Option Investor

Daily Newsletter, Wednesday, 9/28/2016

Table of Contents

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

Market Wrap

Holding Up Into End-of-Week/Month/Quarter

by Keene Little

Click here to email Keene Little
There's been an effort to hold the stock market up into the end of the week to close out the month and quarter on a positive note and it's looking like it could happen. The bulls just need to jump over a few resistance levels and new highs will be next.

Today's Market Stats

The stock market continues to hold up and looks as though it might even be able to make new highs into October if it doesn't reverse back down in the coming days. One has to wonder what is generating excitement about the upside when there's so little fundamentally that's supporting the market. And retail traders, which include the bulk of mutual fund managers, have not been participating in the rally this year.

Investors have pulled about $80B out of equity mutual funds and ETFs so far this year and only one month out of the past nine has been net positive. Through mid-September there's been more than a $5B drawdown and there's little wonder why we often hear this is the most-hated rally we've seen.

In addition to domestic outflows the foreigners are also not participating and have pulled out about $67B out of U.S. assets according to the Treasury Department's data on international capital flows. The combination of domestic and international non-participation of course prompts the question "who's doing all the buying?"

I've mentioned many times the support for the stock market is coming largely from corporate stock buybacks, which continues to be relatively strong and certainly stronger than any selling pressure. For the quarter ending this month corporations in total have spent every penny they've made and borrowed another 18% to buy back their stocks. Whether this makes sense, considering the high prices paid and the complete lack of investments, is a question stock holders should be asking. But as long as the buybacks continue and the sellers stay away and stock prices continue to climb (the music keeps playing) the stock holders are happy.

The risk of course is what happens when the music stops. If corporations, whose earnings have been in decline for 6 quarters in a row, cannot continue to spend their declining earnings or borrow more money to spend on buybacks then who will be the buyer? The answer is the government and like Japan, they could decide to support the market, I mean start QE4 to support the economy, and start buying ETFs and other mutual funds. The Fed is not big enough to do it by itself but if the government decides to take individuals' IRA funds and "invest" it for them, that's a lot of money. But any government action would likely be late and in the meantime, when the music stops we'll likely see a sudden collapse in stock prices.

So while I see an end game soon for the stock market I also recognize that there are some more rabbits that could be pulled out of the hat and if you're bearish you must recognize that the unsupported stock market (unsupported by fundamentals) could rally a lot longer than anyone thinks is possible. We could even get a blow-off rally to SPX 2300 before it's all done. But if you're a bull and enjoying this ride, keep an eye open and your ear on the track so you have advanced warning when the southbound train is headed your way.

Oil got a big boost today, thanks to an "agreement" from OPEC, and since the stock market has been reacting to the oil market lately it came as no surprise to see the stock market rally as well. Oil had spiked down in the early-morning hours and hit a low at 44.35 before rocketing back up to a new high above those since last Thursday. The stock market is following in form but has not yet followed oil to a new high above last Thursday's. Perhaps oil is telling us it's going to happen.

Dow Industrials, INDU, Weekly chart

The Dow's weekly chart shows the 3 little white candles since the low on September 12th, which was a test of its uptrend line from February-June. Other than a spike below the uptrend line on Monday it continues to hold the line, currently near 18250. The bullish pattern, for at least one more leg up, is a rising wedge pattern for the rally off the February low. Currently I'm showing a depiction to slightly above 19K, about another +5.5%. But the bounce off the September 12th low could be just a correction to the decline from August and a drop back below 17992 would indicate a top is already in place.

Dow Industrials, INDU, Daily chart

The rally off Tuesday morning's low has now made it back up to resistance at its broken uptrend line from August 2 - September 1, near 18340, and its May 2015 high at 18351. It came within a point of 18351 and then pulled back to 18339 so resistance is being recognized. Now the bulls need a gap over resistance while the bears need to see a bearish kiss goodbye following the back-test. If we do see more rally on Thursday, watch carefully to see if the downtrend line from August and its 50-dma, both near 18410, block any further upside progress. A drop below Tuesday morning's low at 18052 would be the first signal that the bounce correction finished and new lows are coming.

Key Levels for DOW:
- bullish above 18,351
- bearish below 18,052

S&P 500, SPX, Daily chart

SPX was able to close above its 50-dma today, near 2169, thanks to an end-of-day rally, but if it doesn't hold on Thursday we'd have a head-fake break that could lead to a stronger decline. If the rally continues we'll likely see the September 9th gap closed, at 2181.30, and the downtrend line from August tested, near 2182. Above 2183 would be a strong indication that new highs are coming and at a minimum we should then look for the 2250 area and the top of its rising wedge pattern for the rally from February.

Key Levels for SPX:
- bullish above 2181
- bearish below 2119

S&P 500, SPX, 60-min chart

On the 60-min chart I show a price projection at 2174.30, which is where the bounce off Tuesday morning's low would achieve two equal legs up for a possible a-b-c correction before heading back down. A drop below this morning's low near 2151 would indicate another leg down but again, over 2183 would keep me bullish for another couple of weeks.

Nasdaq-100, NDX, Daily chart

Since early August NDX had struggled with resistance at its March 2000 highs at 4816 until more convincingly breaking above it on September 21st. It then popped above the trend line along the highs from July-November 2015, near 4868, for one day before dropping back down to resistance-turned-support at 4816 on Monday. That was used to launch Tuesday's rally (bullish kiss goodbye) but it stopped right at the trend line along the highs. Today it was able to close only marginally above the line but left a hanging man doji at resistance. So it's not a convincing bullish move yet but any further rally should get NDX up to the price projection at 4930, which is a projection for the 5th wave in the move up from June (where it would equal the 1st wave). It would turn more bullish above 4930.

Key Levels for NDX:
- bullish above 4931
- bearish below 4772

Russell-2000, RUT, Daily chart

A rising wedge pattern for the RUT supports the idea for another rally leg to complete the 5th wave. Based on a couple of different price projections for its move up from February there is upside potential to almost 1300 for the RUT and that could be reached by mid-October. I've been looking for a mid-October turn window, thinking it would mark a low, but now it's looking like it might mark a high. This also helps those who would like to see the market hold up as a way to help the incumbent party stay in power. But if the sellers return and the RUT drops below the September 21st low near 1228 it would be a confirmed break of the uptrend line form June-September, currently near 1235.

Key Levels for RUT:
- bullish above 1264
- bearish below 1228

20+ Year Treasury ETF, TLT, Daily chart

Based on an a-b-c pullback pattern from July into the September low for TLT, I was looking for the start of another rally leg and it's looking like it should continue. But first it will have to deal with its downtrend line from July, which it nearly tagged with today's high at 139.15 and where the downtrend line will be tomorrow. There's a good possibility for at least a pullback and then we'd get to see if it will be a corrective pullback or something more bearish. Until I see evidence that suggests otherwise, I'm looking for a higher rally for bonds (lower for yields).

Transportation Index, TRAN, Daily chart

The TRAN is acting bullishly by climbing again above its downtrend line from August-November 2015, like it did on September 7th. But this time, the rally above the downtrend line on September 22nd was followed by a pullback to the line and then a bounce off it, giving us a back-test and bullish kiss goodbye. Now all the bulls need to do is rally above the September 8th high near 8084 to confirm this is bullish and not just a bounce correction.

U.S. Dollar contract, DX, Daily chart

The US$ hasn't been acting very bullish but it also refuses to break down. It's coiling and holding its uptrend line from May, currently near 94.90, and as long as it holds above its uptrend line it will remain bullish. I show a price projection at 92.73, which is where a pullback from July would achieve two equal legs down so that's the downside objective if the dollar breaks down. But a break above its downtrend line from December 2015, currently near 96.70, would confirm the next rally leg to the 100 area.

Gold continuous contract, GC, Daily chart

Gold remains inside a descending triangle pattern since its July high. This is a bullish consolidation pattern and the next rally leg could reach as high as 1480. A rally above the top of the triangle, near 1345, would the first bullish sign and then above the August 2nd high near 1374 would confirm the next rally leg for gold has started. But the March 2014 high at 1393 and the downtrend line from September 2011 - October 2012, nearing 1400, would be levels to climb above. A breakdown below 1305 would leave a failed bullish pattern and that would likely be followed by a strong selloff.

Oil continuous contract, CL, Daily chart

As mentioned earlier, oil rallied off this morning's low and put in a solid day for oil bulls. The reason for the rally was attributed to an announcement by OPEC that it has reached a deal to limit oil production. It was announced that details would not be released until their official meeting in Vienna on November 30th. Uh huh, and at the same meeting we're going to hear an announcement that the tooth fairy is actually real. As one blogger put it, "I think the "agreement" constitutes the Saudis buying USO, then leaking fake info about a possible agreement, sell USO, buy SCO then leak information about how there won't be an output cap. Rinse repeat..." We've seen a repeated effort to boost the prices of oil with these "announcements" so it's hard to believe this one is any different. But the chart does support the idea for higher prices if it can get above 47.75.

Oil rallied 2.81 from this morning's low at 44.35 to 47.16, a +6% move, this afternoon into the 14:30 close of the RTH session. It continued to push a little higher to 47.47 but it was unable to break above its September 8th high at 47.75 (that could change if the overnight rally continues), which is the 3rd lower high since June 8th. The downtrend line from June 8th is currently near 47.16, which is where the rally stopped in the RTH session. The brief poke higher in the after-hours session made it above the downtrend line (twice) but was unable to hold above the line (as of 19:00 EDT).

I show an expectation for a continuation lower but if price gets above 47.75 it would be more bullish, especially if it gets back above the October 2015 high near 51 (and stays above that level since it could be a setup for a double top).

Economic reports

Thursday morning's economic reports include the 3rd estimate for GDP, which are not expected to change, the unemployment claims data and Pending Home Sales, which are expected to decline. We shouldn't see much of a market reaction unless something really surprises the market.


With the market's recovery off the mid-September low it's looking like we could see a press higher into Friday to complete the end of the week/month/quarter on a high note. I also see the potential for the rally to continue to new highs into mid-October, potentially meeting a turn window at that time. The flip side of that expectation is a strong decline into mid-October as the bounce efforts fail to hold. The declines have looked more impulsive than the rallies and that leaves a potentially very bearish pattern as long as the indexes do not rally above last Thursday's highs (only 8 points away for SPX, at 2080). If the bears are going to pounce before new highs they'll need to do it on Thursday, otherwise they might be forced back into their caves for a couple more weeks.

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

Name Up in Lights

by Jim Brown

Click here to email Jim Brown
Editor's Note

Cree Inc is a manufacturer of LED lights that produce more light on less energy and last up to 32 years. Cree has revolutionized LED lighting and it will only get better from here.


CREE - Cree Inc - Company Profile

Cree, Inc. provides lighting-class light emitting diode (LED), lighting, and semiconductor products for power and radio-frequency (RF) applications in the United States, China, Europe, South Korea, Japan, Malaysia, Taiwan, and internationally. Its Lighting Products segment offers LED lighting systems and bulbs for use in settings, such as office and retail space, restaurants and hospitality, schools and universities, manufacturing, healthcare, airports, municipal, residential, street lighting and parking structures, and other applications. This segment sells its products to distributors, retailers, and customers. The company's LED Products segment provides blue and green LED chip products for use in various applications, including video screens, gaming displays, function indicator lights and automotive backlights, headlamps, and directional indicators. It also offers XLamp LED components and LED modules for lighting applications; and surface mount and through-hole packaged LED products for video, signage, general illumination, transportation, gaming, and specialty lighting applications. In addition, this segment provides silicon carbide (SiC) materials for RF, power switching, gemstones, and other applications. Its Power and RF Products segment offers SiC-based power products consisting of Schottky diodes, SiC metal semiconductor field-effect transistors, and SiC power modules for use in power supplies used in computer servers, solar inverters, uninterruptible power supplies, industrial power supplies, and other applications. This segment also provides gallium nitride (GaN) high electron mobility transistors (HEMTs) and monolithic microwave integrated circuits (MMICs) for military, telecom, and other commercial applications; and custom die manufacturing services for GaN HEMTs and MMICs. Company description from FinViz.com.

Last week Cree introduced a new bulb portfolio of 25 new products. They offer better light quality, better dimming, better lifetime, better warranty and better pricing. LED lighting has finally gone mainstream.

Everybody hates to change light bulbs and the new product line has a life expectancy of 22 to 32 years. The light color has been improved and you can now dim them to as low as 1% output. The new bulbs are now guaranteed for a minimum of 10 years with a 100% satisfaction guarantee. The good news is that LED bulbs are only one of Cree's multiple product lines.

With the democratic political platform strongly green energy based and advocating products that reduce climate change, Cree should be at the top of the green list. The 60-watt replacement bulb offers the same 815 lumens of light but only consumes 9 watts of power. The downside is the cost at $12 for a 4-pack. The upside is a $135 savings in electricity over the 22.8-year life of the bulb.

Cree shares fell -4.50 to $23 when they missed earnings by a penny in August. They also lowered guidance on revenue for the current quarter. That is now behind them and shares are at a seven week high of $25.50. The last week of gains has been powered by multiple new product announcements and suggestions to buy before a Clinton presidency.

Earnings Oct 18th.

The earnings are only four weeks away so this will be a short term position to capitalize on all the "green" talk over the next several weeks.

With a CREE trade at $26.00

Buy CREE shares, currently $25.52, initial stop loss $24.50.

No options recommended because of the short time frame.


No New Bearish Plays

In Play Updates and Reviews

Buy the Dip

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes gapped higher at the open but immediately fell back into negative territory. That dip lasted until about 1:30 and news that OPEC agreed to a production cap sent oil prices surging along with energy equities. That lifted the broader market and Wednesday closed with a decent gain.

Small cap stocks reversed their lackluster performance on Tuesday to lead the markets on Wednesday. This is what we want to see because it suggests portfolio managers are starting to buy for the longer term. They can trade in and out of the big cap techs but once into a small cap position they have limited options because a hurried exit can be costly.

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

ZOES - Zoes Kitchen
The short stock position was opened at $23.95.

EXEL - Exelixis
The long stock position was closed at $14.45.

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

AAOI - Applied OptoElectric - Company Profile


No specific news. Company exhibiting new products at the SCTE/ISBE Cable-Tec Expo this week.

Original Trade Description: September 17th.

Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television (CATV), and fiber-to-the-home (FTTH) networking end-markets. It offers optical modules, optical transceivers, lasers, transmitters, and turn-key equipment, as well as headend, node, and distribution equipment. The company sells its products to internet data center operators, CATV and telecommunications equipment manufacturers, and internet service providers through its direct and indirect sales channels worldwide. Company description from FinViz.com.

For Q2, the company reported adjusted earnings of 16 cents that beat estimates for 6 cents. Revenue of $55.3 million beat estimates for $50.8 million. For the current quarter the company guided to earnings of 16-21 cents and revenue of $56-$59 million.

AAOI is in the same optical sector as NPTN and is also experiencing rapid growth. However, the company's products are also used by cable TV providers. Amazon is AAOI's largest customer.

Last week AAOI won an order for 10,000 transceivers worth more than $5 million from a new company.

Zacks said the consensus earnings for AAOI have been rising rapidly as analysts upgrade their forecasts. Over the last month alone the consensus Q3 estimate has risen from 13 cents to 22 cents. Full year estimates have risen from 37 cents to 51 cents.

Earnings Nov 3rd.

Over the last three months, shares have rebounded from $9 to $21 as the earnings and outlook increased. Resistance is currently $22. With the super cycle getting a lot of headlines I believe the stock will break out.

I am putting an entry trigger on it just in case the recently volatile market gaps down.

Position 9/19/16:

Long AAOI shares @ $22.10, initial stop loss $19.25

BOX - Box Inc - Company Profile


No specific news. Finally a breakout to a 14-month high after two weeks of stagnation just over prior resistance.

Original Trade Description: September 15th.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

In Q2, Box reported an adjusted loss of 14 cents that improved from the 28 cent loss in the comparison quarter. Analysts were expecting a loss of 19 cents. Revenue rose 30% and deferred revenue rose 40%. They had cash on hand of $173.33 million, up from $140 million in the comparison quarter.

The company added 4,000 new corporate customers including Electronic Arts (EA), Pfizer (PFE), AutoDesk (ADSK), Western Union (WU), Uber and the Federal Communications Commission (FCC) to bring their installed base to 66,000.

Box has adopted a neutral strategy. They joined with Microsoft in offering Office 365. They partnered with Alphabet to offer Google's suite of word processing, spreadsheets and other productivity tools known as Google Docs. Box will act as a third party content repository for Google Docs. That may seem odd since they also offer Office 365, which is a competing product suite but that is the key for Box. They are creating a common platform where customers can use the tools they like. One group of people in an office may like Office 365 and another group Google Docs.

Box also partnered with IBM to introduce Box Relay, which is a collaboration platform where outside users, fellow workers, etc, can be invited to participate in documents and worksheets and track changes, alert other users of changes and reduce bottlenecks in the workflow process. You no longer have to email a spreadsheet to other employees and then receive it back by email once they modify it, then add all the changes into the master document. Now it can all be done in the cloud in real time.

Box also partnered with Apple and Amazon in other collaboration projects.

By maintaining a neutral stance in the cloud, Box can take advantage of the current customers of other cloud customers. Everybody benefits because they are not competing but collaborating.

Box shares broke out of a long-term base this week and should be headed back to post IPO levels at $19 or higher now that their technology is receiving widespread acceptance.

Position 9/16/16:

Long BOX shares @ $14.74, see portfolio graphic for stop loss.

EXEL - Exelixis - Company Profile


Exelixis was crushed after news broke that 9 of the 24 patients in a trial for their genital cancer drug were required to reduce the dosage due to adverse events. Despite the events, there was consistency in the overall survival rate of patients. However, shares fell -23% at the open to stop us out at $14.45 for a 65-cent loss. Thankfully, we had a tight stop loss. Leerink analysts said the sell off was vastly overdone.

Original Trade Description: September 24th.

Exelixis, Inc., a biopharmaceutical company, engages in the discovery, development, and commercialization of new medicines with the potential to enhance care and outcomes for people with cancer. It focuses on advancing cabozantinib, an inhibitor of multiple tyrosine kinases, including MET, AXL, and VEGF receptors, which has shown clinical anti-tumor activity in approximately 20 forms of cancer and is the subject of a broad clinical development program. The company has received regulatory approval for two separate formulations of cabozantinib for the treatment of certain forms of kidney and thyroid cancer and marketed as CABOMETYX tablets in the United States and COMETRIQ capsules in the United States and European Union respectively. It also offers COTELLIC (cobimetinib), a selective inhibitor of MEK, in the United States and European Union; and is being evaluated for further potential indications by Roche and Genentech under collaboration with Exelixis. Exelixis, Inc. has collaboration and license agreements with Ipsen Pharma SAS, Genentech, Inc., GlaxoSmithKline, Bristol-Myers Squibb Company, Sanofi, Merck, and Daiichi Sankyo Company Limited for the development and commercialization of various compounds and programs. Company description from FinViz.com

Potential cancer drugs are the main focus of the big cap drug companies. They believe a breakthrough in cancer treatment is just around the corner and the drug that turns into a silver bullet is going to be obscenely valuable. With over 200 types of identified cancers no one drug has been able to affect them all.

Exelixis has multiple drugs in process and cabozantinib has proven effective in 20 different forms of cancer. The company appears well on its way to finding that silver bullet.

The stock is on fire as more investors decide the company will be acquired. If the price is anything like the Alergan (AGN) purchase of Tobira Therapeutics (TBRA) last week any takeout price could be astronomical. TBRA closed at $4.73 and spiked to $40 the next morning.

Earnings Nov 2nd.

Update 9/26/16: In the past 30 days, 3 quarterly estimates have gone higher for Exelixis while none have gone lower in the same time period. The trend has been pretty favorable too, with estimates narrowing from a loss of 16 cents a share 30 days ago, to a loss of 13 cents per share today, a move of 23.1%.

Meanwhile, Exelixis’s current year figures are also looking quite promising, with 4 estimates moving higher in the past month, compared to none lower. The consensus estimate trend has also seen a boost for this time frame, narrowing from a loss of 71 cents a share 30 days ago to a loss of 63 cents per share today, an increase of 12.7%.

I know the stock has been a rocket lately but analysts still believe it is undervalued. With the speculation in the biotech sector the rocket could continue higher. If we can just get a couple days of gains we can tighten up the stop loss and let it ride. Hopefully it will be on somebody's shopping list.

I have wanted to add it for the last couple weeks and kept thinking it would take a rest. It is not happening. Every day I look at it again and it posted another gain.

Position 9/26/15 with an EXEL trade at $15.10

Closed 9/28/16: Long EXEL shares @ $15.10, exit $14.45, -.65 loss.

KS - KapStone Paper & Packaging - Company Profile


No specific news. Minor gain, holding at prior resistance.

Original Trade Description: September 21st.

KapStone Paper and Packaging Corporation manufactures and sells containerboards, corrugated products, and specialty paper products in the United States and internationally. The company operates in two segments, Paper and Packaging, and Distribution. The Paper and Packaging segment offers containerboards consisting of linerboard and corrugated medium to manufacture corrugated containers for packaging products; and corrugated products. It also offers specialty paper products, including kraft paper comprising multiwall paper used to produce bags for agricultural products, pet food, baking products, cement and chemicals, and grocery bags; specialty conversion products, such as wrapping paper products, dunnage bags, and roll wraps; and lightweight paper. In addition, this segment provides saturating kraft paper under the Durasorb trade name for use in construction, electronics manufacturing, and furniture manufacturing industries; and unbleached folding carton board under the Kraftpak trade name to integrated and independent converters in the folding carton industry. Company description from FinViz.com.

On Sept 7th Kapstone announced it was spending $25 million in Q4 to build a new state of the art sheet plant in Ontario, California. They are also investing as a minority partner in a sheet feeder plant in the same city. The facilities will be producing paper by January 2017. The investments will boost Kapstone's annual capacity by over 60,000 tons. They recently completed an acquisition of Central Florida Box, which added 20,000 to 25,000 tons per year.

Kapstone is the fifth largest U.S. producer of containerboard and corrugated packaging products and the largest producer of kraft paper. They have 4 paper mills, 22 corrugated converting facilities and 65 distribution centers.

They reported adjusted earnings of 27 cents that missed estimates for 30 cents. Revenue of $784.9 million missed estimates for $823.8 million. However, revenue rose 17%. The earnings miss was due to the integration costs from multiple acquisitions, and less favorable product mix and the timing of planned maintenance outages. The CEO said this was temporary now that they have achieved the goal of integrating the 115,000 tons of supply from the Victory acquisition into Kapstone's mill and plant system. The company said earnings would now rise over the next 12 months thanks to the higher capacity.

Earnings Oct 26th.

Shares dipped only slightly after the July 27th earnings and have risen steadily in the weeks that followed. On Monday Bank of America upgraded Kapstone from underperform to neutral saying containerboard market conditions are improving and there is limited downside risk for Kapstone. They highlighted the robust revenue growth both in the recent past but expected in coming quarters.

Shares closed at a 9-month high on Wednesday with a breakout over resistance at $18.50.

Position 9/22/16 with a KS trade at $19.35

Long KS shares @ $19.35, see portfolio graphic for stop loss.

BEARISH Play Updates

PPC - Pilgrims Pride - Company Profile


No specific news and no rebound in a bullish market.

Original Trade Description: September 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946. Company description from FinViz.com.

The chicken business is becoming a lot more competitive. The consumer movement to free range chickens with no antibiotics and growth hormones is squeezing normal high volume breeders and reducing their market share. When your chickens have been previously grown in one square foot cages the change to free range brings a lot of problems and a decline in volumes. They are also faced with the growing occurrences of various bird flu breakouts.

PPC sells a lot of meat internationally and the prohibitions are growing against antibiotics and growth hormones. When an entire country becomes suddenly off limits because of new restrictions that can be costly.

In order to combat these problems the company spent large sums of money in research and development and now that debt has become a new burden in a shrinking marketplace. Earnings are also sensitive to price movement in the agricultural community with the cost of soybeans, corn and other feed grains continually rising. The fluctuating dollar is also a problem with their international sales.

Earnings Oct 26th.

Shares are about to trade at a 10-month low when they fall under $20.65. That could accelerate the selling as investors give up on the stock.

Position 9/27/16:

Short PPC shares @ $20.94, see portfolio graphic for stop loss.


Long Nov $20 put @ 70 cents, see portfolio graphic for stop loss.

SHLD - Sears Holdings - Company Profile


Fitch warned that Sears had a high risk of bankruptcy within a year. The 114 page report showed a heightened risk of bankruptcy with Sears, Claire's Stores and Nine West Holdings. Fitch said consumers are abandoning the shopping mall in favor of online shopping or local boutique stores. Fitch also said a Sears bankruptcy would obliterate Seritage, the REIT spun off from Sears last year to generate $2.8 billion in cash. Seritage has 266 retail properties with 170 leased to Sears and 82 leased to Kmart. About 79% of Seritage's rental income comes from Sears. The retailer has already filed notie of termination for 17 stores totaling 1.7 million square feet at the end of January.

Original Trade Description: September 19th.

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of the end of May, this segment operated approximately 833 Kmart stores.

The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of the end of May, this segment operated 709 Sears stores. Sears Holdings Corporation was founded in 1899. Company description from FinViz.com.

After 117 years, Sears is about to go the way of the dinosaurs. The chain has not been able to keep up with the changing times and the competition from online retailers. The company announced on Friday it was closing 64 additional Kmart stores in addition to the 68 Kmarts and 10 Sears stores previously announced in July. In May they warned the total store closings for the year would reach 170 so they are well on their way.

The chain has lost more than $9 billion in recent quarters and were it not for investments by Edward Lampert and sales of real estate for $2.7 billion the store would already be out of business. In Q2 Sears lost $395 million and ended the quarter with only $276 million in cash on hand. CEO Lampbert agreed to loan the company another $300 million so they could survive another quarter. Moody's warned last week that Sears and Kmart do not have enough cash to stay in business. Moody's said the company was bleeding cash and would have to continue relying on real estate sales, sales of assets or outside funding to sustain operations. Moody's estimated their cash burn was $1.5 billion a year. In August, Sears reported cash on hand of only $276 million and not near enough to buy inventory for the holiday shopping season. The company's minimum pension contributions for 2016-2017 are $596 million and nearly twice the cash on hand.

In Q2, sales fell -8.8% to $5.7 billion. Same store sales for Sears fell -7% and -3.3% for Kmart.

In 2000, Sears had sales of $41 billion a year. That declined to $15 billion in 2015. Over the same period Kmart sales have fallen from $37 billion to $10 billion. Sears has funded debt of $3.5 billion and unfunded pension liabilities of $2.1 billion.

Shoppers claim when they do go to a Sears store they have to beg them to take their money. Many report wandering around the floor for a long time just trying to find a sales person to handle their sales. Other say they have quit going back because the shelves are bare and the merchandise they do have has been picked over so much there is nothing left but scraps.

Shoppers at Kmarts claim the store has been using sheets and shower curtains to hide empty shelves and closed departments.

When Sears does go out of business, it will be a windfall for JC Penny. There are 59 malls that have both Sears and JC Penny stores. Any Sears customers that have not already made the switch will immediately move to JC Penny as their general merchandise store of choice. Some people are very faithful to malls they have shopped at for years and that is a boon for JC Penny.

The recent cash burn headline from Moody's may have put Sears into its final death spiral. The shelves are empty, cash is limited and Lampbert is not going to continue putting good money into a bad investment. This could be a long term position.

Position 9/20/16:

Short SHLD shares @ $12.00, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Closed at a new historic low.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.

ZOES - Zoes Kitchen - Company Profile


No specific news. New closing low.

Original Trade Description: September 27th.

Zoe's Kitchen, Inc., through its subsidiaries, develops and operates a chain of fast-casual restaurants. It operates a range of restaurant formats, including in-line, end-cap, and free-standing restaurants. As of August 22, 2016, the company operated 191 owned and franchised restaurants in 20 states of the United States. Zoe's Kitchen, Inc. was founded in 1995 and is based in Plano, Texas. Company description from FinViz.com.

For Q2, ZOES reported earnings of 6 cents that matched estimates. Revenue of $66.3 million missed estimates for $67.3 million The earnings were not the problem.

Same store sales rose only 4% and that was due to a 3.1% increase in prices so the real rise was only +0.9%. This compares to +8.0% in Q1. They also cut their guidance for the full year from 4.5% to 6.0% down to 4.0% to 5.0% and remember that includes a 3.1% price increase so the real comparable numbers are 0.9% to 1.9% sales growth.

The company also cut its revenue guidance from $277 - $281 million to $277 - $280 million, which is not a big drop but analysts were expecting $280 million so the midrange $278 million would be another miss.

Earnings Nov 14th.

The market appears saturated with fast casual restaurants and "earnings were not bad" is not sufficient to propel the stock higher given the decline in same store sales.

ZOES closed at a historic low at $23.80 on Sept 20th. Shares rallied on short covering in the market rebound but are headed back to set a new low.

Position 9/28/16:

Short ZOES shares @ $23.95, see portfolio graphic for stop loss.

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