Option Investor

Daily Newsletter, Monday, 8/1/2016

Table of Contents

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

Market Wrap

The Dog Days Of August

by Thomas Hughes

Click here to email Thomas Hughes


The S&P 500 flirted with new all time closing highs as we enter the dog days of August. Today's action was dominated by global PMI data although last week's poor US GDP figures and ongoing decline in earnings expectations are also weighing on sentiment. Data released today was also not too positive and did not help support the market. The ISM Manufacturing index fell more than expected and construction spending came in at a one year low.

PMI data from both China, Britain and the EU fell in the last month, adding to fear of slowing global growth. In Asia indices were mixed. The Japanese and Hong Kong markets were able to post gains but mainland China shares fell as the governments official PMI came in at a contractionary 49.9 versus the expected 50.0. A private read of PMI from Caixin shows that the smaller and mid-sized Chinese business segment is expanding.

In Europe indices closed flat after an initial move higher. PMI in Britain and the EU both fell, Britain into contraction, which added to negative sentiment inspired by lack luster banking stress tests. The tests show that many of the EU's banks will have a hard time dealing with toxic loans in the event of a financial crisis. The major criticism of the tests, and a reason why they may be overly optimistic, is that they do not include provisions for fall-out from the Brexit.

Market Statistics

Trading was light and choppy today. Futures trading was without momentum, indications for a mildly positive open held steady for most of the early morning. At the open traders seemed unsure which way to go, the indices wavered at break even level for about 5 minutes before making a small move lower to test support. This produced a small bounce which lasted about an hour and half and took the S&P 500 up to set a new all-time intraday high. This high was not held, bears quickly stepped in and spent the next hour and half pushing the indices lower to set a new intraday low. From that point forward the indices drift near the bottom of the daily range until the close of trading.

Economic Calendar

The Economy

There were a couple of domestic economic reports today, both out at 10AM. The ISM Manufacturing Index fell more than expected to 52.6 in July. This is down -0.6% from last month, expectations were for the index to remain flat. Within the report new orders, employment and deliveries all fell. New Orders remains expansionary at 56.9 as does deliveries at 51.8. Employment fell below 50 to 49.4. Production and inventories both rose, production to 55.4 while inventories remain in contraction at 49.5. Basically this is a mixed report, consistent with recent trends in manufacturing. The pace of manufacturing is expanding, but that pace is slowing while overall, inventories continue to contract. Prices paid are also falling, reducing the impact of near term increases in inflation.

Construction spending fell in June by -0.6%, analysts had been expecting a gain in spending of 0.7%. The previous month was revised higher though, up 0.7% to to -0.1%. This month's total is a 1 year low but up 0.3% over this same time last year, and up 6.2% year to date.

Moody's Survey Of Business Confidence rebound from last week's low. The index gained 1.7 to hit 25.3, a four week high. Mr. Zandi says confidence is up but remains fragile, the US remains sturdy. Regardless, global sentiment remains near the multi-year low and will take more than one week of rebound to signal reversal.

Earnings growth for the 2nd quarter fell over the last week, the FactSet blended rate dropping -0.1% to hit -3.8%. This is up from the -5.8% expected at the start of the reporting period but negative nonetheless. So far 63% of S&P 500 companies have reported, 71% beat earnings expectations and 57% beat revenue expectations. At this time only 6 of the 10 sectors are beating expectations, down from 8 a week ago. Another 118 or 23.6% of the index will report this week.

Outlook for earnings continues to decline. Looking out to next year, full year 2017 is still expected to see earnings growth of 13.3%. However, in the nearer terms, Q3, Q4 and full year 2016 have fallen again with full year 2016 outlook on the verge of turning negative. The 3rd quarter growth estimate has now fallen deeper into negative territory, -0.6% while 4th quarter outlook remains positive, but lower than last week by -0.3%, at 6.3%. Full year 2016 outlook now stands at 0.1% and could easily turn negative as early as next week.

This is going to be a big week for data. Tomorrow is auto sales, income and spending and PCE prices. Wednesday is ADP Employment and ISM Services. Thursday is weekly jobless claims, Challenger Job Cuts and Factory Order. Friday wraps the week with consumer credit, NFP, unemployment and hourly earnings.

The Dollar Index

The Dollar Index held relatively steady today but did make some small gains. The index gained about 0.29%, rising from last Friday's closing level, but did not make significant gains. The indicators are both bearish and moving lower, suggesting prices will move lower as well. Near term support appears to be at the 61.8% retracement level, a fall from the current level could result in a move down to the next support target near $94.31. This week's data will be important, if it is as weak as today's and last week's GDP it will likely help drive the dollar lower.

The Oil Index

Oil prices tanked today. WTI fell below $40 for the first time in months, shedding more than -4% intraday and closing with a loss near -3.5%. Oversupply concerns are pressuring the market. A weekend report that OPEC output likely increased to a near term high last month as well as rising US rig counts are to blame. On the OPEC side of things Nigerian and Iraq are to blame, coming back on line after spring and early summer outages. On the US front, rig counts are expected to rise again this week as well. Today's move only barely broke $40 however, a level that may prove to become support as it was twice in April. If support holds a move to $45 looks likely, a break below this level is possible though, with downside target near $35. While oil prices are correcting, there is still expectation for a general market rebalance in the next 12 months or so so they may not fall to much further. This week's US storage data and rig counts could be the deciding factor, economic data will also surely have an impact on outlook.

The Oil Index fell -3% on the fall in oil prices. The index broke below the 1,100 level and looks set to test support at the bottom of the almost four month range. The indicators are both bearish and pointing lower, suggesting a move to support is likely, but both are weak and remains consistent with a trading range.

The Gold Index

Gold prices held steady near the one month high. The metal is being supported by safety seekers as well as a falling dollar and weak US economic data. This week's data will likely help push gold higher even if it comes in as expected, provided it does not raise the specter of an FOMC rate hike. Upside target is near $1380 with a chance of going higher if the data is weak. For now, it looks like $1350 could be near term support with $1310 as next target should a deeper pullback occur.

The gold miners are moving higher on higher gold prices and expected strength in earnings. The miners ETF GDX gained about 0.65% to set a near 3 year high. The ETF looks like it could continue higher but it will need to break through resistance first. Resistance is between $30.80 and $31, consistent with a reversal which occurred late August 2013. The indicators are consistent with a test of resistance but not yet showing strength. Stochastic has rolled into a weak signal, MACD has not yet confirmed but may do so this week should the move to test resistance continue. A move above resistance would be bullish and could take the ETF up to $34.50 in the near to short term.

In The News, Story Stocks and Earnings

Tesla announced this morning it had reached an agreement with SolarCity to purchase the solar energy company, both led by Elon Musk. The deal is an all stock transfer valuing SolarCity at $25.83 per share, about $2.6 billion and below previous forecasts. Together, the companies expect to save about $150 million through cost synergies the first year alone. Musk defended the move saying it is based on “really long term thinking” where SolarCity could provide power solutions for Tesla vehicles, among other opportunities. The deal is subject to SEC approval. Shares of both companies fell on the news, Tesla by -1.78% and SolarCity by -8%.

Verizon announced it was making another acquisition, Fleetmatics. Fleetmatics is a global fleet and mobile workforce tracking company with a suite of SaaS applications. The deal is worth $60 a share in cash and is expected to close in the 4th quarter, subject to regulatory approval. This is the second major acquisition in the last few weeks including the deal to buy Yahoo! and following a better than expected earnings report. Shares of Verizon fell -1.5% on the news and set a one month closing low below the short term 30 day moving average.

Texas Roadhouse reported after the bell. The maker of delicious steaks reported revenue below estimates with a $0.02 beat on earnings driven by declining food cost. Comp sales at company owned stores rose more than 4%, gross margins rose more than 300 basis points and forward outlook includes 2.5% to 3% foodcost deflation in the coming year. Shares of the stock fell more than -4% on the news.

The Indices

The indices continue to churn near recent highs, today's action was very light and a little choppy led by the NASDAQ Composite. The tech heavy index was the only to score gains in today's session, about 0.3%, and set a new one year high. The indicators remains bullish I would expect to see the index continue to drift higher, possibly setting a new all time high, although momentum continues to decline. The all time high is next likely target for resistance, only about 30 points above today's close, and should be viewed with caution as a likely spot for profit-taking and potential reversal. A break above this level could be bullish but again, caution is warranted due to seasonality, earnings outlook and low market volume.

The S&P 500 made the smallest decline among the remaining major indices, about -0.13%. The broad market set a new all-time intraday high in today's session, but only by 1.2 points and trending sideways overall. This consolidation is good for the bulls providing another bullish catalyst emerges but without that indications a pull back is on the way continue to grow. MACD momentum created a bearish crossover, confirming a similar crossover in stochastic formed last week. Stochastic is still high in the upper signal zone but moving lower and fast approaching the signal line, a cross of which would indicate some weakness in the market and provide additional bearish confirmation. Near term support is near 2,160, a break below which would be bearish and could lead to additional downside. Next downside target would be the short term moving average near 2,130.

The Dow Jones Industrial Average fell a little more than the SPX, about -0.15%, and appears to be making a quiet retreat to near term support. Today's action created a small spinning top candle, did not make a new high and appears set to continue lower. Both indicators are bearish and moving lower, consistent with a retreat to support, with first target near the previous and recently broken all-time high. This move could be crucial for the next phase of the market as a successful test of resistance turned support would confirm the break out. If confirmed another leg of rally could follow with upside targets of 19,000 in the near to short term. If support fails and prices fall back below 18,300 further downside should be expected with possible targets near 18,000 and 17,750.

The Dow Jones Transportation Average made the largest decline, about -0.3%, and is sitting on support at the short term moving average. Today's action is the third day support has been tested and the indicators suggest it will be tested further, both MACD and stochastic are moving lower following bearish crossovers. If support at the short term moving average fails next support is just below at the 7,750 level. A break below this level would be bearish and could take the index down to the 7,500 level in the near term.

I am beginning to feel like the boy who cried wolf but I remain cautious on the market. There are many reasons why the market could correct in the next month, the number one of which remains declining forward earnings outlook. Earnings growth, for the broad market, is largely predicated on earnings growth in the energy sector. Full year 2016 and 2017 energy sector earnings growth swelled on the back of $50 oil, at $40 those estimates are likely to fall and could bring the entire market down with it. Add to this the seasonality of late summer trading and tepid domestic and global economic data and the chances for an August swoon grow.

I could be wrong, this week's data and earnings reports may come in stronger than expected, or oil could rebound, and fuel the rally but it didn't happen today. Friday's jobs report may be the catalyst to move the market one way or the other but that is still a few days away.

Until then, remember the trend!

Thomas Hughes

New Plays

Crowded Market

by Jim Brown

Click here to email Jim Brown
Editor's Note

Multiple competitors are pulling out all the stops to build market share and it hurts when you are the small guy on the block. Going head to head with Nike, Under Armour and Adidas is sure to give you some bruises.


No New Bullish Plays


SKX - Skechers - Company Profile

Skechers U.S.A., Inc. designs, develops, markets, and distributes footwear for men, women, and children; and performance footwear for men and women under the Skechers GO brand name worldwide. It operates through three segments: Domestic Wholesale Sales, International Wholesale Sales, and Retail Sales. The company offers casual footwear, including boots, shoes, and sandals for men, as well as oxfords and slip-ons, lug outsole and fashion boots, and casual sandals for women; dress casuals, seasonal sandals and boots, and relaxed fit casuals for men and women; and casual fusion line for young men and women under the Skechers USA brand. It also provides footwear collection for men and women, including lightweight sport athletic lifestyle products, classic athletic-inspired styles, and sport sandals and boots under the Skechers Sport brand name; casual and sporty styles sneakers for females under the Skechers Active and Skechers Sport Active brand; and footwear for women and girls under the BOBS from Skechers name. They operate 1,548 stores with 1,144 outside the USA. They plan to increase that total count by adding another 200 stores before the end of 2016. They opened 133 stores in Q2.

In the recent Q2 cycle they reported earnings of 48 cents that missed estimates for 51 cents. Revenue rose 9.6% to $877.8 million. The revenue was a bigger problem than the missed earnings. Over the last three quarters they averaged a 27% increase in sales. The 9.6% rise was the worst quarter since Q3-2012. In the U.S. revenue actually declined -5.4% with most of the gains coming from overseas. Sales internationally rose 40% but the stronger dollar took a big bite out of profits. They also complained about a warehouse fire in Malaysia and additional VAT taxes in Brazil.

However, the biggest problem is the increased competition from Under Armour and Nike. UA is rapidly expanding its line of running shoes and Nike is increasing the variety of less expensive shoes after their $200+ offerings did poorly over the last two quarters. Under Armour announced it was going to launch a shoe dept in 1,100 Kohl's stores. That gives them broader exposure and it will be at a lower price point.

Skechers has a tough road ahead. They are trying to break into the highly competitive U.S. running shoe market and have been doing rather well but the big guys are determined to push SKX back to the sidelines.

Earnings Oct 20th.

Shares fell from $32 to $25 on the earnings and have continued to move to lower lows in a positive market. If the broader market rolls over the decline could accelerate.

Sell short SKX shares, currently $23.81, initial stop loss $25.25

Optional: Buy Sept $22 put, currently .55, no initial stop loss.

In Play Updates and Reviews

Dow Weakness

by Jim Brown

Click here to email Jim Brown

Editors Note:

We may be coming to the end of the road for this rally based on the Dow's performance. The Dow declined to 18,355 intraday and well under the critical support at 18,400 but the index managed to return to close at 18,403. This may have prevented a technical close under support but the week of lower lows suggests the next directional move could be lower.

The S&P lost -3 points and all the other indexes were negative except for the Nasdaq, which was supported by 2.4% move in the biotech sector. Falling oil prices were to blame in part with the major companies declining sharply as oil dipped under $40.

Current Portfolio

Current Position Changes

HPE - Hewlett Packard Enterprise
The long position was stopped at $20.75.

TWTR - Twitter
The long put position was closed at the open.
The long share position was entered at the open.

RDN - Radian Group
The long position remains unopened until a trade at $13.15.

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

ANF - Abercrombie & Fitch - Company Profile


No specific news. Dead flat.

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. Coverage initiated by Rosenblatt Securities with a buy rating.

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.

Position 7/22/16 with a CUDA trade at $21.45

Long CUDA shares @ $21.45, see portfolio graphic for stop loss.

HPE - Hewlett Packard Enterprise - Company Profile


We were stopped out on the morning dip at $20.75. I had set the stop loss tight because of Friday's spike and the August option was running out of time. HPE will move with the Dow and the Dow has been weak. The next time HPE dips we will jump back in.

Credit Suisse raised the price target from $21 to $25.

Original Trade Description: June 2nd.

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

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

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

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

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

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

Earnings Aug 23rd.

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


Position 6/28/16:
Closed 8/1/16: Long HPE shares @ $17.50, exit $20.75, +3.25 gain.

Position 6/3/16:
Closed 8/1/16: Long August $20 call @ 40 cents. Exit $1.20, +.80 gain.

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

RDN - Radian Group - Company Profile


No specific news.

Position remains unopened until a trade above resistance at $13.15. High today was $13.04.

Original Trade Description: July 30th.

Radian Group Inc. provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance, and Mortgage and Real Estate Services. The Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It offers primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment provides outsourced services, information-based analytics, and specialty consulting services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other asset-backed securities. This segment offers loan review and due diligence, monitoring of mortgage servicer and loan performance, valuation and component services, real estate owned asset management services, and outsourced mortgage services. Radian Group Inc. was founded in 1977.

With the new credit rules borrowers have to have more money down and a higher credit score to qualify for a home loan. Even then there is sometimes the requirement for credit insurance to allow the loan to be sold in the secondary market. Radian provides the insurance and does the due diligence required to write the insurance profitability. They continue to monitor the mortgage servicers to prevent the loans from going to deep into default by being proactive.

In their recent quarter they reported earnings of 38 cents that missed estimates for 40 cents. However, shares went up because of the positive guidance. They are writing more insurance on better credits. They wrote insurance on $12.9 billion in loans, a 60% increase from the $8.1 billion in Q1. Of the loans written 57% of the borrowers have FICO scores over 740 compared to 26% in 2007. Only 7% of loans underwritten had loan to value greater than 95% compared to 24% in 2007. Some 86% of insurance in force is on new loans written after 2008. Because of the higher scores and the smaller loan to value on most loans they were able to reduce their loan loss reserves from $1.204 billion to $848 million.

They are paying off debt and redeemed a $325 million note. They had $718 million in liquidity at the end of the quarter. They authorized another $125 million share repurchase and the board authorized the early redemption of $196 million in senior notes due in 2017. In Q2 they also bought back $12.4 million of convertible notes due in 2019.

Earnings Oct 27th.

Despite the minor earnings miss the company appears to be doing everything right. Shares have risen for two consecutive days after their earnings. Resistance is $13 and they closed at $12.90 on Friday. If they break over that resistance the gains could accelerate.

With a RDN trade at $13.15

Buy RDN shares, initial stop loss $11.85.


Buy Sept $14 call, currently .20, no stop loss.

SCTY - Solar City - Company Profile


I am really hostile at the SolarCity board today. Elon Musk had previously offered $26.50 to $28.50 for SolarCity. Shares had rallied to $27.50. News broke on Sunday that the companies had reached an agreement to merge. With the shares at $27.50 and having recently traded at $34.50 the obvious conclusion is that the board was able to get Musk to raise his bid and sweeten the deal.

Today the board announced a deal for $25.37. This is not a takeover but a take under. What possible negotiating tactic could Musk have used on the board to make them agree to a price $2 below where they were trading? The ambulance chasing securities lawyers will be all over this transaction.

The only benefit SCTY received was a go-shop period of 45 days to try and find someone else to offer them more money. That is not likely to happen.

I had recommended closing SCTY at the open on Monday with the shares just under $27. When I saw the news on Sunday evening I emailed everyone recommending we not sell at the open in expectations of getting a higher price when the deal was announced.

The joint conference call was held before the open and shares opened at $25.33 so the damage was already done. I am recommending we close the position at the open on Tuesday to save our existing gains. Tesla shares are likely to go lower on the deal and they have earnings on Wednesday. They normally decline after earnings.


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.

Position 7/28/16: Long July $27 put @ .45.

TWTR - Twitter - Company Profile


Twitter announced a new live-streaming event of the red carpet premier of Warner Brothers picture "Suicide Squad" scheduled for Monday at 6:PM ET. Twitter is going all out to generate content for its live-stream offerings.

We closed the long put at the open and bought TWTR shares to reestablish our prior long position.

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 8/1/16:

Long TWTR shares @ $16.64, see portfolio graphic for stop loss.

Position 7/25/16:
Closed 8/1/16: Long Aug $17 put @ 62 cents, exit .85, +.23 gain.

Previously closed 7/28/16: Long TWTR shares @ $17.24, exit $15.89, -1.35 loss.

BEARISH Play Updates

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


The VXX closed at 10.02 and a new historic low. Barclay's announced a 1:4 reverse split for the VXX effective when they open for trading on Tuesday August 9th. I am recommending we close the position to avoid the rush. When the last 1:4 reverse split occurred there was a three day rally in the shares ahead of the event. This was more than likely short covering.


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. The last three 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. If it falls under $10, they will do another reverse split and start the decline all over again.

Position 6/24/15: With a VXX trade at $17

Short VXX @ $17, no stop loss.

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