Option Investor

Daily Newsletter, Wednesday, 8/17/2016

Table of Contents

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

Market Wrap

Bulls On the Ropes

by Keene Little

Click here to email Keene Little
The stock market had been chugging higher this month but on much weaker volume and momentum. But it was looking like this opex week had the chance to be another bullish one, until the selling hit on Monday. Tuesday's selling continued today and some support levels were broken but the recovery off the morning low gives the bulls another chance to pull a rabbit out of the hat and save the week from being negative.

Today's Market Stats

The price pattern up until Tuesday's selloff was supporting the idea that we'd see the market hold up for at least a few more days before stronger selling might hit. But Tuesday's selling followed by the selling this morning had the bulls on the ropes and it wasn't looking good for them. Someone then stepped in to rescue the poor bulls and left Wednesday neutral, which in turn leaves the week looking like it could easily go either way. That's of course not very helpful for traders trying to pick a direction.

Until Tuesday's selloff we had the indexes in synch with rising wedge patterns for the leg up from August 2nd, which fit as the final leg for the rally from June 27th. But the rising wedge patterns did not finish and that leaves an unfinished pattern to the upside, which in turn leaves us guessing what kind of pullback we could get before proceeding higher. A more significant high could be in place but unfortunately that can only be guessed at this point without a supporting price pattern. The thing going for the bears, at least for the short term, is that short-term uptrend lines have broken and so far there's been no attempt to recover them.

Providing a little bit of volatility this afternoon was the release of the FOMC minutes from last month's meeting. In the minutes the Fed made reference to an improving economy but provided no hints or clues about when they might raise rates again. The market is left to wonder if September is still possible (highly unlikely) or if December will be the month (also not likely). The discussions that come out of the Jackson Hole meeting on August 26th might provide some more clues but probably not. I don't think the Fed has a clue about this economy and therefore when will be an appropriate time to raise rates. It's the lack of inflation that has the Fed flummoxed.

Making it more difficult for the Fed to even think about raising rates is that it would make the dollar stronger and hurt international trade. Most of the other central banks, including Japan, England and the ECB, are talking about further easing with more money, lower (negative) rates and more asset purchases. It's a little hard for the Fed to try to raise rates in that environment.

There's a big question about what there is left to drive this market higher. There's of course central bank money and government investments but with the European crisis hitting a lull (it will be back) and Brexit fears subsiding, the need to prop up the market has gone away (for now). Earning's expectations have helped some bullish sentiment but it turns out it wasn't a great earnings season.

With the earnings season winding down it could be difficult for the market to make more headway to the upside. Already it's been a slow grind higher on very low volume in the past week (lowest we've seen since 2007) and even though most companies "beat" earnings expectations, those expectations have been carefully managed by companies to ensure the stock analysts will provide numbers that the companies can beat. But those expectations have been consistently lowered and they're now struggling to keep them positive even while using all kinds of accounting tricks to do so. Companies are back to playing the games we saw at market tops in 2000 and 2007 (non-GAAP reporting).

Corporate buybacks have supported the stock market since 2009, adding well over $2T (that's a 'T') buying power to the market, which dwarfs anything the Fed has tried to do. Most of the corporate profits over the years have gone into stock buybacks, which prompts the question "what happens when corporate profits dry up?" Companies have also been on a debt binge, with rates so low, and then using the borrowed money to buy back more of their own stock. Investments in capital equipment and business expansion have been nil because the companies didn't see the demand out there. We've had a very slow recovery since 2009, the slowest since WWII.

At some point, especially with profits drying up, servicing all of the debt used to buy back stocks will become more difficult and lower profits, higher debt payments and fewer loans (bond issuance) will result in fewer stock buybacks. Lower profits also increases the P/E ratio since the 'E' is declining, which gives us a stock market that is becoming more overvalued that's been held up primarily through the support of corporate buybacks. When the music will stop is anyone's guess but with the profit decline now falling into negative territory I don't think the market has much more wiggle room higher.

The chart below shows corporate profits since 1965 (it's hard to read the top of the chart but the values include inventory and capital consumption adjustments). The main point of the chart is that whenever the corporate profits have dropped into negative territory, as it now has, it's been followed by a stock market correction (if not a crash). Will this time be different? That's a dangerous bet but obviously possible in this world of central bank money and government involvement.

Corporate Profits, 1965-2016, chart courtesy fred.stlouisfed.org

The larger point out of all of this is that there are fundamental reasons why the stock market should not be rallying. But the stock market has continued to rally in the face of all the weakness and that's an important message. Price is king and that's all that matters. It's like news -- it doesn't matter; the only thing that matters is how the market reacts to the news. Where is price going? And that's why we use charts and even though the charts have been showing us plenty of reasons to doubt the rally, and therefore not particularly helpful, it's the best tool we have. It's like Winston Churchill telling people that democracy is a lousy form of government, until you compare it to all the rest. So let's start with the SPX weekly chart and work down.

S&P 500, SPX, Weekly chart

The SPX weekly chart has the appearance of topping as MACD and RSI start to roll over. But on a weekly basis there's no bearish divergence to suggest this could be an important top and since MACD has not crossed down yet (even on my faster 8,13,5 setting) there remains the potential for the rally to continue higher as MACD and RSI flatten out in overbought. The price projection at 2223 is the 127% extension of the May 2015 - February 2016 pullback, a common Fib target/resistance level. It doesn't mean SPX will get there but it's a level of interest if reached. In the meantime it's looking vulnerable to at least a larger pullback and maybe something more bearish.

S&P 500, SPX, Daily chart

Monday's high for SPX was a test of the trend line along the highs from April-July and today's pullback was another test of its 20-dma, near 2175. I show another push higher to the trend line again, perhaps up to 2200 by mid-week next week. Above 2200 would be more bullish, in which case I'd look for 2223 mentioned on the weekly chart above. The big strike against the bulls is the significant bearish divergence on MACD. This can of course be negated with another rally but it's showing the weak momentum for the rally from August 2nd, which fits as the 5th wave of the rally from June 27th. If the 5th wave completed on Monday we'll get at least a larger pullback (test the May 2015 high near 2135?) and maybe something more bearish.

Key Levels for SPX:
- bullish above 2200
- bearish below 2147

S&P 500, SPX, 30-min chart

I'm trying to make sense of the shorter-term wave pattern since that's usually a good way to see a setup for a reversal. Unfortunately all we're getting are corrective moves in both directions. That typically means it's an ending pattern and the setup going into Tuesday was for a pullback and then one more leg up to finish a rising wedge pattern. The completion of a rising wedge would have been a great setup for a reversal to trade but that setup got blown out of the water with the Tuesday-Wednesday decline. But that decline turned into just another 3-wave move (labeled a-b-c on the chart), which means it could head higher from here or it could be part of a larger pullback before heading back up. The bottom line though is that without a clean ending pattern to the upside the odds are we'll get another push higher from here or after a larger pullback. Short-term trading in this corrective price environment is the best (and most difficult) way to trade -- get in and out quickly before the market reverses again.

Dow Industrials, INDU, Daily chart

The Dow's daily chart is similar to SPX with just a little more upside potential than SPX to reach its trend line along the highs from April July, which was not tested with Monday's high like SPX did. I have two price projections based on its pattern that correlate closely -- on at 18778 and the other at 18828, so basically a 50-point spread from about 18780 to 18830. The trend line along the highs crosses these projections on tomorrow and August 26th. It doesn't mean the Dow will get up to that target zone, or stop there, but watch closely for a possible high if reached (if a high is not already in place).

Key Levels for DOW:
- bullish above 18,830
- bearish below 18,247

Nasdaq-100, NDX, Daily chart

The biggest negative I see for the NDX is its breakout failure. Last week it struggled to get above its March 2000 high at 4816.35 but then did so with Monday morning's gap up and close at 4827. The problem for the bulls was Monday's volume was the lowest seen since 2007 so it was hardly a bullish breakout. And then on Tuesday it dropped back below 4816 and dropped further today before recovering back into the green, but still below 4816. This leaves a failed breakout attempt as traders take profits after having achieved the short-term victory with a new all-time high. Now there's the risk for profit taking to turn into a more significant decline as more trader stops are hit. Between its 20-dma, near 4750 on Thursday, and its December 2015 high, near 4740, there should be good support if reached. A drop below 4740 would signal something potentially a lot more bearish happening. However, like the blue chips, the pullback from Monday is a 3-wave pullback and it could lead to another push higher directly from here or possibly after a little larger corrective pullback.

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

Russell-2000, RUT, Daily chart

The RUT is in the same pattern as the others and it's the 3-wave move up from August 3rd that has me wondering if maybe we're see a larger rising wedge pattern for the rally to hold up into the end of the month, which I depict in green on its chart. This would be a very frustrating pattern for traders on both sides but I think especially for bears who are already extremely frustrated in this market's ability to simply float higher (albeit slowly) in the face of deteriorating economics and earnings. To bears the question is what kind of catalyst is it going to take to knock this market down. If the RUT drops below price-level S/R near 1215 it's going to look more bearish and as with the others, a drop below the August lows would tell us the top is in place. Whether that top will be just temporary or something more significant would have to be figured out later but for now, the bulls maintain control as long as the pullbacks remain corrective.

Key Levels for RUT:
- bullish above 1244
- bearish below 1198

I mentioned the possibility for the RUT (and the broader market) to push higher into the end of the month and this is supported by relationships between important dates on the Gann Square of Nine chart. Projections from important dates, starting from the 1929 crash, are aligning in the first week of September. The March 2000 high was followed by a September 1, 2000 high and that led to a strong decline into September 2001. Looking at Fibonacci and Gann projections sees additional pointers to the 1st week of September this year so the price projection shown on the RUT's chart would meet both a time projection and price pattern for completion of the rally. For now it's just something I'm watching for while staying aware of the possibility the high is now already in place.

KBW Bank index, BKX, Daily chart

How the banks are doing is usually a good indicator for the broader stock market and at the moment BKX is threatening to break its downtrend line from July-December 2015, near 70 (today it closed at 70.05. Following its failed attempt to break its downtrend line on August 8th it will either be successful here or form a double top at an important downtrend line. A drop below last Friday's low at 68.57 would be a bearish heads up.

Transportation Index, TRAN, Daily chart

A downtrend line from August-November 2015 is where the TRAN was stopped in April and again in July. Currently near 7966, it's only a little higher than where it's currently trading (today's close was 7882). But short term, the TRAN broken its uptrend line from June 27th today and then bounced back up to it by the close. That leaves a potential back-test and bearish kiss goodbye if it sells off on Thursday. Otherwise watch for another test of its downtrend line.

U.S. Dollar contract, DX, Weekly chart

The US$ has pulled back from its July 25th high is what is so far a 3-wave correction to the rally from May. Two equal legs down for the pullback points to 93.82 (yesterday's low was 94.38) so there's a little more downside room for just a normal pullback but at the moment it's holding the bottom of a parallel up-channel from May, currently near 94.75. On the weekly chart you can see the top of its parallel up-channel from 2008 (bold blue line) and the top of the up-channel from May 2011, near 94.27 and 93.57, respectively. Yesterday's low nearly tagged the higher level while the projection for two equal legs down is closer to the lower level. Therefore I wouldn't consider the dollar more bearish until it drops below 93.50 but even then it should still stay range bound if it stays above the May 2nd high at 91.88.

Gold continuous contract, GC, Weekly chart

Gold is showing bearish divergence on its daily and weekly charts since March and a steeper divergence since July) so it's questionable whether or not we'll see another high for gold. But it still like the pattern that supports one more new high to a 1417.50 price projection or at least to its downtrend line from September 2011 - October 2012, currently near 1405. A drop below price support at 1308 and then its uptrend line from December 2015, near 1285 (which is also the 38% retracement of its 2001-2011 rally), would be an indication the top is in place. Whether that top will be just one of many in a new bull market or instead the top of a bounce correction that will lead to a lower price (the way I'm currently leaning) will have to be figured out after the pullback/decline gets started.

Oil continuous contract, CL, Daily chart

Last week oil broke out of its down-channel that it had been in since the June 8th high. It's been in a strong rally since the breakout and on Tuesday it broke back above its 50-dma at 45.70, which has it looking more bullish. There are only a couple more things the oil bulls need to do to prove we have more than just a bounce correction off the August 3rd low. First is to rally above the 62% retracement of its decline from June, which is at 46.90 (today's high was 46.95 but it closed at 46.84). The second thing oil needs to do is break its downtrend line from June 2014 - June 2016, currently near 47.90. And with those two things done it will have broken its downtrend line on MACD, which it's currently testing. But the bearish setup here is for the 3-wave bounce off the August 3rd low to lead to the next leg down so it's going to be important what oil does from here. A continued rally in oil could add support for the stock market.

Economic reports

Tomorrow we'll get the unemployment numbers, the Philly Fed index and Leading Indicators. Other than the Philly Fed index, if it surprises one way or the other, these won't be market moving. There are no major economic reports on Friday.


The pullback from Monday's high has the potential to lead to something stronger to the downside but with the decent bounce off today's low there is an equal chance the market will simply continue marching higher from here. The price pattern remains corrective and that keeps both sides guessing which way this market will head from here. We could get a larger pullback pattern before heading higher or of course it could continue to drop lower.

The recent buying has been on very weak volume and declining momentum so it's hard to bet on the upside. But this rally has defied both fundamental and technical reasons why the rally should have failed long ago and it could continue to defy those reasons. As mentioned earlier, there are some timing reasons why the rally could continue into the first week of September and while the rally might be a laboring choppy affair, it would still frustrate the hell out of the bears. Without seeing an impulsive decline I'm inclined to think the top of this rally is not in yet.

Having said that, I think downside risk dwarfs upside potential and because of that and the potential choppy move higher I'd be reluctant to trade big in either direction for now. Trade small and trade quick while we wait to see how the rest of the month plays out.

Good luck and I'll be back with you next Wednesday.

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

Buy Oil, Sell Vitamins

by Jim Brown

Click here to email Jim Brown
Editor's Note

OPEC is talking up prices for crude and that should continue for the next 2 months. Oil supply and demand is roughly in balance according to the EIA and the OPEC chatter could easily power crude back over $50 in the coming weeks. It is time to make a play in that sector.

The day after I cancelled the Vitamin Shoppe short recommendation the stock fell -7% right to our prior entry point. I am reinstating that position with an entry point just below today's low.


MRO - Marathon Oil - Company Profile

Marathon Oil Corporation operates as an energy company. It operates through three segments: North America E&P, International E&P, and Oil Sands Mining. The North America E&P segment develops, explores for, produces, and markets crude oil and condensate, natural gas liquids, and natural gas in North America. The International Exploration and Production segment explores for, produces, and markets crude oil and condensate, natural gas liquids, and natural gas in Equatorial Guinea, Gabon, the Kurdistan Region of Iraq, Libya, and the United Kingdom; and produces and markets products manufactured from natural gas, such as liquefied natural gas and methanol in Equatorial Guinea. The Oil Sands Mining segment mines, extracts and produces oil from Alberta and Canada.

Marathon reported a Q2 loss of 23 cents beating estimates by a penny. Revenue of $1.3 billion beat estimates for $1.19 billion. Q2 production averaged 384,000 Boepd and in line with guidance. U.S. production averaged 189,000 Boepd. They said they were adding extra rigs in Q3 thanks to new inventory of leases in the STACK play Oklahoma. Raymond James upgraded them from outperform to strong buy and Bank of America upgraded them from neutral to buy.

Earnings November 2nd.

Shares are poised to break over resistance at $15.75 as OPEC chats up the headlines about a possible production freeze in late September. The next material resistance is $20.

With a MRO trade at $16.05

Buy MRO shares, initial stop loss $14.75.

Optional: Buy Oct $17 call, currently 63 cents. No initial stop loss.


VSI - Vitamin Shoppe - Company Profile


Shares collapsed after 3 days of gains to close at a new low. I am reinstating this short position.

Original Trade Description: August 8th.

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 VXI trade at $26.20

Short VSI shares, initial stop loss $27.20.

In Play Updates and Reviews

Asian Contagion

by Jim Brown

Click here to email Jim Brown

Editors Note:

Japan reported some negative economic numbers and the Nikkei opened sharply lower. This could contaminate the European markets and carry over into the U.S. on Thursday. The FOMC minutes rescued the U.S. markets from a sharp decline on Wednesday but the final gains were minimal. The path of least resistance is still lower.

The Russell did not rebound into positive territory and could easily weaken if market sentiment continues to decline. The Fed said in the minutes that global economic weakness was still a problem and then we get the ugly news from Japan tonight. That is not a winning combination for pushing equities higher.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

FDC - First Data
The long position remains unopened until $13.50. High today was $13.31.

NTCT - NetScout
The long position remains unopened until $28.85. High today was $28.74.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

FDC - First Data - Company Profile


No specific news. Still fighting resistance at $13.35.

This position remains unopened until FDC trades at $13.50. The high today was $13.31.

Original Trade Description: August 10th.

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions. They currently process 2,500 financial transactions a second across 118 countries.

First Data was taken private in 2007 for $26 billion by KKR. This debt ended up on the company's books and weighed them down for the last ten years. KKR helped them land a $3.5 billion private placement in 2013. That helped to reduce some of the high interest debt. KKR took them public again in 2015 and raised about $2.8 billion. That was the largest IPO of 2015. The company is still fighting the debt problem with $480 million in interest payments in the first half of 2016. Earlier this year we tried to short FDC because they were strangling under this debt. The situation appears to be improving.

In Q2 they reported adjusted earnings of 35 cents that beat estimates for 34 cents. It also beat the $26 million loss they took in the year ago quarter. Revenue rose 1.9% to $2.93 billion. Revenue in the global financial solutions division rose 12% to $395 million. This is their growth engine. They reduced their net debt by $300 million in the quarter.

Earnings Oct 26th.

Shares spiked from $12 to $13 after earnings and they are about to break over long-term resistance at $13.35. The weakness and volatility from the first six months of 2016 may be coming to an end. If FDC can move over that $13.35 level the next target would be around $16.50.

With a FDC trade at $13.50

Buy FDC shares, initial stop loss $12.65

Optional: Buy Oct $14 call, currently .55, no stop loss.

NTCT - NetScout - Company Profile


No specific news but shares are still holding their breakout gains.

The position remains unopened until a trade at $28.85. High today was $28.74.

Original Trade Description: August 15th.

NetScout Systems, Inc. provides real-time operational intelligence and performance analytics for service assurance, and cyber security solutions internationally. The company offers nGeniusONE management software that enables customers to predict, preempt, and resolve network and service delivery problems, as well as facilitate the optimization and capacity planning of their network infrastructures; and specialized platforms and analytic modules that enable its customers to analyze and troubleshoot traffic in radio access and Wi-Fi networks. It also provides Intelligent Data Sources under the Infinistream brand name that provide real-time collection and analysis of data from the network. In addition, the company offers portable network analysis and troubleshooting tools to identify key issues that impact network and application performance. Further, it provides security solutions that enable service providers and enterprises to protect their networks against DDoS attacks; and threat detection solutions that enable enterprises to identify and investigate advanced threat campaigns that present tangible risks to the integrity of their networks.

In late July NetScout reported adjusted earnings of 28 cents that beat estimates for 25 cents. Revenue od $278 million beat estimates for $275 million. They guided for full year earnings of $1.87-$2.12, up from $1.85-$2.10 with revenue of $1.20-$1.25 billion.

NetScout provides their services to the enterprise and service providers. Their products enable network monitoring to maintain continuous uptime and network availability while isolating bottlenecks and intrusions. Their network visibility switches were ranked number one in market share by IHS Network Monitoring.

They posted record attendance at the company's Engage 16 user conference in May. They released version 2.1 of their advanced security solution, Spectrum. They have a new range of products to be released in the coming months that will boost full year revenue for 2017.

Earnings Oct 27th.

Shares spiked on earnings in late July and then experienced the mandatory post earnings depression phase where they consolidated for two-weeks. On Monday they broke over resistance and closed at a 8-month high.

With a NTCT trade at $28.85

Buy NTCT shares, currently $28.62, initial stop loss $27.10

No options recommended.

RDN - Radian Group - Company Profile


No specific news but shares are still holding their breakout gains.

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 and volume was normal. We are just waiting for the next headline.

On Monday, volume surged to 58.8 million shares and nearly 3 times normal of 22 million in July. Option volume was through the roof with more than 200,000 call contracts traded. That was up from 44,000 daily in July and 95,000 a day last week. Volume fell back to 23.5 million shares and normal on Tue/Wed.

Original Trade Description: - August 1st.

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.

UIS - Unisys Corp - Company Profile


No specific news. Minor decline in a weak market.

Original Trade Description: August 13th.

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segment's product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. The company serves commercial, financial services, public sector, and the U.S. federal government through direct sales force, distributors, resellers, and alliance partners. Unisys Corporation was founded in 1886.

Unisys reported Q2 adjusted earnings of 81 cents compared to estimates for 25 cents. Those earnings more than doubled from the 36 cents in Q2-2015. Revenue of $748.9 million easily beat estimates for $688.1 million. Profit margins rose from -6.5% in Q2-2015 to +6.6%. They reaffirmed full year guidance for earnings, revenue, margins and free cash flow. They ended the quarter with an order backlog of $3.8 billion.

Technology revenue rose 30.7% and accounted for 18% of overall revenue. This is going to be a major profit center in future quarters. Profit margins in this unit rose 48%, up from 15.6% in the year ago quarter. Sales of the ClearPath software are soaring.

The Unisys Stealth security product was approved by the NSA for use in classified programs and making the product eligible for use by more than 20 countries to protect super sensitive systems and information.

On Thursday, Unisys won a government contract to move the Treasury Departments Comptroller of the Currency office to the cloud. This will affect more than 4,000 Treasury employees. Earlier in the year, Unisys moved the U.S. Dept of the Interior and its SAP-based financial management system to the cloud.

This company is at the right place at the right time with the right security products and the NSA approval opens a tremendous business opportunity in those 20 countries.

Earnings Oct 25th.

Shares spiked to $10.40 on the earnings news and then traded sideways for two weeks. Over the last several days the trend has turned positive and it closed at $10.55 on Friday and a 5-month high.

Position 8/15/16 with a UIS trade at $10.65

Long UIS shares @ $10.65, see portfolio graphic for stop loss.

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