Option Investor

Daily Newsletter, Monday, 4/10/2017

Table of Contents

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

Market Wrap

Another Doji Day

by Keene Little

Click here to email Keene Little
For the third day in a row the broader averages finished near the flat line after creating little doji stars for their candlesticks. Investors don't know what to do next and it's showing in the market.

Today's Market Stats

The day started to the upside but like so many days before this, the initial morning buying quickly fizzled and the indexes sold off sharply. But continuing the whipsaws we've seen since last Wednesday, the morning selloff was then followed by a sharp reversal back up in the afternoon before giving back a little in the final hour.

The net result for the day was another doji day for the market, the 3rd in a row, as investors try to figure out whether or not the market can continue its bullish run. For at least the short term I think the chances of heading lower are greater than the chances for a rally from here.

There were no significant economic reports today and therefore the market was left to react to overseas and domestic news, which was very little. But there wasn't much in the way of news either and consequently the market seemed to react more to some competing buy and sell programs than anything else. The result was a day of little movement and hardly any changes to the charts.

Many times I've talked about market sentiment and how it can provide warning signs when extremes are hit. The problem right now is that we do not have any extremes and worse, we have conflicting signals. Like price action itself, we seem to be in a period of confusion for the market but that itself can be valuable information -- it's not a good time to be aggressive in either direction.

Volatility index, VIX, Weekly chart

The VIX is of course one sentiment indicator and it's starting to show more fear as the market has consolidated. Just today, with the doji finish, the VIX climbed 9.2% to 14.05. This is up from a low of 10.90 last Wednesday (just before the market crashed Wednesday afternoon).

From a contrarian perspective the jump higher in the VIX can be considered bullish and notice on its chart that it has made it up close to a downtrend line from November through the March 27 high, currently near 14.35. Only slightly higher, near 14.50, is an old uptrend line from 2014-2015, which the VIX has reacted to several times since. A break above 14.50 would likely coincide with another drop in the market but watch to see if the trend lines become resistance since a drop back down would likely coincide with a market rally.

Fear & Greed index, chart from money.cnn.com/data/fear-and-greed

The CNN Fear & Greed chart also shows we're in somewhat of a neutral position, but leaning to the fear side. It would take a further drop into the fear zone (below 20) before telling us to look for a bottom. There certainly isn't any indication of exuberance by investors right now and that leaves us room to the upside in the market.

S&P 500 COT report, Weekly chart

Looking over to the commercial traders to see what kind of sentiment we're seeing between the commercial and non-commercial traders, it's looking more bearish than bullish for the market. I've drawn vertical lines at previous times there was a large split between the groups and keep in mind that's most often it's best to bet with the commercial traders (although it cannot be used as a market timing tool).

Back in the beginning of 2015 the commercial traders (black line) reached a large net short position. The non-commercials (blue line) reached the opposite with a large net long position and in fact they tend to create more or less a mirror version of the commercial positions. But notice how the market went mostly sideways into September while the commercials trimmed their short positions and non-commercials trimmed their long positions into September.

You can see how the commercial net-long position led to a nice rally in October 2015 while they trimmed their positions. The same thing happened into the February 2016 low where another large net-long position led to a nice rally in the market. But then the opposite position was taken into August 2016, which led to a decline into November. During the rally from November the commercials have been building a large net-short position, just as they had done into the August 2016 high.

The net-short position into the August 2016 market high leg to one of the larger pullbacks we had seen all year and now, even though the market has been consolidating since the March 1st high the commercials have continued to build their net-short positions. This doesn't preclude another push to new highs for the market but it's a warning sign that the market is vulnerable here and especially so if it does press higher but the commercials keep getting more net short.

S&P 500, SPX, Daily chart

It's getting crowded on my SPX daily chart but you can see today's little doji star follows the little dojis on Thursday and Friday. Meanwhile price is getting squeezed between trend lines and moving averages. The 20-dma is currently near 2360 (SPX broke above it today but was unable to hold above) and its 50-dma is currently near 2349, slightly below today's low. It's the 50-dma that many fund managers are watching carefully since most will be dips to that support when the market is in an uptrend. A close below the 50-dma will set off sell alarms.

Coinciding with the 50-dma near 2349 is an uptrend line from November through the March 27th low (the opposite of the downtrend line shown on the VIX chart) and therefore a drop below 2349 would be a technical breakdown. What's not clear from the pattern since the March 1st high is whether we're in just a larger corrective pullback pattern, one which could last all of April, or the start of something more bearish.

The corrective pattern would mean another rally leg will follow this pullback, either from here or after another leg down for the pullback. The more bearish pattern would be confirmed if we see a strong impulsive move down, one that drops below the bottom of a parallel down-channel from March 1st, which is currently near 2311.

Key Levels for SPX:
- bullish above 2379
- bearish below 2322

S&P 500, SPX, 60-min chart

Following last Wednesday afternoon's strong decline SPX has been in a choppy bounce attempt. It's looking like a bear flag pattern with the little parallel up-channel for the bounce and the expectation is for at least another leg down.

As shown on the 60-min chart, two equal legs down from last Wednesday's high points to 2336.91. If we're to get just a 3-wave pullback we should see SPX hold near that level (assuming we'll get another leg down) and set up the next rally leg. A drop below 2336 would then point to at least a test of the March 27th low at 2322, if not the bottom of a parallel down-channel from March 1st (a larger bull flag pattern?), which will be near 2309 by the end of the trading week (Thursday), and maybe down to price-level support near 2300. Two equal legs down from March 1st also points to 2300.

Dow Industrials, INDU, Daily chart

The Dow looks the same as SPX -- the 3rd day in a row with doji star and getting pinched between trend lines and its 20- and 50-dmas. It could literally go either way here and while I lean at least short-term bearish I'd turn bullish with a rally above last Wednesday's high at 20888. But like SPX, the 50-dma, which was again tested today at 20616, is important support and a break of it could start hitting a lot of stops on long positions.

Key Levels for DOW:
- bullish above 20,888
- bearish below 20,412

Nasdaq Composite index, COMPQ, Daily chart

The techs have been no different from the blue chips with their string of doji days and the Nasdaq has been hugging its trend line along the highs from April-August 2016, where it closed today. Assuming we're going to get another leg down from its 3-day consolidation, look for a test of its 50-dma near 5819 and then potentially down to the bottom of its megaphone pattern, which will be near 5700 next week.

Key Levels for COMPQ:
- bullish above 5950
- bearish below 5769

Russell-2000, RUT, Daily chart

Last Wednesday's decline had the RUT breaking below its 20-dma and it repeatedly tried to get back above it since then. Today it rallied above its 20-dma, near 1368, but was rejected by its broken 50-dma, as it was last Wednesday, and closed on its 20-dma. A rally above this morning's high at 1376 would be potentially bullish but it would then have to get through its downtrend line from March 1-31, near 1382.

Assuming the RUT is going to head lower, a break of price-level support near 1347 would point to the likelihood of a drop to the 1310 area (price projection for two equal legs down from March 1st and an uptrend line from February-November 2016).

Key Levels for RUT:
- bullish above 1390
- bearish below 1347

KBW Bank index, BKX, Daily chart

Following the initial morning high the banking index spent the rest of the day in the red, which is not something the bulls like to see. The banks have been acting weak since the March 1st high and have been issuing us a warning about the current rally. Higher interest rates were expected to help the banks' profitability so why aren't they rallying? Does someone know something about the likelihood for more rate increases?

If BKX breaks its downtrend line from March 1st, near 92, it would be at least short-term bullish. At the moment BKX is holding support at its uptrend line from June-October 2016, which was last tested at the March 27th low, and its trend line along the highs from April 2010 - July 2015. A drop below today's low at 89.92 would be bearish, which would be confirmed with a break below the March 27th low at 88.10

Could we be seeing the right shoulder of a H&S topping pattern (left shoulder in December-January)? The downside objective from that pattern would point to 77.60 but it would first find support at its July 2015 high, at 80.87, and its rising 200-dma, currently at 81.38.

Gold continuous contract, GC, Daily chart

Gold has been consolidating below its 200-dma since testing it on March 27th (which followed a failed test on February 27th). Clearly the 200-dma, currently near 1261, is resistance and therefore gold would be more bullish above it. That would also be a break of its downtrend line from August-September 2016 and therefore a break above 1263, if it holds above that level, should lead to a rally at least a price projection near 1281 and potentially higher. A downtrend line from September 2011 - August 2016 is currently near price-level S/R at its January 2015 high at 1308.

The bearish pattern calls for gold to roll over from its 200-dma (note the bearish divergence against its February 27th high) and continue lower this year. The first sign of trouble for gold would be a drop below its rising 20- and 50-dmas, currently near 1247 and 1236, resp.

Oil continuous contract, CL, Daily chart

Oil has rallied strong since March 27th and it has helped the stock market rally at the end of March but not so much this month. The energy sector has helped the broader market so it would be helpful to the market if oil continues to rally. There's upside potential to at least the shallow downtrend line from January-February, currently at 54.73. It would obviously be more bullish above that level but at the moment, as shown further below, the COT report is not favoring the bulls.

Oil COT report, Weekly chart

At the moment today's high is showing bearish divergence against Thursday night's high and with the COT report still showing a wide divergence between the commercial traders and non-commercials, it's telling us the rally could be one of the sucker varieties. The commercials had swung to a large net-short position at the February 27th low while non-commercials were net long. The spread has shrunk a little but there's still a wide spread and the commercials have a lot of unwinding to do to decrease their net-short position. This means it's likely we'll see at least another leg down for the price of oil.

Economic reports

There were no important economic reports today and that won't change much for Tuesday. The JOLTS report will be the only report on Tuesday, which will leave the market again reacting to news from oversea. Wednesday's reports will also not likely affect the market. Thursday morning might see some reaction to the PPI and Michigan Sentiment numbers.

Friday we'll get the CPI numbers and see whether or not the retailers are still getting hammered. Retail sales will be an important indicator about our economy since it's so dependent on consumer spending. Following last Friday's dismal NFP report, which has economists wondering if the jobs market is weakening, which in turn would weaken consumer spending.


We have a mixed sentiment picture at the moment, more neutral but leaning bearish. From a contrarian perspective bearish sentiment can be bullish for the stock market. But sentiment has not reached an extreme and is therefore not that much helpful at this moment. But the COT report suggests the stock market is at risk here and while it does not preclude another rally leg it is telling us not to trust another rally if we get it, especially if the commercial traders load up on more short positions at new market highs.

Both the semiconductor and banking stocks were at the bottom of the list of sectors today, which is not a good sign for the bulls. The SOX and BKX should be in sync to the upside to help a rally. Instead they were in sync to the downside today.

Today's trading was on light volume but the market internals favored the bulls. All of this is simply presenting us with a mixed picture of the market and no clear direction. My best guess is for at least another leg down following the bear flag pattern off last Thursday's lows. Once we get another leg down (assuming we will) it will then be time to watch for a possible reversal to the upside. Hopefully the picture will be a little clearer when I do Wednesday's update.

Good luck and trade carefully (quickly, if at all) in this choppy environment.

Keene H. Little, CMT

New Plays

Small Cap Wasteland

by Jim Brown

Click here to email Jim Brown
Editor's Note

The recent weakness in small cap stocks has killed the majority of the individual stock charts. I spent over 3 hours looking at small cap charts and news articles and I could not find anything that I was willing to risk money even on speculation. This situation could continue until the market picks a direction other than sideways. No new plays today.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Strongest Indexes

by Jim Brown

Click here to email Jim Brown

Editors Note:

It was not much but the small cap indexes posted larger percentage gains than the big caps. You really have to use a microscope to see the gains but the Russell added 0.18% and the S&P-600 +0.29% when the big cap averages were in the +0.06% range. In reality all the indexes posted only low single digit gains so there is nothing to get excited about.

The Dow sprinted higher at the open to hit resistance at 20,750 and immediately implode -135 points to almost hit support at 20,600. It was another reversal day and the indexes closed where they opened. The S&P futures opened positive tonight but have declined from +2.50 to zero in the first two hours of the evening session.

Volume was very light at 5.47 billion shares and it is not likely to pick up the rest of the week. Volume is a weapon of the bulls and without volume the market is at risk.

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

The long position was entered at the open.

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

CPE - Callon Petroleum Company - Company Profile


No specific news. Holding the prior gains.

Original Trade Description: April 3rd.

Callon Petroleum Company, an independent oil and natural gas company, acquires, explores for, develops, and produces oil and natural gas properties in the Permian Basin in West Texas. As of December 31, 2016, its estimated net proved reserves totaled 91.6 million barrel of oil equivalent. The company was founded in 1950 and is headquartered in Natchez, Mississippi. Company description from FinViz.com.

This is a small oil producer with 66 years of experience. They reported Q4 earnings of 8 cents that missed estimates for 10 cents. Revenue of $69.1 million also missed estimates for $71.8 million. However, that is not the real picture.

Production for the full year increased 59% with 77% oil. Q4 production increased 11% with 76% oil. Reserves increased 69% to 91.6 million Boe with 78% oil. They replaced 311% of production with new wells and new discoveries. Their finding and developing costs are very low at $8.77 per barrel. They increased their Permian acreage by 41,000 acres through multiple acquisitions. They raised 2017 production guidance by 60% to 24,000 Boepd. Callon ended the quarter with $653 million in cash.

Earnings May 29th.

Shares hit a low of $11 on March 14th and began to rebound. That rebound has begun to accelerate over the last week with oil prices rising back over $50. With refiners restarting after the Feb/March maintenance cycle, oil inventories should begin to decline. That always lifts prices in the spring and summer months and rising oil prices lifts equities.

Position 4/4/17:

Long CPE shares @ $13.31, see portfolio graphic for stop loss.

Optional: Long May $14 call @ .55, see portfolio graphic for stop loss.

ECA - Encana Corporation - Company Profile


No specific news. Shares up with oil prices.

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.

HABT - Habit Restaurants - Company Profile


No specific news. Nice gain to a three-month high. Habit is nearing resistance at $18. If we can get through that level, the next challenge would be $21 and then $24. The historic high in 2014 was $44.

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.

ILG - ILG Inc - Company Profile


No specific news. Closed at new 52-week high.

Original Trade Description: April 8th.

ILG, Inc., together with its subsidiaries, provides non-traditional lodging covering a portfolio of leisure businesses from vacation exchange and rental to vacation ownership. The company operates through two segments, Exchange and Rental, and Vacation Ownership. The Exchange and Rental segment offers leisure and travel-related products and services to owners of vacation interests and others primarily through various membership programs, as well as related services to resort developer clients; and allows owners of vacation ownership interests to exchange their occupancy rights for alternative accommodations at another resort and/or occupancy period. This segment also provides vacation property rental services for condominium owners, hotel owners, and homeowners' associations. The Vacation Ownership segment engages in the management of vacation ownership resorts; and the sale, marketing, and financing of vacation ownership interests, as well as in the provision of related services to owners and associations. As of December 31, 2016, it provided management services to approximately 250 vacation ownership properties and/or their associations. The company was formerly known as Interval Leisure Group, Inc. and changed its name to ILG, Inc. Company description from FinViz.com.

ILG reported earnings of 48 cents on revenue of $455 million. Net income rose from $16 million to $61 million. Earnings rose from 27 cents to 48 cents. Free cash flow was $180 million. Analysts had expected revenue of $464 million and shares fell sharply over the next week. The company guided for full year revenue of $1.72 to $1.86 billion.

They repurchased 6.5 million shares and paid $52 million in dividends to return $153 million to shareholders. They currently pay a 2.83% dividend.

The company has been on an acquisition and renovation binge. They sometimes acquire properties in great locations that have issues and then spend a few million on renovations to turn them into star attractions. In May they completed the acquisition of Vistana Signature Experiences, formerly known as Starwood Vacation Ownership for $1.15 billion in cash and stock. With the transaction, they acquired an 80-year global license for the use of the Westin and Sheraton brands.

Despite their vast holdings and strong revenue they are still a relative unknown in the investment community. However, with their Vistana acquisition along with the Hyatt and St Regis vacation brands they are starting to become known.

Shares have risen $3 in the last four weeks and have begun to accelerate. The company is a member of the S&P-600 but with the acquisition of Vistana it has a market cap over $3 billion and is eligible for inclusion into the S&P-500. That could provide a nice boost to the stock price but it would be pure speculation.There are many companies with a higher market cap that have not been included.

Earnings May 30th.

Position 4/10/17:

Long ILG shares @ $21.28, see portfolio graphic for stop loss.

Optional: Long June $22 call @ 60 cents.

KRNT - Kornit Digital - Company Profile


No specific news. Minor decline from Friday's closing high.

Original Trade Description: April 5th.

Kornit Digital develops, manufactures and markets industrial digital printing technologies for the garment, apparel and textile industries. Kornit delivers complete solutions, including digital printing systems, inks, consumables, software and after-sales support. Leading the digital direct-to-garment printing market with its exclusive eco-friendly NeoPigment printing process, Kornit caters directly to the changing needs of the textile printing value chain. Kornit’s technology enables innovative business models based on web-to-print, on-demand and mass customization concepts. With its immense experience in the direct-to-garment market, Kornit also offers a revolutionary approach to the roll-to-roll textile printing industry: Digitally printing with a single ink set onto multiple types of fabric with no additional finishing processes. Founded in 2003, Kornit Digital is a global company, headquartered in Israel with offices in the USA, Europe and Asia Pacific, and serves customers in more than 100 countries worldwide. Company description from Kornit.

The company description pretty much says it all. They have developed a process to print on fabric that is fast and cheap and the company is setting new highs as the demand for their product increases.

The company reported earnings of 16 cents on a 33.4% increase in revenue to $34 million. There was a secondary offering in January that raised $38 million for the company and was very oversubscribed.

The big spike in early January was news the company granted Amazon warrants to buy up to 2.9 million shares at $13. Since KRNT only has 31 million shares outstanding that is nearly a 10% position in the company. The warrants came after Amazon placed an order for a "large number" of textile production systems for Amazon's own use in the Merch by Amazon program.

Earnings May 16th.

Shares made a new high on March 31st and they closed within 10 cents of that high on Thursday. Shares have risen over the available option strikes so this will be a stock only position.

Position 4/7/17:

Long KRNT shares @ $19.00, see portfolio graphic for stop loss.

BEARISH Play Updates

ACOR - Acordia Therapeutics - Company Profile


No specific news. Shares fell to within 15 cents of a new ten-year low on Friday but rebounded slightly today.

Original Trade Description: April 5th.

Acorda Therapeutics, Inc., a biopharmaceutical company, identifies, develops, and commercializes therapies for neurological disorders in the United States. The company markets Ampyra (dalfampridine), an oral drug to improve walking in patients with multiple sclerosis (MS); Zanaflex capsules and tablets for the management of spasticity; and Qutenza, a dermal patch for the management of neuropathic pain associated with post-herpetic neuralgia. It also markets Ampyra as Fampyra in Europe, Asia, and the Americas. In addition, the company develops CVT-301 that has completed a Phase III clinical trial for the treatment of OFF periods in Parkinson's disease; CVT-427, which has completed a Phase I clinical trial to treat migraine; Tozadenant that is in Phase III clinical trial for reduction of OFF time in Parkinson's disease; SYN120, which is in Phase II clinical trial to treat Parkinson's disease-related dementia; and BTT1023 (timolumab) that is in Phase II clinical trial for primary sclerosing cholangitis. Further, it develops rHIgM22, which is in Phase I clinical trial for the treatment of MS; Cimaglermin alfa that has completed a Phase I clinical trial in heart failure patients; and Chondroitinase Program that is in research stage for the treatment of spinal cord injury. The company has collaborations and license agreements with Biogen International GmbH; Alkermes plc; Rush-Presbyterian St. Luke's Medical Center; Alkermes, Inc.; SK Biopharmaceuticals Co., Ltd.; Astellas Pharma Europe Ltd.; Canadian Spinal Research Organization; Cambridge Enterprise Limited and King's College London; Mayo Foundation for Education and Research; Paion AG; Medarex, Inc.; and Brigham and Women's Hospital, Inc. Company description from FinViz.com.

It has not been a good four days for Acordia. The company reported on Friday a U.S. District Court had ruled that four key patents for their primary drug Ampyra were invalid. This clears the way for Mylan, Teva and Roxane to immediately begin producing a generic version. Those companies have already applied to the FDA for permission. Seven other companies had sought to copy the drug but agreed to delay settlements with Acordia.

The problem for Acordia is that Ampyra produced 90% of the $519 million in Acordia revenues in 2016. With multiple generic competitors hitting the market very soon, that number will be significantly lower for 2017. Acordia said they were going to appeal the verdict but that is a long shot at best and those larger companies have more money to defend their case.

Acordia said on Wednesday they were cutting 20% of the workforce to save $21 million a year. Unfortunately, that will not be near enough to save the company. They ended 2016 with $153 million in cash and revenue guidance for $540 million in 2017. If that is cut in half they will be forced to raise money with a secondary offering. If they are smart they should already have it queued up and ready to go before the stock falls into single digits. Obviously, that will further depress the stock price but they have no other alternative.

Shares have fallen significantly over the last four days but the patent decision is the equivalent of a death sentence if they cannot raise money quickly.

Earnings are April 27th and the expectations for guidance could be ugly.

Position 4/6/17:

Short ACOR shares @ $17.05, see portfolio graphic for stop loss.

No options recommended because of price.

FSLR - First Solar - Company Profile


Despite a negative article on Bloomberg shares still posted a strong gain of $1.16 and missed our stop loss by 3 cents.

Original Trade Description: March 30th.

First Solar, Inc. provides solar energy solutions in the United States and internationally. It operates through two segments, Components and Systems. The Components segment designs, manufactures, and sells cadmium telluride solar modules that convert sunlight into electricity. This segment offers its products to solar power systems integrators and operators. The Systems segment provides turn-key photovoltaic solar power systems or solar solutions, such as project development; engineering, procurement, and construction; and operating and maintenance services to utilities, independent power producers, commercial and industrial companies, and other system owners. The company was formerly known as First Solar Holdings, Inc. and changed its name to First Solar, Inc. in 2006. Company description from FinViz.com.

First Solar shares have been under pressure for months. On March 20th they were removed from the S&P-500 and investors are still selling the shares.

They reported a Q4 loss of $6.92 per share compared to estimates for $1.00 in earnings. The earnings included a $729 million restructuring charge compared to only $4 million in Q3. If we back out the restructuring charges the company would have earned $1.24 and shown a sizeable beat. However, revenue declined from $480 million in Q3 to $208 million in Q4.

Earnings May 23rd.

First Solar is building quality projects but they are facing a stiff headwind. Tax incentives around the world are shrinking and it is becoming increasingly harder to make a profit. Whenever they get a big power generation facility completed they are forced to sell it to recover their money rather than sit back and let the long term profits roll in.

On Thursday, March 30th, they sold the 250-megawatt Moapa Southern Pauite Solar Project in Nevade to Capital Dynamics, a Swiss private equity firm. The facility supplies power to the Los Angles Dept of Water and Power. They did not disclose the terms of the sale and the stock tanked again. By not disclosing the terms, investors always fear the worst, that they were forced to sell at a big discount.

The stance taken by the new Trump administration on EPA restrictions on coal and gas fired electric generation plants will make power cheap again and these massive solar developments will find it harder to break even. Solar power generation is getting cheaper to build but it cannot compete with gas fired plants at $3 or coal fired plants that operate even cheaper.

Shares broke to a five-year low last week and today's decline is a lower low. The prior low back in 2012 was $11.50 and we could be headed to that level long term.

Update 4/7/17: Reportedly FSLR wants to exit its joint venture with Sunpower (SPWR). The two companies package completed utility scale solar farms into a "Yield Co" for sale to investors. Yield Cos have lost favor with the investing public after SunEdison filed bankruptcy in 2016. Shares posted a minor gain.

Position 3/31/17:

Short FSLR shares @ $27.50, see portfolio graphic for stop loss.

Optional: Long June $25 put @ $1.15, see portfolio graphic for stop loss.

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