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Newsletter

Daily Newsletter, Saturday, 11/26/2016

Table of Contents

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

Market Wrap

Runaway Rally

by Jim Brown

Click here to email Jim Brown

The "end of uncertainty" rally is ignoring calls for its demise and continues making new highs. We will eventually pay for this excess.

Weekly Statistics

Friday Statistics

The markets shook off the midweek slump to surge forward on Friday to close at another new high. The Russell 2000 is now up 15 consecutive days for a gain of 16.4%. As each day passes with a new gain the odds increase for a significant bought of profit taking. With each move higher there is a better chance for a deeper decline when that profit taking appears.

A normal retracement would be 2%-3% but we are well past normal in this rally. We could see 5%. It all depends on how it happens. A couple days of bottomless declines could be the equivalent of ripping off a band aid followed by an equally strong rebound. Or, we could see a week or more of choppy declines as traders rotate out of winners and into stocks with smaller gains. The only guarantee is that we will see some profit taking soon and next week is the logical place since the holiday is over.


There was only one economic report on Friday. The International Trade deficit for October was -$61.99 billion compared to -$56.1 billion in September. Exports declined -2.7% from September to October. Imports rose +1.1%. This is going to be a drag on Q4 GDP because we are seeing the impact of the soybean exports that were pulled forward into Q3. However, the Atlanta Fed GDPNow is tracking at +3.6% growth for Q4 so we have room for a little deterioration and still have a great number. That is nearly double the blue chip consensus estimate for only +2.1% growth. The trade report was ignored because everyone was shopping.

We have a monster calendar for next week. There will be another flurry of Fed speakers telling us the Fed is going to hike soon. The December meeting is on the 14th and you can bet there will be a rate hike. Of the 10 Fed heads charting their expectations on the "dot plot", five of them expect to end 2017 with interest rates between 1.5% and 2.0%. The CME FedWatch Tool is projecting a 93.5% chance of a December hike.


This is also employment week with the ADP forecast at 160,000 jobs and the Nonfarm Payrolls at a whopping 215,000 jobs. Obviously at least one of those estimates is very wrong. Since November is the start of the holiday shopping/shipping season, I would bet the Nonfarm number is the closest to accurate.

The Fed Beige Book is on Wednesday and that summarizes the economic conditions in the various Fed regions. The last report was slightly weaker than the prior version but it was ignored.

Wednesday is also notable because of the OPEC production decision. This could send crude prices back to $40 or over $50 in the coming weeks so the decision is critical.

It is also month end and there will definitely be some window dressing for November after the big rally. That may not move the market since the MSCI quarterly index rebalance comes at Wednesday's close with monster volume that could overpower any window dressing gains. Link to MSCI changes (PDF)

We will get the ISM Manufacturing Index on Thursday and the expectation is for a minor rise from 51.9 to 52.5.


In stock news Swiss biotech Actelion (ALIOY) shares rose 20% on news Johnson & Johnson (JNJ) had offered to acquire the company for $17 billion. The company is working with an advisor to analyze strategic alternatives. Shire (SHPG) was the last company to make an offer to acquire the company.


United Technology (UTX) shares were up slightly over the last two days on news Trump had reached out to subsidiary Carrier Air Conditioning about keeping their plant in Indiana and was reportedly making progress. This would keep 1,400 jobs in Indiana that had been slated to move to Mexico. Nobody knows what Trump has offered or threatened but it would have to be serious. Carrier workers in Indiana make between $16 and $20 per hour. When they complete the move to Mexico, they will pay Mexican workers $3 an hour. Multiply that by 40 hours a week and 1,400 employees and the incentive would have to be more than $44 million a year to offset the additional employee costs. However, in terms of available tax incentives that number would be a drop in the bucket.


Ctrip.com (CTRP) reported earnings of 17 cents compared to estimates for 11 cents. Revenue of $835.5 million beat estimates for $801.8 million. The company also said it signed an agreement to acquire the travel search site Skyscanner for $1.74 billion.


Tesla (TSLA) appears to be recovering from the SolarCity acquisition and shares have moved up for the last week. Morgan Stanley continues to dump on the acquisition saying it makes no financial sense and will become a black hole for Tesla cash. Musk feels different and Tesla stores have already begun selling energy products. Musk and Tesla reported a project to completely power the American Samoa island of T'au with a solar grid and 60 Tesla battery power packs. While that feat could be accomplished by any of the major solar manufacturers, it is confirmation that Tesla is moving rapidly to integrate the two companies. Shares have risen from $180 to $196 over the past few days.


How high is too high? U.S. Steel (X) shares have risen 61% since the election. The fundamentals really have not changed and could actually be worsening. Steel costs are expected to rise and coal is used to make the steel. Coal prices are also expected to rise. With the dollar at 13-year highs, exports of steel are going to be more expensive. I believe this stock has gotten well ahead of its skis and could be headed for a nasty fall. A lot of traders believe this as well because the January $32 put is $2.39 and very high on a historical basis. Open interest is 3,659 when most strikes averaged only a couple hundred in open interest a month ago.


Goldman Sachs (GS) said S&P-500 companies have about $1 trillion in cash overseas. Capital Economics said total cash held overseas is closer to $2.5 trillion. Trump has pledged to change the corporate tax rate to 15% and pass a 10% repatriation tax. Goldman believes that will happen in the second half of 2017.

Goldman expects about $200 billion to be immediately repatriated with a significant portion being used to fund stock buybacks. They expect $150 billion of that to be added to buybacks to increase the total by 20% to $780 billion. That will only be the second time in the last 20 years that S&P companies spent that much on share repurchases. Total cash returned to shareholders through buybacks and dividends would rise to $1.2 trillion. If there is no change in the repatriation tax rate, Goldman said buybacks would only rise about 5%.

FactSet said the blended earnings growth rate for Q3 has risen to +3.2% now that more than 98% of S&P companies have reported. That compares to estimates for a decline of -2.2% at the beginning of the quarter. However, Q4 estimates have declined slightly to earnings growth of +3.3% and 5.0% revenue growth. Earnings for all of 2017 are now forecast to show 11.4% growth and +5.9% revenue growth. That would be a good year but those forecasts change monthly and are normally optimistic at the beginning of the year. The forward PE is now 16.8 and well above the 10-year average of 14.3.

The dollar hit a new 13 year high on Wednesday as the Euro fell to a 13 year low. The turmoil surrounding the Euro is increasing as other countries discussing leaving the currency bloc. The dollar strength is the primary reason for the slight decline in earnings estimates for Q4. At these levels, it is very damaging to anyone exporting products and selling overseas.



Mortgage applications fell -9% last week as interest rates surge. Borderline borrowers are being told they no longer qualify for mortgages because of the higher rates. The annual pace of new home sales fell from 593,000 to 563,000 last week as the selling season ended and those buyers still shopping were scared off by the rates. The yield on the 10-year treasury rose to 2.41% intraday on Wednesday to hit a 15-month high.


Crude prices fell -$2 on Friday after Saudi Arabia cancelled their appearance at a meeting of non-OPEC producers scheduled for Monday, two days before the regular OPEC meeting on Wednesday. With OPEC members in rebellion mode and cannot even agree among themselves about a production cut/freeze/ceiling, there was no reason for Saudi officials to meet with Russia and others to explain an agreement that does not exist and try to get those producers to trim production as well. Saudi officials said they were not attending the meeting in order to focus on reaching a consensus within the organization first. The Monday meeting was supposed to "seal the deal" on a joint cut between OPEC and non-OPEC producers.

OPEC has managed to keep prices from collapsing for the last two months by routinely floating headlines that suggested there could be a deal this time. Unfortunately, they have run out of time and if there is no "credible" deal announced on Wednesday, oil prices will collapse. OPEC had record production in October and probably again in November. Based on the comments out of other OPEC producers, if there is going to be a material production cut, it will have to come from Saudi Arabia and they have said repeatedly they would not accept that fate. Barclays said Saudi could cut 500,000 bpd, the UAE and Kuwait 100,000 bpd each or possibly 200,000 bpd each but Iran, Iraq, Libya and Nigeria will be increasing by an equal amount so there would be no real production decline.

Iran is expecting Trump to impose new sanctions so they will not voluntarily agree in advance to restricting production. They will want to produce every barrel possible until the sanctions hit again.

Most analysts believe OPEC will announce some "face saving" agreement of some sort but nobody will actually comply with the terms. It will strictly be a political statement to make it appear they are doing something. I would expect a sell the news drop on the announcement unless it is much stronger than expected.

The alternative view from Bank of America is that OPEC will be forced to cut production for several reasons related to the Trump victory. Interest rates and the dollar are rising. That forces the price of oil lower on a commodity basis. Trump has also threatened to boost U.S. production significantly and raise the current supply glut and force prices lower. BofA thinks the threat to Iran of a Trump presidency will force them to freeze production with OPEC in an effort to raise prices. BofA believes Iran cannot increase production significantly from current levels without additional foreign investment. Those potential investors will be taking a wait and see attitude before committing additional funds that could get trapped in a new sanctions program.


Active rigs rose by 5 with three of those oil rigs and 2 gas rigs. Activations this week are likely to be low as producers wait to see what the OPEC decision does to prices.


 


 

Markets

Volume was not just low on Friday, it was nonexistent. Only 3.0 billion shares traded across all markets. Nobody expected any volume but that was still 200 million shares more than the 2.8 billion on the same day in 2015.

Internals were still positive with 4,445 advancers to 2,339 decliners. There were 835 new 52-week highs. Tuesday saw the most with 936 new highs followed by 896 on Wednesday.

With month end on Wednesday along with the MSCI index rebalance we should see a significant volume increase on Tue/Wed that could overpower any directional trend. High rebalance volume is typically neutral for the market because stocks are being bought and sold in relatively equal dollar volume.

BofA said prior to the election more than $130 billion had been taken out of equity funds year to date. Since the election, more than $30 billion has flowed back into equities. If we really are at the start of the Great Rotation from bonds back into equities, there are hundreds of billions of dollars still to flow. It will not all happen at once but as long as the markets keep making new highs that is a powerful incentive to accelerate the rotation.

Most professional traders and analysts are taking a wait and see approach. The market has gone too far, too fast and while they would like to add more long positions, they would rather do it on a dip. This thought process suggests any profit taking dips in the near future are likely to be shallow.

The S&P blew through the next to last line of uptrend resistance at 2,205 on Friday with a nearly 9-point gain to close at 2,213. The next level of concern is 2,225. The index is overbought and could/should rest at any time. The 2,175 level should be worst-case support but I would be shocked if we dipped to that level.


The Dow has moved into blue-sky territory with no material resistance in sight. There is light uptrend resistance from 2014/2015 around 19,500. The biggest problem for the Dow this week is simply its overbought status. Some individual components are eventually going to weaken and that will create the drag needed to slow the ascent. The prior uptrend resistance is probably going to be support when the profit taking appears. That is 18,900 today and where I would be a tentative buyer.

The Dow is setting up for an attack on 20,000 by year-end. That would be the mother of all sell the news events. After what would be a monster rally to get to that point, the touch of 20K could be the equivalent of a lightning strike. There will be year-end tax trading considerations as well as severe inauguration risk. With as many as two million protestors reportedly ready to converge on Washington to block the event, this could turn into a very ugly mess. I hate to be talking about this well in advance but portfolio managers with billions at risk, have teams of people that do this kind of research in order to avoid surprises.

I am looking for the Dow to make new highs in December but every step higher increases the year-end event risk. January's have not been kind the last two years and investors tend to remember those events.



The Nasdaq Composite finally kicked into gear and started making new highs as well. The big cap techs are still hit and miss with choppy trading from day to day. Note that none of the FANG stocks are in the list of gainers below. The smaller tech stocks including the chip sector are doing well. Unfortunately, the biotech sector lost traction and struggled all week to close with a minor loss. This held the Nasdaq to some mediocre gains.

The Nasdaq has uptrend resistance around 5,500 and that would be a good target for year end after some minor retracements for profit taking along the way.



I am bullish on the market over the next several weeks but expect any continued gains to be interspersed with some bouts of profit taking. I believe money from bonds will be flowing into equities but maybe not at a breakneck pace until after the inauguration.

We cannot continue the recent gains but dip buyers should keep any declines relatively shallow. The market is making new highs and that is the drug of choice for investors. Everybody wants to chase new highs for fear of missing out on a long-term rally. Retail investors do it because they do not really understand. They are hooked on the momentum. Fund managers do it because they have to or their performance will lag their peers and they risk losing their jobs. Try not to be lured by the Pied Piper of new highs and plan on buying the dips instead.

 


 

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Random Thoughts


The surge in bullish sentiment continues. Bulls are almost over 50% and bearish sentiment is at a five-month low. Bullish sentiment has risen from 23.6% at the beginning of November to 49.9% a rise of more than 100%. This survey ended on Wednesday.

Last week results


David Stockman, Director of Office of Management and Budget under President Reagan, does not share the bullish view of most investors. He is calling this the "Greatest Suckers Rally of All Time." "This 5% eruption is meaningless. It is some robot machine trying to tag new highs." He said he "sees a recession in 2017 and the market is going to go down and stay down long and hard because for the first time in 25 years there is nothing to bail it out." "Sell stocks, sell bonds. Get out of the casino. Bonds have already lost $2 trillion globally and have miles to go." Complete Source Article


General James Mattis is being considered for the Secretary of Defense. Mattis is a soldier's general. He and President Obama did not get along because Mattis was too aggressive in his desire to take the fight to ISIS. He was called "Mad Dog Mattis" by the soldiers under his command and his codename was "Chaos." Nobody wants to fight a war. However, if we do have to fight, then the goal is to win, not play to a draw or political retreat. Mattis is the kind of general a soldier wants to follow.

In late 2003, a colleague of General James Mattis wrote to him asking for a few words on the importance of reading and military history for the officer, even where it might seem that one was "too busy to read." The general was known to carry a library of 6,000+ books with him everywhere he was assigned. His response went viral.

"The problem with being too busy to read is that you learn by experience (or by your men's experience), i.e. the hard way. By reading, you learn through others' experiences, generally a better way to do business, especially in our line of work where the consequences of incompetence are so final for young men.

Thanks to my reading, I have never been caught flat-footed by any situation, never at a loss for how any problem has been addressed (successfully or unsuccessfully) before. It does not give me all the answers, but it lights what is often a dark path ahead.

With TF 58, I had with me Slim's book, books about the Russian and British experiences in AFG, and a couple others. Going into Iraq, "The Siege" (about the Brits' defeat at Al Kut in WW I) was required reading for field grade officers. I also had Slim's book; reviewed T.E. Lawrence's "Seven Pillars of Wisdom"; a good book about the life of Gertrude Bell (the Brit archaeologist who virtually founded the modern Iraq state in the aftermath of WW I and the fall of the Ottoman empire); and "From Beirut to Jerusalem". I also went deeply into Liddell Hart's book on Sherman, and Fuller's book on Alexander the Great got a lot of my attention (although I never imagined that my HQ would end up only 500 meters from where he lay in state in Babylon).

Ultimately, a real understanding of history means that we face NOTHING new under the sun. For all the "4th Generation of War" intellectuals running around today saying that the nature of war has fundamentally changed, the tactics are wholly new, etc, I must respectfully say… "Not really": Alex the Great would not be in the least bit perplexed by the enemy that we face right now in Iraq, and our leaders going into this fight do their troops a disservice by not studying (studying, not just reading) the men who have gone before us.

We have been fighting on this planet for 5000 years and we should take advantage of their experience. "Winging it" and filling body bags as we sort out what works reminds us of the moral dictates and the cost of incompetence in our profession. As commanders and staff officers, we are coaches and sentries for our units: how can we coach anything if we don't know a hell of a lot more than just the TTPs? What happens when you're on a dynamic battlefield and things are changing faster than higher HQ can stay abreast? Do you not adapt because you cannot conceptualize faster than the enemy's adaptation? (Darwin has a pretty good theory about the outcome for those who cannot adapt to changing circumstance - in the information age things can change rather abruptly and at warp speed, especially the moral high ground which our regimented thinkers cede far too quickly in our recent fights.) And how can you be a sentinel and not have your unit caught flat-footed if you don't know what the warning signs are - that your unit’s preps are not sufficient for the specifics of a tasking that you have not anticipated?

Perhaps if you are in support functions waiting on the warfighters to spell out the specifics of what you are to do, you can avoid the consequences of not reading. Those who must adapt to overcoming an independent enemy's will are not allowed that luxury.

This is not new to the USMC approach to warfighting - Going into Kuwait 12 years ago, I read (and reread) Rommel's Papers (remember "Kampstaffel"?), Montgomery's book ("Eyes Officers"…), "Grant Takes Command" (need for commanders to get along, "commanders' relationships" being more important than "command relationships"), and some others. As a result, the enemy has paid when I had the opportunity to go against them, and I believe that many of my young guys lived because I didn’t waste their lives because I didn't have the vision in my mind of how to destroy the enemy at least cost to our guys and to the innocents on the battlefields.

Hope this answers your question. I will cc my ADC in the event he can add to this. He is the only officer I know who has read more than I.

Semper Fi, Mattis"



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria."

John Templeton


 


New Plays

Everything Overbought

by Jim Brown

Click here to email Jim Brown
Editor's Note

This is a hold your nose and buy it market but good companies are still for sale. Unisys exploded higher with the rest of the market but they have good fundamentals and they broke over 52-week resistance last week.



NEW BULLISH Plays

UIS - Unisys Corp - Company Profile

Unisys Corporation provides information technology services worldwide. It operates through two segments, Services and Technology. The Services segment provides cloud and infrastructure services, application services, and business process outsourcing services. The Technology segment designs and develops software, servers, and related products. It offers a range of data center, infrastructure management, and cloud computing offerings for clients to virtualize and automate data-center environments. This segment's product offerings include enterprise-class servers, such as the ClearPath Forward family of fabric servers; the Unisys Stealth family of security software; and operating system software and middleware. Company description from FinViz.com.

The information technology sector is undergoing a transformation and older companies are becoming renewed as they change focus to the new cloud services offerings. Unisys was founded in 1886 making it 130 years old. You can imagine how many times they have changed products and focus over that period.

The company is focusing on cloud-based products and software as a service. They also offer physical security for data centers both physical security and software security. They offer a broad range of outsourcing services for building managers and clients. They have been selling their noncore assets and focusing their skills to build specialized capabilities to win industry specific projects.

They reported adjusted earnings of 41 cents compared to estimates for 29 cents. Revenue of $683.3 million beat estimates for $664 million.

Earnings Jan 24th.

Looking at a daily chart is scary since shares have risen from $10 to $15 since the election. However, the rise has been calm and without any material volatility on the days the market was weak.

On the weekly chart, resistance at $14.50 was broken on Thursday and there is nothing else to slow it down until $20.

Just in case the market tanks on Monday morning, I am putting an entry trigger on the position.

With a UIS trade at $15.25, buy UIS shares, initial stop loss $13.50.

No options recommended because of price and spreads.




NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

New Highs, Again!

by Jim Brown

Click here to email Jim Brown

Editors Note:

The indexes closed at new highs but our days are numbered. Nothing grows to the sky and this advance is very unsupported. The Russell is now up 16.4% over the last 15 days and we could easily see a 3% to 5% retracement at any time.

The Great Rotation out of bonds may have begun but that still does not guarantee a positive market with a never ending rally. There is a dip in our future but nobody has a crystal ball to predict that event. However, next week would be the perfect time since the Trump rally is now 3 weeks old and the bullish holiday weekend will be over.





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


No Changes



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BULLISH Play Updates

FTK - Flotek - Company Profile

Comments:

No specific news. Minor gain despite a $2 drop in oil prices.

Original Trade Description: November 12th.

Flotek Industries, Inc. develops and supplies oilfield products, services, and equipment to the oil, gas, and mining industries in the United States and internationally. The company's Energy Chemistry Technologies segment designs, develops, manufactures, packages, and markets chemistries under the Complex nano-Fluid brand for use in oil and gas well drilling, cementing, completion, stimulation, and production activities, as well as for use in enhanced and improved oil recovery markets. This segment also constructs and manages automated material handling facilities; and manages loading facilities and blending operations for oilfield services companies. The company's Drilling Technologies segment inspects, manufactures, sells, markets, and rents down-hole drilling equipment that are used in energy, mining, and industrial drilling activities through direct and agent-based sales. Company description from FinViz.com.

In the Q3 cycle they reported a loss of 5 cents on revenue of $73.7 million. That was slightly more than the estimates for a 3-cent loss. Revenue estimates were for $79.5 million. The company explained their 16.2% decline in revenue saying there was a 43.2% reduction in the active rig count in Q3 compared to Q3-2015. In other words, their available business was cut nearly in half but they only recorded a 16% decline in revenue. That was actually a 1.0% increase sequentially from Q2.

Flotek services oil wells and especially new wells with their down hole products including their patented Complex nano-Fluid (CnF) technology that is used in fracking wells. Unlike fracking chemicals used by others, the Flotek CnF chemicals are completely non-toxic and have been proven to provide a slippery surface in the reservoir so that oil flows freely. This nontoxic chemical mix made from citrus oils is seen as a plus for producers constantly under fire for potential ground water contamination.

With rigs going back to work and drilled but uncompleted wells being brought online, the company said they were seeing signs of recovery in the sector. The drop in crude prices to $43 last week failed to depress the stock.

FTK has put in a bottom at $11 and could be ready to move towards the September highs at $16.

If OPEC actually announces some kind of production agreement on Nov 30th, the sector could respond aggressively.

Earnings Feb 1st.

Position 11/14/16:

Long FTK shares @ $11.72, see portfolio graphic for stop loss.

No options recommended because of price.



GNC - GNC Holdings - Company Profile

Comments:

No specific news. Only a fractional decline.

Original Trade Description: November 15th.

GNC Holdings, Inc., operates as a specialty retailer of health, wellness, and performance products. The company operates through three segments: Retail, Franchise, and Manufacturing/Wholesale. Its products include vitamins, minerals, and herbal supplement products; and sports nutrition products, diet products, and other wellness products. The company sells its products under the GNC proprietary brands, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, Beyond Raw, GNC Puredge, GNC GenetixHD, and Herbal Plus, as well as under third-party brands. It operates a network of approximately 9,000 locations under the GNC brand worldwide. The company sells its products through company-owned retail stores; Websites, including GNC.com and LuckyVitamin.com, as well as Drugstore.com; domestic and international franchise activities; third-party contract manufacturing; and e-commerce and corporate partnerships. Company description from FinViz.com.

Just over a month ago there was a contingent of Chinese buyers circling GNC when it had a market cap of about $4 billion. When they reported earnings and lowered guidance that market cap fell to about $1 billion. Shares fell from $22 to $13 making the company even more attractive for the Chinese buyers.

The key here is not the U.S. or European business. The key point in a Chinese acquisition is the health conscious Chinese consumer. In China there are plenty of health products but most are scams or poorly processed with large amounts of unknown fillers. The health food and vitamin market is not well managed and all sorts of scary products exist.

GNC as a global brand is the answer. Chinese consumers would feel comfortable buying the brand and knowing there were no harmful ingredients.

Over the last several days, GNC shares have started ticking up again. GNC has hired Goldman Sachs to find a buyer and it is only a matter of time before that happens. The uptick in the shares could be due to rumors leaking out about a potential transaction. Option prices have also escalated suggesting something in progress.

Earnings Jan 26th.

Position 11/16/16:

Long GNC shares @ $14.75, see portfolio graphic for stop loss.

No options recommended because of price.



IDTI - Integrated Device Technology - Company Profile

Comments:

No specific news. Fractional decline from the new 10-month high.

Original Trade Description: November 14th.

Integrated Device Technology, Inc. designs, develops, manufactures, and markets a range of semiconductor solutions for the communications, computing, consumer, automotive, and industrial end-markets worldwide. It operates in two segments, Communications; and Computing, Consumer, and Industrial. The Communications segment offers communication timing products, such as clocks and timing solutions; flow-control management devices comprising Serial RapidIO switching solutions; multi-port products; telecommunications products; static random access memory products; first in and first out memories; digital logic products; radio frequency products; and frequency control solutions. The Computing, Consumer, and Industrial segment provides clock generation and distribution products, programmable timing devices, computing timing solutions, high-performance server memory interfaces, PCI Express switching solutions, power management solutions, and signal integrity products, as well as sensing products for mobile, automotive, and industrial solutions. Company description from FinViz.com.

IDTI reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $184.1 million barely edged ahead of estimates for $184.0 million. Revenue rose 8% making the 12th consecutive quarter of revenue growth.

They announced multiple new products for the quarter including a new 5G product in corporation with IBM for the connected car. They also obtained certification for their second production facility for automotive capabilities.

Earnings Jan 30th.

Shares spiked from $21 to $24 on the earnings then settled in for two weeks of post earnings depression. Over the last two days shares has ticked higher again and closed at $23.60 on Monday. This has been resistance from early October and from back in June. With the positive earnings and a positive market I expect the stock to breakout this time.

Position 11/15/16:

Long IDTI shares @ $23.69, see portfolio graphic for stop loss.

No options recommended because of price.



OCLR - Oclaro Inc - Company Profile

Comments:

No specific news. Still holding over prior resistance.

Original Trade Description: November 19th.

Oclaro, Inc. designs, manufactures, and markets lasers and optical components, modules, and subsystems for the optical communications, industrial, and consumer laser markets worldwide. The company's products generate, detect, combine, and separate light signals in optical communications networks. It offers client side transceivers, including pluggable transceivers; line side transceivers; tunable laser transmitters, such as discrete lasers and co-packaged laser modulators; lithium niobate modulators to manipulate the phase or the amplitude of an optical signal; transponder modules for transmitter and receiver functions; and discrete lasers and receivers for metro and long-haul applications. Company description from FinViz.com.

Oclaro posted strong earnings of 14 cents compared to estimates for 10 cents. Revenue of $136 million also beat estimates for $132 million. The company raised guidance for Q4 to revenue in the $146-$154 million range.

Piper Jaffray said Oclaro will be the only company shipping products in volume in the next two quarters. They cited a lack of price competition today that will appear in mid 2017 as new competitors enter the market in volume. The industry is currently under capacity constraints. PJ also said there was strong demand from China and traction in the U.S. was accelerating due to the surge in IoT devices and video streaming.

Earnings Jan 31st.

Shares surged after earnings then faded the prior week in the Nasdaq uncertainty. Last week the stock broke over resistance at $9.25 and is now breaking out to five-year highs. I believe the rally will continue now that it is in breakout mode.

Position 11/21/16:

Long OCLR shares @ $9.86, see portfolio graphic for stop loss.

No options recommended because of price and spreads.



XLF - Financial SPDR ETF - ETF Profile

Comments:

Only a minor gain but it was another new 8-year high.

Original Trade Description: November 16th.

The Financial Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Financial Select Sector Index.

The ETF is comprised of 44% banks, 20% capital markets, 19% insurance, 11% diversified financial services and 6% consumer finance.

All of those sectors will do better as rates rise. As of today the CME FedWatch Tool shows a 91% chance of a rate hike in December as well as a 91% chance for the February meeting and 92% for March. If they do hike in December the odds will decline for February but depending on their commentary the March meeting will still be on the table. Multiple Fedwatchers have speculated there could be 3-4 rate hikes in 2017 if the economy continues to improve.

The Fed has to hike rates in 2017 in order to have some room to maneuver if the business cycle rolls over and a recession appears. We are in the third longest expansion in history and we are due for another recession soon.

The banks rallied on the rise in treasury yields and the expectations for the December rate hike as well as the potential for decreased regulation. President elect Trump has said he would kill regulations harming the banking industry. There is even talk of modifying Dodd-Frank.

Banks have rallied significantly and I would not suggest buying the actual ETF after the big gain. However, I do not believe the gains are over. The gains last week spiked the ETF to a 7-year high but the 2007 highs were over $30.

On Tuesday, somebody bought 300,000 contracts of the March $23 call at an average of 55 cents. That was $16.5 million in option premiums. That takes some serious conviction. I am recommending we follow them and buy the same call option. That way our risk is limited to $50 per contract. I am willing to bet $50 that the ETF will be over $23 by March. This is a long term position and there will not be a stop loss.

Position 11/17/16:

Long March $23 call @ 29 cents. No stop loss.




BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description

Comments:

Minor decline ahead of weekend event risk. This is probably due to investors buying puts ahead of next week.

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 done 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.




Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.


HOV - Hovnanian Enterprises - Company Profile

Comments:

No specific news. HOV had an excellent week. Shares have been rising post election and they presented at a UBS housing conference on the 9th. Something lit them on fire and our $2 call is now at the money.

Our Feb $2 call only cost 20 cents so we can afford to wait for a recovery.

Original Trade Description: July 27th.

Hovnanian Enterprises, Inc. is a builder of residential homes. The Company designs, constructs, markets and sells single-family detached homes, attached townhomes and condominiums, urban infill, and active lifestyle homes in planned residential developments. It markets and builds homes for first-time buyers, first-time and second-time move-up buyers, luxury buyers, active adult buyers and empty nesters. The Company has two distinct operations: homebuilding and financial services. The Company, excluding unconsolidated joint ventures, is offering homes for sale in 196 communities in 34 markets in 16 states throughout the United States. The Company's financial services operations provide mortgage loans and title services to the customers of its homebuilding operations.

Prior to the financial crisis HOV was an active buyer of land and had extensive holdings when the crash appeared. The decline in home buying and the change in the mortgage business caused them to be very over extended as a result of the crash. Since 2009 they have liquidated a lot of land holdings, built out and sold a lot of properties and have consolidated their efforts and reduced costs significantly.

For Q2 they reported a loss of 6 cents, which was less than half the 13-cent loss in the year ago quarter. Revenues rose 39.6% to $654.7 million. For the first 6-months of the fiscal year revenues rose 34.5% to $1.23 billion. The $7.9 million loss was well below the $25.2 million loss in the year ago quarter. The number of active contracts rose +0.9% to 1,812 homes with the value of the contracts rising 16% to $1.4 billion. The number of contracts in the first six months of fiscal 2016 rose 7.3% to 3,343. The total contract backlog at the end of the quarter was $1.58 billion, up 27.8% from the $1.23 billion at the end of fiscal Q2 2015. As of April 30th, they controlled 34,997 lots.

They paid off $233.5 million in debt over the prior two quarters and ended the period with $125.6 million in liquidity. Since the end of the quarter liquidity has risen $75.1 million due to closings and joint venture funds received. They also paid off another $86.5 million in debt that matured in May.

CEO Ara Hovnanian said, "While our revenue grew 40% and Adjusted EBITDA increased over 220%, as we said last quarter, we remain focused on deleveraging our balance sheet and maximizing our profitability rather than on additional growth. Since October 15, 2015, we have paid off $320 million of debt. More importantly, we continue to believe that we will have the liquidity to pay off the remaining debt maturities through the end of 2017. We are certain that we are taking the correct steps that will best position our company for future success. While it is discouraging to report a loss for the first half of fiscal 2016, it is nevertheless a significantly reduced loss, and we anticipate our profitability in the second half of the year will more than offset this loss."

With the low mortgage rates and the rising number of home sales, I do expect HOV to return to profitability by the end of the year. It has been a long 7 years but they are finally getting rid of the accumulated debt and are riding the wave of new home buyers.

Stocks typically begin to rise about 6-months before widely predicted events. If HOV expects to post profits in Q3/Q4 now is the time to buy the stock. At $1.87 per share I look at it as a LEAP option that does not expire. This is not going to be a rocket stock. This is a buy it and forget it position until year end. Once we are in the position I will track it in the Lottery Play portfolio each weekend. Shares traded at $7 in 2013-2014 and could easily return to that level once they post those profits.

Update 9/9/16: HOV reported Q2 earnings of zero compared to estimates for 6 cents. Revenue rose +32.6% to $716.9 million. For the full year the company guided to revenue of $2.7 to $2.9 billion and analysts were expecting $2.75 billion. The sold or joint ventured 21 communities to reduce their active selling communities from 214 to 193. This impacted revenue as the older communities were culled from the active business. They sold 1,467 homes in Q2 and slightly less than the 1,658 in the same period in 2015, also the result of selling some communities. Their order backlog rose 7.7% to $1.48 billion. There are 3,232 homes currently contracted to be built. They delivered 1,574 homes in the quarter, a +11.8% rise. After paying off $320 million in debt their cash position was $187.7 million. They acquired about 900 lots in the quarter in 20 different communities. They guided for a solid profit in the current quarter of $32-$42 million before some expenses including land acquisitions.

Do not back up the truck on this position just because the stock is cheap. Unexpected events do happen. Just buy a few hundred shares and we will shoot for a return to $6 or a 400% gain.

Position 7/28/16

Long February $2 call @ 20 cents. No stop loss.

Previously Closed 10/17/16: Long HOV shares @ $1.86, closed $1.61, -.25 loss.





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