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Newsletter

Daily Newsletter, Wednesday, 5/24/2017

Table of Contents

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

Market Wrap

Drifting Higher

by Keene Little

Click here to email Keene Little
There might not be a lot of volume behind this week's rally but the buying has been enough to keep the bears away, allowing the market to drift higher. The question for the rest of the week is whether or not the indexes will be able to drift up through resistance.

Today's Market Stats

Last week the market tanked (on Wednesday) because of the political turmoil surrounding President Trump. This week the indexes have nearly retraced all of last week's loss and yet nothing has changed surrounding Trump as more investigations are launched in an effort to smear/clear his name. The VIX is back down below 10 and the big question is why was it so scary last week but nothing to worry about this week? To answer that question would require us to figure out a logical stock market, which of course is an oxymoron.

There's been a big liquidity push into the market in the past week and it could be argued that some big players, including central banks, have been behind the effort to recover the market and keep investors investing. The one missing component this week has been volume and a strong rally (in points) without the volume behind it makes is a little more suspect.

This being the week before the Memorial Day holiday weekend it's typical for us to see lower trading volume. It has in fact made it easier to push the market higher. With the indexes up against resistance we'll now see whether or not the sellers stay away at least before the weekend.

There wasn't much in the way of economic reports to move the market this morning. Mortgage applications were up +4.4%, reversing the previous week's -4.1%. This is a volatile weekly number and gets very little attention. Yesterday's report of new home sales in April showed a lower than expected number (569K vs. 605K expected and down from 642K in March). This morning's report of existing home sales was similarly lower but not by as much. Expectations were 5.65M, a slight drop from 5.70M in March, but the actual number was 5.57M, down -2.3%.

Total housing inventory increased 7.2% in April to 1.93M existing homes (a 4.2-month supply at current sales rate), but it's still down -9% from a year ago. As further evidence of a shrinking home ownership rate, despite a population increase, this was the 23rd consecutive year-over-year decline in the housing inventory. However, with the Millennial generation now hitting the age where they become more interested in home ownership, we could soon see a renewed demand for housing.

The existing home sales were down in every major region except the Midwest but the median sales price for single-family homes rose 6.1% to $246,100. As opposed to the new-home prices, which have steadily declined since early 2013, the median price for used homes has risen each month for over 5 years (this was the 62nd consecutive year-over-year gain). The time on the market for used homes fell to a new low of 29 days vs. 39 days a year ago. So all in all, the housing market is looking healthy, although it's becoming more of an affordability issue. There is a lack of affordable housing, especially for the lower- and mid-market range.

Lumber futures prices have been rising steadily since October 2015, doubling from $200 to a high just over $400 in April. The futures have pulled back slightly from April but price remains in a strong uptrend with no signs of weakening. As Tom McClellan has noted, lumber futures prices tend to lead new home sales by about a year and therefore it's looking like new home sales should continue to increase this year and that might reflect stronger buying interest from the Millennials, even as the Baby Boomers look to downsize.

The bigger problem for new home construction is labor. Many of the trade industries are begging for people and I know that in my hometown of Spokane, WA there are apprenticeship programs (remember those?) and trade association education programs that are trying to entice people into the home construction industry. There is a strong need for new people and that's negatively affecting how many homes can be built right now. It would appear we might now need fewer college-educated kids, with their $50K student loans to pay off, and more trade-educated kids who can earn decent money without monstrous loans holding them back.

The FOMC minutes were released at 14:00 and they caused a little volatility before finishing near the highs of the day. With the low trading volume it's not hard to move the indexes around but apparently shorts were spooked and some buyers jumped in. There was nothing new in the minutes so it was likely just some relief buying following the release of the minutes.

The FOMC minutes reflected agreement on a system to start reducing their balance sheet, which consists mostly of government bonds. They've been holding their balance sheet steady by rolling over expiring Treasuries but are now in agreement to start letting some of the Treasuries expire without replacement. They will be setting caps on how much will be allowed to roll off each month without reinvesting the proceeds. The initial caps will be set low and any proceeds over and above the caps will be reinvested.

The schedule of release of their bonds will be pre-announced in an effort to keep the market informed and reduce surprises and that's likely what the stock market liked. The reaction in the bond market was favorable -- bond prices rallied slightly, which dropped yields back down from their afternoon highs.

The Fed is a little concerned about the slowing inflation and economic indicators in Q1 but they think it's "transitory" and believe their forecast will have to be adjusted as inflation and the economy tick back up. The problem of course is that the Fed has a perfect record of never getting their forecast correct. If they think inflation and the economy are both going to tick higher my bet is that it's going to do the opposite. There are plenty of reasons to expect the long-term deflationary cycle to continue but I won't get into those tonight.

As mentioned earlier, last week's decline has largely been retraced but now we're at the point where we were last week, facing the same resistance levels. The question for the rest of the week is whether or not there will be enough volume (the pressure behind the buying) will be enough to shove the indexes up through resistance.

I was tempted to title tonight's report "I Ain't Afraid of No Bears" based on the quick reversal back down in the VIX from last week's spike up.


Volatility index, VIX, Weekly chart

Just as we had a "too far, too fast" spike to the upside last week, we now have a "too far, too fast" spike back down. The collapse of fear about a lasting downturn, which has driven the VIX back below 10, is worrisome. The VIX closed at 10.02 after hitting a low at 9.88 today and is again not far from the bottom of its large descending wedge from 2015, currently near 9.67. The low on May 9th was 9.56. A low VIX is not a reason to sell your stocks but it is a reason to be more cautious than usual. A retest of the highs for the stock market is being accompanied by a test of the lows for the VIX, and with continued bullish divergence. What, me worry?

In last Wednesday's wrap I kicked off the review of the major indexes with a look at the Nasdaq because it had a very nice setup for a reversal following Tuesday's high and it looked like Wednesday's strong decline was the kickoff to a larger decline. That has now of course been negated with the retracement of the decline. But I had shown an alternate wave count that suggested a pullback from Tuesday's high could lead to one more new high to complete a 5-wave move up from March 27th. Guess what we now have?


Nasdaq Composite index, COMPQ, Weekly chart

Not much has changed on the weekly chart and that means the Naz is still up against resistance at a price projection at 6167.53, which is where the extended 5th wave of the rally from February 2016 is equal to the 1st through 3rd waves. The more bullish interpretations says we need to see the Naz stair-step higher over the next several months and potential up towards 7000 but that would only become more evident after seeing a choppy pullback/consolidation instead of an impulsive decline.

The risk here is that the rally from February 2016 is completing and it will be followed by at least a larger pullback correction, one that could see the bottom of its up-channel from 2011 tested, which is currently near its March 2000 high at 5132.


Nasdaq Composite index, COMPQ, Daily chart

As a reminder, the rally from February 2016 is the 5th wave of the rally from 2011 (to complete an A-B-C rally from 2009). This 5th wave is a 5-wave move and its 5th wave is the leg up from March 27th, shown on the daily chart below. The smaller 5th wave equals the 1st wave near 6164, which was achieved with today's high at 6166.

That gives us longer- and short-term projections at 6164 and 6167, putting today's high in the middle. There is of course last week's high at 6170 that might also be resistance. But if the Nasdaq gets above 6170 and stays above that level then we could see a rally to the 6200-6210 area to test the trend line along the highs from April 2016 - March 1, 2017. This trend line and the 6167 projection stopped last week's rally. So far the test of last week's high is showing a significant bearish divergence. And with the VIX now back below 10, what, me worry? I ain't afraid of no bears (or double tops).

Key Levels for COMPQ:
- bullish above 6210
- bearish below 5996


Nasdaq Composite index, COMPQ, 60-min chart

Dialing in closer, the 60-min chart shows the 5th wave of the rally from March 27th, which is the leg up from last Thursday. This means we're into the 5th of the 5th of the 5th wave and there's every reason to believe we're headed shortly for at least a much larger pullback.

Using the arithmetic price scale, vs. the log scale price used on the daily chart above, the trend line along the highs from April 2016 - March 1, 2017 sits a little lower and was tested with today's high at 6166. There's additional upside potential but this is another setup for a reversal and this time with a double top. The leg up from last Thursday is building a slight rounding top (there's no good uptrend line for the rally) as it hits resistance. Nah, I'm still not worried (wink).


S&P 500, SPX, Daily chart

SPX needs buyers to continue from here otherwise it's going to look especially bearish. Following the March 1st high last week's slightly higher high was with bearish divergence and the selloff left a double top. Now we have a test of last Tuesday's high at 2405.77 with today's high at 2405.58 with an even more significant bearish divergence. Bulls need a break above 2410 (and hold above) in order to negate the bearish divergence and a triple-top setup. I think the selling could get nasty if it starts back down from here.

Key Levels for SPX:
- bullish above 2410
- bearish below 2352


Dow Industrials, INDU, Daily chart

The wave count is not at all clear on the Dow since it either finished with a truncated 5th wave or has a funky looking 4th wave and a truncated 5th wave. For now I'm using trend lines for guidance and today's rally brought the Dow up to its downtrend line from March 1 - April 26th. This downtrend line stopped the rallies on May 9 and 16 and therefore is a trend line traders are watching.

In addition to this trendline resistance (until proven otherwise), the broken uptrend line from November is currently near today's closing price at 21012. Once again, the bulls really need to keep up their buying here. Otherwise we'll have more tests of previous highs with bearish divergence.

Key Levels for DOW:
- bullish above 21,047
- bearish below 20,553


Russell-2000, RUT, Daily chart

The RUT's price pattern since last December has been nothing but corrective 3-wave moves and as such it makes it nearly impossible to discern what its next move is likely to be. Using trend lines and channels is usually effective in identifying potential turns and at the moment the RUT is up against its downtrend line from April 26th, currently near today's closing price at 1382.

Better seen on a 15- or 30-min chart is a rising wedge for the leg up from last week and the RUT broke down from it with today's pullback from the morning high. The afternoon bounce took it back up to the bottom of the wedge, leaving a potential back-test and now waiting to see if we'll get the bearish kiss goodbye with a selloff on Thursday.

Key Levels for RUT:
- bullish above 1401
- bearish below 1351


10-year Yield, TNX, Daily chart

The bond market reacted positively to the FOMC minutes and reversed the buying up until the afternoon release. This of course dropped yields, which closed below yesterday's close and could now be ready for another leg down toward the 2.00% objective out of its double-top pattern between last December and March. The bottom of the trading range (the valley between the double top), near 2.3, was tested with this afternoon's high at 2.297. A continuation lower tomorrow/Friday would more strongly suggest the decline in yields will continue.


KBW Bank index, BKX, Daily chart

The banks could also be ready for the next leg down. Yesterday's high at 91.75 was a back-test of strong resistance at its broken 20- and 50-dma's, at 91.72 and 91.60, resp. It was also a back-test of its broken uptrend line from June 2016, currently near 91.50, which it had broken below last week. There's a lot of resistance here and it's a reason the bulls need to keep up the buying and bust through it. Otherwise a decline on Thursday would leave a bearish kiss goodbye at resistance and a reason to sell. The downside objective for the H&S top, near 75.30, still beckons. That alone would be a 17% loss from here.


Transportation Index, TRAN, Daily chart

Another H&S top, another back-test. The TRAN bounced off its 200-dma last week and has now made it back up to its broken 20- and 50-dma's, at 9046 and 9065, resp., with today's high near 9045. They'll be near 9040 and 9060 on Thursday but at the moment the TRAN has also made it back up to a downtrend line from April 25th, near 9025, closing slightly below it today at 9022. Again, the bulls need to keep up the buying pressure otherwise a selloff from here would leave a bearish kiss goodbye at resistance. The downside potential is to 7900 (from the H&S pattern), which would be a decline of about -12% from here.


U.S. Dollar contract, DX, Daily chart

The US$ has been in decline since topping in January and the decline has been steepening since the bounce to a lower high in early March. On May 16th the dollar dropped below the bottom of a potential bullish descending wedge, which was a bearish move (leaving behind a failed bullish pattern).

It's looking like we should see a drop down to at least the bottom of a parallel down-channel, currently near 96. I'm expecting the dollar to eventually break down below the bottom of the channel but it should provide at least a bounce/consolidation before dropping lower.


Gold continuous contract, GC, Daily chart

The short-term pattern for gold is not clear enough to suggest a higher-probability move over the next week. With it struggling to get back above its broken uptrend line from December-March, currently just above today's close at 1258.60, it's looking vulnerable to another leg down from here. But I could easily argue we'll see a pop up to its downtrend line form 2011, near 1282, before heading back down. It would obviously be more bullish if it can break its longer-term downtrend line.


Oil continuous contract, CL, Weekly chart

Since June 2016 oil has essentially traded in a choppy sideways trading range and it's nowhere near breaking down or up yet. The weekly chart below gives a better sense for where it is than a daily chart. Today's high at 51.88 is a test of the long-term uptrend line from 1998-2008. There's a little more upside potential to its downtrend line from May 2015 - January 2017, currently near 53.30, which is the line that stopped rallies in February and April.

Much above 53.30 for oil would have me looking for a run up to the top of a parallel up-channel for its choppy rally following June 2016 high, which could also have it testing price-level S/R near 58.50. The overall choppy pattern continues to suggest we're going to get another leg down for oil, potentially below its February 2016 low at 26, and that could start from the 52-53 area or possibly higher.


Economic reports

There will be no market-moving economic reports on Thursday and then on Friday we'll get Durable Goods Orders and the 2nd estimate of GDP. With the Fed on data-dependent mode, thinking the economy is improving from Q1, these numbers could sway the market, especially since we should have very low volume on Friday.


Conclusion

Many of the indexes have bounced back up to potentially strong resistance and until the market can rally some more it's looking vulnerable to another reversal back down. This might be a time where the 2nd mouse will get the cheese (the first one who shorted last week's high took the bait and paid dearly for it). Most bears will be reluctant to try shorting this market again but we have a nice setup for them to try. Only in hindsight will we know whether or not the market has a different plan.

It's possible the market will simply drift a little higher into the end of the week in front of the holiday weekend. Without a lot of points added to the board it would keep the bears away and then we'll get a truer sense of market direction next week. But beware of the possibility for a negative day on Thursday, which would kick out some potentially important sell signals.

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

Keene H. Little, CMT


New Plays

Unhealthy Earnings

by Jim Brown

Click here to email Jim Brown
Editor's Note

Retailers of all types have been reporting weak earnings but this company is guiding for lower lows. Vitamins are supposed to be healthy but Vitamin Shoppe has not been taking its own medicine.



NEW BULLISH Plays

VSI - Vitamin Shoppe - ETF Profile

Vitamin Shoppe, Inc., through its subsidiaries, operates as a multi-channel specialty retailer and contract manufacturer of nutritional products in the United States and internationally. It operates through three segments: Retail, Direct, and Manufacturing. The company provides custom manufacturing and private labeling services for VMS products, as well as develops and markets own branded products. It offers vitamins, minerals, herbs, specialty supplements, sports nutrition, and other health and wellness products of approximately 900 brands, such as own brands comprising Vitamin Shoppe, BodyTech, True Athlete, Mytrition, plnt, ProBioCare, Next Step, and Betancourt Nutrition; and national brands, including Optimum Nutrition, Cellucor, Garden of Life, Quest Nutrition, Solaray, Solgar, and Nature's Way. The company sells its products through Vitamin Shoppe and Super Supplements retail stores; and catalogs, as well as through its vitaminshoppe.com Website. As of December 31, 2016, it operated 775 company-operated retail stores; and 7 franchise stores in Panama, 5 franchise stores in Guatemala, 3 franchise stores in Costa Rica, and 2 franchise stores in Paraguay. Company description from FinViz.com.

Vitamin Shoppe reported earnings of 37 cents that missed estimates for 58 cents. Revenue of $316.9 million missed estimates for $326.7 million. Same store sales fell -6.3% while e-Commerce sales fell -9.1%. The stock fell 32% on the news.

Bad earnings happen all the time to many companies. However, they normally try to be upbeat about the future. That was not the case at VSI. The company warned that weak traffic and sales would continue because of changes to their loyalty program and intensifying promotional environment in the Sports nutrition category.

The best thing they could say was that they could continue their cost reduction initiatives. They Guided for the full year for sales to decline in mid single-digits and earnings of $1.50-$1.75. They guided for the quarter to earnings of 32-42 cents. Analysts were expecting $1.76 and 42 cents. The odds are good VSI will come in at the low end of their guidance and that is weighing on the stock.

Earnings August 9th.

They have another problem because only 7 stockholders own 50% of the stock. If one of those stockholders decides to stop the bleeding and cut their losses, there is not enough daily volume to sustain a major exit. That could push shares significantly lower.

Shares are approaching $10 and are already at a historic low. The outlook is grim and once that $10 level is broken we could see a sharp decline as funds race to exit before the $5 level where most funds can no longer hold the shares.

Sell short VSI shares, currently $11.45, initial stop loss $13.15.

Alternate position: Buy Aug $10 put, currently 60 cents, no initial stop loss.


Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 at the market open.


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Tick by Tick

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P inched higher to close at a new high but the Russell 2000 is only moving tick by tick. The Russell traded in negative territory throughout the day but found some bids late in the afternoon after the Dow and S&P begin to threaten new resistance levels. This is a big cap stealth rally and small caps are doing good just to remain positive.

The Dow closed just fractionally above 21,000 and the S&P inched up with a 6 point gain to 2,404 and a new high. The Nasdaq indexes both posted decent 25 point gains but are still short of new highs.

The positive response to the FOMC minutes could help lift the markets the rest of the week but with low volume it could remain lethargic unless we begin to see a lot of short covering.





Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


No Changes



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

BBRY - Blackberry - Company Profile

Comments:

No specific news. BlackBerry currently has more than 60 million QNX operating systems installed in late model cars and expects to license another 36 million in 2017. With U.S. auto rates around 18 million a year, that shows how BlackBerry has infiltrated the overseas markets as well. Shares were down slightly after an article in Forbes suggested Microsoft and Apple could compete for this marketplace in the years ahead.

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

Update 5/15/17: Blackberry is actually profiting from the WannaCry malware. The company pivoted to a software security firm a couple years ago and they offer security for both mobile and enterprise applications.

Update 5/16/17: Blackberry is working with at least two automakers on security software that would monitor the car's operating system and warn the driver if the system has been hacked. This is going to be very important in the future as self-driving cars become more plentiful. The system is currently being tested by Aston Martin and Range Rover. The virus software would cost drivers $10 a month. Blackberry software is already running in millions of cars. Shares exploded higher.

Update 5/17/17: Blackberry announced new mobile software to allow crisis managers, police forces, fleet managers, etc, to always know where their personnel are located. The AtHoc Account is an authorized solution for Federal government FedRAMP applications. The software merges inputs from managers, call center operators, data streams from HR and travel systems as well as self reporting by individuals.

Update 5/22/17: BBRY is exploding higher. I am not going to raise the stop loss because I think they have turned the corner and we could be looking at $20 in the future. $11.25 is two-year resistance and it closed just over that level today. Three-year resistance is $16. The next step up from there is $30. BlackBerry has completely changed its business model and is no longer a phone company. People are finally catching on and I am sure there are plenty of shorts left to cover. Now that a monster move has begun there will probably be a lot of price chasers as well.

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.



IWM - Russell 2000 ETF - ETF Profile

Comments:

Despite the new highs on the S&P, the Russell 2000 barely broke even. I am going to keep the stop loss tight.

Original Trade Description: May 17th.

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities. Description from iShares.com

The Russell 2000 has been moving sideways since early December and has tested both sides of its range multiple times. The spike to a new high at the end of April was sold when the cat fight started in Washington. Fund managers were concerned the tax reform package would be delayed.

Unfortunately, that happened and the political headlines turned deadly with the selling climax on Wednesday.

Now that a special prosecutor has been appointed many months will pass before there is any material news out of that office. For all practical purposes the press and the democrats have lost a rallying cry. Now they have to wait like the rest of us. The market should rebound.

However, there could be volatility on Thr/Fri as margin calls are covered and weekend event risk causes traders to take profits in a shaky market.

I am bringing back the IWM option trade we tried to put on in the middle of April but could not get an entry point. I am recommending we go long at the open on Thursday and hang on through the volatility.

Position 5/18/17:

Long IWM July $138 call @ $2.00, see portfolio graphic for stop loss.



STM - STMicroelectronics - Company Profile

Comments:

No specific news. Minor gain but still holding over support.

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 5/08/17: Long July $17.50 call @ 65 cents, no initial stop loss.

Position 5/18/17: Long STM shares @ $16.25, see portfolio graphic for stop loss.

Previously closed 5/17/17: Long STM shares @ $16.34, exit $16.25, -0.09 loss.



TWLO - Twilio Inc - ETF Profile

Comments:

No specific news. The company announced the new Teilio Proxy messaging service to allow text and voice communications between a customer and mobile worker while providing an additional level of privacy and security.

Original Trade Description: May 20th.

Twilio Inc. provides cloud communications platform that enables developers to build, scale, and operate communications within software applications through the cloud as a pay-as-you-go service in the United States and internationally. It offers programmable communications cloud software that enables developers to embed voice, messaging, video, and authentication capabilities into their applications through application programming interfaces. The company also provides use case products, such as a two-factor authentication solution. Twilio Inc. was founded in 2008 and is headquartered San Francisco, California. Company description from FinViz.com.

Twilio has a messaging application that is built in to dozens of apps you probably use every day. When tech startups try to decide how to engineer a solution they normally find that imbedding Twilio messaging is much simpler in the beginning. The thought process is that once the company is running and profitable they will go back and build their own platform. For most businesses that never happens and they end up paying for Twilio forever.

When they reported earnings on May 3rd, they said revenue growth would slow because Uber was finally taking that step of engineering their own messaging platform and would be phasing out Twilio. When a company reaches the size of Uber they can afford to build their own interface. Only a few companies ever make the switch. Other major customers on their network with no plans to change are Nordstrom, Airbnb, Amazon, Facebook, WhatsApp to name a few.

Uber accounts for 12% of Twilio revenue so the exit is painful. Pacific Crest downgraded the stock saying they had underestimated the risk from Uber. JP Morgan reiterated its overweight rating and $36 price target saying Twilio would continue riding Amazon's coattails to success with Amazon Web Services. Their price target is $33.

Shares fell after Twilio guided for an adjusted loss of 10-11 cents on revenue of $86.5 million. Analysts were expecting 8 cents and $87.8 million.

Last week CEO Jeff Lawson bought 100,000 shares at an average price of $23.43 ($2.34 million). Board member Jim McGeever, VP of Oracle's Netsuite unit, bought 10,000 shares at $23.19. They do not appear to be worried about the business slowing.

Earnings August 1st.

Shares are ticking higher and closed at a three week high on Friday.

Position 5/22/17:

Long TWLO shares @ $25.01, see portfolio graphic for stop loss.

Alternate: Long July $28 call @ $.75, see portfolio graphic for stop loss.



UCTT - Ultra Clean Holdings - ETF Profile

Comments:

No specific news. Nice sprint higher to close at a new high.

Original Trade Description: May 22nd.

Ultra Clean Holdings, Inc. designs, develops, prototypes, engineers, manufactures, and tests production tools, modules, and subsystems for the semiconductor capital equipment and equipment industry segments primarily in North America, Asia, and Europe. It offers precision robotic systems that are used when accurate controlled motion is required; gas delivery systems, which include one or more gas lines consisting of small diameter internally polished stainless steel tubing products, filters, mass flow controllers, regulators, pressure transducers and valves, component heaters, and an integrated electronic and/or pneumatic control system; and various industrial and automation production equipment products. The company also provides subsystems, such as wafer cleaning sub-systems; chemical delivery modules that deliver gases and reactive chemicals in a liquid or gaseous form from a centralized subsystem to the reaction chamber; frame assemblies, which are support structures fabricated from steel tubing or folded sheet metal; and top-plate assemblies. In addition, it offers liquid delivery systems; process modules, which are the subsystems of semiconductor manufacturing tools that process integrated circuits onto wafers; and other high level assemblies. The company primarily serves original equipment manufacturing customers in the semiconductor capital equipment, consumer, medical, energy, industrial, flat panel, and research industries. Company description from FinViz.com.

The company reported earnings of 47 cents that beat estimates for 42 cents. Revenue of $204.6 million also beat estimates for $192.1 million. They guided higher for the current quarter to earnings of 49 to 55 cents and revenue of $210 to $220 million.

Earnings July 26th.

The company said it was seeing "extraordinary demand" and they were ramping up production to meet this demand.

Shares had been moving up steadily and I wanted to add them as a play multiple times but kept waiting for a pullback. That happened last week with a 10% decline and now they are surging again. Any further gain from Monday's close will be a new high.

Poaition 5/23/17:

Long UCTT shares @ $22.60, see portfolio graphic for stop loss.

Alternate position:

Long July $25 call @ .59, see portfolio graphic for stop loss.



USO - US Oil Fund ETF - ETF Profile

Comments:

Minor decline from the 4-week high. OPEC meets on Thursday.

It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season.

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. Still fighting resistance at $9. Whiting is not showing any upside bias and I am recommending we close the position.

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.
Alternate: Long June $9 call @ 60 cents, see portfolio graphic for stop loss.



WTW - Weight Watchers - Company Profile

Comments:

The company is prepaying $75 million in Tranche B2 loans. New closing high.

Original Trade Description: May 13th.

Weight Watchers International, Inc. provides weight management services worldwide. The company operates in four segments: North America, United Kingdom, Continental Europe, and Other. It offers a range of products and services comprising nutritional, activity, behavioral, and lifestyle tools and approaches. The company also engages in the meetings business, which presents weight management programs, as well as allows members to support each other by sharing their experiences with other people experiencing similar weight management challenges. In addition, it offers various digital subscription products, including Weight Watchers OnlinePlus and a weight management companion for Weight Watchers meeting members to digitally manage the day-to-day aspects of their weight management plan, as well as provides interactive and personalized resources that allow users to follow weight management plan. Further, the company provides Personal Coaching, an online subscription product that offers one-on-one telephonic, e-mail, and text support and personalized planning from a Weight Watchers-certified coach, as well as offers access to other online tools. Additionally it offers various products, including bars, snacks, cookbooks, food, and restaurant guides with SmartPoints values, Weight Watchers magazines, SmartPoints calculators, and fitness kits, as well as third-party products, such as activity-tracking monitors. The company also licenses the Weight Watchers brand and other intellectual property in frozen foods, baked goods, and other consumer products, as well as endorses selected branded consumer products; and engages in publishing magazines, as well issues other publications, such as cookbooks, and food and restaurant guides with SmartPoints values. It offers products through its meeting and franchisee business, as well as online. Weight Watchers International, Inc. was founded in 1961. Company description from FinViz.com.

Weight Watchers posted a Q1 profit of 16 cents compared to estimates for a 4-cent loss. Revenue of $329.1 million rose 7.2% and beat estimates for $323 million.

Subscribers rose 16% to 3.6 million. Subscribers have now risen for 5 straight quarters. This is the first time since 2011 that they gained subscribers for a full year. The company raised guidance for the full year to $1.40-$1.50. Analysts were expecting $1.27. They said they were off to a strong start thanks to the Oprah Effect. The TV personality joined the brand late in 2016.

Earnings August 1st.

The stock has been a rocket since Oprah began pitching for the brand but it is showing no signs of fading. The post earnings spike to $25 saw some post earnings depression but shares are already moving back to that post earnings level. I believe female investors are betting on the Oprah Effect to continue driving profits. Even at this level the stock is not overly expensive with a PE of 17.

I am recommending it because it has refused to decline in a weak market. The risk is less with the option position.

Position 5/15/17:

Long WTW shares @ $24.48, see portfolio graphic for stop loss.
Alternate: Long July $26 call @ 90 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

ERA - Era Group - Company Profile

Comments:

No specific news. Shares are moving slowly lower. Very slowly!

Original Trade Description: May 8th.

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:

Minor decline but a new historic closing low.

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.





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