Option Investor

Daily Newsletter, Tuesday, 10/11/2016

Table of Contents

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

Market Wrap

Turnaround Tuesday

by Jim Brown

Click here to email Jim Brown

Tuesday was a shocker for most traders after the Nasdaq 100 closed at a new high on Monday.

Market Statistics

You can never take anything for granted in the market. Today was a prime example of why you should monitor your stop losses every day. Big gains like those we saw on Monday can be erased just as easily the very next day.

The market has continued its string of alternating gains and losses as the October volatility increased. There were as many opinions about why the market fell sharply today as there are investors. The most common reasons were the strong dollar, falling oil prices, treasury selling, worries over China, Q3 earnings, election uncertainty, rate hikes and there are probably at least a dozen more. Just remember the first two weeks of October are normally negative and volatile and this is the second week and we have three days to go.

There was only one economic report today and it had no bearing on the market. The NFIB Small Business Survey for September declined from 94.4 to 94.1 and a four-month low. The internal components were mixed but flat with August. There was not enough change to bother listing them here.

The big event on the calendar for Wednesday is the FOMC minutes. Analysts will be trying to decide if the Fed is going to pass on hiking in November or is that really a live meeting. This could be a volatile report depending on the content.

The rest of the week will be more focused on earnings than economics. Yellen's speech on Friday is not expected to contain any rate hike comments but you never know in advance.

A lot of the major banks report earnings on Friday and that will be an inflection point for the market. Bank stocks have been rising on rate hike expectations and earnings could either accelerate those gains or stop them entirely.

One of the major factors impacting the market at the open was the earnings warning from Illumina (ILMN). The company warned after the bell on Monday that revenue for Q3 would be in the range of $607 million, significantly lower than their prior guidance of $625-$630 million. Analysts were expecting $628.1 million. They also warned that Q4 revenue would be flat to only slightly higher sequentially. They blamed the shortfall on fewer than expected orders for their gene sequencing instruments. That new revenue number is still a 10% increase from the comparison quarter. Shares crashed from the $185 close to $133.80 at Tuesday's open. Shares traded sideways the rest of the day between $135-$140.

The drop in Illumina upset investors all across the biotech sector. Stocks totally unrelated to Illumina were down hard. For instance, Flexion (FLXN), a company that makes pain medication for arthritis fell -7%. The Nasdaq losers list was almost entirely biotech names. The Biotech Index ($BTK) dropped -3.7% and crashed through support at 3,250. This biotech weakness knocked the Nasdaq and the Russell 2000 for big losses.

This morning before the bell Seagate raised its revenue and margin guidance and several brokers issued positive comments on the stock and sector. However, Seagate shares fell -7.5% and Western Digital (WDC) shares fell -4.5%. There was nothing in the upgraded guidance that could have caused the selling. This was purely a sell the news event. Portfolio managers probably though, "ok the good news is out, let's move on to something else." It is very tough to trade around these kinds if events. Good news is supposed to be good news.

After the bell Fortinet (FTNT) warned that Q3 revenue would be in the range of $311 to $216 million, down from prior guidance of $319-$324 million and below consensus of $322.4 million. They also lowered earnings guidance to 15-18 cents from 17-18 cents. Analysts were expecting 18 cents. Total billings will now be in the range of $343-$348 million, well below prior guidance of $372-$376 million. The company blamed "the lengthening of deal cycles as enterprise customers become more strategic with their purchasing decisions and buying with less urgency than last year." Peer stocks in their sector include FireEye (FEYE), Palo Alto Networks (PANW) and Checkpoint (CHKP). FTNT shares fell from $34 to $28 in afterhours. Shares of PANW fell -$7 to $148.50.

Apple shares were up strongly at the open on news Samsung had permanently discontinued the Note 7. As the biggest competitor to Apple's iPhone, this is a windfall for the iPhone 7. Tens of millions of Samsung customers will be forced to either buy an older model Galaxy or jump ship and move to the iPhone. I can just visualize Apple CEO Tim Cook walking down the halls at the Apple complex, high fiving everyone he passes.

This is a major blow for Samsung because it means they will basically be forced to skip a model year and go back to the drawing board to figure out why the phones are blowing up, then reengineer them for 2017. With tens of millions already produced, this is going to be very expensive.

Twitter (TWTR) was one of the few stocks that posted gains today after news broke they are still in talks with SalesForce.com about the acquisition. Reportedly, CEO Tom Dorsey, is sending out companywide memos extolling the virtues of remaining an independent company. He is also trying to keep employees from jumping ship on worries nobody will buy the company and it will fail. In his memo he called Twitter, "The Peoples News Network."

"We're only limited by our sense of urgency. Life is short. Every day matters. And the people who use Twitter every day deserve our best. They are why we're here. So let's show them what we're made of and deliver a better Twitter faster than they thought possible. We can do this every day. We can do this!," he wrote in the memo.

Before the bell Alcoa (AA) reported earnings of 33 cents that missed estimates of 35 cents. Revenue of $5.21 billion also missed estimates for $5.33 billion. The company said global automotive production would only rise between 1-4% in 2016 and aircraft deliveries will be flat to +3% for the year. This will be their last earnings report before splitting into two companies in November. Shares fell -11.4% from $32 to $28. The earnings miss contributed to the negative sentiment in the markets.

Fastenal (FAST) reported earnings of 44 cents that missed estimates for 45 cents. Revenue of $1.013 billion also missed estimates slightly. The company said OEM and construction fastner sales remain "relatively weak" reflecting the continued weakness in the heavy equipment and construction markets. Shares fell -5% on the news.

On the positive side Barracuda Networks (CUDA) reported earnings of 21 cents that easily beat estimates for 13 cents. Revenue of $87.9 million rose 12% and beat estimates for $85.2 million. Active subscribers rose 14% to more than 298,000. Shares spiked 10% in afterhours.

Treasuries have been selling off for more than a week on expectations for an eventual rate hike. While November may not be likely, the odds for December increase with every passing day. Furthermore, comments from other central banks suggest the global easing cycle may be coming to an end. The Fed will be the first central bank to hike rates and that anticipation is lifting yields and the dollar. We may be setting up for the "great rotation" where hundreds of billions of dollars currently sitting in the bond market suddenly begin moving back into equities.

The rising dollar is going to weigh on commodities and could easily blunt the OPEC oil rally.

Oil prices saw another boost on Monday after Putin said Russia was ready to join OPEC in reducing production. I will caution everyone once again, this is just talk, timed to lift oil prices over the normally weak October period.

OPEC is not going to meet until November 30th and even if they do announce an agreement to reduce production, no OPEC member is actually going to cut a significant amount of production. They may say they will cut but they have never stuck to the terms of any prior agreements.

The political uncertainty did not ease after Sunday's debate. If anything, it actually became even more uncertain. The voting public is becoming increasingly hostile towards the opposition candidates and the rhetoric between the candidates is becoming even harsher. The republicans are self-destructing and that just makes them more frantic to pull down Clinton. The next four weeks are going to be ugly and the market does not like increased uncertainty. There is a credible threat that the democrats could potentially take back the senate and reduce the amount of gridlock. That could produce rampant spending and send the $20 trillion in debt to even higher levels.


On Tuesday, the market broke out of its complacency range and plunged to test resistance across the board. The S&P dipped to 2,128 from Monday's high of nearly 2,170. The selling was constant until 2:30 when a few dip buyers finally appeared. The support at 2,145 was soundly broken and that puts the mid September support at 2,120 firmly in focus.

The Dow dipped to below 18,100 intraday but the pattern break was not as start as the S&P. The Dow has seen some wide ranges and today was just a continuation of the wider range. However, the close at 18,128 puts the Dow within range of critical support at 18,000.

The Dow chart does not scare me because there are other indexes that present a bigger problem. Friday is when the Dow components begin reporting and continuing through next week. If the earnings from the Dow components are similar to those we have seen from Honeywell, Dover, PPG and Alcoa, we are in big trouble.

The Nasdaq 100 closed at a new historic high on Monday, eclipsing the old high by 2 points. Today, all the gains for the last two weeks were erased with the drop back to nearly 4,800 and critical support. This was caused mostly by the crash in the biotech sector as a result of Illumina. There are no material tech earnings this week but next week is a full calendar and we need them to be positive.

A break below 4,800 targets 4,700 but I am not expecting that this week.

The small cap indexes scare me more than the big caps. Both the indexes broke lower support and moved to new levels. This was due to the large number of small cap biotechs but it is still a problem. If they continue lower, it would be very bearish for market sentiment.

I would like to believe the Tuesday sell off was triggered by Illumina and Alcoa in an already volatile market. However, we are in the second week of October and historically a very volatile week with a downside bias. Those earnings disasters could have just been the straw that broke the market's back or they could have just been one more factor in an already confused market.

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

Disappointing Earnings

by Jim Brown

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Editor's Note

Most of the early earnings reporters have disappointed and several earnings warnings have soured market sentiment. Add in the elections, rising dollar, sell off in the treasury market, worry over rate hikes and a dozen other variables and the Nasdaq went from new highs on Monday to testing support on Tuesday. We could very easily see an equally large market rebound on Wednesday or we could see a retest of lower lows. This is the second week in October and a week that is normally negative and known for second half market lows. I am recommending we not add any new plays on Wednesday and see what the day brings.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Small Cap Crash

by Jim Brown

Click here to email Jim Brown

Editors Note:

Both the small cap indexes crashed back to mid September support on no specific news. The small cap indexes and the Nasdaq were the biggest lowers today. The Nasdaq 100 closed at a new historic high on Monday only to give bak -72 points today and retest support at 4,800. The Dow traded below 18,100 intraday and the S&P traded below 2,130.

The Russell 2000 lost -1.85% to trade all the way back to 1,222 after hitting 1,253 on Monday. That is a major move for the Russell. The S&P-600 dipped all the way back to 741 after trading at 759 on Monday. The small cap indexes are the market sentiment indexes. When they crumble, the rest of the market is put on notice there are problems ahead.

The biotech sector was responsible for much of the Nasdaq crash. The Biotech index fell -3.7% after Illumina lost -$46 on a profit warning.

While we could just as easily rebound again on Wednesday and keep the string of alternating gains and losses intact, the damage inflicted today could be lasting. This had to damage market sentiment for portfolio managers.

We had a really nice portfolio yesterday with green across the board. Today's crash erased that green and stopped us out of three positions.

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

TASR - Taser Intl
The short stock position was opened at $22.25.

AAOI - Applied OptoElectronics
The long stock position was stopped out at $22.45.

BOX - Box Inc
The long stock position was stopped out at $15.25.

FLXN - Flexion
The long stock position was stopped out at $19.45.

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. Shares fell -5% in the Nasdaq crash and stopped us out with a minor gain.

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:

Closed 10/11/16: Long AAOI shares @ $22.10, exit $22.45, +.35 gain.

ALRM - Alarm.com - Company Profile


No specific news. Shares fell -2% from Monday's 2-month closing high.

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. Big drop with the tech sector to stop us out.

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:

Closed 10/11/16: Long BOX shares @ $14.74, exit $15.25, +.51 gain.

FLXN - Flexion Therapeutics - Company Profile


No specific news. The Illumina crash killed the biotech sector, which fell -3.7% for the day. Flexion lost -7.3% on the biotech drop to stop us out.

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

Closed 10/11/16: Long FLXN shares @ $20.15, exit $19.45, -.70 loss.

FNSR - Finisar Corp - Company Profile


No specific news. Goldman upgraded from neutral to buy. Shares still declined -2.3% but avoided our stop loss.

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.

NLNK - Newlink Genetics - Company Profile


No specific news. Shares declined slightly and showed decent relative strength.

This position remains unopened until a trade at $16.55.

Original Trade Description: October 10th.

NewLink Genetics Corporation, a biopharmaceutical company, focuses on discovering, developing, and commercializing immunotherapeutic products to enhance treatment options for patients with cancer. Its portfolio includes biologic product candidates based on its HyperAcute cellular immunotherapy technology, which is designed to stimulate the human immune system; and small-molecule product candidates that are focused on breaking the immune system's tolerance to cancer by inhibiting the indoleamine-2, 3-dioxygenase pathway and the tryptophan-2, 3-dioxygenase pathway. The company's lead product candidate, algenpantucel-L, an investigational immunotherapy, is being studied in Phase III clinical trials for patients with pancreatic cancer; tergenpumatucel-L, is being investigated in Phase IIb clinical trial for patients with advanced non-small cell lung cancer(NSCLC), as well as Phase I/II clinical trial is evaluating the combination of indoximod and docetaxel for patients with advanced NSCLC; and dorgenmeltucel-L, is being investigated in a Phase II clinical trial for patients with advanced melanoma. It is also developing HyperAcute cellular immunotherapies for renal, prostate, and breast cancers. In addition, the company is developing IDO pathway inhibitors comprising indoximod and GDC-0919 for patients with advanced NSCLC, advanced melanoma, metastatic prostate cancer, and other cancers; NLG2101 for patients with metastatic breast cancer; NLG2102 for treating refractory malignant brain tumors; NLG2103 for patients with advanced melanoma; NLG2014 for patients with metastatic pancreatic cancer; and NLG2105 for pediatric patients with refractory malignant brain tumors. Company description from FinViz.com.

Newlink shares have been improving rapidly since late September for multiple reasons. They have an Analyst Day coming up on October 25th and they are expected to present a rosy picture.

Last Tuesday after the bell they announced a $25 million award from the U.S. Dept of Health and Human services to support advanced development of the V920 Ebola Zaire vaccine candidate. The award has an additional $51 million of additional contract options as results stages are met. DHHS has already funded $76.8 million for developing the manufacturing facility and manufacturing process activities along with additional clinical trials.

The FDA has already designated V920 as a breakthrough therapy and the European Medicines Agency (EMA) has given it PRIME (PRIority MEdicines) status.

The new contract will enable accelerated full-scale production of V920, once it is approved. Merck (MRK) has already licensed the drug from Newlink in order to help Newlink accelerate development using Merck's vaccine expertise. Merck will be responsible for distribution and regulatory approvals.

Having a big sugar daddy with deep pockets backing your efforts along with the Dept of HHS is a real plus. This vaccine is going to be produced and could save thousands of lives. In the last outbreak alone more than 9,200 patients died.

Earnings Nov 3rd.

Shares spiked again on the Ebola news and will likely continue rising. Shares closed at $16.41 with resistance at $20, which will be our target in this position.

With a NLNK trade at $16.55

Buy NLNK shares, initial stop loss $14.45

No options recommended due to wide spreads.

BEARISH Play Updates

TASR - Taser Intl Inc - Company Profile


No specific news. Opening bump was on a new product announcement.

This position remains unopened until a trade at $20.25.

Original Trade Description: October 8th.

TASER International, Inc. develops, manufactures, and sells conducted electrical weapons (CEWs) worldwide. The company operates through two segments, TASER Weapons and Axon. Its CEWs transmit electrical pulses along the wires and into the body affecting the sensory and motor functions of the peripheral nervous system. The company offers TASER X26P and TASER X2 smart weapons for law enforcement; TASER C2 and TASER Pulse CEWs for the consumer market; and replacement cartridges. It also provides Axon Body, a body-worn camera for law enforcement; Axon Body 2 camera system; Axon Flex camera system that records video and audio of critical incidents; TASER Cam HD, a recording device; Axon Fleet, an in-car video system; Axon Interview, a video and audio recording system; Axon Signal, a body-worn camera; and Axon Dock, a camera charging station. In addition, the company offers Evidence.com, a cloud-based digital evidence management system that allows agencies to store data and enables new workflows for managing and sharing that data; Evidence.com for Prosecutors to manage evidence; and Evidence Sync, a desktop-based application that enables evidence to be uploaded to Evidence.com. Further, it provides Axon Capture a mobile application to allow officers to capture digital evidence from the field; Axon View, a mobile application to provide instant playback of unfolding events; Axon Five, a software application to enhance and analyze images and videos; Axon Convert, a software solution to convert unplayable file formats; and Axon Detect, a photo analysis program for tamper detection. The company sells its products to military forces, private security, and consumer personal protection markets, as well as to federal, state, and local law enforcement agencies and corrections through its direct sales force, distribution partners, online store, and third-party resellers. Company description from FinViz.com.

Taser shares were crushed last week when the NYPD chose VieVu instead of Taser for its supplier of more than 1,000 body cameras. The camera has become a larger market for Taser than the actual Taser weapon. When Taser sells a camera they also sell a 3-5 year subscription to Evidence.com, which is their video storage and retrieval application in the cloud. While a Taser sale may be in the hundreds of thousands of dollars per police department and the camera sale also in the hundreds of thousands, the subscription to archive the hundreds of thousands of hours of video footage costs millions of dollars.

The $399 camera is just the camel's nose under the tent. Each camera requires its own subscription to Evidence.com which costs $39 to $79 a month before quantity discounts. The 1,000 camera order for the NYPD would have been a minimum of $39,000 a month for five years or $2.3 million to $5.0 million in revenue.

The Safariland VieVu camera system is now deployed in more than 4,000 agencies in 17 countries. With Safariland the camera is holster activated and turns on when the officer's gun is drawn. This is a major competitor for Taser.

Another blow for Taser last week was a Supreme Court decision not to hear a case involving the death of a person stunned by a Taser. The court let stand a ruling that said Tasers amount to an unconstitutional use of excessive force and officers can only use Tasers if they are in immediate danger. This could negatively impact Taser sales, which is still the largest portion of their international revenue.

If Taser sales slow because of the ruling, then body camera sales could also slow since many times they are packaged together. That means Evidence.com subscriptions would also slow.

Earnings Nov 3rd.

Taser shares are in free fall after the dual blow last week. The Supreme Court decision is the one problem that will last.

Position 10/11/16 with a TASR trade at $22.25

Short TASR shares @ $22.25, see portfolio graphic for stop loss.

Long Nov $22 put @ $1.25. See portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


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. Minor decline, but still a decline.

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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