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Daily Newsletter, Saturday, 7/29/2017

Table of Contents

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

Market Wrap

Sentiment Damaged?

by Jim Brown

Click here to email Jim Brown

The sudden 143-point Nasdaq decline on Thursday may have damaged market sentiment.

Weekly Statistics

Friday Statistics

With multiple highly regarded market analysts warning of an impending sell off and the sudden 143-point Nasdaq decline on Thursday, we could be nearing a point where investor sentiment is going to sour. The Nasdaq crash like we saw on Thursday, tends to knock a bunch of people out of the market as their stop losses are hit. Investors understand when a stock declines for a reason like an earnings miss but when the top 20 stocks decline 4% to 5% in just a few minutes without any news, that is a shock to sentiment.

The Nasdaq dipped to support again on Friday but rebounded slightly to end with only a 7 point loss despite the Amazon earnings miss. That suggests any sentiment damage was light and there are still investors buying the dip. However, do you remember August of 2015?

Starting on August 18th, 2015, the S&P declined from 2,101 to 1,867 in ONLY five trading days. That was a drop of -235 points. The Nasdaq dropped -800 points in those same 5 days. The VIX shot up from 14 to 53 in 3 days. So what caused this? The decline began on Tuesday of option expiration week and was fed by a market drop in China to six-month lows, Grecian Prime Minister Alex Tsipras said he would resign after losing parliamentary majority and some bland FOMC minutes that suggested the economy was doing fine and the Fed could begin hiking rates over the coming quarters. Who knew a relatively benign series of events could knock 11% off the S&P in five days? (FYI, if you are researching past market events, did you know you can go back to ANY daily market commentary on OptionInvestor.com all the way back to 1998? That really comes in handy when trying to learn why the market moved on any particular day.)

Prior to the decline, the market decline the S&P had been moving sideways in a 75-point range for more than five months. Suddenly one morning somebody kicked off a sell program that triggered a cascade event where sell stops were hit causing volume to increase and volatility to explode. Liquidity evaporated because the dip buyers were overrun on the first drop below 2,050. There is not an unlimited supply. Once they are blown out, the market can free fall until sellers run out of stock.

S&P August 2015

The Volatility index had been idling along for an extended period of "abnormally low volatility" just like we are seeing today. I wrote in the Option Writer newsletter on Wednesday, "When volatility returns it seldom arrives slowly. It tends to arrive suddenly and violently." The 2015 market crash was a prime example. The headlines were not expected and individually they were not that bad. The market does not need a reason to decline. It declines when investors large and small suddenly decide in the same week that maybe it is time to take some chips off the table.

I recommend all readers reevaluate the amount of capital they have at risk as we head into the normally volatile Aug/Sep period. Unexpected events do happen with some regularity.

VIX August 2015

The lead economic report on Friday was the GDP for Q2. The headline number rose from 1.24% growth in Q1 to 2.57% in Q2. Consumption contributed 1.93%, fixed investment 0.36%, exports 0.18% and government 0.12%. Inventories removed 0.2%.

Real disposable income rose 3.2%, up from 2.8% in Q1. The personal savings rate declined from 3.9% to 3.8%. The PCE inflation indicator showed a 0.3% rate of inflation, down from 2.2% in Q1. The core rate, excluding food and energy, declined from 1.8% in Q1 to 0.9%.

Despite the fluctuations from quarter to quarter, the economy continues to muddle through the post crisis expansion period at almost exactly a 2% growth rate. The economic expansion is now 8 years old and the third longest in history. In reality, the economy is remarkably stable given the almost full employment and the lack of any material inflation.


The final reading on July consumer sentiment improved slightly to 93.4 from the initial 93.1 reading. This was the lowest reading since October and the second month of 2 point declines. The present conditions component improved from 112.5 to 113.4 and the expectations component declined from 83.9 to 80.5.


We have a busy calendar for next week with home sales, ISM and employment data. The jobs will be the most important with the ADP Employment number expected to rise from 158,000 to 186,000 jobs for July. The ADP numbers have missed expectations to the downside the last several months. The Nonfarm Payroll numbers on Friday are expected to decline from 222,000 to 182,000. The nonfarm numbers have greatly exceeded expectations the last several months. Regardless of the numbers, the Fed is likely on hold until December, according to most analysts and quite a few do not expect any further rate changes until 2018.

The rest of the economic reports have been relatively stable with the occasional dip or gain but remaining near the recent trend.


Stock news was very light on Friday with volume light at 5.99 billion shares. It was a summer Friday and volume was actually a little higher than normal with only three weekends left before kids begin returning to school. If traders are going to squeeze in another vacation, time is running out.

Advancers of 3,504 narrowly beat decliners of an even 3,500. I do not recall seeing them that close in several years. Trading interest was definitely lacking.

Exxon Mobil (XOM) hit a 52-week low intraday after missing estimates. The company reported earnings of 78 cents ($4.3 billion) compared to estimates for 83 cents. Revenue of $62.88 billion did beat estimates for $61.16 billion. Production averaged 3.922 million Boepd and flat with the year ago quarter. Liquids production fell 3% to 2.269 million bpd due to field depletion. Natural gas production rose 2% to 9.92 Bcf per day thanks to gains in Australia. The refining division reported profits of $1.4 billion, up $560 million from Q2-2016. Exxon refined an average of 4.4 million bpd, a 5% increase. Capex declined -24% to $3.9 billion.

The company said they made the final investment decision for the Liza field, offshore Guyana. They are now projecting gross recoverable resources for the Stabroek block at 2.25 billion to 2.75 billion oil-equivalent barrels. That block includes the Liza field and discoveries at Payara and Snoek. They announced results and progress on multiple other discoveries. The company has a lot of future production coming online in the next 3-5 years.


On the flip side, Chevron (CVX) reported earnings of 91 cents compared to estimates for 89 cents. Revenue of $34.48 billion greatly exceeded estimated for $31.18 billion. Overall production rose an impressive 10% to 2.78 million Boepd. Production was boosted by multiple long-term projects coming online. Those include the Gorgon LNG facility, which is now 100% operational and the Wheatstone LNG facility where Train 1 is complete. They also started production at the Angola LNG project, Jack/St Malo in the Gulf, and the Alder project. They did not complete any asset sales in Q2 but they expect to complete another $5 billion by the end of 2017. They are currently producing 175,000 bpd in the Permian with production rising. Overall operating expenses were down 10% and capex spending declined 25% because most of the major projects are now complete. Shares rose $2 on the news and added 14 Dow points.


Dow component Merck (MRK) reported earnings of $1.01 compared to estimates for 87 cents. Revenue of $9.93 billion beat estimates for $9.79 billion. They guided for the full year for earnings of $3.76-$3.88 with revenue of $39.4-$40.4 billion. Revenue for the drug Keytruda nearly tripled to $881 million but their top selling drugs, Januvia and Janumet saw sales decline -8% to $1.51 billion. That missed estimates for $1.62 billion. Shares rose fractionally on the news.


Drug maker AbbVie (ABBV) reported earnings of $1.42 that beat estimates for $1.40. Revenue of $6.94 billion just barely edged by estimates for $6.93 billion. Sales of Humira rose 13.7% to $4.72 billion. Analysts were expecting $4.64 billion. U.S. sales rose 18%. The drug has a list price of $4,441 for a two-pen pack and is used to treat autoimmune disorders. Sales of their Hep-C treatment, Viekira Pak, were $225 million and missed estimates for $2.57 million.

AbbVie has the best drug pipeline in the market with multiple drugs nearing adoption that could generate sales over $1 billion a year each. However, shares declined slightly after earnings.


American Air Lines (AAL) reported earnings of $1.92 that rose 8% and beat estimates for $1.97. Revenue of $11.105 billion rose 7.2% but barely beat estimates or $11.087 billion. They plan on spending $4.1 billion on new aircraft this year as they renew the fleet. They spent $1.1 billion in Q2 for 16 mainline aircraft and 4 regional planes. These are replacing existing planes rather than simply making additions. They repurchased 10 million shares for $450 million and they have $1 billion left on their existing buyback authorization. Shares posted a fractional gain.


Rockwell Collins (COL) reported earnings of $1.64 compared to estimates for $1.58. Revenue of $2.09 billion rose 57% and beat estimates for $2.03 billion. They guided for the full year to earnings of $5.95-$6.15 with revenue of $6.8 billion. They ended the quarter with $578 million in cash. Shares spiked $4.71 on the news. All of the defense contractors have been reporting strong earnings and guidance.


Lithia Motors (LAD) reported earnings of $2.28 that rose 16% and beat estimates for $2.22. Revenue was $2.47 billion. They guided for the full year for earnings of $8.35-$8.50 with revenue from $9.6 to $9.9 billion. Same store sales rose 3%, used vehicle sales rose 4%, service, body and parts sales rose 7%. They announced a dividend of 27 cents payable August 25th to holders on August 11th. Shares rose $7 on the news.


As of Friday, 289 S&P companies have reported earnings and 73% beat expectations. This is above the long-term average of 64% and the short-term average of 71%. Of those 289 companies, 70.9% beat on revenue, also above the 59% and 56% averages. The current forecast for final Q2 earnings is 10.8% growth. There have been 83 instances of negative guidance and 45 companies issued positive guidance. The current 12 month forward PE is 17.9 for the S&P. Next week only one Dow component reports earnings, Apple, with 134 S&P companies reporting. After this week, 423 S&P companies will have reported and the majority of the Q2 earnings cycle will be over.

In addition to Apple earnings on Tuesday evening, Tesla reports on Wednesday, Activision Blizzard and YUM Brands report on Thursday.


Tobacco companies were hammered on Friday after the FDA said it was proposing a cut in nicotine to "non addictive" levels. The FDA chief, Scott Gottlieb, directed the staff to develop new regulations on nicotine. Most non-smokers are always amazed that cigarettes are even legal. Cigarette smoking is responsible for 480,000 deaths annually. If any other product caused even 100,000 deaths, it would have been banned long ago. The FDA said studies have found that reducing nicotine levels by 90%, leads smokers to be "less dependent."

There are concerns that a reduction in nicotine could lead to more smoking and even more harmful effects from the bad chemicals in cigarettes. However, studies have shown that reducing by 90% leads to less smoking because the dependency fades. With the availability of e-cigarettes there is no need to continue inhaling harmful smoke and the FDA is going to force that evolution. The FDA is also going to consider new regulations on cigars. Altria (MO) fell 15% intraday but rebounded to only a 7% loss. You can bet this decline is not over.


Snap Inc (SNAP) continues to decline but we could be nearing a turning point. With a 37% short interest of 69 million shares out of a float of 188 million, investors are betting the lockup expiration is going to be a disaster. More than 85% of the authorized shares will see their lockup expire in August. On Monday, 400 million shares are free to trade. On August 14th another 782 million shares are released. On August 30th another 20 million shares expire. Reportedly, officers and directors hold 60% of the shares to be released so we do not know what they are planning to do. Shares hit $29.44 on the second day of trading and have declined to $13.81 at Friday's close.

Investors have been betting that the lockup expiration will be a disaster given the decline in the stock price. People have seen the value of their holdings decline sharply as Facebook and others have cloned most of SnapChat's features and user growth has slowed dramatically. They may be tempted to jump ship and take whatever they can get today rather than wait for shares to rebound. Many expirations in the past have had the opposite results where very few holders sold and the stock rebounded when shorts were forced to cover. At the same time, there have been disasters so we will not know which occurs until it actually happens.


The Dow Transports crashed last week with a 244-point decline. In theory, the falling transports will be a drag on the Dow industrials but it did not happen with the Dow setting new highs nearly every day. The rising oil prices may be a drag on the transports but I suspect there are other forces in play. Railroads guided for a weak Q3 and shares declined. It was not that there was a shortage of freight but Q3 2016 had a strong uptick in freight so the comps for this quarter will be high. Airlines are packing people in as tight as possible so they are not reporting any serious traffic problems. Trucking companies are running ads for drivers on nearly every Sirius radio station with $5,000 sign on bonuses and guaranteed earnings and future bonuses. They are not hurting for business. This may just be profit taking from the big rebound to new highs but any further declines could be Dow negative.


Crude prices rallied strongly after Saudi Arabia said they would export one million barrels less per day starting in August and U.S. inventories declined sharply. The U.S. rig counts are starting to plateau according to Halliburton and some companies have talked about slowing their production efforts to let prices stabilize. All of those things are positive but one of them is fake news.

Saudi Arabia burns up to one million barrels of oil per day more than normal in August because they use oil to generate electricity for cooling and August temperatures are unbearable in Saudi Arabia. They have played this game many times in the past with promised cutbacks because they know the general public does not know about the extra demand. They cannot export that oil because they need it. Secondly, they said they would export 1.0 mmbpd less not "produce" 1.0 mmbpd less. That is the key fact. If they continue to export less after the August heat passes, it just means they will store the oil for future sale when nobody is watching.

Personally, I am glad Saudi Arabia captured trader's attention with the export ploy because that lifted crude prices, which supports the equity market. Unfortunately, there will come a day later this year when the export numbers rebound. Since the U.S. driving season ends with the Labor Day weekend, that export bump will be in a low demand cycle. Prices will be pressured again.




Markets

The market may have suffered some significant damage to sentiment on Thursday. The S&P suffered an outside reversal day meaning there was a higher high and lower low followed by a lower close on the following day. This is also called a bearish engulfing pattern in candlestick charting. The key here is the word bearish. While there is never a guarantee of future direction, the pattern typically indicates a change in trend. The chart may not look bearish and it may not work out that way but chartists all over the country are looking at those candles this weekend and trying to decide if they should buy the dip or sell the next bounce.

The key point is there is nothing wrong with earnings, the economy or the Fed. There is no specific reason why the market should decline. We know it does not need a specific reason but it normally takes a reason to push investors into action. With earnings expected to be over 10%, congress moving towards tax reform and the Fed on hold for months to come, the decision should be to buy the dip. Washington gridlock is positive for markets because nothing negative can be passed. However, the sudden outbreak of market warnings could be changing the way investors are looking at the market. Add in the fact that August and September are the two weakest months of the year and they may decide to take some chips off the table.

With liquidity shrinking as more and more investors move to passive funds and ETFs, any sudden changes in direction could trigger a significant move. The August correction in 2015 would be a prime example.

Initial support is now 2,465 with 2,483 as solid resistance. If we were to break through that level, the large round number psychological resistance at 2,500 could be a real challenge in a typically weak August.


Nearly every day last week the Dow benefitted from strong earnings related gains in several stocks. Boeing gained 29 points for the week and added 198.5 Dow points. The Dow only gained 250 points for the week so Boeing accounted for 79% of that gain. The odds of that happening again next week are zero. Apple is the only Dow reporter this week and I would be shocked if they posted a significant gain.


Thanks to Boeing and several others, the Dow has broken out to a new high and well over prior resistance. The next hurdle will be the round number resistance at 22,000. Coming in the month of August that could be a significant hurdle. Without a handful of Dow stocks posting large gains, I doubt the index is going to easily exceed that level.

Starting next week, the Dow should begin experiencing post earnings depression. That means traders will begin taking profits in those big earnings gainers and moving on to something else.


On Thursday, the Nasdaq hit 6,461 intraday for a new high then plunged -143 points to 6,318 intraday. The entire move took only about 90 minutes and traders bought the dip. However, the velocity of the rebound was lackluster and recovered only 52 of those points. That was followed by another dip at Friday's open, thanks to Amazon's earnings miss, and the index could not return to positive territory.

Friday's rebound was powered by the big caps with Google recovering some if its losses for the week. Apple remains unstable ahead of its earnings with every forecast imaginable making the rounds. Some have Apple surprising to the upside on the strength of everything but the iPhone and some have it disappointing because people held off on purchases in anticipation of the iPhone Pro/8. Many analysts believe Apple will have to guide lower because of the slippage in production of the new phone. Most analysts are not expecting deliveries until November. The good news is that any slippage will be made up in a much larger Q1. Translation, buy any material post earnings dip.



Over the last three months, we have had three similar declines in the Nasdaq. Only one of them rebounded immediately. The other two had some volatility issues for several days before a rebound occurred. That is entirely possible this time as well. However, since earnings are fading there is less incentive for traders to buy the dip in tech stocks. There has been such a flurry of dire warnings about an impending correction, they may want to cling to cash in hopes that comes true in Aug/Sep.

Support is well below at 6,100 but there could be some stutter steps at multiple levels on the way down. Once a real decline appears, traders will be eagerly awaiting a pause point to begin buying. That should limit any real decline.


The Russell had a decent rally going until Wednesday. The three-day decline knocked it back to support at 1,425 and that is a critical level. A breakdown there should target 1,400 and it would be damaging to market sentiment.


There was a $900 million buy program on the NYSE at the close on Friday. This overcame any decline caused by traders exiting positions ahead of the weekend. It would be nice if we knew who was buying but that information is not available. If it were a well-known hedge fund it would be bullish. If it were a sovereign wealth fund, it would not be particularly bullish because they do not normally time buys to capitalize on dips or opportunities. It is mechanical rather than opportunistic.

The main point to stress this weekend is that the majority of the big cap, high profile earnings are over. Post earnings depression should appear soon. Whether positive earnings expectations for Q3 can overcome that depression is of course unknown. Volume is going to be weak over the next month as vacations wind down and kids go back to school. Money will be leaving the market to pay tuition. I continue to recommend not being overly long in the weeks ahead. Respect the historical trend for weakness in Aug/Sep whether it comes true this year or not.

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Random Thoughts


With the markets closing at new highs on Wednesday, the day this survey closes, I would have expected a significant boost in bullish sentiment. Instead, there was a minor decline. Investors were moving to neutral and away from bearish but not quite bullish. Slightly more than 65% still believe the market is not going higher.



A mystery trader, not the recently unmasked "50 Cent" that works for Ruffer LLP, has acquired 262,000 VIX October $15 calls. To fund it he sold 262,000 VIX $12 puts expiring in October. He used those proceeds to buy a 1x2 call spread, which involves buying 262,000 $15 calls and selling 524,000 $25 calls. If the VIX spikes but does not exceed $25 in October, he could make up to $262 million. If the VIX exceeds $32.50, he would begin to lose money. The October expiration covers two Fed meetings, the Congressional budget battle and the debt ceiling battle at the end of September.



North Korea is nearing the point of military action. On Friday they launched an ICBM that flew 2,299 miles into space, roughly 10 times the height of the International Space Station and then returned to earth about 621 miles from NK to land in Japanese waters. Scientists have calculated the rocket could reach Denver, Chicago or Dallas and any city west of those locations. Kim Jong Un then announced they now have the capability to hit any U.S. city with a nuclear weapon. That remains to be seen since shooting an empty rocket straight up into space is a lot easier than accurately shooting a loaded one horizontally for 7,500 miles. However, U.S. Marine General Joseph Dunford, Chairman of the Joint Chiefs of Staff, contacted his South Korean military counterpart, General Lee Sun Jin, to discuss "military options."

In a new assessment, U.S. officials warned North Korea will be able to launch a nuclear capable ICBM as early as next year. President Trump said he was weighing "some pretty severe things" in response. North Korea already has two satellites that cross over the U.S. twice a day. I really hope they do not have EMP weapons Kim can use in the event North Korea is attacked.


A UK driver had a very bad day on Friday. The driver had just purchased a Ferrari 430 Scuderia, one of only 499 made and worth about $200,000. The car can go 0-60 in 3.3 seconds with a top speed of 198 mph. Within an hour of picking up the supercar, he totaled it when the car went airborne and crashed. The driver escaped with minor cuts and bruises but the car was completely destroyed. When complaining about your bad day, just remember, things could be worse.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Much of the social history of the Western world, over the last three decades, has been a history of replacing what worked with what sounded good."

Thomas Sowell


 


New Plays

Bullish Retailer

by Jim Brown

Click here to email Jim Brown
Editor's Note

Not all retailers are dying for lack of sales. GIII Apparel is actually growing.



NEW BULLISH Plays

INFY - Infosys - Company Profile

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It operates in two segments, Wholesale Operations and Retail Operations. The company's products include outerwear, dresses, sportswear, swimwear, women's suits, and women's performance wear; and women's handbags, footwear, small leather goods, cold weather accessories, and luggage. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under the G.H. Bass brand; and proprietary products under the DKNY, Donna Karan, Andrew Marc, Marc New York, Black Rivet, Wilsons, Eliza J, Jessica Howard, G-III Sports by Carl Banks, and G-III for Her brands. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, Tommy Hilfiger, Karl Lagerfeld Paris, Guess?, Kenneth Cole NY, Cole Haan, Levi's, Vince Camuto, Ivanka Trump, Ellen Tracy, Kensie, and Jessica Simpson brands, as well as has licenses with the National Football League, National Basketball Association, Major League Baseball, National Hockey League, Hands High, Touch by Alyssa Milano, Collegiate Licensing Company, Major League Soccer, Starter, and Warrior by Danica Patrick, as well as approximately 140 U.S. colleges and universities. The company offers its products to department, specialty, and mass merchant retail stores in the United States and internationally. As of January 31, 2017, it operated 411 leased retail stores, which included 190 Wilsons Leather stores, 163 G.H. Bass stores, 50 DKNY stores, 5 Calvin Klein Performance stores, and 3 Karl Lagerfeld Paris stores. The company also operates Wilsons Leather, G.H. Bass, and DKNY branded online stores. Company description from FinViz.com.

G-III shares were pressured in May by the weakness in the retail sector in general. They rebounded in early June on better than expected earnings but were hit again in early July by the next wave of retailer warnings.

In the last quarter, G-III saw sales rise 16% to $529 million. Because of costs associated with the acquisition of Donna Karan they posted a loss of 18 cents but analysts were expecting a loss of 37 cents. Wholesale sales are growing by double digits in most brands. The Wilsons Leather and Bass Stores are the exception and they said they were closing some stores and repurposing some others. The Donna Karan brand is rapidly expanding with new merchandise and G-III thinks it could eventually be their biggest brand. The company is expected to earn $1.27 in 2017 and $1.72 in 2018.

Expected earnings September 5th.

Shares have risen over the last three weeks despite the market volatility. They closed only 20 cents below a five-month high on Friday. A breakout could trigger short covering and additional buying.

Buy GIII shares, currently $25.98, initial stop loss $23.85.
Alternate position: Buy Sept $30 call, currently 66 cents, initial stop loss $23.85.


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


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Back to Support

by Jim Brown

Click here to email Jim Brown

Editors Note:

After failing at 1,452 resistance three times, the Russell 2000 has returned to support at 1,425. The optimistic rally over the prior two weeks has returned to the breakout point and now faces a significant decision. Are traders going to buy small caps ahead of the typically volatile Aug/Sep period or has the summer decline already started?

The Dow managed to close at a new high thanks to UnitedHealth, Goldman Sachs and Chevron. The Nasdaq closed well off its lows but still lost 7 points. The S&P eroded further with a minor 3-point loss.





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.




Lottery Ticket Plays - Updated only on Weekends


Current Position Changes


No Changes



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BULLISH Play Updates

ARNC - Arconic Inc - Company Profile

Comments:

No specific news. Shares declined slightly with the weakness in the Nasdaq.

Original Trade Description: June 24th.

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Arconic Inc develops and manufactures engineered products and solutions for the aerospace, industrial gas turbine, commercial transportation and oil and gas markets. (description from company release)

For Q2, Arconic reported earnings of 32 cents that beat estimates for 27 cents. Revenue of $3.261 billion beat estimates for $3.233 billion. Since the breakup of Alcoa, Arconic has been focused on reducing costs, reducing debt and expanding their product line. They guided for the full year for revenues of $12.3-$12.7 billion, up from prior guidance at $11.8-$12.4 billion. Earnings guidance was raised to $1.15-$1.20, up from $1.10-$1.20. They ended the quarter with $1.8 billion in cash. They declared a 6-cent quarterly dividend payable August 25th to holders on August 4th.

Expected earnings Oct 24th.

After the breakup of Alcoa, Arconic saw their share price double because this was the high tech portion of the business. They make complex aluminum components for airplanes, aerospace, autos and just about everything that needs a high performance, lightweight component. After the big ramp higher they traded sideways for three months along with the market, Shares declined sharply after the high rise fire in England because one of their components was used in the cladding that had recently been added to the building. Investors did not know if Arconic had any liability risk. The answer is probably not.

The contractor on the building combined multiple components in an unsafe manner to cover the outside of the building. It was not an Arconic component that failed and their products conformed to all the building codes. Once that was established shares began to rise again in late June.

Shares closed at $25 on Monday and resistance is $28. They reported earnings before the bell and after a pre-market spike they traded flat for the day with an uptick at the close. I am going to put an entry trigger on this position just in case there is a delayed reaction to the earnings.

Position 7/25/17 with an ARNC trade at $25.35

Long ARNC shares @ $25.35, see portfolio graphic for stop loss.
Alternate position: Long Oct $27 call @ $.95, see portfolio graphic for stop loss.



INFY - Infosys - Company Profile

Comments:

No specific news. Minor rebound.

Original Trade Description: June 26th.

Infosys Limited, together with its subsidiaries, provides consulting, technology, and outsourcing services in North America, Europe, India, and internationally. It provides business information technology services, including application development and maintenance, independent validation, infrastructure management, and business process management services, as well as engineering services, such as engineering and life cycle solutions; and consulting and systems integration services comprising consulting, enterprise solutions, systems integration, and advanced technologies. The company's products include Finacle, a banking solution that provides analytics, core banking, consumer e-banking, corporate e-banking, Islamic banking, mobile banking, origination, payments, SME enable, treasury, wealth management, and youth banking solutions. Its products also comprise Infosys Mana, a knowledge-based AI platform; Infosys Information Platform, an analytics platform that enables to get insights from various data sources for decisions across industries; AssistEdge, CreditFinanceEdge, ProcureEdge, and TradeEdge that are cloud-hosted business platforms; Panaya that enables various SAP and Oracle EBS changes; and Skava, which are digital experience solutions, as well as analytics, cloud, and digital transformation services. The company serves clients in the financial services, manufacturing, retail, consumer packaged goods and logistics, energy and utilities, communication and services, hi-tech, life sciences, healthcare and insurance, and other industries. Company description from FinViz.com.

Infosys reported earnings of 24 cents that rose 5.8% and beat estimates by a penny. Revenues of $2.651 billion beat estimates for $2.629 billion. Revenues rose 6.3% on a constant currency basis. The company announced numerous wins of high profile contracts.

The company is dilligently following its "Renew Now" program with three offerings. Those are Artificial Intelligence, Knowledge-based IT and Design Thinking. During the reported quarter, Infosys continued to renew traditional services and rolled out others in areas such as Cloud Ecosystem, Big Data and Analytics, API and Micro Services, Cyber Security, and IoT Engineering Services. Also, during the quarter, Infosys launched Boundaryless Data Lake, an offering powered by the Information Grid Solution on Amazon Web Services (AWS).

The company raised 2018 guidance with revenue growth in the range of 7.1% to 9.1%, up from 6.1%-8.1%.

Earnings October 13th.

Shares rebounded over the last week to close at a new 9-month high on Wednesday.

Position 7/27/17:

Long INFY shares @ $15.66, see portfolio graphic for stop loss.
Alternate position: Long Oct $17 call @ 25 cents. See portfolio graphic for stop loss.




BEARISH Play Updates

AOBC - American Outdoor Brands - Company Profile

Comments:

No specific news. Shares closed at a new three month low by a few cents.

Original Trade Description: July 22nd.

American Outdoor Brands Corporation, formerly Smith & Wesson Holding Corporation, is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and outdoor enthusiast. The Company operates through two segments. The Firearms segment manufactures handgun and long gun products sold under the Smith & Wesson, M&P and Thompson/Center Arms brands, as well as providing forging, machining and precision plastic injection molding services. The Outdoor Products & Accessories segment provides shooting, hunting and outdoor accessories, including reloading, gunsmithing, gun cleaning supplies, tree saws, vault accessories, knives, laser sighting systems and tactical lighting products. Brands in Outdoor Products & Accessories include Crimson Trace, Caldwell Shooting Supplies, Wheeler Engineering, Lockdown Vault Accessories, BOG POD and Golden Rod Moisture Control, as well as knives and specialty tools under Schrade, Old Timer, Uncle Henry and Imperial. Company description from FinViz.com.

Smith and Wesson saw the future when they changed names to American Outdoor Brands. President Obama was the best firearms salesman ever. He never missed an opportunity to talk down firearms and talk up gun control. Consumers, worried there would be a change in policy, rushed out to buy guns every time there was a new verbal assault on the second amendment. Gun sales hit record levels year after year.

When President Trump was elected as a pro-gun president, the urgency to buy more guns, faded. 2017 is still going to be another record year but only by a thin margin.

Smith & Wesson realized while President Obama was in power they needed to rebrand themselves to avoid the curse of being a prominent gun company in case the laws changed. They changed names to American Outdoor Brands and began a concentrated campaign to acquire a bunch of outdoor brands for products that had nothing to do with the shooting sports but they acquired some of those as well. Scopes, knives, safes, reloading, camping supplies, etc. Unfortunately, their main product line still depended on a continuing rise in firearms sales.

They reported earnings in late June of 57 cents that easily beat estimates for 37 cents. Revenue of $229.2 million beat estimates for $211 million. However, they guided for the current quarter for earnings of 7-12 cents and revenue in the $140-$150 million range. For the full year, they guided for $1.42 to $1.62 and revenue of $750-$790 million. Analysts were expecting $1.61 and $827.8 million. They said gun sales had slowed because of the new president. Secondly, they said they were going to use their unused portion of their $500 million line of credit to acquire additional growth opportunities. That means they were going to leverage up to their max debt to acquire new brands.

The CEO said, "Although good for the long-term viability of the industry, we believe that the election results coupled with a Republican Congress and choice of Supreme Court justice(s) could be a net-negative for [American Brands] as it eliminates any realistic fear of gun regulation, which has been a major driver of gun sales over the past eight years."

Shares declined sharply to $21. Over the last three weeks they have tried to rebound from that level but there is no excitement left. There have been a series of lower highs and Friday's close was below support and a three-month low.

Expected earnings September 24th.

I believe AOBC is going to retest the March lows at $18 if not lower. There are no positive catalysts on the horizon.

Position 7/24/17:

Short AOBC shares @ $20.78, see portfolio graphic for stop loss.
Alternate position:
Long Sept $20 put @ $1.00, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Only a minor rebound and closed well off the highs. Next week could see volatility spike. We will ride it out.

The VIX historical low close was 9.31 on Dec 22nd, 1993. We are at those levels now.

Fundstrat said "go long volatility" because there is a 50% chance of a 10% correction in the S&P over the next three months.

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.




Left Over Lottery Tickets

These positions were left over from prior plays where we had an optional option with no stop after the stock position was closed. Rather than close these for a few cents they are left open as a "Lottery Ticket" play. With months before expiration, anything is possible. A strong move in a single stock can be well worth the additional patience.

These positions are only updated on the weekend.


BOX - Box Inc - Company Profile

Comments:

No specific news. Shares continued their Nasdaq decline from Thursday.

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 Sept $20 call @ 90 cents, see portfolio graphic for stop loss.

Previously closed 7/27: Long BOX shares @ $19.21, exit $19.25, +0.04 gain.



ECA - Encana Corporation - Company Profile

Comments:

No specific news. Shares are holding their prior gains thanks to higher oil prices.

Original Trade Description: March 13th

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 9 cents compared to estimates for 3 cents. Revenue of $822 million also beat estimates for $771.9 million. Production averages 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex will be funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings July 27th.

Over the last couple of weeks an investor built up 7,000 July $11 calls at $1 each and 7,000 October $11 calls at $1.50 each. That is a $1.7 million investment in call options. I am suggesting we follow them in that trade as well as buy the stock. They may know something that is not public information or they just believe that the company is too good to pass up. With the drop in crude prices ECA has fallen to a 5-month low and is resting on the 200-day average.

Update 5/5/17: Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.

Update 6/10/17: Encana agreed to sell its Piceance natural gas assets to Caerus Oil for $735 million. There are 3,100 operated wells that produce 240 million cubic feet of gas and 2,178 barrels of natural gas liquids every day.

Update 7/21/17: Encana reported earnings of 18 cents that easily beat analyst estimates for 4 cents. Revenue of $1.08 billion also beat estimates for $773.2 billion. The outlook and long-term projections were also strong. Shares closed positive but were hampered by a -1.32 drop in oil that tanked the sector.

Position 3/14/17:

Long October $11 call @ $1.40, no stop loss.

Previously closed 4/19/17: Long ECA shares @ $10.43, exit $11.15, +.72 gain.



FRGI - Fiesta Restaurant Group - Company Profile

Comments:

No specific news. Shares collapsed for the week to close at a 4-year low.

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:

Long September $17.50 put @ $1.05, see portfolio graphic for stop loss.

Previously closed 7/21/17: Short FRGI shares @ $18.75, exit $18.85, -.20 loss.



HZNP - Horizon Pharma - Company Profile

Comments:

No specific news. There was a stunning reversal today. Shares rallied 50 cents at the open then reversed to lose 50 cents for the day.

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.



NGVC - Natural Grocers Vitamin Cottage - Company Profile

Comments:

No specific news. Shares rebounded sharply the last two days. This may be a case of people exiting plays in the market weakness and looking for stocks already beaten up in hopes of a rebound from a position of relative safety.

Original Trade Description: June 24th.

Natural Grocers by Vitamin Cottage, Inc., together with its subsidiaries, operates natural and organic groceries, and dietary supplement retail stores in the United States. Its stores offer natural and organic grocery products, such as organic produce; bulk food and private label products; dry, frozen, and canned groceries; meat and seafood products; dairy products, dairy substitutes, and eggs; prepared foods; bread and baked products; and beverages. The company's stores also provide private label dietary supplements; body care products comprising cosmetics, skin care, hair care, fragrance, and personal care products containing natural and organic ingredients; pet care and food products; household and general merchandise, including cleaning supplies, paper products, dish and laundry soap, and other common household products; and books and handouts. As of June 6, 2017, it operated 138 stores in 19 states. The company operates its retail stores under the Natural Grocers by Vitamin Cottage trademark. Natural Grocers by Vitamin Cottage, Inc. was founded in 1955 and is headquartered in Lakewood, Colorado. Company description from FinViz.com.

The company reported earnings of 13 cents that missed estimates for 16 cents. Revenue of $192.2 million missed estimates for $197.3 million. Same store sales declined -1.7%. They narrowed their full year guidance to earnings of 50-54 cents. They said they were cutting back on the number of new stores previously announced. That is a sure sign they are seeing competitive pressures on the business. The CEO warned that "the food retailing environment remains challenging."

The Amazon announcement just made their retailing environment significantly more challenging. NGVC has a very nice produce section of organic produce and a small grocery department roughly one fourth the size of a Whole Foods Market. Another 25% of their space is dedicated to vitamins. I visit one about once a week for a couple items. I have long ago switched my vitamin buying to Amazon because of the significantly reduced cost. I ran out of something a couple weeks ago and thought I will just swing by NGVC and get a bottle. The price was so high compared to Amazon, the sticker shock had me leaving the store empty handed. I had it from Amazon two days later.

I am afraid that is what many people are learning. It is hard to beat Amazon prices and the selection is much larger. NGVC was a niche store 10 years ago and did well. Now that Safeway, Walmart and Kroger carry so much organic food, NGVC is having trouble competing.

Expected earnings August 3rd.

NGVC shares are in free fall after their earnings. The Amazon announcement just greased the slide a little more.

Update 6/29/17: NGVC won the "Good Egg Award" at the Good Farm Animal Awards Ceremony in London. Shares spiked to $8.60 at the open to stop us out of the stock position at $8.45. The option position remains open.

Position 6/26/17:

Long August $7.50 put @ 28 cents, see portfolio graphic for stop loss.

Previously closed 6/29/17: Short NGVC shares @ $8.06, exit $8.45, -39 cent loss.





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