Option Investor

Daily Newsletter, Monday, 10/24/2016

Table of Contents

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

Market Wrap

Storm Clouds On The Horizon

by Thomas Hughes

Click here to email Thomas Hughes


The market churned another day as we enter a very busy three week period. This week; a little data and a lot of earnings. New Home Sales, Pending Home Sales and 3rd quarter GDP are on tap economically speaking; 178 or 35% of the S&P 500 is on the schedule to report earnings. Next week; the much anticipated November FOMC meeting as well as monthly macro-data to include NFP and unemployment, as well as a fair amount of earnings reports. The week after, well that week holds Election Day, a day that will not soon be forgotten.

International markets were largely higher if a bit mixed, particularly in Europe. Asian indices closed primarily in the green, led by China, on news of better than expected trade data from Japan. The country reported a decline in exports but less of one than was expected. In Europe indices closed closer to flat line, some in the red, following a choppy session.

Market Statistics

Futures trading indicated a higher opening for the US indices all morning, about +10 points for the SPX. This held relatively steady for the bulk of the pre-opening session as there was little in the way of economic or earnings news to drive trading. The open was orderly, the broad market opened about 0.4% higher than Friday's close, quickly moved up to hit an early high near +0.5%, and then proceeded to trade in a tight range between +0.4% and +0.5% well into the afternoon portion of the session and into the close of the day.

Economic Calendar

The Economy

Only one economic release today, Markitt's Flash Manufacturing PMI for October. The index made a gain of 1.7% to hit 53.2%, indicating expanding growth within the sector. The data was relatively well received as an indication other, more reliable and closer watched, data will show improvement as well.

Very little data this week, GDP on Friday is probably the big one of the week. Between then and now there is New Homes Sales, Pending Home Sales and the weekly jobless claims to look forward to. Next week as I said will be the big one, monthly macro-data as well as the FOMC meeting. Before the meeting we'll get PCE, Auto Sales and ISM Manufacturing, after the meeting we'll get the employment bundle, Productivity/Labor Costs and Factory Orders.

Several Fed members made speeches or other comments today, the one to make headlines being Bullard. He says that low rates are likely to be with us for the next 2-3 years which I think is no surprise. The one thing that has remained consistent about the FOMC's month to month stance on rate hikes is the timeline, slow and gradual.

Moody's Survey of Business Confidence moved higher for the second week in a row. The index gained 1.5% to hit 29.3, the highest reading since late May. Mr. Zandi says the survey results indicate that the election are still not having a major effect on global sentiment, that the US is still expanding at the high end of its potential and that globally sentiment is less robust. South America remains the weakest but he notes that there are signs of improvement.

Earnings season is indeed unfolding better than expected. Whether it is better-than-expected-enough is yet to be seen but the signs are positive. The third quarter blended rate with only 23% of the index reporting has risen nearly enough to turn positive for the quarter, +2% to -0.3%. If the season continues to unfold as it has the first few weeks then I think it safe to say we'll see the final growth rate for the quarter in the 1-2% range. This week there are another 178 S&P 500 companies reporting so I expect to see some day to day volatility as they roll in.

Looking forward the outlook is still good and, dare I say it, maybe in really good. Next quarter estimates remain steady in the mid-5% range. Assuming that earnings trends can be trusted to hold true the 4th quarter could see growth as high 9.5% to 10%. Full year 2016 earnings growth has already returned to positive growth, +0.1%, and that will likely increase before the end of this cycle, and then again by the end of the 4th quarter cycle. Next year outlook remains robust at 12.4% but I must note, estimates have fallen more than -0.5% in the last two weeks to a one year low.

The Dollar Index

The Dollar Index climbed to a nine month high today as the market prices in a rate hike this year. The CME's fed watch tool is showing only a 9% chance of hike at the meeting next week but a near 75% chance of at least a 25 BPS increase at the December meeting. The risk at next weeks FOMC meeting, or potential catalyst depending on your view point, is that the FOMC will/will not give a clearer indication of their willingness to raise rates. The index gained about 0.15% today, a small move, but was able to close above my $98.65 resistance for the third day in a row. The index is moving up within a longer term range following the break of a shorter term wind up within that range. Next upside target is near $101.50 and means a full retracement of the Dec '15/May '16 bear market in the dollar.

The Oil Index

Oil prices came under pressure again today as new headlines drive volatility. Today, news that Iraq was resistant to the new OPEC deal to cap prices warred with another report that Russia was talking the deal up. In both cases the news is more hot air to drive near term speculation, longer term fundamentals remains skewed to oversupply and lower prices. WTI fell a little over a half percent to trade at $50.50.

The Oil Index was able to hold its ground today, closing with a small gain, although it is still capped by resistance at the top of the 7 month trading range. It seems to me as if the market has literally not bought into the idea that oil prices may move higher. The indicators are bearish and continue to retreat following the recent peak and whipsaw to multi-month highs, consistent with a range bound asset. A break above resistance would be bullish but would, I think, require a more substantial indication of supply/demand rebalancing than what we've gotten so far, or at least some decent earnings outlook from the producers themselves. The second scenario we might get later this week as the big integrated oil companies report.

The Gold Index

Gold prices held steady today near $1,265. The rising dollar is holding the metal near four month lows and may push it lower in the near term. Support firm support is currently near $1,250 and will likely be tested as the dollar moves up to retest its high. A break below $1,250 would be bearish and could take the metal down to $1,220 or lower in less than a session.

The Gold Miners ETF GDX is moving lower on gold/FOMC outlook. The ETF dropped a little over -2.5% in today's action, falling from resistance at the short term moving average, and has confirmed the near term down trend. Next target is near $22.50 and may be reached in the next week or so. The caveat, $22.50 also looks like a potential support target as indicated by MACD divergence so the depth of the move may not be too great. This target is also the 50% retracement level of the 2016 bull market in the sector which may provide additional support. A break below this level would be bearish and could lead to a full retracement of said bull market, first target however would be $19.75.

In The News, Story Stocks and Earnings

Last week rumors that AOL and Time Warner were in talks to merge, again, only 6 years after they split apart. This past weekend those rumors were confirmed and my only response is. . . what?!?!?!?!?!? The last merger did not end well, labeled "the Marriage from Hell" by online news sources, which begs the question, just exactly what is different now? Whether or not the deal will go through is highly questionable, regulators in Washington already giving push-back. Shares of Time Warner are down on the day but up about 8% since the news began to break. Verizon, parent company of AOL is flat on the day but down about 6% the news broke and looks like it is heading south from here.

T-Mobile reported before the bell and delivered. The company reported strong earnings, strong customer growth and raised forward guidance a quarter billion dollars above the previous range. Driving the results are customer counts, up more than 2 million in the third quarter alone, which drove a 17% increase in revenue and a 165% increase in net earnings. Shares of the stock jumped nearly 10% on the news to trade a 9 year high.

Visa reported fiscal Q4 earnings after the bell. The credit and bank card processing company reported adjusted quarterly earnings of $0.78 per share, above analysts estimates and a 28% increase over the same period last year. Full year revenue was also strong, up 5% over last year, and driven by positive company performance and the "abatement" of headwinds that is expected to continue into next year. Shares of the stock were little changed in after hours trading.

The Indices

For the most part the indices made small gains in today's session, trading well within and near the mid-point of their respective near term trading ranges. The one bucking the trend is the NASDAQ Composite which gained nearly a full percent in today's session, about 0.99%. Despite this the tech heavy index failed to set a new high, although it is getting close. The indicators remain weak but they are rolling into a potential trend following buy signal which needs to be monitored. A move up to resistance at the all time high, with a break to new highs, would be bullish with a first upside target near 5,500.

The next biggest gainer in today's session was the S&P 500 which posted a rise of only 0.48%. The broad market created a very small spinning top candle smack in the middle of the September/October trading range, right at the short term moving average. The indicators remain consistent with range bound trading, trending near the middle of their respective ranges, and are not even giving an indication of direction within the range. The upper boundary is near 2,180, the lower boundary is near 2,120 and both look as if they will hold prices in check, into the near term.

The Dow Jones Industrial Average closed with a gain near 0.43%. The blue chip index created a small spinning top candle near the middle of the September/October trading range and below the resistance of a previous all time high. The indicators remain weak and consistent with a trading range, and are pointing lower suggesting a test of the bottom of that range but little else. The sidewinding action within the range is bringing us closer and closer to a long term up trend line, the intersection of which should happen the 2nd week of November.

The Dow Jones Transportation Average brings up the rear in today's session with a gain of only 0.37%. The index created a small doji type spinning top wedged between the support of the short term moving average and the top of the nearly 8 month trading range. The indicator continue to show weakness, indicating a pull back from the top of the range, which could result in a move down to test for support. First target for support would be 8,000, next target should that one fail is near 7,750. A break above resistance, 8,150, would be bullish but would require confirmation before entering a trade as next resistance target would be 8,250.

The indices continue to churn. The signs are shaping up for a nice rally but the fact remains, we have a very busy three weeks to get through and two major hurdles to get over, either of which could easily trip the market up; the FOMC meeting and the elections. The good news, I think, is that the FOMC meeting is next week, the elections the week after so we don't have long to wait. This week may be another dud, another week of slowly sidewinding within recent trading ranges, but a volatile one as earnings reports are released. I remain cautious, hopeful, optimistic and patiently awaiting the signal that all is clear, it's rally time.

Until then, remember the trend!

Thomas Hughes

New Plays

Betting on OPEC

by Jim Brown

Click here to email Jim Brown
Editor's Note

OPEC claims they are going to halt production at or below the current levels at the end of November. The Saudi oil minister said oil prices will be in the $60-$65 range by the end of 2016. I hope he is right.


HLX - Helix Energy Solutions - Company Profile

Helix Energy Solutions Group, Inc., provides specialty services to the offshore energy industry primarily in the Gulf of Mexico, North Sea, the Asia Pacific, and West Africa regions. It operates through three segments: Well Intervention, Robotics, and Production Facilities. The company engineers, manages, and conducts well construction, intervention, and abandonment operations in water depths ranging from 200 to 10,000 feet; and operates remotely operated vehicles (ROVs), trenchers, and ROVDrills for offshore construction, maintenance, and well intervention services. It also offers well intervention; intervention engineering; production enhancement; inspection, repair, and maintenance of production structures, trees, jumpers, risers, pipelines, and subsea equipment; and life of field support. In addition, the company provides reclamation and remediation services; well plugging and abandonment services; pipeline abandonment services; and site inspections. Further, it engages in the installation of subsea pipelines, flowlines, control umbilicals, manifold assemblies, and risers; burial of pipelines; installation and tie-in of riser and manifold assembly; commissioning, testing, and inspection activities; and provision of cable and umbilical lay, and connection services. Additionally, the company offers oil and natural gas processing services to oil and natural gas companies; and fast response system services. It serves independent oil and gas producers and suppliers, pipeline transmission companies, alternative energy companies, and offshore engineering and construction firms. Company description from FinViz.com.

Last week Helix reported earnings of 10 cents compared to estimates for 4 cents. Revenue of $161.2 million beat estimates for $156.4 million. The company said they had "seen a significant improvement in their financial results but industry conditions remain challenging."

An increase in the price of oil would do wonders for Helix and all the other offshore service businesses. Fortunately, for Helix they operate around the world and there is a strong surge in offshore natural gas drilling and pipeline construction around Africa and Australia. They are also very active in the North Sea. The natural gas activity has kept them afloat where other offshore service companies have failed.

They sold $100 million in stock in Aug/Sep and they had $499 million in cash at the end of the quarter. They prepaid $8 million in debt in Q3 and capex spending was $99 million.

The company is in good shape financially and the offshore drilling activity is increasing. If OPEC is successful in claiming a production cut/halt at the end of November this will raise the price of oil and benefit everyone.

Earnings January 18th.

Buy HLX shares, currently $10.09, initial stop loss $8.85.

No options recommended.


No New Bearish Plays

In Play Updates and Reviews

Window Dressing Began

by Jim Brown

Click here to email Jim Brown

Editors Note:

The window dressing for the mutual fund fiscal year end began today. Resistance was tested on the Dow, S&P and Russell 2000. However, the big cap Nasdaq 100 index broke out to a new high as fund managers started throwing money at highly liquid tech stocks.

With the election outcome still very uncertain, portfolio managers do not know what sector will win and which will lose after the election. In defense they are throwing money at big cap tech stocks. They can always exit those positions quickly after the election and shift the money into sectors expected to do well under the new president.

The Russell tested resistance at 1,232 and was immediately rejected. The Dow tested 18,250 and was rejected. The S&P did manage to close 1 point over resistance at 2,150 so that level is still in play.

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 $30.15.

CSIQ - Canadian Solar
The long stock position remains unopened until a trade at $16.15.

SSYS - Stratasys
The short stock position was entered at $19.97 at the open.

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BULLISH Play Updates

ALRM - Alarm.com - Company Profile


No specific news. Resistance is now $30.

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.

CC - Chemours - Company Profile


No specific news. Only a 2 cent decline from Friday's new high.

Original Trade Description: October 17th.

The Chemours Company helps create a colorful, capable and cleaner world through the power of chemistry. Chemours is a global leader in titanium technologies, fluoroproducts and chemical solutions, providing its customers with solutions in a wide range of industries with market-defining products, application expertise and chemistry-based innovations. Chemours ingredients are found in plastics and coatings, refrigeration and air conditioning, mining and oil refining operations and general industrial manufacturing. Our flagship products include prominent brands such as Teflonâ„¢, Ti-Pureâ„¢, Krytoxâ„¢, Vitonâ„¢, Opteonâ„¢ and Nafionâ„¢. Chemours has approximately 8,000 employees across 35 manufacturing sites serving more than 5,000 customers in North America, Latin America, Asia-Pacific and Europe.

Chemours was spun off from DuPont in 2015. The company spent hundreds of millions of dollars developing hydrofluoroolefin (HFO)-based alternatives and blends with low global warming potential. These replace the hydrofluorocarbons (HFCs) that were used in air conditioners for decades and reportedly responsible for global warming.

The UN's Montreal Protocol calls for HFCs to be phased out and replaced. Chemours has created a replacement and expects more than 24 million vehicles to be on the road in 2016 using their HFO-1234yt (Opteon) product in their air conditioners. By the end of 2017 that number will rise to more than 50 million. They believe by 2025 the HFO-based solutions will have replaced 325 million tons of Co2 equivalents. The Opteon product line has been widely accepted and nearly every refrigeration manufacturer is moving in that direction.

For Q2 they reported adjusted earnings of 27 cents that easily beat estimates for 17 cents. Management delivered more than $100 million in cost reductions in the first six months of 2016.

Earnings Nov 3rd.

CC has been moving up steadily since August as analysts began coverage and the company beat on earnings on August 8th. Over the last 30 days consensus estimates for Q3 have risen from 26 cents to 30 cents. Full year estimates have risen from 77 cents to 84 cents. Rising estimates suggest the stock will continue higher.

After a $7 rally since the earnings, the stock pulled back last week and found support at $14.75. Shares were up today on the UN news since it means even more manufacturers will be forced to switch to the HFO products.

Position 10/18/16 with a CC trade at $15.45

Long CC shares @ $15.45, see portfolio graphic for stop loss.

No options recommended.

CLVS - Clovis Oncology - Company Profile


No specific news. Big gain on Thursday on no news was erased by a big decline today. Shares are back at support at $32. I raised the stop to limit our loss if $32 breaks.

Original Trade Description: October 12th.

Clovis Oncology, Inc., a biopharmaceutical company, focuses on acquiring, developing, and commercializing anti-cancer agents in the United States, Europe, and internationally. It is developing three product candidates, which include Rociletinib, an oral epidermal growth factor receptor and mutant-selective covalent inhibitor that is under review with the U.S. and E.U. regulatory authorities for the treatment of non-small cell lung cancer; Rucaparib, an oral inhibitor of poly polymerase, which is in advanced clinical development for the treatment of ovarian cancer; and Lucitanib, an oral inhibitor of the tyrosine kinase that is in Phase II development for the treatment of breast cancers. Company description from FinViz.com.

Clovis has been rising on the prospects for the drug Rucaparib. They reported in September the FDA was not planning on holding an advisory committee meeting to discuss the new NDA application. The FDA has accepted the company's NDA for accelerated approval and granted it a priority review. The FDA response is expected to be positive and is expected by Feb 23rd.

However, on October 7th the company released data on a Rucaparib trial that appeared to show it was less effective than a competing drug already on the market from AstraZeneca. Shares were crushed for a $10 drop at the open. Analysts were quick to come to their defense saying there are many trials and making a decision by just one trial with a very narrow patient subset was comparing apple to oranges. Shares immediately rebounded.

Clovis has several anti cancer drugs in final stages and the outlook is very positive. Just seeing that CLVS shares have not declined with the sector over the last couple of days is a very strong indication that portfolio managers are buying and holding.

Earnings Nov 3rd.

Position 10//13/16:

Long CLVS shares @ $31.97, see portfolio graphic for stop loss.

No options recommended because of price.

CSIQ - Canadian Solar - Company Profile


No specific news. Minor decline after testing resistance at $16.

This position remains unopened until a trade at $16.15.

Original Trade Description: October 20th.

Canadian Solar Inc., together with its subsidiaries, designs, develops, manufactures, and sells solar wafers, cells, and solar power products primarily under the Canadian Solar brand name. The company operates through Module, Energy Development, and Electricity Generation segments. Its products include various solar modules that are used in residential, commercial, and industrial solar power generation systems. The company also provides specialty solar products consisting of Andes Solar Home System, an off-grid solar system, designed to provide an economical source of electricity to homes and communities without access to grid; and Maple Solar System, a clean energy solution for families, as well as solar system kits, which are a ready-to-install packages, such as inverters, racking system, and other accessories. In addition, it develops, builds, and sells solar power projects; performs the engineering, procurement, and construction (EPC) work for the solar projects; and offers operation and maintenance services that include inspection, repair, and replacement of plant equipment, site management, and administrative support services. It offers its products to distributors, system integrators, project developers, and installers/EPC companies. Company description from FinViz.com.

Canadian Solar has a global pipeline of commercial and utility installations in progress of 2.4 gigawatts of power. Last week they bought a 49% stake in two 15 megawatt solar projects in Telangana India. The projects come with a 25 year power purchase agreement and a 5.54 rupee tariff per kilowatt hour.

This is just one more project for CSIQ as the continue to grow in scale and extend their reach around the world. They have installed more than 16 gigawatts across 90 countries since 2002 but this is their first project in India. Australia recently approved funding for two projects totaling 47 megawatts with a 20 year power purchase contract. The 17 Mw Longreach project will consist of 54,600 MaxPower2 solar modules and produce 39.0 gigawatts of power in the first year. The 30 Mw Oakey project will use 93,600 solar modules and produce 59.9 gigawatts of power the first year.

The company had $3.47 billion in sales last year with $171 million net profit. They are currently priced very cheaply at a PE of 11 times earnings. They have more than $500 million in cash and their market cap is only $900 million. Sales are growing at a rapid rate.

Earnings Nov 10th.

Share have resistance at $16 and then clear sailing until $20.

With a CSIQ trade at $16.15

Buy CSIQ shares, currently $15.70, initial stop loss $14.35

Optional: Buy Nov $17 call, currently .65, no stop loss.

FNSR - Finisar - Company Profile


No specific news. Shares rebounded back to resistance. Maybe this time we will see a breakout.

This position remains unopened until a trade at $30.15.

Original Trade Description: October 19th.

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.

We entered a FNSR position on October 4th just as shares gapped open to $31. That turned out to be the peak for a three month rally. After a week of declines the shares could be ready to move higher.

The declines were sector related. The optical networking stocks were all slammed after some guidance warnings in the space. Finisar was riding the crest of a Goldman Sachs upgrade to buy on the 11th. That caused the peak in the stock just as the sector news appeared.

I am putting an entry trigger on this position to make sure the stock can get over recent resistance before we buy it.

With a FNSR trade at $30.15

Buy FNSR shares, currently $29.65, initial stop loss $28.75

No options recommended.

FTNT - Fortinet - Company Profile


First Analysis Securities initiated coverage at equal weight with a price target at $32, which was exactly where it opened. That new coverage was the same as a sell rating since the target was hit. Shares lost 50 cents on the headline. With earnings on Thursday I am recommending we close the position while it is still profitable.


Original Trade Description: October 15th.

Fortinet, Inc. provides cyber security solutions for enterprises, service providers, and government organizations worldwide. The company offers FortiGate physical and virtual appliances products that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, Web filtering, anti-spam, and wide area network acceleration; FortiManager product family to provide a central management solution for FortiGate products comprising software updates, configuration, policy settings, and security updates; and the FortiAnalyzer product family, which provides a single point of network log data collection. It also offers FortiAP secure wireless access points; FortiWeb, a Web application firewall; FortiMail email security; FortiDB database security appliances; FortiClient, an endpoint security software; and FortiSwitch secure switch connectivity products. In addition, the company provides FortiSandbox advanced threat protection solutions; and FortiDDos and FortiDB database security appliances. Further, it offers security subscription, technical support, training, and professional services. Company description from FinViz.com.

Fortinet released preliminary earnings numbers on the 11th and the stock was crushed in the afterhours market. The company said earnings would be in the range of 15-16 cents compared to prior guidance of 17-18 cents. Revenue would be in the range of $343-$348 million compared to guidance of $372-$376 million.

This is not the end of the world but shares fell from $34 to $29. They blamed the guidance miss on lengthening deal cycles saying enterprises were becoming more strategic in their purchasing decisions and buying with less urgency than last year. They also admitted to "sales execution challenges" in North America as the result of a new sales force in that market. They just recently expanded into North America. There were also "macro" issues in Latin America and the U.K. that they did not explain.

Despite the guidance cut they are still positive about Q4 and 2017 saying the "competitive-differentiating and market-leading security fabric" was intact and they remain confident in the underlying strength of the business. They will release their actual earnings on October 27th. Normally, when a company warns in advance, they report better earnings than their guidance in the warning.

Shares are already rebounding because multiple brokers immediately reiterated their buy ratings. Wunderlich said buy with price target of $42. Doughtery said buy with a price target of $35. RBC Capital reiterated a sector perform rating with a price target of $37.

I believe there is very little risk in taking a position in FTNT at this level. The damage has already been done.

Position 10/17/16:

Long FTNT shares @ $30.92, see portfolio graphic for stop loss.

MENT - Mentor Graphics - Company Profile


No specific news.

Original Trade Description: October 13th.

Mentor Graphics Corporation provides electronic design automation software and hardware solutions to design, analyze, and test electro-mechanical systems, electronic hardware, and embedded systems software worldwide. It offers printed circuit boards; Mentor Graphics Scalable Verification tools; Questa platform to verify systems and integrated circuits (ICs); FastSPICE, Eldo, and ADVance MS analog/mixed signal simulation tools; and Veloce hardware emulation system. Further, the company provides software, tools, and professional engineering services; and methodology development, enterprise integration, and deployment services. It sells and licenses its products through direct sales force, distributors, and sales representatives to the communications, computer, consumer electronics, semiconductor, networking, multimedia, military and aerospace, and transportation industries. Company description from FinViz.com.

Billionaire Paul Singer, head of Elliott Management, announced on Sept 29th his firm was taking an active 8.1% stake in Mentor Graphics. In the SEC filing Elliott said there are "strategic opportunities" available at MENT and he is going to force a sale. Singer is no stranger to activist investing. Since 1994 he has launched 114 campaigns and 14 proxy fights when companies do not take his advice and get the M&A ball rolling. Elliott has $27 billion under management and Mentor only has a $3 billion market cap. If the board does not take action quickly, Elliott could launch a proxy fight to get enough people on the board that will take action. As a relatively small company, Mentor is in the crosshairs and there is very little chance for escape.

Shares spiked in the middle of the day on Thursday after TheStreet posted an article explaining Elliott' s game plan. The close at $27.92 was a 15-year high. Since Elliott announced his position at $24.69 the shares have risen about $3.50 with $2 of that the first day. Elliott is in for the long term and they will not be bailing on a $3 gain. They have a much larger goal in mind.

Earnings Nov 17th.

A lot of investors follow these activist funds and I would expect the stock to continue to rise as the headlines appear. More than 7,000 Jan $30 calls were bought today against an open interest of only 3,944.

Because of the afternoon spike I was going to put an entry trigger on the position just over the afternoon high. However, the S&P futures are down hard again tonight and maybe we will get an opportunity to buy the stock lower so I did not add the trigger. Support is $26.

Position 10/14/16:

Long MENT shares @ $28.54, see portfolio graphic for stop loss.


Long Jan $30 call @ $1.35, no stop loss.

We will hold the option as a lottery ticket play is the long stock position is stopped.

BEARISH Play Updates

SSYS - Stratasys Ltd - Company Profile


No specific news. Shares only gained 13 cents in a bullish market and that was probably short covering. I believe the direction is still down.

Original Trade Description: October 22nd.

Stratasys Ltd. provides three-dimensional (3D) printing and additive manufacturing (AM) solutions for the creation of parts used in the processes of designing and manufacturing products; and for the direct manufacture of end parts. Its 3D printing systems utilize its patented fused deposition modeling (FDM) and inkjet-based PolyJet technologies to enable the production of prototypes, tools used for production and manufactured goods directly from 3D CAD files or other 3D content. The company offers entry-level desktop 3D printers to systems for rapid prototyping, and production systems for direct digital manufacturing under the Dimension, Objet, Fortus, Polyjet, SolidScape, and MakerBot brands, as well as MoJo and uPrint product families, and Dental Series products. It also provides 3D printing consumable materials, including FDM, cartridge-based materials, Polyjet cartridge-based materials, Smooth Curvature Printing inkjet-based materials, and non-color digital materials, as well as provides color variation services. In addition, the company offers customer support, basic warranty, and extended support programs; leases or rents 3D printers and 3D production systems; produces prototypes and end-use parts for customers from a customer-provided CAD file; and provides plastic and metal parts for rapid prototyping and production processes, as well as related professional services. Further, it operates Thingiverse, an online community for sharing downloadable, digital 3D designs; and GrabCAD Community for mechanical engineers and designers. The company's products and services are used in aerospace, automotive, consumer electronics, consumer goods, medical processes and medical devices, education, dental, jewelry, and other industries. Company description from FinViz.com.

Stratasys does not report earnings until Nov 15th. Piper Jaffray believes they will miss on revenue because of a recent survey of 68 firms showed "extremely discouraging" demand for SSYS and 3D Systems (DDD) products. Stratasys is expected to post its first year over year profit in 8 quarters because of extensive cost cutting but revenue is expected to fall short of the $174.5 million consensus estimate.

The challenge is the entry of the 800 pound gorilla into the 3D market. That gorilla is Hewlett Packard. They announced their entry into the market five months ago and will begin shipping products over the next two months. Piper and some other analysts said buyers are waiting to commit to purchases until they actually see the HP products. The HP product line is expected to be robust and priced competitively. Another manufacturer, privately held Carbon 3D, is also drawing attention and suddenly buyers have an entire array of 3D printers and manufacturers to choose from. GE just bought a 3D printing company in Europe and is expected to expand the offering in a big way given their available cash and manufacturing experience. Because of the expense on some of these printers, buyers are taking the extra time to make sure they buy the one that fits their needs the best.

Shares are trading at a 3-month low and only about 50 cents above an 8-month low. If support at $19.35 fails we could see $15 in a hurry as investors flee before the mid November earnings.

Position 10/14/16:

Short SSYS shares @ $19.97, see portfolio graphic for stop loss.

No options recommended because of distance from the strike and short time frame.

VXX - Volatility Index Futures - ETF Description


Another new historic low.

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

Original Trade Description: September 6th.

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

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

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

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

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

Position 9/7/16:

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

No options recommended because of price.

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