Option Investor

Daily Newsletter, Tuesday, 4/26/2016

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

The alphabet soup in that title was instrumental in keeping a lid on the markets on Tuesday.

Market Statistics

The big weight on the market was the expectations for Apple's earnings after the close. The worry over a big miss that would drive the indexes lower kept traders on the sidelines on Monday as well with volume the second lowest of the year at 5.9 billion shares. The lowest day of the year was Monday after Easter so that day does not really count.

Apple disappointed as did Twitter and Chipotle Mexican Grill. Immediately after the reports, the S&P futures were down hard at -7.50 and the Nasdaq futures at -61. Wednesday's open may not be pretty.

The morning economics were mixed but traders were not paying attention. They were too focused on the coming Apple event. The Richmond Fed Manufacturing Survey for April declined from 22 to 14 but at least it was still positive. New orders declined from 24 to 18 but back orders rose from 1 to 11. Employment slid from 11 to 8 and capital expenditure plans improved from 15 to 22.

Activity in the Richmond area grew slower than in March but it was still a good report. Manufacturing has been weak in the area for the last year and this could be a sign growth is returning.

In the separate services survey the headline number rose from 9 to 15 and the highest level since October. The three-month moving average doubled to 12 suggesting this recovery has legs and is picking up speed.

The Consumer Confidence for April declined from 96.1 to 94.2 and pushing the three-month average to the lowest level since December 2014 at 94.7. The expectations component fell from 83.6 to 79.3 and the lowest since February 2014. The present conditions component rose from 114.9 to 116.4. Those that felt jobs were plentiful declined from 25.4% to 24.1% but those that felt jobs were hard to get also fell from 25.2 to 22.7%. Potential homebuyers fell from 6.3% to 5.4%, appliance buyers from 50.5% to 49.5%. Car buyers were basically flat at 11.7% after 11.8% in the prior report.

With gasoline prices rising and political campaigners telling consumers daily how bad things are, it is not surprising to see confidence decline.

The Durable Goods orders for March rose from -3.1% to +0.8%. Unfortunately, analysts were expecting +1.8%. Over the last 12 months orders are -2.5% below year ago levels. If you subtract defense orders that falls to -1.1%. Nondefense orders are now down -11.6% from year ago levels. Shipments declined -0.5% and backorders improved only slightly from -0.4% to -0.1%. The manufacturing sector is still in decline and the strong dollar is keeping it in decline.

The calendar for Wednesday is stacked against the market. There are several U.S. reports, the Fed meeting announcement, which could be hawkish, and the full boat of Japanese economics including the BOJ monetary policy. There is downside risk for Wednesday and Thursday's GDP could also be a risk if it comes in with negative growth.

Dow component Procter & Gamble (PG) reported earnings of 86 cents compared to estimates for 82 cents. Organic sales rose +1% but net sales declined -7% to $15.76 billion. That also included a 5% negative impact from foreign exchange rates. The higher earnings came on the back of significant cost cutting rather than rising sales. This was the seventh consecutive quarter of revenue declines. However, there is a reason for this. P&G is shrinking its vast portfolio of products to focus on the most profitable items while selling off the low margin products. However, analysts believe that focusing strictly on high margin items will provide earnings growth in the short term but provide limited growth of both revenue and earnings in the long term. The company expects full year earnings to decline 3-6% but that was slightly better than the 3-8% drop they predicted in January. Shares declined -2% on the news.

Dow component 3M (MMM) reported earnings of $2.05 that easily beat estimates for $1.92. Revenue declined -2.2% to $7.409 billion. The strong dollar reduced revenue by -3%. Revenues from the energy and electronic segments were down -13.6% to $1.1 billion. 3M is also in a restructuring phase where they are selling off non-core products to concentrate only on the most profitable operations. They cut their business from 40 to 26 segments since 2012. Shares declined $2.30 on the news.

Dow component DuPont (DD) reported a 6% decline in revenue to $7.4 billion. Much of the decline, -4%, was due to the strong dollar. Earnings of $1.39 beat estimates by a whopping 22 cents. However, the company raised guidance for the full year from $2.95-$3.10 per share to $3.05-$3.20 per share. They said the dollar would not be as big an issue in Q2 with only a 2% impact. DuPont still believes the $130 billion merger with Dow Chemical is on track but there will be significant regulatory issues. The deal would create one company called DowDupont and then split into three independent public companies focused on agriculture, material science ans specialty products. DuPont shares rose 2.4% on the news.

Whirlpool (WHR) reported GAAP earnings of $1.92, down from $2.38 in the year ago quarter. Adjusted earnings of $2.63 missed analyst estimates for $2.68. Revenue of $4.6 billion saw a -$750 million hit from currency issues. They guided for the full year to earnings of $14.00 to $14.75. Shares fell $6.60 on the news.

Hershey (HSY) reported earnings of $1.10 and beat estimates of $1.05 by a nickel. Net revenue of $1.83 billion missed estimates of $1.91 billion. Revenue declined -5.6% with a -1.2% impact from the strong dollar. The company said revenues declined due to a shorter Easter selling season because of the position on the calendar. Sales in North America declined -4.3% to $1.63 billion. Sales in the international segment fell -15.4% to $195.3 million. Currency impact reduced those sales by 7.3%. Sales in Mexico rose 4.2% and 9.6% in Brazil. Chinese sales fell -37% due to problems with sell-in related to the Chinese New Year items. HSY shares fell -2% on the news.

After the bell Twitter (TWTR) reported earnings of 15 cents compared to estimates for 10 cents while revenues of $595 million rose +36% but still fell short of estimates for $608 million. Twitter said it expects Q2 revenue of $590-$610 million and analysts were expecting $678 million. Monthly active users rose only 3% to 310 million compared to estimates for 308 million. The company said major advertising brands cut back on spending in the quarter. The company said they were developing and would deliver additional features for advertisers later this year, including more detailed demographic targeting and verification, and offer frequency planning and purchasing. Twitter shares collapsed from the $17.75 close to trade at $15.35 in afterhours.

Apple (AAPL) shares collapsed to $96 from a $104.35 close after the company reported earnings of $1.90 that missed already lowered estimates of $2.00. Revenue of $50.56 billion missed estimates for $52 billion and was well below the $58 billion in the comparison quarter. iPhone shipments were 51.2 million, down -16% from 61.17 million. Analysts were expecting 50.3 million. Analysts had cut estimates so many times they were overly bearish. Apple raised the dividend 10% and added $50 billion to the stock buyback to lift it to $250 billion.

The company sold 10.3 million iPads, down -19% but beating estimates for 9.4 million, and 4.03 million Macs, -12% and missing estimates for 4.6 million. Service revenue rose +20% to $6 billion. "Other" revenue which includes the watch was $2.2 billion. Apple guided for the current quarter to $41-$43 billion in revenue and analysts were expecting $47 billion and that was the already dramatically lowered estimate. This guidance is very bearish. Tim Cook said Apple was only in the "early innings" of the iPhone cycle. Despite having Apple streaming turned off in China, he still felt good about the future for iPhone sales there saying the Chinese economy was "stable."

The bearish guidance for the current quarter is going to hit all the Apple suppliers and this should weigh on the Nasdaq on Wednesday. Nasdaq futures are down more than 60 points in afterhours.

Chipotle Mexican Grill reported a loss of 88 cents compared to estimates for a loss of 95 cents. Revenue declined 23.4% to $834.5 million and transactions declined -21.1%. Same store sales declined -29.7%. This was expected after a series of food problems at multiple stores. The company gave out more than six million free burritos and one million chips, salsa and guacamole orders in an effort to bring customers back into their stores. All this free food caused the average ticket to decline up to -5%. During the quarter, they opened 58 new stores and expect to open 220-235 stores by the end of this year. JP Morgan predicted their comps would not return to normal until Q1-2018 and that earnings growth would double in 2017. They expect 20% earnings growth through 2020. Chipotle did not give guidance for earnings, saying it would depend on the rate of recovery. Shares declined -$25 to $427 in afterhours trading.

Ebay (EBAY) reported earnings of 47 cents that beat estimates by 2 cents. Gross merchandise volume rose 1% to $20.45 billion. Active buyers rose +3.8% to 162 million. The company guided to current quarter revenue of $2.14 to $2.19 billion and earnings of 40-42 cents. Full year revenue is expected to be $8.6-$8.8 billion compared to the prior forecast of $8.5-$8.8 billion. Shares spiked to $26.25 in afterhours but fell back to $24.75 and a gain of only 25 cents.

Chinese regulators shutdown the content partnership between Alibaba (BABA) and Disney (DIS) called DisneyLife. The over-the-top streaming service was just launched in late 2015. The mouse shaped receiver cost $123 (799 yuan) and only needed an internet connection. This came after regulators shutdown Apple's streaming content service last week. Alibaba would only say the service was down for an upgrade but they immediately began issuing customer refunds. The Disney cartoon characters were in shock over the move to censor cartoons.

After the bell, the API reported a decline in crude inventories of -1.07 million barrels. However, inventories at Cushing rose +1.9 million. Gasoline declined -400,000 barrels and distillates fell -1.0 million barrels. Crude prices rallied 40-cents on the news but it will depend on the EIA numbers on Wednesday to see if the gain will stick.

WTI rallied a whopping 4.7% during the regular session and completely erasing the drop to $42.50 yesterday. The Monday decline came after Bank of American warned that the recent rally lacked any fundamental underpinning and could collapse at any time. Saudi Arabia announced a financial restructuring program based on $30 oil. All of those headlines evaporated when the dollar sank to a three-day low at the open. The dollar recovered into the close but the short squeeze in oil was already in full bloom. If the Fed gives a dovish statement tomorrow afternoon, the dollar could weaken again.


The markets traded sideways on low volume of 6.4 billion shares while they waited for the Apple earnings to pass. The small caps ignored the danger and the Russell 2000 and S&P-400 both gained more than 12 points with the S&P-600 adding 9 points. The NYSE Composite Index, which contains a high number of small and mid cap stocks, added 57 points while the Dow only garnered +13 and the S&P +4.

The resurgence of the small caps is good for market sentiment but Wednesday is likely to be a big cap day. The drop in Apple is going to impact the Dow, Nasdaq and S&P. However, it is only one stock and there could be a relief bounce by the rest. S&P futures are still negative at -6 and -50 on the Nasdaq so we should start off in the hole unless something changes by morning.

The S&P has gone dormant below resistance at 2,095 and above support at 2,075. As each day passes and more companies report, it will become more difficult for the index to move higher. As each company reports they are normally followed by a period of post earnings depression even if the immediate reaction is positive.

A break below 2,075 could test 2,042 and a break over 2,095 targets the 2,111 resistance high from last week.

The Dow was helped by a couple of component headlines today. Those positive reactions will begin to evaporate tomorrow. PG and MMM reported earnings but suffered large losses to drag on the index. Boeing was up strongly after receiving a large order from China. Caterpillar was up on an upgrade to buy from Argus Capital.

Apple will be a roughly 65 point drag on the Dow at the open thanks to its -$9 drop in afterhours. It would take a couple of really good earnings reports from Boeing and United Technology to offset the drag from Apple on Wednesday.

The index is stuck between resistance at 18,165 and support at 17,925. The old adage "the path of least resistance is down" has never been truer but the new high syndrome is still in place. Traders may try to reach that new high before they give up on the long-term direction.

The Nasdaq will be the battle ground on Wednesday. If investors realize how bad the Apple guidance really was there could be lower lows for the company on Wednesday. I mentioned last week we could see $94 on Apple and that is entirely possible if not lower. However, some analysts are recommending a dip buy here because of the 10% increase in the dividend and the additional $50 billion added to the stock buyback. We could see investors rush into the void but I would be surprised. I would personally want to see if a bottom appeared before committing new money to the company.

The Nasdaq has closed at resistance at 4,900 for three days and it should start the day off under 4,850 on Wednesday. That will make resistance at 4,900 that much stronger on the next rebound.

The Russell 2000 closed at a four-month high and just below resistance at 1,165. This was an outstanding performance for the small cap stocks and suggests underlying market strength despite what the big cap indexes are projecting. The Russell has a long way to go to a new high with the 1,165 and 1,200 resistance likely to be formidable.

I am neutral for the market on Wednesday. We know we are going to start negative unless a miracle happens overnight to lift the futures. The worry over a potentially hawkish Fed statement could keep investors on the sidelines until after 2:PM. Uncertainty over the potential Bank of Japan actions overnight could also keep them on the sidelines. I would pick Thursday as a directional day after all the various headlines are dissected. I still believe the big cap indexes are facing significant resistance but I am glad to see the small and midcaps leading the market with gains. The Dow Transports were also up strongly with a 91-point gain. That confirms the strength in the small caps. We just need the big caps to shake off the earnings weakness but that may be too much to ask. Apple will continue to be a key stock. If Apple rebounds from its opening drop then market sentiment would improve significantly.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now


New Plays

Limiting Risk

by Jim Brown

Click here to email Jim Brown
Editor's Note

The markets have been docile in recent days but Wednesday is not likely to follow the pattern. We know the market is going to open negative on Wednesday because of Apple's big earnings disappointment. That will be followed by the Fed announcement at 2:PM and the Bank of Japan monetary policy announcement early Thursday morning. Wednesday could be wildly negative, dormant or wildly positive if Apple investors buy the dip in volume.

In keeping with my past recommendations, I do not want to add new positions unless we have at least some indication which way the market is going to move. There is no reason to add additional risk unless conditions justify that risk.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Direction Please?

by Jim Brown

Click here to email Jim Brown

Editors Note:

Now that the Apple cloud has passed, which way is the market headed? The futures were down hard after the Apple, Twitter, Chipotle, Ebay earnings but they have cut their losses in half. This could mean that investors are relieved that the Apple event has passed and might be willing to buy the dip on Wednesday.

The small and midcap stocks were up strong today even though the three bigcap averages were struggling. The Russell 2000 and S&P-400 both gained over 12 points.

We were stopped out of HALO on no news. Shares fell 8% at the open to stop us out at $11.25.

Wednesday could be an interesting day with economics in the morning, Fed statement at 2:PM and then Japanese economics after the close.

Current Portfolio

Current Position Changes

KKD - Krispy Kreme

Close the call option at the open on Wednesday.

VXX - Volatility ETF

The long position remains unopened until the VXX trades at $16.75.

NTAP - NetApp

The short position remains unopened until NTAP trades at $23.95.

HALO - Halozyme

The long position was stopped out at $11.25 this morning.

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

CONN - Conns Inc - Company Profile


Shares rebounded +6% on zero news. Small cap stocks were rocking today.

Original Trade Description: April 20th.

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.

Position 4/21/16 with a CONN trade at $13.80

Long CONN shares @ $13.80, see portfolio graphic for stop loss.

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

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, see portfolio graphic for stop loss.

No options because of wide spreads.

HALO - Halozyme Therapeutics - Company Profile


No specific news. Shares collapsed -6% to stop us out at $11.25 for a 74 cent loss.

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, see portfolio graphic for stop loss.

No options recommended.

KKD - Krispy Kreme - Company Profile


Still holding at the highs after addition to the S&P-600. No specific news.

I am recommending we close the option portion of this trade. The option has doubled in value and it will begin evaporating rapidly as we near May expiration. I prefer to take the profit and let the long position in the stock continue.


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.

Position 4/20/16 with KKD trade at $16.50

Long KKD shares @ $17.05, see portfolio graphic for stop loss.

Optional: Long May $17 call @ .30, no stop loss.

TRN - Trinity Industries - Company Profile


Nice 3% gain in a weak market. 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. Only a minor gain but the market was weak.

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.

VXX - VIX Futures ETF - ETF Profile


The VIX declined after the Dow and S&P began their rebound from the opening low. If the VXX continues to decline I will lower the entry point for the long position.

Original Trade Description: April 25th.

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.

Last Tuesday the VXX declined to 15.56 and the lowest level since August 10th. We had been long the VXX and that stopped us out of the position.

Since then the market has failed at resistance and spent several days in decline. With Apple's earnings likely to disappoint, it could cement the decline and lead us into the sell in May cycle.

Keith Bliss of the Cuttone Company, said research back to 1957 showed that last week was normally the best week of the entire second quarter. After last week the markets tended to "ebb" into June as the sell in May cycle takes hold as the earnings cycle wanes.

This year we have the Brexit vote in June, a likely Fed rate hike in June, the possibility for riots at the Republican convention in July, and many other factors that could weigh on the market.

I am proposing we get long the VXX and hold it because it is only a matter of time before we see another bout of volatility that could push it back to the 26-30 level. This means we could see some short-term bouts of calm if the markets try to make a new high again. Therefore, I am putting a stop loss on the position but I plan to reenter it the instant it appears volatility is starting to heat up. Hopefully the first long will be the only long we need.

Historically, there is very little long term risk with the VXX because the market will always have volatility spikes, but because it is a futures product there is a premium bleed if the ETF is held for a long time. If it were a regular stock we could just hold it until an event occurred. Since it is futures related, we have to have a stop loss.

With a VXX trade at 16.75

Buy VXX shares. Initial stop loss $15.25 and a new historic low.

BEARISH Play Updates

LGF - Lions Gate Entertainment - Company Profile


Shares held at support at $20 again. No specific news. If support breaks there could be a rapid decline but that support has been firm.

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.

Position 4/20/16 with a LGF trade at $19.65

Short LGF shares @ $19.65, see portfolio graphic for stop loss.


Long May $19 put @ 75 cents, see portfolio graphic for stop loss.

NTAP - NetApp - Company Profile


No news, only gained a penny. Support at $24 holding.

This position remains unopened until NTAP trades at $23.95.

Original Trade Description: April 5th.

NetApp provides software, systems and services to manage and store computer data worldwide. Data ONTAP storage operating system that delivers integrated data protection, comprehensive data management, and built-in software for virtualized, shared infrastructures, cloud computing, and mixed workload business applications; E-Series storage systems for storage area network workloads (SAN); all-flash arrays that deliver input/output operations per second and ultralow latency to drive speed, responsiveness, and value from the applications that control key business operations; and hybrid arrays for mainstream business applications.

About two weeks ago the stock trend turned negative and has started accelerating downward after Sterne Agee and Macquarie both downgraded from neutral to sell. Sterne Agee said the downgrade came after the Q1 IT survey. The survey showed weakness in end-user budgeting for storage systems and upgrades. Spending had declined 10% year-over-year and was negatively weighted towards incumbent vendors. Agee said they did not expect revenue from ONTAP8 and SolidFire to offset enough share loss potential over the next year. The analyst said valuation appears compressed and the stock should underperform its peers.

Another analyst said deteriorating net income would keep the stock depressed.

Earnings May 25th.

Based on the chart shares may not find support until $21. The last two days shares have stalled the decline at just over $24. I am recommending we short NTAP with a trade at $23.95 and target $21 for an exit.

With a NTAP trade at $23.95

Sell short NTAP shares, initial stop loss $24.95


Buy long June $24 put, currently $1.25, initial stop loss $24.95.

XLF - Financial ETF - ETF Profile


New four-month high. This ETF reacts to the markets just as much as it does to financial news.

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.

If you like the trade setups 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.

subscribe now