Option Investor

Daily Newsletter, Saturday, 7/2/2016

Table of Contents

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

Market Wrap

Consolidation Pause

by Jim Brown

Click here to email Jim Brown

A combination of factors helped lift the Dow 940 points in four days but resistance remains strong and sellers were waiting.

Weekly Statistics

Friday Statistics

Traders used Friday as a consolidation day. Nearly every stock that was up big over the prior three days saw some profit taking. However, it was light and there was not a herd of bulls stampeding to the exits. I think investors are unsure of what the next week will bring but most were willing to wait and see rather than taking their chips off the table.

The Dow hit 18,000 and came to an abrupt halt. The S&P traded as high as 2,108 before sellers overpowered buyers and pushed the index back to 2,103 at the close. The Nasdaq touched resistance at 4,880 before giving up 18 points to close at 4,862. All the material resistance levels held in a low volume environment.

The factors that helped lift the market from the lows have ended. Equity funds used some of their near record cash hoard to window dress their portfolios for the end of the quarter. Pension funds spent as much as $18 billion to bring their bond/equity ratios back into balance. Bargain hunters bought the dip but now there are only a few bargains left after the big rebound. With the Brexit uncertainty still a cloud over the markets, we will need a new headline to power us higher next week.

The ISM Manufacturing Index for June surprised at 53.2 compared to 51.3 in May and estimates for 51.4. After several declines in the regional reports there was a risk the national ISM would miss estimates. Instead of a miss, that was the highest reading since the 53.5 in June-2015. After spending five months (Oct-Feb) in contraction territory, the index has surged and is showing some strength. Unfortunately, the sharp drop in the pound and spike in the dollar is likely to create some headwinds in the months ahead.

The production component rose from 52.6 to 54.7, new orders 55.7 to 57.0 and order backlogs from 47.0 to 52.5. Employment actually edged back into expansion from 49.2 to 50.4. Export orders rose slightly from 52.5 to 53.5. Twelve industries reported manufacturing growth and five reported a decline. Those declining included wood products, electrical equipment, primary metals, plastics/rubber and transportation equipment.

Construction spending improved slightly for May from a decline of -1.8% in April to a decline of -0.8%. Analysts were expecting a rise of +0.6%. Total construction spending in May was $1.14 trillion.

Vehicle sales for June fell to an annualized pace of 16.66 million compared to 17.45 million in May. The trailing 12-month average was 17.5 million so the decline was significant. Auto sales declined from 7.1 million to 6.8 million. Light truck sales declined from 10.3 million to 9.9 million. Truck sales were helped by the continued low gasoline prices and low interest rates. Consumers are saving an average of $183.5 million per day on lower fuel prices over the same period in 2015.

The flight to quality and search for yield is continuing with the yield on the ten-year treasury falling to 1.456% at the close after a 1.414% intraday low. Those are four year lows and very close to a historic low at 1.394%. The yield on the 30-year treasury hit 2.205% intraday, which was a historic low. The record close at 2.241% is just below the prior record low close of 2.251% in January 2015. These yields reflect the movement of cash from overseas in search of yield and safety. More than $13 trillion in overseas government bonds are now trading at a negative interest rate. You have to pay the government to hold your money.

This is one of the few things that could lift the equity markets next week. Investors looking for a return greater than those government bonds may be forced to look at high yield bonds or equities.

This is payroll week with the ADP Employment on Thursday and the Nonfarm Payrolls on Friday. The consensus estimate on the ADP is 150,000, down from 173,000 jobs reported for May. The consensus range was 100,000 to 209,000. The consensus estimate for the Nonfarm report is 180,000, significantly higher than the 38,000 actually reported for May. The consensus range is 130,000 to 235,000 so a diverse group of opinions. After the Brexit vote, the job numbers no longer matter to the Fed. There is almost no way they could hike in July so the jobs are just a data point for later in the year.

The FOMC minutes for the June meeting will be released on Wednesday and after the sudden change in direction for the majority of Fed members, this report will be scrutinized even harder than prior reports to try and determine what happened.

In stock news Tesla ($TSLA) shares recovered from a sharp drop in afterhours trading on Thursday when the NHTSA said it was investigating a fatality that occurred in a Model S while being controlled by the autopilot. Tesla said that was the first fatality in more than 130 million miles.

The car was traveling at a high rate of speed and a truck and trailer coming from the other direction turned in front of the Model S. The car did not brake because the autopilot did not differentiate between the sudden appearance of the white trailer and the very bright sky. The car went under the trailer and sheared the roof completely off the car. The Model S continued down the road another half mile before hitting a telephone pole and snapping the pole in half.

The driver was a strong supporter of Tesla and bragged about using all the technological features of the car to their limits. When bystanders approached the car there was a DVD player still playing a Harry Potter movie so apparently the driver was not paying attention to the road.

Tesla and Mobileye (MBLY), the maker of the Autopilot software, were quick to remind everyone this is not a self-driving car. The Autopilot is designed for keeping you in your lane, changing lanes, etc. It is more of a cruise control on steroids and not a self-driving system.

Tesla shares fell to $205 from a close at $212 in afterhours when the initial news was released. After the full details became public, shares rebounded to close at $216 on Friday.

Micron (MU) reported an adjusted loss of 8 cents that beat estimates for an 11-cent loss. Revenue of $2.9 billion fell -24.8% and missed estimates for $2.95 billion. The company lowered guidance and said it would slash 2,400 jobs as part of a cost-cutting plan to combat challenging market conditions. The company said demand for DRAM chips used in PCs continued to fall and the market for NAND chips used in devices like Smartphones was becoming very competitive. Revenue has declined for three consecutive quarters. Now the company said it would focus on fewer products and try to streamline operations for that smaller product base. Current quarter revenue is expected to decline from 11% to 19%. Shares fell -9% on the weak guidance.

Oracle (ORCL) shares were up fractionally despite a jury award of $3 billion in damages to HP Enterprise (HPE) for breaking a contract back in 2011. The company contracted to support HP's Itanium servers and then changed its mind after CEO Mark Hurd was booted from HP and hired by Oracle. A five-week jury trial found the contract to be valid and awarded the $3 billion to HPE. Oracle said it would appeal and I am sure they will appeal it through every court available rather than pay those damages. They can spend several million a year in attorney's fees and they might get lucky several years from now and have a higher court overturn the judgment.

Disney (DIS) is in talks to acquire a one-third stake in the technology services unit of MLB Advanced Media, known as BAM Tech. This values the company at roughly $3.5 billion. Disney would also get a four-year option to buy another 33%. The streaming service is very popular with consumers. The service streams live broadcasts of out-of-market games. MLB had about 3.5 million subscribers at the end of last season.

Disney is riding the wave of record setting revenue from the Finding Dory movie and The Big Friendly Giant (BFG) starts this weekend. This could be another strong movie with its production budget of $140 million.

Hershey's (HSY) board unanimously rejected the $23 billion acquisition offer from Mondelez (MDLZ). A charitable trust set up by Hershey's founder owns 81% of the company's voting stock. Without the trust approval, a sale is impossible. There have been multiple acquisition attempts in the past and all have failed. In 2002, the Wrigley Company tried to buy it and failed. In 2007, Cadbury also failed. In 2010, the trust prevented Hershey from bidding to buy Cadbury. The trust was set up more than 100 years ago to benefit underprivileged children. However, it is being investigated by the Pennsylvania AG regarding its spending habits and how long its directors serve. The AG's office has called for the resignation of three of the longest serving directors. The trust has created a $12 billion endowment that funds a school and amusement park in Hershey PA.

Mondelez may have thought that the current investigation might have provided a crack in the armor surrounding the trust and made them more agreeable to a sale. However, the AG's office also has veto power of any deal if it deems it "unnecessary for the future economic viability of the company." I would say there were some nearly insurmountable hurdles for a Mondelez deal. That being the case, Hershey could be a huge short opportunity on Tuesday.

Apple (AAPL) may be in talks to buy Jay Z's streaming music service Tidal. The artist bought the service in 2015 for $56 million. Apple is apparently considering the acquisition to enhance its existing Apple Music product. Tidal has quite a few big name artists including the majority of the Prince catalog. Potential competitors for a Tidal deal include Samsung, Google and Spotify. The rumor could not lift Apple shares because of even bigger rumors about the iPhone 7.

There is a growing stack of evidence that the iPhone 7 will be a lackluster offering. Even worse, apparently, Apple is planning on releasing the iPhone 8 in 2017 and skip the model S update cycle for the iPhone 7. The lack of must have features on the 7 according to the dozens of leaks, could fail to excite the buying public.

The WSJ recently revealed "At a meeting with an Apple executive last month, one of the company’s China-based engineers asked why this year's model lacked a major design change in keeping with Apple's usual two-year cycle. The answer, one person at the meeting recalled, was that the new technology in the pipeline will take time to implement. People familiar with the matter said some features that Apple hopes to integrate into iPhones, such as curved screens, weren't ready for this year's models." The iPhone 7 is rumored to be "almost identical" to the 6/6S. With so many leaks about the lack of features on the 7 and radical new features on the 8, the buying public may wait until 2017 and buy the 8. That would be a serious blow to the 7 and to Apple's revenue. There is also a strong recurring rumor of an iPhone Pro in 2017.

Mizuho downgraded Apple suppliers on Friday on worries about smaller orders for components. They downgraded Skyworks (SWKS) from buy to neutral and slashed the price target from $99 to $68. The analyst cut Qorvo from buy to neutral with a price target of $55.

Canaccord Genuity initiated coverage on Netflix ($NFLX) with a buy rating and a price target of $120. The analyst cited the strong viewership of the shows streaming on Netflix. The premier episode of Orange is the New Black was seen by 6.7 million in the U.S. and comparable with the HBO hit Game of Thrones. He said Netflix has a long runway for growth internationally even if Q2 subscriber growth fails to impress. The long-term outlook is very strong after they opened in 130 countries in January.

He said Netflix only has about 5.3% penetration in international markets compared with 37.3% in the USA. In his studies of market penetration he found that by the third year subscribers exceed 10% and by the fifth year it is over 20% on average. Emerging markets take longer than developed markets but the overall trends still apply. Canaccord expects 112 million international subscribers by 2020 compared to 27.4 million today. That rises to 187 million by 2025.

In the map below, the red areas were open in December 2015. The green areas were opened in January 2016. The only area not yet open is China because of their censorship. January was a major growth spurt for Netflix and according to Canaccord they are just scratching the surface. Netflix Growth Forecast

Harley-Davidson (HOG) shares spiked 20% on rumors it had received a bid from private equity firm KKR. The rumor came from "TheFly.com" and neither HOG or KKR would comment on the news. This could be another shorting opportunity.

U.S. Steel (X) rallied 8% on news of very heavy option activity in the calls. More than 12,000 January $24 calls were purchased compared to an open interest of 1,157. That is a long window and the stock was only about $17.50 when they were bought. That is about a $1 million bet.

Another potential short candidate would be Jones Lang LaSalle (JLL). Shares have turned negative after Brexit because they generate 26% of their revenue from Europe and the UK. Research firm Green Street Advisors warned that London office building values could fall as much as 20% within three years as companies move out to find new locations that are still in the EU. New leasing activity is also expected to fade with companies being reluctant to lease new space until after the actual exit and then any new leases could be in EU countries depending on the post exit commerce rules imposed on the UK.

The Q2 earnings cycle does not really take off until the following week. So far, 81 of 113 S&P companies issuing guidance have warned on earnings. That is expected to worsen. That compares to 96 out of 122 warning in Q1. To date only one company has warned because of Brexit and that was Carnival Corp (CCL). Q2 earnings for S&P companies are expected to decline -5.3% compared to the final -6.7% decline in Q1. Historically earnings typically end about 2% above their estimates at the beginning of the quarter. At the start of Q2, earnings were expected to decline -8.8%. This will be the fifth consecutive quarter of earnings declines. Revenues are expected to decline -0.8% for the sixth consecutive quarterly decline.

The tech sector has seen the largest decline in earnings estimates led by Apple with a cut from $1.78 to $1.40 per share. Tech earnings are now expected to decline -7.2%. Overall, 36 of the 72 companies in the S&P tech sector have seen estimate cuts. IBM estimates were cut from $3.44 to $2.88, Microsoft from .67 to .58 and Seagate from .78 to .13 per share.

The energy sector is going to lead the losers list when they report in Q2. Analysts are expecting a 77.7% decline in energy earnings.

The current market PE on a forward basis is 16.4 compared to the 10-year average at 14.3.

Crude Oil

Crude prices have been trading in a range from $46-$50 over the last several weeks as inventory declines have been spotty and the dollar has been increasingly volatile. U.S. inventories declined -4.1 million barrels last week as we head into the busiest driving weekend of the summer. Gasoline demand is expected to hit a record of more than 10 million barrels per day thanks to the low fuel prices. The national average was $2.28 per gallon on Friday. The average for the first six months was $2.04 per gallon and the lowest prices since 2004. Because of the oil glut, gasoline prices are expected to remain between $2.25-$2.40 for the rest of the summer. Gasoline demand could exceed the record demand set back in 2007. U.S. oil production was 8.622 mbpd last week and that is one million bpd lower than the 9.61 mbpd peak on June 5th last year.

Active oil rigs spiked +11 to 341 last week with gas rigs falling -1 to 89. Offshore rigs fell -2 to 19 and a new low for this cycle. This compares to 60 two years ago.

The price of natural gas is exploding higher because of low injections into storage and the falling rig count for gas rigs. With the Cheniere LNG facility in Louisiana ramping up production there is additional demand that was not in the system last year. We added only 42 Bcf to storage last week and we are heading into the high demand cooling season where gas is used to generate electricity.


The last seven trading days have been a lesson in extremes. The Dow declined from the 18,011 close on Thursday before the Brexit results to 17,063 on Monday. That 948-point drop in two days was erased by a rebound to 18,002 intraday on Friday. The S&P fell from 2,113 to 1,991 and returned to 2,108 at the high on Friday.

However, it was the volume that is the most amazing. The market rallied last Thursday on expectations the UK would vote to stay in the EU. The S&P hit a four-week high at 2,113 at the close. However, the volume was anemic at only 6.387 billion shares. For that kind of rally, the volume was very low.

On Friday, the market traded more than 15 billion shares or nearly 2.5 times the volume on Thursday. Complicating an apple to apples comparison was the Russell index rebalance at the close. But the volume was still extreme even without the rebalancing. Monday traded 10.6 billion shares in another huge decline.

The last three days of the quarter saw more than 8 billion shares each thanks to equity fund window dressing, investors bargain hunting and pension funds rebalancing their bond/equity ratios.

If you had any doubt that those factors were impacting the market you only need to look at the volume for Friday and the first day of Q3. It was right back at the 6.7 billion shares we were trading before Brexit happened.

This is what I expect next week. Light volume and choppy markets. Without the funds being forced to put money to work, we may not have any upward momentum. In fact, we could see some window undressing because of the continued uncertainty out of Europe, the strong dollar and the plunging pound.

Make no mistake. We witnessed a rare market event last week that would have had significantly different results if it had occurred a week later on the calendar and the fund moves were not a factor.

The market volatility has collapsed. The VIX hit 26 on Friday but immediately began to decline even while the markets were still falling on Monday. Traders did not expect the Brexit decline to last and the falling VIX was the proof. At Friday's 14.77 close, it is nearly back to the 13 lows from the prior three weeks. There is no fear in the market. The monster rebound has put everyone back into complacency mode.

The S&P climbed right back into the resistance band that has prevented further gains since last summer. We have been here many times and each time has resulted in a failure and a decline. Now that we are in the summer doldrums between July 4th and Labor Day, the volume will be very low and conviction on the part of the bulls will probably be lacking. There are too many factors hanging over the market.

The EU is refusing to negotiate with the UK over their future trade agreements until after they submit the Article 50 request to exit the EU. The UK has said they will not do that until after a new PM is installed in September or even as late as October. Some voices in the EU are recommending harsh penalties on the UK in order to prevent other countries from duplicating their exit. This was always a worry before the Brexit but now it is growing.

The strong dollar, weak pound will cause earnings warnings in the Q2 earnings cycle that starts in two weeks. We can count on it. With earnings already expected to decline more than 5% the outlook is already shaky. U.S. economics are improving slightly but it is spotty, not nationwide. Whether that is enough to energize the bulls remains to be seen.

The key is going to be resistance. If the S&P can make a new high over that 2,119 close back in early June then we could be off to the races. That is a capital "IF" because they have not been able to do that over the last 11 months in a better market environment. While it is possible to continue last week's rally, it is not probable. I hope I am wrong.

Resistance from 2,100 to 2,128 is very strong as we have seen for the last year. The market is now overbought after a 1,000 point and 111 point rebound on the Dow and S&P. That is a huge gain in only four days.

Support remains 2,040 and we can start to get excited with a move over 2,115.

The Dow has the same problem as the S&P with major resistance from 17,925 to 18,165. The dead stop at 18,000 on the last three attempts suggests there are plenty of sellers waiting to exit at that level. The Dow stocks are international and they will see a greater impact from the strong dollar, weak pound/euro combination. I would be very surprised if the majority did not warn on guidance.

For Tuesday, the resistance at 18,000 is key. If the market continues to fail at that level it could sour sentiment and force some more consolidation at a lower level. A decent range has been established between 17,400 and 18,000 and we could spend some more time chopping around in that range.

The Nasdaq Composite had a nice rebound but unlike the other major indexes, it failed to return to the strong resistance at 4,900. It did come close but it also declined more in the afternoon. The Nasdaq has strong resistance at 4,900 and again at 4,968 and that is well below the major resistance from 5110-5160. If the Nasdaq remains the weakest link in the market the other indexes will feel the drag.

The Russell 2000 performed a textbook rebound from support at 1,095 and is now back in the congestive resistance from 1150-1165. This is the same relative level to the Nasdaq rather than the strong performance of the Dow and S&P. The Russell 2000 benefitted from the rebalance the prior Friday as funds continued to add to positions last week to get their weightings right after the reconstitution. That extra lift will be absent next week.

The Russell will not be a plus for the market until it moves over 1,200. With a broad resistance range that is the key level to watch.

Last week I suggested buying a rebound on Monday. That came at 11:AM and again at 3:PM. Both rebounds came from support at 1,990, which I have been showing on my charts for months. If you bought that rebound, you should be a happy camper. If you took Art Cashin's weekend suggestion of buying at 11:AM on Tuesday you would still be a happy camper.

This week I would caution you not to be overly long. The market is short term overbought and sitting right at strong resistance. What headline could produce a continued rally? I do not know of one this weekend. Volume is going to be very light in a holiday week and the markets can either go dormant ahead of the following week's start to earnings or they could be volatile in that light volume. Time will tell.



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Random Thoughts

Bullish sentiment spiked +6.9% to 28.9% for the week ended on Wednesday. The survey ends on Wednesday so there were two days of very strong gains to offset the Fri/Mon drop. Neutral sentiment fell 5.1% to 37.7% and bearish sentiment declined -1.8% to 33.4%. Apparently, the bears were not convinced the rally was going to stick since the majority of change came out of the neutral camp.

The CME FedWatch Tool is predicting a 100% chance of no rate hike at the July meeting. There is actually a 2.4% chance of a rate cut. Obviously, it is way too early to be talking about rate cuts but that is what the Fed funds futures are showing.

The September meeting is showing a 5.9% chance of a rate hike and a 2.2% chance of a rate cut. The biggest increment at 91.9% is showing no change. You can go all the way out to the February meeting and there is only a 22.9% chance of a rate hike.

Your home address is about to change. A new startup is going to change the way we find addresses by shaking up the global addressing system. The U.S. has figured out how to address locations in a somewhat logical way but the rest of the world has not. Finding an address in Latin America or Africa is a tough job. Some 126 countries do not have a countrywide addressing scheme. Global shipping companies are constantly struggling with locations without physical addresses. Finding the "fourth house on the left after the road turns to gravel" or the "third business past the lamp post" is hardly a desirable address. What3Words claims more than 4 billion people are invisible and cannot get mail or deliveries or receive aid because they do not have a valid address.

The startup, What3Words, is planning on fixing that problem. Instead of road names and zip codes, the company has divided the world up into 57 million 3x3 meter squares and assigned each square a three word identifier such as "dog.cat.stick."

Using the company's system, anyone can find any address on the planet by speaking/typing the three words into a smart watch, mobile phone, GPS device or automobile navigation system. Several countries have already signed up to have their country addressing system converted to What3Words. Mongolia's state-owned postal delivery service, Mongol Post, is making the system the national addressing standard. The system is currently in use in more than 170 countries.

The beauty of this system is that the 3x3 meter location can be anywhere. It does not have to be on a road, highway, city, etc. It can be at the bottom of the Grand Canyon or deep in the Amazon rain forest. Like GPS but easier to operate you can find anything or anywhere with just three words. The same capability exists with GPS but the nomenclature is harder to work with. For example the GPS coordinates for the Empire State Building are N40° 44.9064', W073° 59.0735'. In W3W terms, the actual address is "veal.notion.loses." What3Words is not writing their own mapping software but partnering with existing companies like Garmin or Navmi to integrate the three words into their existing systems. The only problem I see in the future is people wanting to assign their own three words to their location like "good.singles.bar" instead of "stinky.dead.snake."


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"If your car could travel at the speed of light, would your headlights work?"

Steven Wright

New Plays

Still Looking for a Top

by Jim Brown

Click here to email Jim Brown
Editor's Note

Friday's market action was lackluster and did not convince me we are going higher. The QQQ play from Thursday was not triggered so I am listing it again. I also added a Chinese internet company that just hit single digits on the way to lower levels.


No New Bullish Plays


VNET - 21Vianet Group - Company Profile

21Vianet Group, Inc. provides carrier-neutral Internet data center services to Internet companies, government entities, blue-chip enterprises, and small-to mid-sized enterprises in the Peoples Republic of China. It offers hosting and related services to house servers and networking equipment in its data centers, and connects them through a data transmission network; and other hosting related value-added services.

In June 2015 the Chairman of the board, Kingsoft Corporation and Tsinghua Unigroup International proposed a deal to take the company private. Shares were trading around $20 at the time. On Thursday the same group rescinded their "non-binding" go private offer. The group said "after careful consideration, the group had determined not to proceed with the proposal under the current circumstances." Those circumstances were not described.

After keeping the stock price around $20 for the last year based on this offer the group decided to pass on the deal. While it may have had something to do with the earnings, I suspect it had more to do with the current problems with taking companies private in China. Qihoo (QIHU) and YY (YY) are also struggling. The China Securities Regulatory Commission is considering limits on the numbers of reverse mergers from previously foreign listed companies. There are worries they could impose an outright ban.

In an attempt to counter the drop in the stock the company announced a $200 million share repurchase plan. However, in the first sentence reads, "The Board has authorized, but not obligated, to repurchase up to $200 million in outstanding shares within the next we months." The key words there are "not obligated" which means they do not have to buy the shares if they change their minds. This is a Chinese company and the generally accepted rules are rarely followed. This is just another ploy to try and support the stock price.

Earnings August 24th.

Sell short VNET shares, currently $9.57, initial stop loss $10.65.


Buy August $9 put, currently 90 cents. No initial stop loss.

QQQ - Nasdaq 100 ETF - ETF Profile

The Dow has struggled with the 18,000 level since last November. Eventually there will be a breakout but I strongly doubt it will be during the summer doldrums between July 4th and Labor Day. The volume will be to low and other factors are weighing on the index. The 30 Dow stocks are all exposed to the strong dollar and falling pound as a result of the Brexit. I would be very surprised if less than two-thirds of the Dow stocks did not warn for Q3 on the strong dollar problem. With Q2 earnings starting on July 11th, i would expect some investors to begin moving to the sidelines to avoid the rush.

The S&P 500 has solid resistance from 2,100 to 2,115. It has failed at those levels on every attempt since August of last year. With earnings expected to be weak, economics weak and Europe weak, I would expect the S&P to fail at those levels again.

The Nasdaq has strong resistance at 4,900 and 4968. These are lower highs from the peak last November. The biotech sector is still weak and Merrill Lynch just downgraded the semiconductors. Oil prices are likely to remain around $50 for the rest of the year and that means the bloom is fading on the energy stocks.

The Nasdaq 100 ETF (QQQ) is approaching solid resistance at $110. I actually doubt it will get there but that appears to be the target. If the QQQ reaches that level I would recommend shorting the ETF. I know that is a big ticket item for Premier Investor readers but there are no low dollar index ETFs that will accomplish the same thing. I am going to recommend a long put in place of the actual short.

I would like to enter the position at $110 but that would take about a 200 point gain on the Nasdaq 100 ($NDX) and I seriously doubt that will happen.

Since we cannot count on that $110 level being reached I am going to recommend buying the put with a trade at $106.85. If the index does go higher then we can target the $110 level as well.

With a QQQ trade at $106.85

Buy August $106 put, currently $2.05. No initial stop loss.

With a QQQ trade at $109.50

Buy August $108 put, estimated to be $2.05. No initial stop loss.

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow hit critical resistance at 18,000 intraday and sellers were waiting. The intraday high was 18,002 but the Dow did not drift too far away with the close at 17,946. However, that resistance has been strong and I would be surprised if we just blew through it next week. It may be tested several times with negative results but we are entering into the summer doldrums and resistance normally holds over the next two months.

The positive factors helping to lift the market are over. The equity funds put some of their near record levels of cash to work window dressing their portfolios and pension funds spent $18 billion on equities to balance their bond/equity ratios. The dip is over so there are fewer bargains left to buy. It could be a tough week unless the bulls call for reinforcements to push through that 18,000 level.

Current Portfolio

Current Position Changes

QQQ - Nasdaq 100 ETF
The short position in the QQQ remains unopened until the QQQ trades at either $109.50 or $106.85.

QURE - UniQure
The short position was stopped out at $7.55.

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

EXAS - Exact Sciences -
Company Profile


No specific news. Minor gain but still another new high.

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


No specific news. Minor gain in a choppy market.

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 6/28/16: Long HPE shares @ $17.50, see portfolio graphic for stop loss.

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

SCTY - Solar City - Company Profile


SCTY declined 33 cents on the drop in Tesla shares and the choppy market. The resistance at $24 could be a challenge but that Tesla offer for $26-$28 is alive and well. Shares were downgraded by Credit Suisse from outperform to neutral.

Credit Suisse said the offer price is too low but there was a 60-70% chance of the deal being consummated because of the aura of invincibility surrounding Elon Musk.

Original Trade Description: June 27th.

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.

Position 6/28/16:

Long SCTY shares @ $23.40, see portfolio graphic for stop loss.

BEARISH Play Updates

ATHM - AutoHome - Company Profile


No specific news. Shares popped 5% on no news at all. The majority of the gain came at the open so it was probably a short squeeze. I lowered the stop loss just in case the rebound sticks.

Original Trade Description: June 29th.

Autohome Inc. operates as an online destination for automobile consumers in the People's Republic of China. The company, through its Websites, autohome.com.cn and che168.com, delivers comprehensive, independent, and interactive content to automobile buyers and owners, including professionally produced content that comprises automobile-related articles and reviews, pricing trends in various markets, and photos and video clips; automobile library, which includes a range of specifications covering performance levels, dimensions, powertrains, vehicle bodies, interiors, safety, entertainment systems, and other unique features, as well as manufacturers suggested retail prices; new and used automobile listings, and promotional information; and user forums and user generated content. Autohome Inc. also offers advertising services for automakers and dealers; dealer subscription services that allow dealers to market their inventory and services through its Websites; used automobile listings services, which allow used automobile dealers and individuals to market their automobiles for sale on its Websites.

In April, Telstra Corp, which owns 55% of Autohome, said it was going to sell a 48% stake to Ping An Insurance Group for $1.6 billion. CEO James Qin is now leading a revolt against his previous benefactor that helped launch the company and get it listed on the NYSE. There is a suit and Qin is launching a rival bid. When the company needed startup capital Telstra was the investor. Qin and other minority shareholders representing 11% of the outstanding shares have lodged a petition with the Grand Court of the Cayman Islands where the company is registered. The suit claims Telstra's representatives on the board of Autohome allegedly acted in bad faith and breached the rules. Qin is trying to form a coalition with multiple private equity firms to launch a competing bid. Qin made a firm offer of $31 a share in April including a bank letter of credit to finance the deal and it was rejected. The next day Telstra said it was selling its shares for $29.55 to Ping An. Qin's group countered at $31.50 that caused a peak in Autohome shares at $32.15 in expectations for a bidding war that never appeared.

The board is deeply divided and Telstra will not provide any supporting documents for the "purported" sale to Ping An. Telstra has 5 directors on the board and there are 5 independent directors. On May 13th Telstra convened a board meeting to approve the deal. The 5 independent board members refused to show up so there was no majority. The 5 Telstra directors appointed a 6th director on the spot, completely against the corporate rules, and the 6 directors approved the deal. The group aligned with Qin filed the petition with the court to put a hold on any acquisition until the proper documents are submitted and the full board can review the documents vote on the matter. Telstra still refuses to provide any documentation and the fight continues.

Meanwhile shares are crashing. On Monday, the company reported the CEO Qin and the CFO had been replaced and five new directors had been appointed. The company stated the sale of 47.4% of the outstanding shares to Ping An had been completed on June 22nd. It appears the hostile takeover has been completed but the court fight is ongoing.

On Wednesday, shares closed at a historic low at $20.54. This company appears broken and normal shareholders are fleeing to the exits. There was no bounce on either is the last two days when the markets were up big.

Zacks changed their rating to Strong Sell. Credit Suisse changed their rating to Sell.

Earnings August 3rd.

Position 6/30/16:

Short ATHM shares @ $20.50, initial stop loss $22.15.

QURE - UniQure - Company Profile


No specific news. QURE looks like it is trying to form a bottom at $7. Maintain the current stop loss. If the market weakens that support may evaporate.

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

Closed 7/1/16: Short QURE shares @ $8, exit $7.55, +.45 gain

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


The bullish market and the futures roll over are taking their toll. We are probably going to be in this position for a long time as it declines to new lows well under $13 this summer.

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.

Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible.

These positions are only updated on the weekend.

FDC - First Data - Company Profile


No specific news. The Brexit drop push FDC below $10 temporarily but the rebound lifted it back to $11 where it has not made any progress for three days. We still have a lot of time.

We were stopped out on the stock short on 5/23 there was no stop loss on the option and that position remains open. At the current 10-cent price that is a lottery ticket that the headlines will fade and the original direction will return. This is a July option so plenty of time for a disaster to appear.

Original Trade Description: May 16th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions.

In their Q1 earnings, they grew revenue 3% and operating income rose from $185 to $220 million. Earnings of 24 cents were slightly above expectations for 21 cents. Revenue of $1.69 billion was below estimates for $1.71 billion. Unfortunately, FDC has $19 billion in debt compared to its $3 billion market cap. Interest expense in the first quarter was $263 million or more than $1 billion a year.

Global business solutions revenue declined in the quarter while financial solutions and security solutions showed only marginal growth.

Earnings July 21st.

While the company tried to put a positive face on the future by projecting revenue growth, it appears investors were not impressed. Shares have fallen from $13.50 to $10.50 over the last three weeks since earnings. FDC does not provide guidance and that is troubling to some investors.

I am anticipating a retest of the post IPO low at $8.50 or even worse, depending on the market.

Position 5/17/16:

Long July $10 put @ $.60, no stop loss.

Previously closed 5/23/16: Short FDC shares @ $10.69, exit $11.55, -.86 loss.

TRN - Trinity Industries - Company Profile


No specific news. Brexit blunted the two month high but the shares have erased the loss and should return to $20 this week, market permitting.

We have a July call option that is worth 20 cents today. I would bet $20 that it will recover by July expiration.

Original Trade Description: March 18th

Trinity Industries manufacturers rail cars, highway guard rails and steel beams for infrastructure projects, structural towers for wind turbines and electrical distribution grids, oil and chemical storage tanks, barges to transport grain, coal, aggregates, tank barges to transport oil, chemicals and petroleum products. The company was founded in 1933.

Shares crashed in mid February after they reported earnings that beat the street but guidance that disappointed. Earnings of $1.30 easily beat estimates for $1.07 but revenue of $1.55 billion missed estimates for $1.61 billion. They had full year earnings of $5.08 per share.

They guided for 2016 to earnings of $2.00 to $2.40 per share. The challenge is the slowdown in orders for railroad tank cars and barges to transport oil. With oil prices crashing the producers and refiners are cutting back on capex spending until prices recover. Trinity said revenue in 2016 could decline -32%. Shares declined -35% over two days on the news.

The key here is that Trinity is now trading at a PE of 3. Yes 3.74 to be exact. With earnings in the middle of their range at $2.20 and a PE of 10 that would equate to a $22 stock price.

Here is the good news. The company has $2.12 billion in cash and undrawn credit. They are not in financial trouble. They authorized a $250 million share buyback starting January 1st. They have an order backlog of $5.4 billion in orders for 48,885 railcars. They received orders for 2,455 cars in Q4 and their backlog stretches out to 2020. The barge division received orders for $190.1 million in Q4 and had a backlog of $416 million as of December 31st. The structural tower segment has $371.3 million in order backlogs.

They recognize that tankcar and barge orders are going to remain slow until oil prices recover, which should happen later this year.

This stock was extremely oversold but began recovering in early March. Trinity produces a lot of railcars for carrying all types of products other than oil. That demand is not going to disappear and they already have order backlogs stretching into 2020.

At their current valuation they could also be an acquisition candidate. This is a great business that has been overly punished by the oil crash.

Earnings April 21st.

Position 3/21/16:

Long July $20 call @ $1.50, no stop loss.

Previously Closed 4/5/16: Long TRN shares @ $19.15, exit $17.50, -1.65 loss.

WIN - Windstream Holdings - Company Profile


Brexit drop has been erased. Now we just need to get over resistance at $9.40.

We have an August $9 call and it is in the money with a lot of time left. This is a lottery play that WIN will be well above $9 by August.

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.

Update 5/5/16: Windstream reported a much smaller loss than expected. The company reported an adjusted loss of 23 cents compared to estimates for 54 cents. Revenues declined slightly to $1,373.4 million and missed estimates for $1,378.8 million. However, product revenues rose 11% to $32.4 million. WIN bought back $75 million in shares in Q1. The company ended the quarter with 1,430,700 household subscribers.

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.

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