Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/15/2017

Table of Contents

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

Market Wrap

No Surprise from FOMC

by Keene Little

Click here to email Keene Little
As was expected at this point, the Fed raised rates 0.25% with today's announcement. What was a little surprising to many was the lack of a hawkish tone about further rate increases.

Today's Market Stats

There were practically no surprises from the FOMC's announcement this afternoon as it delivered an expected +0.25% rate increase and mentioned it's on track for two more rate increases this year. Considering the recent inflation and employment data there were some who began to believe the Fed would have to be more aggressive than just two more rate increases this year and only 3 next year.

Slow and steady seems to be the Fed's mantra and if the data continues to show stronger inflation we'll have to see if the Fed changes their tune. The lack of a more hawkish tone to the Fed's announcement helped spark a rally in the stock market as it realizes the Fed is not going to kill the goose that's laying the golden eggs. It also helps explain the rally in the bond market and the decline in the US$. It might even explain the disappointing reaction in the banking sector.

While the broader market rallied this afternoon the banks did not. Usually a rate increase is good for banks since it widens their spread between loan rates and rates paid to their depositors. The banks should have rallied and the fact that they didn't means there's worry that the Fed might see something that will dampen their enthusiasm about raising rates.

One area of concern is commodity prices -- they've been in decline since early February, which was a lower high for the commodity index compared to the June 2016 high. In other words, commodity prices have not been mirroring stock prices and it could be an indication that the global economy is slowing. The U.S. would not be immune to the slowdown and if the banking sector starts leading to the downside, along with the small caps, it would be a warning sign for the broader stock market.

The US$ also reacted negatively to today's announcement, which is opposite of what it normally does. Higher rates make the dollar more desirable, which in turn drives the price higher. Seeing the opposite today is the currency market (smartest of them all) telling us things might not be as rosy as the stock market's rally would have us believe.

Bonds also reacted opposite to what would have been expected. The Treasury market rallied, which drove yields lower at a time when the Fed is raising rates. The bond market is the place to watch, not the Fed, and while a post-FOMC reaction doesn't mean the move will continue, it does offer fair warning. A rallying bond market would put negative pressure on the stock market.

So the day turned out to have some mixed messages and the same can be said about the stock market. While the rally in the stock market is showing signs of slowing, there's nothing yet to confirm a high is in place. That leaves bulls in control until we see something that says otherwise.

The problem at the moment is that the stock indexes do not have clear short-term patterns and that leaves the direction for the next several days up in the air. But as I'll show the charts, starting with the Dow's weekly chart, I think upside potential is limited while downside potential looks to have the greater potential for a trader.


Dow Industrials, INDU, Weekly chart

At its March 1st high the Dow tested the tops of two up-channels, one for the rally from February 2016 and the other for the rally from May 2011. The tops of these two channels actually cross near 21215 next week and we could see another test of the tops of the channels if the rally holds up into next week. The vulnerability is for a drop down to at least the bottom of the up-channel from February 2016, perhaps near the January low near 19678 by mid-May. The Dow would obviously be more bearish below that level.


Dow Industrials, INDU, Daily chart

If I view the rally from January 19th as needing a final 5th wave, it would equal the 1st wave near 21225, which is very close to the tops of the two up-channels mentioned above. That's the upside potential I currently see. But the short-term pattern supports the idea that today's rally might have been the conclusion to a small bounce pattern off the March 9th low and now we'll get another leg down for the pullback/decline from March 1st. Whether another leg down would then lead to another rally or something stronger to the downside would have to figured out after getting the decline and seeing where it might stop.

Key Levels for DOW:
- bullish above 21,225
- bearish below 20,770


Dow Industrials, INDU, 60-min chart

The Dow's 60-min chart shows a closer view of how it held support at its uptrend line from November 4 - January 31, including another test of it this afternoon before the FOMC announcement. Based on a projection for the bounce pattern the Dow would be more bullish above 21050, in which case I'd look for a rally to the 21225 target. But a drop below this afternoon's low at 20870 would be a bearish heads up and then below Tuesday's low at 20786 would confirm we're getting another leg down for at least a larger pullback. Two equal legs down would target 20585 and it would be more bearish below that level.


S&P 500, SPX, Daily chart

SPX has the same pattern as the Dow and I see an equal chance of a little more rally but it wouldn't turn more bullish unless it was able to get (and stay) above 2410. If we see a sharp reversal back down Thursday morning I'd look for a drop down to at least 2343 where it would achieve two equal legs down from March 1st. Much below that level would have things looking more bearish.

Key Levels for SPX:
- bullish above 2410
- bearish below 2340


SPX vs 52-week highs, Daily chart

The problem the market is experiencing right now is a lack of participation in the rallies, which is one of the indications we're likely much closer to the end of the rally that at the start of a bigger one. The number of new 52-week highs continues to decline, which shows us the rally to new highs (or tests of highs) is happening on the backs of fewer and fewer stocks. New 52-week lows beat new highs 4 out of the 5 days last week. Unless this gets turned around we should be looking for selling opportunities instead of buying opportunities.

In addition to some of the technical indicators that show the market's rally is tiring, there are some fundamental reasons why we should be wary of any further rally attempts. We're getting plenty of warning signs and while they don't pinpoint exactly when we'll see a market top (wouldn't it be nice if it was that easy) we do have enough to tell us to be very careful on the long side.

Along with the declining number of new 52-week highs, another measure of lack of participation can be found in the numbers of senior executives of companies who don't believe this is a good buying opportunity. When they are doing a lot of insider buying it should give us confidence to add to our own portfolios. And just the opposite is also true. Currently, according to SEC filings, insider buying is at its lowest level in the past 30 years. Let that sink in for a bit and it's clear company leaders do not like the investment opportunities in their own companies and yet other investors keep snapping up the stock. Big warning sign.

The stock market is extremely over valued and the lack of insider buying supports that view. The P/E ratio of the S&P 500 stocks is now above 26.5 and the only other two times it was higher in the past 100 years was in 2000 and 2008, both of which were not good years to be invested in the stock market.

The Cyclically Adjusted P/E (CAPE), which smoothes out the previous 10 years, has only been higher twice in the past 100 years as well -- 2000 and 1929. Again, not good years to be invested in the stock market.

Complacency in the market is also a dangerous time and the lack of a 1% pullback for 106 straight days at this point has many feeling the market is impervious to any bad news. The longer a market rally goes without corrections the more vulnerable it becomes to an even larger correction as all those late-to-the-party buyers start to bail en masse. The last time the S&P went this long without a stronger correction was 22 years ago (1994) and the most recent time it went close to 100 days without a 1% correction was prior to the 2008 crash.

Stocks are expensive, complacency is high and we haven't had any large corrections since October. What could possibly go wrong?


Nasdaq Composite, COMPQ, Daily chart

The Nasdaq also has the same pattern as the blue chips and a continuation of the rally on Thursday would open the door to new highs (it tested today's high but no new high yet). There's upside potential for the Naz near 6000, another 100 points higher, if it can make it up to the trend line along the highs from November-February. The first sign of trouble for the rally would be a drop below Tuesday morning's low near 5832.

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


Semiconductor index, SOX, Daily chart

One of the drivers behind the rally in the techs, especially the NDX, has been the semiconductor sector. But that might be about to change if the multiple trend lines and bearish divergence on the SOX daily chart will have anything to say about the current rally. The SOX has been pushing up against the trend line along the highs from March-July 2016 and it has now run into the trend line along the highs from July 2014 - June 2015.

It's getting pinched in a rising wedge pattern and the waning momentum for the rally suggests the end of the rally could be very close, if not here. Conversely, a rally out the top of its rising wedge would be a bullish move but it will obviously need a strong catalyst to void the bearish divergence. A drop below the February 24th low at 955 would be confirmation a top is in place.


Russell-2000, RUT, Daily chart

The RUT has been more volatile than the other indexes and today it outperformed to the upside. As I'll show further below, the RUT has been underperforming the market for a while but today it got back a little bit of its greater loss. It still has further to go to challenge its March 1st high and the first thing the bulls needed to do was get the RUT back above its 50-dma, near 1376, which it did today with its high at 1385.69. The next hurdle is its broken 20-dma, near 1388, and if it can rally above that level we could see a run back up to its trend line along the highs from 2007-2015, near 1420.

But at the moment there's a bounce pattern off its March 9th low that suggests today's rally is going to be followed by another leg down for the decline off its March 1st high. The first downside projection in that case would be 1328 for two equal legs down and then near 1293 and a test of its uptrend line from February 2016 as well as its 200-dma

Key Levels for RUT:
- bullish above 1422
- bearish below 1347


RUT's Relative Strength to SPX, Daily chart

The RUT has been a concern for bulls since December when it started to significantly underperform the market. The chart below shows the Relative Strength (RS) of the RUT as compared to SPX. You can use technical indicators on RS charts just like others and there are two things to point out here.

Note the RUT's RS dropped below the bottom of a parallel down-channel, on March 7th, for the decline from December. Just like a stock, when it does this it means the decline is very likely going to accelerate lower. In this case it could mean SPX will rally without the RUT or that the RUT will lead it to the downside. Currently it has bounced back up to the bottom of the down-channel and this is a typical back-test which will lead to a continuation lower if the bearish message from this chart is correct. If you're looking to play the short side in the market, assuming the indexes turn back down, the RUT (IWM) is the one to pick on.


20+ Year Treasury ETF, TLT, Daily chart

Bond prices, as represented by TLT, have been in decline since the July 8, 2016 high and last week, on March 8th, TLT broke below its uptrend line from February 2011 - December 2013. But today's bullish reaction to the FOMC announcement has TLT back above the uptrend line, leaving a possible head-fake break (or is today's rally the head fake?). Notice too that Monday's low was slightly lower than its December 2016 low but with significant bullish divergence. It's looking like a bottom could be in but that would not be confirmed until it rallies above its February 24th high at 122.14. Potential resistance to a further bounce is the bottom of its previously broken sideways triangle, currently near 119.60.


KBW Bank index, BKX, Daily chart

The banks have been pulling back marginally with the broader market since March 1st but what was surprising was to see the banks selling off after the FOMC announcement this afternoon, just the opposite of what the broader market was doing. Was the rate hike already priced in? I could say that's probably true if the banks had rallied into today's announcement but that's not the case. For the moment it's a question mark but if the banks continue to show weakness it would be another warning sign for stock market bulls (how many do we have now?).

BKX has dropped back down to a mid-line in an up-channel from April-June 2016. The last time it did that was January-February before launching another rally leg. Back then it was also being supported by its 50-dma, which is currently a little lower, at 94.10 today. This morning's low was 95.49, which was nearly tested with this afternoon's low at 95.51.


U.S. Dollar contract, DX, Daily chart

The US$ reacted negatively to the FOMC announcement, dropping more than $1 (-1%) from its pre-FOMC price, which is a relatively large move for a currency. Apparently the Fed's less-than hawkish statement about future rate increases was reason enough to sell.

From a chart perspective today's decline looks bearish because it followed Tuesday's back-test of the rising wedge pattern off the February 2nd low, which was broken on Monday. The back-test has been followed by a bearish kiss goodbye and there's a good chance the decline will continue to at least its uptrend line from May-August 2016, currently near 98.50, which is also where its 200-dma is located. The dollar remains bearish below its March 2nd high at 102.27.


Gold continuous contract, GC, Daily chart

Gold did just the opposite of the dollar by spiking back up following the FOMC announcement. Gold had broken price-level support near 1205 last Thursday and had been hanging around under support. Today's rally popped gold back above 1205 and it was able to get back above its broken 50-dma at 1214.90 (with a high at 1222). I see higher bounce potential to at least the broken 20-dma, near 1229, but following the February-March decline it's looking vulnerable to another leg down.


Oil continuous contract, CL, Daily chart

Tuesday morning's sharp decline in oil was reversed with the afternoon sharp rally, which retraced the morning decline. The resultant bullish hammer candlestick for Tuesday is pointing to at least a larger bounce (in time if not price) before heading lower. If oil can get back above price-level S/R near 51 it would provide us a with a bullish heads up but for the moment I think there's a higher probability for either a consolidation or for it to head lower sooner rather than later.


Economic reports

There were no surprises in this morning's economic reports and with the market more focused on what the Fed will do it didn't matter much anyway. On Thursday we'll get the unemployment claims data as well as housing starts and permits, which are not expected to change much. We'll also get the Philly Fed index for March, which is expected to show a decline from February, and the JOLTS report on job openings.


Conclusion

The post-FOMC reaction was expected since rarely have we found the market to sell off following their announcement. It's as if buy programs are preset to make sure the market doesn't sell off. We can't have the Fed embarrassed by such a thing. What happens the following day is usually more telling and it's often a reversal of the post-FOMC afternoon move. That would mean at least a down day on Thursday but as shown on tonight's charts, there are some upside targets that the indexes could be heading for.

With a very complacent market, one that's overbought and showing waning upside momentum, it's a risky time to be long the market. Following the market higher with trailing stops seems like a prudent thing to do. Placing stops just below pullback lows is a good tactic here.

Whether we'll get a catalyst that sparks stronger selling (something greater than 1%) or just a tired market that starts down and trips stops along the way, we're likely close to significant high for the major indexes, if the highs are not already in place. There are no signs yet of a market top (no strong impulsive moves down) so there's not much for bears to do yet.

But if you're itching to get short, use this time to look at Relative Strength charts to see which indexes, sectors and stocks you want to consider. I have a feeling when a breakdown happens it's going to happen quickly. In the meantime, if you're long the market just enjoy the ride with the knowledge that your stops are set and that you'll let the market tell you when it's time to pull the ejection handle.

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

Keene H. Little, CMT


New Plays

Major Move Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

Etsy is changing its game plan and I think this is a winning modification.


NEW BULLISH Plays

ETSY - ETSY Inc - Company Profile

Etsy, Inc. operates as a commerce platform to make, sell, and buy goods online and offline worldwide. Its platform includes its markets, services, and technology, which enables to engage a community of sellers and buyers. The company offers approximately 45 million items across approximately 50 retail categories to buyers. It also provides various seller services, including direct checkouts, promoted listings, and shipping labels, as well as Pattern by Etsy to create custom Websites; and seller tool and education resources to start, manage, and scale businesses to entrepreneurs primarily through Etsy.com. In addition, the company operates A Little Market, a handmade and supplies market for sellers and buyers. Company description from FinViz.com.

Etsy reported earnings of 3 cents that beat estimates for a penny. Revenue of $110.2 million also beat estimates for $106.9 million. Merchandise sold rose 16.7% to $865.2 million. The stock was crushed because the company guided for higher costs. However, there was a good reason and shares are starting to rise again.

Etsy is an ecommerce website where crafters can post and sell their wares. So far, so good. The company has come up with the great idea to sell craft supplies on the website so other existing crafters plus all the people shopping the website can buy their supplies there as well. Not only will the company provide supplies but they are adding tutorials and other craft ideas. That will make the site even more "sticky." This is scheduled to launch in April.

In addition, they introduced Google Shopping on the website and launched their first ever global brand campaign. They have changed the backend of the seller website to provide a new seller dashboard and new application called Shop Manager.

I think this expansion is a great idea. Where other retail websites are stagnant, Etsy is growing rapidly and these new features will increase viewers, buyers and sellers. The knee jerk decline in the stock price on the rise in expenses was a buying opportunity.

Earnings May 30th.

Buy ETSY shares, currently $10.30, initial stop loss $9.30.

Optional: Buy June $12.50 call, currently 40 cents, no stop loss.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Major Recovery

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap indexes exploded higher with 1.5% gains as buyers flooded the market. The Russell 2000 gained 20 points or 1.5% and the S&P-600 added 12 points or 1.48%. They were the biggest broad market gainers thanks to a 1.64% spike in the biotech sector.

I am sure there was a lot of short squeeze in the move because they started the day positive and never looked back. If this was a sudden change in sentiment because support held on Tuesday then I am thrilled. I just hope it sticks. Unfortunately a bullish market also lifted most of the short positions.





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


ARNC - Arconic
The long put position was stopped at $27.10.



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BULLISH Play Updates

ARNC - Arconic - Company Profile

Comments:

No specific news. Resistance broke on the big spike higher and we were stopped out on the put for a minor gain. We still have the long call but without a major move on Thursday the position will expire worthless on Friday.

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.
Closed 3/15/17: Long Mar $28 put @ 60 cents, exit $1.18, +.58 gain.



CSIQ - Canadian Solar - Company Profile

Comments:

No specific news. Shares are continuing to rebound.

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.



ECA - Encana Corporation - Company Profile

Comments:

No specific news. Shares rallied 7% on news crude inventories in the U.S. declined unexpectedly.

Original Trade Description: March 13th

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

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

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

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

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

Earnings May 18th.

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

Position 3/14/17:

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

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



VIPS - Vipshop Holdings - Company Profile

Comments:

No specific news. The company completed a note repurchase for $3.125 million. The offer was very under subscribed. Nobody wanted to sell their 1.5% notes.

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. Shares rebounded with the market and missed our stop loss by 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.



FOSL - Fossil Group - Company Profile

Comments:

Fossil said it entered into a loan modification agreement with its lenders that appears to be bearish. The amendment reduces the credit available to $850 million but the press release did not say what level it was reduced from. The amendment also removed an incremental term loan that was previously available. It also extends the maturity date until May 17th, 2019 BUT removes the company's ability to ask for an extension.

Basically, their credit limit was lowered, one facility was cancelled and they cannot ask for an extension of the maturity date, meaning the loan has to either be paid or a new loan with new lenders has to be acquired.

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. Minor rebound from the 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 a four-week low.

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.

The Dow Theory Forecasts newsletter cut their rating on Kroger from buy to sell based on declining fundamentals, increased competition and disappointing guidance.

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.



SHLD - Sears Holdings - Company Profile

Comments:

Sears lost the third top executive in the last three months. Kmart president Alasdair James is no longer with the company. Sears does not announce departures because there has been so many. The name just disappears from the website. James was removed on Wednesday. Sears will not comments on departures even when asked.

Original Trade Description: March 11th

Sears Holdings Corporation operates as a retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Joe Boxer, and Alphaline labels; Sears brand products, such as Kenmore, Craftsman, and DieHard; and Kenmore-branded products. As of October 31, 2015, this segment operated approximately 952 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers appliances and services to commercial customers in the single-family residential construction/remodel, property management, multi-family new construction, and government/military sectors; appliance and plumbing fixtures to architects, designers, and new construction or remodeling customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; and home improvement services, as well as protection agreements and product installation services. This segment provides merchandise under the Kenmore, Craftsman, DieHard, Covington, Canyon River Blues, Metaphor, Outdoor Life, Structure, and Apostrophe brands, as well as under the Roadhandler, Ty Pennington Style, and Alphaline brands. As of October 31, 2015, this segment operated 735 Sears stores. Company description from FinViz.com.

We played Sears as a short several times before. Sears is eventually expected to file bankruptcy. It is only a matter of time.

Fitch warned Sears will burn through $1.5-$1.8 billion in cash this year and even selling off the Craftsman brand will only gain them an additional 12 months of life.

Sears closed at a new 14-year low on Feb-9th before spiking the next day on misplaced optimism to stop us out of a short position for a decent gain.

In early January, they announced they were closing 150 stores. There are 109 Kmarts and 41 Sears stores. Last week they announced the completion of the sale of the Craftsman brand to Stanley Black & Decker for $525 million in cash and payments over the next 3-5 years to total $900 million. That shows how desperate they are for cash since they originally expected to raise $1.5 to $2.0 billion on the sale. Now they are looking to sell the Kenmore and Diehard brands.

Sears reported an adjusted Q4 loss of $1.28 that was better than expectations for a loss of $2.85 per share. That still represented a loss of $607 million and they are burning cash at an alarming rate. Analysts now believe they need $2 billion to make it through 2017. Revenue was $6.1 billion, down from $7.3 billion but beat estimates for $5.9 billion.

Earnings June 8th.

Susquehanna said Sears is struggling just to exist and the results were terrible. They do believe the chain will continue to exist through 2017 thanks to sales of real estate and brands, and then the outlook becomes increasingly worse once there are no longer any assets to sell. By selling their real estate and leasing it back, they raise immediate cash but they take on a new debt on every store. Outstanding debt and capital lease obligations rose from $2.2 billion to $4.2 billion in 2016. That means their cash burn in 2017 will actually increase significantly.

Update 3/13/17: Sears lenders hired Kramer Levin to represent them in expected debt talks. The lenders are expecting trouble so they already hired a bankruptcy firm. That is not a good sign for Sears.

Shares spiked on short covering after the earnings but came to a dead stop at $9.50 and exactly where resistance held back in January. I think the shorts will load up again now that earnings are over and no further headlines are expected.

Position 3/13/17:

Short SHLD shares @ $9.10, see portfolio graphic for stop loss.

No options recommended because of price.

The $9 put is $2.05 and 22% of the stock price.





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