Option Investor

Daily Newsletter, Monday, 6/27/2016

Table of Contents

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

Market Wrap

Brexit Driven Sell-Off Deepens

by Thomas Hughes

Click here to email Thomas Hughes


The Brexit driven sell-off deepens as traders around the world wonder... what now? The question is many faceted but the most pressing may be, when will the Brexit actually occur? Or maybe, will it actually occur? Just because they voted to do it doesn't mean it will necessarily come to pass, at least according to some of the analysis I've seen. To make it happen the prime minister has to invoke Article 50 of the Lisbon Treaty, the article outlining how a nation may voluntarily leave the union, since David Cameron is stepping down that might not happen until the fall. There is also a theory that the EU will make concessions to the UK which may provide reason enough for them to stay. In either case the PM has put the kibbosh on a second referendum saying the people have voted, now the nation has to honor it.

Asian markets did not react to the Brexit in quite the same way as the EU and US market did on Friday. Mainland Chinese indices closed flat to negative while the Hong Kong index, Japan and many other major indices in the region were able to make gains. Of note, Japanese Prime Minister Shinzo Abe told the finance minister, after an emergency meeting with the BOJ, to take whatever steps necessary to stabilize the yen following the wild surge it saw last week.

EU indices did not post gains today. Indices across the region lost at least -1%, most in the range of -2% to -3%, led by the STOXX 600 -4.10%. Later in the day, after the close of the European session, Britain and the BOE received credit downgrades from Standard & Poors and Fitch.

Market Statistics

Futures trading indicated a major sell-off in US equities from the earliest electronic trading. The major indices were indicated to open with losses greater than -1% for most of the morning with some volatility throughout the morning. At the open indices did indeed post a -1% loss in the first minutes of trading and then extended that loss to greater than -2% by the low of the day. Lows were reached by 11AM at which time a near term/intraday bottom was put in. From that point forward the indices were able to bounce but did not recover more than about 1% of the days losses before it was exhausted. Late afternoon saw the indices fall back toward the day's low where they bounced again. The late day bounce carried into the close of trading but left the indices with losses in the range of -1.5% to -3%.

Economic Calendar

The Economy

The advance report on International Trade In Goods And Services was the only official economic data released today. The report shows a -$60.6 billion deficit in trade, greater than the -$50.4 expected by economists and the -$57.5 deficit reported for April.

There will be quite a few major reports later this week. Tomorrow the 3rd estimate of Q1 GDP is due out at 8:30AM. The consensus is for it to be revised higher to 1% from 0.8%. Also on tap tomorrow is the Case-Shiller 20 City Index and Consumer Confidence. Wednesday Personal Income & Spending and Pending Home Sales are due. Thursday we'll see weekly jobless claims and Chicago PMI. Friday we'll get Auto/Truck sales, ISM Manufacturing and Construction Spending.

Moody's Survey of Business Confidence rose 0.7% to 26.3. The caveat is that it may not fully reflect the Brexit vote which was announced Friday, the last day of the survey. According to Mark Zandi global business sentiment appears fragile, most worrisome is South America where political upheaval continues. The US is seen as the strongest with an economy expanding consistent with its potential.

According to FactSet 10 S&P 500 companies have reported earnings for the 2nd quarter so far this season. Of those only 4 have beaten on earnings while 5 have beaten revenue estimates. Since the beginning of the 2nd quarter 9 sectors have been revised lower. The blended rate for 2nd quarter earnings is now -5.2%, the lowest level to date. The energy sector remains the number 1 contributor to earnings decline, ex-energy the expected rate of decline is -1.7%. The two sectors, not energy, with the largest downward revisions to earnings growth are Info Tech and Industrials led by Apple and GE, both companies with large exposure to business outside the US.

Looking forward the earnings picture continues to deteriorate. Q3 and Q4 have both seen estimates reduced by a tenth, both are now at new lows. Q3 growth is expected to be positive, 1.2%, with that growth expanding to 7.5% in Q4. To put this in perspective, last year at this time Q4 was projected to see growth in excess of 15%. Growth has also been revised lower for the full year 2016, to 0.7% from 0.8%. 2017 estimates remain steady at 13.6%.

The Dollar Index

The Dollar Index continues to surge in the post-Brexit referendum world. The index gained another 1% in today's session following a greater than 2% surge last Friday. Post referendum the GBP and EUR are both losing ground to the dollar in a flight to safety trade while the JPY is gaining versus the dollar. On the central bank front the the FOMC was more dovish than expected and now, post-Brexit, some pundits see a possibly of reducing interest rates, not raising them. And at the same time Japan continues to posture towards monetary action to stabilize the yen. Looking forward the waters are muddy to say the least. The current move higher appears to be strong, the candles are extremely long and white and confirmed by a strong signal from the indicators. It looks like the index will at least continue to test resistance near $96.50, the 50% retracement line, with a possible move higher. If resistance is broken a move up to $97.50 is likely.

The Oil Index

Oil prices fell again today. The price of WTI fell more than -2.5% intraday, closing with a loss of -2.4%, on a stronger dollar and persistent oversupply. Not only has the Brexit affected the dollar, it is also calling global growth into question and by extension demand for petroleum. At the same time global production remains high which is adding downward pressure to prices. Market rebalance may be on the way, but it isn't here yet, so prices are likely to remain low without additional catalyst. $50 is looking like strong resistance at this time, first target for support is near $45. A break below $45 could go as low as $40 before finding next support.

The Oil Index fell more than -3% in today's move. The candle is long and black, extends the move below the short term moving average and breaks through support at the bottom of the recent 3 month trading range. The indicators are mixed but generally support a test of support, if not a move lower, with downside target near 1,050... provided oil prices do not snap back.

The Gold Index

Gold prices are moving higher on flight to safety, and are disconnecting from the dollar ... at least for now. Spot gold closed with a gain of 0.42% in today's session, adding $5.50 to Friday's settlement price. The move is an extension of the +$50 move sparked on Friday. Momentum is to the upside with resistance targets near $1350. Goldman Sachs raised its average price target for 2016,2017 and 2018 by roughly 10%, to $1250, and has added Barrick Gold to its conviction buy list.

The gold miners are moving higher in the footsteps of gold. The miners ETF GDX gained nearly 1% in today's session, and is trading above my previous resistance target of $26.50. The move in gold, along with forward outlook, is supporting the miners and could carry them higher into the short term. Nearer term there is potential resistance near $27.50, a break above this level could take the ETF up to the $30 level. The indicators are turning bullish but remain weak; MACD has just turned bullish while stochatic is showing a weak bullish crossover. Based on the candles it looks like there are sellers present at current levels but are likely profit takers. A consolidation at these levels before moving higher would be good for longer term bullish prospects.

In The News, Story Stocks and Earnings

The news wasn't all Brexit, believe it or not. On the M&A front Medtronic announced the purchase of Heartwave for $1.1 billion. The deal is worth $58 per share in cash to shareholders, a 93% premium to Friday's closing price. Heartware makes diagnostic tools and treatments for heart failure, the addition is expected to be accretive for Medtronic by the 3rd year. Shares of Medtronic fell nearly -2% on the news but sellers stepped in to support prices, leaving the stock with a loss of only -1.4% at the close of the session.

The VIX fell about 10% in today's session and is already showing signs of topping. Today's action began with a move to the upside, extending the Friday gains, but met resistance and sent the index into retreat after hitting the early high. Today's candle is black with a large upper shadow, indicative of resistance at the $25 level. At the same time both indicators are confirming potential resistance at this level. The MACD is rising, but the current peak is divergent from the index, while the stochastic is rolling over, below the upper signal line, following a bearish crossover. If this signal plays out the index could easily return to test support near the $20 level. However, with the current situation with Brexit uncertainty and us on the cusp of a poor earnings season I think it too soon to say with any surety. A move above $25 would be bearish for the broad market and could take the fear index up to the $30 level.

Nine of ten S&P sectors were lower in today's session. The one posting gains was the utilities. The Utilities Sector SPDR was able to make strong move upward, gaining nearly 1% from the short term moving average and moving up from previously broken resistance now turned support. The reason for the move is complex but includes the fact that these companies have little to no exposure to Brexit fall-out, will continue to produce revenue and earnings in the face of a market downturn and pay a dividend, 3.19% for the XLU itself. The indicators are weakly bearish at this time but rolling over into a possible bullish signal. Today's close was a new all time high, if we see follow through it could lead to more new highs with a possible upside target of $52.50 in the near to short term.

The Indices

The indices fell again today. The move was strong, it tried to bounce from an intraday bottom but was not able to recover more than a token amount by the close. The day's leader was the Dow Jones Transportation Average which lost more than -3% and is fast approaching key support levels. Today's move created the second of two long black candles and extended the fall from the 150 day moving average and the 7,500 support level which was broken on Friday. Both indicators are bearish and moving lower, pointing to test of the next support level at least, near 7,000. There is some sign that support exists at this level, today's bounce began just above it, but there is no guarantee it will hold. A move below this level, the first and weaker of two potentially key levels of support, could take it down to 6,750 or 6,500 in the near to short term.

The next largest decline in today's session was posted by the NASDAQ Composite. The tech heavy index fell slightly more than -2.41% in a move that broke below the 4,650 support target and set a near 4 moth low. The indicators are both bearish, showing some strength and pointing to a test of stronger support. Next target for support is near 4,550 with a possible move down to 4,375.

The third largest decline in today's session was posted by the S&P 500. The broad market fell -1.81% at the close, after falling more than -2% intraday, and broke below the 2,020 support target. The index appears to be moving lower and this is supported by the indicators. Both MACD and stochastic are moving lower, confirming the move, stochastic is making a bearish crossover with today's action adding strength to the signal. The index is likely to fall to the 1980 level at least, with additional targets near 1,960 and 1,950, the long term up-trend line.

The smallest decline was posted by the Dow Jones Industrial Average, -1.5%. The blue chips extended their drop below the 150 day moving average and broke below an up trend line with today's move. The index looks set to move lower, perhaps as low as 16,500, and this is confirmed by the indicators. Both MACD and stochastic are pointing lower, and both are showing some signs of strength. One sign is increasing bearish MACD histogram, another is the bearish crossover on the stochastic which completes a strong bearish signal for that indicator.

I've been waiting for a correction for the last 2 months and it has begun. I thought it would be due to poor earnings, not the Brexit, but in the end the Brexit vote was merely the spark that started the selling. I still think poor earnings, declining outlook and tepid economics are why the market is correcting. Now that it has begun the question is, how deep will it run? The transports are already down more than -12% from the peak set two months ago, the NASDAQ about -8%, the SPX about -5.6% and the Industrials about -4.7%. If the transports are leading we could see another -5% or more in the broad market before it is all said and done.

Looking forward I am still positive on the future. Earnings growth is still expected to return, economic expansion is still progressing if slowly and the consumer is getting stronger. This correction is, in my opinion, another hiccup in the long term secular bull market and will provide another great entry for long term positions. I'm bearish in the near term, waiting for signs of the bottom and the start of the next major rally.

Until then, remember the trend!

Thomas Hughes



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New Plays

Small Cap Wasteland

by Jim Brown

Click here to email Jim Brown
Editor's Note

Small cap stocks are a wasteland of broken dreams. The category has fewer green shoots than a hike through Death Valley. I looked at several hundred small cap charts today and there were more smoking hulks than you would see in a Mad Max movie. Some of these stocks are down 15-20% in just the last two days. Sellers did not just sell they were running for their lives. I cannot remember when I have seen so many broken charts in only a two day period.


HPE - Hewlett Packard Enterprise -
Company Profile

We were stopped out of our stock position on the initial market drop on Friday. The pending earnings, buybacks and dividends are so strong I am recommending we buy the dip.

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.

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.

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 August 23rd.

Shares hit a historic high last week at $19.85 and have crashed back to $17 today. All of today's loss came at the open and the $17 level was strong support all day. I am recommending we buy the open and hang on. If the open is positive, we should develop a cushion rather quickly. If shares go down again there is stronger support at $16.

Buy HPE shares, currently $17.21, no initial stop loss to avoid the volatility.

SCTY - Solar City - Company Profile

SolarCity Corporation designs, manufactures, installs, monitors, maintains, leases, and sells solar energy systems to government, residential, and commercial customers in the United States. The company provides solar energy systems; solar lease and solar power purchase agreements; mypower loan agreements; grid control/energy storage systems; zep solar mounting systems; and proprietary software, including SolarBid sales management platform, SolarWorks customer management software, PowerGuide proactive monitoring solutions, and Energy Designer, a proprietary software application used by field engineering auditors to collect site-specific design details on a tablet computer. It also sells electricity generated by solar energy systems to customers.

SolarCity has had a troubled past with the rise and fall of solar based on the whims of governments and the on again-off again investment credits and tax rebates. SolarCity is still humming right along and building up their base of installed systems into one giant annuity that will pay for decades to come. The problem is that it takes cash to build and install those systems that they sell to customers. Cash up front for a long and profitable payout.

SolarCity was co-founded by Elon Musk. He also started Paypal, SpaceX and Tesla. Last week he (Tesla) offered to buy SolarCity, where he is the largest stockholder and Chairman of the board, for $26-$28. Tesla shares cratered. SolarCity shares spiked for one day then fell back again. Numerous analysts were against the plan. Now shares are rising again.

Elon Musk believes he can marry his battery business with the solar business and have a winning combination. He already makes battery backups for your home but they run off regular utility company power. With SolarCity he can power those battery systems with solar and it makes a lot more sense for customers.

Shares have established a base at $21 and with the $26-$28 offer under consideration along with "other strategic alternatives" it would appear there is limited downside.

Earnings August 8th.

Buy SCTY shares, currently $22.62, no initial stop loss to avoid the current market volatility.

No options recommended because of price.


No New Bearish Plays

In Play Updates and Reviews

Follow Through Selling, Check

by Jim Brown

Click here to email Jim Brown

Editors Note:

The follow through selling from Friday appeared on schedule but was stronger than expected. The S&P crashed another 47 points intraday to stop at 1,991 early in the morning and then again in the last hour before a minor rebound lifted the index back over 2,000 by a fraction.

The drop to 1,991 occurred in the first hour and the tone of the market shifted. Analysts and traders are starting to worry that we could see a decline back to the February lows at 1,820. That would be a major change in sentiment and would damage the market.

Funds were overly long going into the Thursday vote and now they are paying the price. With the end of the quarter on Thursday they appear to be dumping stocks and going to cash. Since they already had near record levels of cash on hand at 6% this is going to be troublesome for the market. However, if they do not window dress for the end of the quarter, they are likely to begin buying on Friday in hopes of picking up some bargains.

Everyone expected follow through selling today with some expecting it to continue through Tuesday morning and then an afternoon rebound to begin. Let's hope the analysts are right.

The S&P futures are actually positive tonight by 4 points so somebody is thinking about bargains.

Current Portfolio

Current Position Changes

CSII - Cardiovascular Systems
The long position in CSII was stopped out at $16.75.

NVAX - Novomax
The long position in NVAX was stopped out at $6.45.

UIS - Unisys
The long call position in UIS was closed.

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

CSII - Cardiovascular Systems -
Company Profile


No specific news. A 5% decline broke support to stop us out.

Original Trade Description: June 13th.

Cardiovascular Systems, a medical technology company, develops, manufactures, and markets devices to treat vascular diseases in the United States. It offers peripheral arterial disease products, including Stealth 360° Peripheral Orbital Atherectomy System (OAS), Diamondback 360 Peripheral OAS, Diamondback 360 60cm Peripheral OAS access device, and the 4 Diamondback 360 French 1.25 Peripheral OAS access device products for treating a range of plaque types, such as calcified plaque, in leg arteries both above and below the knee and address many of the limitations associated with existing surgical, catheter, and pharmacological treatment alternatives, as well as Diamondback 360 Coronary OAS, a catheter-based platform to facilitate stent delivery in patients with coronary artery disease.

In the last quarter revenues rose 7%, gross margin rose from 77.8% to 80.4% and operating expenses decline -5%. They expect to reduce expenses by another 7% in the current quarter. Coronary revenues rose +31%.

With more than 18 million Americans suffering from Peripheral Artery Disease (PAD), which is the accumulation of plaque in the peripheral arteries, their market is booming. Coronary Artery Disease is a leading cause of death in the USA. With more than 40% of the population already diagnosed and probably another 20% undiagnosed the market for their products is also growing rapidly. With the baby boomers retiring and these health problems becoming more life threatening as they age the number of "interventions" as my cardiologist calls them is growing rapidly. Stenting any patient with any symptoms of heart disease is becoming more common than tonsillectomies for children. More than 600,000 Americans die from heart disease annually. That is equivalent to 6 jumbo jet crashes every day.

In Q1, Broadfin Capital added a 1.46 million share stake in CSII or 4.47%. Point72 Asset Management added 102,000 shares. Shares have broken out of resistance at $16 and continue to creep higher.

Earnings are August 3rd.

Position 6/14/16:

Closed 6/27/16: Long CSII shares @ $18.16, exit $16.75, -1.41 loss.

EXAS - Exact Sciences - Company Profile


No specific news. Any recent gainers were crushed today. EXAS lost 7% but remains over support at $10.

Original Trade Description: June 25th.

Exact Sciences Corporation, a molecular diagnostics company, focuses on developing products for the early detection and prevention of various cancers. The company develops the Cologuard, a non-invasive stool-based DNA screening test for the early detection of colorectal cancer and pre-cancer. Its Cologuard test includes a protein marker to detect blood in the stool, utilizing an antibody-based fecal immunochemical test. The company has a collaboration, license, and purchase agreement with Genzyme Corporation, as well as with MAYO Foundation for Medical Education and Research for developing tests to detect lung, pancreatic, and esophageal cancers.

Shares of EXAS fell from $18.50 to $7 in October after the U.S. Preventative Services Task Force, an independent panel of health care experts, issued preliminary screening test recommendations that did not include Cologuard as a recommended product. The draft listed Cologuard as an "alternative" screening test. Exact Sciences protested strongly about the classification.

On June 14th, the same task force issued its final cancer screening recommendations and clarified the inclusion of Cologuard. The information was accidentally leaked and the panel had to release the report earlier than the planned June 21st date. With the final recommendation for Cologuard the company has begun advertising strongly and sales should increase. Cologuard is now an A-rated preventative service under the Affordable Care Act.

Earnings July 26th.

Shares have broken out of their 9-month consolidation base and could close the gap back to $18 in the coming weeks.

Position 6/27/16:

Long EXAS shares @ $11.50, stop loss $9.45.

No options recommended.

HPE - Hewlett Packard Enterprise - Company Profile


CEO Meg Whitman announced another round of management shakeups with some people changing positions and others being promoted. I like Meg, she is not afraid to make changes and upset the status quo in order to move forward. Shares declined to support at $17. I am adding HPE back in as a long stock position today.

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

Previously closed 6/24/16: Long HPE shares @ $18.40, exit $18.61, +.21 gain

NVAX - Novavax - Company Profile


No specific news. After closing at a 5-month high on Thursday the stock has imploded with the market. Shares declined another 6% today to stop us out.

Original Trade Description: June 14th.

Novavax, Inc., a clinical-stage vaccine company, focuses on discovering, developing, and commercializing recombinant nanoparticle vaccines and adjuvants. The company produces its vaccines using its proprietary recombinant nanoparticle vaccine technology. Its product pipeline includes respiratory syncytial virus (RSV) vaccine candidates for elderly and maternal immunization that are in Phase III clinical trials, as well as pediatric RSV candidate, which is in Phase I clinical trial; seasonal quadrivalent influenza and pandemic H7N9 vaccines, which are in Phase II clinical trials; vaccine candidate against Ebola Virus that is Phase I clinical trial, as well as combination respiratory vaccine candidate and seasonal influenza vaccine candidate that is in pre-clinical trial; and rabies G protein vaccine candidate, which is in Phase I/II clinical trial. The company also has pre-clinical stage programs for various infectious diseases, including the Middle East respiratory syndrome coronavirus; and develops technology for the production of immune stimulating saponin-based adjuvants.

Novavax is using a new proprietary model for vaccines that does not require the long incubation time and the annual reformulation. They are far along in their trials compared to other companies and these vaccines can be given to children.

The top line State III data for the RSV F vaccine is due out in Q3 and they already have a fast track designation from the FDA. The drug could be commercially available by mid-2017. This drug could generate $1 billion in sales. While there is always the potential for a trial to fail, this initial drug has already progressed through all the early and mid stage trials. Novovax also has $434 million in cash so plenty of liquidity to continue the process.

Earnings August 9th.

Analysts are predicting a 100% gain for NVAX over the next year and that is attracting new investors today. With their advanced pipeline they could be an acquisition target. Shares only pulled back about 50 cents in the market weakness over the last three days and they posted a gain in today's weak market.

Position 6/15/16:

Closed 6/27/16: Long NVAX shares @ $6.65, exit $6.45, -.20 loss.

UIS - Unisys Corp - Company Profile


No specific news. The call position was closed at the open.

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:

Closed 6/27/16: Long October $9 call @ 80 cents. Exit 35 cents, -.45 loss.

Previously closed 6/24/16: Long UIS shares @ $8.47, exit $7.94, -.53 loss.

BEARISH Play Updates

GOGO - Gogo Inc - Company Profile


No specific news. New historic low. I lowered the stop loss again.

Original Trade Description: June 11th.

Gogo provided communication services to the commercial and business aviation markets in the U.S. and internationally. They provide in-flight connectivity and wireless digital entertainment solutions to commercial airline passengers to and from North America.

Gogo has had a rough few months as airlines complained about the service and some removed the Gogo service and replaced it with a competitor.

On May 23rd Gogo announced the pricing of $525 million in senior secured notes. On May 26th the stock spiked 20% after the company filed a notice with the SEC saying an unspecified airline had requested a proposal for service to cover its large domestic fleet. Under the proposal Gogo would provide Wi-Fi to a "meaningful" portion of the domestic fleet that is is currently serving. Gogo cancels the $525 million debt sale.

On June 3rd shares plunge as the unspecified airline turns out to be American Airlines and the proposal is far less than expected. American picked ViaSat (VSAT) to provide internet access on 100 new Boeing jets. Gogo updates its SEC filing to say it would provide service on 140 American planes and continue service on 400 others. However, American retained the option to remove Gogo equipment on any American planes at any time. Gogo said it now expects American to remove its equipment on the "mainline" planes over the next several years. American said it was planning on upgrading the service on its planes but had not picked a successor. That means the 100 ViaSat planes will be a live test and will likely replace Gogo. ViaSat provides 12 mbps of bandwidth to each seat while Gogo provides 70 mbps for the entire plane and that bandwidth has to be shared by all passengers. There is a significant difference.

On June 9th Gogo reinstates the $525 million debt offering and priced it at 12.5% after Moody's rated it a B3-PD (Probability of Default) credit.

Earnings Aug 4th.

The future is not bright for Gogo. They are trying to produce a faster service through satellite connections rather than ground based systems but the testing and roll out is not going smoothly. Several years of hostility between passengers and carrier over the slow bandwidth has poisoned the relationships and ViaSat appears poised to take over the market.

Shares closed at a historic low on Friday at $8.97 and the downward trend is likely to continue.

Position 6/13/16:

Short GOGO shares @ $8.99, see portfolio graphic for stop loss.

I am not recommending an option but the August $8 put is $75 cents.

INSY - Insys Therapeutics - Company Profile


No specific news. New 2-year low. I lowered the stop loss again.

Original Trade Description: June 18th.

Insys Therapeutics, Inc is a specialty pharmaceutical company that develops and commercializes supportive care products. The company markets Subsys, a sublingual fentanyl spray for breakthrough cancer pain in opioid-tolerant cancer patients in the United States. Its lead product candidate is Syndros, an orally administered liquid formulation of dronabinol. The company is also developing Cannabidiol Oral Solution, a synthetic cannabidiol for childhood catastrophic epilepsy syndromes; and other product candidates, including other dronabinol line extensions and sublingual spray product candidates.

Two former employees were arrested on June 9th for allegedly participating in kickback schemes involving doctors who prescribed the company's main drug, Subsys, a pain medication containing fentanyl. This is the drug that killed Prince, Joan Rivers and Michael Jackson. The two employees paid doctors thousands of dollars to participate in sham educational programs in order to induce the doctors to prescribe millions of dollars worth of the Subsys product. In 2014 alone the employees paid one doctor $147,000 and another $112,000 in speaker fees to give a talk at one of their "educational" programs. Those doctors were two of the largest prescribers of the drug in the USA. The scheme was discovered in November 2015. Subsys revenue in 2015 was $330 million. In 2014 a record 28,000 people died from subscription opioid addiction.

Earnings August 4th.

Clearly, this will have a long-term impact on Insys since there will be liabilities associated with the revenue generated from the scheme. The company is under attack by Preet Bharara, U.S. Attorney for New York. He has brought down dozens of other companies over the last several years for various types of misdealing.

Position 6/20/16:

Short INSY shares @ $13.06, see portfolio graphic for stop loss.

No options recommended because of wide spreads and high prices.

JBLU - JetBlue - Company Profile


No specific news. New 17-month closing low on worries about exposure to the UK.

Original Trade Description: June 15th.

JetBlue Airways Corporation, a passenger carrier company, provides air transportation services. As of December 31, 2014, the company operated a fleet of 25 Airbus A321 aircrafts, 130 Airbus A320 aircrafts, and 60 Embraer E190 aircrafts. It also served 93 destinations in 28 states in the United States, the District of Columbia, the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and 19 countries in the Caribbean and Latin America.

Business was good until all the airlines began adding capacity at the same time. The discount airlines were particularly aggressive. In order to fill that extra capacity they increased the number of discount seats and overall pricing went down. Now they have plenty of passengers but their revenue per mile has declined. They are still making money but with rising fuel prices they are going to have to raise ticket prices and that will dampen demand.

Last week JetBlue said May traffic measured in revenue passenger miles of (RPMs) rose +10.7% from 3.47 billion to 3.84 billion. Over the prior 12 months available seat miles (ASMs) rose 12.1% to 4.54 billion. The load factor or the percentage of seats filled by passengers declined from 85.7% to 84.6% because the rapid expansion of capacity outweighed the traffic growth generated by the discount tickets. That means the revenue per available seat mile (RASM) declined -7%.

The airline lowered guidance for RASM to decline 7.5% to 8.5% for Q2 compared to prior guidance for a 7% decline. They also lowered ASM growth from 8.5%-10.5% to 8.0% to 9.5%. They do not need to add additional capacity if they cannot fill the seats they already have.

Factor in the strong dollar, rising fuel prices and the increased terrorist activity and the outlook for profits is declining. Since the Belgium airport attack airline traffic has slowed. People do not want to be blown up while waiting in a security line. Add in the Zika virus that has disrupted traffic to Latin America and the Caribbean and that is another reason seats are empty. On the positive side JetBlue was accepted by the DOT to operate scheduled flights to Cuba. However, compared to their total capacity those few weekly flights will not move the needle.

Earnings July 26th.

JBLU shares have already declined significantly. They fell sharply in early May when they reported April traffic numbers. When the numbers did not improve in May they declined again starting on June 10th. JBLU was a rocket ship when it rallied from $5 to $24 in 2015 but we are headed for a round trip with shares back at $16.66 today. It has been a series of disappointing events one after another. I think we will see single digits again soon because of all the events impacting traffic and earnings I discussed above.

Position 6/16/16 with a JBLU trade at $16.50

Short JBLU shares @ $16.49, see portfolio graphic for stop loss.


Long September $16 put @ $1.15, no initial stop loss.

QURE - UniQure - Company Profile


No specific news. New 52-week low. I lowered the stop loss again.

Original Trade Description: June 20th.

UniQure is a biopharmaceutical company, engages in the discovery, development, and commercialization of gene therapies in the Netherlands. The company offers Glybera, a gene therapy product for the treatment of patients with lipoprotein lipase deficiency. They have multiple drugs in development for a variety of illnesses.

In their recent earnings they reported a loss of 92 cents that missed estimates for a loss of 82 cents. Revenue of $4.3 million did beat estimates for $2.9 million. This is a very small company and since the ASCO conference their shares have been in crash mode.

Losses appear to be accelerating and they lost $22.69 million in Q1. Their market cap is only $204 million.

There was no gap open today despite the major gap higher in the market. They closed at a historic low at $8.20. They have only been public for 2 years and from the chart today it looks like they are going significantly lower. Normally when a stock hits the prior historic low there is a rebound or at least a pause. Neither occurred and that suggests it will go lower.

Position 6/21/16 with a QURE trade at $8.00

Short QURE shares @ $8, initial stop loss $9.25.

No options recommended.

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


Big spike intraday to 17.87. I am leaving the secondary recommendations open to short it again at $20 and $25 if it reaches those levels. Let's hope it does not move that high since it would mean a serious market crash.

Original Trade Description: June 22nd.

The VXX is a ETF type product that is based on the Volatility Index futures. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

We have played the VXX before with big gains. The object is to short it on a bounce and then hold the position until the volatility fades again.

On the big declines last week the VXX spiked to $17. Back in January and February is spiked to $30 on the market corrections. While I do not expect that to happen from this lower level, I do expect some volatility to appear regardless of the vote outcome.

I am recommending we enter a short position with a return to $17. If it continues higher I would add to that short at $20 and again at $25 and then we wait for the post event decline in the volatility and the return to $13 or lower.

Because this is a flawed product it will always go lower. It has already had several 1:4 reverse splits to keep it from being delisted back in November 2010, October 2012 and November 2013. If it falls under $10, they will do another reverse split and start the decline all over again.


6/24/15: With a VXX trade at $17, now short VXX @ $17, no stop loss.

With a VXX trade at $20, short the VXX again, no stop loss.
With a VXX trade at $25, short the VXX again, no stop loss.

If we are successful in entering all three positions our average entry price will be $20.66 assuming you shorted an equal amount in each transaction. I would have no problem with increasing the quantity on the second and third position because it will always go down with the exception of short-term spikes on market corrections.

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