Option Investor
Newsletter

Daily Newsletter, Wednesday, 6/7/2017

Table of Contents

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

Market Wrap

Waiting Game

by Keene Little

Click here to email Keene Little
The market has been consolidating since last Friday as it waits to get through some potentially market-moving news this week. The consolidation looks like a bullish continuation pattern but a new rally might not get started until the market shakes out a few bulls.

Today's Market Stats

The market's consolidation has presumably been because it's waiting to get through Thursday when we'll hear ex-FBI Director Comey's testimony to Congress and learn what the ECB's next move will be. Thursday night we'll get the results of the UK election so Thursday/Friday could see the market break out/down from this week's consolidation.

Very little has happened in the market this week and economic reports have been quiet as well. There's been very little geopolitically as well and the consequence has been a market that doesn't know what to do next. The anticipation of Comey's testimony has become the latest reality-TV show and all 3 major news networks are going to be providing live coverage. I'm sure they'll all be offering unbiased coverage (cough).

Some Washington D.C. bars will open early to host "viewing parties," which shows us the whole event has captured the attention of people and obviously the market as well. The whole thing has become a staged show by the Democrats (and the left leaning major media) in an effort to further discredit Trump. Whether he did something illegal or not is now not the point. And would have Hillary and Bill in office been any better when it comes to lies, shenanigans and more lies? The whole system is about as corrupt as it can get without blatant violations of public trust (although I think we're there).

At any rate, let the show begin so that we can get our market back. How it will react is anyone's guess so all we can do is see if the charts should have us leaning one way vs. the other.


S&P 500, SPX, Weekly chart

From a weekly perspective I see upside potential for SPX around 2500, which I know a lot of analysts are looking for as well. For a 5-wave move up from 2009 the 5th wave would equal the 1st wave near 2490. This 5th wave, which is the leg up from January 2016, has formed a rising wedge pattern (common for a market that has gone too far and starts to peter out in the 5th wave) and the 5th of this 5th wave would be 62% of the 1st wave near 2507. There's another short-term projection for the 5th of the 5th wave that points to 2485. So we have confluence between 2485-2507 for a projection for a final high. Note also how the top of the rising wedge pattern is near 2500 next week. Now all we need to see is another rally leg to complete this.


S&P 500, SPX, Daily chart

The move up from March 27th is a choppy move, which fits for the move up inside the rising wedge pattern from January 2016. An A-B-C move up from March 27th could complete with just a minor new high (to give us a small 5-wave move up from May 18th). But a larger pullback before heading higher is very possible and that would mean more whippy price action into July. I see the potential for a quick high (positive reaction to Comey's testimony?) and then a hard reversal back down or a strong drop down, possibly to the 2340-2350 area, before reversing back up. Be careful with your positions over the next few days and maybe weeks.

Key Levels for SPX:
- bullish above 2435
- bearish below 2400


S&P 500, SPX, 60-min chart

The 60-min chart shows a depiction (in green) to a minor new high to complete a 5-wave move up from May 18th. The May 25-31 and June 2-7 consolidations are exactly the same amount of time and therefore it could be ready for another thrust higher, presumably from a positive reaction to Comey. But the 3rd wave of the leg up from May 18th was a little shy of 62% of the 1st wave and if the 5th wave achieves only 62% of the 3rd wave we'll see a rally to only 2447, or lower, before reversing back down. This short-term pattern suggests the weekly projection to the 2500 area might not happen. Or it might not happen until we get a large pullback (2340-2350) first.


Dow Industrials, INDU, Daily chart

The Dow has the same pattern as SPX and the same short-term and longer-term possibilities. If we do get a strong rally in the next week or so I see the potential for the Dow to reach 21600 by mid-June, which is where it would run into its trend line along the highs from May 2011 - December 2014.

But short term, if we get just a quick pop higher, we could see the rally finish around 21300 and then reverse back down. If we get a negative reaction to news and the Dow drops below its May 31st low at 20942 we could see a sharp drop down to its April 19th low near 20380 before setting up the next rally leg (a sharp decline would look like the completion of a larger pullback pattern and NOT the start of a more serious decline).

Key Levels for DOW:
- bullish above 21,212
- bearish below 20,942


Nasdaq-100, NDX, Daily chart

NDX has been consolidating just below its trend line along the highs from November 2014 - July 2015, currently near 5910. This is just above a price projection at 5906 where the move up from April 13th would achieve two equal legs up (for a possible a-b-c move). It's also up against the top of a parallel up-channel for its rally from March, the top of which crosses the 2014-2015 trend line near 5915 in the next few days. There's strong resistance just above but it also means a rally much above 5925 would be a bullish breakout.

Key Levels for NDX:
- bullish above 5925
- bearish below 5762


Russell-2000, RUT, Daily chart

The RUT has been a choppy mess since December and has been running much weaker than the big cap indexes. With all the 3-wave moves and reversals it's near impossible to figure out whether it's going to head higher or lower from here. It's simply not a helpful index to follow at the moment. If it does head higher we could see another test of the trend line along the highs from June 2007 - June 2015, now near 1435. This is the top of a possible large megaphone topping pattern so I wouldn't trust a move up to 1435 for a longer-term hold position.

Obviously a sustained move north of 1435 would be a bullish breakout. If we get a downside reaction to news we could see the RUT drop down to price-level support near 1347 and maybe down to the trend line along the lows since January (the bottom of a smaller megaphone pattern since December, which is at the end of the larger megaphone pattern).

Key Levels for RUT:
- bullish above 1400
- bearish below 1300

We have had a large difference this year between the small and large cap stocks, with SPX up +8.5% this year while the RUT is up only +2.8%. Some of the outperformance in the large caps has to do with the strength in foreign markets, which is when the large-cap multinationals tend to do better. The small caps reflect more of our local economy and smaller companies have been struggling more. So which index is our Goldilocks index that's not too strong and not too weak? Enter the midcap stocks, which I've now added to the Market Stats in the table at the top of the wrap.


S&P Midcap 400 index, MID, Daily chart

If the midcap index is a better reflector of the stock market I'd say the bulls are in good shape for months to come but not before we see a pullback, as depicted in green on its chart below. The sideways triangle fits well as the 4th wave correction in the rally from January 2016. A 4th wave leads to the 5th wave (up in this case) to complete the move, which is why sideways triangles (typical for 4th waves) tend to point to the final move. The bottom of the triangle and the uptrend line from January-November 2016, near 1680, gives us a downside target for now.

The wave count inside a triangle is typically a 5-wave move, labeled a-b-c-d-e and we're now waiting for a pullback for wave-e. Back down to the bottom of the triangle would be a very good setup to get long for the next rally. The 3rd wave of the leg up from January 2016 was a little more than 62% of the 1st wave (typical inside a rising wedge pattern) and if the 5th wave achieves a little more than 62% of the 3rd wave we get an upside projection around 1850-1875.

A projection from 1680, the presumed low for the completion of the 4th wave, to 1875 would be about a +12% rally. This is of course speculation at this time but it will be a pattern that I'll continue to watch since it could provide us with a good idea about what the market will do next.

Key Levels for MID:
- bullish above 1761
- bearish below 1673

I've been watching the bond market closely since December as yields pulled back their highs back then. Most people feel the bond market has bottomed and that we're now in a new bull market for bonds. I still hold onto my opinion that the bond's bull market has not ended yet and that we'll probably see the 10-year below 1% before the bull market is finished. This is part technical and part fundamental, with the fundamental part having to do with a deflationary cycle that I believe we're still in.

We currently have a large credit bubble and when (not if) it pops it will create havoc in the financial system (again). Credit contraction is deflationary and I see no way to avoid what's coming. Stocks will tank during this time and the new TINA (there is no alternative) investment will be bonds, not stocks. But obviously I could be wrong (it happened once back in 1982) and that's why I'm watching the bond pattern carefully.


U.S. Treasury 30-year Bond, ZB emini contract, Monthly chart

The big picture is offered with the monthly chart of ZB, which is the emini futures contract for the 30-year Bond. There is more history with the 30-year than the 10-year so that's why I use it. ZB is unarguably in an uptrend that started from the low in 1981. It's been inside a parallel up-channel following the 1985 peak and suggesting bonds have peaked is really nothing more than top picking (I've been known to try that a time or two).

ZB dropped below the midline of its up-channel back in November when yields spiked up following Trump's election. It poked below its 50-month MA twice, in December and March, but is currently holding above this MA. If it gets back above its midline, currently near 157 (about 2-1/2 handles above its current price), it will remain bullish. If it drops below its 50-month MA we could then see a drop at least to the bottom of its up-channel, currently near 136. That would obviously spike yields higher. RSI has curled back up from above the 40 level, which it has consistently done while in its up-channel. From a monthly basis I don't see a reason (yet) to turn bearish bonds.


10-year Yield, TNX, Daily chart

The 10-year yield, TNX, has been chopping its way lower since December and that could be an indication that it's just a corrective pullback that will be followed by another climb higher. But so far TNX has been acting more bearishly than bullishly (coinciding with the opposite I'm seeing on the ZB chart since December).

As I've mentioned in previous market wraps, the double top between December and March, with the valley in between, gave us a trading range as a downside projection once TNX broke support near 2.321. The downside projection is near 2.00, which would easily have it closing its November 14th gap, at 2.117, but it would still have more work to do to reach its November 9th gap at 1.862. There's one wave count idea (double zigzag for the pullback from December) that points to 1.98 for two equal legs down. Therefore I think a break below 1.98 would be more bearish than what we've seen so far.

The bearish price action I've seen so far is breaks of support and then only back-tests before proceeding lower. The latest was a break of its 200-dma last Friday and then a quick bounce back up to it on Monday before dropping away to a new low. It was also a break of price-level support (the top of its November 14th gap and the April-May lows) near 2.19, which was also back-tested on Monday. Today's bounce up to 2.183 is another back-test of its broken 200-dma at 2.184.

Note also that the double top was above the downtrend line from June 2007 - December 2013 but then it dropped back below the trend line when it broke its uptrend line from July-September 2016. Again, bearish price action. We'll have to see if today's back-test can get some upside follow through, otherwise a continuation lower would continue to target the 2.00 projection.


KBW Bank index, BKX, Daily chart

BKX continues to leave us guessing about its next move. It remains above the neckline of a possible H&S top, which is the trend line along the lows since January and currently near 86.80. But it also remains below its crossing 20- and 50-dma's, near 90.50 and 90.95, and its downtrend line from March, currently near 90.75. A sustained breakout above 91 would be at least short-term bullish whereas a breakdown below 86.70 would likely see a decline to price-level support at its July 2015 high at 80.87 and potentially down to its H&S price objective at 75.25.


U.S. Dollar contract, DX, Daily chart

The US$ continues to work its way lower but it's starting to show minor bullish divergence against its May 23rd low. The bottom of its down-channel from January is currently near 95.75 and a downtrend line along the lows from March-May is near 96 so watch for possible support between those two levels. Lower than 95.50 would likely see a drop down to 94.79 where the 3rd wave of the decline from January would be 162% of the 1st wave down. Once any of these levels are achieved and we then get a bigger bounce/consolidation we'll get some more clues about whether or not we should expect lower.


Gold continuous contract, GC, Daily chart

On Tuesday gold made it up to its downtrend line from September 2011 - July 2016 (log price scale, whereas the trend line is lower when using the arithmetic price scale, which is usually not as accurate when looking at large price swings over a longer period of time). At the same time it achieved two equal legs up for the rally from May 9th at 1296.80 (yesterday's high was 1298.80 and it closed at 1296.60). Today it pulled back and we're left to wonder if we will now see a reversal back down.

Gold bulls need to see gold rally above 1300, although watch carefully if it reaches a price projection at 1317.20, which is where it will achieve two equal legs up from March 10th. The overall pattern of the bounce off the December low has it looking like it will all get retraced but I could argue for a little higher before it does that. A move up to the top of an up-channel for its rally from December would mean we'll see close to 1350 before potentially moving back down.


Oil continuous contract, CL, Daily chart

Oil has been in a whippy pattern for a long time and it's anyone's guess which way this will resolve. I think oil is in the process of rolling over and will start to accelerate lower but that opinion and $3.00 will get a decent cup of coffee. For now the key levels to watch are the May 5th low at 43.76 and the May 25th high at 52. Mind the chop in between.


Economic reports

There are no market-moving economic reports the rest of the week and other than maybe being moved by the ECB rate decision and/or the UK election results (late Thursday night), the biggest market-moving event will be Comey's Congressional testimony on Thursday. That could cause some volatile price action on Thursday.


Conclusion

The market has been on hold since last Friday and the presumed reason is that it's waiting to get through the Comey Congressional testimony on Thursday. If he drops a bombshell on the Trump Tower, indicating Trump tried to thwart an FBI investigation into Flynn and other accusations about ties to Russia, we can expect the market to tank. It would put a nail in the coffin of expectations for what the market perceives as positive changes (tax rules, business rules, infrastructure spending, etc.). The rally since November has been based on expectations that Trump would achieve his campaign promises and any trouble for Trump could torpedo those expectations.

If Comey indicates Trump was not trying to thwart any FBI investigation we'll probably see the market rally in relief. But a news-related spike could finish the leg up from May 18th, which in turn could complete a larger upside pattern. Therefore I'd be very careful chasing the market higher from here. It's possible we'll see a stronger rally develop and have SPX reach 2500 but first I'd want to see it can successfully get through 2450 before I would trust the move.

The bottom line is that I see the potential for a lot more price volatility in the next couple of days/weeks and it will likely remain a trader's market, not a buy/sell-and-hold. Trade carefully.

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

Keene H. Little, CMT


New Plays

Outsourcing Fading

by Jim Brown

Click here to email Jim Brown
Editor's Note

The trend to outsource HR, customer service and IT, to countries where labor is cheaper, is now fading. Outsourcing has taken on a negative connotation and companies are bring jobs back from overseas.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

SYNT - Syntel Inc - Company Profile

Syntel, Inc. provides digital transformation, information technology (IT), and knowledge process outsourcing (KPO) services worldwide. The company operates through Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; and Retail, Logistics, and Telecom segments. It offers managed services, including software applications development, maintenance, and digital modernization testing, as well as IT infrastructure, cloud, and migration services. The company also provides a range of consulting and implementation services built around enterprise architecture; data warehousing and business intelligence; enterprise application integration; and SMAC technologies, including social media, Web and mobile applications, big data, analytics, and Internet of things. In addition, it offers KPO services that provide outsourced solutions for knowledge and business processes; and business intelligence, enterprise resource planning, and business and technology consulting services. The company offers its products to various companies in the banking and financial services, healthcare and life sciences, insurance, manufacturing, retail, logistics and telecom, and other industries. Syntel, Inc. was founded in 1980 and is headquartered in Troy, Michigan. Company description from FinViz.com.

Syntel has been around for a long time but there is far more competition today than just a decade ago. Cloud sourcing has overtaken outsourcing. Companies do not need to maintain their own server farms and services like SalesForce.com and Automatic Data can handle all the service issues of running a business.

Syntel reported earnings of 46 cents and analysts were expecting 44 cents. Those estimates had dropped from 51 cents over the prior four weeks. Revenue of $225.9 million beat estimates for $225.1 million.

The company guided for the full year for earnings of $1.57 to $1.77. Analysts were expecting $2.32 but had revised their estimates lower over the prior 4 weeks to $1.90. Syntel still missed the lowered targets.

Estimated earnings July 20th.

Shares are sinking fast and are very close to a new 7-year low at $16.35. There is very little buying activity.

Sell short SYNT shares, currently $16.62, initial stop loss $17.65.

Alternate position: Buy August $15 put, currently .55, 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.



In Play Updates and Reviews

Treading Water

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets moved slowly sideways as they waited patiently for Thursday's testimony. When news broke late in the day that Comey's opening remarks had been posted online, the market improved slightly because there was no obvious smoking gun. The live testimony on Thursday will still be contentious but it appears Comey is not going to be a hostile witness against the president.

Once the public testimony is over, the markets should rebound as long as there are no revelations not disclosed in the printed remarks.

The Russell 2000 traded in an 8-point intraday range and closed right in the middle with a 2 point gain. Since the first index deletion list will be released Friday after the bell, I do not expect any big gains in the Russell this week.





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:

Blackberry launched a new QNX operatinf system for cars called Hypervisor 2.0.

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.

Update 6/1/17: Short seller Citron Research issued a buy recommendation on Blackberry saying their automotive software is a game changer for the company. With an installed base of 60 million, QNX already has four times the number of cars as Mobileye when Intel bought them for $15 billion. Citron thinks BlackBerry shares could double and they could be an acquisition target now that their focus has changed to software. Shares rallied 8% to a new 52-week high.

Update 6/6/17: Blackberry downplayed the shift by Toyota away from the company's QNX software in favor of an open source Linux version for driving the console functions in the 2018 Camry sedans. Blackberry said it was focusing more on the faster growing market for autonomous driving technology.

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.



FLEX - Flex Ltd - Company Profile

Comments:

No specific news. Shares retreated a minor 14 cents in a weak market.

Original Trade Description: June 3rd.

Flex Ltd. provides design, engineering, manufacturing, and supply chain services and solutions to original equipment manufacturers worldwide. It offers innovation services, such as innovations labs for supporting customer design and product development services from early concept stages; collective innovation platform, an ecosystem of technology solutions; Lab IX, a startup accelerator program; centers of excellence solutions in critical areas; interconnect technology center for printed circuits; and CloudLabs that enables customers to accelerate a spectrum of cloud, converged infrastructure, and datacenter strategies. The company also provides design and engineering services, including contract design and joint development manufacturing services, which cover various technical competencies, such as system architecture, user interface and industrial design, mechanical engineering, technology, enclosure systems, thermal and tooling design, electronic system design, reliability and failure analysis, and component level development engineering; and systems assembly and manufacturing services. In addition, it provides component product solutions, including rigid and flexible printed circuit board fabrication, and power supplies; after-market supply chain logistics services; and reverse logistics and repair services, such as returns management, exchange programs, complex repair, asset recovery, recycling and e-waste management for consumer and midrange products, printers, smart phones, consumer medical devices, notebooks, PC's, set-top boxes, game consoles, and infrastructure products. The company was formerly known as Flextronics International Ltd. and changed its name to Flex Ltd. in September 2016. Flex Ltd. was founded in 1990 and is based in Singapore. Company description from FinViz.com.

FLEX surprised me. I have traded it numerous times over the last 20 years but it was named Flextronics. They were a manufacturer of circuit boards. If you look at their company description above they are doing far more than that today.

FLEX reported earnings of 29 cents that beat estimates for 28 cents. They posted revenue of $5.86 billion that beat estimates for $5.67 billion. They guided for the current quarter for revenue of $5.7 to $6.1 billion and earnings of 24 to 28 cents. Full year free cash flow was $660 million and cash flow from operations of $1.15 billion. They have expanded margins for 14 consecutive quarters. They repurchased $350 million in shares for the year ended in March. The company said it remained committed to return 50% of free cash flow to shareholders on an ongoing basis. They ended the quarter with $1.8 billion in cash and debt of $3.0 billion.

Earnings July 27th.

Their guidance for earnings was a little lighter than expected because they announced a capex spending project that would weigh on the quarter's earnings. The spending is to improve a process to further expand margins.

Shares are in a steady uptrend and making new highs almost daily.

Position 6/5/17:

Long FLEX shares @ $17.53, see portfolio graphic for stop loss.

Alternate position: Long July $18 call @ 49 cents, see portfolio graphic for stop loss.



FRAC - Keane Group - Company Profile

Comments:

No specific news. Crude inventories rose unexpectedly with a 3 million barrel gain and analysts were expecting a 3 million barrel decline. I am recommending we close the long stock position but continue to hold the long call position. It will move to the Lottery Play section this weekend.

Original Trade Description: May 31st.

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.

Position 6/1/17:

Long FRAC shares @ $15.34, see portfolio graphic for stop loss.
Alternate position: Long July $17.50 call @ 45 cents. No stop loss.



KTOS - Kratos Defense - Company Profile

Comments:

The company received $5 million in orders for Specialized Satellite Communications Systems from a U.S. national security related customer.

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. Big 3.5% bounce.

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.



WTW - Weight Watchers - Company Profile

Comments:

No specific news. New closing high. Could be getting ready for a breakout.

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

CAR - Avis Budget Group - Company Profile

Comments:

No specific news. Shares spiked at the open but faded quickly. There has been a sudden increase in volatility but no change in direction yet.

Original Trade Description: June 5th.

Avis Budget Group, Inc., together with its subsidiaries, provides car and truck rentals, car sharing, and ancillary services to businesses and consumers worldwide. The company operates through two segments, Americas and International. It operates the Avis brand car rental system with approximately 5,550 locations that supply rental cars to the premium commercial and leisure segments of the travel industry; the Budget brand vehicle rental system with approximately 4,050 car rental locations, which serve the value-conscious segments of the industry; and the Zipcar brand, a membership-based car sharing network that provides vehicles to approximately 1 million members. The company also operates the Payless brand, which comprises approximately 240 vehicle rental locations; the Apex brand primarily in the deep-value segment of the car rental industry with approximately 25 rental locations in New Zealand and Australia; and the Maggiore brand that provides vehicle rental services in the commercial, leisure, and insurance replacement/leasing segments with approximately 130 rental locations in Italy, as well as the France Cars brand, which offers light commercial vehicle fleets with approximately 60 rental locations in France. In addition, it is involved in the local and one-way truck rental businesses with a fleet of approximately 22,000 vehicles, which are rented through a network of approximately 1,000 dealers and 480 company-operated locations that serve the consumer and light commercial sectors in the continental United States. Further, it offers optional insurance products and coverages, such as supplemental liability, personal accident, personal effects protection, emergency sickness protection, automobile towing protection, and cargo insurance products. The company was formerly known as Cendant Corporation and changed its name to Avis Budget Group, Inc. in September 2006. Avis Budget Group, Inc. was founded in 1946. Company description from FinViz.com.

Avis has been in existence for more than 70 years. Who would have thought 70 years ago that you could someday pull a phone out of your pocket and have a Uber or Lyft at your location within minutes?

The rental car business is changing and within another 5 years, there may not be a driver in that car that picks you up. The business model for car rental companies is dying.

Adding to their woes are the falling prices for used cars and the changing mix of vehicles in the rental fleets. Hertz, Avis, Budget and Payless have been moving towards smaller and cheaper cars with better gas mileage but customers are demanding more SUVs to pack in all their family and luggage. This is also related to the Uber trend. Single travelers are more than likely to hail an Uber but families are more likely to rent a car. Because of this the mix of models in the fleets are suddenly all wrong. The companies do not want to invest in an SUV fleet since those models can cost more than twice as much as the smaller passenger cars. When you are buying cars by the thousands, this price difference is material.

In their recent earnings Avis reported a loss of 94 cents compared to estimates for a loss of 51 cents and a loss of only 28 cents in the year ago quarter. Revenues of $1.839 billion missed estimates for $1.854 billion and declined due to higher fleet costs and pricing pressures.

Earnings August 2nd.

Hertz reported a similar earnings disaster.

The sector is in decline and it is not likely to recover soon.

Shares closed at a multiyear low on Monday.

Position 6/6/17:

Short CAR shares @ $21.31, see portfolio graphic for stop loss.

Alternate position: Long July $20 put @ $1.18, see portfolio graphic for stop loss.



FOSL - Fossil Group - Company Profile

Comments:

No specific news. Shares are holding at that 14-yr low.

Original Trade Description: May 25th.

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.



SNCR - Synchronos Technologies - Company Profile

Comments:

No specific news. Moving back towards the lows.

Original Trade Description: June 1st.

Synchronoss Technologies, Inc. provides cloud solutions and software-based activation for connected devices worldwide. The company's products and services include cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, and identity/access management that enable communications service providers, cable operators/multi-services operators, original equipment manufacturers with embedded connectivity, and multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices. It also provides Synchronoss Enterprise solutions, such as secure mobility management, data and analytics, and identity and access management solutions for the financial, telecommunications, healthcare, life sciences, and government sectors; and Synchronoss Personal Cloud platform that delivers an operator-branded experience for subscribers to backup, restore, synchronize, and share their personal content across smartphones, tablets, computers, and other connected devices. In addition, the company offers software as a service for the organizations to securely manage, control, track, search, exchange, and collaborate on sensitive information inside and outside the firewall. Its products and platforms are designed to enable multiple converged communication services to manage across a range of distribution channels, such as e-commerce, m-commerce, telesales, customer stores, indirect, and other retail outlets. The company markets and sells its services through direct sales force and strategic partners. Synchronoss Technologies, Inc. was founded in 2000 and is headquartered in Bridgewater, New Jersey. Company description from FinViz.com.

SNCR was supposed to report earnings on May 9th. Instead, on April 27th they announced that the new CEO and CFO were leaving unexpectedly after only a few months on the job. The prior CEO and founder and the prior CFO would return to help get the company through some rough times.

The company also announced that expected revenue for Q1 would be $13-$14 million less than prior guidance. Operating margins of 8% to 10% would also be less than prior guidance. Earnings will be on May 9th and everything will be explained on the call.

On May 8th the company announced it was rescheduling the earnings date for May 15th.

On May 15th, they announced they would not be releasing earnings and they had no projected date. Apparently, the founder and CEO for 17 years along with his partner the prior CFO were having problems reconciling some items and the auditor Ernst & Young was "suggesting" additional reviews of critical accounting procedures.

This is just speculation but when a new CEO and CFO suddenly depart after only a few months, it may have been because they uncovered a hornets' nest of problems and determined they did not want to be associated with the company. We will never know if that is correct or not. However, when the prior CEO for 17 yrs and CFO for 13 yrs, cannot immediately reconcile the books after only being away for a few months, that suggests additional problems. These are the kinds of things that get auditors really interested and they start poking into things they glossed over before.

On May 22nd, the company received the warning of impending delisting by the Nasdaq. This is a boilerplate type event triggered by the failure to file and they have until November to correct the problem, but itis just one more thing on their plate.

Shares had already been falling since the weak earnings in January. They closed around $25 before the first announcement broke. They declined to $11 then rebounded to $19 on the hope that the prior CEO/CFO would quickly get the company back on track. Now the stock is back at 7 year lows and the bad news just keeps piling up.

If they had a projected earnings date, I would feel better about their recovery. We are now nearly a month late on the financials and no news is flowing. SNCR could be headed a lot lower because the eventual news could be bad. Rarely do earnings delays result in positive news.

This has to be a stock only play because the options are too expensive.

Position 6/2/17:

Short SNCR shares @ $12.64, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

No material move. Waiting for Thursday's events.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

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.





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