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Newsletter

Daily Newsletter, Wednesday, 6/14/2017

Table of Contents

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

Market Wrap

No Surprise Rate Hike

by Keene Little

Click here to email Keene Little
Most of the market has been in a choppy consolidation this week while waiting to get through this afternoon's FOMC announcement. To no one's surprise the Fed raised rates 0.25% and the initial reaction was sell the news. But a late-day rally saved the indexes from a worse selloff.

Today's Market Stats

This morning started like previous mornings where we saw a small gap up that was then followed by immediate selling. Tuesday's gap up and immediate pullback was followed by another push back up but today's pullback was followed by mostly sideways consolidation. The pre-market economic reports caused some commotion in the dollar and metals, which then reversed themselves after the FOMC announcement. The net result was more chop and a negative day for the indexes, except the Dow as it continued to work its way higher to another new all-time high (it's working on a 4th straight week at new highs).

This morning's economic reports gave the stock index futures a little pop to the upside and that gave us the little gap up to start the day. The retail sales report, which was largely ignored again, showed further slowing. It will matter when it matters. Sales dropped -0.3% in May from +0.4% in April. Retail sales ex-auto was the same -- -0.3% in May vs. +0.4% in April. That's a significant drop and it points out the fact that the consumer is very likely maxed out on their credit cards (consumer debt is now higher than where it was back in 2007 before the crash into 2008).

The other pre-market report was CPI data, which also slowed and we're now facing possible deflation, er I mean, disinflation. CPI dropped -0.1% in May vs. +0.2% in April and it was lower than the expected 0.0%. Core CPI was higher, coming in at +0.1%, the same as April.

In the Fed's statement this afternoon they feel the slowing of inflation is, let's say it together, transitory. While inflation is running well below the Fed's target of 2%, The Fed feels the economy can handle another rate increase of 0.25%, making the Fed's policy rate now 1.00%-1.25%.

As for reducing its balance sheet, the Fed stated the roll-off of some maturing debt will start sometime this year but they were not specific about when it would start. They are of course data dependent on this, stating "The committee currently expects to begin implementing a balance sheet normalization process this year, provided the economy evolves broadly as anticipated."

The information about the roll-off stated there will be an initial cap of $6B for Treasuries and $4B for agency and mortgage debt, meaning only $10B per month will be allowed to expire without replacement. The remainder of expiring debt for the month will be reinvested. This is obviously a puny amount when you're talking about a balance sheet that has more than $4T of debt.

The Fed's current plan is to increase the cap by $6B per quarter for Treasuries and $4B per quarter for agency and mortgage debt until the cap reaches $30B and $20B per month, respectively. Considering the per quarter increase and max cap of $50B per month (which would be a significant drain of liquidity from the market) it would take about 6 years to get their balance sheet down to where it was prior to the huge expansion that started in 2009. This plan will of course change depending on the economy and it assumes no recession and/or financial catastrophe hits us.

No recession and no financial disaster in the next 10 years has about a zero percent chance of happening. I came across the chart below that shows we could be a lot closer to both than most are currently thinking. It's a chart that shows year-over-year changes in bank loans plus nonfinancial commercial paper. Interestingly, notice the deterioration that's been happening for a long time -- the peaks since 1973 have been lower during each recovery. Also, each low since 1981 has been lower.

Typically, each time loans have peaked and the year-over-year change turned down there's been a recession (vertical gray bars) and the last time (2008) led to extreme financial hardship for banks as all the bad debt had to be written off. Today we have a lot of bad debt in auto and student loans, much of which is already in default (and default rates are on the rise). With the recent turn down in bank loans we have to wonder if it will be different this time. I would not bet on that.

Declining Bank Loans, 1967-April 2017

I'll start tonight's chart review with the Dow since it's been the stronger index lately. It seems money might be rotating into the safety of the bluest of the blue chips, which many view as a defensive move. Money that must be invested in stocks (many funds require managers to be fully invested) will often be moved to the large cap stocks because it's much easier to get in and out of them without greatly affecting their prices.

With the significant expansion in the use of ETFs (passive investing), these are also used by fund managers to control their risk (so they think). One of the consequences of using ETFs is that individual stock picking has declined significantly. The large impact of the FAANG stocks is an example of how just a few stocks can greatly impact the index it's a part of. The tech indexes have suffered much worse than the Dow recently because of this. Helping the Dow has been the recent outperformance of the financials and energy (although energy took a hit today).

The RUT has been more volatile than the others because funds use the various small-cap ETFs (inverse, 2x, etc.) as their playground and it causes a lot more volatility than playing around in the larger-cap ETFs. But the overall result in the use of these ETFs is what we're seeing today -- a fractured market between the indexes as traders unselectively trade in and out of a multitude of stocks only because those stocks are a part of the same index as say the FAANG stocks.


Dow Industrials, INDU, Weekly chart

The weekly chart of the Dow is the one that has kept me more bullish than bearish but admittedly I was beginning to think it was in trouble at the end of April and beginning of May. That was when it was making a double top with its March 1st high and showing bearish divergence. But the pullback into the May 18th low looked more like a correction to the rally and not something more bearish and since then we of course have seen the Dow push to new highs.

Unfortunately for the bulls the bearish divergence has not been negated and it suggests the recent push to new highs might not hold. It doesn't prevent a continuation higher but it does suggest caution about the upside. I've been thinking we might see the Dow make it up to its trend line along the highs from May 2011 - December 2015, which is currently near 21590 and about 200 points above today's high.

An important point to keep in mind is that the rally from January 2016 now has the requisite 5-wave move and can be considered complete at any time. Betting on further upside is a risky bet since upside potential is significantly dwarfed by downside risk.


Dow Industrials, INDU, Daily chart

The rally from May 18th has formed a rising wedge pattern (better seen on the 60-min chart further below), which is another warning sign for bulls to pay attention to. The good thing for the bulls right now is the Dow's ability to climb back above its broken uptrend line from November-April, which has acted as support this month. Bulls want to see that trend line, currently near 21270 and rising about 20 points/day, hold as support since a break of it would indicate a top is likely in place.

Key Levels for DOW:
- bullish above 21,169
- bearish below 21,159


Dow Industrials, INDU, 60-min chart

The Dow's 60-min chart shows the rising wedge pattern for the rally from May 18th. Today it made it up to the top of the wedge and achieved the price projection near 21384 with today's high near 21392 (but closed back below 21384). This projection is where the 5th wave is 62% of the 3rd wave, a typical projection for each wave inside a rising (and descending) wedge. Notice the 3rd wave was also 62% of the 1st wave.

This is a good setup for a reversal back down into a strong selloff (wedges tend to get retraced faster than the time it took to build them) but obviously we have no evidence yet of a top in place. It's only a setup and now we wait to see if the market agrees. A continuation higher out of the wedge would be a bullish move (up to at least the 21600 area.


S&P 500, SPX, Daily chart

SPX has a slightly different price pattern than the Dow and it isn't quite as clear where it could head next. I see upside potential to the top of a rising wedge for its rally from March, currently near 2456. A choppy rally into next week could see it as high as 2465 and above that level would be more bullish, in which case I'd look for a rally to the 2500 area where it would achieve some longer-term price projections based on its rally pattern. But as with the other indexes, the daily chart is overbought and showing bearish divergence, as is the weekly chart. The bulls are toast if and when SPX drops below its June 9th low near 2416.

Key Levels for SPX:
- bullish above 2447
- bearish below 2415


Nasdaq-100, NDX, Daily chart

Heading into its high last Friday NDX presented a very nice setup for the bears to take advantage of, which I posted at the time. It was up against two trend lines along the highs, one since the end of March and the other from November 2014 - July 2015. It was also close to achieving a price projection for the 5th wave of the rally from its March 27th low, at 5906 (the high was near 5898).

Following Friday's quick morning high it then tanked and dropped sharply into Monday's low before starting a bounce correction. Note the bounce off support at its uptrend line from December 2016 - April 2017 (green line), which it again tested with this afternoon's low at 5682. We could see a larger bounce correction but with a 50% retracement of its decline and a back-test of its broken 20-dma the pieces are in place for the next leg down.

Key Levels for NDX:
- bullish above 5898
- bearish below 5633


Russell-2000, RUT, Daily chart

Following last Friday's test (again) of its trend line along the highs from June 2007 - June 2015 the RUT pulled back sharply but looked like it was going to try it again with Tuesday's rally. However, today's decline dropped the RUT below its steep uptrend line from May 31st and while there remains upside potential to at least the 2007-2015 trend line, near 1435, it's now vulnerable to a breakdown from here.

Key Levels for RUT:
- bullish above 1440
- bearish below 1386


10-year Yield, TNX, Daily chart

This morning the bond market rallied and yields tanked. TNX dropped to a new low below its June 6th low before starting a small consolidation and then a bounce back up after the FOMC announcement. The morning low at 2.103 was good enough to close its November 14th gap at 2.117. The low was also a test of a short-term trend line along the lows from May 18 - June 6 and since it's possible this trend line is the bottom of a bullish descending wedge we could see at least a higher bounce from here.

TNX remains bearish below its downtrend line from 2007-2013, currently near 2.25, and turns more bearish if it drops out the bottom of the wedge pattern. A continuation lower from here would target the double-top price objective near 2.00.


10-year emini contract, ZN, Weekly chart

Another way to look at the bond market is of course price instead of yield. The weekly chart of ZN, the 10-year emini contract, shows another reason why yields could start at least a bigger bounce, if not a new rally. Off the December 2016 low ZN now has a 3-wave bounce up to strong resistance at its broken 50- and 200-week MAs and a downtrend line from July 2012 - January 2015. All of these lines cross near 127, which was achieved with today's midday high at 127'08 before reversing back down following the FOMC announcement.

If ZN reverses back down from here it would of course drive yields back up, which is supported by the bullish descending wedge shown on the TNX daily chart above. But obviously if ZN powers through resistance it would be bullish and that would drop TNX below the bottom of its descending wedge. So it's decision time for bond prices here.


KBW Bank index, BKX, Daily chart

Financials have been one of the stronger sectors since last week, along with energy (although energy stocks got thumped this morning with oil), and that has helped the blue chips in their relative strength in the past week. BKX shows a strong spike up from June 6th but that might be all there will be to see for its bounce attempt. The spike up fits well as the c-wave of an a-b-c bounce off the April 17th low and it has so far left a bearish kiss goodbye following the back-test of its broken uptrend line from June 2016 - April 2017.

The trend line was tagged twice, on Monday and Tuesday, but the line held as resistance. For the short-term pattern I do see the potential for one more minor new high, for another back-test of the broken uptrend line, before starting back down.


Transportation Index, TRAN, Weekly chart

Since its December high the TRAN has been trading in a sideways choppy trading range. Following the rally from January 2016 the choppy consolidation can certainly be viewed as a bullish continuation pattern. But there are some signs of weakness that suggest any new highs from here might not hold for very long.

The weekly chart below shows the recent rally off the May 18th low has brought the TRAN back up to its broken uptrend line from June-October 2016 for what is likely to be just a back-test before turning back down. One reason for thinking that is because of the extreme bearish divergence seen on the weekly oscillators.

Daily is now overbought and looking ready to turn back down at any time. That would leave essentially a triple top since December with bearish divergence and a huge "SELL ME!" sign hanging over it. IYT is the transportation ETF that can be traded (e.g., buy puts) if you agree with the bearish setup.


U.S. Dollar contract, DX, Weekly chart

Today was a little wild for the US$ as it spiked down in the morning (presumably on the negative inflation number and perhaps a sudden fear the Fed might back off on another rate increase) but then spiked back up following the FOMC announcement of another rate increase. The dollar finished the day lower but the morning low might have been a good test of last week's low and with bullish divergence since the May 23rd low it's looking like the dollar could get at least a decent bounce.

The weekly chart, which I haven't shown in a while, helps keep the big picture in mind. There are a multiple possibilities for where the dollar will trade inside its large megaphone pattern off the March 2015 high. The dollar has been chopping up and down in a widening trading range and that might not change much in the next year or two.


Gold continuous contract, GC, Daily chart

Gold did the opposite of the dollar today -- it spiked up on the 8:30 economic reports but then spiked back down on the FOMC announcement. Today's high could have completed a bounce correction to its June 6-13 decline but so far the back-test of its 50-dma near 1261 is holding and it remains bullish above 1261. However, on the bear's side, this afternoon's spike high was a perfect 62% retracement of the decline and a back-test of its broken uptrend line from May. This follows the June 6th test of its downtrend line from September 2011 - July 2016, which potentially completed the larger bounce correction off the December 2016 low. The larger pattern suggests lower for gold and we should soon find out if the market agrees or not.


Oil continuous contract, CL, Daily chart

Oil has been trading in a choppy sideways trading range since June 2016 and it's decision time for oil traders. This morning oil spiked down and landed on an uptrend line from August 2016 - May 2017. It then traded in a very tight sideways consolidation for the rest of the day, which has it looking like the trend line will break. That would obviously be more bearish and a drop below the May 5th low at 43.76 would confirm another leg down for the decline from January was in progress.

The price pattern for the decline suggests the selling could accelerate and drive the price of oil well below 40 soon. But if oil gets a bigger bounce started we could easily see 50 again before rolling back over. Until I see evidence to the contrary I believe we'll see oil at least test its February 2016 low near 26 before we'll see oil above 55.


Economic reports

Thursday morning will be busy with economic reports, some of which could be market moving. The Philly Fed index is expected to show a drop from 38.8 to 26 but if it's worse than that, especially in light of this morning's numbers showing a further decline in retail sales and the slowing of inflation (disinflation, not the dreaded word deflation), there could be a negative reaction. It will be interesting to see what the Import/Export prices look like since it will either mirror or counter the inflation numbers we got today.

But the Empire Manufacturing index is expected to show a gain from -1.0 to 6.0 so that would balance out fears about the Philly Fed index. And if both jump higher we could get a nice pop up in the morning. Mitigating any difference between the two, the Industrial Production number is expected to drop to 0% from 1.0%.


Conclusion

The market is fractured at the moment with different indexes doing different things. Money appears to be rotating out of the riskier high-beta stocks and into the safety of the blue chips. Even the utility index has been relatively strong, which is another defensive sector.

While the indexes appear to be holding up for opex I think it's vulnerable to topping at any time. The techs look like they've already topped while the blue chips could hold up for a little longer. I don't think the risk:reward ratio supports betting on the long side but bears obviously need to be careful in a market that always seems to turn back up no matter what kind of selling hits. That I think is about to change but that opinion and $3 will buy you a cup of coffee.

The bottom line is that I see price patterns that support the idea that we're close to getting a strong selloff, even if that selloff is only going to be a larger pullback correction before heading higher again later this summer. Depending on your trading/investing timeframe, now's a good time to pull stops up a little tighter and maximize your profits before going to either cash or trying some short positions.

Good luck and I'll be back with you for Saturday's Market Wrap as I fill in for Jim. See below for a good deal on an OIN subscription for the rest of the year. And in the process you'll be supporting starving writers (wink).

Keene H. Little, CMT


 

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New Plays

Trouble Brewing

by Jim Brown

Click here to email Jim Brown
Editor's Note

We escaped the news headlines for more than a week but there is trouble ahead. The weak economics this morning, the Washington shooting and the Fed decision and press conference kept stocks flat for most of the day. After the bell, news broke that the special counsel has expanded the probe to investigate President Trump for obstructing justice. The market does not want to see any further damage to the president's agenda. S&P futures were down -8 points a few minutes ago. I am not going to add additional risk in an unstable environment.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Disturbing Reversal

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the major indexes except the Dow posted losses today. The Russell lost 8 points after closing at a new high on Tuesday. The Nasdaq lost 25 points after the big cap tech stocks rolled over gave up some of their rebound gains. The weakness was broad based after the Fed decision was released but there was a little buying at the close to lift the indexes off their lows.

This is troubling for Thursday. The Russell 2000 only lost 8 points but the majority of the small cap stocks I saw today were negative. The breadth of the losses was more than the 8 points would suggest.





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


YRCW - YRC Worldwide
The long position was entered at the open.



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. The excitement has worn off. Time to close the position.

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.

Update 6/13/17: Blackberry is getting a lot of press over its $400 device that collects and transmits data on movement, temperature and physical contents of trailers for 1,300 truck trailers belonging ot Titanium Transport. The trucking company reduced labor costs, tracked lost trailers and helped provide maximum utilization of the fleet. Tracking trailers both empty and full is a major headache for trucking companies. Raymond James believes BlackBerry could easily scale to 10% of the addressable market of 8 million trailers in North America.

Earnings June 23rd (revised)

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 - Company Profile

Comments:

No specific news.

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.

Update 6/13/17: Kratos said it was going to unveil its newest high performance class of military unmanned aerial system technology at the Paris Air Show next week. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.

Position 5/30/17:

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



UCTT - Ultra Clean - Company Profile

Comments:

No specific news. Barely clinging to support.

Original Trade Description: June 12th.

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 and beat estimates for 42 cents. Revenue of $204.6 million beat estimates for $192.1 million. They guided for the current quarter to earnings in the range of 49-55 cents and revenue in the $210-$220 range. Those were above analyst estimates for 33 cents and $183.3 million.

Estimated earnings July 26th.

We played UCTT recently for a minor gain. The tech sell off has provided an ideal entry point at uptrend support and the lows from late May.

Position 6/13/17:

Long UCTT shares @ $22.52, see portfolio graphic for stop loss.
No options recommended due to price and strike availability.



WTW - Weight Watchers - Company Profile

Comments:

No specific news.

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.



YRCW - YRC Worldwide - Company Profile

Comments:

No specific news. The rebound stumbled slightly in a weak market.

Original Trade Description: June 13th.

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2016, this segment had a fleet of approximately 7,700 tractors comprising 6,200 owned and 1,500 leased; and 31,000 trailers consisting of 24,900 owned and 6,100 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, truck loading, and other specialized offerings; guaranteed and expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates hollandregional.com, reddawayregional.com, and newpenn.com, which are e-commerce Websites offering online resources to manage transportation activities. This segment had a fleet of approximately 6,600 tractors, including 5,000 owned and 1,600 leased; and 13,500 trailers comprising 10,800 owned and 2,700 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. YRC Worldwide Inc. was founded in 1924 and is headquartered in Overland Park, Kansas. Company description from FinViz.com.

For the 4th time in 7 years, Walmart selected YRC Freight as the National LTL Carrier of the Year. YRCW delivers to Walmart stores, Sams Club facilities and distribution centers all across North America. Walmart said the extensive YRCW network offers significant coverage to Walmart and their suppliers.

The company reported a loss of 70 cents for Q1 compared to estimates for 27 cents. Revenue of $1.17 billion did beat estimates for $1.14 billion. Shares imploded on the earnings miss and fell from $10.69 to $7.36.

Next estimates earnings August 3rd.

The company announced a restructuring plan to reduce management headcount and "de-layer" operational overhead. They announced several initiatives to reduce costs.

Last week they released metrics for the last two months. In April, freight tonnage per day rose 6.2% with May tonnage rising 3.3% over year ago levels. Regional tonnage increased 1.4% in April and 5.5% in May.

The business is growing and a reduction in costs will be positive. Investors seem to like the news with a rebound to pre-earnings levels. Resistance is $11.25 and a breakout there could easily run to $14.00 if the story and the market remains positive.

Position 6/14/17:

Long YRCW shares @ 10.70, see portfolio graphic for stop loss.
Alternate position: Long July $11 call @ 55 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

FOSL - Fossil Group - Company Profile

Comments:

No specific news. Now that support broke we could see a steady decline.

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.

Update 6/13/17: Shares crashed on news the CEO sold 520,000 shares last week and 1.074 million shares on May 30th. A Macquarie research note also said that 3.8 million shares were pledged as security for a note of around $75 million and they could be sold at any time. With FOSL shares at $11 the pledge was already in the red by $30 million. At today's close at $10 that value dropped by another $3.8 million. The CEO only has 4.426 million shares after his sales last week and with 3.8 million pledged, that leaves him with roughly 600,000. It appears the CEO is bailing on his holdings and that is never good for the stock price. If the price declines further he may be forced to sell his remaining 600,000 shares to make up the shortfall on the pledged shares. Shares are now at 16-yr lows.

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.



SNAP - Snap Inc - Company Profile

Comments:

No specific news. Support broke and today was a historic closing low.

Original Trade Description: June 10th.

Snap Inc. operates as a camera company. It offers Snapchat, a camera application that helps people to communicate through short videos and images. The company also provides a suite of content tools for partners to build, edit, and publish snaps and attachments based on editorial content; and Spectacles, which are sunglasses that capture video from a human perspective. The company was formerly known as Snapchat, Inc. and changed its name to Snap Inc. in September 2016. Snap Inc. was founded in 2010 and is headquartered in Venice, California. Company description from FinViz.com.

Snap went public on March 2nd, the day after the prior market highs. Excitement was high and the stock spiked to $29.44 the day after the IPO. Since then, Snap's optimistic future has dimmed considerably. Facebook copied almost every Snap feature in an effort to keep members from straying out of the Facebook fold. It was outright war and Snap lost.

They reported their first earnings as a public company on May 10th and missed estimates and provided weak guidance. Shares fell from $23 to $18. After a couple days of dead cat bounce rebound, they returned to $22 but that is when the trouble began. Nearly every day an analyst would cut their price target and rating.

Estimated earnings August 9th.

Citigroup, a previous backer of SnapChat (SNAP) has had a change of heart. On Friday, Citi downgraded the company from buy to neutral saying they are not sure when SNAP will turn profitable. They downgraded the 2018 earnings estimate from a loss of 42 cents to a loss of 46 cents. Citi said monetization was slower than previously expected because of a slower than expected rollout of new channels and opportunities. "Given issues with Android, summer seasonality, heightened competition and the nature of Snap's social network, we expect user growth to remain modest near term."

Nearly 70% of analysts have something other than a buy rating on SNAP.

The company is also facing a large lockup expiration in August. Currently SNAP has 404 million shares available to trade and on July 29th another 663 million Class A shares will be unlocked along with 281.1 million Class B shares and 215.9 million Class C shares. Those convert to Class A shares if the holders decide to sell them. Snap recently tried to get existing insider shareholders to commit to a one-year holding period but were unsuccessful. That suggests many are planning to dump shares when the lockup expires.

I am recommending a short on SNAP but I am not recommending an option. The August put premiums are too expensive.

Position 6/12/17:

Short SNAP shares @ $18.05, see portfolio graphic for stop loss.



SNCR - Synchronos Technologies - Company Profile

Comments:

The company disclosed in a SEC filing that the audit committee had informed the board that financial statements for 2015 and 2016 would have to be restated. May earnings have already been postponed and the restatement could take months. Support broke and today was a 17 year closing low.

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.



SYNT - Syntel Inc - Company Profile

Comments:

No specific news. Just waiting for support to break.

Original Trade Description: June 7th.

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.

Position 6/8/17:

Short SYNT shares @ $16.65, see portfolio graphic for stop loss.

Alternate position: Long August $15 put @ .43, no stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

New historic low close.

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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