Option Investor

Daily Newsletter, Thursday, 6/9/2016

Table of Contents

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

Market Wrap

Stock Market Holding On

by Keene Little

Click here to email Keene Little
The stock market is challenging all-time highs but now showing signs of tiring and too much bullish sentiment. The big question as we look at the longer-term charts is whether the market can bust through the highs or instead create a double top. It's an important time for traders on both sides of the market.

Today's Market Stats

Despite many signs of a slowing economy and deteriorating corporate earnings, plus a Fed that appears to be forced to sit back down and forget about further rate increases, the stock market has high hopes it can bust through last year's highs and make new ones. But the slowing momentum combined with high bullish sentiment is now working against the market so it could use at least a breather to bring on some new buyers before attempting to charge back up the hill. But today is the typical head-fake day in front of opex where they pull the market back in the morning, get the shorts in and then use short-covering to add to the rally into opex. Today's bounce left me wondering if that pattern will repeat this coming week because at the moment it's looking like it might not work.

The stock market indexes are overbought in all time frames now and at the same time they're showing bearish divergence (waning momentum) at the new highs vs. the highs earlier this year and even vs. the highs over the past three years. At the same time bullish sentiment has jumped back up to an extreme level, as can be seen with CNN's Fear & Greed index below. This combination makes it a risky time to be long the market and certainly too late to be thinking about entering new long positions (unless you're good at selectively choosing strong companies that will be able to fight a downturn). The index has reached a level (80) that has marked previous market reversals. It can go higher but it's a risky bet.

CNN Fear & Greed index, chart courtesy money.cnn.com/data/fear-and-greed/

Many are baffled why the stock market is rallying and not showing more concern about the deteriorating fundamentals (and I include the Fed in the funnymentals). The market started rallying when the Fed started saying more strongly that there would be a good chance for a rate increase in June because they felt the economy was doing well enough to continue their rate-increase campaign. The theory then was that a stronger economy would be good for the stock market.

But recent reports, especially last Friday's dismal NFP report, now has most everyone firmly believing the Fed doesn't have the needed room to raise rates in July, let alone in June. So what does the market do? It rallies. If ever there was a place that can have its cake and eat too it's the stock market. It's like oil prices -- depending on the mood of the market it will either rally or decline on an oil rally/decline and just make up a reason for the move. There's very little rhyme or reason for it. It's why I will always say news is noise and it's best to stick with the charts. That's hard enough (wink).

The employment data from the Bureau of Labor is so saddled with inaccuracies, especially the unemployment rate, that the Fed has developed its own data, which they track as the "Change in Labor Market Conditions Index," shown below. This chart runs from 1976 and as you can see, there have been several drops below the zero line that did not lead to recessions in the U.S. But that's the risk right now as the latest data shows the index dipping below zero, which could be an early indication that our economy is slipping into another recession. The plethora of other economic data, including declining tax receipts, supports the likelihood that a recession has already started and we're just waiting for the confirmation of it (usually six months after the fact). The stock market usually sniffs out a recession and tops about six months before the official declaration of a recession. I wonder if the stock market might peak around here, as it nears last year's highs, or if instead it will continue to defy fundamentals in hopes that the Fed will be able to continue to support the market, I mean economy.

FRED Change in Labor Market Conditions Index, 1976-June 2016, chart courtesy research.stlouisfed.org

While we continue to receive more evidence of a slowing economy we have a stock market that's challenging its all-time highs. There's a lot of hope in this market right now, not to mention greed as shown with the first chart, and that has it looking like it did in May 2008 when there was a big recovery off the January-March 2008 double-bottom lows following the 2007 highs. This year we have a recovery off the January-February double-bottom lows and we could be setting up another big fall just as people get the most bullish, buying near the top again.

From a timing perspective we are at an interesting point where it's been a Fibonacci 377 weeks since the March 2009 low and a Fibonacci 55 weeks from the May 2015 high. The 55-week period is also an important Gann cycle. So with an Elliott Wave pattern that can be considered complete at any time and a Gann/Fibonacci time cycle occurring at the same time we could have a very important time/price setup for a big market reversal. There's no price evidence yet that declares a top is likely in place but we have enough that has come together right here as a reason to be on the lookout for the possibility. I'll start off with the granddaddy of the indexes, the Wilshire 5000 index, to help us look for more clues.

Wilshire 5000 Total Market index, W5000, Weekly chart

The W5000 index has rallied back up to price-level resistance near 22000, which was last tested in November 2015. This level goes back to the high in December 2014 and became a shelf of support for the first half of 2015 until it broke in August 2015. The first back-test in November 2015 was followed by a strong breakdown into the January 2016 low and now here it is back again testing this S/R level. What it does from here will tell us plenty about the expected longer-term price pattern. It's a significant drop back down to price-level support near 21000 and that's the level the bears need to see broken, especially since it would also be back below its 50-dma, currently at 21042. It's a wide 1000-point range but keeping it simple, it's bullish above 22K and bearish below 21K, with the potential for it to be choppy and whippy in between.

Wilshire 5000 Total Market index, W5000, Daily chart

You can see on the daily chart below how the W5000 rallied right up to the 22000 S/R line on Tuesday and Wednesday (with a high at 21999.99) and today's decline could be the start of a larger move down, or maybe just a small pullback before continuing higher. If a pullback finds support at either its broken downtrend line from June 2015 - April 2016, near 21630, or its 50-dma, near 21490, and then rallies above 22000 I'd abandon all short positions and get long. But if we start to see a sharp impulsive move down and only choppy bounce corrections we'd then know to play the short side. It's too early to tell yet which it's going to be and therefore stay short-term oriented for now. We're heading into a normally bullish week, with opex and FOMC next week and it remains possible we'll see the market continue to melt up into the FOMC meeting (provide as big a cushion as possible before the FOMC rate decision and then the Brexit vote the following week).

Key Levels for W5000:
- bullish above 22000
- bearish below 21000

S&P 100, OEX, Weekly chart

Before looking at my regular updates to the S&P 500 charts I wanted to show the S&P 100 weekly chart to point out that it too is back up to important resistance and what happens from here should provide some good clues. The rally into the April high stopped at the downtrend line from July-November 2015, pulled back and is now again testing this downtrend line, currently near 936. It tried to get through the downtrend line on Tuesday and Wednesday and today's pullback could be the start of a kiss goodbye. But it's too early to tell for sure and OEX would obviously be more bullish above 936. But if the bears go on the attack here we could see resistance hold once again. And with a rolling top pattern this could be an important high for this index.

S&P 500, SPX, Daily chart

I figured SPX 2105-2118 was going to be a tough resistance zone based on some price projections off the wave pattern, trend lines and price-level S/R. Yesterday's high was near 2120 so it made it through that resistance zone but fell back inside it today. As we've seen repeatedly over the past two weeks, this morning's gap down was followed by a slow choppy move back up and it has it looking like there's "someone" very afraid of a selloff and supporting the market. But there's a lot of buying power going into just holding the market up (for the past two years, as seen on the OEX weekly chart above). There's upside potential to the May 2015 high near 2135 and then a price projection near 2160 but I'd be very careful chasing this market higher right now. There's the potential for a nasty surprise some morning.

Key Levels for SPX:
- bullish above 2118
- bearish below 2075

S&P 500, SPX, 60-min chart

Looking at the rally from May 19th into this week's high it looked good for the completion of a 5-wave move but today's price action leaves a question mark as to whether or not we should be looking for at least a minor new high before a larger pullback or if instead it will start from here.

Dow Industrials, INDU, Daily chart

There are two price projections that I'm watching for the Dow, the first being 17986, which is where the 5th wave of the rally from January is 62% of the 1st wave. This is a common projection when the rally simply gets too tired to make it up to the projection where the 5th wave (the leg up from May 19th) will equal the 1st wave, which is at 18391. In between is the top of a shallow parallel up-channel from August 2015, which is where the April rally stopped and is currently near 18120. Yesterday's high at 18016 has achieved the first upside target but it's still a little shy of the top of its up-channel. A rally above 18120 would have me thinking the May 2015 high at 18351 and the price projection at 18391 would be the next target zone. But with waning momentum it's looking like it could be a struggle to add more points to the board.

Key Levels for DOW:
- bullish above 18,120
- bearish below 17,664

Nasdaq-100, NDX, Daily chart

I'll give NDX bulls credit for not giving up. They've been facing tough resistance near 4525, which is the shelf of support back in mid-April for the little island between the gap up on April 13th and the gap down on April 22nd. It hasn't been able to close the April 22nd gap yet, at 4540.80 (Monday's high was close at 4536.55), but it keeps trying. For eight straight days now, since first hitting 4525 on May 31st, it has tried to climb above both its downtrend line from December 2015 - April 2016, currently near 4509, and price-level resistance at 4525. We have either a bullish consolidation at resistance or a small rolling top pattern and I suspect we'll soon find out which one it is. If it does rally from here I'd look for a test of the 4600 area before setting up a larger pullback/decline. But if it rolls over from here and drops below the May 11th high, near 4408, it would tell us a top of significance is likely in place.

Key Levels for NDX:
- bullish above 4525
- bearish below 4407

Russell-2000, RUT, Daily chart

The RUT has been the leader to the upside for the rally from May 19th and that's been a good sign for the bulls. But today's bounce attempt off the morning low was not as strong as the others and it looked more like a correction than the start of another rally. That was a warning flag by the end of the day so the bulls will want to see the indexes pushing to new highs with the RUT out in front. If it instead starts down stronger than the others and breaks back below support at 1158-1160 it would provide a bearish heads up and likely embolden the bears to get more aggressive. While opex week tends to be bullish it can also be strongly bearish if it starts to break down. Neither side can afford to make any assumptions heading into next week.

Key Levels for RUT:
- bullish above 1206
- bearish below 1130

10-year Yield, TNX, Daily chart

It's looking like the bond market is predicting no rate increase in June (or July) as TNX breaks down from its sideways triangle that it had been trading inside of since the March high. It's nearing yield-level support at 1.64% and the short-term pattern look like a setup for a bounce correction before heading lower. A break below 1.64 would be more immediately bearish and could lead to a strong decline in yields (with a bond market rally). But if we do see yields bounce back up I think we could see TNX back up to its 50-dma, currently near 1.79%, before starting a stronger decline. It now takes a rally in TNX above its May 31st high at 1.89 to turn it bullish. Typically the stock market trades in synch with yields (e.g., a bond market rally often sees money rotating out of stocks and into bonds, which has yields dropping with the stock market) but so far the stock market has been ignoring the bond market. That's oftentimes a dangerous time for the stock market since the bond market is recognized as the smarter market.

KBW Bank index, BKX, Daily chart

The banks have been weak since peaking on May 25th and like the bond market, they've been showing concern that the Fed will not be raising rates anytime soon, which has been my argument since before they inappropriately (imho) raised rates last time. Higher rates provide greater profitability for the banks, one of the reasons why the Fed wants desperately to raise rates (they're trying to take care of their own blood-sucking selves). But there's no clear pattern yet and I could argue the pullback since May 25th is a correction within an up-channel from February. That argues for new highs and a rally above 71.50 would be bullish (for the broader market as well). A drop below 68 would provide a bearish heads up.

U.S. Dollar contract, DX, Weekly chart

The US$ has had a sharp pullback from its June 1st high, especially with the negative reaction on June 3rd to the weak Payrolls report. This week's low has been a test of price-level support near 93.80 and the top of a parallel up-channel from May 2011 (which the dollar broke above in December 2014). The top of this channel was also tested in May and as long as the rally continues from here we should see a bullish break of its down-channel from December 2015, which was tested last week. If we see the dollar get a little bounce and then continue lower it would be a bearish breakdown, especially if it drops below its May low at 91.88.

Gold continuous contract, GC, Weekly chart

Following gold's pullback from its May 2nd high it has had a sharp rally back up from the low on May 31st. It appears gold traders were the only ones who abided by the "sell in May and go away" and then returned on June 1st. The two-week bounce had now retraced a little more than 62% of the pullback and it could continue higher but I think we'll see at least a larger pullback, potentially down to its 50-week MA, currently near 1162. A decline below 1160 is needed to tell us gold could drop to a new low rather than just give us a pullback. If it rallies above its May high at 1306 I'm not sure it will be able to do any better than its 200-week MA, currently at 1315 and coming down.

Silver continuous contract, SI, Weekly chart

Silver's two-week rally has brought it back up to the top of its parallel down-channel from 2013, near today's high at 17.34. There could be one more minor new high coming before it will be ready for at least a larger pullback but holding inside its down-channel keeps it in an established downtrend. Like gold, I think there's a good chance we'll see lower prices before setting up a longer-term rally. But a rally from here above 18 would be at least short-term bullish, which could mean a rally up to its 200-week MA, currently at 20.36 and coming down.

Oil continuous contract, CL, Daily chart

Yesterday oil made it up to a price projection at 50.95 where the A-B-C bounce off the January low achieved two equal legs up. It's also a test of the October 2015 high at 50.92. The c-wave, which is the leg up from April 5th, has formed a rising wedge, which is a common ending pattern for c-waves (and 5th waves). The bottom of the wedge is currently near today's low at 50.23 so a continuation lower would be a bearish heads up that the rally finished this week. Rising (and descending) wedges tend to get completely retraced faster than it takes to build them so that would mean back down to the April 5th low at 35.24 in less than two months. I think there's a good chance oil will drop below the January/February lows near 26 and the first sign of trouble for oil would be a drop below its June 1st low at 47.75.

Economic reports

Other than the Michigan Sentiment (preliminary) report tomorrow morning there's not much for the market to pay attention to. It's more likely to react to overseas reports and markets but in reality the market has its attention focused on what it thinks the Fed will do next week.


The stock market is in denial and is ignoring the messages from the economy, the bond market, the dollar and just about everything else. As it so often does at important tops, it's whistling past the graveyard, apparently confident that the Fed can protect it. The market doesn't realize that the Fed is behind it getting mauled by the zombies and is no longer in a position to help. I'm just waiting for the day the market turns around, screams like a little girl and runs away (sells).

There's been a lot of buying power going into just holding the market up and preventing a selloff and that smells like the work of the Fed/government. With indexes up against resistance there's a good chance the rally will fail but with us heading into opex week and FOMC next week I can certainly see the possibility for the market to continue being supported. I can't see a reason to go long here since the upside potential is again dwarfed by downside risk. Extreme bullish sentiment in a market that is showing waning momentum and deteriorating market breadth is typically a time when new buyers jump in and then get hurt.

If we start to see strong impulsive moves down followed by choppy bounce corrections and then lower again it would be a time to start playing the short side. We don't have any strong signs of a market top yet so it's risky jumping in front of this market that continues to press higher. At the moment I think the sidelines is a safe place to be until we start seeing confirmation that a high is in place, especially since next week could be volatile so trade carefully in the coming week.

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

Tough Sector

by Jim Brown

Click here to email Jim Brown
Editor's Note

Land's End said it was a disruptive quarter with aggressive discounting and promotional activity. This quarter is not likely to get any better.


No New Bullish Plays


LE - Land's End - Company Profile

Land's End operates as a multi-channel retailer. The company operates through two segments, Direct and Retail. It offers casual clothing, accessories, footwear, and home products. The company sells its products through its e-commerce Websites, direct mail catalogs, dedicated LandsÂ’ End Shops at Sears, stand-alone LandsÂ’ End Inlet stores, and international shop-in-shops. As of January 29, 2016, it operated 227 LandsÂ’ End Shops at Sears; and 14 LandsÂ’ End Inlet stores in the United States, as well as 5 United Kingdom based shop-in-shops.

Land's End operated in the world of Amazon and they are getting crushed. They use the term multi-channel because they retail a lot online. Unfortunately, in an Amazon dominated environment they are finding it hard to sell sheets, blankets, towels, shoes and apparel and still make a profit.

In their recent report they lost 18 cents compared to analyst estimates for 2 cents. Revenue of $273.4 million that was below the $299.4 million in the comparison quarter. Retail segment revenue declined -10.4% with same store sales falling -7.1%. Even worse, inventory rose 8.9% to $309.9 million up from $284.6 million. Cash balanced declined -$50 million. Stale inventory is rising, they are burning cash and sales are falling. That is not a recipe for earnings growth.

The retailer was forced to remove Gloria Steinem from their online website and from their catalog after the feminist made some comments on abortion rights. Customers, including numerous religions groups, promised a large scale boycott if Steinem was not removed from all advertising.

The summer months are not likely to be kind to Land's End. They will be forced to further discount products to move them out of inventory in a period where customers are vacationing rather than shopping.

Earnings Sept 1st.

When the market finally rolls over, we could see selling in LE accelerate due to a lack of interest in holding for a Q4 rebound. The historic closing low is $15.81.

Sell short LE shares, currently $15.95, initial stop loss $17.25.

In Play Updates and Reviews

Huffing & Puffing

by Jim Brown

Click here to email Jim Brown

Editors Note:

Like the little engine that could, the Dow huffed and puffed as it struggled higher but it failed to close back over 18,000. The Dow came back from an 89 point drop to almost close positive but selling at the close kept it at a 20 point loss. That 18,000 level remains solid resistance and it was the bears that gained a little confidence in the afternoon as they kept the index from piercing that level for more than 10 minutes.

The Biotech Index lost -2.5% to drag the Nasdaq and the Russell 2000 lower. This was expected and I wrote about it more than once in my commentaries. The post ASCO depression is settling in for traders.

The volume was very weak at 5.4 billion shares and it will only be weaker on Friday. The summer doldrums have arrived. I expect Monday/Tuesday to be positive ahead of the Fed announcement on Wednesday and then see a market decline into month-end.

Current Portfolio

Current Position Changes

HTZ - Hertz Global

The long position remains unopened until a trade at $11.75

ENDP - Endo Pharma

The long position remains unopened until a trade at $18.35

SWIR - Sierra Wireless

The long position remains unopened until a trade at $20.30.

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

ENDP - Endo Pharmaceuticals -
Company Profile


No specific news.

The long position remains unopened until a trade at $18.35.

Original Trade Description: June 8th.

Endo develops, manufactures and distributes pharmaceutical products and devices worldwide. The market well known brands including Percocet, Lidoderm, Voltaren and a wide range of pain medications and testosterone replacement therapies.

Shares have declined from $26 last week to $14 in mid May. The company slashed full year guidance by -11% on revenue and -23% on earnings. The acceleration of the decline over the last several weeks has been in reaction to some generic competitors expected to receive approvals from the FDA soon.

The company also disclosed they were being investigated by the U.S. Attorney's Office for its relationship with pharmacy benefit managers or PBMs. In light of the improper relationship between Valeant and Philidor the USAO is investigating to see if the same problems exist at Endo. In November, Novartis had to pay a $390 million fine to settle charges it paid specialty pharmacies for illegal kickbacks in exchange for inducing patients to refill certain medications.

Endo was also under pressure as a result of the Valeant Pharmaceutical disaster and the overall decline in the biotech sector. However, now that the Valeant disaster has turned into old news, analysts are starting to talk about price targets on Endo in the $40-$50 range.

Full year earnings are expected to be in the $4.50 range and that means their current PE is around 4.5. That is ridiculously cheap. That guidance was reduced from $5.85-$6.20 because of some generics going off patent, specifically Voltarena Gel and Percocet. Investor Wally Weitz believes there is significant upside in Endo and they probably reduced guidance conservatively so they would makes sure to hit future earnings.

Earnings are August 4th.

The shares have rebounded from the May lows at $12.50 and refused to decline after the ASCO conference ended. I am putting an entry trigger on this position to make sure we buy on a breakout rather than a breakdown.

With a ENDP trade at $18.35

Buy ENDP shares, currently $17.71. Initial stop loss $15.95.

No options recommended with $20 the closest OTM strike.

HPE - Hewlett Packard Enterprise - Company Profile


Brean Capital, formerly a bear on HPE, said there could really be a change in progress at HPE. The analyst retained a hold rating but she saw major changes occurring in server storage, networking and cloud security. "They seem to have a plan for the coming years in the context of future IT trends." He said HPE could be worth $18 to $25. The stock closed at $19.25.

Original Trade Description: June 2nd.

Hewlett Packard Enterprise was spun off from Hewlett Packard (HPQ) to be the high growth segment of the company. The remaining HPQ was the slower growing PC and printer company.

HPE reported adjusted Q1 earnings of 42 cents and in line with estimates. Revenue of $12.711 billion would have been up +4% on a constant currency basis. Analysts were expecting $12.419 billion.

For the current quarter, HPE guided to earnings of $1.10 to $1.14. For the full year, they expect $1.85-$1.95 and that was more than analysts expected at $1.89. They increased free cash flow +101% to $1.1 billion for the quarter.

The good news came from their plans for the cash flow. HPE expects to generate $2.0-$2.2 billion in free cash flow in 2016. They are receiving $2 billion from the Tsinghua transaction which closed in early May and the money will be used for share repurchases. In 2016, HPE is increasing its commitment to return 100% of the free cash flow to investors in dividends and buybacks.

This means over the next couple of months we should see significant share activity as funds position themselves to be the beneficiaries of all this buyback/dividend activity that could exceed $4 billion in 2016. $2.5 billion of that is in an "accelerated" buyback program. The board authorized another $3 billion in buybacks to bring the current authorization to $4.8 billion.

They also announced a tax-free spinoff of their services division to Computer Sciences Corporation (CSC), which is expected to close in March 2017. This will produce another $8.5 billion in value to HPE shareholders in the form of $4.5 billion in equity in the combined company and $1.5 billion in a cash dividend and the removal of $2.5 billion in debt from HPE.

Earnings Aug 23rd.

HPE shares have shaken off their May weakness and closed today at a historic high. I am recommending we buy this stock in anticipation of additional fund investors moving in ahead of future dividends, buybacks and the spinoff.

Position 6/3/16:

Long HPE shares @ $18.40, see portfolio graphic for stop loss.


Long August $20 call @ 40 cents. No stop loss.

HTZ - Hertz Global Holdings - Company Profile


No specific news.

This position remains unopened until a trade at $11.75.

Original Trade Description: June 8th.

Hertz engages in the rental and lease of cars and trucks worldwide. It operates through four segments: U.S. Car Rental, International Car Rental, Worldwide Equipment Rental, and All Other Operations. The company rents various makes and models of cars, crossovers, and light trucks under the Hertz, Dollar, Thrifty, and Firefly car rental brands on hourly, daily, weekend, weekly, monthly, or multi-month basis through a network of company-owned rental airport and off-airport locations, as well as franchise locations. They operate 9,980 corporate and franchise locations. They also rent industrial equipment like earthmovers, air compressors, power generators, etc.

Last week Hertz shareholders formally agreed to the proposed split of hertz into two companies. Hertz Global will remain a car rental company. Herc Holdings will be the equipment rental company and trade under the symbol HRI.

The HRI stock will be spun off on June 30th to shareholders on June 22nd as a dividend distribution and therefore taxed at a lower rate when sold.

Shareholders will receive one HRI share for every five HTZ shares they own. Further complicating the process the HRI shares will have a reverse split of 15:1 on July 1st. The HRI portion of Hertz is significantly smaller and the reverse split is to boost the initial share price.

Activist investor Carl Icahn filed a notice with the SEC last week that he had increased his stake in Hertz to 15.24%. The Herc Holdings company will add three Icahn affiliate directors when the spinoff occurs.

With Icahn remaining on board the company should continue to be shareholder friendly. Icahn was instrumental in forcing the company split.

Also, the Hertz CEO was instrumental in producing a boost in the stock earlier in the week when he said the tide had turned for pricing in the rental car market. The fleet sizes had been reduced, everyone was running very tight and rental prices were rising. That fueled the sector on hopes of better earnings.

I am recommending we add the stock now and then decide on June 21st if we want to hold over the spinoff. Shares are right at resistance from March at $11.50. I would like to see them move over that level before we jump in.

With HTZ trade at $11.75

Buy HTZ shares @ $11.75, initial stop loss $10.45.

No options recommended because of the spinoff.

P - Pandora Media - Company Profile


Axion Capital upgraded Pandora from hold to buy after being neutral on the stock for years and "skeptical" of the company to navigate in an increasingly competitive environment. "We now believe that there is a greater probability of Pandora building a successful and differentiated on-demand service while increasing the value of the core business." The analyst raised the price target to $16.

Original Trade Description: June 1st.

Pandora provides internet music streaming services in North America. Listeners can create personalized stations to access free music and comedy catalogs as well as personalized play lists. They offer Pandora One, a paid subscription based service for listeners. They sell audio, video and display advertising for delivery on connected platforms. They also offer a ticketing platform for promoters and advertising to promote their events.

In Q1 active listeners rose to 79.4 million and hours streamed rose 4% to 5.52 billion. They reported a loss of 20 cents but that was 19 cents better than the 39 cent estimate.

Pandora's chairman Jim Hill bought 250,000 shares at $10.97 per share and then another 250,000 shares at $11.33 each. That is close to $6 million in purchases. CFO Mike Herring bought 225,000 shares a couple weeks earlier. Last week somebody bought 12,000 contracts of the September $12 call options. Today somebody bought 1,000 contracts of the July $13 calls and there was another trade for 2,500 of the September $10 calls.

So what is powering this sudden interest in Pandora? In May the hedge fund Corvex Management announced it had acquired a 9.9% stake and demanded the company be sold to the highest bidder. Keith Meister runs the fund and he believes there should be an auction and Facebook should buy the company. Since Pandora has only a $3 billion market cap that should be attractive to Facebook because it would get those 79 million listeners to further spread its advertising reach across the internet.

Apple, Google and Amazon already have some type of streaming app and that leaves Facebook as the likely candidate. Barron's suggested Verizon or Liberty Media could buy them. Sirius XM was also mentioned as a possible buyer.

With plenty of potential acquirers and insiders buying huge amounts of stock there may be some discussions in progress.

Update 6/3/16: Board member, Timothy Lelweke, bought 10,000 shares on Wednesday at about $11.63 each. He now owns 43,768 shares so that was almost a 30% increase in his holdings. Something is definitely going on behind the scenes to generate all this insider buying. Position 6/2/16

Long Pandora shares @ $12.08. See portfolio graphic for stop loss.

No option recommended but the July $13 is only 62 cents.

SWIR - Sierra Wireless - Company Profile


No specific news. Shares fell back below $20. The longer it holds here the more likely we will see a breakout. It does not cost us any money to watch this unopened play until a breakout occurs.

The position remains unopened until a trade at $20.30. High today was $20.10.

Original Trade Description: May 26th.

Sierra Wireless engages in building the Internet of Things with intelligent wireless solutions. They operate in three segments, Original Equipment Manafacturer, Enterprise Solutions, and Cloud Connectivity Services. They offer cellular embedded modules, software and tools to integrate wireless connectivity into various products and solutions.

In their recent earnings they reported an adjusted profit of 8 cents. Revenue declined -5.1% because of previously reported softness in orders from several existing automotive customers. For Q2 they expect earnings in the range of 9-17 cents on revenue of $150-$160 million. For the full year they guided to earnings of 60-90 cents on revenue of $630-$670 million. They bought back 549,583 shares in the quarter.

The revenue in the OEM solutions segment declined -9.1% due to softness in auto production in Q1. Enterprise solutions revenue rose 9% and cloud and connectivity systems revenue rose 92%. They began upgrading their global LTE core network to provide additional connectivity for wholesale operators.

In their guidance, they said business should improve significantly because of more than 40 new customer programs moving into production on new IoT products. They manufacture to customer specifications when the customer adds a new product.

Earnings Aug 4th.

To go from an 8 cent profit in Q1 to 60-90 cents for the full year is a major gain in profitability. Shares have been rising since the earnings report and showing no weakness when the market was down.

With a SWIR trade at $20.30

Buy SWIR shares, currently $19.90, initial stop loss $18.45.
No options recommended due to wide spreads.

UIS - Unisys Corp - Company Profile


No specific news.

Original Trade Description: June 6th.

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segments product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. The company serves commercial, financial services, public sector, and the U.S. federal government through direct sales force, distributors, resellers, and alliance partners.

Unisys has morphed in its 143 years of operation into a global cloud, IT and infrastructure services company. That is a long way from the original company that produced the first commercially viable typewriters and adding machines under the name Burroughs, Sperry and Remington Rand.

Today one of their main products is Unisys Stealth for protection of digital and physical assets. Stealth Mobile protects secur emobile applications and Stealth Cloud expands that protection to the cloud.

Just before their recent earnings they announced a deal with Mitel to provide the Unisys stealth technology to protect their 60 million mobile and enterprise customers. Business is booming but it has been a long time coming. In Q1 revenue declined -3% and services declined -2%. However, the company said its "lumpy" quarter-to-quarter strategy was changing with a stronger focus on the Stealth products and their rapid wide scale adoption. They expect the amount of money spent on cybersecurity to more than double from the $75 billion in 2015 to more than $170 billion in 2020. The cost of data breaches will rise to $2.1 trillion annually by 2019 and more than four times the cost in 2015.

Unisys has been a stealth company for the last year with shares declining from $30 to $7. With their new products and the rapid acceptance of those products their stock is rebounding off the three month consolidation pattern.

Earnings July 28th.

Shares moved over resistance at $8.25 last week and are preparing to move higher. The big decline in March was a $190 million offering of convertible senior notes due 2021 with a conversion price of $9.76. That was a 20% premium to the stock price post announcement.

If the current rebound continues the next material resistance is $12.

Position 6/7/16:

Long UIS shares @ $8.47, no initial stop loss.


Long October $9 call @ 80 cents. No stop loss.

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