Option Investor

Daily Newsletter, Wednesday, 3/29/2017

Table of Contents

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

Market Wrap

Dead Cat Bounce or New Rally

by Keene Little

Click here to email Keene Little
The big question on most everyone's mind is whether the bounce off Monday's low is of the dead cat variety or something more bullish. The jury is still out deliberating while the indexes have pressed up against some potentially strong lines of resistance. The jury should decide in the next day or two.

Today's Market Stats

Depending on the index we look at we see either most or nearly the entire March 21st decline retraced with this week's bounce. Many bears speculate it was mostly short covering and are itching to short the bounce. The bulls see steady buying off Monday's low and while trading volume hasn't been strong in the rally the market internals have supported the idea that the rally has more room to run. What happens over the next couple of days will help traders decide whether to look for dips to buy or bounces to short.

Today's trading was a little more lackluster than Monday and Tuesday, especially for the blue chips, and once again it can be argued either way. The bears see the short-covering rally already running out of steam while the bulls see today as more of a breather in preparation for another move higher.

The tech indexes had a better day, up about +0.4%, and the RUT was also a little stronger than the blue chips, up +0.3%. But the banks and semis spent the day in the red and bulls would much prefer those two indexes supporting the rally. There was more buying in Treasuries and that's another negative pressure on stocks. As I'll review with the charts, it's looking like we should be close to at least a pullback to correct this week's rally and potentially something a little more bearish.

The only economic reports of merit this morning were two housing related numbers -- the MBA Mortgage Index, which improved slightly from -2.7% the week prior to last week's -0.8%, and the Pending Home Sales, which improved greatly from -2.8% in January to +5.5% for February (double what had been expected). As discussed below, a big jump in consumer confidence translated to higher confidence in buying a home.

There was a big jump in consumer confidence, as reported yesterday, which jumped to 125.6 in March, up from 116.1 in February. That's the highest reading since 128.6 in 2000 and very likely reflects the confidence in the stock market after the big post-election rally. The reading was before last week's failure to get a health care reform bill passed and the stock market decline.

The high consumer confidence reading coincides with bullish enthusiasm for the stock market. There was an article in Bloomberg this morning, Bullish Americans, that showed the chart below to point out how bullish Americans have become about the stock market -- 47.4% of Americans expect the market to be higher in the next 12 months. This is the highest reading since January 2000, just before the March 2000 high.

From a contrarian perspective, the highest consumer confidence and bullish stock market sentiment since 2000 are not something the bulls should be rejoicing about. It's more likely to mean that anyone who wants to be invested in the stock market is likely already in, including fully invested mutual fund managers, and that could leave a dearth of buyers to help power the market higher.

What we don't know is how much more buying will come from corporate buybacks, which have been a huge driver behind the stock market's rally over the past several years. Extremely low interest rates have made it cheap to borrow funds for buybacks. Additionally, companies have preferred to use earnings to pay for buybacks and higher dividends. Over the longer term this is troubling since it's an inefficient use of capital resources. It's a form of financial engineering instead of investing in the future of the companies and that could exacerbate a future downturn.

The funding of corporate buybacks has resulted in a massive amount of borrowing and corporate debt levels that are now very high. If interest rates continue to climb (although I have my doubts about that) and earnings slow down with the expected slowdown in the economy (GDP has been ratcheted down significantly in the first 3 months of this year) those companies which borrowed heavily are going to find themselves in a bit of a pickle. All of this could be coming to a head at the same time consumer and investor sentiment are at/near all-time highs.

Countering the bullish investor enthusiasm is the latest Investors Intelligence reading, which was after last week's selloff. The selloff was stronger than what we had seen for more than 4 months and it scared a lot of investors. After this week's recovery we'll see if that gets reversed but today's report showed a sharp drop in bulls vs. a steady reading for bears. Bulls dropped from 56.7% to 49.5% while bears rose only slightly from 17.3% to 18.1%. The resulting spread declined by 6.4% and as Tom McClellan noted to his subscribers, a one-week drop of more than 6% oftentimes marks a bottom for the stock market's pullback.

SPX struggled to add points today but managed to finish in the green with a +0.1% gain. It remains a good proxy for the market and I'll start off the chart review with a weekly chart of SPX.

S&P 500, SPX, Weekly chart

When the price pattern becomes more difficult to read I find that trend lines and channels often do a good job guiding traders. Along with moving averages and Fibonacci levels they provide reasons to watch for possible support and resistance. Back in mid-February SPX had climbed above its trend line along the highs from April-August 2016 and stayed above the line until it dropped back below the line last week.

With the rally to yesterday's and today's high (a test of yesterday's high) SPX is now back-testing this trend line and is potentially setting up a bearish kiss goodbye if it falls back down. But if the bulls can keep up the buying pressure for the next couple of weeks we could see a rally to the 2450 area before meeting the next lines of resistance.

S&P 500, SPX, Daily chart

I've drawn in a down-channel for the pullback from March 1st that uses a trend line along the two lows of the pullback and attaching a parallel line to the high in between the two lows (a typical channel construction) and yesterday's and today's rally also tested the top of this down-channel, currently near 2361.

As mentioned above, additional resistance is at the trend line along the highs from April-August 2016. Only slightly higher, now near 2365, is the broken 20-dma and for all these reasons I think it's going to be tough to power higher. But if SPX does make it above 2366 (and holds above) then we'd have a bullish heads up that we'll see a stronger rally.

Key Levels for SPX:
- bullish above 2390
- bearish below 2322

S&P 500, SPX, 60-min chart

The 60-min chart shows price struggling at the top of its down shown on the daily chart above. At the same location, at 2361.58, is the 50% retracement of the pullback from March 1st. If the rally does continue on Thursday watch to see how it does at the downtrend line from March 1-15, near 2379.

Dow Industrials, INDU, Daily chart

The Dow was the weak sister today as it was the only major index to trade in the red all day. Yesterday it was able to get back above its broken uptrend line from October 2011 - November 2012, but today closed back on the trend line, near 20660. Monday's low was a bullish test of the 50-dma, now near 20495, and if the buyers can keep up the pressure we could see a test of its broken 20-dma, nearing 20820. But if the sellers return and drive the Dow back below its 50-dma we could see a decline to price-level S/R at 20K.

Key Levels for DOW:
- bullish above 21,000
- bearish below 20,412

Nasdaq Composite Index, COMPQ, Daily chart

The techs have been the stronger indexes in this week's rally and NDX is very close to achieving a new high above its March 21st high. The Nasdaq is only a smidge behind NDX but it could struggle to make it higher. When viewing the daily chart with the log price scale it puts the trend line along the highs from April-August 2016 near 5901, which is what the Naz bumped into today.

The chart below is using the arithmetic price scale, which lowers the April-August trend line but it also lowers the broken uptrend line from November-December, which is also now near 5901. So regardless of the price scale there is a trend line that's currently blocking the bull's path.

There's a possible megaphone pattern for the price action since March 1st, the top of which is currently near 5937, and this is typically a topping pattern. A marginal new high with another lower high for the oscillators would be a very bearish sign. But a rally above 5937 would open the door to 6000-6025 (where the broken uptrend line will be by April 7th when using the log price scale, which is a potentially important turn date).

Key Levels for COMPQ:
- bullish above 5950
- bearish below 5750

Russell-2000, RUT, Daily chart

After flirting with the bears last week and again on Monday, with the break below price-level support near 1347, the bounce off Monday's low has now run into possible trouble with its 20- and 50-dmas, currently near 1370 and 1376, respectively. Today's close near 1372 places it between the two averages. Only slightly higher is its downtrend line from March 1-17, currently near 1378. A rally above 1380 would therefore provide us with a bullish heads up but until that happens it's a setup for a reversal back down, especially with a short-term overbought market.

Key Levels for RUT:
- bullish above 1394
- bearish below 1335

Since the end of 2016 we saw a significant increase in the net long positions by the commercial traders in 10-year Treasury futures. The Commitment of Traders (COT) has shown a significantly large spread between commercial traders and non-commercials (the rest of us, including fund managers) where the non-commercials had steadily increased their net short positions as they continued to bet on the continuation of the selloff in the bond market.

With the Fed raising rates and threatening to continue raising them it would seem a natural bet for bond yields to head higher (with selling in the bond market). This helps explain the large net short position by the speculators. But when too many believe in something it's often wise to take the opposite trade. This is why it's important to look for extremes in the COT positions and at least shy away from trades where the speculators have piled into.

The spread between commercials and non-commercials has reduced somewhat since the beginning of March as the 10-year yield (TNX) double topped against its December high. But the spread is still wide enough to suggest yields have further to fall (further rally in bond prices) before the COT readings become more neutral.

10-year Yield, TNX, Weekly chart

The 10-year yield has stalled since mid-December and the March 10th high was a test of the December high with significant bearish divergence. It seems everyone was already in the pool and there were no more sellers to drive bond prices lower. It's possible we'll see TNX chop sideways while the overbought condition (oversold on bond prices) works its way off. But I think it's more likely we'll see at least a larger pullback, if not the resumption of the decline in yields this year.

KBW Bank index, BKX, Daily chart

Along with the "unexpected" rally in Treasury bonds following the Fed's rate announcements (as happened in 2005 when the Fed started raising rates) the decline in bank stocks following the Fed's announcements has surprised many. The common belief is that banks' earnings will improve with higher rates (it increases their profit spread between loan rates and deposit rates). The rate increase might have already been priced in when BKX peaked on March 1st but that calls into question the belief that the Fed will continue raising rates.

The weekly chart of BKX shows the March 1st high achieved a Fib projection at 99.96 (just shy of it with a high at 99.77) for the rally from June 2016 where it equals 261.8% of the first leg of its rally off the February 2016 low. It was a small throw-over above the top of a parallel up-channel for the rally from 2009 but the week closed at the top of the channel. Now the question is whether or not the rally from February 2016 is complete. The correct answer to that question will help determine whether or not we should be looking for a higher rally this year or to short the current bounce.

The bullish wave count calls the pullback from March 1st the 4th wave correction in the rally from February 2016. That interpretation calls for another leg up to above 100 -- I show a projection to about 103 where the 5th wave of the rally would equal the 1st wave. The bounce off the bottom of its up-channel for the rally from June 2016, as well as the trend line along the highs from April 2010 - July 2015, both near Monday's low at 88.10, is reason enough to feel bullish about BKX here.

Countering the bullish interpretation is the idea that we should be looking for just a 3-wave move up from February 2016 and that the March 1st high was the completion of the move. That makes the current bounce, which could get larger, something that should be shorted. In order to prove the bears correct they'll need to see BKX break below Monday's low (which is true for all the indexes).

Transportation Index, TRAN, Daily chart

As a reflection of our economy, which has been downgraded significantly since the end of last year (along with corporate earnings expectations), the TRAN is a good index to watch. Shipping goods and materials, or not, tells us when the economy is running on all 8 cylinders or if some cylinders are starting to misfire.

As with so many indexes, the TRAN topped on March 1st following a small rising wedge off the January 3rd low. That wedge was quickly retraced by last week and in the process the TRAN broke its uptrend line from June-October 2016, near 9010 at the time. This week it made it back up to the trend line, currently near 9095, for what could be a back-test that will be followed by a bearish kiss goodbye. A drop below Monday's low at 8798 would confirm the bearish setup. A little higher, if the buyers keep up the pressure, is the declining 20-dma, now nearing 9150. In order to turn this more bullish we need to see the TRAN back above 9310.

U.S. Dollar contract, DX, Daily chart

Predictably, the US$ bounced off its uptrend line from May-August 2016 when it was tagged Monday morning. We have a 3-wave move down from the January 3rd high and that could be the completion of the pullback that we'll see for the dollar. I think the dollar has lower to go before setting up a bigger rally but we could first see a higher bounce before turning back down.

The declining 20- and 50-dma's have come together at 100.62 and they could be upside targets for the current bounce. But like the stock market, a drop below Monday's low at 98.67 would be a break of its uptrend line from May 2016 and likely stronger selling. But the first downside target would be 97.65 for two equal legs down from January and then more bearish below that level.

Gold continuous contract, GC, Daily chart

Monday's spike low in the stock market was matched with a spike high in gold, which was a back-test of its broken 200-dma at 1262.50 (gold stopped just shy of it at 1261). The 200-dma is now near 1262, which matches its downtrend line from August 2016, and therefore gold would be at least short-term bullish above 1263. The next upside target would be its downtrend line from 2011-2016, near 1290.

But at the moment we have a double top at the 200-dma with bearish divergence, suggesting a turn back down. The first support level would be the 20- and 50-dma's, currently near 1230 and 1228, respectively.

Oil continuous contract, CL, Daily chart

With last week's and Monday's lows oil nearly tagged its uptrend line from April-August 2016, now near Monday's low at 47.08, and got a good bounce. Today was a strong day for oil, up +2.4%. I'm surprised oil's rally didn't help the stock market more. Oil has now made it up to slightly above its broken 20-dma, currently at 49.29.

A rally above the 20-dma would target price-level S/R near 51, which was broken sharply on March 8th. Above that level would be more bullish but it would then have to contend with its declining 50-dma, currently at 51.64. Oil might bounce a little higher but I believe it will be followed by a continuation lower.

Economic reports

Other than Thursday's usual unemployment claims data we'll get the 3rd estimate for GDP, which is not expected to change. The Atlanta Fed's GDP Now numbers suggest half the government's 2% estimate. Friday we'll receive the personal spending and income reports (no changes expected from January) and the PCE prices (watched carefully by the Fed), which is expected to show some softening in the increase in prices. We'll also receive the Chicago PMI and Michigan Sentiment, neither or which are expected to changed much from February.


The bounce off Monday's low looks strong, albeit on lower volume than the decline, but it's not clear yet whether it's more short covering than real buying and the start of something more bullish. The price pattern could be argued either way. As reviewed in the charts, most look ready for a pullback but the bullish interpretation of the pattern for the banks suggests it could be a pullback worth buying. I don't see enough corroborating evidence yet for that but it's a warning to bears.

Regardless of what this week's bounce might mean for the next couple of weeks, the short-term setup looks good for at least a pullback to correct this week's rally. If the pullback turns into a sharp impulsive decline, especially if it gets the indexes below Monday's lows, we'll likely see stronger selling. But if we get a choppy pullback pattern I'd look at it as a buying opportunity.

Over the next couple of days, assuming we'll get a pullback, we'll have better clues about what this week's rally means. If the rally does continue into next week we'll likely see new highs, even if only minor ones, and I'd look to April 7th as a potentially important turn date. Look for the techs to provide continued leadership to the upside if the bulls are back in the driver's seat. Look for the RUT to lead us lower if Monday's lows are broken.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

New Plays

Semis Are Hot

by Jim Brown

Click here to email Jim Brown
Editor's Note

The semiconductor index has been setting new highs for several months. The index broke out in August 2016 and has been moving steadily higher.


HIMX - Himax Technologies - Company Profile

Himax Technologies, Inc., a fabless semiconductor company, provides display imaging processing technologies to consumer electronics worldwide. The company operates through Driver IC and Non-Driver Products segments. It offers display driver integrated circuits (ICs) and timing controllers used in televisions (TVs), laptops, monitors, mobile phones, tablets, digital cameras, car navigation, and other consumer electronics devices. The company also designs and provides controllers for touch sensor displays, liquid crystal on silicon micro-displays used in palm-size projectors and head-mounted displays, light-emitting diode driver ICs, power management ICs, scaler products for monitors and projectors, tailor-made video processing IC solutions, and silicon IPs. In addition, it offers digital camera solutions, including complementary metal oxide semiconductor image sensors and wafer level optics, which are used in various applications, such as mobile phone, tablet, laptop, TV, PC camera, automobile, security, and medical devices. The company markets its products to panel manufacturers, agents or distributors, module manufacturers, and assembly houses; and camera module manufacturers, optical engine manufacturers, and television system manufacturers. Company description from FinViz.com.

Himax is riding the wave of Ultra HD and 4K TVs as well as the surge in normal TVs to higher definition and width. Nobody has a 24 inch or even a 32 inch TV in their family room. Those have gone the way of console TVs and black and white. Worldwide the demand for display driver IC (DDIC) chips is expected to grow by 19.5% annually through 2020. Add in the surging demand for VR and AR (augmented reality) products, self driving cars, tablets and laptops, phones and business is booming.

They missed on earnings when they reported in mid February but guidance was so strong the stock rose 50% over the next week. After two-weeks of post earnings depression the stock has been moving higher again.

Earnings May 18th.

Since their earnings four brokers upgraded the shares and one upgraded them twice. Morgan Stanley upgraded them from underweight to equal-weight. A week later they came back and upgraded them again to overweight. Northland upgraded to outperform, Nomura to buy and Roth Capital to buy.

Shares flat lined last week with a slower rise. They dipped slightly on Wednesday with the entire sector weak. If we buy this minor dip we can keep the stop loss tight and have limited risk. Resistance is $11.

Buy HIMX shares, currently $9.28, initial stop loss $8.45

Optional: Buy May $10 call, currently 55 cents. No stop loss.


No New Bearish Plays

In Play Updates and Reviews

Looks Like a Rally

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes have risen for three days and the Russell is approaching resistance. Obviously there are no guarantees but this was a seven day high for the small cap indexes and the big cap Dow and S&P are sluggish. Could it be that we are finally seeing a rotation out of the overbought big caps and back into small caps?

The Nasdaq Composite pulled to within 6 points of a new high and the Nasdaq 100 made a new high. The biotech index gained more than 1%. There are some positive points to the market but with the Dow and S&P lagging there are also negative worries.

With Congress going on recess on April 10th they are not likely to start any new firefights and we will have almost two weeks before they come back. Unfortunately, April is typically a volatile period for other reasons so we should not become too complacent.

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

NLNK - Newlink Genetics
The long stock position was entered with a trade at $21.

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

BCRX - Biocryst Pharmaceuticals - Company Profile


The company announced it would speak at the Needham Healthcare Conference on April 4th at 8:40 ET. Shares lost 10 cents on a neutral day.

Original Trade Description: March 18th

BioCryst Pharmaceuticals, Inc., a biotechnology company, designs, optimizes, and develops small molecule drugs that block key enzymes involved in the pathogenesis of diseases. The company markets peramivir, an intravenous neuraminidase inhibitor, which is approved for uncomplicated seasonal and acute influenza in the United States and Canada under the name RAPIVAB, in Japan and Taiwan as RAPIACTA, and in Korea as PERAMIFLU. It also has various ongoing development programs, including BCX7353 and second generation oral inhibitors of plasma kallikrein for hereditary angioedema; and galidesivir, a broad spectrum viral RNA polymerase inhibitor that is indicated to treat filoviruses, as well as forodesine, an oral purine nucleoside phosphorylase inhibitor for use in oncology. It has collaborative relationships with Mundipharma International Holdings Limited for the development and commercialization of forodesine; Shionogi & Co., Ltd. and Green Cross Corporation for the development and commercialization of peramivir in Japan, Taiwan, and South Korea; Seqirus UK Limited for the development and commercialization of RAPIVAB worldwide, except Japan, Taiwan, Korea, and Israel; and the University of Alabama at Birmingham for the development of influenza neuraminidase and complement inhibitors. Company description from FinViz.com.

BioCryst produces drugs and vaccines that treat or prevent the flu. They have a novel new drug called Rapivab that is used to treat viruses. They also have a new broad-spectrum antiviral for use against Ebola, Zika and the Marburg virus, among others. Whenever bird flu or swine flu headlines appear, BioCryst shares tend to rise because of their vaccines and treatments.

The current bird flu is H7N9 and a new version just appeared called the Yangtze River Delta lineage. This particular strain is highly contagious and jumps human to human. The virus has changed into a "high path" virus as opposed to a "low path" virus. That means it spreads faster inside the body and causes more damage. More than 41% of people infected eventually die.

The number of cases per year dating back to 2013 were in the 100-200 range and mostly in China. In the last several months with the outbreak of this new strain more than 460 cases have been confirmed. Remember, more than 41% die. This is the worst bird flu season on record.

Normally the bird flu is confined to mainland China. However, because there are open air fowl markets in China, the flu can be picked up by any migratory bird and spread around the world.

In early March, a form of H7N9 was discovered at a Tyson chicken farm in Tennessee. This was the high-path form. The farm was quarantined and the entire flock of 55,000 chickens was destroyed. The problem is that the infection was caused by a wild bird that contaminated the flock. Since the virus does not impact the birds, nobody knows if the flock is contaminated except they are constantly checked with blood tests. Once they find one chicken is infected it is too late.

In the U.S. bird farms are supposedly "bio-secure" to isolate the chickens from wild birds. Normally that works in most cases. However, the virus still makes it into the population unless extreme measures are taken.

The key to this position is that there will likely be more H7N9 headlines in the U.S. because the possibility of further farm contamination is too great. This is not one bird that flew from China and contaminated one farm. Birds carrying it fly north across Russia to Alaska infecting other birds as they go. Once in Alaska they are pushed south by the winter weather and everywhere they stop, other birds are infected. There is no telling how many thousands or even millions of wild birds are infected in the U.S. already because it does not affect their health. They are passive carriers.

When new headlines appear, it will boost stocks that have vaccines and treatments against exotic viruses like Ebola, Zika, etc. Those treatments will not specifically work against the bird flu other than as a broad-spectrum antiviral. However, the stocks will rise on the expectations.

BCRX spiked to $9 on the news of the farm in Tennessee and should move higher on their own even if there are no further headlines. The potential for the H7N9 contamination to be limited to just one farm is highly doubtful.

Update 3/24/17: News broke Friday that the bird flu had been detected in three new farms in Alabama. The state issued a "stop movement" order for birds and eggs in Alabama. The prior week three farms in Tennessee had to slaughter and dispose of all their chickens after testing positive.

Earnings May 29th.

We have to buy the stock because the option premiums are inflated due to the expectations of another significant spike. I looked at buying a longer strike out in June but the spreads are too wide. If you buy that call you have to hold it or lose half your premiums if stopped out.

Position 3/20/17:

Long BCRX shares @ $8.82, see portfolio graphic for stop loss.
No options due to price and spreads.

ECA - Encana Corporation - Company Profile


No specific news. Oil prices were up 2% and that powered a 7% gain in Encana.

Original Trade Description: March 13th

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compares to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings May 18th.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

Position 3/14/17:

Long ECA shares @ $10.43, see portfolio graphic for stop loss.

Optional: Long October $11 call @ $1.40, no stop loss.

FNSR - Finisar - Company Profile


No specific news. Minor decline from the new 3-week high.

Original Trade Description: March 25th.

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, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless 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. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

Finisar reported earnings of 59 cents that rose 136% but missed estimates for 62 cents. Revenue rose 23% to $380.6 million but also missed estimates for $389.5 million. They guided for Q1 earnings of 53 cents and revenue of $370 million. Analysts were expecting 58 cents and $393 million.

Despite the enormous improvement in sales and earnings the stock was crushed for a 25% decline from $35 to $26. The damage was worse because competitor Ciena (CIEN) had also reported a weaker quarter the day before. Panic gripped traders that optical networking was somehow slowing down. The pace of sales "growth" in China slowed slightly and that sent investors running for cover. China is building out its 100 gigabit network technology in metropolitan areas and they are consuming enormous amounts of networking equipment.

Earnings June 9th.

Good article in Barrons very positive on Finisar. Read it here.

Finisar is not a one trick pony. They are also pushing into the smartphone market and will be competing on the 3D sensor components in the next version of smartphones. They are also building out massive networks in the cloud computing datacenters that require miles of fiber and very fast connections.

After the drop, multiple analysts reiterated buys and outperforms on FNSR saying this was just a hiccup and there are far greater earnings in the future. Raymond James upgraded them from outperform to strong buy. Jefferies upgraded from hold to buy. MKM reiterated a buy rating and $41 price target. Needham reiterated a strong buy and $44 target. Stifel, Raymond James and William Blair all reiterated a buy rating.

Shares have rebounded $2 off the lows from last week and should continue to accelerate higher in the days ahead.

The Optical Networking and Communications Conference was last week and there were numerous positive comments about Finisar and Lumentum. This should help lift this stock.

I know FNSR is pressing our $30 limit in this newsletter and that means higher risk of loss if a disaster appears. Readers may want to buy the option instead on this position.

Position 3/17/17:

Long FNSR shares @ $27.89, see portfolio graphic for stop loss.

Optional: Long May $30 call @ $.85, see portfolio graphic for stop loss.

HABT - Habit Restaurants - Company Profile


No specific news. Another nice gain to a 3-month high close.

Original Trade Description: March 22nd.

The Habit Restaurants, Inc., a holding company, operates fast casual restaurants under The Habit Burger Grill name. It specializes in offering fresh made-to-order char-grilled burgers and sandwiches featuring choice tri-tip steak, grilled chicken, and sushi-grade albacore tuna cooked over an open flame; and salads, as well as sides, shakes, and malts. As of March 2, 2017, the company operated approximately 170 restaurants in 15 locations in California, Arizona, Utah, New Jersey, Florida, Idaho, Virginia, Nevada, Washington, and Maryland, the United States; and the United Arab Emirates. The Habit Restaurants, Inc. was founded in 1969 and is headquartered in Irvine, California. Company description from FinViz.com.

Habit reported earnings of 7 cents that beat estimates for 3 cents. Revenue rose 21.8% to $73.9 million. Same store sales rose 1.7%. This was the 52nd consecutive quarter of positive same store sales. They opened 11 company stores and 2 franchises in Q4. The CEO said they were proud of their strong beat considering it is a fiercely competitive environment.

For full year 2017, they guided to revenue of $338 to $342 million, which represents 19.8% growth at the midpoint. The guided for 2% same store sales and the opening of 31 to 33 new company stores alony with 5 to 7 franchised stores. Analysts were expecting $339.2 million.

Earnings June 1st.

Shares spiked from $14 to $16 on the news and then pulled back for two weeks on post earnings depression. They have since recovered that $16 level and are about to break out to a new three month high. Shares dipped on Tuesday but very little and the rebound today erased the dip completely.

Position 3/23/17:

Long HABT shares, currently $15.95, see portfolio graphic for stop loss.
Optional: Long June $17 call @ 70 cents, no initial stop loss.

ITCI - Intercellular Therapies - Company Profile


No specific news. Another nice gain to a three-month closing high.

Original Trade Description: March 16th

Intra-Cellular Therapies is developing novel drugs for the treatment of neuropsychiatric and neurodegenerative diseases and diseases of the elderly, including Parkinson's and Alzheimer's disease. The Company is developing its lead drug candidate, lumateperone (also known as ITI-007), for the treatment of schizophrenia, bipolar disorder, behavioral disturbances in patients with dementia, including Alzheimer's disease, depression and other neuropsychiatric and neurological disorders. Lumateperone, a first-in-class molecule, is in Phase 3 clinical development for the treatment of schizophrenia, bipolar depression and agitation associated with dementia, including Alzheimer's disease. The Company is also utilizing its phosphodiesterase platform and other proprietary chemistry platforms to develop drugs for the treatment of CNS and other disorders. Company description from company website.

ITCI is meeting with the FDA in late March to discuss the filing of their newest drug for schizophrena and they have already contracted with a manufacturer to supply commercial quantities. The drug is lumateperone and it has already successfully navigated all the required studies and the results were presented at the annual meeting of the American College of Neuropsychopharmacology (ACNP) and the CNS Summit. For company information on their other drugs Click Here

They reported a smaller than expected Q4 loss of 64 cents compared to estimates for 77 cents. The company has averaged a 14.6% positive earnings surprise over the last four quarters. They are not a big company and deal mostly in research so they have a permanent loss until their new drugs hit the market. They have $10 per share in cash.

Shares were very volatile the day the earnings were released and shares settled at $13.50 several days later. Now a new uptrend has begun with a close at $15.75 today. The prior high was the mid $40 range. Shares crashed in September when a trial of drug ITI-007 for schizophrena failed a stage three trial for one specific test. The drug has 7 other uses.

Earnings May 31st.

There is an uptrend forming with resistance at $17. If the stock breaks above that resistance level it could run because of the recent memory of the $45 highs.

Position 3/17/17:

Long ITCI shares @ $15.72, initial stop loss $13.75,
No options recommended because of high prices and wide spreads.

NLNK - Newlink Genetics - Company Profile


No specific news. Support at $20 held and buyers finally arrives. The stock shot up through our $21 entry trigger to close at $22.18. Nice gain and a break through $22.50 would be a new 52-week high.

Original Trade Description: March 20th.

NewLink Genetics Corporation, a biopharmaceutical company, focuses on discovering, developing, and commercializing immunotherapeutic products for the treatment of cancer. Its portfolio includes biologic product candidates based on its HyperAcute cellular immunotherapy technology, which is designed to stimulate the human immune system to attack cancer cells; 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 is developing IDO pathway inhibitors comprising indoximod that is in multiple Phase I and Phase II clinical trials for patients with melanoma, pancreatic cancer, malignant brain tumors, metastatic breast cancer, acute myeloid leukemia, prostate cancer, and non-small cell lung cancer (NSCLC); and GDC-0919 and atezolizumab (MPDL3280A) that is in Phase Ib clinical trials for patients with locally advanced or metastatic solid tumors. Its clinical development products include NLG2101 for metastatic breast cancer; NLG2102 for refractory malignant brain tumors; NLG2103 for advanced melanoma; NLG2104 for metastatic pancreatic cancer; NLG2105 for pediatric patients with refractory malignant brain tumors; and NLG2106 for acute myelogenous leukemia. The company's HyperAcute cellular immunotherapy product candidates under clinical development include tergenpumatucel-L, is being investigated in Phase Ib/II clinical trial for patients with advanced NSCLC; and dorgenmeltucel-L, is being investigated in a Phase II clinical trial for patients with advanced melanoma. Its infectious disease program includes replication-competent recombinant vesicular stomatitis virus, a vaccine technology to treat Ebola and Marburg viruses. The company has license and collaboration agreements with Genentech, Inc. and Merck, Sharpe and Dohme Corp. Company description from FinViz.com.

NewLink reported a loss of 46 cents in Q4 and that beat analyst estimates for 66 cents. Revenue of $12.7 million significantly beat estimates for $4.3 million. They ended the quarter with $131.5 million in cash.

Earnings May 30th.

Newlink has multiple drugs in the pipeline targeting cancer and it has been mentioned multiple times as a possible acquisition target by Gilead Sciences. In addition to the IDO pathway drugs they partnered with Merck to develop an Ebola vaccine. The drug received breakthrough therapy designation from the FDA and PRIME status from the EU Medicines Agency. In December, the final results of a trial in Guinea were published in the Lancet confirming the efficacy of the vaccine.

In early April the company will present two abstracts at the American Association for Cancer Research (AACR) annual meeting. Presenters accepted to deliver their abstracts normally rise into the meeting. They present on April 4th. The abstracts being presented are chosen by an AACR committee as the best and most promising. This is an honor to be chosen.

This is a stock only play because option prices are out of sight. Shares hit a new 52-week high on Monday.

Position 3/29/17 with a NLNK trade at $21.00

Long NLNK shares @ $21, see portfolio graphic for stop loss.

Previously closed 3/21/17: Long NLNK shares @ $22.56, exit $20.65, -1.91 loss

VIPS - Vipshop Holdings - Company Profile


No specific news. Resistance appears to have formed at $14. I considered closing the position for lack of movement but today was actually a higher low day. It would not hurt my feelings if readers wanted to take the minor gain and exit. If we do get a move through $14 a trade at $14.50 would be a six-month high.

Original Trade Description: February 27th

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People's Republic of China. It offers a range of branded products, including women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories consisting of belts, fashionable jewelry, watches, and glasses for women and men, cosmetics, toys and games, sports equipment and hundreds of other categories. Company description from FinViz.com.

In Q4 revenue rose 36.5% to $2.73 billion. Full year revenue rose 40.8% to $8.15 billion. The number of active customers in Q4 rose 39% to 27.5 million. The number of total customers rose 42% to 52.1 million. Total orders for Q4 rose by 26% to 82.0 million. Total orders for the full year rose 40% to 269.8 million. Gross profits for Q4 rose 33.4% to $643.4 million. Gross profits for the full year rose 37.4% to $1.96 billion. They added five local distribution centers to further improve speed and efficiency of order processing. They have more than 20,000 staff and 2,000 self-operated delivery stations.

Earnings May 22nd.

Vipshop is tiny compared to Alibaba but they are growing rapidly and the three main rating agencies recently gave them favorable ratings. Fitch rated them BBB+, Moody's Baa1 and S&P BBB. The company is not a flash in the pan and those ratings indicate they are solid.

Shares spiked to $13 on the earnings news and moved sideways for a week. They posted a minor gain today in a weak market to close at a five-day high.

Update 3/7/17: The company announced a new credit facility for $632,500,000 for the purpose of repurchasing outstanding 1.5% convertible notes due 2019.

Position 3/3/17:

Long VIPS shares, currently $13.15, see portfolio graphic for stop loss.
Position 3/6/17: Long April $14 call @ 30 cents, no stop loss.

BEARISH Play Updates

SPXC - SPX Corp - Company Profile


No specific news. Shares posted another minor gain but resistance is $24 and resistance at the 100-day of $24.15 is still intact.

Original Trade Description: March 27th.

SPX Corporation supplies infrastructure equipment serving the heating and ventilation (HVAC), detection and measurement, power transmission and generation, and industrial markets in the United States, China, South Africa, the United Kingdom, and internationally. It operates through three segments: HVAC, Detection and Measurement, and Engineered Solutions. The HVAC segment engineers, designs, manufactures, installs, and services cooling products for the HVAC and industrial markets, as well as boilers, comfort heating, and ventilation products for the residential and commercial markets. The Detection and Measurement segment offers underground pipe and cable locators, and inspection equipment, as well as bus fare collection systems, communication technologies, and specialty lighting products. The Engineered Solutions segment provides transformers for the power transmission and distribution markets; and process cooling equipment, as well as rotating and stationary heat exchangers for the power generation and industrial markets. This segment sells transformers for publicly and privately held utilities under the Waukesha brand name; and process cooling products and heat exchangers under the brand names of SPX Cooling, Marley, Yuba, and Ecolaire. Company description from FinViz.com.

SPX Corp is losing money. For Q4 they lost $86.1 million or -$2.06 per share after a -48 cent loss in the year ago quarter. Revenue of $395.3 million fell sharply from the $468.4 million in the year ago quarter. A lot of their loss came from divesting businesses that were marginally profitable or even losing money. They are trying to stop the bleeding. On an adjusted basis they reported earnings of 69 cents.

Earnings May 25th.

The company sold its European power generation business for "nominal cash at closing." That means they got rid of a loser and it did not cost them any additional money. They closed their dry-cooling tower business for $48 million. They also split into two companies, SPX Corp and SPX Flow (FLOW). After all their divestitures and spinoff they ended the year with only $100 million in cash. Last week they signed an agreement with creditors allowing them to keep the $48 million from the sale of the cooling tower business for another 360 days. The loan was partially secured by those assets and having to pay the loan down by that amount as called for in the prior agreement would have cut their cash on hand in half. The company said it was not looking to sell any other divisions at present but would be restructuring after the divestitures and trying to turn a profit. Good idea but not very convincing.

They guided for 2017 revenue of $1.3 to $1.4 billion and well below estimates for $1.47 billion. They did guide for earnings of $1.55 to $1.70, which would be an improvement if they can make it happen.

SPX Corp is not in good shape. It is a viable business but management made some bad decisions in the past and they are working through them. If the market weakens in April as is typically the case, SPXC is probably going to see more sellers than buyers. Investors have far more opportunities to buy growing companies rather than companies like SPX, which have been shrinking.

SPXC broke below support of the 100-day average and tried for three days to break back to the upside and failed. That average is now strong resistance. Back in November they tested the 200-day and that is the likely target on any continued decline.

Position 3/28/17:

Short SPXC shares @ $23.18, see portfolio graphic for stop loss.

No options recommended because of price.

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