Option Investor

Daily Newsletter, Tuesday, 8/2/2016

Table of Contents

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

Market Wrap

Transport Crash

by Jim Brown

Click here to email Jim Brown

The Dow Transports lost more than 2% as the airlines crashed and railroads derailed.

Market Statistics

German carrier Lufthansa warned on passenger volumes because of ISIS fears and Delta said unit revenue fell -7% in July. Delta blamed the decline on a rise in capacity, low fares for last-minute bookings and huge swings in currencies. Lufthansa said recent terror attacks in Europe and heightened global distress had caused a "tangible impact on passenger volumes." The CEO said "our industry has to prepare for a difficult second half-year." "Forward bookings, in particular for our long-haul services to Europe have declined significantly."

Delta (DAL) shares fell -8%, United (UAL) fell -6%, American (AAL) -6% and JetBlue (JBLU) -6.5%. In North America, the airlines are also fighting the Zika epidemic with travel to Latin America slowing over fears of the virus.

The drop in the airlines and continued drop in the railroads because of low oil prices pushed the Dow Transports to a big loss and that weighed on the Dow Industrials and the market in general.

Also complicating the markets for Tuesday was a lackluster stimulus program from Japan. Prime Minister Shinzo Abe announced a $274 billion stimulus program but only $73 billion is actually new direct spending. The 28 trillion yen program is spread out over several years rather than provide a needed immediate injection into the economy. Part of the program is a 15,000 yen ($147) payment to 22 million low-income individuals, an increase in the number of child care facilities for working parents and compensation for employers for longer maternity leaves. The Nikkei fell -1.5% on the news as investors were hoping for a much stronger and more immediate program. This is the 26th stimulus program announced during the current decline in the Japanese economy. There was a new 2-month study commissioned on the impact of Japan's monetary policy after which they could launch a new program. The drop in the Nikkei contaminated the European indexes and there were losses all around.

There were a lot of lightweight economic reports today and none of them were market moving other than the auto sales for June. Sales rose from an annualized 16.66 million pace in June to 17.88 million for July thanks to dealer incentives that were the highest since Nov-2010. Estimates were for 17.4-17.6 million. However, the big three manufacturers struggled to put any gains on the board.

GM sales fell -1.9% in July to 267,258 vehicles. Ford sales declined -3% to 216,479 vehicles. Fiat Chrysler reported only a 0.3% rise to 180,727 vehicles thanks to a 22% increase in fleet sales. U.S. retail sales were down -2% to 155,855.

The NY ISM rose from 45.4 to 60.7 and the highest level since the 62.0 in December. However, three of the four internal components were still in contraction territory under 50. Employment did improve from 35.9 to 45.3 but remains in contraction. The six-month outlook fell from 59.5 to 56.8 but remained in expansion territory.

Personal income for June rose +0.2% and flat with May. Analysts were expecting a +0.3% rise. The PCE Deflator rose +0.1% after a +0.2% gain in May. Gasoline rose 2.4%, housing +0.3% and healthcare rose +0.2%. However, durable goods fell -0.3% and motor vehicles and parts declined -0.2%. The headline PCE inflation over the last 12 months is now 0.9% compared to the Core PCE over the same period at 1.6%. Declines in food prices actually lowered the headline number. Personal spending for June rose +0.3% after a 0.3% rise in May.

Semiconductor billings for June rose +1.1% and the biggest gain since October at +2.0%. Unfortunately this was down -5.8% from the same period in 2015. Weak overseas demand and financial volatility are slowing economic expansion and the demand for semiconductors. Of course, that is all relative since sales for June were $26.4 billion. Sales in the U.S. rose +0.9% but they are down -10.8% from year ago levels. Asia Pacific demand declined -0.8% and is 11% lower from the year ago period. Chinese sales rose 4.1% and they are up +1.7% year over year.

On tap for Wednesday is the ADP Employment report where estimates have declined -10,000 since last week to a gain of only 170,000. The Nonfarm Payroll estimate for Friday has also declined about 10,000 to 175,000 compared to the 287,000 reported for June. These reports will be critical for Fed thinking when they meet again in late September. They will also have the August jobs numbers before that meeting. Various Fed heads are starting to talk about rate hikes again although they are remaining elusive on the timing. I think it is just a conspiracy to try and talk up rates even though they know they will not be hiking until 2017.

Biogen (BIIB) spiked $28 at 2:30 on rumors Allergan (AGN) and/or Merck (MRK) were in discussions about an acquisition. The WSJ said the companies had held talks but they were only in the preliminary stages. Since Biogen had a market cap at the close of $72 billion it would be a whopper of a deal. Merck has a market cap of $162 billion and Allergan $101 billion. One analyst said it was very unlikely Allergan would actually be a strong bidder after they were shot down on the attempted Pfizer acquisition. The rumor and the spike in Biogen shares helped lift the Nasdaq off its intraday lows.

Deutsche Bank (DB) and Credit Suisse (CS) are being dropped from the Stoxx Europe 50 index for the first time since 1998. Both stocks have declined more than 50% this year as a result of negative rates and European economic weakness. The exchange operator said they were being ejected using a "fast exit" rule where a company on the index can be ejected if they fall to 75th or lower in the list of companies being considered for additions. That means there are 75 companies more in favor than DB or CS.

Electronic Arts (EA) reported earnings of 7 cents compared to estimates for a loss of 2 cents. Revenue of $682 million also beat estimated for $651 million. For the current quarter, the company projected a loss of 17 cents on revenue of $1.08 billion. Analysts were expecting $1.11 billion. Shares fell -$2 in afterhours.

FitBit (FIT) reported earnings of 12 cents compared to estimates for 11 cents. Revenue of $587 million also beat estimates for $578 million. They sold 5.7 million units in the quarter. They guided for the current quarter for revenue of $490-$510 million and analysts were expecting $497 million. They guided for earnings of 17-19 cents and analysts were expecting 17 cents. They also expect full year revenue of $2.5-$2.6 billion. Overall, it was a good report but shares only gained 75 cents in afterhours.

AIG (AIG) reported adjusted earnings of 98 cents on revenue of $13.13 billion. Analysts were expecting 91 cents. AIG is in the midst of a restructuring program and the CEO said we "have executed more quickly and smoothly than expected and our confidence in reaching our 2017 financial targets is high as our earnings become more sustainable." The return on equity rose from 6.8% to 8.6% and costs declined -7%. They are targeting a $1.6 billion cost reduction over two years. They bought back $3.2 billion in stock during the quarter for a total of $7.9 billion towards its target of $25 billion. The board authorized another $3 billion buyback for the current quarter and declared a dividend of 32 cents. Shares gained $2 after the bell. The consensus price target is about $65.

Endurance International (EIGI) posted adjusted earnings of 19 cents on revenue of $197.4 million. Analysts were expecting 33 cents on revenue of $299 million. EIGI registers, builds, sells and manages websites and domain names. They offer marketing tools, web payment interfaces and various cloud services, etc. They had 5.48 million subscribers on the platform at the end of the quarter. Shares fell -23% on the news.

Aetna (AET) reported earnings of $2.21 compared to estimates for $2.11. Revenue of $15.95 billion also beat estimates for $15.74 billion. Aetna had 46.3 million people receiving benefits at the end of the quarter. They guided for full year earnings of $7.90-$8.10. However, the company said Obamacare losses rose from $160 million in 2015 to $320 million expected for the full year. As a result, the company is no longer looking to expand into other states but is reevaluating its current participation in the 17 state exchanges it currently serves. With United Health and Humana already pulling out of the program it would leave Blue Cross as the only carrier in multiple states. Cigna is a smaller insurer and despite the expected loss this year they are still considering adding several states to their program but will not make the decision until later this year. Aetna shares gained $1.26 on the earnings.

Dow component Pfizer (PFE) reported earnings of 64 cents on revenue of $13.15 billion. Analysts were expecting 62 cents and $13.10 billion. The company reaffirmed full year earnings forecast of $2.38 to $2.48 per share. Drug sales were challenged and the outlook is for more of the same. Shares fell 2.5% on the news.

Dow component Procter & Gamble (PG) reported earnings of 79 cents compared to estimates for 74 cents. Revenue of $16.1 billion also beat estimates for $15.84 billion. The company guided for organic sales to rise 2% in 2017 and core earnings to grow mid single digits from the current year's $3.67 per share. The company said it was developing new products to specifically fight smells in workout clothes. The new Tide and Downy products will be called the "Odor Defense Collection." Although overall sales were weak last quarter the CEO said he was seeing improvements in China. Sales in China were flat compared to declines in prior quarters. Shares gained only slightly on the report.

Gun maker Sturm Ruger (RGR) reported earnings of $1.22 on a 19% increase in revenue to $167.9 million. The company said its modern sporting rifle, the AR-556, was responsible for one-third of all sales. They declared a cash dividend of 49 cents payable on August 26th to holders on August 12th. The company said gun demand was booming.

The National Shooting Sports Foundation reported today that FBI background checks surged 27.9% to 1,210,731 compared to July 2015 checks at 946,528. With Clinton promising to gut the second amendment, regulate semi-automatic firearms and slow down gun sales in general, you can bet the next 8-12 months will see new sales records set.

Earnings on the schedule for Wednesday will see Tesla, Jack in the Box, Humana, Tripadvisor and Ctrip.com as the headliners. There are no Dow components for the rest of the week and only four left to report.

Crude oil declined to $39.26 midday after a spike to $40.90 shortly after the open. The decline was sharp and there was no specific news. Shares closed at $39.56 but gained 20 cents in afterhours after the API inventory report showed a decline in crude inventories of -1.3 million barrels. Refined product inventories were basically flat.

Ironically, Exxon and Chevron were the top two gainers on the Dow.


The S&P finally broke out of its recent range from 2160-2180 and dipped to 2,147 intraday. For a few minutes, it appeared the markets were going into crash mode but buyers stepped in and rescued the indexes. The S&P rebounded 10 points to close at 2,157 for a loss of -14 points.

We now have a clear picture of resistance at 2,177 and the majority of support levels are back in the 2100-2128 range with 2,150 the intraday support from today. The market is still very overextended and we could easily continue lower simply from a lack of interest. However, volume was 7.5 billion shares and the highest since July 12th. Much of that was selling with decliners at 5,499 3:1 over advancers at 1,641. The volume was almost identical to the A/D ratio.

Normally this is where I would saw the volume rules. The heaviest volume is typically the indicator for market direction the following day. However, the dip buyers are alive and well even though we are moving into the seasonal weakness in August/September.

The Dow has been the weakest index as post earnings depression settles in on the 26 Dow stocks that have already reported. The earnings excitement has left the index. The Dow closed below support at 18,350 and this was the seventh consecutive day of declines for the index.

The Dow rebounded +67 points from the intraday low at 18,247 but still lost -91 points for the day. The Dow is still overextended and could easily return to support at 18,000 without damaging the current trend. That would only be a 3% decline and normal profit taking. A decline under 18,000 would target 17,400, which would be a 6% decline. We would have to drop back to nearly 16,500 to qualify as a 10% correction. I do not see that happening.

The Nasdaq declined almost to 5,100 before the Biogen spike changed the tone of the market. The index rebounded 28 points very quickly but then went dormant the last hour of trading at 5,140. The index is back in the prior resistance band after coming within 18 points of a new high on Monday. Like the other indexes, the Nasdaq remains overextended and derived much of its gains over the last week from the rally in the biotech sector. As long as that rally continues, it will provide support.

Resistance is now 5,200 and support 5,100.

The Russell 2000 dropped -17 points to close back under prior resistance at 1,205. This could be a launch point for a new rally or a failure point on any further decline. The Russell has risk back to 1,095 on any decline that is not normal profit taking.

I was going to say flat is the new down after three weeks of flat markets but today proved me wrong. I had a reader email me and ask "what happened? I thought the markets only went up." He was of course joking. It is just that we have not seen an actual market drop since June 24th.

While it is fun to joke about nonexistent declines, we should always remember, regardless of how bullish the market appears, it is never more than one headline away from a Jekyll and Hyde character change. The biggest declines are the ones that happen when we least expect them. With everyone expecting a decline into August, I would be very surprised if it was dramatic. Just keep your stop losses in place and prepare to launch new positions if we get an actual dip.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Did the Rally Just End?

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Dow finally rolled over and the S&P broke out of its range. This was the first real market decline since June 24th. Futures are negative suggesting it could continue on Wednesday but we know that could reverse at any time. The markets are still overbought and I would prefer not to add new long plays until we see if a bottom is going to appear. Adding new shorts in potential gap down market is also dangerous. I am not adding any new plays today and review the setup on Wednesday. I am looking for a buying opportunity but I do not think today was it.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Finally a Real Decline

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow completed its 7th day of declines driven by a big drop in Transports. The Dow closed under support at 18,350 with a close at 18,313 and a loss of 91 points. The Dow Transports fell -167 points on the weakness in the airline and railroad sectors.

All the major indexes were in the red but the Dow was actually the strongest index with a -.49% loss compared to the -2.13% decline in Transports and 1.4% decline in the Russell 2000.

There were no indications of a potential bounce but the indexes did close slightly off their lows indicating some minor dip buying.

Current Portfolio

Current Position Changes

ANF - Abercrombie & Fitch
The long position was stopped at $19.85.

SCTY - SolarCity
The long position was closed at the open.

VXX - Volatility ETN
The short position in the VXX was closed at the open.

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. Big -4% drop in a weak market to stop us out for a minor loss. The broad consumer sector was down big for the day.

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

Closed 8/2/16: Long ANF shares @ $20.10, exit $19.85, -.25 loss.

CUDA - Barracuda Networks - Company Profile


No specific news. Big -2.5% decline in a weak market.

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.

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


The position was closed at the open this morning.

Monday comments: 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:

Closed 8/2/16: Long SCTY shares @ $23.40, exit $24.63, +$1.23 gain

TWTR - Twitter - Company Profile


Twitter said the new communications chief Natalie Kerris had left after only 6-months on the job. The exit is effective immediately. Kerris had previously been with Apple for 14 years. Kerris and Twitter were both quiet on why she left so abruptly and where she might be going.

Twitter announced they would be live-streaming the highlights from the Olympics. They will have a featured Periscope channel and will use Moments, new hash tags, new emojis and dedicated lists for following specific athletes.

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

SKX - Skechers - Company Profile


Skechers fell another 4% after Argus cut its rating from buy to hold. This also coincided with the cross the board drop in consumer goods.

Original Trade Description: August 1st.

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.

Position 8/2/16:

Short SKX shares @ $23.75, see portfolio graphic for stop loss.

Optional: Long Sept $22 put @ .55, see portfolio graphic for stop loss.

VXX - Ipath VIX Short Term Futues ETN - ETN Profile


The VXX position has been closed. That was a huge win and the good news is that we get to do it again the next time volatility spikes after the 1:4 split next Tuesday. I would love to see a volatility spike next week that gives us a good entry point for our next short position in the VXX.

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

Closed 8/2/16: Short VXX @ $17, exit $10.13, +$6.87 gain.

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