Option Investor

Daily Newsletter, Wednesday, 4/20/2016

Table of Contents

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

Market Wrap

Bulls Getting Tired But Not Giving Up

by Keene Little

Click here to email Keene Little
There are signs of waning momentum for the rally but all efforts to sell the market are met with renewed buying and the indexes continue to power higher. We have an overbought market that's showing some bearish divergences so it's a good time for bulls to be cautious while the bears chomp at the bit to get started.

Today's Market Stats

Oil powered higher today, up +3.8% for the day (and pushing higher in the after-hours session), and that helped the stock market power higher as well. There was a small but sharp giveback at the end of the day and that looked a little bearish but the buyers are not giving the sellers any play time and that could continue the rest of this week.

There was very little in the way of economic reports but with oil's rally and the selling in Treasuries it helped keep the spark alive in stock market bulls. The charts are showing signs of waning momentum and a slight deterioration in market internals so the rally probably doesn't have much more room to run on the upside. But that doesn't mean the rally will end now and therefore the bears need to continue exercising patience while the bears need to get a little more defensive and protect what they've made. Once the leg up from February completes we should see at least a sizeable pullback into May and potentially something more bearish.

Bullish sentiment has spiked up again, thanks to the strong market rally off the February low. At that low most thought there was no bottom and that we were in the middle of a crash lower. I had suggested at the time that the wave pattern suggested we should be looking for an end to the decline and a big bounce correction to the decline. I did not think we'd see prices recovering the full decline but here we are. Now sentiment has completely reversed and most are feeling there is no end to the current rally and that new all-time highs are coming. That might happen but it's a risky bet here.

Tom McClellan tracks the bullish minus bearish sentiment reported by the Investor's Intelligence report and graphs it with a moving average band around the 50-dma, shown on his chart below. You can see the spikes to the downside (few bulls, more bears) in August 2015 and February 2016, each of which dropped through the lower band and suggested sentiment was getting too bearish. The opposite occurred at the November 2015 high and now currently -- lots of bulls, few bears. The reading spiked above the upper band in November 2015 and led to a turn back down and the same spike up through the upper band is happening currently. The bull-bear spread is now more bullish than it was following the rally off the August decline and is a strong warning to bulls that the rally has produced too much froth.

Investors Intelligence Bull-Bear Spread, chart courtesy Tom McClellan

Another chart of sentiment comes from CNN Money (Fear&Greed) which uses several different sentiment measures and combines them into one reading, which is tracked in the chart below. This index peaked in late March and while price has been pressing higher the sentiment index has not made it to new highs. This could be thought of as bullish, as in there's more bullish sentiment to go. But the bearish interpretation of this is that there are just a few less bullishly inclined investors and as they become a little less sure about the rally they become less inclined to keep buying. Without their support, which is reflected in the weaker market internals shown further below, one could argue that the market is going to run out of buyers soon.

CNN Money Fear & Greed Index, chart courtesy CNN Money

While bullish sentiment, as measured by the two charts above, is begging for a correction we're seeing some market internals that suggest the rally is getting tired. Momentum can only last so long before it peters out and the kind of market we seem to have now is like a light switch -- it's either all bullish or all bearish and when it flips it can quickly reverse the prior move. Certainly the moves since last May's highs bear this out and this kind of volatility is typically seen at major highs. What we can't know is how long it will continue or even if it ended and we're into a new bull market. But even if that's true, nothing goes in a straight line and corrections to severely overbought and overbullish tend to happen quickly.

The series of charts below show SPX at the top, new 52-week highs in the middle and the Advance-Decline at the bottom. The 52-week highs and a-d line have a 10-dma (red) to smooth out the daily spikes and you can see the bearish divergence vs. the new price high off the April 7th low. It doesn't guarantee a reversal anytime soon but it does give us fair warning.

SPX vs. 52-week highs and Advance-Decline line, Daily chart

Dow Industrials, INDU, Weekly chart

The non-stop rally off the February low has the Dow popping above price-level S/R near 18100 (today's high was 18167) but it was unable to close above this level (it closed basically on it at 18096). Above 18100 there's not much resistance up to its May 2015 high at 18351 and it certainly looks like it's acting as a siren call to the bulls right now. But the sharp little selloff in the final hour looks a little ominous so it's going to be important for the bulls to turn it back up right away Thursday morning (for something more than just a bounce correction).

The Dow's rally has also achieved two equal legs for the bounce off the August low for what could be a large a-b-c correction/consolidation before heading back down. The bearish pattern says the a-b-c bounce pattern is a 2nd wave correction following the 1st wave down into the August low. There are a couple of bullish possibilities, the first being the completion of a correction in the longer-term rally at the February low. The current rally would be the 1st wave of what will become a much more bullish run this year. That calls for just a pullback correction into May before heading much higher into the summer. Both the bearish and bullish patterns call for at least a pullback and perhaps something more bearish so it's a good time to be ready for what should be at least a deeper pullback into May. The big question of course is where and when the pullback/decline will begin.

Dow Industrials, INDU, Daily chart

As mentioned above, today's rally achieved two equal legs up from the August low and at the same time hit the top of a parallel up-channel for the bounce off the August low. The rally could go higher but this achievement, and the little selloff in the final hour, says bulls should be careful here. It could press a little higher but I think that's a risky bet The bearish interpretation of the a-b-c bounce pattern off the August low is that the next big move will be a strong decline that takes the indexes well below the January-February lows. Whether the rally will stop here or continue up to the May high at 18351 can't be known yet but with overbought charts (intraday, daily and weekly) showing bearish divergences at recent highs and extreme bullish sentiment it's not a good time to be chasing this higher. If long, just trail your stops close.

I noted on the daily chart below two MA crosses of interest -- back in January and yesterday. When the 50-dma crosses above the 200-dma we have the Golden Cross and when the 50 crosses below the 200 we have the Death Cross. But I'm not sure why anyone actually uses this signal that way since it seems to do just the opposite and use it from a contrarian standpoint. The crosses usually happen near the end of the trend and as you can see on the chart, the Death Cross on January 13th was followed a week later by the January 20th low and now we have a Golden Cross as of yesterday. Will it mean the top of the rally will be within the week?

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,8484

S&P 500, SPX, Daily chart

SPX made it up to within 5 points of its November 2015 high at 2116.48 and it could have its eyes on the prize at its all-time high at 2134 back in May 2015 (Dow 18351 equivalent). We obviously have a bullish market but we have to be very careful as the indexes approach what should be solid resistance with an overbought market that is showing waning momentum. It stays bullish above its uptrend line from February and its broken downtrend line from July-November 2015, which cross near 2092 tomorrow, while a drop below Monday's low near 2073 would indicate a top is likely in place.

Key Levels for SPX:
- bullish above 2117
- bearish below 2073

S&P 500, SPX, 60-min chart

There are a few trend lines/channels to watch closely as this rally extends higher and as mentioned above, an important level for the bulls to hold is the broken downtrend line from July-November, near 2092. Below that level would be a bearish heads up but not until it drops below Monday's low near 2073 would it indicate the deeper pullback/decline has likely started. A drop below 2073 would also be a confirmed break of the uptrend line from February 11 - April 12, currently near 2081. In the meantime I see the potential for this rally to extend higher into the end of the week and maybe the first part of next week before the sell-in-May crowd takes over. The November high at 2116, if not the May 2015 high at 2134, appear to be on the bull's radar screen. But is there enough gas in the tank to climb the last bit of the hill to reach those levels?

Nasdaq-100, NDX, Daily chart

For the past week NDX has been trying to break free of its downtrend line from December, currently near today's closing price at 4540. At today's low it tested its uptrend line from February, near 4524, so that's an important level to hold. A drop below 4524 would be a bearish heads up since that would likely be followed by a close of its April 13th gap up, at 4496, and at that point it would suggest the bigger pullback/decline has started. A trend line along the recent highs from April 1st is currently near price-level S/R at 4600 so that's still upside potential, maybe higher. Above 4600 would open the door to its December high near 4740.

Key Levels for NDX:
- bullish above 4600
- bearish below 4435

Russell-2000, RUT, Daily chart

The RUT made it within less than a point of achieving a price projection at 1148.13 (with today's high at 1147.72) for a 3-wave bounce off its February low where the 2nd leg up is 62% of the 1st leg. That's also on top of the 78.6% retracement of its December-February decline, at 1148.48. The pieces are in place to call a high at any time but obviously we'll need to price to confirm. A drop below Monday's low at 1125 would be the first bearish sign and then below 1100 would confirm the top is in place and we're into at least a larger pullback. If the pullback is choppy and corrective with overlapping highs and lows in the move down (such as a bull flag pattern) we'd then know to look at it as a buying opportunity. But if the decline becomes a sharp impulsive move down then we'd know it will likely drop to new lows and we'd want to short the bounces. It's too early to know and obviously the first thing we need to see is the start of a pullback, something the bulls have not let happen yet.

Key Levels for RUT:
- bullish above 1150
- bearish below 1100

10-year Yield, TNX, Daily chart

Bonds dropped sharply today and that had Treasury yields popping (10-year up +4.0%, 30-year +2.5%) and considering the big move I'm surprised the stock market didn't benefit more. Maybe money freed up from bonds today will flow into stocks tomorrow. TNX has bounced back above its 20- and 50-dma's, where it's been struggling for the past week and this could be part of what will become a larger rally in yields up to its downtrend line from June 2007 - December 2013, near 2.20% by the end of May. If the stock market does start a pullback any day now and pulls back into the end of May before heading higher we could see stocks and bonds in synch instead of counter-trend with each other. But the bearish pattern for TNX says the bounce off the April 7th low is only a correction to the March 16 - April 7 decline and at the moment it's just a 3-wave bounce. If the larger pattern is still bearish, which I believe it is, we'll see TNX continue lower once the current bounce completes (two equal legs up from April 7th is at 1.859 and today's high was 1.854).

KBW Bank index, BKX, Daily chart

After struggling a little with price-level S/R near 66.50 BKX has blasted higher in the past 3 days and now it's testing its 50% retracement of its 2007-2009 decline, at 69.45. A little higher than today's high, at 69.70, is its 200-dma at 70.22. If the bulls can do better than that we should see a rally up to 72.13 (two equal legs up from February) and maybe 72.43 (78.6% retracement of its December-February decline, which crosses its downtrend line from July-December 2015 in the first week of May).

Transportation Index, TRAN, Daily chart

The transports have been showing renewed strength following its pullback into the April 7th low and has now rallied marginally higher than its March 21st high. While the oscillators could catch up, at the moment they're showing bearish divergence so the bulls need to keep price from rolling over and leaving a little double top with bearish divergence. Yesterday's and today's highs challenged a downtrend line from the August and November 2015 highs and while the importance of that trend line is questionable, traders seem to be paying attention to it. The leg up from April 7th can be satisfactorily counted as complete and therefore there is the risk that it will turn back down from here.

U.S. Dollar contract, DX, Weekly chart

The US$ looks like it's either basing near 94 or has one more small drop to about 93 before it will be ready for the next leg up in its consolidation pattern. The decline from its December 2015 high is looking like a bullish descending wedge with bullish divergence since its February 11th low on its daily chart. It's oversold on its weekly chart and is looking like it could start its bounce at any time, either from here or after one more drop to 93.

Gold continuous contract, GC, Weekly chart

Gold has been holding up near the top of its down-channel from 2013, currently near 1250, and from a bearish perspective it's getting ready to roll back over. But I can view the consolidation since February as a bullish triangle, in which case it should continue to consolidate for another few weeks before pressing higher. Another leg up would very likely challenge its 200-week MA, currently at 1327, but then be ready for a larger pullback before continuing higher (or not). Many have jumped on the bullish gold bandwagon (and now silver since it's catching up) but I'm not convinced yet that the rally from December is anything more than an oversold rally in a continuing bear market.

Oil continuous contract, CL, Weekly chart

Oil has broken above the top of its down-channel that it's been in since the January 2015 low, currently near 41, and today it almost made it up to its 50-week MA at 43.59. The weekly chart below reflects tonight's after-hours high so far at 43.99 but since I use the continuous contract, which rolled over today I'm not sure I have the correct prices. In any case it's bullish above 43.60 and it could make a run up to its October 2015 high at 50.92. Two equal legs up from February points to 51.09 so that's an upside target as well. I would guess 50 would also be a psychological line of resistance if reached. As with commodities in general, especially if the dollar is getting ready to rally, this bounce might not hold and it's too early to tell if it's something bullish or just an oversold bounce before heading back down. As long as it holds above its April 5th low at 35.24 it will stay bullish.

Economic reports

Tomorrow's economic reports include unemployment claims and the Philly Fed index before the bell. Other than the Philly index there's not likely to be much of an impact from the reports.


The bulls don't seem to care about how overbought the market is but there are signs of waning momentum so it appears there are a few less believers in a continuation of the rally. This is also reflected in the pullback in bullish sentiment, although the bull-bear spread as reported by Investors Intelligence remains at a nosebleed level above where it was at the November 2015 high. Higher bullish sentiment with a lower price could be considered bearish divergence but it's too early to tell. The important thing to note is that the rubber band has been stretched to the upside just as it had been pulled back at the February low. Beware the snapback.

There is one other piece of information that has often worked as a market timing tool -- my highly proprietary Moon Phase Trading System (MPTS). We have a full moon on Friday and we're within the timing window for a high on a full moon. Be careful chasing this higher but bears need to know we're clearly in an uptrend and any short plays here are attempts to pick a top. Once we see an impulsive (not a 3-wave) decline and especially with a drop below Monday's lows we'll then have a green light for the bears to take their turn at the feeding trough. Only after seeing how the pullback/decline develops into May will we have the clues we'll need to help determine whether it will be a pullback to buy or instead start looking for bounces to short. Keep trades on a tight leash in the meantime.

SPX MPTS daily chart

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

Selloff Overdone

by Jim Brown

Click here to email Jim Brown
Editor's Note

Conn's fell -23% after reporting earnings in March but the problem was related to only one division. The company has a bright future and a 125-year history. An insider bought $3 million in shares last week.


CONN - Conns Inc - Company Profile

Conn's operates as a specialty retailer of durable consumer goods and related services in the USA. The company stores offer refrigerators, freezers, washers, dryers, dishwashers, ranges, furniture, mattresses, home office products including computers, tablets, desks, printers, etc. They also sell consumer electronics including TVs, home theater equipment, etc. They operate more than 100 locations and were founded in 1890. Conn's is like a Best Buy with furniture and appliances.

Shares fell -23% after reporting earnings in late March and bottomes on April 8th. Revenue rose 7% and same store sales rose 3.6% excluding categories the company exited during the quarter. The furniture section saw same store sales rise +15.2% while electronics sales decline -13.3%. They reported earnings of 11 cents compared to estimates for 28 cents. The sharp earnings miss was caused by a major increase in loan loss reserves on their customer financing programs. The 60-day delinquency rate rose to 9.9%. Conn's finances 80% of its sales through its own in house financing plans. This is a short-term problem that will pass as they tighten up credit standards on future sales. They plan to open 10-15 new stores in 2016.

Earnings are May 31st.

An insider bought 250,000 additional shares last week for roughly $3 million. That is a huge vote of confidence.

The sell off was overdone. Shares have now rebounded above the consolidation highs for the last four weeks where the sellers were exiting. Wednesday's close was a four-week high.

I believe we can take a long position in Conn's and ride it up to the $16 level or possibly higher.

With a CONN trade at $13.80

Buy CONN shares, initial stop loss $12.25.

No options recommended. The June $14 call is $1.45 and I think that is too expensive if we are only targeting $16-$17 on the long position.


No New Bearish Plays

In Play Updates and Reviews

Losing Traction

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow closed 70 points off its high and the S&P lost nearly 10 points to post a gain of 1 point for the day. The final short squeeze in crude prices ahead of futures expiration at the close helped lift energy stocks and the broader market in the morning. Once crude futures expired the major indexes lost traction and gave back nearly all their gains.

There was a flood of earnings after the bell and while some were good, some were not. Whether fear of earnings caused the market to roll over or simply a reaction to resistance, we will not know until tomorrow.

The S&P came to a dead stop at 2,011 and just under the next resistance band. The Dow punched through initial resistance at 18,110 to touch 18,167 intraday before falling back to close under 18,100 again. The resistance band from 18,110 to 18,165 may have finally impacted the Dow rally.

Earnings on Thursday include Microsoft, Google, Starbucks, Travelers, Visa, Verizon, under Armour, Biogen and GM to name a few. The big Nasdaq guys will report after the close and the Dow components Travelers and Verizon before the open. Dow component Visa reports after the close. Dow components GE, CAT and MCD report on Friday before the open.

That means holding over the Thursday PM, Friday AM, earnings could carry a penalty if some of those companies disappoint.

Current Portfolio

Current Position Changes

KKD - Krispy Kreme

The long position was opened with KKD traded at $16.50.

ORBC - Orbcomm

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

LGF - Lions Gate Entertainment

The short position was opened when LGF traded at $19.65.

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

DPLO - Diplomat Pharmacy - Company Profile


No specific news. The company scheduled an investor day for May 18th.

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


No specific news. Holding at three-month highs.

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.

KKD - Krispy Kreme - Company Profile


A 6% gain on the news of addition to the S&P-600.

Original Trade Description: April 18th.

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 an 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 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.

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. Downgraded from buy to hold by Stifel. Earnings are Thursday. 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. Minor profit taking from the 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

LGF - Lions Gate Entertainment - Company Profile


LGF dipped to trigger our short entry at $19.65 then rebounded to close positive for the day. No specific news.

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.

XLF - Financial ETF - ETF Profile


The XLF posted another nice gain. Our $23 call is now in the money by 54 cents and we need this rally to continue.

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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