Option Investor
Newsletter

Daily Newsletter, Thursday, 7/20/2017

Table of Contents

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

Market Wrap

A Double Dose

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

A resilient market withstands a double dose of central bank meetings and another twist in the Trump scandal. Meetings from the ECB and BOJ produced no changes to policy but did deliver commentary furthering a growing divide between the two. On the domestic front special counsel Robert Mueller has begun to investigate Trump finances in relation to the Russia scandal. That news at got the market moving to the downside but buyers quickly stepped in to take advantage of the dip.

Asian indices closed mostly higher aft er the BOJ decided to hold its rates steady. The bank also indicated that its inflation target has been lowered which basically means we can expect easy money policy to continue indefinitely. The Nikkei led with gains near 0.6%. European indices were no so buoyant following the ECB meeting and comments from Mario Draghi. He says the bank will likely begin discussing a taper this fall. Indices there fell marginally save for the FTSE which posted a gain near 0.75%.

Market Statistics

Futures trading was flat to positive all morning. The SPX was indicated to open with minimal gains to start with that growing to about 3 points going into the open. The open was a little hectic, the index opened with gains as expected and the moved higher only to quickly reverse itself and begin moving lower. The move lower was precipitated by the Mueller news and hit a low shortly after 10:30. The day's low was less than -5 points for the SPX and turned out to be support. The index bounced from that level and was able to move back up to the early high by mid afternoon. The indices weren't able to hold the highest highs of the day but there were able to remain near them into the close.

Economic Calendar

The Economy

The July read on the Philadelphia Federal Reserve's Manufacturing Business Outlook Survey is 19.5. This is below the expected 22 and the previous 27.6 but is the 12th month of positive reading. All sub indices were positive although they also all fell, showing a slower pace of growth this month than last. Looking forward the 6 month outlook gained 5.6 to hit 36.9.


Initial claims for unemployment fell -15,000 to 233,000. This is on top of an upward revision of 1,000 to last week's figure. The four week moving average of claims fell -2,250 to 243,750. On a not adjusted basis claims fell -9.9% versus an expected -3.9% and are down -4.4% over last year. This week's drop is positive sign of labor market health within a tight and tightening market, consistent with long term trends.


Continuing claims for unemployment rose by 28,000 on top of an upward revision of 4,000 to hit 1.977 million. The four week moving average of claims rose by 8,750 to hit 1.959 million. This week's gains brings the continuing claims figure up to a 3 month high but it remains low relative to the long term trend and consistent with labor market health.

The total number of Americans receiving unemployment benefits fell -28,728 to 1.872 million. This week's drop is consistent with seasonal trends and likely precedes a small uptick in claims expected over the next few weeks. Year over year claims are down -9.9% and low relative to long term trends.


The Index of Leading Indicators was released at 10AM and came in much better than expected. The June read on forward expectations rose by 0.6% versus an expected 0.4% and the previous 0.2%. The previous month's read was revised lower by 0.1%. Economist at the Conference Board say the continued strength seen in the index points to accelerated GDP growth in the 2nd half of the year. The Coincident and Lagging Indices both rose by 0.2%.


The Dollar Index

The dollar went on a wild ride today. The Dollar Index was first up on the BOJ decision, then up a little more on the ECB decision, and then down down down on Mario Draghi's comments. The two decisions effectively weakened their respective currencies as it reinforced the divergence in current easy money policy from that of the FOMC. The Draghi comments firmly put tightening on the table with an expected starting date sometime next year. The Dollar Index fell nearly a half percent to hit a 12 month low with bearish indicators and looks like it could go lower. Support may be at the 12 month low, near $94.25, a break of which would be bearish. If support is broken downside target becomes $92. Risk now is the FOMC meeting next week. They are not expected to change policy but they could move the market on a change of tone.


The Gold Index

Gold prices dipped on early strength in the dollar but were able to recover the losses. Spot price fell about -0.25% to test the $1,235 level and then recovered the loss following Mario Draghi's comments. Gold is now trading just above $1,240 and drifting higher in the near term. Upside target is $1,250, near the mid point of the 6 month range. The next potential catalyst for gold is next week with the FOMC meeting. They aren't expected to change policy but they are expected to deliver a statement and the wording of it will be important. A break above $1,250 will be bullish with upside target at the top of the range near $1,300.

The gold miners are on the rise and trying to move higher. The miners ETF GDX rising a little more than a half percent in today's action. Although near term action is bullish I remain skeptical of this move. The indicators are bullish in support of it but momentum remains weak, stochastic is overbought in the near term and both remain consistent with range bound trading. A break above resistance, at today's close, would help confirm further upside but even that would face resistance at the long term moving average and then the middle of the 6 month range near $24.


The Oil Index

Oil prices tried to set a 6 week high in early trading but the gains did not hold. Drawdowns of US stockpiles have helped support prices ahead of OPEC's meeting next week but traders are getting cautious ahead of said meeting. WTI closed the day with a loss near -0.70% creating a small black candle falling from resistance. Resistance is near $46.75 and the current 6 week high, the OPEC meeting begins on Monday and is in St. Petersburg. A thought; when OPEC curbs production they aren't making oil disappear, it's still in the system, it just remains at the source.

The Oil Index tried to break above near term resistance today. The index opened with a gain near 0.5% and at a new 1 month high only to fall back to support and close with a loss near -0.5%. Support is now the 1,120 level which was broken yesterday. For those of us looking for reversal in the index today's action is promising but not confirmation. The indicators are in support so prices may continue to rise. A bounce from support would be bullish and confirm a double bottom reversal. Upside targets are 1,150 and 1,200 in the near term, both of which may prove to be strong resistance. The OPEC meeting is a likely catalyst however, once again, by only meeting market expectations they may create a sell-the-news event.


In The News, Story Stocks and Earnings

Abbot Labs reported before the bell. The maker of products for the professional and retail pharma industry beat on the top and bottom lines. The company reported a 25% increase in revenue driven by a near 90% increase in medical device revenue. The really good news was an increase in guidance to a range above consensus. Shares of the stock popped on the news gaining nearly 3% to trade at a new 2 year high. The stock is moving higher on strong momentum and fast approaching the all time high set 2 years or so ago.


After hours reporting was busy, releases from EBAY, MSFT, V and COF had stocks moving. Ebay is the only one to disappoint. The company was only in line with expectations and provided light guidance. They did announce a $3 billion dollar buyback program but it was not enough to support prices. Shares fell more than -4%.


Visa beat on the top and bottom lines, as did Capital One. Visa says payments volume is up 38% from this same time last year with an 11% growth in cross border transactions. Results were strong enough for management to raise guidance for full year EPS growth of 20%. Shares of the stock rose more than 1%. Capital One grew earnings by 16% over last year and beat estimates by more than 5%. Results were driven by an increase in revenue and decrease in costs. Share prices jumped more than 5% on the news.


Microsoft reported an impressive top and bottom line beat on 97% growth of the Azure platform. Azure is their cloud computing solution and outperforming expectations, total EPS came in at $0.98 or 38% above consensus. Shares jumped on the news, gaining more than 1.5% in after hours trading.


The Indices

While most of the market held steady near yesterday's highs one index fell nearly a full percent. The Dow Jones Transportation average shed -0.97% to fall to a 3 week low below 9,500. The index is sitting on the short term moving average with a chance of falling through. The indicators are bearish and pointing lower so a test of support is expected. A break below the moving average could go as low as 9,300 or 9,125 in the near term.


The Dow Jones Industrial Average made the next largest decline but is more flat than not. The index closed with a loss of -0.13% after flirting with positive numbers throughout the day. The index created a small red bodied spinning top candle just beneath resistance at the long term up trend line. This is the fifth day the trend line has provided resistance and the indicators are showing it. Both stochastic and MACD and rolling over in evidence of near term weakness and in danger of forming bearish crossovers. A drop from resistance would be bearish near term with downside target near the short term moving average.


The S&P 500 made the smallest decline, only -0.02%. The broad market created a small red bodied candle and set a new all time intraday high while doing so. The index continues to creep higher in line with prevailing trends with indicators in support of the move. There are some signs of weakness emerging but still no indication of fall. Signs of weakness include stochastic %K showing resistance to higher a flattening of MACD that may indicate near term peak. If prices continue higher next target is 2,500, if they fall support is likely near 2,440 and the short term moving average.


The NASDAQ Composite posted the only gains today and is likely to rise tomorrow based on today's after hours reports. The index closed with a gain of 0.08% and set a new all time high. Today's candle is a small spinning top doji and one that may indicate near term consolidation or pull back is near. The indicators are both bullish but also both showing signs of near term weakness that could limit gains.


There is no economic data tomorrow so trading will be all about earnings and options expiration. After hours reports from MSFT, Visa and Capital One are likely to help lead the market higher but there could be some volatility. The market has risen more than 2.5% in the last 3 weeks and now is as good a time as any to trim some profits. I remain firmly bullish for the long term, cautiously bullish for the near waiting for next week's FOMC meeting.

Until then, remember the trend!

Thomas Hughes


New Plays

Summer Friday

by Jim Brown

Click here to email Jim Brown
Editor's Note

This is an option expiration Friday as well as a summer Friday. Volume has been weak and this is an expiration Friday where volume is supposed to increase. This suggests Friday could be a duplicate of Thursday where the indexes trade flat without a material direction. After setting record highs this week and with the Nasdaq up for 10 consecutive days, we could see some weakness appear.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Stutter Step?

by Jim Brown

Click here to email Jim Brown

Editors Note:

After Wednesday's bullish breakout across the board, equities paused on Thursday. Earnings are suddenly not as positive as expected. Numerous companies disappointed but there were still some winners. The mixed messages from the earnings was not enough to overcome the 60 point drag on the Dow from Home Depot and Travelers.

Checkpoint and Qualcomm were big disappointments but Microsoft posted solid earnings after the close. With the exception of the Dow and Dow transports, most of the indexes closed relatively flat. However, the transports have fallen off a cliff and the Dow Industrials are not likely to rally strongly until the transports recover. The dollar fell off the same cliff to close at an 11-month low.

There are suddenly some undercurrents to the market that could give us a mixed Friday.





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


NTNX - Nutanix Inc
The long position was entered at the open.



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BULLISH Play Updates

BOX - Box Inc - Company Profile

Comments:

No specific news. Holding over $19.50.

Original Trade Description: July 17th.

Box, Inc. provides cloud content management platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Company description from FinViz.com.

Expected earnings August 30th.

Box is making a lot os smart moves lately. The recently partnered with Microsoft to jointly offer Box cloud management to Azure enterprise customers. Box will use Azure as a strategic public cloud platform and the companies have committed to share go-to-market investments, including initiatives to co-sell Box with Azure. Any time you can get Microsoft to partner with you, share the expenses and market your product, it was a good move.

Last week Box appointed Stephanie Carullo as the new COO. Carullo led U.S. sales for Apple's education business. Before that whe led the data center and virtualization architecture group at Cisco Systems. That is a good pedigree.

Shares have ticked up since both of those events last week and could be headed for a breakout over $19.50.

Position 7/18/17:

Long BOX shares @ $19.21, see portfolio graphic for stop loss.
Alternate position: Long Sept $20 call @ 90 cents, see portfolio graphic for stop loss.



HZNP - Horizon Pharma - Company Profile

Comments:

No specific news. Only a minor decline.

Original Trade Description: July 15th.

Horizon Pharma Public Limited Company, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of orphan diseases, arthritis, pain, and inflammation and inflammatory diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and malignant osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; PROCYSBI for the treatment of nephropathic cystinosis; QUINSAIR for the treatment of chronic pulmonary infections due to pseudomonas aeruginosa in cystic fibrosis patients; and KRYSTEXXA to treat chronic refractory gout. Its products also include RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus, and multiple other indications; DUEXIS to treat signs and symptoms of osteoarthritis and rheumatoid arthritis; MIGERGOT for the treatment of vascular headache; PENNSAID 2% to treat pain of osteoarthritis of the knees; and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis. The company has collaboration agreements with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer; and Alliance for Lupus Research (ALR) to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus (SLE) patients. Company description from FinViz.com.

Expected earnings August 7th.

Horizon posted and earnings disappointment in May that saw the stock collapse from $15.50 to $9.50. They reported earnings of 21 cents that missed estimates for 25 cents. Revenue was $220.9 million and missed estimates for $248 million. They guided for the full year for revenue of $1.0 to $1.03 billion. The problem was a shift in the contracting model with pharmacy benefit managers that was not performed in accordance with expectations.

That contracting problem has been solved. They also announced that three patents cases against Dr Reddy's, Lupin Ltd and Mylan Labs were upheld by a US District Court, which will prevent generics for VIMOVO until 2022 at the earliest.

Horizon is small company with numerous drugs in the pipeline and in trials. Shares are recovering from the May disaster and there is still $2.50 to gain to fill the gap from the post earnings crash.

Position 7/17: Alternate position:
Long Aug $14 call @ $.50, see portfolio graphic for stop loss.



NTNX - Nutanix - Company Profile

Comments:

No specific news. Shares declined slightly after four consecutive gains.

Original Trade Description: July 19th.

Nutanix makes infrastructure invisible, elevating IT to focus on the applications and services that power their business. The Nutanix enterprise cloud platform leverages web-scale engineering and consumer-grade design to natively converge compute, virtualization and storage into a resilient, software-defined solution with rich machine intelligence. The result is predictable performance, cloud-like infrastructure consumption, robust security, and seamless application mobility for a broad range of enterprise applications.

Expected earnings August 24th.

Nutanix announced last week that its business in Canada had grown 75% over the 12 months prior to the quarter end. They increased their customer base from 179 customers to 313. There was also a record number of customers that invested $1 million or more into Nutanix infrastructure products.

Goldman added the stock to their conviction buy list saying there was a 53% upside potential. Goldman called Nutanix a '"hyperconverged infrastructure company," a "once-in-a-decade tech infrastructure story," as they see strong adoption of the technology among chief information officers. Based on a survey Goldman did in June they found that 18% of CIOs expected to move to this technology over the next two years with Nutanix the leader in the field. They also said the company could easily be an acquisition target because of their size and revolutionary technology.

Position 7/20/17:

Long NTNX shares @ $24.48, see portfolio graphic for stop loss.
Alternate position: Long Oct $30 call @ $1.50, see portfolio graphic for stop loss.




BEARISH Play Updates

FRGI - Fiesta Restaurant Group - Company Profile

Comments:

No specific news. Another minor rebound from the new 4-year low. Very close to being stopped out on the short stock position.

Original Trade Description: July 12th.

Fiesta Restaurant Group, Inc., through its subsidiaries, owns, operates, and franchises fast-casual restaurants. It operates its fast-casual restaurants under the Pollo Tropical and Taco Cabana brand names. The company's Pollo Tropical restaurants offer various Caribbean inspired food, and Taco Cabana restaurants offer a selection of Mexican food. As of January 1, 2017, it had 177 company-owned Pollo Tropical restaurants, 166 company-owned Taco Cabana restaurants, and 29 franchised Pollo Tropical restaurants in the United States, Puerto Rico, Panama, Trinidad & Tobago, Guatemala, the Bahamas, Venezuela, and Guyana, as well as 5 franchised Taco Cabana restaurants located in New Mexico, 2 non-traditional Taco Cabana licensed locations on college campuses in Texas, and 1 location in a hospital in Florida. Company description from FinViz.com.

Expected earnings August 7th.

On May 8th, Fiesta reported earnings of 25 cents compared to estimates for 30 cents. Revenue of $175.6 million missed estimates for $178.2 million. Same store sales declined -6.7% at Pollo Tropical and transactions declined -8.9%. Sales at Taco Cabana decreased 4.5% and sales transactions fell -4.0%. The company closed 30 stores that were losing money.

The company is under attack by JCP Investment Management, which has a 3% stake. JCP had lobied for changes to be voted at the June shareholder meeting. The company and JCP have been trading hostile press releases. The shareholder meeting went in favor of Fiesta but JCP is not giving up. Shares began to decline further when JCP did not gain control of the board.

Shares closed at a 4-year low on Wednesday at $18.80 and the IPO price in 2012 was $11. Shares had traded as high as $69. With the chain closing stores at a rapid pace, their long term future is in doubt.

Position 7/13/17:

Short FRGI shares @ $18.75, see portfolio graphic for stop loss.
Alternate position: Long September $17.50 put @ $1.05, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

New closing low.

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.

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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