Option Investor

Daily Newsletter, Saturday, 7/23/2016

Table of Contents

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

Market Wrap

Breakouts Everywhere

by Jim Brown

Click here to email Jim Brown

The Dow did not manage to make a new high on Friday but nearly every other broad market index did and others made new relative highs.

Weekly Statistics

Friday Statistics

The market is confounding bears at every turn and Friday's gains helped to push multiple indexes to new highs. The S&P-500 closed at 2,175 and 2 points over the prior high. The S&P-400 Mid-Cap index closed at 1,552 and 3 points over the prior high close of 1,549.

The S&P-600 closed at 741.86 and just under the prior historic high close of 742.13. That is close enough for me.

The Vanguard Total Stock Market Index (VTI) closed at 111.72 and just over the prior high close of 110.72.

The Russell 3000, the top 3,000 stocks by market cap, extended its new high to 1,283.

Whether the bears like it or not there is a summer rally in progress and it is climbing a decent wall of worry to make that happen.

The Nasdaq and the Russell 2000 are still lagging but the Russell closed at an 11-month high and the Nasdaq at a 7-month high.

The internals are positive and growing more bullish by the day. The only fly in our rally soup is the light volume. Volume on Friday was only 5.6 billion shares. The average volume for the week was only 5.9 billion shares. The day with the heaviest volume was Thursday (6.5 billion) when the market declined.

Fund managers are clearly chasing prices with every minor dip in a momentum stock being bought on any sign of a rebound. Netflix is about the only major stock that has not rebounded after their earnings dip.

There were no economics of note on Friday. However, most of the reports earlier in the week showed minor improvement. Unfortunately, the biggest report of the week, the Philly Fed Manufacturing Survey, saw a negative headline number. The good news hiding behind that negative number was an improvement in almost every internal component. New orders went up to 11.8 and the second highest reading over the last year. Backorders turned positive for the first time in a year. The price components were the only two that did not improve but they did remain in positive territory.

There are green shoots in the U.S. economy but they are not readily seen in the headline numbers of the various reports.

We get the first look at the Q2-GDP next Friday. The consensus estimate is for 2.7% growth and the Atlanta Fed's real time GDPNow forecast is currently 2.4% growth. Either of these forecasts would be significantly better than the final 1.07% reading for Q1.

Other reports due out next week include home sales, which are expected to show another increase. Zillow reported that time on the market for a home listing had declined by more than 1 week in the latest analysis. Low mortgage rates are spurring people to buy and prices are rising because of the reduced inventories. The housing reports this week are likely to show gains.

The negative event this week is the Fed announcement on Wednesday. There is still almost zero chance of a rate hike at this meeting with the Fed Funds Futures showing only a 2.4% chance. However, the September meeting has risen to a 20% chance, November 22% and December 48%. Any further improvement in the economic picture will likely raise the chances for a rate hike sooner than December.

The following week we will get the employment reports with the ADP on Wednesday and Nonfarm Payrolls on Friday. Any continued strength in the Nonfarm numbers will produce rate hike anguish in the market.

The Bank of Japan meeting on Thr/Fri could cause some volatility because analysts expect additional stimulus. The stress test results for 50 EU banks are due out on Friday and that could also produce some market volatility.

The market movement this week came from some positive earnings. On Friday, GE reported earnings of 51 cents that easily beat estimates for 46 cents and it is not normal for GE to beat by a wide margin. Normally they report inline or only a penny or two over the estimate. Revenue rose 15% to $33.49 billion. Revenue was boosted by a 31% rise in revenue from their power generation business. If you recall in Q1 they had some issues with deliveries and the surge in revenue in Q2 was the result of those deliveries being completed. During the quarter, GE escaped the SIFI designation by getting rid of the majority of their financial operations. GE said this freed up $18 billion in capital and they are returning it to shareholders through buybacks with $13.7 billion spent in Q2. GE had cash and equivalents of $91.8 billion at the end of the quarter. In a sell the news event shares traded down nearly 2% after earnings.

The CEO said they were seeing a "volatile and slow growth economy."

After the close on Thursday Schlumberger (SLB) reported earnings of 23 cents and a 20% decline in revenues to $7.16 billion. Analysts were expecting 21 cents and $7.13 billion.

The company also announced an additional 16,000 layoffs. The company did say the oil business in the U.S. had turned but would remain weak for the rest of 2016. The CEO said, "In the second quarter market conditions worsened further in most parts of our global operations, but in spite of the continuing headwinds we now appear to have reached the bottom of the cycle." That followed similar comments from Halliburton on Wednesday.

Honeywell (HON) reported earnings of $1.66 compared to estimates at $1.64. Revenue rose 2% to $9.991 billion but missed estimates for $10.134 billion. They raised earnings guidance for the full year from $6.55-$6.70 to $6.60-$6.70. Revenue is now expected to be $40.3-$40.9 billion up from $40.0-$40.6 billion. Shares fell sharply on the revenue miss and anemic guidance upgrade.

Whirlpool (WHR) reported earnings of $3.50 that beat estimates for $3.36. That compared to $2.70 in the year ago quarter. Revenue was flat at $5.2 billion. The company raised its full year earnings guidance from $14.00-$14.70 to $14.25-$14.70. The company said cost reduction efforts offset the unfavorable exchange rates. Shares rose $5 and are nearing the prior high from April.

Stanley Black & Decker (SWK) reported earnings of $1.84 compared to estimates for $1.72. Revenue of $2.93 billion also beat estimates for $2.91 billion. The company guided to full year earnings of $6.30-$6.50 per share, up from $6.20-$6.40 thanks to volume growth and expanding profit margins. Shares rallied 5% on the news.

American Airlines (AAL) reported earnings of $2.81 compared to estimates for $1.68. However, revenue declined -4% to $10.36 billion but still beat estimates for $10.32 billion. They said Q2 revenue was hurt by growth in capacity from competitors, macroeconomic weakness and foreign currency weakness. Revenue per available seat mile declined -6.3% to 12.71 cents. Shares rose 4% on the news.

Starbucks (SBUX) reported earnings after the bell on Thursday of 49 cents and revenue of $5.24 billion. Earnings matched estimates but revenue fell short of estimates for $5.35 billion. Same store sales rose +4% ending a streak of 25 quarters of 5% growth or better in the USA. They raised guidance for new stores from 1,800 to 1,900 in 2016. However, revenue growth is expected to top out at 10% compared to prior estimates for the low teens. Same store sales comps are now expected to be mid-single digits compared to prior guidance for "somewhat above mid-single digits." Current quarter earnings are now projected to be 54-55 cents and analyst estimates were 55 cents.

CEO Howard Schultz said the drop in same store sales growth came from the change in the loyalty card program. Previously the awards were given based on the number of store visits and now they are based on the total amount spent. He said some customers were gaming the old system by asking cashiers to ring up a coffee and bagel separately to simulate two visits. The change angered some customers and caused a drop in total visits. Customers were so angered they failed to show up for the Frappuccino Happy Hour promotion that caused a 20% increase in revenue in the same period in 2015. Despite the hostility by some customers, the number of loyalty club members rose 18% over the same period in 2015 to 12.3 million.

Schultz warned the U.S. is facing a very challenging environment. He said, "I think we have a situation where you have a very uncertain election, you have domestic civil unrest with regard to race, and I think the issues around terror have created a level of anxiety, so we are no longer looking at just an economic downturn, there are a number of things that we are facing as citizens and I think the direction of the country."

Next week is the busiest week of the cycle for earnings and Thursday is the busiest day of the cycle. There are a lot of high profile companies reporting. There are 12 Dow components and more than 175 S&P companies.

FactSet said 25% of the S&P has reported for Q2 and 68% have beaten on earnings and 57% beat on revenue. Only 17% of companies have missed earnings estimates. Earnings growth has improved from the prior week forecast of -5.5% to -3.7%. Revenue is now expected to decline -0.3% which is slightly better than the prior estimate for -0.8%. For Q3 14 companies have warned and 5 companies have issued positive guidance. The earnings outlook for Q3 has deteriorated from +0.3% growth to a -0.1% decline in earnings. On March 31st, the outlook was for 3.3% growth in Q3.

After the close on Friday, news broke that Verizon was the successful bidder for Yahoo in the range of $5 billion. The news was not confirmed but flowing from multiple sources. The bid includes Yahoo's real estate but not their intellectual property. Verizon bought AOL for roughly $4 billion and they believe adding the Yahoo assets into AOL will make both websites more valuable. Verizon wants the roughly 300 million Yahoo users to enhance their existing advertising programs. This will give Verizon more eyeballs and it will give AOL significantly more content. Despite the downtrend in Yahoo's business, they still have a lot of content. Verizon will probably sell the recent Yahoo acquisitions that make no sense. Those would include Polyvore, BrightRoll, Flurry and Tumblr.

While Halliburton and Schlumberger both claim the bottom is behind us in the oil patch the price of crude continues to fall as inventories of refined products continue to rise. We are rapidly approaching the end of the driving season with the Labor Day weekend. Time sure flies when you are having fun. Gasoline inventories are at their highest level for this time of year since 1984 despite record demand for fuel in June. Gasoline demand in June rose 2.7% to 9.64 mbpd. Crude supplies have declined for nine weeks but they are still more than 100 million barrels over the five-year average. Bullish sentiment that drove prices over $50 and had analysts predicting $60-$65 by year-end has evaporated.

Analysts are already talking about oil in the $30s once the summer driving season ends.

Active land rigs rose +15 to 462 with oil rigs up +14 to 371 and gas rigs -1 to 88. Miscellaneous rigs rose 1 and offshore rigs declined -3 to 19. That was the biggest gain in oil rigs since early 2015. The stagnant gas rig count and low injections into storage have pushed nat gas prices up to $2.80 and near an 8-month high.

The dollar hit a 4-month high at 97.35 on the Dollar Index. This helped push crude prices lower along with the rest of the commodity sector. This will continue to pressure earnings for multinational companies.


I know as soon as I turn bullish in my comments here that will be the kiss of death for the rally. However, a longtime reader named John, claims I am already drinking the Kool-Aid despite my constant warnings about being "overly long."

There is always a hesitance to commit to a direction when that direction goes against the obvious fundamentals. However, when multiple indexes are breaking out to new highs and the S&P is 45 points over its last resistance, it is hard not to be bullish.

Typically, there are events along the way that signal a trend change. The current market had been range bound around S&P 2,100 since December 2014. Portfolio managers were lulled into a false sense of complacency that the markets would remain range bound or in decline ahead of Brexit, elections, weak earnings and the weakest two months of the year in Aug/Sep. They have been sitting on the most cash since 2001 and got caught off guard.

Now they have to buy the market as long as it keeps going up. They cannot afford to sit in cash while their competition is buying stocks and the markets are making new highs.

The key question now is how high can the market go while it remains this overbought? I noticed in Keene's commentary on Thursday he is projecting potential reversals at 2,177 and 2,293. Blue sky forecasting is very difficult because all the easily seen resistance levels have already been broken. Traders have no obvious target. The vast majority of traders are not technicians so they are flying blind.

We have to watch other indexes more closely to see if they are going to breakout as well. The broader the index the more representative of the broader market. That is why I listed the VTI and $RUA at the beginning of this commentary. They are both 3,000 stocks and both are breaking out. The Dow and S&P get all the attention but they are the stocks with the biggest market cap. The other 4,500 stocks with a smaller market cap are still important to market direction. We talk all the time during most market rallies that the generals are leading the charge and the troops are following reluctantly. That is true today as well with the Dow and S&P the farthest into their new highs but the troops are also beginning to charge.

Another way we can monitor the market is with the charting tools. Keene uses a shorter duration MACD at (8,13,5) compared to the standard MACD at (12,26,9). I am using Keene's tool settings today because he is a CMT and that stands for Chartered Market Technician not Certified Massage Therapist. According to the shorter MACD the S&P is on the verge of rolling over. However, the index closed at a new high on Friday ahead of the weekend event risk. That suggests the index could continue higher temporarily despite the weakness in the indicator. The only indicator that is foolproof is hindsight.

When the markets are in blue-sky territory, the prior forecasts from market analysts become more important. As each target price is hit, traders will watch to see if the market is going to stop before they put new money to work. According to S&P, the consensus analyst estimates is for the S&P to end 2016 at 2,175 and exactly where it closed on Friday. The average for the 15 analysts below is 2,161. Remember, this is where they expect the S&P to finish the year, not where they expect it to top out. Most do expect a late summer decline ahead of the election.

I apologize if any of these have changed and I missed it. With the recent market volatility, I know estimates have been revised almost daily by somebody. These estimates were collected over the last 90 days.

Bank of America, Savita Subramanian, 2,000.
JP Morgan, Dubravko Lakos-Bujas, 2,000.
Wells Fargo, Chris Haverland 2000-2100.
Goldman, David Kostin, 2,100.
BMO Capital, Brian Belski, 2,100.
Credit Suisse, Andrew Garthwaite, 2,150.
Citigroup, Tobias Levkovich 2,150.
Morgan Stanley, Adam Parker, 2,175.
UBS, Julian Emanuel, 2,175.
Wells Fargo, Scott Wren 2190-2290.
Barclays, Jonathan Glionna, 2,200.
Deutsche Bank, David Bianco 2,200.
S&P Capital IQ, Sam Stoval, 2,250.
Oppenheimer, John Stoltzfus 2,300.
Fundstrat, Tom Lee 2,325.

On a simple trend line projection the S&P could continue to 2225-2240 but over a very long timeframe like the 8-years below it is hard to expect enough portfolio managers to be watching the progression and decide to exit at that resistance level. To put it simply, the market will stop where it stops and a couple weeks later there will be a dozen analysts saying "I told you it would stop there."

One factor that could impact the market significantly is the Q2 earnings cycle. This coming week is the busiest week with Thursday the busiest day of the cycle. Over 175 S&P companies report earnings next week. Once these core earnings are behind us there will be less excitement about the lower quality companies that will follow. Next Friday is the point where the summer doldrums, low volume and diminished earnings interest can produce an inflection point for the market. With Aug/Sep historically the two weakest months of the year, a strong case can be made for the rally to end.

The Dow had an incredible rally of more than 1,500 points but it appears to have stalled at just over 18,500. The index has gone sideways as some companies beat on earnings and others disappointed. There are 12 Dow components reporting earnings next week. As earnings excitement fades, even positive reports will produce a smaller post earnings bounce while negative reports will still cause declines.

In the chart below, notice the congestion at the highs for last week. The index appears to be losing traction. With the Fed meeting this week, we could see some profit taking just to avoid a hawkish statement about the potential for future hikes.

The Nasdaq finally reached the bottom of the resistance band from 5,100 to 5,160. Now the real test can begin for the Nasdaq. The index is up 526 points (+11.5%) since the 4,574 post Brexit low. We can go an entire year and not see a gain of 11% in normal years. With the Nasdaq very overbought and tech stocks at extended valuations it could be tough to get through that 5100-5160 resistance to a new high. With Apple, Amazon, Amgen, Expedia, Baidu and Google reporting next week there is a lot of opportunity to push the index around with post earnings moves.

I am encouraged by the break over strong resistance by the Russell 2000. After 9 days of sideways movement, the pattern appears to be resolving to the upside with an 11-month closing high. That suggests market sentiment is improving and any further gain should trigger additional short covering. This is the chart to watch. A break higher here could support the broader market while a decline under 1,200 would be a sell signal.

The market is tired. Volume is slowing but as long as the upward move continues, the fund managers will have to keep buying. They have plenty of cash so the move could continue next week. We are running on borrowed time and the peak in Q2 earnings on Thursday could also trigger a peak in the market. August begins the seasonal weakness the following Monday. That is no guarantee the markets will weaken but portfolio managers do have a memory. I suspect they would like to keep some cash handy for the normal September/October buying opportunity.

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

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Random Thoughts

The AAII sentiment survey had an interesting change in direction. Despite the market setting new highs almost every day the bullish sentiment declined -1.4% to 35.4%. Bearish sentiment rose +2.3% to 26.7%. This survey ends on Wednesday and the market was positive the first three days of the week. Investors must be looking at those overextended charts and coming to the same conclusion we are that profit taking cannot be far off.

June was the warmest on record according to the National Oceanic and Atmospheric Administration (NOAA). June temperatures averaged 1.62 degrees over the 20th century average. The six months ending in June were the hottest on record at 2.4 degrees warmer than the end of the 19th century. The El Nino trend boosted global temperatures starting in October but the underlying trend so far this century has been routinely setting records. Arctic Sea ice during the summer melt season covered 40% less area than normal. Source

Elon Musk released his Master Plan Part 2 last week. He said Tesla is going to expand their product line including heavy duty trusks and large passenger transport vehicles like busses. He reiterated they are working towards a fully autonomous vehicle that would be significantly safer than driving yourself. The plans for trucks and busses would be unveiled next year. The bus vehicle is already in development.

He envisions fully autonomous cars that you can summon from anywhere and after it picks you up you could read, sleep or do anything else on the route to your destination.

He said Tesla planned to marry the SolarCity rooftop panels with battery storage and allow individuals to become mini utility companies with a large amount of electricity returned to the grid for a profit.

Tesla changed its web address from TeslaMotors.com to just Tesla.com as it prepares to combine all its products into one gateway website.

Full text of the Master Plan Part 2

Who is this alien on the right in the new Star Trek Beyond movie that debuted this weekend? He is very famous and the third richest person in the world. He is also a Trekie. I guess if you are rich enough you can do anything your heart desires, even appear in a Star Trek movie.

Answer: Jeff Bezos


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"When you say a situation or person is hopeless, you are slamming the door in the face of God."

Charles L. Allen

New Plays

Sector Leader

by Jim Brown

Click here to email Jim Brown
Editor's Note

Networking stocks are on a roll and this one started the excitement. Ciena reported better than expected earnings on June 3rd and the sector spiked on the news. F5 Networks also beat on earnings and that powered the sector plus it sent Cisco Systems to a 10-year high.


CIEN - Ciena Corporation - Company Profile

Ciena Corporation provides equipment, software, and services that support the transport, switching, aggregation, service delivery, and management of voice, video, and data traffic on communications networks worldwide. The company's Converged Packet Optical segment offers networking solutions optimized for the convergence of coherent optical transport, OTN switching, and packet switching. The company's Optical Transport segment transports voice, video, and data traffic at high transmission speeds. Its Software and Services segment offers network management solutions, including the OneControl Unified Management System, ON-Center Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release, and Planet Operate; Blue Planet software platform; and SDN Multilayer WAN Controller and its related applications. This segment also provides consulting and network design, installation and deployment, maintenance support, and training services. The company sells its products through direct and indirect sales channels to network operators.

On June 3rd Ciena reported adjusted earnings of 34 cents that beat estimates for 27 cents. Revenue rose 3.1% to $640.7 million. Software and services revenue rose 27%, global services rose 3.2% and networking platforms 1.9%. International customers accounted for 43% of revenues. Latin America and Asia Pacific both rose more than 20%. They guided for the current quarter to revenue of $655-$685 million. Analysts were expecting $670 million.

After the earnings, somebody bought 20,000 of the October $23 calls for $1.12 with the stock at $20. On July 16th, there was a rumor of a pending acquisition bid for Ciena but analysts dismissed the rumor rather quickly.

Shares are holding at resistance at $20. The next resistance is $22 and then a potential sprint to $25.50. If the holder of those October calls knows something we do not then an acquisition bid is possible. That is a huge buy since the average daily option volume in all strikes is less than 1,200 contracts. Sometimes hedge funds buy a large quantity of calls when they know they will be buying shares of the stock. When they report their stock purchase it can cause the stock to spike and make the calls profitable.

Earnings are Sept 1st.

I am looking to buy CIEN shares with a trade at $20.35, which would be a five-week high. I am also going to recommend we piggyback on those 20,000 calls and buy the same strike for a long-term hold.

With a CIEN trade at $20.35

Buy CIEN shares, stop loss $19.35


Buy Oct $23 call, currently 62 cents. No stop loss.


No New Bearish Plays

In Play Updates and Reviews

Creeping Higher

by Jim Brown

Click here to email Jim Brown

Editors Note:

Thursday's minor decline in the Dow was not erased by Friday's rebound but the S&P did make a new high. The Dow lost 77 points on Thursday and gained only 53 on Friday. The S&P recovered its 7 point loss with a 9 point gain to close at a new high.

There were no market headlines of note in either direction and no economic reports. Volume was light and there were simply more buyers than sellers.

The most bullish event was the close by the Russell 2000 at 1,213. That is an 11-month high and a very slight breakout over resistance at 1,210. That could be our canary in the coal mine for Monday indicating higher highs.

Current Portfolio

Current Position Changes

CUDA - Barracuda Networks
The long position in CUDA shares remains unopened until $21.45

QURE - Uniqure
The short position in QURE shares remains unopened until $7.00.

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

AAOI - Applied Optoelectronics - Company Profile


No specific news. 3-month high close on a minor gain.

Original Trade Description: July 16th.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide.

This is a small but growing company. The share price has been volatile over the last year with a big drop on Q1 earnings that knocked it down from $16 to $8. They had a problem with lower than anticipated yields on a new 40 Gb light engine and had to redesign it and modify the manufacturing process. That was a onetime event that cost them 30 cents a share in Q1 despite record shipments. They saw a 30% increase in shipments of 100 Gb products.

Immediately after the earnings drop shares began to recover and reached $11.80 last week, which is decent resistance. With expectations for a return to profitability in Q2 I expect the $12 level to be broken and some short covering begin.

Earnings are August 4th. They did not warn for this quarter. We have a short window of about two weeks in this position.

Position 7/18/16 with an AAOI trade at $12.00

Long AAOI shares @ $12, initial stop loss $10.85.

No options recommended because of short duration trade.

ANF - Abercrombie & Fitch - Company Profile


No specific news.

Original Trade Description: July 20th.

Abercrombie & Fitch Co. operates as a specialty retailer of casual apparel. The company sells knit and woven shirts, graphic T-shirts, fleece, jeans and woven pants, shorts, sweaters, and outerwear; personal care products; and accessories for men, women, and kids under the Abercrombie & Fitch, Abercrombie kids, and Hollister brand names. As of March 2, 2016, it operated through 754 stores in the United States; and 178 stores in Canada, Europe, Asia, and the Middle East. The company sells its products through its stores and direct-to-consumer sales.

Abercrombie has been pounded from the highs at $33 back in March after some disappointing earnings and weak outlook for the retail sector. Since then they have cleaned up their inventory levels and dumped a ton of bad product choices. Now they are heading into their heavy selling season and ready to go head to head with other stores.

The company has been in a restructuring period for over a year where they remodeled stores, dumped inventory and closed unprofitable locations. The drop from $33 to $16 took all the fluff out of the stock price and shares are moving higher today. They closed at a 2-month high on Wednesday.

If the market begins to roll over, these previously oversold stocks will look like a safe haven for investors looking for a bargain. This is Abercrombie's biggest selling season so sentiment should remain positive through Labor Day. The National Retail Federation said back-to-school spending will rise by 11.4% to $75.8 billion this year of which $9.54 billion will be on clothes. Apparel retailers like ANF get about 15% of their annual sales in the back-to-school season.

Earnings August 25th.

Position 7/21/16 with a ANF trade at $20.10

Long ANF shares @ $20.10, see portfolio graphic for stop loss.

No options recommended.

CUDA - Barracuda Networks - Company Profile


No specific news. Minor gain as it fights resistance at $21.25

The position remains unopened until a trade at $21.45. High today was $21.38.

Original Trade Description: July 21st.

Barracuda Networks, Inc. designs and delivers security and data protection solutions. The company offers cloud-enabled solutions that enable customers address security threats, improve network performance, and protect and store their data. It provides various security solutions and Barracuda Web Security Gateway, a solution to protect users from Web-based threats. The company's security solutions also comprise Barracuda NextGen Firewalls to secure the network and optimize traffic flows; Barracuda Web Application Firewall to protect Web applications and websites from data breaches and downtime; and Barracuda Load Balancer ADC to optimize application performance, availability, and security. In addition, it offers data protection solutions, such as Barracuda Backup, Barracuda Message Archiver, and CudaSign, an eSignature platform. The company sells its appliances, services, and software products to education, government, financial services, healthcare, professional services, telecommunications, retail, and manufacturing industries through its sales personnel, distribution partners, and value added resellers in approximately 100 countries.

On July 7th the company reported adjusted earnings of 20 cents that easily beat analysts for 11 cents. Revenue of $86.7 million rose 11% and also beat estimates for $83.8 million. Recurring subscription revenue rose 20% to $65.3 million because of the success in moving to a cloud subscription model rather than appliance sales. Subscription revenue now represents 75% of all revenue. Active subscriptions rose 14% to over 286,000 customers and the renewal rate was 93%.

Earnings Sept 27th.

After the earnings shares spiked to $18.50 from $15. A day later they spiked again to $19.50 as analysts raised their guidance. Shares consolidated for about three days before beginning to trend higher. Thursday's close was a 9-month high with a 1.7% gain in a weak market.

Shares are about to move over resistance at $21.25 from last November with the next major resistance at $30.

With a CUDA trade at $21.45

Buy CUDA shares, initial stop loss $19.25.

No options recommended due to wide spreads.

FLXN - Flexion Therapeutics - Company Profile


No specific news. 8-week high close.

Original Trade Description: July 18th.

Flexion Therapeutics, Inc. is a specialty pharmaceutical company that focuses on the development and commercialization of anti-inflammatory and analgesic therapies for the treatment of patients with musculoskeletal conditions. It lead product candidate includes Zilretta, a sustained-release intra-articular steroid, which is in clinical trials to treat the patients with moderate to severe osteoarthritis (OA) pain. The company is also developing FX007, a preclinical, small-molecule TrkA receptor antagonist to address post-operative pain; and FX005, a sustained-release intra-articular p38 MAP kinase inhibitor for patients with end-stage OA pain.

In clinical trials the drug Zilretta reduced knee pain by 50% from the baseline from week 1 through week 12. The FDA said the results were enough to support a filing for U.S. approval. The current treatment is a corticosteriod injection that wears off quickly so Zilretta has a good chance of becoming the treatment of choice for current sufferers. Those over the counter drug patients would also be candidates.

Flexion said they can price the drug at $2,000 a year and that is well within normal insurance guidelines so getting insurance payments should not be a problem. Once Zilretta is in the market place and advertising has begun they expect it to produce more than $1 billion in annual revenue very quickly.

Last week they hired three new executives to prepare marketing plans and advertising so Flexion will be ready to go when the drug is approved. While there is no guarantee the drug will be approved, the FDA rarely suggests the clinical results are sufficient to apply for approval if it is not going to happen.

Recently hedge funds Millennium Management and Renaissance Technologies both bought 125,000 share positions.

Earnings are August 4th.

Shares spiked on May 26th to $17.35 on the news the FDA said they could submit the drug for approval. That excitement faded in June to $13 but shares have returned to a positive trend. If we only saw the shares return to $17.35 that would be a 10% gain but I believe they will pass that level on the potential for the approval of a billion dollar drug.

Position 7/19/16:

Long FLXN shares @ $15.89, see portfolio graphic for stop loss.

No options recommended because spreads are too wide.

HPE - Hewlett Packard Enterprise - Company Profile


No specific news. Closed back over $20. If we can get one good day well over $20 it should trigger a lot of short covering.

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


Shares posted a small gain but rebounded from a significant drop at the open.

The earnings date changed from 8/8 to 7/28.

Musk said he had spoken with the largest investors in SolarCity and he expects a "super majority" to support the acquisition.

I expect Tesla will have to pay more than the $26-$28 it has offered to buy the company. I am still expecting a counter offer in the $30-$32 range.

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.

Update 7/18/16: SCTY raised $345 million in tax equity from four separate partners in June to finance new solar projects. The money will be used to fund new installations. The company also increased its operating line by $110 million by adding two new lenders to the facility. The SCTY capital team has raised more than $1.5 billion in project financing in 2016. They now have more than 30 different banks and corporate partners with financing available 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.

TWTR - Twitter - Company Profile


Raymond James cut Twitter from outperform to market perform saying expectations may be too high. Twitter has earnings after the bell on Tuesday. I have mixed emotions about holding over the report. They have so many new programs their guidance could be out of the park. I am recommending we buy a August $17.00 put currently 71 cents. If shares spike after earnings we will sell the put and take a loss but the spike in Twitter shares should offset that premium loss. If shares crash after earnings we will exit the shares and hopefully earn a profit on the put. If the earnings are ugly we could see shares retrace significantly to $16 or worse. If the earnings/guidance is good we could see a move to $20. Our cost in the shares currently is $17.24.

Buy AUG $17 Put, currently .71, no stop loss.

Original Trade Description: July 6th.

Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.

Twitter's monthly active users have flat lined for many months with almost no growth. New users come into the system, get confused and overwhelmed and then leave just as quickly. There was nothing "sticky" to keep them on the system unless they were a news junkie or addicted to the next wild comment from Donald Trump.

Twitter is trying to change that with Twitter Live. They are testing the concept this week with a live twitter video feed from Wimbledon. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. Twitter has already announced several live events they are going to stream. They paid $10 million to the NFL to stream 10 of the Thursday night games. Live news stories are also being tweeted.

Analysts have been pleasantly surprised and claim "this may actually be something useful from Twitter." If they can successfully transform themselves from a 140 character shorthand rant site into a site with thousand of live streams of everything under the sun then they may actually avoid obsolescence.

Shares have been rising since the $14 low on June 10th and appear poised to break over resistance at $18. By reinventing themselves as a live stream video portal they open up a significant advertising opportunity and could actually attract some big money buyers looking for a social media acquisition. Apple and Google are the permanent favorites constantly mentioned as possibly having interest. If they see that Twitter is suddenly becoming relevant again, they could pull the trigger.

This time last year Twitter was trading around $38 and their historic high was around $75 so even without an acquisition offer they could rebound significantly.

Twitter has been a slow mover even though it is up $3 in three weeks. If it were to move over that $18 resistance it could pick up speed as investors come back for a second or third look and realize the company is evolving.

Do not buy this with expectations for a quick bounce and out. If you enter this position, you should look for a slow move to $20 and then reevaluate the position. Over $20 could trigger some real short covering.

Earnings July 26th and we could hold over the event depending on the news flow and stock level.

Position 7/7/16:

Long TWTR shares @ $17.24, see portfolio graphic for stop loss.

I am not recommending an option because of the recent history of slow movement. However, a long-term option may be the correct way to play this position. Your risk is known in advance and the cost of entry is very low. Here are some examples.

Sep $19 Call $1.04
Dec $20 Call $1.51
Jan $20 Call $1.64

BEARISH Play Updates

QURE - UniQure - Company Profile


No specific news. QURE has not yet hit our entry trigger at $7. Shares fell -3% on Friday.

The position remains unopened until a drop to $7.

Original Trade Description: July 19th.

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.

Earnings August 25th.

Shares have been declining for the last week and are very close to a new low. We played this back in June when it was making that low and were stopped out for a gain when it rebounded. I think it will set a new low this time and probably sink to $5.

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.

With a QURE trade at $7.00

Short QURE shares, initial stop loss $8.00.

No options recommended.

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


The VXX closed at 11.17 and 2 cents above the new historic low set on Wednesday at 11.15.

We are probably going to be in this position for a long time as it declines to new lows well under $12 this summer. Around $10 and they will do another reverse 1:4 split. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

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.

JKS - Jinko Solar - Company Profile


No specific news. We have a long August $21 call that we added as insurance to the short on JKS shares. If JKS breaks back above $19 we should see that call appreciate.

Original Trade Description: July 13th.

JinkoSolar Holding Co., Ltd., engages in the design, development, production, and marketing of photovoltaic products in the People's Republic of China and internationally. The company operates through two segments, Manufacturing and Solar Power Projects. It offers solar modules, solar cells, silicon ingots, silicon wafers, and recovered silicon materials. The company is also involved in the solar power generation activities; engineering, procurement, and construction of solar power projects; connecting solar power projects to the grid; and operation and maintenance of the solar power projects, as well as provides solar system integration and processing services.

For Q1 the company reported earnings of $1.68 that easily beat estimates for $1.11. revenue of $848 million also beat estimates for $714 million. Shares spiked to a new two month high and immediately began to slide and that slide is continuing. Operating expenses rose 80.3% to $91.8 million. Interest expenses rose +101% as the company took on more debt to finance projects.

Only 4 analysts have current recommendations on JKS. Those are Jefferies, Roth capital, Morgan Stanley and Zacks. All are strong buys. The consensus price target is $31. If they begin to change their recommendations because of the falling stock price that should cause further declines.

Earnings August 18th.

In theory Jinko is positively positioned to continue growing. However, solar capacity in China is very over supplied. Selling prices are falling and new processes constantly make old manufacturing techniques outdated and overly expensive. Constant upgrading to new manufacturing requires capital and time that constrains output from the old processes.

Short interest is over 15% on JKS. Shares appear poised to break below support at $19. They traded as low as $14 last August. I am suggesting we short JKS but buy an August $21 call option just in case the analyst recommendations suddenly cause a reversal in the trend. If JKS shares do break under $19 we will recover the 75 cents paid for the option very quickly. If the stock reverses sharply we have upside protection.

Position 7/14/16 with a JKS trade at $19.35

Long August $21 call @ 70 cents, no stop loss.

Previously Closed 7/20/16: Short JKS shares @ $19.35, exit $19.05, +.30 gain.

SHLD - Sears Holding - Company Profile


No specific news. Shares are creeping higher and closed at a 3-month high.

We were stopped out on the long in SHLD shares on the 14th. The long call was optional and we are tracking it here with no stop loss.

Original Trade Description: July 11th.

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. As of October 31, 2015, this segment operated 735 Sears stores.

I probably did not need that big company description paragraph because everybody knows about Sears. They have fallen on hard times in recent years but they are struggling back. Sears is charging forward with "brand extensions" of its existing brands including Kenmore, Craftsman, DieHard, etc. What is a brand extension? Everybody knows about Kenmore appliances. They have been around for 75 years. But soon you will see Kenmore sinks, facets, and many more items carrying that name. Sears is preparing to market a DieHard line of tires because the DieHard brand is the leading brand for batteries. They are also reducing the store count and selling some real estate. They are also moving to stores within a store. This is where brand name companies rent a certain amount of floor space to sell their products. Sears gets a commission and does not have to order or inventory any products. This reduces overhead and allows for better management of the individual product sections.

Whether it will work or not remains to be seen but it appears they have stopped the bleeding and are now focusing on rebuilding the business.

Shares bottomed at $10 in May and Monday's close at $14.48 was a two-month high. Next resistance is around $18.50.

Earnings are August 18th.

Position 7/12/16 with a trade at $14.65

Long Sept $16 call @ .88, no stop loss.

Previously closed 7/14/16: Long SHLD shares @ $14.65, exit $13.75, -.90 loss.

VNET - 21Vianet Group - Company Profile


VNET shares have flat lined at $9.50 as the buyers and sellers jockey for position. It could go either way and we have a $9 put option.

Original Trade Description: July 2nd.

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.

Position 7/5/16:

Long August $9 put @ 85 cents. No initial stop loss.

Previously Closed 7/11/16: Short VNET shares @ $9.57, exit 9.88, -.31 cent loss.

WIN - Windstream Holdings - Company Profile


No specific news. Shares dipped during the week but recovered on Friday.

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 expiration.

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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