Option Investor
Newsletter

Daily Newsletter, Wednesday, 5/31/2017

Table of Contents

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

Market Wrap

Dip Buyers Continue to Rescue the Market

by Keene Little

Click here to email Keene Little
Following a quick pop up this morning the indexes spiked down as strong sell programs hit the tape. But as is usual for this market, the selling stopped after the first 30 minutes and the dipsters arrived to mop up. Buying the dip continues to work but there is growing risk it might not soon.

Today's Market Stats

The market got hit with some strong sell programs right after a small gap up started the day. But the selling stopped after the first 30 minutes and the dipsters arrived on cue to start their buying again. The indexes recovered a good portion of the morning selling and they closed with only marginal loses. Interestingly, the techs look vulnerable to a reversal back down while the RUT looks like it could start a bigger bounce, which would reverse the pattern we've seen between the two.

The morning selloff was blamed on some economic numbers but those pre-market reports saw very little reaction in the futures. It wasn't until the cash market opened that the selling hit. Was it a shot across the bow of the USS Bullship or just a quick shot of selling to clear some weak longs before resuming the rally? Answer that question correctly and you'll be able to position yourself for the next move.

One of the issues we're soon going to be dealing with is higher volatility from big trades going off in the ETFs, which now account for over $2T worth of U.S. stocks. And more than a quarter of these funds are traded by the quant hedge funds, otherwise known for their computerized algorithm trading. There's little to no concern about individual stocks and they're trading only on technical/algo signals

The computer program trading is pretty much on autopilot where a human is not even involved and the buying and selling can quickly get out of control. The programs are designed to stop trading if things get out of whack and that could then cause the problem with lack of liquidity in the market. That's when flash crashes have occurred in the past.

Because everyone is "investing" in the same ETFs, especially the big ones like SPY to essentially be invested in the S&P 500 index, we could see huge price swings if everyone starts to react the same way and panic in and out of funds en masse. Selling will quickly get out of control since fear is a stronger emotion than greed and when everyone wants out there could be times when there are virtually no buyers. The computers will have shut down trading after initially joining in the selling to clear their inventory.

Many are now investing in ETFs to avoid fees with mutual funds, who are also heavily investing in ETFs rather than individual stocks since the fund manager feels safer that way instead of being responsible for picking the wrong stocks. Hedge funds have much higher fees and haven't had stellar performance, which is driving more investors into passive investing through ETFs. This makes for a very different market than we had not many years ago. I think it makes it a much riskier market, especially when the selling begins. And that makes the question about this morning's selling even more relevant.

Before getting to my regular charts I wanted to show some comparative charts as a way to highlight the weakness under the surface of this market. At the moment we're seeing all dips bought and a constant underlying bid to the market. That has many thinking we must be in a new paradigm with a constant stream of new money coming into the market. Whether it's out-of-thin-air Fed money, overseas money, Mom and Pop money through ETFs, corporate buybacks, you name it, there seems to be an endless stream of money into the market. The cumulative advance-decline line continues to show good liquidity coming into the market. So it's not unreasonable to think this market has much higher to go.

What we can't know is what will cause the money spigot that's pouring money into the market to turn off. Usually it's an event that jolts players awake and ask the question, "Is my money safe in the stock market?" When enough people become concerned about the market we'll see a reversal but not before. A hint of investors becoming concerned start to show up in some of the market breadth numbers and comparative (relative strength) charts.

The first group of charts below shows market breadth with new 52-week highs in the middle and the number of advancing less declining stocks in the bottom chart. SPX is at the top. Notice the negative divergence between the new highs for SPX but declining highs for the number of stocks hitting their own 52-week highs and the slight deterioration of the number of advancing stocks. In other words the rally in the broader averages is happening on the backs of fewer and fewer stocks.


S&P 500 vs. New 52-week highs and Advancing-Declining stocks, Daily charts

Some of the explanation for the deterioration in the market breadth numbers above could be the fact that more investors are simply going with the passive investment approach by simply investing in ETFs, such as SPY for SPX, instead of picking individual stocks. Picking individual stocks is what mutual funds used to do but even they now do a lot of passive investing.

Buying just the SPY as an example creates buying in just the 500 stocks in the S&P 500, whether or not each stock in the S&P 500 deserves to be bought. The rest of the stocks outside the S&P 500 essentially get ignored. It's only speculation as to whether or not this is the primary cause of the deterioration in the market internals but with a strong bearish divergence on the daily and weekly charts for SPX I'd say it's still providing us fair warning.

We have a very different market than even what we had at the start of this century. All the program trading and ETF trading, many will argue, leave us extremely vulnerable to large volatile moves as all 500 stocks in the S&P 500 get bought and sold together, en masse. Panic moves, in either direction, could cause massive price swings and that would result in even fewer investors desiring to be in the stock market. This would be especially true for the baby boomer group who are now more interested in protecting their capital.

Needless to say, it's going to be interesting moving forward when the market finally starts to correct in a bigger way.

Back to the comparative charts, the relative strength (RS) of the Transports (TRAN) vs. Utilities (UTY) is shown in green and the RS of Consumer Discretionary (XLY) vs. Consumer Staples (XLP) is shown in red. SPX is again in the top chart. The bottom chart shows the RS each of BKX and RUT vs. SPX.

I like to watch the Transports as a sign of strength (or weakness) of the economy while the Utilities is more of a defensive sector (where money goes for safer dividends rather than growth). When TRAN starts to underperform UTY it's a sign of a move into more of a defensive posture, which does not support an ongoing bull market. Note that the RS of TRAN/UTY is threatening to break a support level that it has held since March 24th.

Consumer discretionary (XLY) spending will show a stronger RS vs. consumer staples (XLP) when consumers are feeling better about their financial position and the economy. When XLY starts to underperform XLP it shows consumers are becoming more cautious but still obviously buy toothpaste, toilet paper, etc. They forego big TVs and other toys. Up until the high on May 2nd the RS line has pulled back and is now threatening to break its uptrend line from March 21st. We're on the cusp with both RS lines of knowing whether or not the present bull market will be in more trouble.

S&P 500 vs. Relative Strength of Transports vs. Utilities and Consumer Discretionary vs. Consumer Staples, Daily charts

Now onto the regular charts, I'll start with the Nasdaq again since the techs have been stronger than the other indexes. When they reverse back down we'll have a stronger signal to pay attention to. Until then, with their outperformance to the upside, the bulls remain in control. However, there are some early signs that the bulls should be very careful here.


Nasdaq Composite index, COMPQ, Weekly chart

The Nasdaq has worked its way up toward a price projection at 6263 (it's still 40 points away with this morning's high at 6222), which is where an extended 5th wave in the rally from February 2016 would equal the 1st through 3rd waves (one of the common relationships when the 5th wave extends). This projection crosses the trend line along the highs from April 2016 - March 1, 2017 next week.

The 2016-2017 trend line is currently near 6240 and was last tested with last Thursday's high and remains the upside target for now (if the bulls can keep up their buying pressure). But as I'll show on the other two Nasdaq charts further below, now's a good time for bulls to play more defense rather than hope for more highs.


Nasdaq Composite index, COMPQ, Daily chart

The 2016-2017 trend line is the purple line on the daily chart below. It was tested on May 16th and again on May 25th. This morning's quick gap up to 6222 was another test and was quickly followed by a strong spike down. The bearish divergences on MACD and RSI suggest the rally will likely complete sooner rather than later. The 5th wave of the move up from November is showing bearish divergence against the 3rd wave (the March 1st high).

The 5th wave of the leg up from March 27th is also showing bearish divergence against the 3rd wave (the May 16th high), which is more easily seen on RSI. This all helps confirm the wave count and it suggests this rally is now running on fumes and might have topped with this morning's quick high. Today's hanging man doji at resistance is reason for caution as well. There's a little more upside potential but the wave count, with the 5th of the 5th wave in the rally from November completing, suggests upside potential is now dwarfed by downside risk.

Key Levels for NDX:
- bullish above 6240
- bearish below 5996


Nasdaq Composite index, COMPQ, 30-min chart

Moving in closer to look at the final little 5th wave, which is the leg up from May 18th, the rally made it up to the 127% extension of the previous decline (May 16-18), at 6217, which is a common reversal Fib to watch. This morning's high came within about 4 points of its trend line along the highs from March 21 - May 1 and then spiked down.

Notice the bottom on May 18th -- a gap down was quickly followed by a strong spike back up. The spike up completed in the first hour and then pulled back before continuing higher. This morning's gap up was followed by a spike back down and then a bounce. As below, so above? The bounce off this morning's low is currently a 3-wave move and could therefore be just an a-b-c correction to this morning's decline. Any further selling Thursday morning would turn the short-term pattern further bearish and more strongly suggest the rally from November has completed.

Another reason why the techs might be topping here is because I see the potential loss of support from the semiconductors. The SOX has now achieved a price target and is up against trendline resistance.


Semiconductor index, SOX, Weekly chart

The SOX has now made it up to a price projection zone at 1092-1106. The higher level is the 78.6% retracement of its 2000-2002 decline and the lower number is where the 5th wave of the leg up from February 2016 equals the 1st wave. This morning's high was 1101.76, about 5 points shy of the higher target.

A trend line along the highs from March-October 2016 was tagged with this morning's high and it's slightly above its broken uptrend line from June-November 2016, currently near this morning's low at 1086. The bulls need to push above this morning's high whereas the bears want to see this morning's low broken. Where the SOX goes from here will likely lead the tech indexes.


S&P 500, SPX, Daily chart

SPX pulled back to support this morning near its March 1st high at 2401 and its May 9th high near 2404. This level was resistance in May until the gap up over it last Thursday. That gap was closed with this morning's drop down to 2403.59 and with support holding it's looking like SPX will press higher. But like the Nasdaq, the bounce off this morning's quick low is just a 3-wave bounce so far and nearly accomplished two equal legs up at 2412.43 with this afternoon's high at 2412.31.

A drop back down Thursday morning would be potentially bearish, especially if the 2401-2404 support level breaks. However, as long as support holds there remains upside potential to the price projection at 2434, which is where the move up from March 27th would achieve two equal legs up (to complete an A-B-C move for the 5th wave of the rally from January/February 2016, which is a rising wedge pattern).

Key Levels for SPX:
- bullish above 2406
- bearish below 2352


Dow Industrials, INDU, Daily chart

The Dow's spike down this morning had it breaking back down below its downtrend line from March 1 - April 26 but then recovered back to the line for the close. Whew, almost lost it there. This is the trend line the Dow gapped up over last Thursday so it's important for bulls to hold the line. However, today's decline has the Dow back below its uptrend line from November 4 - April 19, now nearing this morning's high at 21051. This morning's low found support at the 20-dma, at 20937, and that's probably a more important level for the bulls to defend.

There's upside potential to 21211 where it would achieve two equal legs up from March 27th and then much higher potential if the bulls can break above that level. But with the waning momentum it's looking doubtful that the bulls can accomplish much, if anything, more to the upside.

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


Russell-2000, RUT, Daily chart

The RUT had one of the stronger bounces off this morning's low, which is a bit of a change in character for the index that's been running weak compared to the others. With this morning's low near 1355 the RUT tested its uptrend line from March 22 - May 18 and almost made it down to its uptrend line from February-November 2016, currently near 1353.

The resulting candlestick today is a bullish hammer on support and if it rallies on Thursday we'd have at least a short-term bullish reversal candlestick pattern. The challenge for the bulls will be its broken 20- and 50-dma's, currently near 1382 and 1378, resp. Just above those is its downtrend line from April 26 - May 25, currently near 1385. That gives the bears a 1378-1385 zone of resistance to defend.

Key Levels for RUT:
- bullish above 1392
- bearish below 1347


10-year Yield, TNX, Daily chart

On May 17th TNX broke support at its uptrend line from July-September 2016, tried to recover last week but then sold off from last Wednesday's high, leaving a back-test and bearish kiss goodbye. It's now about to test price-level support at 2.19, which is the bottom of its gap up on November 14, 2016 and then back-tested twice on April 18th and May 18th.

Normally I'd say the chances of another back-tested holding is slim but with the 200-dma coming up to the same level, currently near 2.17, there's likely to be at least a bounce off 2.17-2.19 support. It would obviously be more bearish below 2.17.

The weakness in TNX (rallying in bonds) has been another warning sign for the stock market since lower yields reflects the bond market's concern about economic growth and slowing inflation. But it would obviously be a boost for the stock market if TNX can hold support and launch another rally. The oscillators are even hinting of the possibility.


KBW Bank index, BKX, Daily chart

The banks were particularly weak today, continuing their relative weakness vs. SPX since December. Today BKX dropped slightly back below its trend line along the highs from April 2010 - July 2015, currently near 88.90, but then managed to close on the line. It did the same in mid-April but then bounced to a lower high on May 4th vs. its March 1st high. It held the line on the next pullback into the May 17th low and is now again testing the line. Only slightly lower is the neckline of a possible H&S topping pattern (left shoulder in December, head on March 1st, right shoulder high on May 4th), currently near 86.80.

Between the trend line along the highs and the H&S neckline BKX has a 86.80-88.90 support zone, which should produce at least a bounce. But a drop below 86.80, and especially below its 200-dma (rising and currently at 85.67), would suggest a strong selloff to follow. The first downside target would be the H&S price projection near 75.25. Not until BKX can break its downtrend line from March 1st, currently near 91.40 (above its 20- and 50-dma's), would I start to think something bullish about the banks.


U.S. Dollar contract, DX, Daily chart

The US$ consolidated off its May 22nd low and now looks ready for another leg down, which could take the dollar down to the bottom of its parallel down-channel from January, currently near 96. I think it will work its way down to a price projection at 94.79 for the 3rd wave (or c-wave) in the decline from January, where it would equal 162% of the 1st wave down but not likely in a straight line.


Gold continuous contract, GC, Daily chart

With the dollar sinking lower it's helping gold bounce higher but gold is now approaching its downtrend line from September 2011 - July 2016, currently near 1280. This is an important trend line, which last stopped the rally into the April 17th high, so the bulls want to see gold above 1280. The bearish interpretation of the pattern says resistance will hold and we'll soon see another leg down for gold. We should get our answer soon.


Oil continuous contract, CL, Daily chart

Oil has been doing so much chopping up and down that I don't anyone has a strong clue about where oil is headed next. This morning's decline had oil dropping below its uptrend line from August-November 2016 but it then recovered with a spike back up off the midday low. It was also able to save itself from a close below its 20-dma at 48.57.

If oil rallies above last Thursday's high at 52 I think we could see a strong rally but first it would have to get through its downtrend line from February-April, near 52.40, and then its longer-term downtrend line from May 2015 - January 2017, near 53.40. But if the selling continues and oil drops below this morning's low at 47.73 it would be a break below multiple support lines and could lead to much stronger selling (down to 40 at a minimum).


Economic reports

Thursday morning is full of economic reports, the most important of which will be the ADP report, which is expected to be 180K and near what it was for April. Some additional labor numbers are not expected to change much either and as long as there are no nasty surprises it will keep the Fed on course to raise rates again in June.

In the morning we'll also get the results of construction spending and the ISM Index, neither of which is expected to have changed much from previous months. Friday morning in the pre-market session we'll get the NFP reports, which are expected to show a small decline from April.


Conclusion

The bull market rally is by no means dead yet and with a constant big under the market, along with the dip buyers, we could certainly see the market float higher for a long time. Some believe we need to see a melt-up, similar to the tail end of the rally into the 2000 high, before we should even think about looking for a top to this rally.

But from at least a short-term perspective I think we're close to, if not at, a market high. The pattern for the Nasdaq shows a wave count, price projections and trend lines that suggest it's very close to finishing the rally from November, which would mean at least a larger pullback correction. It's possible the techs put in their highs with this morning's quick pop higher but the blue chips support the idea for at least one more push higher. Even the RUT perked up a little today.

We have no confirming signals of a top and while there are plenty of warning signs, they aren't market timing signals. Stick with the bulls but only very carefully and with relatively tight stops. My concern is that we could see a big gap down to start the decline and many tight stops will be gapped over. Lightly positioned on the long side and mostly in cash is my recommendation for now.

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

Keene H. Little, CMT


New Plays

Energy Crash

by Jim Brown

Click here to email Jim Brown
Editor's Note

The current drop in energy stocks is temporary. Events already in motion will end the decline. There is a market adage paraphrased by Warren Buffett that says, "Be fearful when others are greedy and be greedy when others are fearful."



NEW BULLISH Plays

FRAC - Keane Group - ETF Profile

Keane Group, Inc. provides full-service completions that include hydraulic fracturing, wireline, coiled tubing, and nitrogen units. It also offers drilling and well construction services that include top hole air rig packages and cementing. The company was founded in 1973 and is based in Houston, Texas. Company description from FinViz.com.

Investors are fleeing energy stocks and analysts are talking about $40 oil. This is ridiculous. All the major players, EIA, IEA, OPEC, Wood MacKenzie, etc all believe global inventory levels are declining by 700,000 bpd thanks to the OPEC production cuts. There are challenges where production is increasing. Libya is ramping up production after years of dormancy because of the civil war. The U.S. is ramping up production we well. These facts are constantly quoted by the bears. What they do not tell you is that global demand is expected to increase between 1.2 and 1.4 million bpd in 2017. With the summer driving season now underway, that demand will begin to surge. Inventory levels in the U.S. have declined -19 million barrels over the last 7 weeks. Now that driving season is here they will begin to decline at a faster rate.

In order for U.S. production to increase there needs to be an increase in fracking capacity. Much of that capacity was cold stacked in 2016 after the oil crash. Today there is not enough capacity and prices are surging.

Keane Group is an oil field service company that just came public in January. The dual oil crashes in March and May, crushed the stock back from $23 to $12. When they reported earnings in early May they were reactivating fracking capacity at a frantic pace. They went from 15 operating fleets to 19 fleets over the last quarter and are still in the progress of reactivating the rest.

In late May they announced the acquisition of RockPile Energy, another oilfield service company and fracking operator. The acquisition will increase Keane's fleet of frackers by 26% and it will be one of the largest and most modern pressure pumping fleets in North America. They will have about 1.2 million hydraulic fracturing horsepower available.

The evolution of hydraulic fracturing in the U.S. over the last three years has been remarkable. The horizontal laterals on the wells are longer with most now in the range of 10,000 feet. The amount of sand and chemicals forced into the wells have increase by a factor of four or more, which means more horsepower, bigger sand capability and better technology. The frackers are going to be in high demand for years to come because producers have figured out how to produce oil and be profitable under $50.

Keane's shares have declined from the IPO price but over the last month they have been rising while all the other energy stocks have been declining. This is proof that frackers are in high demand and investors are understanding the production curve.

Expected earnings August 1st.

Weekly inventories are due out on Thursday morning. If there is another big decline the oil price meltdown could end as quickly as it began.

Because this is a new stock, the option spreads are wide and dangerous. If FRAC performs as expected, we will be ok. If not there could be a substantial penalty in stopping out of an option position. For that reason the alternative option position will not have a stop loss.

Buy FRAC shares, currently $15.38, initial stop loss $13.65.
Alternate position: Buy July $17.50 call, currently 50 cents. No 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

Encouraged

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 fell -17 points at the open but recovered to close flat. That is encouraging. This suggests the decline over the last week has been some sort of month end adjustment scenario. The market volume today was huge at 8.0 billion and all the indexes recovered to post only minimal losses. The Russell had the best recovery of them all.

Unfortunately, with the first list of stocks being kicked out of the Russell due out on the 9th, I am not overly optimistic that the index will continue rebounding. I would certainly be appreciative but I am not counting on it. Once that list is posted the general public can get in on the act by shorting everything on the list.





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


TWLO - Twilio
The long stock position was stopped at $23.85.

UCTT - Ultra Clean
The long position was stopped at $22.75.



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. Only a 4 cent decline. I think shares have found support.

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.

Update 5/24/17: 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.

Update 5/27/17: Blackberry and Qualcomm reached a final agreement on the arbitration award on overpaid royalties. The final award will be $940 million and wil be paid to Blackberry on May 31st. Qualcomm will deduct some royalties due from 2016 and Q1-2017 but Blackberry will receive most of the money. That includes $125 million in interest and attorney's fees. Qualcomm had originally agreed to cap certain royalties under their original licensing deal years ago but then demanded Blackberry pay anyway. In this case Blackberry prevailed.

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.



KTOS - Kratos Defense - ETF Profile

Comments:

No specific news. Shares rebounded with the sector despite the Russell weakness.

Original Trade Description: May 24th.

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.

China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.

Kratos expects to build $30 to $40 million in unmanned target drones for the Navy in the 2017 budget. That is per batch of BQM-177 drones and there is the potential for multiple batches.

Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.

Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense depart spending.

I am not recommending a stock position given the sharp gains already.

Position 5/30/17:

Long August $12.50 call @ 59 cents, see portfolio graphic for stop loss.



STM - STMicroelectronics - Company Profile

Comments:

No specific news. Minor decline and 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. Shares declined with the small caps for the third day and finally hit our stop loss at $23.85. The long call position is still open and will move to the lottery section.

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:

Closed 5/31/17: Long TWLO shares @ $25.01, exit $23.85, -1.10 loss.

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



UCTT - Ultra Clean Holdings - ETF Profile

Comments:

No specific news. Shares crashed with the market at the open to stop us out at $22.75 for a minor gain. This went from a nice gain two days ago to only a fractional gain thanks to the drop in the small cap stocks.

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:

Closed 5/31/17: Long UCTT shares @ $22.60, exit $22.75, +.24 gain.

Alternate position:

Closed 5/31/17: Long July $25 call @ .59, exit .80, +.26 gain.



WTW - Weight Watchers - Company Profile

Comments:

No specific news. Only a minor gain in a weak market.

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. New 7-month low close. Support is $7.25.

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.



FOSL - Fossil Group - Company Profile

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, MISFIT, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, CHAPS, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry 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 December 31, 2016, it owned and operated 94 retail stores and 129 outlet stores located in the United States, as well as 230 retail stores and 132 outlet stores internationally. Company description from FinViz.com.

Fossil reported an adjusted loss of 35 cents compared to estimates for a loss of 21 cents. Revenue of $581.8 million missed estimates for $596.5 million. For Q2 they guided for a loss of 23 to 40 cents.

Analyst expectations for Q2 have declined from a loss of 6 cents to a loss of 25 cents and has declined three times in the last couple of weeks. For the full year analysts are now expecting earnings of 90 cents, down from $1.11 a month ago.

Earnings August 8th.

Fossil is struggling despite the decent revenue. Costs and marketing are too high and they are losing market share to the rapidly expanding number of brands.

Shares closed at an 8-year low on Thursday and under $11.30 would be a 14 year low. I believe Fossil is going to single digits with $6 the likely target.

Position 5/26/17:

Short FOSL shares @ $11.78, see portfolio graphic for stop loss.

Alternate position:
Long July $11 put @ 55 cents, see portfolio graphic for stop loss.



VSI - Vitamin Shoppe - ETF Profile

Comments:

No specific news. Still holding at historic lows.

Original Trade Description: May 24th.

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.

Position 5/25/17:

Short VSI shares @ $11.55, see portfolio graphic for stop loss.

Alternate position:
Long Aug $10 put @ 49 cents, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Minor gain on the market drop.

Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.

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.





If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now