Option Investor

Daily Newsletter, Wednesday, 8/24/2016

Table of Contents

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

Market Wrap

Chop Chop

by Keene Little

Click here to email Keene Little
Today's decline has things looking a little more bearish than they've been the past couple of weeks but in reality all we have is a tight trading range full of choppy price action. We're still waiting for a break out of the range and the return of some volatility.

Today's Market Stats

The stock market is stuck in a rut and neither side has pushed very hard to get the market unstuck. That might not change until we get into September but possibly the Fed's Jackson Hole meeting on Thursday and Friday might provide a reason for one side or the other to get a little more energetic. At the moment there's little interest in the market, although today showed a little more volume than we've seen recently (on a down day so that's not encouraging for bulls).

There was little in the way of economic reports to move the market today but the existing home sales was a little disappointing, especially after the strong new home sales report on Tuesday. The 5.39M annualized sales number was less than June's 5.57M and less than the 5.54M the market was expecting. Following that report at 08:30 the equity futures tumbled lower and we started the day with a gap down. A morning bounce attempt led to stronger selling in the afternoon and depending on the index you look at it looked either bearish or just a continuation of the sideways choppy trading range.

I've discussed in the recent past the enormous support provided to the stock market by corporations and their stock buybacks. Well over $2T has been pumped into the stock market since 2009 thanks to cheap borrowing costs and lack of investments in their businesses. Instead of investing in capital equipment, business expansion or new business ideas we've seen companies instead boost dividends and buy back a lot of their stock. Fewer outstanding shares boosts earnings per share and that has created a false sense of value for these companies.

With earnings declining (6 quarters in a row) and borrowing in decline we're seeing a reduction in stock buybacks as can be seen on the chart below (data from TrimTabs Investment Research). With the drop of support from corporate buybacks it's going to be much more difficult for the remaining bulls to power the stock market higher. We could see more money come in from foreign sources but at this point that's an unknown. What we do know is corporations are cutting back significantly and the stock market is losing that prop. Can the Fed save us now?

Slowdown in corporate buybacks, August 2015 - August 2016, chart courtesy Casey Research

At the same time the market is losing the support that has propped it up so strongly we see bullish sentiment hitting extremes that have led to trouble in the past. Neither of these measures are good market timing tools but it's important to be aware of those times when the market has become more vulnerable to a catalyst that will cause selling.

The chart below is one from Tom McClellan, which tracks the Investors Intelligence report on Bulls minus Bears vs. the S&P 500. This report shows the percentage of bullish vs. bearish newsletter writers. McClellan noted that not only is the difference high (Bulls 56.7 vs. Bears 20.2, for a difference of 36.5) but that it's also above the upper band (one standard deviation away from the 50-dma), each of which is a danger sign for a possible top at any time. What he also noted was the steady increase since the June 27th low and how steady the spread in the bands has remained. It's almost as though the market's been manipulated higher but we know that can't happen (cough) so at this point it's just an interesting phenomenon.

The significance of the way the sentiment picture has developed is that it is high and has gone steadily higher instead of running in fits and starts, which indicates a steady increase in bullish complacency. This is very likely due to the fact that the market hasn't made a move greater than 1% in 33 trading days, counting today. That's nearly 7 weeks where the market has made very small moves and it seems to have lulled most into a false sense of security with an expectation that the rally will simply continue. We all know what happens when the majority believes in one direction for the market. Ah yes, I know, this time is different. The VIX is very low and the Bollinger Bands are very tight -- what could possibly go wrong here?

Investors Intelligence report vs. SPX, chart courtesy Tom McClellan

This market has even sucked me over to the dark side with the bulls (wink) as I think the market has higher to go. But I'm only short-term bullish since I believe September is not going to be kind to bulls and if we do continue to get marginal new highs into a potentially important turn window in the first week of September it would then be a setup for a strong selloff to reverse the rally from June. My opinion is of course subject to change as the market dictates. I could turn bearish tomorrow or not until after the election (some of us believe there's a strong government effort to hold the market up until November to ensure the Democratic party remains in power). Price will let me know when to step off the bull train and get on the southbound bear train but as of right now I don't see the southbound train as ready to leave, although admittedly today has me wondering, as I'll show on the charts.

I'll start tonight's review with the NDX since its price action right here could tell us whether or not to shift over to the bearish side of the fence sooner rather than later. While I feel short-term bullish, based on some timing factors and a lack of a clear ending pattern to the upside, I also know this market is vulnerable to a fast move down and it might be from just a small catalyst that prompts more selling than what catalyst called for. Profit taking leads to stop runs which leads to strong selloffs. Sometimes it's no more complicated than that.

Nasdaq-100, NDX, Weekly chart

For the rally from February NDX would achieve two equal legs up at 4865, less than 30 points above this week's and last week's highs. That projection crosses a trend line along the highs from July-November 2015 next week. Between that and a turn window in the first week of September it would make a good time for a top to form. Depending on the form of the decline (impulsive or corrective), whether from here or from a little higher, I'll get a better sense about when a top is likely in place but so far there's no evidence to suggest we've seen the top.

Nasdaq-100, NDX, Daily chart

The NDX daily chart is the one that's causing me to feel like a top is now in place and while I'm not ready to get aggressively short yet I do have some short positions for my JIC trade (just-in-case). NDX has been struggling to break through resistance at its March 2000 high at 4816.35. After being rejected at that level twice, on August 9th and 11th, it finally closed above it on August 15th. But then it dropped back down below that level the next day. One failed breakout attempt. It then repeatedly banged its head at that level last week before getting back above it yesterday, only to pull back to the line by the close (4818.48). Today it gapped back down below and closed lower than the previous 9 sessions. Two failed breakout attempts and now a double top with bearish divergence. I have to say the price action on the NDX daily chart has me wanting to get aggressively short here. As noted at the bottom of the chart, the oscillators support the idea of a rolling top at major resistance. While I'm aware of a possible high in the first week of September, I'm not feeling the bullish love here.

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

S&P 500, SPX, Daily chart

I've been thinking for the past few days that we might see a rising wedge pattern complete for SPX in another week or two but today's selloff has made that pattern questionable. It could still chop its way higher, which is what I show on the daily chart, but something more bearish could be starting. A continuation lower on Thursday would have me more seriously questioning whether we should expect another new high into next week. Below the August 2nd low near 2147 would be convincing evidence the high is already in place. Like NDX, we have a double top between the August 15th high and yesterday's high, both near 2194. But there's still a chance for a choppy move higher into the first week of September, which could see SPX up near 2215 before the rally will be complete.

Key Levels for SPX:
- bullish above 2194
- bearish below 2147

S&P 500, SPX, 60-min chart

The 60-min chart shows the uptrend line form August 2-17 as the bottom of the rising wedge that I've been watching but today's decline dropped SPX below it, now near 2179. It's possible we're going to get an a-b-c pullback from August 15th, which would have two equal legs down at 2168, and then another rally. Considering the 2168 projection and the August 17th low near 2168 I'd say the pattern turns more bearish below that level. But at the moment I think bears need to be ready for the possibility of another rally to kick off from here or from 2168. The late-day bounce back up today got SPX to close at price-level support near 2175. We've had nothing but choppy 3-wave price action since mid-July and that makes it very difficult to project a price pattern from here. But keep in mind that sharp declines since mid-July have been conclusions to pullbacks and not the start to a more serious decline. The decline from yesterday could be the same thing (to complete an a-b-c pullback from August 15th) and the bounce back up to support near 2175 might be the start of a reversal back to the upside. We should find out quickly Thursday morning.

Dow Industrials, INDU, Daily chart

The Dow has been a little weaker than the other indexes and slow rollover from its August 15th high could be the start of a stronger decline. But as with the others, there's no clear ending pattern to the upside and the pullback from August 15th looks choppy and more like a corrective pullback than something more bearish. It could suddenly break down, which would change the corrective pullback into an impulsive decline but at the moment I don't get a warm and fuzzy feeling for the bears here. As with SPX, an a-b-c pullback from August 15th would have two equal legs down at 18430, 18 points below this afternoon's low and a drop below that level would start to look more bearish. A drop below its May 2015 high at 18351 would have me growing some bear claws but for now I'm anticipating the bears will get another slap in the face with a rally that "shouldn't happen." The bears rightfully complain there is no fundamental reason for the market to rally. But that's like arguing the market should be logical.

Key Levels for DOW:
- bullish above 18,670
- bearish below 18,247

Russell-2000, RUT, Daily chart

I've been tracking the same idea for a rising wedge for the RUT and it continues to hold inside the wedge after today's decline. Yesterday's high was a test of the top of the wedge and today's low was a test of the bottom of the wedge. Yesterday's high fits well as the 3rd wave inside the wedge and the decline from yesterday fits as the 4th wave, which gives us a setup for just one more push higher to complete the 5th wave and for now I show a projection to about 1264 by September 1st. A drop below the August 17th low, near 1222, would have it looking more bearish and above 1267 would be more bullish, although the significant bearish divergence does not suggest a more bullish outcome from here.

Key Levels for RUT:
- bullish above 1267
- bearish below 1221

10-year Yield, TNX, Daily chart

Bonds have been trading in a tight range since the July 21st high for yields (lows for bond prices). TNX and TYX (10-year and 30-year, resp.) have each formed a sideways triangle for their consolidation patterns and they should soon be ready to break out to the upside. The July 6-21 rally has been followed by a sideways triangle, which points to another leg up. For TNX we could see a rally to its broken uptrend line form July 2012 - January 2015 and its 200-dma, which will both meet soon near 1.82%. Another leg up would have it achieving two equal legs up from July 6th near 1.8%-1.82%, depending on where the triangle consolidation finishes. Bonds seems to be waiting for the Fed's Jackson Hole meeting, which starts on Thursday, and at this time it's looking like they might take a hawkish stance and prompt a bond selloff (yield rally). That could actually help the stock market so it will be something else for stock market bears to consider. However, notice the previous sideways triangle in March-May 2016, which led to a breakdown instead of a rally so the only thing we can know at this point is that there's likely to be a big move soon out of this sideways triangle.

Transportation Index, TRAN, Daily chart

The TRAN has been bumping up against resistance since breaking its uptrend line from June 27th last week. In addition to multiple back-tests of the broken uptrend line, yesterday and today it also hit its downtrend line from August-November 2015, near 7950. Since the August 2nd low MACD has barely lifted its head off the mat at the zero line, which is not exactly a sign of strength. If anything, running up to double resistance has it looking like a setup to get short here.

U.S. Dollar contract, DX, Weekly chart

The US$ has dropped down near support at the top of its parallel up-channel from 2008-2011 and the one from May 2011, near 94.35 and 93.65, respectively. In addition to those support levels there is a projection to 93.82 for two equal legs down from July 25th and last week's low was 94.05. So the dollar is down to a support zone and I'm now waiting to see if it will start another rally leg. Depending on what comes out of the Jackson Hole meeting tomorrow and Friday we could see a dollar reaction (hawkish comments would be bullish for the dollar).

Gold continuous contract, GC, Weekly chart

Not much has happened to gold prices since it topped on July 6th at 1377.50. It looks like it might be forming a sideways triangle that could continue for another few weeks before breaking out. A sideways triangle here should lead to one more push higher and that would have it reaching its downtrend line form September 2011 - October 2012, currently near 1404 and potentially higher. A drop below 1307 would be a bearish heads up for at least a larger pullback and potentially something more bearish.

Oil continuous contract, CL, Weekly chart

Last week oil popped above its downtrend line from June 2014, currently near 47.80, but has dropped back down below the line this week, which at the moment leaves a failed breakout attempt. A rally above last Friday's high at 48.75 would be bullish and then it would be more bullish above price-level resistance near 51. But the larger pattern supports the need for another leg down and a drop below its 50-week MA, currently at 41.56, would be bearish, especially a weekly close below that level.

Economic reports

Other than the unemployment numbers tomorrow morning, we'll get the Durable goods orders for July, which are expected to show a reversal of June's numbers. There could be a negative reaction in the pre-market futures if that doesn't happen. On Friday we'll get the 2nd estimate for GDP in the pre-market session, which isn't expected to change much, and then Michigan Sentiment at 10:00, which is also expected to stay steady with July's number.


With a tight trading range and choppy price action for nearly two months we are left wondering if the market is in a topping pattern or just a consolidation before heading higher into the end of the year. We're seeing significant bearish divergences at recent highs compared to the ones back in July but sometimes what appears to be bearish divergence is nothing more than the market relieving the overbought conditions as the market trades sideways. This latter interpretation is quite bullish and therefore the bears need to stay cognizant of that possibility.

Arguing for the bearish case is the high bullish sentiment as the market's momentum to the upside fades. Trading volume has been very light this month (about 30% lighter than the average for August) but today's volume was heavier and on a down day that's not a good sign for bulls. From a timing standpoint there's a potentially important turn window in the first week of September so a continuation of a choppy move higher into the turn window will have me watching carefully for a market top. But stay aware of the potential for this market to break down sooner rather than later. As discussed with the NDX charts, there are enough bearish signs to be extremely cautious about further upside.

As mentioned earlier, I am short-term bullish into the first week of September but only if prices turn back up from here. A further decline would have me wondering if an important top is already in place.

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

Falling Hard

by Jim Brown

Click here to email Jim Brown
Editor's Note

Fox News is catching heat from all sides as the sexual harassment claims keep coming despite the departure of Roger Ailes. A new suit was filed and there are rumors of others to follow.


No New Bullish Plays


FOXA - 21st Century Fox - Company Profile

Twenty-First Century Fox operates as a diversified media and entertainment company in the United States, the United Kingdom, Continental Europe, Asia, Latin America, and internationally. It operates through Cable Network Programming; Television; Filmed Entertainment; and Other, Corporate and Eliminations segments. The company produces and licenses news, sports, movie, and general and factual entertainment programming for distribution primarily through cable television systems, direct broadcast satellite operators, telecommunications companies, and online video distributors. It also broadcasts network programming; and operates 28 broadcast television stations, including 11 duopolies in the United States.

Lately Fox News has been in the headlines after, Gretchen Carlson, a female news anchor, sued Fox and President Roger Ailes for sexual harassment. Within two weeks of the suit being filed, Ailes resigned from the network. In an internal investigation, more than 25 former and current Fox News employees reported incidents. The investigation revealed that a former Fox News staffer, Laurie Luhn, had been given a $3.15 million severance package after she complained about harassment by Ailes who forced her into a sexual relationship through threats and intimidation. Luhn implicated others in the support staff, several of which have moved into management positions with the Ailes departure.

This week Andrea Tantaros, former co-host of The Five and The Outnumbered, filed suit against Ailes and the network claiming the division "operates like a sex-fueled, Playboy Mansion-like cult, steeped in intimidation, indecency and misogyny." She claims other executives under Ailes aided in the cover-up and named names in the suit. She said Ailes actions were "condoned by his most senior lieutenants, who engaged in a concerted effort to silence Tantaros by humiliation and retaliation.

The law firm handling the original Ailes harassment investigation said they anticipate Fox being forced to settle with the women who have filed claims and the numbers of women are in "double digits."

This kind of news is not something Fox wants to report. While the settlements are likely to be in the millions, it is the damage to the brand that is the most important. Fox has been recognized as a pro-family conservative organization and these kinds of continuing headlines will tarnish that image.

Shares have fallen to a 7-month low and are likely to continue falling until after the settlements and the headlines have passed.

Short FOXA shares, currently $24.81, initial stop loss $25.65.

Optional: Buy Oct $24 put, currently .60, no stop loss.

In Play Updates and Reviews

Two Steps Backward

by Jim Brown

Click here to email Jim Brown

Editors Note:

The big gain on the Russell 2000 on Tuesday was completely erased with an 11-point decline today. The Russell and the Nasdaq were dragged lower by the -3.4% decline in the biotech sector. The politicians were all talking about high drug prices and "doing something about it" and the sector crashed. Making matters worse TEVA had a patent invalidated by the court opening them up to generic competition. It was not a good day for the sector.

The Nasdaq lost -42 and S&P -11. The Dow lost -65 but closed more than 30 points off its lows. Other than the biotechs, this was profit taking ahead of Janet Yellen's speech on Friday. Monday did start the six most volatile weeks of the year but today it was fear of the Fed causing the selling.

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

HZNP - Horizon Pharma
The long recommendation has been cancelled.

ACAT - Arctic Cat
The short position remains unopened until $14.15. Low today was $14.86.

HUN - Huntsman
The long position remains unopened until a trade at $17.65.

RUBI - Rubicon Project
The short position was opened at $8.90.

UIS - Unisys
The long position should be closed at Thursday's open.

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. Shares gave back 25 cents in a weak market.

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.

Position 8/23/16 with a FDC trade at $13.50

Long FDC shares @ $13.50, see portfolio graphic for stop loss.

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

HZNP - Horizon Pharma - Company Profile


No specific news. Big 10% decline on the crash in the biotech sector. Cancel the recommendation.

Original Trade Description: August 18th.

Horizon Pharma plc is a biopharmaceutical company that engages in identifying, developing, acquiring, and commercializing medicines for the treatment of arthritis, pain, inflammatory, and/or orphan diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; DUEXIS and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis; and PENNSAID for the treatment of pain of osteoarthritis of the knees. Its products also include MIGERGOT to treat vascular headache; RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus and multiple other indications; and KRYSTEXXA to treat chronic refractory gout. The company has a collaboration agreement with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer.

On August 8th the company reported earnings of 56 cents that beat estimates for 53 cents. Revenue of $257.4 easily beat estimates for $238.1 million. They guided for full year revenue of $1.025 to $1.050 billion and analysts were expecting $1.02 billion. They also affirmed adjusted EBITDA in the range of $495-$510 million.

All three business units, Orphan, Primary Care and Rheumatology performed well. Primary care revenues rose 33%. Orphan revenues rose 51% and Rheumatology rose +211%.

They have multiple drugs rapidly gaining market share and multiple drugs in the pipeline. This stock could be a prospect for a long-term hold.

Earnings Nov 7th.

Shares broke through resistance on the August 9th earnings, consolidated and drifted back slightly to use that same resistance as support. Today's close was only 3 cents below an 11-month high. A continued push higher by even a few cents could trigger significant short covering with a target over $30.

Recommendation cancelled.

MRO - Marathon Oil - Company Profile


No specific news. Oil prices fell -$1.30 and equities followed.

Original Trade Description: August 17th.

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.

Position 8/18/16 with a MRO trade at $16.05

Long MRO shares @ $16.50, see portfolio graphic for stop loss.


Long Oct $17 call @ 70 cents. No initial stop loss.

NTCT - NetScout - Company Profile


No specific news. Only a minor loss in a weak market.

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.

Position 8/19/16 with a NTCT trade at $28.85

Long NTCT shares @ $28.85, see portfolio graphic for stop loss.

No options recommended.

RDN - Radian Group - Company Profile


No specific news. New 8-month high close on Tuesday, only a 2 cent loss today.

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.

Position 8/12/16 with a RDN trade at $13.15

Long RDN shares @ $13.15, see portfolio graphic for stop loss.


Long Sept $14 call @ .15, no stop loss.

UIS - Unisys Corp - Company Profile


No specific news. The weakness accelerated. I am recommending we close this position.

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.

BEARISH Play Updates

ACAT - Arctic Cat - Company Profile


No specific news. Minor loss in a weak market. Somebody is still providing support at $14.75.

This position remains unopened until a trade at $14.15.

Original Trade Description: August 20th.

Arctic Cat Inc. designs, engineers, manufactures, and markets snowmobiles and all-terrain vehicles (ATVs), and recreational off-highway vehicles under the Arctic Cat and MotorFist brand names. The company also provides related parts, garments, and accessories. It offers accessories consisting of bumpers, cabs, luggage racks, lights, snow plows, backrests, windshields, wheels, track systems, and winch kits; shocks, attachments, and float avalanche airbags; and maintenance supplies, such as oil and fuel additives. In addition, the company provides snowmobile garments for adults and children under the Arcticwear brand, which include jackets, coats, pants, and casual sportswear. Its Arcticwear line of clothing also includes insulated outerwear, hats, mittens, helmets, boots, sweatshirts, T-shirts, and casual wear.

For Q2 the company reported a loss of 81 cents that was twice what analysts expected at 40 cents. Revenue of $104.9 million also missed estimates for $118.7 million. The company lowered guidance for the full year to a loss of 70 cents to $1 per share on revenue of $635-$655 million. Shares crashed from $18.25 to $14.33 on the news.

Earnings Oct 28th.

Since the July 29th earnings, analysts have been slashing estimates. Six analysts have cut full year estimates from a consensus loss of 19 cents to a loss of 92 cents. For the current quarter, five analysts have cut estimates from 41 cents to 62 cents.

Shares tried to rebound twice and failed. If the post earnings low fails we could see ACAT move into single digits.

I am recommending we short the stock if it makes a new August low. The current low is $14.33. It could take several days before this position it triggered.

With a ACAT trade at $14.15

Sell short ACAT shares, currently $14.81. Initial stop loss $16.00.

There are some bad ticks recently and I would like to avoid being stopped out on a bad upside tick. Once in the position I will reset the stop loss.

RUBI - Rubicon Project - Company Profile


No specific news. The position was opened with a trade at $8.90.

Original Trade Description: August 22nd.

The Rubicon Project is a technology company that engages in automating the buying and selling of advertising. The company offers advertising automation platform that creates and powers a marketplace for buyers and sellers to readily buy and sell advertising at scale. Its advertising automation platform features applications for digital advertising sellers, including Websites, mobile applications, and other digital media properties to sell their advertising inventory; applications and services for buyers comprising advertisers, agencies, agency trading desks, demand side platforms, and ad networks to buy advertising inventory; and a marketplace over which such transactions are executed.

Unfortunately, the arrival of sophisticated ad blocking software has caused RUBI significant pain. The war to claim the space occupied by display advertising has gone nuclear. Facebook reported they had changed their advertising code to get past the largest ad blocker, AdBlock Plus. Only a day later AdBlock reported they had changed their code to counter the change by Facebook. The next day Facebook announced a new change followed by AdBlock announcing a new change, etc. This went on for nearly ten days and we still do not know who will be the winner. AdBlock has more than 200 million users of its blocking program.

For a small company like Rubicon, they are getting trampled by the giants as they race to make their blocking/serving software successful. In their Q2 earnings RUBI reported 17 cents and $65.1 million in revenue. That beat the street on both numbers. However, they warned that "the digital advertising market is undergoing changes that have fueled headwinds that we expect will continue the remainder of the year in desktop advertising."

They cut guidance for the current quarter from 12 cents and $70.2 million to 8 cents and $62 million. They cut full year guidance to 75-90 cents on revenue of $260-$275 million. That compared to a prior forecast of $275-$290 million. Consensus estimates were looking for 90 cents and $295 million.

Shares crashed from $14 to $9 on the guidance warning. After a minor rebound attempt they are heading lower again and closed at $9.05 on Monday and a historic low.

The outlook is not good for RUBI and their competitors. The ad blocking war is only going to grow more competitive and fewer ads are going to be served and that will impact revenue for quarters to come.

With a RUBI trade at $8.90

Short RUBI shares, initial stop loss $10.

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