Option Investor

Daily Newsletter, Tuesday, 10/4/2016

Table of Contents

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

Market Wrap

Support Test

by Jim Brown

Click here to email Jim Brown

Multiple indexes tested support and they barely rebounded as the October trend begins to take hold.

Market Statistics

With the Q3 window dressing over on Friday, the October window undressing is gaining speed. Typically, the first two weeks of October are negative and the indexes appear to be setting up for a support break. Buy the dip traders are probably going to refrain from jumping in immediately if those support levels break. The first two weeks of October have hosted some spectacular market declines over the years. While I do not expect any material crash, it is the one that we do not expect that causes the most damage. For weeks, I have recommended not to be overly long and to keep a shopping list handy of stocks you would like to buy at lower levels. That is even more important over the next ten days.

There were no economic reports to boost the market this morning. The CoreLogic Home Price Index showed prices rose +6.2% year over year in August compared to +6.0% in July. That was the 20th consecutive monthly price increase. New York posted the biggest gain at +1.7%, Las Vegas +1.2%, Houston at +0.7%, Dallas, Phoenix and Philadelphia rising +0.6% for the month. This report is normally ignored.

The ISM - New York for September rose from 47.5 to 49.6 but remains in contraction territory for the second month. The ISM has been in contraction for four of the last five months. The internal components were mixed but employment imploded with a drop from 54.9 to 33.9 and well into contraction. That is the weakest reading since the financial crisis. The August employment reading was the only positive number since January. The report was ignored.

The rest of the week is headlined by the employment reports and should the numbers come in as expected the market could breathe easier. Several of the recent Fed speakers have tried to revive the November Fed meeting as a possible rate hike and a hot payroll number over 200,000 could help stimulate those fears. The consensus estimate is a gain of 168,000. However, August came in at +151,000 and missed estimates by a mile BUT it is the most heavily revised number of the year. Upward revisions can be significant. If September comes in strong and August has a big upgrade it could bring the Fed back into focus even though the November meeting is only four working days before the election. The Fed normally tries to avoid movement in that situation in order to avoid appearing political.

The Sunday night debate could have a significant impact on Monday's market if it appears Trump recovers from the beating in the first debate. Surrogates are predicting an entirely different Trump. Clinton was on her game so it will be hard for her to improve. The market appears to favor a Clinton presidency and a divided government in hopes of retaining the status quo.

In stock news, Darden Restaurants (DRI) reported earnings of 88 cents compared to estimates for 82 cents. Revenue of $1.71 billion missed estimates for $1.72 billion. Same store sales of +1.3% were below forecast. They repurchased 3.2 million shares in the quarter. The board authorized a new $500 million buyback program compared to their $7.7 billion market cap. They finished the quarter with $114.7 million in cash compared to $274.8 million in the year ago quarter.

Darden guided for full year earnings of $3.87-$3.97 compared to prior forecasts of $3.80-$3.90 with same store sales rising 1% to 2%. Analysts expect $5.57 billion in revenue. Shares spiked $2.50 to $63.90 at the open but fall back to trade briefly in negative territory before the close. Weak comp store sales guidance was blamed for the decline.

Netflix (NFLX) shares failed to continue their big 4% gains from Monday on rumors Disney may be looking at acquiring the streaming company. Disney is also said to be considering a bid for Twitter (TWTR). Netflix is constantly talked about by the rumor mill as an acquisition target with Apple (AAPL) the most likely acquirer. However, Disney would be a good fit given all their content availability. It would take the pressure off the ESPN cord cutters and give the company a big jump into streaming. Disney's market cap is $150 billion and Netflix is $44 billion. Shares of Netflix punched through the resistance at $100 on Monday and held its gains today in a weak market.

Transocean Offshore (RIG) continued its decline after the company announced on Monday that Reliance Industries had cancelled a contract on the Discoverer India as of December 2016. The contract was supposed to run through January 2021. Transocean will receive a lump sum termination payment of $160 million. The daily lease rate was $528,000 so the termination payment was only a minor amount of the $771 million in payments left on the lease. On the positive side the Transocean Barents was awarded a new contract for $260,000 per day for 15 months but the contract does not start until Q3-2017.

Alphabet (GOOGL) announced its new smartphone called Pixel. Instead of licensing out production to be made and marketed by its prior partners, Google is contracting with HTC to make the Google branded phone. This will allow Google more control over what goes in the phone and they made a big point of saying it will not have any of the "bloatware" now common on Android phones. The manufacturers and carriers like Verizon put tons of software on the Android phones in hopes of getting you hooked and running up your data bills.

The Pixel comes with Google Assistant, which is their answer to Apple's Siri and supposedly an improvement to Google Now. The phone will come in two sizes (5.0 and 5.5 inch) and three colors (black, silver and blue). Google is also giving owners unlimited cloud storage at full resolution. That means any pictures you take will not be degraded by being compressed for storage. The 12.3 megapixel camera has a DxOMark rating of 89, which is the highest of any smartphone. A 15-minute charge will supply 7 hours of battery life.

The phone also comes Daydream VR ready and this time they have actual headsets rather than a cardboard contraption used in the past.

The phone starts at $649 and will be available on Tuesday in the U.S. and Canada. There is a 32 gb version and 128 gb and it has a headphone jack.

They also announced Google Home, a competitor to Amazon's Alexa device, Echo. Google Home will start at $129 compared to $179 for Echo. Home will be available November 4th. They also announced a new WiFi router and updated Chromecast Ultra.

After the bell Micron (MU) reported an adjusted loss of 5 cents compared to estimates for a loss of 12 cents. Revenue of $3.22 billion beat estimates for $3.13 billion. The company guided for actual earnings of 13 to 21 cents in Q3 compared to analyst estimates for 12 cents. Revenue guidance is now $3.55 to $3.85 billion and analysts were expecting $3.48 billion. Chipmakers are rebounding because of a surge in PC sales after years of steady declines. The successful implementation of Windows 10 has caused many consumers to finally make that upgrade decision. This decline created an oversupply of memory chips but the recent PC surge has sucked up much of the available inventory and chipmakers are seeing prices firm again. Volumes of DRAM chips rose +20% with a 12% rise in Nand chips. Despite the earnings beat and strong guidance the stock lost $1 in afterhours.

Acacia Communications (ACIA) shares rallied 8% after the bell when they guided for higher earnings. They raised guidance from earnings of 64-76 cents to 83-90 cents. Analysts were expecting 74 cents. The company also said it was going to do a secondary offering of 4.5 million shares of which 1.2 million will be sold by the company. This allows prior investors with previously restricted shares the ability to sell. The entire networking sector has been seeing raised estimates and strong performance. China is only half way through its upgrade to 100 gb infrastructure and U.S. carriers like Verizon are just beginning.

Sears Holdings (SHLD) spiked to $13.69 on news the company was taking bids on the Craftsman tool brand. Rumors have Stanley Black & Decker (SWK), Hong Kong based Techtronic Industries, Apex Tool Group and Husqvarna are making bids. Bloomberg said this could bring Sears up to $2 billion. Shares of SHLD shot up 17% and were halted for volatility. When trading reopened they crashed back to almost where they started.

Shares of Team Health (TMH) spiked 16% just before the close after the Wall Street Journal said the company was up for sale. They are reportedly in talks with the Blackstone Group and Bain Capital and could strike a deal this month. Team Health supplies outsourced medical services for medicine, emergency care, critical care and other areas to more than 3,000 healthcare facilities.

Crude oil prices rallied through resistance at $48.50 on continued chatter about the potential for an OPEC production cut. After the bell, the API inventory report showed a massive decline of -7.6 million barrels and prices continued to make gains. Analysts were expecting a weekly build of about 1.5 million barrels. The drop in inventories is most likely related to Hurricane Matthew. It has been brewing in the Caribbean for the last ten days and tankers headed for the Gulf would have lingered well out in the Atlantic while waiting for Matthew to move north and away from the entry points into the Gulf.

This week the path between Cuba and Florida has been closed and last week it was the southern route between Cuba and Mexico that was closed. The storm spent a week south of Cuba. There are probably close to 100 tankers parked well out into the Atlantic waiting for these storms to pass. The new storm headed for Bermuda is named Niccole.




The major indexes are all pulling back to critical support levels and trouble could be headed our way. The S&P dipped below initial support at 2,150 but managed to recover right at the close. On an intraday basis, there have been dips to the 2,140 level and that appears to be where the dip buyers were waiting. With the close at 2,150 today, they may not be so ready to buy another dip to 2,140 on Wednesday. If the early October trend is going to assert itself the dip buyers may pull back and look to test the waters again at 2,120.

I have said several times I think the 2,120 level will hold and I would be a buyer there on any apparent rebound. I would rather not catch a falling knife and wait to see if that level is going to hold. Getting in too late is far easier on the pocketbook than getting in too early.

I mentioned in the weekend newsletter than the higher low pattern on the Dow was ragged and far less promising than the one on the S&P. In fact the pattern of lower highs has become prominent and is suggesting the next material move is going to be back to support at 18,000 instead of up to 18,400.

I scanned the charts of the 30 Dow components and only about 7 actually have a bullish bias. Most of them are bearish rather than neutral. If there is going to be a period of firming before the earnings cycle begins it better begin soon or that 18,000 level is not going to hold.

The Nasdaq was the bright spot on Tuesday with only a -0.2% decline. The Composite Index is holding near its recent highs and not showing any indications of a potential decline. That could change in a heartbeat if something happens to the overseas markets or the payroll reports miss estimates.

Initial support at 5,255 has not been tested since last Thursday. That would be the first line of defense but it is also lighter support than the 5,200 level. Apple, Google, Netflix and Amazon have been supporting the market so far this week. The various headlines may have run their course and those gains could fade.

The Russell 2000 also has a pattern of lower highs and support at 1,235 is being tested almost daily. Any material bout of selling is likely to break that support and the next level is well down at 1,205. The small cap index is the market sentiment index and a support break could trigger additional selling in the larger cap indexes.

This is one of those situations where everyone is watching everyone else and waiting to see who is going to make the first move. There does not appear to be any volume buying. There are a few nibbles here and there but most of the big gains are coming on headline stocks.

Portfolio managers are likely to wait for a concentrated downdraft to clean out the weak holders before they go all in for the late October rally. I believe we have risk to the September lows. While we may not make it down to those levels, we need to be prepared just in case we do get a washout. Ships can sink in a quiet sea and stocks can fall for no reason in a low volume, no headline market.

Beware the payroll reports. Any material deviation from the estimates could cause market volatility in either direction. I would continue to urge not to be overly long and maintain a shopping list of stocks you would like to buy at a lower level. We may never get that chance but if we do, we need to be ready.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Got Knee Pain?

by Jim Brown

Click here to email Jim Brown
Editor's Note

Flexion has a new drug for treatment of arthritic knee pain. If approved it would immediately catapult into billion dollar drug status.


FLXN - Flexion Therapeutics - Company Profile

Flexion Therapeutics, Inc., a specialty pharmaceutical company, focuses on the development and commercialization of anti-inflammatory and analgesic therapies for the treatment of patients with musculoskeletal conditions. It lead product candidate includes Zilretta, a sustained-release intra-articular steroid, which is in clinical trials to treat the patients with moderate to severe osteoarthritis (OA) pain. The company is also developing FX007, a preclinical, small-molecule TrkA receptor antagonist to address post-operative pain; and FX005, a sustained-release intra-articular p38 MAP kinase inhibitor for patients with end-stage OA pain. Company description from FinViz.com.

The FDA has recently said that results from one phase 4 trial can support a FDA application for approval. Recently, Flexion reported positive results of a trial for Zilretta. The drug is a ne wform of treatment for chronic knee pain caused by arthritis. Typically, once a patient can no longer get by on aspirin or Advil, the next solution is quarterly shots of a corticosteroid. As time passes these shots have less of an impact on the pain and patients are suffering significantly before the quarter is over.

Zilretta provided a 50% improvement in pain relief and the lack of pain lasted for the entire trial. With more than five million patients currently on the corticosteroid treatment there is a huge market just waiting to be tapped. This is expected to be a billion dollar a year drug.

Flexion is going to market the drug itself rather than sell it off to some larger partner. They have been storing up cash and currently have $119 million with another $44 million in short term investments. The company only has $16 million in debt so net cash it is debt free. The company's market cap is only $500 million so a billion dollar drug could easily double the stock price.

They plan on filing the FDA application over the next couple months and that will be a major milestone for the company and should lift the stock. The approval will not be until late 2017 but we will be out of the position before the November earnings. We are just playing the buildup to the application.

Earnings Nov 3rd.

The $20 level appears to be resistance and it was tested on Monday. I am putting an entry trigger on the position just over $20.

With a FLXN trade at $20.15

Buy FLXN shares, initial stop loss $18.45

No options recommended because of wide spreads.


No New Bearish Plays

In Play Updates and Reviews

Tensions Rising

by Jim Brown

Click here to email Jim Brown

Editors Note:

As the market drifts back towards critical support levels, investors are starting to get nervous. The S&P 600 Small Cap Index fell back to support at 748-750 and rebounded only about a point. Closing that close to critical support makes traders nervous.

The Dow lost -137 points intraday to come very close to initial support at 18,100 and it only rebounded slightly. The S&P closed right on support at 2,150 after dipping to 2,145 briefly intraday. These are not encouraging signs.

Since the first two weeks of October are typically negative we are right on trend and a break below those support levels could trigger significant selling. The buy the dip traders are probably sitting with their finger on the sell button in case those levels break.

The PI portfolio had a good day in a weak market. Every current long position actually posted a gain and every short position posted a loss with PPC and ZOES posting major losses.

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

FNSR - Finisar
The long stock position remains unopened until a trade at $30.25.

CREE - Cree Inc
The long stock position remains unopened until a trade at $26.00.

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


Minor gain in a weak market. No specific news.

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

ALRM - Alarm.com - Company Profile


No specific news. Minor gain i a weak market. Good relative strength.

Original Trade Description: October 1st.

Alarm.com Holdings, Inc. provides cloud-based software platform solutions for the connected homes in the United States and internationally. It offers multi-tenant software-as-a-service platform that allows home and business owners to intelligently secure and manage their properties, as well as remotely interact with an array of connected devices through a single intuitive interface. The company provides interactive security solutions, which offer intelligent security and awareness services through a dedicated, cellular, and two-way connection to the home or business; and intelligent automation solutions that connects, integrates, and controls the devices in the home or business, such as security systems, garage doors, lights, door locks, thermostats, electrical appliances, environmental sensors, and other connected devices. It also offers video monitoring solutions, which provide live streaming, smart clip capture, high definition continuous recording, and instant video alerts through its mobile app or on the Web; and energy management solutions that offer enhanced energy monitoring and management services. It has approximately 2.6 million residential and business subscribers. Company description from FinViz.com.

For Q2, the company reported earnings of 15 cents compared to estimates for 11 cents. Revenue rose 24% to $64.4 million and beat estimates for $58.6 million. Software as a Service (SaaS) revenue rose 23% to $42 million. The company guided for the ful lyear for earnings of 49-51 cents and revenue of $242.3-$245.8 million. Analysts were expecting 48 cents on $241.7 million.

Earnings Nov 8th.

Despite the strong beat and strong guidance shares crashed from the historic high close of $33 before the earnings were released. Shares were up +135% since the February low at $14 and traders took profits. The only ratings change was from Raymond James from outperform to market perform based on value because of the strong gains. At the same time Imperial Capital raised their price target from $24.50 to $30. Since shares closed the day before at $30 that was an implied neutral rating.

Shares collapsed back to $28 and here there for three weeks then fell sharply on September 6th on no news to bottom at $25. That bottom was quickly bought and Friday's gain lifted the shares back over resistance at $28.50.

There is no bad press for Alarm.com. Earnings and revenue are growing, subscribers are growing and shares are back over resistance. If the market is going to rally in late October this should be a tech stock that outperforms.

Position 10/3/16 with a ALRM trade at $29.05

Long ALRM shares @ $29.05, see portfolio graphic for stop loss.

No options recommended because of price.

BOX - Box Inc - Company Profile


No specific news. A minor gain to a new 14-month high.

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.

CREE - Cree Inc - Company Profile


No specific news. Minor decline with the market.

This position remains unopened until a trade at $26.

Original Trade Description: September 28th.

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 $25.53, initial stop loss $24.50.

No options recommended because of the short time frame.

FNSR - Finisar Corp - Company Profile


No specific news. Shares posted a decent gain in a weak market with a high at $30.06, which is resistance.

This position remains unopened until FNSR trades at $30.25 and above resistance.

Original Trade Description: October 3rd.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Company description from FinViz.com.

Finisar shares rallied throughout the third quarter. In early September shares spiked after earnings and then leveled off but retaining a positive bias. They reported earnings of 38 cents that beat estimates for 30 cents. Revenue of $341.3 million also beat estimates for $334 million. The company guided for the current quarter for earnings of 44-50 cents on sales of $355-#375 million. Analysts were only expecting 32 cents and $344 million. The CEO blamed the soaring earnings on booming sales of certain transceivers and switches. China is in the middle of their upgrade to a 100 Gb infrastructure and the U.S. carriers like Verizon are just getting started.

Earnings December 8th.

Shares spiked from $23 to $27 on the news even after a big ramp up from $17 at the beginning of the quarter. Shares slowed their ascent but reached $30 last week. That is a five-year high. A move over that psychological resistance at $30 could start a new leg higher. The intraday high last week was $30.19. I am recommending we enter a position with a trade at $30.25.

With a FNSR trade at $30.25

Buy FNSR shares, initial stop loss $27.50

No options recommended because of cost. The Dec $32 call is $1.45 if interested.

KS - KapStone Paper & Packaging - Company Profile


No specific news. Minor gain. Resistance still a factor.

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. Luck was with us today. PPC avoided our stop loss and fell -4.5% on no news. That is a 10-month closing low.

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.

VXX - Volatility Index Futures - ETF Description


VXX down in a weak market. New lows coming.

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. Big -3.3% decline to a new low. Forbes had a very negative article on Zoes and their increasing rate of cash burn.

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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