Option Investor
Newsletter

Daily Newsletter, Tuesday, 8/1/2017

Table of Contents

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

Market Wrap

Dead Stop at 22,000

by Jim Brown

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The Dow gapped open to 21,988 but could not move higher as traders hit the sell button.

Market Statistics

The Dow sold off immediately from that first attempt at 22,000 but tried again at 11:AM and again at noon. Both attempts stopped just under that round number resistance. After the initial morning volatility, the Dow traded in a narrow 50-point range the rest of the day. Apple gained $9 in afterhours and that would add about 50 points to the Dow if the gains hold overnight. That would lift the Dow over 22,000 based on the 21,960 close but I really doubt we will see a breakout. The likely scenario would be an opening touch of that level and then a fade as traders sell the news.


There was a heavy economic calendar this morning but none of it impacted the market. The CoreLogic Home Price Index for June rose from 6.6% to 6.7% as the gain over June 2016. The surplus of home price reports means they are all ignored.

Construction spending for June declined -1.3% compared to zero in May and analyst estimates for a +0.8% gain. Public construction spending fell -5.4%. Private construction spending fell -0.1%. Residential spending fell -0.2% and removing home improvement spending drops that to -0.3%. To put this in perspective U.S. construction spending was still $1.21 trillion with private construction at $940.7 billion. Highway spending fell -6.6% and spending on educational buildings fell -5.5%.

The ISM Manufacturing Index for July fell from 57.8 to 56.3. Analysts expected 56.5. The average for 2017 is 56.4 so we are right in the range. New orders declined from 63.5 to 60.4 and order backlogs declined from 57.0 to 55.0. Production slipped from 62.4 to 60.6 and employment fell from 57.2 to 55.2. Analysts fear a slowdown in auto manufacturing over the next several months will drag on the ISM and the GDP. Manufacturers are expected to extend the down time as they retool for the new model year. This is typically how they deal with excess inventory. Plants will remain closed after the retooling until inventories deplete.


Annualized auto sales for July were 16.8 million compared to the 16.7 million in June. This was the fifth month in this range and represents a plateau of sorts. Light truck sales fell from 10.72 million to 10.55 million and -1.6% lower than year ago levels. This is the first time that has happened since 2011. Auto sales rose from 5.98 million to 6.21 million but that was 12.5% lower than June 2016 and the lowest level since 2011. The average selling time for a new car/truck at a dealer was 76 days and the longest since 2009. Incentive spending/discounts averaged $3,900 per vehicle. According to JD Powers, that was a record for July.

For months, I have been writing about the declining credit availability for auto loans. Banks are seeing 3% delinquencies on existing loans and the highest since 2011. Some banks are no longer doing auto loans and the Fed has mentioned this credit tightening in recent months.

Personal income was flat in June and the lowest since November. Analysts expected a 0.4% rise. If rental income had not risen +0.6% the headline number would have been negative. Obviously, the vast majority of workers do not have rental income. Employee compensation rose +0.4% but proprietors income declined -0.1% and income on assets fell -1.8%. May's total personal income rose $53.2 billion but June income declined -$3.5 billion.

Personal spending was also flat after a +0.2% rise in May. Durable goods spending declined -0.1%, motor vehicles and parts -0.8%, household furnishings -0.1% and recreational spending -0.1%. Spending on clothing rose 0.7% and gasoline +1.2%.

Analysts believe the tight labor market is going to cause wages to rise along with spending but the increases are slow to appear. Rising wages will pull disenchanted workers back into the job market and their spending will increase significantly.

The PCE Deflator derived from those reports above, was flat at zero inflation for June. This came after a -0.1% decline in May. With zero inflation for the last two months, the Fed is going to struggle to justify another rate hike unless there is a dramatic change in inflation soon. The Fed continues to claim the low inflation is "transitory" but their time frame for rising inflation has now lengthened to "the next several years." That sounds more like wishful thinking than actual data.

Tomorrow we see the ADP Employment for July. The expectation is for a gain of 186,000 jobs. ADP estimates have been much higher than the real numbers over the last several months. Let's hope analysts got it right this time.

The Nonfarm Payrolls on Friday are expected to show a gain of 182,000 jobs, down from 222,000 in June. The nonfarm estimates have been low for the last several months.

The numbers are not going to matter unless there is a very large miss in either direction. The Fed is on hold until December so other than some minor volatility, the numbers will be ignored.


The calendar that matters is the earnings calendar. Tesla reports on Wednesday after the close with Yum and Activision Blizzard on Thursday. After this week is over more than 425 of the S&P 500 companies will have reported and the pace of the remaining reports will decline significantly.


The 800-pound gorilla that will determine Wednesday's market direction reported earnings after the close. Apple reported earnings of $1.67 ($8.72 billion) compared to estimates for $1.57. Revenue of $45.41 billion beat estimates for $44.71 billion. They guided for the current quarter to revenue of $49-$52 billion. Analysts were expecting $49.15 billion. Apple sold 41.03 million iPhones compared to estimates for 40.7 million. For Q2-2016 they sold 40.4 million. CEO Tim Cook had previously said Q2 might be a little sluggish as people waited for the iPhone Pro/8 to be announced.

The guidance seems to indicate that there will be an announcement in September. It is a good guess that the iPhone 7 and 7s Plus will be updated in September with the SE seeing a possible update in August. The guidance did not lend any credibility to a potential manufacturing delay in the Pro/8 but they also did not put the fears to rest.

Apple also sold 11.42 million iPads compared to estimates for 9.03 million. They shipped 4.29 million Macs and missed estimates for 4.33 million.

If Apple can hold the gains through the open on Wednesday, they could power the Dow to touch 22,000. Whether the Dow will hold that level is another question.


Under Armour (UA) reported earnings before the bell and it was not pretty. The company reported a loss of 3 cents compared to estimates for a 6-cent loss. Revenue of $1.09 billion rose 8.7% beat estimates for $1.08 billion. They guided for earnings of 37-40 cents for the full year, which was lower than the 42-cent estimate. They guided for revenue growth of 9-11% compared to prior guidance of 11% to 12%.

The company said it was launching a restructuring plan and would close facilities, existing leases and cut jobs. They will take a full year charge of $110-$130 million. They have already closed 33 factory outlets and 23 UA stores in the last 12 months.

Footwear sales declined -2.4% compared to the 40% growth in Q2-2016. This chart from Quartz, shows the progression of footwear revenue over the last 13 quarters. Sales are plunging and so is the stock price.


Shares of UA fell -10.4% to a historic low. The declines are likely to continue.


Lumber Liquidators (LL) rocketed higher after posting earnings of 16 cents that beat estimates for 8 cents. That reversed a 45 cent loss in the year ago quarter. Revenue rose 11% to $253.5 million and beat estimates for $256 million. Shares rose 36% on the news. This was the best quarter since the scandal over the Chinese flooring.


Shopify (SHOP) reported a loss of 1 cent that easily beat estimates for a 6-cent loss. Revenue rose 75% to $151.66 million and beat estimates for $143 million. The company said a record number of retailers joined the platform and more than 500,000 retailers in 175 countries now used the service. Cash on hand rose from just under $500 million in March to more than $932 million. More than 131 million people have purchased from a Shopify store in the last 12 months. Shares rallied 13% on the news.


Xerox (XRX) reported earnings of 87 cents compared to estimates for 80 cents. Revenue of $2.57 billion missed estimates for $2.62 billion. The company guided for full year earnings of $3.20-$3.44 compared to estimates for $3.32. Xerox completed a 1:4 reverse split in June.


Snap Inc (SNAP) will not be eligible for inclusion into the S&P-500 and Russell indexes because of new rules requiring voting rights for shareholders and prohibiting companies with multiple share classes. This will not impact existing companies including Google, Berkshire Hathaway. The Russell indexes passed a rule last week requiring unaffiliated investors to have at least 5% voting rights in order to be in a Russell index. The S&P indexes followed suit with the multiple share class restriction. Existing companies with multiple classes are grandfathered under the new rule.

The SNAP IPO gave investors in their multiple share classes little to no voting rights. The two founders retained 88.6% of the voting rights. Alphabet (GOOGL-GOOG) started the craze in 2014 when they did a 2:1 split where the new shares had no voting rights in order to protect the founders from being diluted. When Facebook went public, Zuckerberg retained the preferred shares with 10 votes each while regular shareholders only received 1 vote.

The SNAP lockup expiration has begun with 400 million new shares available to trade. On August 14th another 782 million shares will be free to trade. Shares closed at a new low on Tuesday.


After the bell AMC Entertainment (AMC) shares fell -25% to $15.70 after the company warned it expected to report a loss of $1.34-$1.36 per share for the quarter. That compares to earnings of 24 cents in the year ago quarter. The big hit will come from a $202.6 million impairment charge on its investment in National CineMedia LLC. The results also include a 4.4% decline in the U.S. box office results. The company also warned of "lower estimates for a very challenging third quarter." They plan on raising an additional $30 million through higher prices, promotions and adjustments to operating hours and staffing levels. They recently completed the $1.2 billion acquisition of Carmike Cinemas. They will report earnings on August 7th.


Oil prices fell more than 2% after a Bloomberg News survey showed that OPEC production rose another 210,000 bpd in July after a 393,000 bpd increase in June. We also learned that compliance with the 1.8 mmbpd production cut enacted in January by OPEC and non-OPEC producers, fell from 90% to 78% in July. That is the lowest compliance for the year. To do the math for you, that means they only cut 1.4 mmbpd in July or 400,000 bpd less than their promise.

After the bell today, the API inventory report for last week showed a surprise rise of 1.779 million barrels compared to expectations for a -2.8 million barrel decline. If the EIA report on Wednesday shows an increase as well, we could be headed back to $45 oil.




Markets

The S&P posted the biggest gain in a week at +6 points but it failed to retest resistance at 2,485. The index traded in a very narrow 7-point range and all the gains came at the open. There was some morning volatility but that ended at noon and the range shrank to 2 points for the rest of the day. This is NOT a bullish sign. Obviously, everyone was waiting for Apple to report before putting new money to work. Unfortunately, the S&P futures are only up 2 points in afterhours. Now that the excitement is over, does that mean the sellers will appear? Only time will tell.


The Dow "should" be on track to touch 22,000 on Wednesday. However, even with Apple's big $9 afterhours gain, the Dow futures are only up 42 points. Immediately after the Apple spike the futures rose to 22,025 but they have since declined to 21,948. That does not suggest Apple is going to push the index over that 22,000 level but there is still a lot of darkness before the market opens. Anything is possible.

Personally, I would not be surprised to see the 22,000 level touched but then get hit by a sell the news event. These big round number targets act as magnets but once touched they can reverse polarity and repel the index just as quickly.



The Nasdaq only gained 15 points today despite being well off its highs and posting three days of declines. This was a very lackluster session but obviously, everyone was waiting for Apple. Now that Apple has reported, investors are free to place bets in the direction of their choice. The Nasdaq futures are up +44 points and the majority of that is Apple's 9 point gain. If the Nasdaq rolls over and breaks support at 6,335 it could be a long drop. Conversely, if Apple's gains energize the sector there is very strong resistance at 6,400 and 6,460.



The small cap Russell 2000 posted a gain but it was also lackluster. The index barely moved over the critical 1,425 level and it definitely was not a bullish bounce.


With the futures well off their highs, I am concerned we could get a sell the news event on Wednesday. I would be happy if I am wrong but the market feels heavy despite the broad gains on Tuesday. Volume was only moderate at 6.3 billion shares and now that Apple has reported, the earnings excitement will fade along with the volume.

There is no reason to rush into the market. There is always another day to trade if you have capital in your account. Retail traders normally turn bullish right at the top in the market and exactly at the wrong time. Be patient. Let's see what Wednesday brings.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Overnight Weakness

by Jim Brown

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Editor's Note

The futures spiked immediately after the Apple earnings and $9 gain. The Dow futures spiked to 22,025 and everyone thought Wednesday was going to be a breakout day. In the hours after the evening session closed the Dow futures have declined to 21,945 and are slowly bleeding points. The S&P futures have decline to only +1.50 and the Russell futures are down -1.00. The Nasdaq futures are holding at +42 and that is purely based on the $9 Apple afterhours gain.

There is a good chance we could see a spike at the open on Wednesday and then a sell the news event. I am recommending we wait and watch on Wednesday and see what happens.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Dow Dragging Market Higher

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow remains the market leader and helped to lift the other indexes on Tuesday. The Dow gapped up to 21,988 and held its gains but could not move higher. The round number resistance at 22,000 is encouraging traders to light up on longs and enter speculative short positions. The Dow range after the opening spike was only 50 points the rest of the day.

Apple beat on earnings and gained $9 in afterhours. That is good for nearly 50 Dow points at the open on Wednesday if the gains hold overnight. That would put the Dow right back at 22,000 once again.





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


ARNC - Arconic Inc
The long position was stopped at $24.50.

AOBC - American Outdoor
The short stock position was stopped at $20.95.



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BULLISH Play Updates

ARNC - Arconic Inc - Company Profile

Comments:

No specific news. Shares declined sharply at the open to stop us out then rebounded to close with a gain of 31 cents.

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

Closed 8/1: Long ARNC shares @ $25.35, exit $24.50, -.85 loss.
Alternate position:
Closed 8/1: Long Oct $27 call @ $.42, exit .20, -.22 loss.



GIII - G-III Apparel - Company Profile

Comments:

No specific news. Shares posted a decent gain to push through resistance.

Original Trade Description: June 29th.

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.

Position 7/31/17:

Long GIII shares @ $26.10, see portfolio graphic for stop loss.
Alternate position:
Long Sept $30 call @ 72 cents, see portfolio graphic for stop loss.



INFY - Infosys - Company Profile

Comments:

No specific news. Minor rebound but still fighting resistance.

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.



KR - Kroger - Company Profile

Comments:

No specific news. Minor gain but still a gain.

Original Trade Description: July 31st.

The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food for sale in its supermarkets. The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of January 28, 2017, the company operated 2,796 retail food stores, including 1,445 fuel centers; 784 convenience stores; and 319 fine jewelry stores and an online retail store, as well as franchised 69 convenience stores. The Kroger Co. was founded in 1883. Company description from FinViz.com.

Expected earnings September 14th.

Shares crashed from $30 to $20 on the Amazon announcement but over the last week a strong rebound has begun. Whole Foods has 340 stores. Kroger has 2,796 stores. Whole Foods sells to a high dollar consumer, thus the nickname Whole Paycheck Foods. They have an estimates 12 million potential customers. Kroger sells to everyone with a potential customer base of more than 200 million. Amazon is not going to be a threat to Kroger for a long time even if the acquisition gets approved and that is still an unknown with multiple committees researching antitrust issues and the current administration clearly anti-Amazon.

I am recommending we ride the stock back up until reality returns to the price.

Position 8/1/17:

Long KR shares @ $24.50, see portfolio graphic for stop loss.
Alternate position: Long Sept $25 call @ $.98, see portfolio graphic for stop loss.




BEARISH Play Updates

AOBC - American Outdoor Brands - Company Profile

Comments:

No specific news. Shares spiked at the open to stop us out of the short stock position for a minor 17 cent loss. The long put is still in play and will move to the Lottery Play section next weekend.

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:

Closed 8/1: Short AOBC shares @ $20.78, exit $20.95, -.17 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 decline. This week could see volatility spike starting on Wednesday. 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.

Shortsqueeze.com is reporting current short interest at 63 million shares out of 88 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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