activity and economic data which means gains/losses could muted until the FOMC meeting next week. Resistance is likely at the recent high, near $23, with support at the top of the recently broken trading range near $21.25.

In The News, Story Stocks and Earnings

The dollar lost a little ground today, about -0.25%, on the Doha deal and risk off appetite. The Dollar Index fell back to potential support at the 78.6% retracement level, near $94.45, and may fall through. The drop to support and potential break down are in line with 4.5 month trend and consistent with central bank outlook. The ECB is not expected to expand QE, the FOMC is not expected to tighten policy, the theoretical effect being stronger euro and weaker dollar. If support is broken the index will likely retest the recent low, just below $94, with a chance of moving down for a full retracement of the trading range.

Disney helped to lift the market today, gaining more than 3%. The stock got a boost from much better than expected results from the release of the new Jungle Book movie. The movie's success helped to alleviate fears the movie pipeline had already been priced into the stock and sent it up to a new three month high. Disney is scheduled to report earning May 10th.

Toy maker Hasbro released earnings this morning and beat on the top and bottom lines. The company increased sales and earnings on all fronts, boosted by brands such as Play Doh and Nerf. Licensed merchandise for Star Wars and Frozen also contributed. Earnings grew 83% from last quarter, revenue only 16%, with positive outlook for the rest of the year. Shares of the stock jumped more than 5% on the news and is now trading at a new all time high.

Morgan Stanley reported earnings before the bell. The investment bank beat on the top line, revenue fell short, but nevertheless posted a year over year decline in both. EPS of $0.55 was $0.09 better than expected, but down more than 50% from last year. Revenue was $7.8 billion, down 21% from previous. Shares of the stock tried to move higher at the open but couldn't. Sellers took charge and drove prices below break-even to close with a loss near -0.5% and below resistance.

Netflix and IBM both reported after the bell, and both beat bottom line expectations. Netflix fell short on revenue expectations, IBM did not, but was able to increase revenues by 24%. Netflix also provided weaker than expected outlook, primarily on 2nd quarter projections, sending shares lower in after hours trading. IBM reaffirmed guidance and sent shares of its stock higher.

The Indices

The Doha deal fell apart, oil prices tanked and yet the market moved higher. Today's rally was broad, led by the S&P 500, but not overly strong. The candle is long and white but only of average size so nothing worth special note. The move does appear to confirm near term support at 2,075 although the indicators persists in weakness. Both MACD and stochastic are divergent from the new high and highly suspicious. The divergence has been growing for weeks, as the index approaches record highs, and does not instill much confidence in the strength of the rally. Despite this it appears as if the index will move up to test resistance near 2,120.

The Dow Jones Industrial Average made the 2nd largest gain in today's session. The blue chips added 0.60% in a light session and managed to move above 18,000 for the first time in 9 months. Today's move is not very strong and accompanied by divergent indicators so caution is due. Upside target is near 18,315 but beyond that is highly questionable.

The NASDAQ Composite gained 0.44% in today's session. The move is weakly bullish, with glaring divergences, but does manage to break above resistance. Resistance is at 4,950, the move above marginal at best, with next target near 5,035 should the the index continue to drift higher. The indicators are divergent and indicate a weakening and extended rally, vulnerable to correction.

The Dow Jones Transportation Average made the smallest gain, only 0.31%. The move is very weak for this index, considering it led us higher the first three months of the year. This index did not make a new high with today's action and is still below potential resistance near 8,050. The indicators are bearish but may cross into a bullish signal any day. A break above resistance would be bullish, with a first target near 8,250.

The market moved higher once again and seems to want to keep moving up, possibly to test the current all time highs. The caveat is that the move also appears to be a little heady and is certainly losing momentum. We could easily get a test of the highs, there is still no sign the rally is stopping. The question is, what will happen then? Will the market break out or will it correct? A break to new highs would be nice but what will drive it, weak earnings, unstable oil prices or slow growth?

The longer term outlook is much brighter and lending support but near term the indices appear to be overextending and ripe for a correction. I remain bullish for the long term and very cautious in the near.

Until then, remember the trend!

Thomas Hughes

New Plays

Got a Sweet Tooth?

by Jim Brown

Click here to email Jim Brown
Editor's Note

Who would have thought that Krispy Kreme Donuts would be impacted by falling oil prices and currency translation issues? They are a donut store headquartered in the USA. Unfortunately, not all their stores are in the U.S.


KKD - Krispy Kreme - Company Profile

Krispy Kreme operates as a branded retailer and wholesaler of doughnuts, coffee, treats and packaged sweets. Who would have thought that Krispy Kreme Donuts would be impacted by falling oil prices and currency translation issues? They are a donut store headquartered in the USA. Unfortunately, not all their stores are in the U.S. KKD only has 297 stores in 41 states but they have more than 825 stores in 25 other countries.

There are 105 stores in Saudi Arabia, 136 in Mexico, 19 in the UAE, 14 in Kuwait and 12 in Russia. All of those countries have been impacted by the drop in oil prices and spike in the dollar.

In the last quarter sales at locations outside the U.S. fell -7.1% and expectations are for a continued decline in sales. The strong dollar caused revenue to decline -3.4% to $7.4 million in last quarter.

In late March they warned earnings would be in the range of 87-91 cents and analysts were expecting 93 cents. Shares fell -10% on the news. However, within four days the stock had rebounded to more than the level before the warning and have continued higher. Monday's close was a 8-month high.

They are running promotions to boost sales in the U.S. and they appear to be succeeding. On April 1st they gave away a free donut to anyone walking in their door, no purchase necessary. The stores were packed.

KKD only has $11 million in debt and $51 million in cash. They bought back 2.8 million shares in 2015. They have an authorized buyback for up to $144 million in shares for 2016.

Earnings are June 21st.

I am recommending we buy KKD shares with a trade at $16.50, just over today's high and target $18 to sell using a tight stop loss.

With KKD trade at $16.50

Buy KKD shares, initial stop loss $15.65

Optional: Buy May $17 call, currently .25, no stop loss.


No New Bearish Plays

In Play Updates and Reviews

Shorts Squeezed Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

With everyone expecting a decline in equities and especially energy stocks after the Doha meeting, apparently everybody was short. Oil prices crashed on Sunday night and rebounded on Monday. Energy equities were down 2-5% at the open but rebounded to be up 2-5%. The Dow broke through resistance to close over 18,000.

After the close IBM, NFLX and ILMN were all down hard on earnings and warnings but the S&P and Nasdaq futures are positive. The Dow futures are slightly negative because of IBM.

The rally today was exactly the opposite of what traders expected and apparently the short got squeezed again. Most of the gains were in the first hour with the S&P shaking off a -7 point decline to add +10 points in the first 60 minutes. That was not a bunch of fund managers nibbling at new positions. That was a major short squeeze.

I wrote in a newsletter on Sunday that should the market open sharply lower and rebound to post significant gains, we are probably going to retest the historic highs. Traders appear fixated on those highs and that is a very old pattern. When the indexes near historic highs they seem to move there as if they were price magnets. This happens even on bad news and weak earnings. Traders tend to use the bad news as stepping stones higher in the wall of worry.

I cancelled the bearish recommendation on the IWM until we reach those highs. Then I will reinstate it.

Current Portfolio

Current Position Changes

DPLO - Diplomat Pharmacy

The long position was opened with a trade at $30.35.

DDD - 3D Systems

The long position was closed at the open at $17.00.

VXX - Vix Futures ETF

The long position was stopped out at $16.25.

ORBC - Orbcomm

The long position remains unopened until ORBC trades at $10.50.

LGF - Lions Gate Entertainment

The short position remains unopened until LGF trades at $19.65.

IWM - Russell 2000 ETF

The short recommendation was cancelled.

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


CellDex presented favorable data on the drug varlilumab at the AACR annual conference. There was a big spike at the open and then a sell the news event that knocked the stock back from $4.97 to $4.38 at the close. CellDex has four more abstracts to deliver at this meeting.

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


The position was closed at the open today after the sell rating from Citigroup on Friday. The position was closed for a gain.

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

Closed 4/18/16: Long DDD shares @ $15.60, exit $17.00, +1.40 gain.

Closed 4/18/16: Long May $17 call @ $1.05, exit $1.47, +.42 gain.

DPLO - Diplomat Pharmacy - Company Profile


No specific news. The company announced an investor day for May 18th. Shares rose 50 cents to start the position with a nice move.

Original Trade Description: April 15th.

Diplomat Pharmacy operated as an independent specialty pharmacy in the USA. The company stocks, dispenses and distributes prescriptions for various biotechnology and specialty pharmaceutical manufacturers. A specialty pharmacy does more than just dispense pills. The provide other services for the patients like infusion, patient financial assistance, risk evaluation and medication strategies. Many of their patients are on complex programs with multiple high dollar drugs. The company has 16 locations and was founded in 1975.

DPLO had a rough six months. The Valeant problem with specialty pharmacy Philidor put a cloud over the entire sector. After DPLO reported robust earnings back in March, JP Morgan downgraded them saying they could decline 15%. The company guided below expectations but remained bullish. The analyst said he could not bridge the gap between the guidance and management bullishness. Shares dropped from $36 to $26 on the downgrade.

Fortunately, that was the bottom and shares have been moving up steadily. They accelerated last week after the company announced the availability of a new Lilly drug for Plaque Psoriasis. This confidence in DPLO by Lilly seemed to encourage investors.

Earnings are May 9th.

Shares are just over $30 with resistance at $35. With the potential for a market meltdown on Monday if the OPEC meeting in Doha does not go well, I am putting an entry trigger on the position.

Position 4/18/16 with a DPLO trade at $30.35

Long DPLO shares @$30.35, initial stop loss $28.75

No options because of wide spreads.

HALO - Halozyme Therapeutics - Company Profile


HALO presented preclinical data at AACR on two new compounds for combating tumors. The presentation was a 4:PM and shares rallied 30 cents in afterhours.

Original Trade Description: April 13th.

HALO is a biotechnology company that researches, develops and commercializes human enzymes. Its human enzymes are used to facilitate the delivery of injected drugs and fluids, enhancing the efficacy and the convenience of other drugs or can be used to alter tissue structures for clinical benefit. The company is also developing PEGylated recombinant human hyaluronidase (PEGPH20) for the treatment of metastatic pancreatic cancer, non-small cell lung cancer, gastric cancer, metastatic breast cancer, and other cancers in combination with various cancer therapies.

This is an easy play. The company is presenting data from multiple trials at the American Association of Cancer Research meeting that will take place April 17-20th. They will release five different abstracts detailing drug interactions at this conference. At the same time they will host an investor/analyst meeting on April 18th at 4:PM.

They reported earnings of 3 cents compares to expectations for a loss of 11 cents. Revenue was $52.2 million.

HALO has partnerships with Roche, Baxalta, Pfizer, Janssen, AbbVie and Lilly. This is not a pipsqueak company.

HALO broke over recent resistance at $11.25 on Wednesday and could run if the data presented is positive. I am recommending we take a long position with a tight stop at $10.50.

Position 4/14/16

Long HALO shares @ $11.99 initial stop loss $10.50.

No options recommended.

ORBC - Orbcomm Inc - Company Profile


No specific news. ORBC continues to move sideways but with every consolidation in the past the end result was a strong spike.

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.

TRN - Trinity Industries - Company Profile


No specific news. We will not be exiting before earnings. 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 April 21st.

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


No specific news. New 10-month high.

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 @ .38 cents.(Adjusted) NO STOP LOSS

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

BEARISH Play Updates

IWM - Russell 2000 ETF - ETF Profile


The market did not roll over as expected and now appears to be targeting the prior highs. I am temporarily cancelling this recommendation. Once we hit those highs or the market trend reverses I will bring this play back.


Original Trade Description: April 14th.

This is a simple play. The markets have rallied to resistance and could face a significant challenge in moving higher. The Russell broke over at 1,110 (111 on the ETF) and rallied right to downtrend resistance and the 200-day average. It is entirely possible the market will continue higher but there is a good chance it will roll over as well. The next few days will be critical.

The two-day short squeeze faded on Thursday and the markets did not sell off. They held their gains, which is bullish. However, we have a potentially negative event on Sunday with the OPEC meeting in Doha, Qatar. If those bozos fail to produce some kind of agreement that will satisfy the market we are going to see a crash in oil prices that could knock the market significantly lower.

We are also going to see a deluge of earnings next week and the earnings warnings are thicker than flies at a picnic. If the first few companies miss estimates it could sour the market.

On the positive side, when the major indexes near historic highs those highs tend to turn into price magnets. The Dow is only about 425 points from its historic high. That is a powerful market dynamic. The S&P is 50 points below its high.

We have multiple forces pushing and pulling the market and those will increase next week. I am recommending we enter a bearish position at $111.50 on the ETF, currently $112.20.

I do not want to be short unless the market rolls over.

Recommendation cancelled

LGF - Lions Gate Entertainment - Company Profile


LGF only posted a minor gain but we are still not in this position so we can watch for free.

This position remains unopened until LGF trades at $19.65.

Original Trade Description: April 12th.

Lions Gate Entertainment engages in motion picture production and distribution, television programming and syndication, home entertainment, digital distribution and sales activities. They produced the series Twilight, Hunger Games and Divergent along with dozens of other films.

Shares have been falling since the Hunger Games and Divergent movies have run their course. The last Divergent movie, "Allegiant" only produced $137 million in worldwide ticket sales and was considered a disappointment.

The company has other films in progress but none are expected to be the box office draws like the ones mentioned above. There was a report last week that Lions Gate may be looking to partner with another studio and may be looking at buying a minority interest in Paramount. That would be a good deal for Lions Gate since Paramount owns Transformers, Mission Impossible and Star Trek. However at the 25-35% stake being discussed that would be roughly $2 billion and a big bite for Lions Gate at a time when future cash flows may be shrinking.

Lions Gate has not been one to shy away from acquisitions. They have done several in the past and that is how they got the Hunger Games and Twilight franchises when they purchased Summit Entertainment. They even tried to buy MGM in 2010 but failed.

Knowing that Lions Gate is on the prowl for an acquisition and has no major movies in the pipeline has put the stock into a slide.

Earnings are May 10th.

I am recommending we short LGF with a trade at $19.65 and look for them to set a new low on any acquisition announcement. Normally the acquirer shares go down. Even if they do not make an acquisition we know they are looking so investors are getting out of the way now.

With a LGF trade at $19.65

Short LGF shares, initial stop loss $20.65


Buy May $19 put, currently 80 cents, stop loss $20.65.

VXX - VIX Futures ETF - ETF Profile


When the market rebounded from the opening dip the VIX crashed back to 13 and the VXX fell -6% to 15.87. That stopped us out at 16.25 for a $1.90 loss. Since the $15.86 level is only 30 cents away from a historic low, I will be bringing this play back once the markets peak. We will win this money back on the next market drop.

Original Trade Description: April 9th.

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.

Position 4/11/16

Closed 4/18/16: Long VXX shares @ $18.15. Exit $16.25, -1.90 loss.

No options because of high premiums.

XLF - Financial ETF - ETF Profile


Morgan Stanley earnings fell -54% but they still beat the street estimates. Goldman Sachs reports on Tuesday. Goldman could be a big lift to the XLF or a major anchor.

Original Trade Description: April 11th.

The XLF is commonly referred to as the banking ETF. However, it is actually a Financial Sector ETF. Banks account for 33% of the holdings with WFC, JPM, BAC, C, USB and GS six of the top ten holdings. Insurance, brokers, diversified financial services and REITs make up the rest of the ETF.

We are playing it to capitalize on the movements in those six top banks as they report earnings. The ETF normally moves slowly and I would not recommend it as a stock holding ahead of those earnings simply because we do not know which way it will move.

I am recommending a short-term option strategy called a strangle using very inexpensive options. We only care about catching the post earnings move in what could be a rocky quarter. Since estimates are already very low there is the potential for an upside surprise and that could cause some short squeezes with the banks.

I looked at playing the weekly puts but the premiums were in some cases higher than the May premiums so we will buy the time even though we will not use it.

Position 4/12/16

Long May $23 call, @ 19 cents, no stop loss.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.

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