Option Investor

Daily Newsletter, Monday, 8/8/2016

Table of Contents

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

Market Wrap

Bulls Remain in Charge

by Keene Little

Click here to email Keene Little
Despite all the "right" reasons why the stock market should be declining it continues to rally instead. We all know a logical stock market is an oxymoron and I'm betting there are more than a few bears who are feeling moronic for fighting this market. Many are throwing in the towel.

Today's Market Stats

Whether the market is rallying more from short covering (by bears who can't believe their eyes but covering nevertheless) or because there are many who believe the market really does have much higher potential, the fact remains that the market is rallying in the face of a deteriorating economy and corporate earnings. It's literally climbing the wall of worry while the bear are simply climbing the walls. How long this will continue is anyone's guess but at least we have some charts to show potentially important levels to watch.

I'm filling in for Tom today since he and his wife have been blessed with the birth of their baby. Send him good wishes (for some sleep as well, wink).

There was very little news today and no major economic reports and basically the stock market gapped up following an overnight rally in the futures (they rallied with the European markets, pulled back a little and then bounced a little into the open. But there was no follow through to the gap open and the market immediately pulled back into the red, which was then followed by a sideways consolidation for most of the day. Trading volume was low and even though the major indexes closed marginally in the red the internals were actually slightly positive.

All in all I'd give today a more positive than negative grade, especially since a consolidation keeps the pattern bullish, but maybe not for long. I'll start tonight's review with a top-down look at NDX

Nasdaq-100, NDX, Weekly chart

There are a couple of different ways I can look at the weekly pattern of NDX from an EW perspective but regardless, there is the potential for bulls to run into trouble as it approaches the 4800-4865 area. There is the March 2000 high at 4816.35 that is clearly in the bull's sights and only about 16 points above last Friday's high at 4799.86. Just below the March 2000 high is a projection at 4799.20 (achieved on Friday) where a large 3-wave move up from 2009 has two equal legs up for a big A-B-C bounce within the secular bear market. The higher projection at 4865 is where the move up from February would achieve two equal legs up. Based on these projections a rally above 4865 would be much more bullish. But bulls should be careful in the 4800-4865 area since there's a good possibility we'll see a high in this zone.

Nasdaq-100, NDX, Daily chart

There's one other projection for NDX at 4818 -- the 162% extension of the previous decline (April-June) is at that level and the correlation with the other projections, and March 2000 high, make this a potentially very important level. The bulls are fine until NDX drops below the August 2nd low near 4689 since that would be a good indication the top is in place.

Key Levels for NDX:
- bullish above 4820
- bearish below 4689

Nasdaq-100, NDX, 30-min chart

A close-up view of NDX is shown on the 30-min chart below. It shows NDX has remained inside an up-channel since rallying up into on July 8th. Since then, other than the brief throw-over on August 1st and the brief throw-under on August 2nd (two head-fake moves), price has remained inside the channel. Last Friday's high stopped at the top of the channel and the bottom is currently near 4764 so it can be used as a short-term guide to see how well each side is doing.

S&P 500, SPX, Daily chart

SPX had been stalled since July 20th beneath a price projection near 2178, which is where the 2nd leg of a 3-wave move up from February is 62% of the 1st leg. Equality is up near 2293 so that's the upside potential that bears need to keep in mind. Friday's rally popped SPX above 2178 and today it held that level, keeping the pattern bullish. But there's another price projection not far above, near 2191, that's based on the pattern for the leg up from June 27th. That coincides with a trend line across the highs from April-July so watch that level carefully for the possibility of a top. A rally above 2192 would open the door to 2220, which is where the 5th wave of the rally from June 27th would be 62% of the 1st wave (a common projection when the 1st wave extends, as in this case). And then if the bulls are really feeling feisty, there's the 2293 projection. The first sign of trouble for the bulls would be a drop below the August 2nd low near 2147 since that should then lead to at least a large pullback and potentially something much more bearish.

Key Levels for SPX:
- bullish above 2192
- bearish below 2147

S&P 500, SPX, 30-min chart

The SPX 30-min chart shows the pattern for the rally from August 2nd and a 5-wave count that I'm watching. The pattern ideally only needs one more new high to complete the count and the 5th wave would equal the 1st wave near 2192, which "coincidentally" matches the other projection and trend line near 2191. That makes it an important level to watch if reached. Below that is a projection at 2186.55, which is where the 5th wave of the move up from August 2nd would be 62% of the 1st wave and that matches the 127% extension of the previous decline (August 1-2), which is a common reversal Fib to watch. Assuming we'll get another, and final, leg up from here, watch 2186-2187 and then 2191-2192 for the completion of this rally. Depending on the form of the pullback/decline (assuming that's still allowed) we'll then get an idea about whether to look at it as a buying opportunity or instead something to short.

Dow Industrials, INDU, Daily chart

Similar to SPX, the Dow has a trend line running along the highs from April-July that's currently near 18730 and that makes for a good upside target for now. A short-term price pattern suggests an upside target near 18653, which gives us a relatively wide zone to watch for a completion to the rally.

Key Levels for DOW:
- bullish above 18,800
- bearish below 18,247

Russell-2000, RUT, Daily chart

The RUT is slightly different from the Dow and SPX in that it has two trend lines along the highs since April to watch (April-June and June-July). The June-July trend line stopped the rally a few times at the end of July and August 1st but last Friday's rally popped the RUT above the line, which was followed by today's pullback to a close barely below the line. Another bounce on Tuesday would leave today looking like a successful back-test of resistance-turned-support, which would then have us looking for a test of its higher April-June trend line, currently near 1242. The 5th wave of the rally from June 27th would achieve 62% of the 1st wave at 1245 so 1242-1245 is a good upside target zone if the rally continues. Above 1245 would be more bullish.

Key Levels for RUT:
- bullish above 1245
- bearish below 1198

20+ Year Treasury ETF, TLT, Daily chart

After pulling back from its high on July 8th we've seen the bond market trade more or less sideways and it's not clear at the moment if we'll see lower prices before heading higher or just head higher from here. Until TLT drops below 134 I'll continue to look at the pullback from July 8th as a correction within a larger rally pattern but below 134 would be a break below the bottom of its down-channel from July 8th as well as its uptrend line from June-November 2015. Two equal legs down from July 8th, if it's going to pull back further, points to 135, which is close to its February high at 135.25 and therefore I would expect this area to be support if tested. But a rally from here that makes it above the July 29th high at 141.68 would suggest the bond rally will continue (which would drive yields lower).

KBW Bank index, BKX, Weekly chart

The banks have also had a strong rally off the June 27th lows and BKX has now made it up to its downtrend line from July-December 2015, currently near 70 (today's high was 70.45 but it closed at 69.99). This should (in a normal market) be tough resistance on the first test. Time will tell.

Transportation Index, TRAN, Weekly chart

As can be seen on the TRAN's weekly chart below, it continues to struggle with two downtrend lines, one from February 2015 - April 2016, currently near 7980, a downtrend line from August-November 2015, currently near 7880. This morning's high was 7937 but the selloff from there left a shooting star on its daily chart after trying to break through its broken 20-dma and downtrend line (both at 7880). On the weekly chart you can see how little MACD has bounced off its June 27th low while price spiked back up near its mid-July high. The same thing can be seen on its daily chart for the spike back up from August 2nd -- MACD is still stuck at the zero line and therefore neither the weekly nor the daily charts support its rally (although it's important to remember price is king). These indicators suggest most of the rally is likely to be short covering and not strong buying.

U.S. Dollar contract, DX, Daily chart

I normally show the US$'s weekly chart because I don't think there's a lot to pay attention to while it chops around in a $92-$100 trading range since the May 2015 high, which I think will run through the rest of this year. It's not clear yet whether the dollar will head higher from here or if it will first get a larger 3-wave pullback from July 25th but regardless, it would not turn bearish (maybe) until it drops below the bottom of its shallow down-channel from May 2015, near 92.80. But at the moment it's facing potentially strong resistance at its broken 20- and 200-dma's, at 96.43 and 96.63, respectively (it closed today at 96.27 after making a high at 96.42).

Gold continuous contract, GC, Daily chart

For a while I've been showing an upside projection for gold near 1415 for the completion of two equal legs up from December 2015. But after yesterday's sharp spike back down and today's consolidation I'm beginning to wonder if we've seen the high for now. The top of a rising wedge pattern (trend line along the highs from February-July) crosses the 1415 projection the end of next week and therefore it remains a possibility. But the weakening momentum, as shown on the daily chart's MACD, as well as RSI, is not looking so good for gold bulls. It's trying to hold onto its 20-dma, at 1339.20 (today's close was 1341), but if that doesn't hold then it will likely test its 50-dma next, currently at 1310 and rising. A drop below the bottom of the rising wedge (uptrend line from December 2015), currently near 1275, would be more bearish but as long as it holds inside the rising wedge there is the potential for another leg up.

Gold COT report, 2007-July 2016, chart courtesy tradingster.com

A big strike against gold bulls is the COT report, which shows commercial positions vs. non-commercial. Another name for these two would be "smart" money vs. "dumb" money. The message from these two does not necessarily make a good market timing tool but it's always best to keep an eye on this information so as to be aware of risky times to bet against the commercials who are currently in a larger net short position than any time in the last 10 years (as far back as this chart covers). At the same time the non-commercials (you and me, mutual funds, ETFs, etc.) are in their largest net long position in the past 10 years. This is not a good time to betting on the long side for gold.

Oil continuous contract, CL, Daily chart

If a draw a parallel down-channel for the oil's pullback from June's high, the bounce off the August 3rd low made it up to the top of the channel today, as well as the broken 20-dma, both near 43.24. This could be a back-test that will lead to a continuation lower but obviously it would be at least a little more bullish above 43.24 (today's high was 43.39 but closed at 42.87). There is no bullish divergence at the August 3rd low and therefore there's a good chance that low will at least be tested.

Economic reports

There were no economic reports today and there will only be a few Tuesday morning but nothing market moving. Friday will probably be the only morning when there might be some market-moving economic news.


I'm seeing plenty of resistance for the stock market indexes just overhead and that in combination with price projections tells me we could be looking for just one more new high to complete the leg up from June 27th. That in turn could complete the larger rally pattern from February and set us up for a much more significant decline. But a larger bullish pattern cannot be ruled out yet, which calls for just a pullback to correct the rally from June 27th and then continue strongly higher. I have trouble believing in the more bullish scenario but then again I didn't think we'd still be rallying now. Price is king and we'll have to let it lead rather than follow our bias. Just be careful chasing a new high from here since I think there's a very good chance it will be followed by a strong reversal back down, possibly before the week is over.

Good luck and I'll be back with you on Wednesday to see how that "top" is developing (or not).

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Plays

Keeping Healthy

by Jim Brown

Click here to email Jim Brown
Editor's Note

Vitamin Shoppe is facing the same problem of a lot of retailers. That is slow consumer spending. Spending $100 a person to go to a theme park or paying $50 or more for a bottle of vitamins is starting to become a challenge for consumers.


No New Bullish Plays


VSI - Vitamin Shoppe - Company Profile

Vitamin Shoppe, Inc. operates as a multi-channel specialty retailer and contract manufacturer of nutritional products in the United States. It operates through three segments: Retail, Direct, and Manufacturing. The company provides custom manufacturing and private labeling services for VMS products, as well as develops and markets own branded products. It offers vitamins, minerals, herbs, specialty supplements, sports nutrition, and other health and wellness products of approximately 800 brands. The company sells its products through Vitamin Shoppe, Super Supplements, and Vitapath retail stores; and catalogs, as well as through its vitaminshoppe.com Website. As of March 1, 2016, it had approximately 700 company-operated retail stores.

The company reported Q2 earnings of 55 cents that missed estimates for 59 cents. Revenue of $332.7 million narrowly beat estimates for $331.6 million. The CEO warned, "The external environment was more promotional and volatile than we had anticipated and we responded by increasing our promotional activity. As a result, our performance for the quarter was mixed, with improved comps offset by lower margins. The positive comps in the quarter reflect the benefits of some of our new initiatives as well as stepped up promotional activity. In addition, our manufacturing business is performing below expectations with lower sales and margins, which also contributed to our overall weaker performance in the quarter." I was not a glowing report. He also said, "Given the current operating environment with variability from day to day, we have put in place a dedicated effort behind more aggressive cost controls and margin realization. Our goal will be to achieve the appropriate balance between revenue growth and profitability." That is a good example of a CEO trying to put a positive spin on a negative environment. Shares declined after his comments.

Earnings Nov 2nd.

I am a vitamin junkie. I cringe every time I have to buy a bottle of something that costs $50 to $75 and I am sure the normal consumer is also suffering from sticker shock when they see those prices. Obviously, you can buy the generic chemical equivalents for a lot less but if you are trying to buy the best quality formulations, it is expensive. Add in all the competition from the multilevels like Thrive and the vitamin boosted meal replacements from brands like Vega and the consumer has so many choices they can't make up their minds. All the chain stores like Kroger, Whole Foods, etc, are now carrying complete inventories from multiple competitive brands at discounted prices. This gets back to the "promotional environment" the CEO was talking about.

Since the earnings drop on July 28th shares have declined $5 and are currently struggling to hold support at $27.50 that dates back to May. A breakdown there targets $26.25 and the 52-week lows. If VSI does make a new low, I think we could see a significant drop. Vitamin Cottage (NGVC) is already at $12 and dropping after hitting highs over $40 at the same time VSI was hitting $65.

With a VSI trade at $27

Short VSI shares, initial stop loss $28.65

I am not recommending an option but the Sept $27.50 put is $1.45 and the November $25 put is $1.50.

In Play Updates and Reviews

Just Passing Time

by Jim Brown

Click here to email Jim Brown

Editors Note:

There was no follow through on Friday's short squeeze but no rush to the exits either. Investors are just passing time while they wait for the next market move and the lack of a decline today suggests they expect that move to be higher.

The biggest move on any of our positions was only 17 cents. If today were a fish, I would throw it back.

Current Portfolio

Current Position Changes

NAVI - Navient
The long position was entered at the open at $14.57.

INFY - Infosys Ltd
The short position remains unopened until $15.75. Low today was $16.25

CUDA - Barracuda Networks
The long position remains unopened until $22.50. High today was $22.25

RDN - Radian Group
The long position remains unopened until $13.15. High today was $13.10

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

CDNS - Cadence Design System - Company Profile


No specific news. Shares posted a fractional gain.

Original Trade Description: August 3rd.

Cadence Design Systems, Inc. develops, sells, leases, and licenses electronic design automation (EDA) software, emulation and prototyping hardware, verification intellectual property (VIP), and design intellectual property (IP) for semiconductor and electronics systems industries worldwide. It offers functional verification products, including logic verification software that enables customers to coordinate verification activities across multiple teams and various specialists for verification planning and closure; and system design and verification products for hardware-software verification, as well as for system power exploration, analysis, and optimization. The company also provides digital integrated circuit (IC) design products, such as logic design products for chip planning, design, verification, and test technologies and services; physical implementation tools, including place and route, signal integrity, optimization, and double patterning preparation; and signoff products to signoff the design as ready for manufacture by a silicon foundry, as well as design for manufacturing products for use in the product development process.

Basically, Cadence is a software company that specializes in software to design chips and validate designs. They reported earnings of 29 cents compared to estimates for 28 cents. Revenue of $453 million beat estimates for $449.7 million. They guided for Q3 for revenue of $440-$450 million and earnings of 27-29 cents. Unfortunately, that was slightly lower than the $457 million and 31 cents analysts expected. They guided for the full year for revenue of $1.8 - $1.83 billion and earnings of $1.17 to $1.23. Analysts were expecting $1.824 billion and $1.21 per share.

The stock was knocked back from $26 to $24 after a strong run since January. Shares have stabilized at $24 and I expect their prior trend to continue. The guidance was conservative and analysts always over estimate.

Earnings Oct 25th.

Position 8/4/16 with a CDNS trade at $24.35

Long CDNS shares @ $24.35, see portfolio graphic for stop loss.

Optional: Long Sept $25 call @ 35 cents, no stop loss.

CUDA - Barracuda Networks - Company Profile


No specific news. Shares are holding over prior resistance at $21.25 but cannot seem to make a higher move.

This position remains unopened until CUDA trades at $22.50. The high today was $22.25.

Original Trade Description: July 21st., August 3rd

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.

We were stopped out of long position on 8/3 because I had the stop loss too tight. I believe CUDA will move higher after a period of consolidation at the current level. I am putting an entry point just over the current consolidation range.

With a CUDA trade at $22.50

Buy CUDA shares, initial stop loss $21.00.

NAVI - Navient - Company Profile


Navient gave back some of Friday's gain on no specific news. Just a pause in a weak market.

Original Trade Description: August 6th.

Navient Corporation provides financial products and services in the United States. The company offers Federal Family Education Loan Program (FFELP) Loans, Private Education Loans, and Business Services. It holds the portfolio of education loans insured or guaranteed under the FFELP, as well as the portfolio of private education loans. The company also provides asset recovery services for loans and receivables on behalf of guarantors of FFELP loans, and higher education institutions, as well as federal, state, court, and municipal clients. They also offer business processing services on behalf of municipalities, public authorities, and hospitals. Navient was spun off from Sallie Mae in April 2014.

Adjusted earnings for Q2 rose 17.5% to 47 cents and beat estimates for 45 cents. Helping produce the earnings beat was a 44.4% decline in provisions for credit losses to $110 million.

During the quarter Navient acquired FFELP loans of $623 million bringing their total under management to $92.6 billion.

The private education loan segment reported earnings of $57 million. During the quarter Navient acquired another $23 million to bring their total under management to $24.7 billion. The spread on the private loans was stable at 3.66%. The charge off rate was only 2.2%.

During the quarter they retires $255 million in senior unsecured debt and they completed three ABS placements totaling $2.278 billion to raise liquidity. They repurchased 13.6 million shares for $175 million and had $360 million outstanding under the current authorization.

Earnings Oct 18th.

Although Navient is not a high flying investment like Apple or Netflix it is a good solid business. Friday's close at $14.50 was a 52-week high and a breakout over prior resistance. The next resistance will be a gap fill around $17 from last July.

Position 8/8/16:

Long NAVI shares @ 14.57, see portfolio graphic for stop loss.


Long Oct $15 call @ 50 cents. No initial stop loss.

RDN - Radian Group - Company Profile


No specific news. Three month high close but still stuck under $13.

Position remains unopened until a trade above resistance at $13.15. High today was $13.10.

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.

TWTR - Twitter - Company Profile


No specific news. Shares held their gains from last week and that is encouraging.

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.

Previously closed 7/28/16: Long TWTR shares @ $17.24, exit $15.89, -1.35 loss.
Previously closed 8/1/16: Long Aug $17 put @ 62 cents, exit .85, +.23 gain.

BEARISH Play Updates

INFY - Infosys - Company Profile


No specific news. Support at $16 is in play. It could take several days for this position to be triggered, if at all. However, if we are triggered at $15.75 the stock could continue to single digits.

Original Trade Description: August 4th.

Infosys Limited, together with its subsidiaries, provides consulting, technology, and outsourcing services in North America, Europe, India, and internationally. The company offers business information technology (IT) services comprising application development and maintenance, independent validation services, infrastructure management, business process management, and engineering services consisting of product engineering and life cycle solutions; and consulting and systems integration services, including consulting, enterprise solutions, systems integration, and advanced technologies.

Infosys is an Indian company that does business all over the world but it does have a heavy presence in Europe and the UK. Just before the company released disappointing earnings in July they issued a press release saying, "We do not know how Brexit will play out" but we are cutting our guidance anyway. At the same time, they warned they would miss prior estimates for Q2 "even though there was no Brexit impact so far." This would appear to be a case of using a convenient headline as an excuse for poor performance.

The company cut full year revenue growth guidance from 11.5% to 13.5% to 10.5% to $12.0%. They blamed a lack of visibility by banks as a potential reason they may see growth decline. When they reported earnings of 22 cents they missed estimates for 23 cents. Revenue of $2.5 billion also missed estimates for $2.55 billion. Remember, they said there had been no impact from Brexit so far so this was just a miss and they were setting up analysts for a future miss with the guidance cut.

Earnings Oct 14th.

Analysts were quick to downgrade the stock with Nomura cutting it from buy to neutral and Credit Suisse cutting from outperform to neutral.

Shares fell from $18.50 to $16.50 on the announcement and then traded sideways for two weeks. This week they have begun to decline and are only slightly above a new 52-week low. If they punch through the support at $16 they could go to single digits.

With a INFY trade at $15.75

Sell short INFY shares, initial stop loss $16.65

No options recommended because of wide spreads.

SKX - Skechers - Company Profile


No specific news. Shares posted only a minor gain.

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.

Update 8/3/16: Skechers earned the "Bear of the Day" strong sell call from Zacks. The analyst said the consensus estimate for 2016 earnings had fallen from $2.11 to $1.81 in the last 60 days. The 2017 estimates had fallen from $2.53 to $2.05.

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.

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