Option Investor

Daily Newsletter, Tuesday, 5/3/2016

Table of Contents

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

Market Wrap

China, Australia and the Fed

by Jim Brown

Click here to email Jim Brown

Weak economic data from China, a rate cut in Australia and a Fed head warning of a possible rate hike in June.

Market Statistics

Those events combined to push an already uncertain market sharply lower and erases the gains from Monday. In China, the Caixin purchasing managers index declined from 49.7 to 49.4 and the 14th month below 50, a level representing contraction. The official Chinese PMI declined from 50.2 to 50.1 for March. The Caixin numbers suggest the recent stimulus that lifted Q1 growth slightly, is fading. The Caixin gauge is considered more accurate than the government PMI because it focuses on private firms while the government number is heavily influenced by state owned companies. The government PMI is thought to be manipulated to remain positive.

The Reserve Bank of Australia cut interest rates to a record low of 1.75% in an effort to head off deflation. Australia is a commodity economy and has not seen the major economic problems of other countries until now. The Australian dollar crashed causing a ripple higher in the other global currencies.

The spike in the U.S. dollar accelerated the decline in equities and commodities. WTI declined -2.5% on the dollar strength and news that OPEC nations were boosting production even higher. After the close the API inventory report said U.S. crude inventories rose +1.3 million barrels with another 382,000 barrel rise at the futures delivery point of Cushing Oklahoma.

Gold declined from its high at $1,300 to $1,287 on the dollar spike.

Atlanta Fed President Dennis Lockhart said "June is a live meeting." Also, "two rate hikes are certainly possible. We have enough meetings remaining. June is a real option." He also warned that the Brexit vote in June was a real risk to the global economy. Bringing the Fed back to the forefront of the conversation put an additional cloud over the equity markets.

The ISM-NY report rebounded significantly with a sharp increase from 50.4 to 57.0 and a four-month high. This is material since the index was only 0.5 away from contraction in March. However, the six-month outlook fell from 65.0 to 53.1 and the lowest reading since 2009 and the financial crisis. The quantity of purchases fell from 57.1 to 48.2 and a three-month low. While the headline improved, the internals components were mostly lower. Only employment showed a dramatic improvement from 40.9 to 49.9 but still in contraction territory for 7 of the last 8 months.

Vehicle Sales for April rebounded to an annualized pace of 17.4 million after 16.6 million in March. This is 4% higher than April 2015. Auto sales rose from 6.9 million to 7.1 million and trucks/SUVs rose from 9.7 million to 10.4 million. All the major manufacturers posted gains except for Ford, which was flat at 2.8 million.

The first April employment report is due out tomorrow and expectations are for a 5,000 jobs decline to 195,000. If the ADP report comes in anywhere close to this number, it will be ignored. The Nonfarm Payrolls forecast has declined slightly and is now expected to show a decline of 15,000 jobs to 200,000. This would also be a Goldilocks number and the market would probably breathe a sigh of relief.

Dow component Pfizer (PFE) led the earnings parade today. Pfizer earnings jumped +27% to $3.02 billion due to higher sales and lower taxes. Adjusted earnings of 67 cents easily beat estimates for 55 cents. Revenue rose +20% to $13.01 billion and well above estimates for $11.97 billion. This comes only four weeks after Pfizer cancelled the $160 billion merger with Allergan. This was the sixth consecutive quarter of revenue growth despite an increase in generic competition. The company got a boost from the $15 billion acquisition of Hospira last September. That company supplied $1.2 billion in revenue for the quarter.

The company guided for full year earnings of $2.38-$2.48, up from $2.20-$2.30 in January. Revenue estimates rose by $2 billion to $53 billion. Pfizer also began an accelerated share repurchase program of $5 billion announced in March. The company has bought back nearly $51 billion since 2010. Shares rose to a six-month high at $34.

Molson Coors (TAP) reported earnings of 54 cents that easily beat estimates for 43 cents. Revenue of $657.2 million beat estimates for $602 million. TAP is made up of more than 65 leading brands of beer and operates in 30 countries. They have been struggling for several quarters because of weak economies in Europe, the USA and Canada. Sales declined as consumers cut back on beer purchases. To combat this decline the company launched multiple premium categories with higher prices and higher margins. Apparently this strategy has worked.

CVS health (CVS) reported earnings of $1.18 that beat estimates by 2 cents but that was the slowest earnings growth since Q4-2013. Revenue rose +19% to $43.22 billion compared to estimates for $43 billion. The company guided for earnings of $1.28-$1.31 for Q2 and that was lower than the $1.35 estimate. For the full year, they guided to earnings of $5.73-$5.88 compared to analyst estimates for $5.82.

Pharmaceutical company Mallinckrodt (MNK) reported earnings of $2.01 compared to estimates for $1.72. Revenue of $918 million also beat estimates for $874 million. The company guided for full year earnings of $8.15-$8.50, up from $7.85-$8.30. Sales in the specialty brands segment rose from $334 million to $535 million. However, sales of specialty generics fell -27.1% to 264.4 million. Shares spiked 7% or $4.40 but the chart remains mired in consolidation.

Clorox (CLX) may not be sexy as a growth stock but they reported earnings of $1.21 that beat the street by 11 cents. Revenue of $1.43 billion rose +2% and beat estimates for $1.41 billion. They guided for full year earnings of $4.85-$4.95 compared to prior guidance of $4.75-$4.90. Sales are expected to rise 4-5% on a constant currency basis. The company said it had completed the $290 million acquisition of Renew Life, the number 1 brand of natural probiotics. Clorox said that $10 billion digestive supplement market is very fragmented and growing 7% a year. Within that is the $1.3 billion probiotics category that is growing 15% a year. Does anyone else think it is strange a bleach company is going to clean out your digestive system? Actually, bleach only accounts for 15% of total revenue at Clorox.

American International Group (AIG) reported earnings of 65 cents that was well below estimates for $1.00. Net investment income fell -44% to $577 million. The commercial property and casualty business saw income fall -38.5% to $720 million. This was the third consecutive quarter of earnings below expectations. AIG did return $4 billion to shareholders in Q1. AIG is rapidly removing investments from hedge funds. They had been active investors until the market turned volatile a couple years ago and now the model no longer works for them. They received $1.2 billion in redemptions in Q1 and said it will be several quarters before they receive the rest of their investment back because of fund withdrawal restrictions. Shares declined slightly on the earnings news.

Mylan (MYL) reported earnings of $1.18 billion or 76 cents that beat estimates by a penny. Revenues of $2.19 billion missed estimates of $2.26 billion. The company affirmed full year guidance for $4.85-$5.15 with analysts expecting $4.90. Revenue is expected to be $10.5-$11.5 billion and analysts were expecting $10.6 billion. Mylan is one of the largest generic and specialty pharmaceutical companies in the world. They currently have over 1,400 drugs on the market. They expect to complete the $9.9 billion acquisition of Meda in Q3. Shares rose slightly on the minor beat.

After the bell, Zillow Group (ZG) reported a loss of 13 cents compared to expectations for a loss of 9 cents. Revenue rose 25% to $186 million and easily beat estimates for $177 million. The company raised full year guidance from $805-$815 million to $825-$835 million. Monthly average unique users rose to 156 million with a record number of visitors in March. Shares spiked 12% or $4 in afterhours.

Online craft site Etsy.com (ETSY) reported earnings of a penny that beat estimates for a loss of 2 cents. Revenue rose 4-% to $81.85 million compared to estimates for $75.2 million. Gross merchandise volume rose 18.4% to $629.5 million. They guided in line for revenue growth of 20-25% for the year. They currently have 1.6 million active sellers and 25 million active buyers.

Match.com (MTCH) rose $1 in afterhours after posting earnings of 11 cents that beat estimates for 9 cents. Revenue of $285.3 million also beat estimates for $280.5 million.

Overall the earnings calendar for Tuesday was rather bland. That will continue the rest of the week with Tesla and Priceline the two attention getters on Wednesday. Overall, the size and quality of companies reporting in the days ahead will dwindle. Excitement will focus on a couple of companies a day and next week it will be even slower.

Abercrombie & Fitch (ANF) former competitor Aeropostale (AROP) is reportedly preparing to file for bankruptcy. This came as no surprise to traders since the stock was delisted from the NYSE on April 22nd when its market cap declined below $50 million for a 30-day period. The Wall Street Journal said today they could file bankruptcy this week and will close 100 stores. This is just one more example of the dying malls. This store was a teen hotspot ten years ago but lost its attraction and sales have been imploding. Same store sales in Q4 declined -6.7%.

Valeant Pharma (VRX) saw a little daylight on Tuesday after both Moody's and S&P eased up on the negativity. S&P upgraded Valeant's CreditWatch rating from "developing" to "positive" suggesting the company could be upgraded from its current B rating. The analyst said an upgrade to B+ was possible once they have greater confidence in the 2016 operating trends.

Moody's raised the "probability of default rating" to B2-PD from Caa1-PD. They made the upgrade after Valeant filed the 10K on Friday and removed any possibility of default on a technical basis. Moody's said there were still significant challenges related to stabilizing operations and generating sustainable earnings growth without large acquisitions.

The dual upgrades powered the stock to a 10% gain and that is probably the first of many gains we will see once traders begin to feel the worst is over. The installation of Joe Papa as CEO on Monday was the first step and the replacement of the board is currently underway. Bill Ackman said he has no doubt he will get all his money back because the assets are there and the company is very profitable. They just need to wade through the skeletons and get back to business.

Apple shares rebounded $1.54 after eight consecutive days of decline. Support at $92.50 held and Tim Cook's appearance on CNBC brought investors back into the market. The 8-day decline was the longest streak of losses since 1991. I think investors are missing an important point or two. They reported revenue of more than $50 billion and earnings of more than $10 billion in Q1. No other company has earnings of $10 billion a quarter that are considered "bad." Apple is trading at a PE of 10. They have $230 billion in cash. Their market cap today is $521 billion and they have a stock buyback authorization for $250 billion. They are going to buy back roughly 50% of their stock between now and 2018. What other company is doing that?

Cook said massive innovations are coming. "We are going to give you new features on the iPhone that you will not be able to live without. You will wonder how you ever got along without them." Obviously, he would not disclose those features until the new product announcement in September. He said China was doing great. Cook said in 2007 when the first iPhone was released the middle class in China was 50 million people. Five years from now, it will be 500 million people. The switch rate from Android phones to Apple phones in China is 40%. In ten years, India will be the most populous country and nearly 50% of the population is under 25. That is the target generation for smartphones. Unfortunately, India is also a poor country and $700 phones are a real stretch for consumers. He believes that will be rectified in the years to come just like China's rapidly growing middle class.

There are more than 1 billion people currently subscribing to some Apple service like music, iCloud, etc. Services revenues have been growing at 26% and are accelerating.

I was already a convert on buying Apple at the current levels but Cook's comments convinced me even more. The bad news is already priced in and the good news is still ahead. The average analyst price target for 37 analysts is $126 with the high estimate at $185.


Tonight we are faced with a decision. The market sold off late last week and then rebounded strongly on Monday with a triple digit gain. Today there was a larger triple digit loss. However, the Dow was down -220 at the low and ended the day down only -140. Which day was the correct market direction? Was it the +117 Dow gain on Monday or the -140 loss today?

We will not know until later this week. As is always the case, the market tends to over react in both directions. However, the S&P put in a lower high at 2,111 two weeks ago and put in a lower low on Friday. While this may only be a period of volatility resulting from profit taking after seven-weeks of gains in March, it looks suspiciously like a topping process. Volume on Thursday was 8.0 billion and Friday was 8.99 billion shares on sharply declining days. Volume on Monday's rebound was 7.0 billion or -2 billion less than Friday. Volume today was only slightly higher at 7.7 billion. When in doubt follow the volume. The direction with the most volume is the right direction and that direction is to the downside. Declining volume was 4:1 over advancing volume today compared to 2:1 on Friday. Yes, volume was more negative today than Friday.

The key levels to watch this week are support at 2,040 and resistance at 2,100. We could chop around between those levels for several days. We could see an oversold bounce on Wednesday that completely negates today's losses. You may remember back in Nov/Dec we saw alternating triple digit gains and losses almost every other day. Volatility and uncertainty are always part of a topping process.

The Dow benefitted from the Apple rebound and the Pfizer earnings. Unfortunately, the Chinese economics and the Australian rate cut pushed the banks lower and JPM/GS were contributors to the decline. Falling oil prices from the spiking dollar pushed Chevron and Exxon lower as well.

The Dow decline came to a dead stop on support at 17,750 and that is a key level. Today's low at 17,670 was nearly equal to the lows on Friday and that means we should watch that level for a failure. A drop below 17,670 should target 17,500. Resistance remains 17,925 through 18,165.

With only a couple Dow components reporting earnings this week there is little to lift the Dow higher while post earnings depression could weigh on the index.

The Nasdaq lost 54 points and tested support at 4,750 again intraday. There are a lot of tech stocks with bearish charts. The tech stocks tend to suffer more post earnings depression than industrial or consumer discretionary stocks. Tech investors are fickle and are quick to move from one stock to another in search of a new earnings report.

The 4,750 level is critical for the Nasdaq with the next support down at 4,600. The Nasdaq failed to even come close to the relative levels of the Dow and S&P in late April and remains only about 1% out of correction territory. A break under 4,750 would put it back into correction again. That is hardly a bullish outlook.

The biotech index ($BTK) crashed again with -2.5% decline today and that weighed on the Nasdaq and the Russell 2000.

The Russell 2000 dropped -19 points to fall back below the 200-day average at 1,125 and to stop on prior uptrend resistance at 1,121. There are multiple converging support levels from 1,090 to 1,110 so further declines could be choppy as those levels are tested. The Russell failed to retest resistance at 1,165 and struggled to even make a print over 1,150. There is a good chance the Russell rally is over as we head into the sell in May cycle and the summer doldrums. Fund managers are not going to be excited about putting money into low liquidity stocks ahead of the very low liquidity summer months.

I am neutral on the market for Wednesday but I am bearish on the market for the weeks ahead. I think we will see lower lows as we head into late May and early June. Earnings are normally weak in Q2 and the current negative projection could become weaker as the Q1 earnings cycle plays out.

The worry over a June rate hike, weakness in China, sell in May and the election cycle will weigh on the markets. That is just my opinion but I think I am in good company.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Russell Rout

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Russell 2000 gave back 19 points on Tuesday and appears to be headed for a retest of critical support. The small cap index gave back -1.7% compared to the S&P decline of .8%. If the small cap rally is over, I am hesitant to add new small cap plays. We do not want to add bearish plays after a 35-point decline in four days. I hate to add bullish plays if the market is finally failing.

We should only add new positions when we have a reasonable chance of profitability. Wednesday's market direction is a tossup and I believe we should just hold what we have and see if a trend develops.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Key Reversal

by Jim Brown

Click here to email Jim Brown

Editors Note:

Tuesday's decline erased the gains from Monday and produced another lower high. We avoided a lower low on the S&P with the intraday low at 2,054 after a 2,052 low on Friday. It was close but not close enough. The S&P rebounded to 2,069 intraday before fading to close at 2,063.

The return to the lows was disappointing for the bulls and despite the lack of a new low the sentiment is turning bearish. The weak Chinese economics and warning from Dennis Lockhart that June would be a live meeting for the Fed was all we needed to sour the market. The few stocks that beat earnings at the open were not enough to lift the market from the opening decline.

The earnings after the close turned the S&P futures positive but it remains to be seen if they will carry forward into Wednesday. The ADP Employment report is expected to show a gain of 195,000 jobs and an actual reading anywhere near that number will be ignored. The market is actually worried that declines in job gains could appear at any time to go with the weak economics in other areas.

If the S&P moves lower, the critical level now is 2,040 and the lows from early April. That and 2,100 are the most important levels to watch.

Current Portfolio

Current Position Changes

BLOX - Infoblox

The long position was entered at the open today.

KKD - Krispy Kreme

The long position was stopped out at $17.06 today.

NAV - Navistar

The long position remains unopened until a NAV trade at $15.40.

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

BLOX - Infoblox - Company Profile


No specific news. Waiting the Sohn Conference which starts tomorrow. Shares declined -36 cents in the regular session but rebounded to $17 after the close.

Original Trade Description: May 2nd.

Infoblox designs, develops, manufactures and sells network control solutions worldwide. Their primary product manages domain servers handling the routing of Domain Name Systems (DNS). In order for the Internet to work a domain name like OptionInvestor.com has to be converted to an actual IP address by looking up the DNS in a domain server or appliance. Because of the security issues surrounding this process the DNS system is a high priority and highly dynamic process.

I know that sounds kind of wonky but Infoblox has created an entire suite of products that make the process easy and secure.

Earnings May 26th.

Activist investor Starboard Value is the same fund that attacked Yahoo, Depomed, Macys, Advance Auto Parts and Darden Restaurants to name a few. They were just awarded a four board seats on the Yahoo board.

Starboard announced a 7% stake in BLOX on the 22nd saying the shares were undervalued. This suggests Starboard is about to announce changes they would like to see to improve shareholder value at BLOX. With the Sohn conference later this week, Smith typically announces his new projects in hopes of seeing a bump in the stock price and instilling a little fear in the board of the company to be attacked.

Last week the head of sales for BLOX left the company and the CEO is filling his spot temporarily. That sounds like a possibility for Starboard to agitate for change.

I am proposing we take a position in BLOX ahead of the Sohn Conference in hopes Starboard touts his new position. The stock has rallied to $17 where it came to a dead stop. A breakout over $17 could be explosive.

Position 5/3/16

Long BLOX shares @ $16.86, initial stop loss $16.00

KKD - Krispy Kreme - Company Profile


No specific news. Shares declined below $17 in a weak market to stop us out at $17.06. That was the lowered stop I changed yesterday just in case the market rolled over. We entered the play with a bad fill when the S&P announcement adding them to the S&P-600 caused the stock to gap higher. I wanted to make sure it did not turn into a loss and that is why the tight stop. We posted a gain of 35 cents on the option position when it was closed last week.

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

Closed 5/3/16: Long KKD shares @ $17.05, exit $17.06, +0.1 gain.


Closed 4/27/16: Long May $17 call @ .30, exit .65, +.35 gain

NAV - Navistar - Company Profile


Minor decline on no news. The position remains unopened until it trades at $15.40.

Original Trade Description: April 29th

Navistar manufactures and sells commercial and military trucks, diesel engines, school and commercial busses and provides service on these products worldwide.

For the last several years, Navistar has been under a cloud. In 2010 the company said it had developed an advanced truck engine that would meet EPA certification requirements. In 2011 the engine failed to pass the tests for EPA certification. In 2012 after making some changes to the engine they reapplied for certification. The EPA staff objected saying there were "several serious concerns" that needed to be resolved before certification. Despite the objections the company released several statements characterizing the application as a "milestone" in development and was proceeding in a timely manner. The company planned to start production on the engine in 2012. It never happened and the SEC fined the company $7.5 million last week for improper statements in 2012. The CEO making those statements was forced to step down in 2012.

Fast forward to today and all those problems are behind the company now that the SEC finally reached a determination. Navistar is producing new state of the art trucks and engines and the stock is in rebound mode.

In their recent earnings they reported a loss of 40 cents that was significantly better than the estimate for a 77 cent loss. Revenue of $1.77 billion was short of estimates for $2.05 billion. However, the company guided for $9.0 to $9.25 billion for the full year.

Earnings June 2nd.

On Thursday, shares spiked to resistance at $16.50 and then retreated in the weak market on Friday. I believe they will break through that resistance level and test the next level at $20.

With a NAV trade at $15.40

Buy NAV shares, initial stop loss $12.95.

TRN - Trinity Industries - Company Profile


Trinity collapsed -4% when the small caps collapsed today. They were the biggest losers and that hit TRN hard.

We have a July call option so we have time to wait for a rally.

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.

VXX - VIX Futures ETF - ETF Profile


The VXX rebounded to $16.53 but I would have expected it to move higher with the Dow down -220 intraday. I am starting to worry about this position. I would have expected $17.50 to $18 with that sharp decline.

For this position to be profitable, we need the market to continue lower. Obviously that means our long plays will lose money. This is a hedge against that decline.

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.

Position 4/29/16 with a VXX trade at 16.75

Long VXX shares @ $16.75. Initial stop loss $15.00 and a new historic low.

WIN - Windstream Holdings - Company Profile


No specific news. Very minor decline of 4 cents. Earnings on Thursday. We will not be exiting the option position.

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.

XRX - Xerox - Company Profile


No specific news. Still in the grip of support at $9.50 despite the dip to $9.44.

Original Trade Description: March 27th

Xerox has grown into a global services company that also provided document management solutions. The services segment provides business outsourcing services, customer care, transaction processing, finance and accounting, human resources, communication and marketing, consulting and analytics. The hardware segment produces copiers and printers of all sizes, capabilities and combinations.

The company announced in January they were going to split into two companies. One would be hardware and the other business services. They did this because they were under attack by activist shareholders. Carl Icahn was awarded three seats on the board. Shares rose from the February low at $8.50 to the April high at $11.50.

When they reported earnings this week the stock crashed back to $9.50. They missed on earnings and provided weaker guidance. Earnings of 22 cents missed estimates for 23 cents. Revenue fell -4% to $4.28 billion but beat estimates for $4.24 billion. The strong dollar caused a 4% decline in revenue.

The company also reported higher costs as a result of the current restructuring. They expect the restructuring to cost $220 million but provide more robust earnings growth starting in Q2. They incurred $126 million of those costs in Q1. The CEO said they were accelerating the cost reduction efforts and would begin to see results in Q2. In light of the restructuring costs they are delaying additional stock buybacks until 2017. The company reaffirmed its full year guidance.

Shares held at the $9.75 level for three days before rising to close at $10 today and the three-day high. Normally when a company goes through this process the current holders bail on the earnings news and a new set of investors buy the dip in expectations for the improvement in earnings in future quarters plus the added incentive of the split. We see it constantly where companies report a bumpy quarter, the stock crashes and a couple days later a rebound begins that propels the stock higher than the pre earnings levels.

I think the risk has been removed from Xerox. I believe we can buy it here at $10 and ride the rebound towards the "improved" Q2 results. Because of the recent low, our risk is minimal.

Position 4/28/16

Long XRX shares @ $9.95. Initial stop loss $9.50.

BEARISH Play Updates

NTAP - NetApp - Company Profile


Shares declined 30 cents in the regular session but rebounded 30 cents in afterhours on no news.

Original Trade Description: April 25th.

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.

Position 4/29/16 with a NTAP trade at $23.95

Short NTAP shares @ $23.95, initial stop loss $24.95


Long June $24 put @ $1.17, initial stop loss $24.95.

XLF - Financial ETF - ETF Profile


Big drop at the open with the major banks down early on the rate cut in Australia and weak economics in China. When the Dow rebounded in the afternoon, the banks bounced as well.

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

Closed 4/29/16: Long May $23 call @ 19 cents, exit .58, +.39 gain.
Long May $22 put @ 47 cents, no stop loss.
Net debit 66 cents.

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