Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/8/2017

Table of Contents

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

Market Wrap

Slow Pullback

by Keene Little

Click here to email Keene Little
Since the March 1st high we've seen the indexes slowly pull back as dips are bought and bounces are sold. There seems little commitment by either side to move the market and we're left wondering if the pullback is going to be just a short correction to the rally or something more bearish. The jury is still out deliberating.

Today's Market Stats

Other than the weaker small cap stocks the other indexes have not given much back in the past week and the slow choppy pullback continues to keep the price pattern potentially bullish. What's not clear yet is whether or not we'll get a larger pullback before possibly heading higher again or if instead we're going to get a large (in time if not price) consolidation over the next several weeks before then turning back up.

Of course the bears could always make a surprise attack and scare up enough bulls to hit their stops and start the market tumbling lower. We have a preliminary sell signal that goes by the scary sounding name "Ohama Titanic Syndrome," which I'll discuss more later. It wouldn't be the first time that a slow pullback/consolidation suddenly lets go to the downside so these sell signals, even if it doesn't pan out, deserve our attention.

This morning started off quietly with a continuation of the sideways choppy consolidation we've seen since Monday. The afternoon turned weaker when it became more apparent that the consolidation wasn't going to lead to another bounce. The dipsters are probably getting a little frustrated that their favorite trade for the past 100 years (OK, I exaggerate but it feels that long) isn't working. It's not much but the pullback from March 1st is already a little deeper than anything we've seen since the Trump rally began on November 4th. The risk is that the hope-filled rally will start to deal with reality.

This morning's economic reports had very little effect on the market. One surprising number was the ADP report, which showed a higher than expected gain of 298K jobs vs. expectations for 180K and an improvement from 261K in January. This was the biggest monthly gain since April 2014. And the January number was revised higher from 246K. The expectation for the NFP report this Friday is 188K, down from 227K in January, but we could see an upside surprise there as well.

The strong employment number, especially if it's mirrored in Friday's NFP report, would prompt a higher expectation for a rate increase by the Fed next week, although they're pretty much 100% now for next week. Expectations of another hike in June jumped above 50% for the first time. We did see some selling in the bond market today, which drove yields higher, but the rates we see as consumers (2-year through 30-year) are not affected by the Fed. Market forces (supply/demand) are what drive their prices. What the Fed does is somewhat meaningless for most of us.

Crude inventories were reported this morning and they jumped +8.2M barrels last week, up from +1.5M barrels the previous week. This caused oil prices to take a dumperoo and oil broke support today (I'll cover more later).

Other than that, it was a quiet day but another weak one. The market is pulling back but it's doing so slowly and in a choppy fashion. This pattern supports the idea that we'll get another rally leg out of this but it's too early to tell whether or not the decline is simply building up for a bigger move to the downside or if instead it will continue to consolidate for weeks as it's done in the past before moving higher.

The RUT has been the weaker index and that could be an indication of bigger trouble for the broader market. I'll start tonight's chart review with a top-down look at the RUT to try to discern its next move.


Russell-2000, RUT, Weekly chart

Since December, when the RUT was first approaching its trend line along the highs from 2007-2014-2015, I've been watching to see if it will be resistance. It was finally tagged February 21st and again on March 1st (at 1414). Both times it left a significant bearish divergence on the daily chart as well as the weekly chart, as can be seen clearly on MACD. Price has rolled over from resistance and the oscillators have rolled over, giving the impression that this line of resistance is going to hold.

We could of course get another quick pop back up for another attempt or we could first see a deeper pullback to its uptrend line from February-November 2016, currently near price-level support (its June 2015 high) at 1296. If we get a choppy sideways/down pullback over the next several weeks we could see the uptrend line closer to 1340 by the time it's tested in April. A choppy pullback to the uptrend line would suggest another rally leg would follow. But a sharp impulsive decline to the uptrend line would suggest a bounce would be followed by a break of the uptrend line. But for now the short-term pattern is not clear enough to suggest one way or the other.


Russell-2000, RUT, Daily chart

The RUT's daily chart shows a little more clearly the price action at the trend line along the highs from 2007-2015 and the significant bearish divergence against the December high and between the February and March highs. Yesterday and today it's been struggling to hold support at its 50-dma, near 1376, and only slightly lower is an uptrend line from December 1 - January 30, near 1367.

The short-term pattern supports the idea that the RUT will find support at either of these two levels, 1376 or 1367, and start at least a bigger bounce. That bounce could lead to at least a minor new high to again test the trend line along the highs from 2007-2015, maybe by the end of the month. The choppy pattern in a shallow rising wedge since December would likely continue and see the RUT struggle to make it back up to the top of the wedge, which will be near 1425 by the end of the month. But if we get a bigger bounce and then a break of the uptrend line from December 1st it would be a stronger sign of the bear.

Key Levels for RUT:
- bullish above 1415
- bearish below 1367


Russell-2000, RUT, 60-min chart

The RUT's 60-min chart shows the struggle around 1376 (the 50-dma) and an expectation for a drop down to its uptrend line from December 1st. It could of course break the uptrend line but it's short-term oversold and I think the odds favor a bounce off support. A high bounce that's then followed by a break lower would increase the likelihood that we're at the start of a more serious decline. But until that happens we have to keep in mind the bullish potential for another choppy climb back up to the 1420 area later this month or into April.


RUT's Relative Strength vs. SPX, Daily chart

To put the RUT's weakness in perspective, the chart below compares its strength to SPX and as you can see, it has been underperforming SPX since the RS peaked on December 8th. Even more bearish, the RS of the RUT has now dropped below the bottom of a parallel down-channel that it's been in since December. Like a stock, when it drops below the bottom of a parallel down-channel it means the decline is accelerating. A deteriorating picture for the small caps is likely to infect the broader market.

S&P 500, SPX, Daily chart

From a short-term pattern perspective it's important for the bulls to defend against a break below the February 24th low at 2352.87 since it would indicate the leg up from February 24th completed. That in turn could indicate we're going to get at least a larger pullback before potentially heading back up again. A drop below 2352 would also be a break of support at its 20-dma, now near 2355, and an uptrend line from November 4 - January 31, now near 2353.

Only slightly lower is the trend line along the highs from April-August 2016, now near 2347, and a break below that level would be key for the bears. Once SPX broke above this trend line, on February 14th, it should act as support on a back-test. If the back-test doesn't hold it would mean it was a failed breakout attempt and that would be bearish.

Key Levels for SPX:
- bullish above 2401
- bearish below 2347


SPX vs New 52-week highs, Daily chart

While the pullback from last week looks relatively small and the choppy pattern supports the idea we could see another rally, the underlying strength of the market is questionable. As reflected with the RUT's underperformance, a check under the hood reveals further weakness. The chart below is just one example, which shows the deterioration of new 52-week highs into the March 1st peak.

The indexes were looking good with their new price highs but the rally was on the back of fewer stocks participating in the rally. This doesn't prevent another attempt at a new high but it does tell us the underlying strength in the market is waning. It's not a good time to chase the market higher when this occurs since a fast reversal makes upside potential dwarfed by comparison.

We could see another sideways consolidation like we saw off the December high but notice the higher high for 52-week highs in December vs. the lower high in March. This increases the chance for a more meaningful correction, if not bearish decline, than what we saw after the December high. I'm not showing the advancing stocks minus declining stocks but it's the same picture -- fewer stock participated in the advance into the March high than we saw into the December high.

While we're on the subject of new highs, Tom McClellan noted on Monday that we're nearing the dreaded "Ohama Titanic Syndrome" for the market. This is a signal that was developed back in 1965 by Bill Ohama and is generally agreed to be a preliminary sell signal for the market. It is triggered when the number of new 52-week lows for NYSE-listed stocks exceeds new highs within 7 trading days of a new market high. The NYSE made its high on March 1st and only 3 trading days later, on Monday, new lows exceeded new highs.

New lows have exceeded new highs 3 days in a row this week, which gets us closer to Ohama's refined syndrome signal, which he believes is more accurate if the market experiences 4 out of 5 trading days with new lows exceeding new highs and new highs must decline to about 1.5% of total issuance (about 30). The number of new highs on Monday and today were 42.

By Friday we'll know whether or not we have a more accurate syndrome sell signal and with many participants worried about an overvalued market and a Trump rally that could start to unwind, the sell signal could get more investors worried about the current decline if it continues.

Dow Industrials, INDU, Daily chart

On March 1st the Dow hit its trend line along the highs from May 2011 - March 2015 and then immediately sold off the next day. It then dropped back below the top of a parallel up-channel for its rally from February 2016, near 21K. The selloff from the trend line, like the RUT, and the rollover of its oscillators has it looking more bearish than bullish. But the short-term pattern for the pullback looks corrective and supports the idea that the bulls aren't quite finished yet. We could see another attempt to break above the trend line along the highs from 2011-2015.

If the sellers overpower the buyers we could see the Dow drop down to support at its 20-dma, currently near 20700, and its uptrend line from November 4 - January 31, currently near 20630. A drop below 20630 would be more bearish, especially if the decline starts to develop into a sharp impulsive move.

Key Levels for DOW:
- bullish above 21,200
- bearish below 20,630


Dow Industrials, INDU, 60-min chart

The current decline for the Dow has it approaching potential support near 20840-20850, which includes its February highs and its uptrend line from January 31 - February 8. This afternoon's low was 20835 and the uptrend line crosses 20840 at the open on Thursday. It's a good setup for at least a bounce off support to relieve the short-term oversold condition.


Nasdaq Composite, COMPQ, Daily chart

There are a few lines of support that the Nasdaq is currently testing. It makes it a bit congested on its chart, and hard to see the multiple doji stars for the past 3 trading days, but at the moment you can see the Nasdaq testing its uptrend line from December 30 - January 31, currently near 5860 (closer to 5848 when viewed with the arithmetic price scale). Today's close at 5837 was below this trend line but only by a minor amount and easily recoverable.

A more important trend line is the one along the highs from April-August 2016, which the Naz broke above on February 14th. It has used this trend line as support on multiple pullbacks since then and the line is currently near 5840, very close to today's closing price. A failure to hold this line would leave a failed breakout attempt.

Slightly lower, near 5828, is the 20-dma and then below that, near 5810, is its uptrend line from November 4 - December 30. And finally, its February 24th low at 5800 is the last support line the bears need to cross. All of this gives us a relatively tight support zone at roughly 5800-5860 for the bulls to use to launch either another rally leg or at least a larger bounce. Until the Naz drops below 5800 there remains the potential for another rally leg to a new high.

Key Levels for COMPQ:
- bullish above 5912
- bearish below 5800


10-year Yield, TNX, Weekly chart

The sideways triangle that I've been tracking on TNX since its December high counted as complete with the February 24th low, which was a slight throw-under below the bottom of the triangle (a typical way triangles complete). Yesterday TNX broke above the top of the triangle and rallied higher today. It should be into its final leg of the rally from July 2016 and the upside target zone remains 2.606-2.687, which are two price projections based on the wave pattern. In between is a downtrend line from 1988-2007, currently near 2.635 (arithmetic price scale).

Once this rally leg from July 2016 completes we should get at least a large pullback correction (for several months) before continuing higher (that's the bullish interpretation) or it will start back down and head for new lows later this year (the bearish interpretation). I favor the bearish interpretation, which is based on the longer-term pattern and the idea that the Treasury market will be the go-to place for yield, especially if the stock market heads back down. Foreign investors who want something more than a negative interest rate on their investments will also prefer U.S. Treasuries and higher demand for them will raise their prices and drive yields lower.


Transportation Index, TRAN, Daily chart

On Tuesday the TRAN dropped out of its small ending diagonal (rising wedge) off its February 2nd low. In addition to that bearish move it has now closed back below the November 2014 high at 9310. It has tried repeatedly to clear this S/R level but has been unable to do so. It also closed below its 50-dma, near 9281, and needs to recover that quickly if it wants to keep the bears away. The last break was February 2nd but was recovered the next day. Following the significant bearish divergence into the January, February and March highs, we could be seeing the start of a more significant breakdown.


U.S. Dollar contract, DX, Daily chart

Since its February 2nd low the US$ has been chopping its way back up in what looks like a small rising wedge pattern. It looks like it could use one more minor new high to complete the pattern, perhaps near 102.75 in another couple of days. Unless the dollar rallies above 103 I'm expecting it to soon start back down and head for its uptrend line from May-August 2016, currently near 98.15.


Gold continuous contract, GC, Daily chart

Gold has made a relatively quick move down from its February 27th high, which was a back-test of its broken 200-dma, followed by a bearish kiss goodbye. It then broke its 20-dma and uptrend line from December on March 2nd, followed by a quick back-test of both on Monday before dropped lower. It has now made it down to support at its 50-dma (1210.50) and price-level support near 1205, a break of which would obviously be more bearish for the shiny metal. We could see a bounce off this support zone before heading lower but so far I'm not seeing much in the way of bullish divergence to suggest support is going to hold.


As mentioned earlier, oil got hit hard after the morning inventory report. With all the oil rig platforms coming back on line and the much higher efficiency of the frackers I'm surprised the inventory report was a surprise but apparently caught more than a few traders leaning to the long side.

In fact, the COT report has been showing a huge number of speculators betting oil will continue higher (while commercials have built a larger net-short position). As can be seen in the chart below, the number of long contracts held by speculators (the blue line at the bottom) is at the highest level seen in a long time. It's a higher level than was seen in mid-2014 just before the price of oil crashed lower. The result will likely be similar here.

Speculators in Oil, updated through March 3, 2017, chart courtesy stansberryresearch.com


Oil continuous contract, CL, Daily chart

I've been expecting oil to drop lower from its choppy bounce pattern off the January 10th low and today's decline should be followed by lower prices. There is of course the potential for another leg higher in oil but with the large number of speculators betting on that outcome I think it would be wiser to bet against them (and with the commercials).


Economic reports

The few economic reports Thursday morning will not be market moving but Friday's could move the market if there are any big surprises in the employment numbers. It will all be in the interpretation of WWTFD (What Will The Fed Do).


Conclusion

Time and again we've seen the stock market go into a holding pattern following a rally and it appears so far that a similar pattern has started. Chopping sideways/down is a way to work off an overbought condition and set up the next rally and it's possible we're in the beginning of what could be another multi-week consolidation.

The decline from March 1st is already larger than anything we've seen in the rally off the November 4th low. It's not saying much but it is a change in behavior when the dipsters can't drive the market back up following a small pullback. Whether or not the current pullback turns into a full blown decline of 5% or more (the Ohama Titanic Syndrome signal is a threatening signal) we should be prepared for that possibility. At a minimum we should see a larger consolidation and worse we could see a much stronger breakdown. In either case I think it's riskier being long the market than short it.

As long as the pullback/decline continues to be a slow choppy sideways/down pattern we'll know it's likely to consolidate and work off the overbought condition before heading higher again. The consolidation would likely last through this month (oh joy).

But if the decline starts to steepen, which the RUT is threatening to do, and gains more momentum to the downside then we'll likely get a much stronger correction to the rally and potentially the start of a much more serious decline (if the bull market finished on March 1st, only days from the anniversary of the March 6, 2009 low). It's a good time for both sides to stay cautious while we wait for further price action to provide some more clues.

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

Keene H. Little, CMT


New Plays

Small Cap Direction?

by Jim Brown

Click here to email Jim Brown
Editor's Note

Tell me where the small caps are headed and I could predict market direction. The small caps are leading the large cap indexes lower. The Nasdaq is trying to fight off the small cap decline but is struggling. The Dow is showing more weakness over the last week than in the last six weeks. It is entirely possible the small caps are finally going to retest support at 1,340 on the Russell and that could force a temporary dip in the large caps. I do expect that level to hold but there are no guarantees.

Small cap stocks have been very choppy over the last several weeks and the individual stocks have been unable to maintain a direction either up or down. With the Dow, S&P and Russell closing at their lows today there is a possibility of a continued decline on Thursday. I have no potential plays that are screaming buy me today so I am going to pass on adding a new position.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Leading the Market Lower

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes posted big declines and closed at the lows for the day. The small caps have been sharply lower for five consecutive days and they are now leading the broader market lower. Both are now significantly below recent support and are nearing secondary support. A failure there would be a major blow to the broader market.

We have been having problems with our small cap plays for the last two weeks because nothing is moving. I do not know what is dragging the small cap indexes lower because the daily gains/losses on each stock in the portfolio are in the 15-25 cent range.

With a Fed rate hike likely on the 15th and the government debt ceiling expiring on the same day, there could be some additional profit taking in the days ahead.





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


KR - Kroger Co.
The short stock 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

ARNC - Arconic - Company Profile

Comments:

No specific news. Only a minor decline today. We need one more big push lower. The put is now in the money.

Original Trade Description: February 16th.

Arconic Inc develops and manufactures engineered products and solutions for the aerospace, industrial gas turbine, commercial transportation and oil and gas markets. Company description from FinViz.com.

What that description does not tell you is that Arconic is the old Alcoa. Back in October Alcoa spun off the aluminum smelter business and named it Alcoa. The remaining hith tech manufacturing business they named Arconic. Basically, this is the profitable part of the old Alcoa. They produce all sorts of high tech aluminum products for nice profits.

Their Q4 earnings were mixed because of expenses incurred as a result of the spinoff.

Zacks reported Q1 estimates have risen from 20 cents to 25 cents over the last several weeks as analysts reevaluate the new company. Full year estimates have risen from 92 cents to $1.10, a 19.6% increase.

On Wednesday Arconic said it had sold 60% of the Alcoa stake it kept during the spinoff for $890 million and would use the money to pay down debt and buy back shares. They also retained loss carry forward tax credits that will offset future earnings.

Earnings May 2nd.

Shares went ballistic after the Q4 earnings and rose from $23 to $30. Every day I kept watching the stock and thinking, "ok, tomorrow they will dip and I will add them to the portfolio." They never dipped until this week. That dip was very shallow and has lasted only 3 days.

We never know. They could fall off a cliff tomorrow and retest the $23 pre-earnings. I seriously doubt it because funds have been adding Arconic as a new position.

I am going to recommend an options only strategy with a four-week duration. I am recommending we buy a $30 call and a $28 put. The total cost will be $1.52 and that is our total risk. We only need ARNC to move in either direction more than a couple bucks and we should be profitable.

Either way at least one option should be profitable and offset the cost of the other. Depending on the market we could actually profit on both if we got a big dip and then a big rebound. The only way we lose both premiums is if the stock holds at $29 for the next month. That is not likely.

Update 2/17/17: Hedge fund Lion Point, a minor shareholder in Arconic, urged the company to "promptly engage" with Elliott Management to increase shareholder value. Elliott is the largest shareholder in Arconic is trying to get the CEO replaced and they have nominated five board members. Lion Point and Elliott both believe "the intrinsic value of Arconic materially exceeds the company's current stop price."

Update 2/23/17: Arconic declared a quarterly dividend of 6 cents on common stock, 93.75 cents on Class A preferred stock and $6.71875 on Class B shares. The dividends are payable on May 25th to holders on May 5th.

Update 3/2/17: The board appointed former UTX executive David Hess as an independent director. At the same time they issued an open letter to shareholders rebutting activist investor Elliott Management's attempt to take over the board and replace the CEO Klaus Kleinfeld. Shares declined $1 as the fight took a very public turn.

Position 2/17/17:

Long Mar $30 call @ 90 cents. No stop loss.
Long Mar $28 put @ 60 cents, No stop loss.



CSIQ - Canadian Solar - Company Profile

Comments:

No specific news. Shares posted a minor gain. The earnings date was rescheduled to March 21st. Our option will expire on the 17th. We really need a rebound over the next several days.

Original Trade Description: February 27th

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

Shares are rebounding out of a three month base at $12 and nearing a four-month high. They had a tough Q3 where they matched earnings estimates after a drop in Chinese demand due to a drop in incentives. That resulted in a 30% decline in panel prices.

CSIQ is the second largest solar manufacturer in the world with 5.8 gigawatts of annual module capacity. It has a strong pipeline of orders, $1 billion in cash and $1.2 billion in future proceeds from the sale of non-core assets. That is a lot of liquidity for a solar company. They have an operating portfolio of solar plants worth $1.4 billion that will eventually be sold to investors.

CSIQ has earnings on March 9th. Normally I would not recommend a position ahead of earnings. However, I am not recommending this as a stock position. In a normal stock position we risk about $1 per share. I am recommending we buy a call option, currently 93 cents and hold over earnings. The stock is moving in the right direction and earnings expectations are low. We could have a break out situation with CSIQ.

Position 2/28/17:

Long April $16 call @ 95 cents, see portfolio graphic for stop loss.



SWIR - Sierra Wireless - Company Profile

Comments:

No specific news. Shares still consolidating in a weak market.

Original Trade Description: March 1st

Sierra Wireless, Inc. provides wireless wide area modem solutions for the mobile computing, rugged mobile, and machine-to-machine (M2M) markets. It develops and markets wireless modems for mobile computers; embedded modules for original equipment manufacturers (OEMs); and fixed and mobile wireless data solutions for industrial, commercial, and public safety applications. The company's products and solutions connect people, their mobile computers, and fixed terminals to wireless voice and mobile broadband networks. Its mobile computing products are used by businesses, consumers, and government organizations to enable high speed wireless access to a range of applications, including the Internet, e-mail, corporate intranet, remote databases, and corporate applications; and rugged mobile and M2M products are primarily used in the public safety, energy, industrial, transportation, and transaction processing markets. The company also provides various product development and integration support services, which include software and hardware integration, platform RF testing and optimization, regulatory approvals, mobile operator certification, project management, and sales and technical support training. Company description from FinViz.com.

Sierra guided for Q4 earnings of 13-19 cents and revenue of $157 million. They reported earnings of 27 cents on revenue of $163 million. Revenue from OEM solutions rose 11.2% and Enterprise solutions +27.1%. Gross margin was 34.3%. They guided for Q1 revenue from $152-$161 million representing up to 12.7% growth. They projected earnings of 13-20 cents. Analysts were expecting $154.8 million and 12 cents.

Earnings May 11th.

The company is very strong in the IoT and just won the fastest connected car contract with Volkswagen. The car company will be using Sierra's modems to connect the cars to the cloud through its Car-Net platform. The connected car market is expected to grow 31% annually through 2020 and be worth $41 billion a year.

They have a 33% market share in the machine to machine (M2M) market. They recently announced a new wide area WiFi technology to allow IoT devices to be plug and play.

The company has a lot going for it and they beat their own guidance significantly last quarter.

Position 3/2/17:

Long SWIR shares @ $29.10, see portfolio graphic for stop loss.

No options recommended because of price and spreads.



VIPS - Vipshop Holdings - Company Profile

Comments:

No specific news. Shares up slightly after Tuesday's loan announcement.

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

CONN - Conn's Inc - Company Profile

Comments:

No specific news. Only a minor gain of 5 cents.

Original Trade Description: March 6th

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through Retail and Credit segments. The company's stores provide home appliances comprising refrigerators, freezers, washers, dryers, dishwashers, and ranges; furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; and home office products consisting of computers, tablets, printers, and accessories. Its stores also offer consumer electronics, such as LED, OLED, Ultra HD, and Internet-ready televisions; and Blu-ray players, and home theater and portable audio equipment. Conn's, Inc. also provides repair service agreements, installment credit plans, and various credit insurance products. As of March 29, 2016, the company operated approximately 100 retail locations in Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Company description from FinViz.com.

In the Q3 earnings cycle, Conn's reported a smaller than expected loss of 12 cents. Analysts were looking for -19 cents. Revenue of $308.4 million and below the $395.23 million in the year ago quarter. They guided for Q4 same store sales to decline -10%. At the end of Q3 analysts were expecting a profit of 13 cents and revenue of $453.44 million. The odds of them beating this forecast are slim. Zacks said the analyst estimates have declined significantly to a loss of 52 cents for Q4. They have dropped 11 cents in just the last 30 days.

Conn's sells electronics along with appliances and furniture. Electronics sales are being dominated by Amazon and Best Buy. The furniture sector has been slow and appliances are hit and miss. With appliance prices rising sharply it has cut down on buyers that can afford the big ticket items.

Earnings March 28th.

I believe Conn's will continue lower because everything we have heard about the Q4 retail picture has been negative. Shares are trading at a 6-month low with support at $6.50. I believe we can still get $1.50 between now and earnings on the 28th. The odds of a rebound over the next three weeks are very slim.

Position 3/7/17:

Short CONN shares @ $8.00, see portfolio graphic for stop loss.
No options recommended because of price.



CRAY - Cray Inc - Company Profile

Comments:

No specific news. Shares posted a minor gain and avoided a new low.

Original Trade Description: February 18th

Cray Inc., together with its subsidiaries, designs, develops, manufactures, markets, and services high-performance computing systems. The company operates through Supercomputing, Storage and Data Management, Maintenance and Support, and Engineering Services and Other segments. It offers a range of supercomputing systems, including the Cray XC40-LC, XC40-AC, CS400-AC, CS400-LC, and CS-Storm supercomputers. The company also provides analytics products comprising Cray Urika-GD Graph Discovery Appliance, which addresses the interactive data discovery with graphs; and Cray Urika-XA Extreme Analytics Platform used for production-class data analytics workloads. In addition, it offers storage and data management products, such as the Cray Sonexion storage systems that embeds the Lustre parallel file system and other software in an optimal configuration; Cray DataWarp applications I/O accelerator; and Cray Tiered Adaptive Storage, a flexible storage and archiving solution, which allows customers to transparently move data among fast, primary, and archival tiers. Further, the company provides custom engineering solutions; and customer support services comprising hardware and software maintenance, applications support, installation project management, system installation and de-installation, site preparation, and technical training for its systems, as well as ancillary services in application consulting, third-party software support, site engineering, on-site analysts for defined projects, and specialized training. Company description from FinViz.com.

Shares of CRAY were weak in January after the company provided selective guidance that was not specifically positive. They reported earnings on Feb 9th and spiked from $17.50 to $22.50 but never rose any higher.

The earnings of $1.38 were good and beat estimates for $1.24. Revenue of $346.6 million also beat estimates. However, the earnings guidance and commentary was lackluster. "While 2016 was not nearly as strong as we originally targeted we finished the year well." "Due to current market conditions, the company has limited visibility into 2017. While a wide range of results remains possible, the company continues to believe it will be difficult to grow revenue compared to 2016." Revenue is expected to be flat to down. Operating expenses are expected to be higher and gross profits are expected to be slightly lower. It was hardly an exciting outlook.

Earnings May 9th.

Shares began to decline last week and are poised to break below the post earnings support at $21. With a lackluster outlook, any decline in the Nasdaq could be magnified in Cray.

Position 2/21/17:

Short CRAY shares @ $21.30, see portfolio graphic for stop loss.

Optional but not recommended: April $20 put, $1.00.



FOSL - Fossil Group - Company Profile

Comments:

No specific news. Shares rebounded slightly from Tuesday's new 8-year low.

Original Trade Description: March 5th

Fossil Group, Inc., together with its subsidiaries, designs, develops, markets, and distributes consumer fashion accessories. The company's principal products include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, and soft accessories. It offers its products under its proprietary brands, such as FOSSIL, MICHELE, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC BY MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry stores, company-owned retail and outlet stores, mass market stores, e-commerce sites, licensed and franchised FOSSIL retail stores, and retail concessions, as well as sells its products on airlines and cruise ships. As of January 2, 2016, it owned and operated 99 retail stores and 139 outlet stores located in the United States, as well as 250 retail stores and 131 outlet stores internationally. Company description from FinViz.com.

Fossil reported adjusted earnings of $1.36 that beat estimates for $1.21. Unfortunately, that was a decline of 23.2% over the year ago quarter. Revenue of $959.2 million declined -3% and missed estimates for $971.7 million. For the current quarter, the company expects to lose 10 to 25 cents compared to earnings of 11 cents a year ago. They guided for a wide range for earnings of $1.00 to $1.70 for the full year. They guided for Q1 revenue to decline 8% to 11.5%.

Traditional watch sales declined -2%. Sales of jewelry and leathers declined -5%. Global same store sales fell -7% with declines in all product categories. Gross margin declined 200 basis points and operating margins fell from 9.0% to 6.9%. Cash on hand at the end of the quarter declined -$64 million to $236 million.

Over the last 30 days consensus earnings estimates for the ful lyear have declined from $1.94 to $1.19. All revisions have been negative.

Earnings May 16th.

Shares dropped sharply on Friday after the consensus earnings revisions were released. The $17.42 close was an 8 year low and the very negative comments above suggest shares could go a lot lower.

Position 3/6/17:

Short FOSL shares @ $17.48, see portfolio graphic for stop loss.

Optional: Long April $17 put @ $1.00, see portfolio graphic for stop loss.



INFN - Infinera Corporation - Company Profile

Comments:

No specific news. New 4-week low close.

Original Trade Description: February 25th

Infinera Corporation provides optical transport networking equipment, software, and services worldwide. The company offers Infinera DTN-X family of platforms for subsea, long-haul, regional, and metro mesh networks; Infinera DTN platform for subsea, long-haul, and regional mesh networks that support a range of Ethernet and optical transport network client interfaces; and Infinera FlexILS Line System platform that connects various Infinera platforms over long distance fiber optic cable. It also provides Infinera TM-Series, a carrier-grade packet-optical transport platform; Infinera TS-Series, a passive optical wavelength-division multiplexing (WDM) product; Infinera Cloud Xpress Platform, a compact platform for cloud/data center interconnect applications; and Infinera ATN Platform, a small form-factor WDM platform. In addition, the company offers Infinera Open Transport Switch, a software platform that enables abstraction and virtualization of the underlying Infinera platforms; and Infinera Management Suite, a network management system used by network operators to manage various Infinera platforms. Further, it provides various support services for vraious hardware and software products. The company serves communications service providers, Internet content providers, cable providers, wholesale and enterprise carriers, research and education institutions, and government entities. Company description from FinViz.com.

Infinera makes products primarily used by telecom companies to increase their capabilities over existing fiber optic cables to reduce the need to laying more fiber. Their major market today relies on infrastructure upgrades in China, which is a very competitive market.

The company reported a loss of 12 cents that narrowly beat estimates for a 13 cents loss but was down sharply from the 5 cent profit in the year ago quarter. Revenue declined 30% to $181 million but did beat estimates for $175 million. For the current quarter they guided for revenue of $167-$178 million, down from $249 million in the year ago quarter. Analysts were expecting $171 million. However, they guided for a loss of 16 cents and analysts were expecting 11 cents.

Analysts claim the company is suffering from a perfect storm of M&A among its biggest clients that has reduced demand.

Earnings May 11th.

After trading flat at $8.50 for seven months the shares spiked to just over $12 on the better than expected earnings. Short covering is a wonderful thing if you are long. However, everyone that sat on the $8 stock for seven months is now running for the exits. I believe the stock will return to its prior levels given the negative guidance.

Position 2/27/17:

Short INFN shares @ $10.87, see portfolio graphic for stop loss.

Optional: Long July $10 put @ 78 cents, see portfolio graphic for stop loss.



KR - Kroger Co - Company Profile

Comments:

No specific news. Minor rebound from the two-year low close on Tuesday.

Original Trade Description: March 7th

The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food for sale in its supermarkets. The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of January 30, 2016, the company operated 2,778 retail food stores, including 1,387 fuel centers; 784 convenience stores; and 323 fine jewelry stores and an online retail store, as well as franchised 78 convenience stores. Company description from FinViz.com.

Kroger reported earnings of 53 cents that matched estimates but declined 7% from the year ago quarter. Revenues rose 5% to $27.611 billion and that best estimates for $27.357 billion. Same store sales fell -0.7% and the first decline in 13 years. Analysts expected a 0.1% rise. Competitors Ahold Delhaize, Walmart, Publix and Aldi reported an increase in sales so apparently Kroger is losing market share.

They guided for 2017 for earnings in the range of $2.21-$2.25 per share. Analysts were expecting $2.23.

Earnings June 1st.

There is a major battle shaping for the grocery sector. German discounter Aldi is on a push to open hundreds of new stores in areas currently served by Kroger. Target has vowed to lower prices and sacrifice margins in order to retain market share. Amazon is experimenting with the grocery store concept and has been rumored to be considering opening more than 1,000 stores. Walmart has expanded their grocery departments and now carry more than 350 organic products under the private Walmart labels.

Kroger has been forced to adopt a more promotional posture with bigger ads and lower prices in order to retain share. Goldman removed Kroger from their conviction buy list and warned they doubt they will be able to even get close to their forecast for 8-11% earnings growth. Northcoast cut them from buy to neutral and several analysts cut their price targets.

Tuesday's close was a two year low and the decline is not likely to stop. The grocery sector is broken and profits are going to be tough to generate.

Position 3/8/17:

Short KR shares @ $28.85, see portfolio graphic for stop loss.

Optional: Long April $27.50 put @ 45 cents, no stop loss.





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