The S&P-600 is locked in a solid trading range between 748-758 and there is no deviation. With the small caps deadlocked and the Dow and S&P-500 also trading in a range but less precise, investors seem to be waiting for a breakout in either direction before making a commitment. The Nasdaq pulled closer to a new high but it is also in a range only with higher boundaries.
If we continue to alternate gains and losses, traders will lose what little conviction they have and volume will slow to a crawl. That is when the market could turn dangerous.
The first two weeks of October are normally negative but given our chart patterns over the last several months I am not expecting any major decline. That does not mean it will not happen but we can drop significantly without damaging the charts. The 730 level on the S&P-600 is the critical level with 18,000 critical for the Dow.
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.
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
FLXN - Flexion
The long stock position was opened with a trade at $20.15.
CREE - Cree Inc
The long stock recommendation has been cancelled.
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
Piper Jaffray raised the price target from $24 to $27. Shares rallied 7.5%.
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.
Long AAOI shares @ $22.10, initial stop loss $19.25
ALRM - Alarm.com - Company Profile
No specific news. Very minor gain but held prior gains over resistance.
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 loss after a 14-month high on Tuesday.
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.
Long BOX shares @ $14.74, see portfolio graphic for stop loss.
CREE - Cree Inc - Company Profile
No specific news. Shares are not moving. I am cancelling this recommendation.
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.
FLXN - Flexion Therapeutics - Company Profile
No specific news. Shares blew through resistance at $20 as the biotech sector heated up again. Great way to start a new position.
Original Trade Description: October 4th.
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.
Position 10/5/16 with a FLXN trade at $20.15
Long FLXN shares, see portfolio graphic for stop loss.
No options recommended because of wide spreads.
FNSR - Finisar Corp - Company Profile
No specific news. Shares gapped up after Ciena (CIEN) was upgraded to a strong buy at Zacks. The position trigger was $30.25 but shares opened at $30.46 so that is our entry point.
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.
Position 10/5/16 with a FNSR trade at $30.46
Long FNSR shares @ $30.46, see portfolio graphic for stop loss.
KS - KapStone Paper & Packaging - Company Profile
No specific news. Minor gain. Shares fell -4% to stop us out.
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. Shares rebounded to recover less than half of Tuesday's decline.
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.
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 not down as much as I would have expected. Must be a lot of traders worried about an October surprise.
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.
Short VXX shares @ $33.88, no initial stop loss.
No options recommended because of price.
ZOES - Zoes Kitchen - Company Profile
No specific news. Another big -3.6% decline to a new low. On Tuesday 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.
Short ZOES shares @ $23.95, see portfolio graphic for stop loss.
If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.