Option Investor
Newsletter

Daily Newsletter, Tuesday, 5/9/2017

Table of Contents

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

Market Wrap

Nasdaq to the Rescue

by Jim Brown

Click here to email Jim Brown

The Nasdaq big caps kept the broader market from collapsing intraday.

Market Statistics

All of the indexes opened higher with the Dow rising to 21,046 and the S&P 2,404. Those two indexes rolled over and headed back into negative territory but the Nasdaq toughed it out and managed to remain positive and then regain the highs. The Dow declined -75 points intraday and the S&P -9 points after their early gains. The rebound in the Nasdaq helped to lift those indexes again and the markets ended the day neutral.

The computers are keeping the markets from making any major moves. Everyone has heard about the move from active to passive investing and the surge in ETF trading by computers. With more than 60% of our daily volume done by computers, they have learned how to range trade. Rips are sold and dips are bought. Buying and selling millions of shares of ETFs causes those stocks represented by the ETFs to also rise and fall fractionally. We are in the midst of a computer war but we cannot see it other than the flat charts.

The Dow and S&P have traded in lock step for the last three weeks. Prior to today, the Dow traded in a .02% intraday range or less on 8 of the last 9 days. Today makes it 9 out of 10 days.


The sharp afternoon drop was caused by the North Korean ambassador to the UK. He said "We are ready to turn into ashes any available strategic assets of the US." He also said North Korea was prepared for their sixth nuclear test as soon as Kim Jong Un gave the order.

After the close, President Trump fired FBI Director James Comey on the recommendation of Attorney General Jeff Sessions and Deputy Attorney General Rod Rosenstein. In Trump's letter to Comey he said it was time to find somebody that could restore public trust in the agency. Shortly thereafter Senate Democratic leader Chuck Schumer called for a special prosecutor in the investigation between Trump's campaign and Russia. Schumer said the pattern of dismissals of people critical of the Trump administration was troubling. Acting Attorney General Sally Yates was terminated and former super star U.S. attorney Preet Bharara was also dismissed. According to Schumer, the Comey termination suggests the administration is trying to cripple the Russian investigation. S&P futures crashed -5 points almost immediately after the two headlines.

In the economic news, the NFIB Small Business Optimism Index declined fractionally from 104.5 to 104.5. That remains at multiyear highs despite the -1.4 point decline over the last three months. The index average in 2016 was 95.3. However, the percentage of small businesses that expect the economy to improve over the next six months fell from 46% to 38%. The current job-opening component rose from 30 to 33. A net of 16% of companies plan to increase employment but 33% said they had jobs that were hard to fill. The uncertainty over Obamacare and the AHCA and what will eventually be passed is causing business owners to tone down their post election expectations. The promise was to repeal Obamacare and that has not yet happened and it is looking more likely every day that some portions will remain in force in some form.

Moody's Chart

The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings remain steady at a 3.8% rate in March. There were 5.743 job openings, 5.260 million hires and 5.088 million separations. There were 3.116 million quits and 1.615 million layoffs. The hiring rate was unchanged at 3.6%. Because this was a lagging report for March, it was ignored.

The Atlanta Fed real time GDPNow forecast opened the quarter forecasting 4.3% GDP growth for Q2. After a week of soft economic reports, that has declined to 3.6%. This morning's Wholesale Trade report for March showed inventories rose +0.2% with durable goods rising +0.6% and nondurable falling -0.5%. Sales were flat. The weak inventory build caused the GDP forecast to weaken.


The calendar for the rest of the week is led by the Retail Sales on Friday and the price indexes on Thr/Fri. Unless there is a dramatic miss of the estimates, none of those should move the market.


After the bell the API inventory report for crude oil showed a decline of -5.789 million barrels compared to estimates for a -1.8 million barrel decline. The API report showed a -4.158 million barrel decline last week but the EIA report only showed a drop of 900,000 barrels. If the EIA report tomorrow were to catch up with the API numbers and show something well over a 5 million barrel drop, we should see prices begin to recover from the multi-week decline.

Over the weekend Saudi's oil minister, Khalid al-Falih, said "after conversations with participants, I am confident the production cut agreement will be extended for another six months and possibly beyond." The OPEC meeting is May 25th and we should be getting almost daily headlines ahead of that event.

That tease about "possibly beyond" is their attempt to start building some excitement over a potential production cut extension that is not limited to six months. Crude prices are still lingering in the $46 range and they did not rebound after the API numbers.


Valeant Pharmaceutical (VRX) reported earnings of $1.79 compared to estimates for $1.08. However, that includes a onetime tax benefit. Revenue of $2.11 billion missed estimates for $2.18 billion. The company blamed lower volumes in U.S. diversified products and branded products as the cause. They also blamed "challenging market dynamics." They did raise their forecast for adjusted earnings to a range of $3.60-$3.75 billion, up from $3.55-$3.70 billion. Shares spiked 24% on the news.


Allergan (AGN) reported earnings of $3.35 that beat estimates for $3.31. Revenue of $3.57 billion also beat estimates for $3.53 billion. The company said revenue from facial aesthetics, Botox, eye care and other products were responsible for the revenue growth. They guided for full year revenue of $15.8-$16.0 billion with adjusted earnings of $15.85 to $16.35 per share. Analysts were expecting $15.9 billion and $16.03 per share. Shares declined $3.50 on the news.


Online retailer Wayfair (W) reported a loss of 48 cents that beat estimates for 56 cents. Revenue of $960.8 million rose 29% and beat estimates for $939.2 million. The company said the number of direct retail customers had risen 45%. In the home shopping category that is hard to do. They hired 1,800 new people in 2016 and formed them into teams to attack various categories in their addressable market where they were smaller relative to perceived potential. Apparently it worked. Selling furniture is not going to be something Amazon charges into in the near future because of the shipping problems. However, Amazon could do it through a third party marketplace where the manufacturers are responsible for the shipping. Wayfair is attempting to capitalize on their narrow lead in this area. Shares exploded higher for a 21% gain.


Apple (AAPL) shares continued to hit new highs and lift the Nasdaq and the Dow after an SEC filing showed that Warren Buffett nearly tripled his holdings in the company. Buffett disclosed he owned $19.2 billion in Apple shares, up from $7.1 billion on March 31st. That makes Berkshire Hathaway the 4th largest owner of Apple shares at roughly 133.65 million shares. Apple currently has 5.1 billion shares in circulation. The stock rose to close over $803 billion in market cap and definitely on their way to become a trillion dollar company if everything continues to work in their favor.

Also helping Apple shares was a report in DigiTimes that the iPhone 8 production is "on schedule" which is contrary to multiple supplier and press reports over the last month. Taiwan semiconductor is reportedly ready to ramp up production of the A11 chip that powers the phone starting in June. Circuit board manufacturers Zhen Din Technology and Kinsus Interconnect Technology have reportedly "managed to improve their yields of the board" enough to move into volume production in June. Lastly, Foxconn, Wistron and Pegatron, the actual assemblers of the phones, are ramping up recruitment and training of new workers in China in preparation of the new phone.

However, there was no word on the delay in the 3D sensors or whether Apple had resolved the overheating problem from the wireless charging process. There is also worry that Samsung will not be able to produce enough OLED screens to satisfy both Apple and the other manufacturers using the same screens. There are still risks that final manufacturing concerns could mean certain rumored features could be scrapped and that would be negative for sentiment. There are rumors the fingerprint sensor may have to be moved to the back of the phone and that would be a mistake.

Given all the moving parts that have to come together perfectly to sell 80 million iPhones in Q4, there is always the potential for some specific part to spoil the party. So far, Apple has been very fortunate in the past models that they have escaped this challenge. We saw a similar event with the cordless ear buds, which were delayed significantly. If that were to happen to the iPhone 8 it would be a disaster for the stock.


After the bell, my favorite company, Nvidia (NVDA), reported earnings of 79 cents that rose +126% and easily beat estimates for 66 cents. Revenue of $1.94 billion rose 48% and even beat optimistic analyst estimates for $1.91 billion. In one fell swoop all the recent critics of Nvidia were left standing on the sidelines while the stock spiked $15 immediately after the release.

Analysts had said Nvidia's gaming revenue was on the decline because PC games were not selling as well so high dollar graphics cards were fading. The company said gaming graphics revenue rose $687 million to $1.03 billion. The only thing fading is analyst credibility. Datacenter revenue rose +186% from $143 million to $409 million. Automotive revenue rose from $113 million to $140 million.

The CEO said demand for AI chips was exploding and Nvidia GPUs were by far the choice for those leading the charge into the AI future.

Nvidia will hold its GPU Technology Conference next Wednesday and it is expected they will unveil more details about its next generation architecture, called Volta, which will be another giant leap for mankind. Sorry Intel.


Dow component Disney (DIS) reported earnings of $1.50 compared to estimates for $1.41. Revenue of $13.34 billion missed estimates for $13.41 billion. Cable network revenue rose 3% to $4.1 billion but operating income fell -3% to $1.8 billion because of lower revenue from ESPN. The determining factor was higher programming costs. There was also a shift in the college playoff game schedule that skewed revenue. Disney also suffered from the pre-release costs for Beauty and the Beast but none of the revenue, which is in Q2. Comparisons were also difficult because of Star Wars and Zootopia in the year ago quarter. CEO Bob Iger continued to claim that the worry over ESPN cord cutting is "highly exaggerated" saying the company has taken numerous steps to prevent any material decline in revenues. Shares fell $3 in afterhours.


Shares of TripAdvisor (TRIP) rose $3 in afterhours after reporting earnings of 24 cents that missed estimates for 28 cents. Revenue of $372 million rose 5.7% but missed estimates for $378.7 million. They announced an agreement with GrubHub (GRUB) to integrate the service into the TripAdvisor websites to allow customers to order from more than 4.2 million restaurants in more than 1,100 cities.


Yelp (YELP) needs some help after reporting earnings of 19 cents that beat estimates for 16 cents. Revenue rose 24% to $197.3 million and just below estimates for $198 million. The problem came from lowered guidance. The company said it now expects full year revenue of $850-$865 million and analysts were expecting $889 million. Yelp said it was facing an advertiser revolt as smaller businesses failed to compete well with larger corporate advertisers. Small emerging businesses were getting lost in the advertising shuffle. Shares imploded on the news.


Priceline (PCLN) reported earnings of $9.88 compared to estimates for $8.83. However, given Priceline's history of big beats, that was almost considered a miss. Revenue of $2.42 billion missed estimates for $2.43 billion. They guided for the current quarter to earnings of $13.90-$14.00 and analysts were expecting $15.49. Shares fell $60 on the news.


Earnings highlights for Wednesday are SnapChat, Symantec, Whole Foods, Mylan Labs and Netease. SNAP will probably get the most headlines since this is their first public earnings report.


Markets

The S&P futures have recovered slightly from the -5.50 low to trade at -3.50. There is still a lot of darkness before the dawn and anything can happen. The market is suffering from erectile dysfunction and we need the equivalent of a stock Viagra to pump it up. With the earnings cycle slowing the lack of more than 2-3 high profile companies per day with good earnings, is not enough to keep the optimism going.

While Nvidia soared tonight, their gains are easily offset by the drop in Priceline shares. Nasdaq futures are negative as well. The Nasdaq big caps have been supporting the market for the last three weeks or longer. The top ten Nasdaq stocks are also in the S&P and three in the Dow so while they were leading the Nasdaq higher they were also providing support for the other big cap indexes. Eventually Apple is going to fall from its tree and waken the bears sleeping below. One or two of the FAANG stocks cannot support the market. It has to be a group effort. Google and Facebook were negative today and Apple, Amazon, Netflix were only barely positive relative to their dollar value.

Since the Nasdaq has supported the market, it is the Nasdaq that will eventually crash the market when profit taking finally appears. The Composite Index closed at a new high at 6,120 after finally breaking over initial resistance at 6,100. Unfortunately, it is still battling uptrend resistance at the 6,130 level.

The Nasdaq 100 has broken out to a new high over that same uptrend resistance mostly thanks to Apple's recent spike. I showed the Apple chart earlier and it is extremely over-extended. The September iPhone announcement is a long way off and anything can happen over the next four months.

The $NDX has support at 5,610 should it decide to rest.




The small caps did not decline and that is a positive. They did not rally either so the overall impact is neutral. The S&P-600 has solid resistance at 850 but it is not declining from that battle.


The Dow rebounded from the -75 intraday low but could not make it back to resistance at 21,000. With Disney down after the close, it could start out negative on Wednesday. The Dow futures are only down 40 points so there is no real decline. There are no other Dow components reporting this week so the Dow stocks will have to get their energy from some other source. Support is 20,900.



The S&P traded over 2,400 to 2,404 but fell back to 2,390 intraday. The index is trying to move higher thanks to the Nasdaq big caps but it may face some headwinds on Wednesday. Support is well back at 2,380.


I am worried the Nasdaq bullish streak could be due for a rest. Apple is due for some profit taking and most of the big cap tech stocks have already reported earnings. We are moving into the "sell in May and go away" cycle and once the MACD on the S&P gives a sell signal, we will see whether this cycle will be material in 2017. Given the strong earnings for Q1, the impact could be negligible.

The termination of FBI Director Comey and the call for a special prosecutor by Chuck Schumer, could be the events that finally spoil the market sentiment. Only time will tell but I would be cautious about adding new positions until the market actually picks a direction other than sideways.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Vertically Challenged

by Jim Brown

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Editor's Note

The Dow and S&P are suffering from a sleeping sickness. They are putting traders to sleep. The market is passing time waiting for a catalyst to give it a vertical direction. The mixed earnings after the bell along with the termination of FBI Director Comey and Schumer's call for a special prosecutor for Trump's staff, has tanked the futures and could spoil sentiment for Wednesday. There is no reason to jump into the market with a new position just because it is open.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Market Neutral

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the indexes except the Nasdaq remain stuck in neutral. The engines revved up during the day but the vehicles did not move. The Dow fell back from 21,046 at the open to trade down -75 points intraday but the strength of the Nasdaq big caps lifted the Dow back to a minimal loss. The S&P trade up to 2,404 and down to 2,390 but ended with only a 2 point loss.

The small cap indexes closed barely positive. We cannot draw any conclusion from the small caps other than there were no buyers or sellers.

The big cap techs are driving the bus and everyone else is just along for the ride.





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


ERA - Era Group
The short stock position was entered at the open.



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Short term Calls and Puts on equities = Option Investor Newsletter

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Iron Condors = Couch Potato Trader



BULLISH Play Updates

BBRY - Blackberry - Company Profile

Comments:

No specific news. Holding at the 52-week high.

Original Trade Description: April 28th.

Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company was renamed Blackberry Ltd in an effort to change its public identity. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Blackberry Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. Company description from FinViz.com.

Blackberry has evolved from a hardware vendor to a software company. They no longer produce their own phones and their main product is a secure software interface that is used by security conscious governments and firms everywhere.

Blackberry has moved from just a phone company to multiple product lines including software packages for automobiles. Blackberry just signed a new deal with Ford to use the Blackberry QNX software. The software has been deployed in more than 60 million vehicles. BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise.

The Blackberry phones now run an Android operating system. The Blackberry KeyONE was just launched in the UK with a 4.5 inch screen above a traditional Blackberry keyboard. The device will go on sale in May in the rest of the world. The phone has a Qualcomm Snapdragon 625 chipset, 3gb of RAM, 12MP rear camera, 8MP front camera, Android 7.1 and a 3,505mAh battery for long life. Blackberry phones fill a niche for those who want an actual keyboard and/or greater security than you can get in other phones.

In their recent earnings the CEO said Blackberry was looking at opportunities for branded tablets, wearables, medical devices, appliances, point of sale terminals and other smartphones. The key point is that Blackberry security software will be integrated into all Blackberry branded items even though they will be made by over companies. That makes them low risk, all reward, opportunities.

They announced a couple weeks ago they had been awarded $814 million in royalty overpayments plus attorney's fees and interest from Qualcomm. The arbitration proceeding has been in process for a long time. This is a major infusion of cash for Blackberry.

Shares spiked to $9 on the award. After some initial profit taking they have started to rise again and closed at a new 52-week high on Friday.

Update 5/1/17: CEO was on CNBC this morning talking about accelerating transition to a software service company. Video of interview

Update 5/4/17: TechCrunch reviewed the new BlackBerry phone and said it was the one they should have introduced 10 years ago. CNBC also did an article on it. Read it Here

Earnings June 30th.

Position 5/1/17:

Long BBRY shares @ $9.34, see portfolio graphic for stop loss.

Optional: Long July $10 call @ 35 cents. No stop loss.



FNSR - Finisar Corp - Company Profile

Comments:

No specific news. AAOI spiked 8% to a new high and succeeded in lifting the entire sector.

Original Trade Description: April 24th.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

We played Finisar several weeks ago and got caught in the downdraft on China worries. Reports out of the sector suggested orders from China had slowed. Shares crashed from $35 to $21 over the period of about six weeks. Raymond James said the selloff is overdone and the worries over China are overblown.

China is on track to network 120 major cities with populations of more than one million. That will take a lot of networking gear. The directives have been given from the governmental level but the actual orders will come from the provincial level. Bids for routing and wireless components have already been submitted and optical equipment is expected to be next in line.

Raymond James said Finisar has the most upside potential with a target of $39 and is cheap with a PE of only 9 times 2018 earnings estimates.

Shares have rebounded the last two days after the Raymond James note to investors.

Earnings June 8th.

Update 4/26/17: The U.S. government expanded its investigation regarding compliance with sanctions programs against Iran, Cuba, Sudan and Syria. The target is China-based Huawei but OCLR, ACIA, LITE and FNSR have similar operations. Last month ZTE, a peer to these companies, pleaded guilty and faces fines of $1.2 billion. If the government is going name by name in their investigation, investors may reconsider their ownership of these companies. At least one analyst said today's dip on sector related news rather than company specific, was overdone.

Update 4/28/17: Stifel Nicolaus lowered their price targets on LITE, FNSR, FN and OCLR but maintains a buy rating. The new target on FNSR declined from $39 to $33 with shares at $23. The analyst cut the targets based on the slowness in bid requests from China's governments on the 120 city networking project.

Update 5/5/17: Nice gain on unusual option activity. More than 6,800 May $24 calls traded against an open interest of 2,800, which means they were bought at around 75 cents each. Another 2,000 May $25 calls were bought at 45 cents. That is a total of $600,000 in premium when the normal volume is only a couple hundred contracts. Somebody is betting big on a short fuse with only two weeks to go.

Position 4/25/17:

Long FNSR shares @ $23.10, see portfolio graphic for stop loss.

Optional:

Long June $25 call @ $1.20, see portfolio graphic for stop loss.



STM - STMicroelectronics - Company Profile

Comments:

No specific news. Almost a new high.

Original Trade Description: May 6th.

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest semiconductor maker. They posted a surge in revenue growth after six years of declines thanks to IoT, phones, automotive and industrial demand. Revenue is expected to grow 12.3% in Q2 and the company said it was on track to meet 2017 objectives. The CEO said, "Entering the second quarter, we continue to see healthy demand, with strong booking trends across all our product groups and regions."

They reported revenue of $1.821 billion that rose 12.9% and matched analyst estimates. Earnings of 12 cents missed estimates for 14 cents. The company said it would webcast its Capital Markets Day on Thursday.

Earnings July 27th.

Shares closed at a new high on Friday and the turnaround excitement is building. A positive analyst day on Thursday could send it higher. Shares rallied from November through February and then went dormant in Mar/Apr. Now that the consolidation is complete, they are surging again.

Position 5/8/17:

Long STM shares @ $16.34, see portfolio graphic for stop loss.

Optional: Long July $17.50 call @ 65 cents, no initial stop loss.



USO - US Oil Fund ETF - ETF Profile

Comments:

No specific news. Minor decline in oil prices ahead of the inventory reports.

It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season. Hopefully those declines will begin soon and the repair process can begin.

Original Trade Description: April 22nd.

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

Oil prices fell -6% last week after Wednesday's inventory report failed to show a significant decline in crude inventories. Complicating the problem was the expiration of crude futures on Thursday. That means everyone long for the EIA report had to dump their position immediately to avoid expiration.

I expect the price of crude to return to $54 over the next several weeks. That equates to $11.25 or higher on the USO ETF. The ETF closed at $10.32 on Friday. I am recommending we buy the $10.50 call, currently 42 cents and plan to double our money and exit.

Oil prices will rise because refineries are restarting production after their normal two-month maintenance period centering on March. Oil inventories will begin to decline sharply in the coming weeks as they begin to fill the system with summer blend fuels before Memorial Day.

You could also just buy the USO ETF for $10.32 but you will get a better return using the option. I would not recommending buying a $10 stock with the intention of making 75 cents.

Update 5/8/17: Saudi's oil minister, Khalid al-Falih, said "after conversations with participants, I am confident the production cut agreement will be extended for another six months and possibly beyond." The OPEC meeting is May 25th and we should be getting almost daily headlines ahead of that event.

Position 4/24/17:

Long Jun $10.50 call @ 40 cents, no stop loss.



WLL - Whiting Petroleum - Company Profile

Comments:

No specific news. Minor gain despite the drop in oil prices.

Original Trade Description: May 1st.

Whiting Petroleum Corporation, an independent oil and gas company, engages in the development, production, acquisition, and exploration of crude oil, natural gas liquids, and natural gas primarily in the Rocky Mountains region of the United States. It sells oil and gas to end users, marketers, and other purchasers. As of December 31, 2016, the company had total estimated proved reserves of 615.5 million barrels of oil equivalent; and interests in 1,917 net productive wells on approximately 517,200 net developed acres. Whiting Petroleum Corporation was founded in 1980 and is based in Denver, Colorado. Company description from FinViz.com.

Whiting reported an adjusted loss of 15 cents and analysts were expecting a loss of 22 cents. Revenue of $371.3 million beat estimates for $361.4 million. Production of 10.6 million Boe beat guidance of 10.4 million Boe. Lease operating expenses declined from $9.00 to $8.56. General and administrative expenses declined from $3.15 to $2.34 and interest expenses declined from $4.80 to $3.83 per share.

Earnings July 26th.

The company raised guidance for the year for multiple reasons. They just completed a three-well Loomer pad in North Dakota using advanced completion models with longer laterals and 8.9 million pounds of sand in each well. The resulting production suggests each well will produce 1.5 million Boe over their productive life. That is 50% higher than other wells in the area. That equates to roughly $75 million in revenue from each well with an initial cost of about $9 million each.

Whiting plans to apply this completion method to all its 2017 wells while continuing to test and improve on the model.

Also helping Whiting is the recently completed Dakota Pipeline that President Trump approved a couple months ago. That makes it considerably easier to transport oil out of the Bakken and at a lower cost.

Whiting raised full year guidance to 45.2 to 46.2 million Boe but did not raise the capex expectations. The production guidance was raised because of the better completion methods. This will be a 23% increase in production from Q1 start to Q4 end.

Energy companies have been hammer recently with oil prices falling back under $50. This is a temporary situation. The refinery maintenance cycle was longer than normal and the restart just accelerated over the last two weeks. Inventories last week declined -3.6 million barrels and they should continue to decline sharply over the next four months. Prices will rise as the summer driving season begins.

I think the September $9 option is too expensive at $1.13 and the $10 option is expensive as well. The June options are a short fuse with earnings after expiration. The tradeoff suggests the short term June would be the best play.

Position 5/2/17:

Long WLL shares @ $8.55, see portfolio graphic for stop loss.
Optional: Long June $9 call @ 60 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

ERA - Era Group - Company Profile

Era Group Inc. provides helicopter transportation services primarily to the oil and gas exploration, development, and production companies. Its helicopter services include emergency response search and rescue; air medical services; Alaska flightseeing tours; and other services, as well as utility services to support firefighting, mining, VIP transport, power line, and pipeline survey activities. The company also leases helicopters to third parties and foreign affiliates; engineers, manufactures, and distributes after-market helicopter parts and accessories; and provides classroom instruction, flight simulator, and other training services. As of December 31, 2016, the company owned, leased, or managed a total of 136 helicopters, including 13 heavy helicopters, 49 medium helicopters, 33 light twin engine helicopters, and 41 light single engine helicopters. It also serves cruise line passengers. Company description from FinViz.com.

Era reported a loss of 27 cents on revenue of $54.5 million. This was the second quarterly revenue decline but revenues have been weakening for the last two years. The last quarter they posted positive earnings was June 2016 and the losses are growing. In this table from Capital Cube all the numbers look terrible.

Earnings August 1st.

I am frustrated because I almost recommended them in the weekend newsletter. I decided to wait until support broke at $11.50. That support failed today with a big drop. I believe the shares are going to retest the November lows at $7.50. After looking at that table above would you buy this stock?

Position 5/9/17:

Short ERA shares @ $10.69, see portfolio graphic for stop loss.

No options recommended because of wide spreads.



VXX - Volatility Index Futures - ETF Description

Comments:

New historic low close. The VIX closed at a 24 year low. If the market bullishness continues, the VXX should continue to bleed points. Long term, the VXX always goes down.

Original Trade Description: April 12th.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong market gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

We know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.



WLB - Westmoreland Coal - Company Profile

Comments:

No specific news.

WLB announced their new earnings date would be May 15th before the open. That is next Monday. Close the position at the open on Friday. I lowered the stop loss to prevent a loss.

Original Trade Description: May 3rd.

Westmoreland Coal Company, through its subsidiaries, operates as an energy company. The company operates through Coal - U.S., Coal - Canada, Coal - WMLP, and Power segments. It produces and sells sub-bituminous coal and lignite to power plants. The company owns and operates coal mines in Montana, North Dakota, Ohio, and Texas, the United States; and Alberta and Saskatchewan, Canada. It has total proven or probable coal reserves of approximately 888,202 thousands of tons. The company is also involved in the production of electricity. It operates two coal-fired power generating units with a total capacity of approximately 230 megawatts in Weldon, North Carolina. Westmoreland Coal Company was founded in 1854. Company description from FinViz.com.

Westmoreland shares spiked from $8 to $20 post election and the excitement has left the stock in the recent months. Westmoreland was trading below $4 when Trump began his rise in the polls talking about putting coal miners back to work. Now that the excitement is fading I would not be surprised to see shares return to $4.

The coal sector is on life support. Cheap natural gas burns cleaner, is easier to transport and there is no storage required. Coal is dirty, requires long trains traveling halfway across the country and large rail yards and storage yards to hold the inventory. As long as gas remains under $5, currently $3.22, that will be the fuel of choice.

Westmoreland has a little more going for it because it owns two power plants but it is still losing money on coal.

They recently reported a loss of 41 cents on revenue of $392.7 million. For the full year they lost -$1.47 per share. They are being forced to restate earnings because of past problems.

They guided for a weak 2017 and said two supply contracts had expired. Warmer weather was also weakening demand.

Earnings June 27th. (revised to May 15th)

Shares are $10.25 with support at $8.50 but that support was based on expectations for Trump to win the election. The expectations that coal use would somehow miraculously rebound have now evaporated.

Position 5/4/17:

Short WLB shares @ $10.16, see portfolio graphic for stop loss.





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