Option Investor
Newsletter

Daily Newsletter, Monday, 8/7/2017

Table of Contents

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

Market Wrap

More Of The Same

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The broad market moved sideways within a very narrow range for the 13th trading day in a row, and the Dow set another new all time high. Neither moved looks very strong yet both are supported by fundamentals and outlook; the economy is growing, earnings are growing and both are expected to keep growing. The Index of Labor Market Conditions has been indicating the onset of robust economic growth for some time, the Index of Leading Indicators has begun to confirm that outlook.

Asian indices moved higher in their Monday session. Traders were cheered by the strong NFP figures from Friday and the prospect of economic strength in the US. Australia led with a gain near 1.0% while others in the region closed with gains closer to 0.5%. European indices were not so buoyant as tension between North Korea and the rest of the world escalate. The United Nations imposed new sanctions aimed at cutting $3 billion out of the countries export income which resulted in new threats from Pyongyang. The strategy now appears to be taunting North Korea into expending their arsenal with empty threats.

Market Statistics

Futures trading was quiet this morning. US indices were indicated to open flat to mildly positive and that held true throughout the morning as there were little in the way of earnings and no economic reports to move the market. The open was calm and orderly, the indices began trading with marginal gains that pushed the Dow Jones Industrial Average to a new all time high. An early morning test of support resulted in a double bottom and reversal that led to new intraday highs for all the major indices. The new highs were only a hair above the opening highs and after noon trading moved sideways from there so overall action was tepid and sideways.

Economic Calendar

The Economy

No official data today but we did still get the Moody's Survey of Business Confidence. This week global business confidence fell -1.0% to a 4 month low. Despite the fall Mr. Zandi says confidence remains strong and evidence of an economy growing above its potential. Pricing power has been able to hold up through the summer as sales, hiring and investment remain firm.


Another earnings cycle is drawing to a close and once again the final rate of growth is well above expectations going into the season. So far 84% of the S&P 500 has reported earnings and of those 72% beat EPS estimates while 70% beat revenue estimates, both well above average. On a sector by sector basis 10 of the 11 S&P sectors are showing growth and 10 of 11 sectors are doing better than expected. The blended rate of growth jumped another 2% this week to 10.1% and is now sitting at the highest level this cycle and matching expectations dating back to early February. With another 36 companies reporting this week the figure is likely to rise further.


Looking forward expectations are still positive and gain strength into the end of next year but, of course there is a but, those expectations have taken a hit in recent weeks. Looking to next quarter earnings growth is expected to 5.6%, this is down from near 10% earlier in the year. The following quarter, Q4, is now expected to see earnings growth of 11.4%, down from 12.5% 3 months ago but still robust. The bright side is that full year growth outlook is on the rise and at a 3 year high. Also, based on the averages, we can expect to see the final growth rates for each of these quarters come in about 4% better than expected which will boost full year growth further.


The Dollar Index

The Dollar Index gave up some of the gains it made Friday as traders come to terms with the NFP release. The release was above expectations at 209,000 but not overly strong. It supports the idea of tightening labor markets and economic growth but not so much an impetus for the Fed to raise rates in the near to short term. The CME's Fed Watch Tool still shows only, at best, a 50/50 chance for rate hike by December. Economic data may support the dollar between now and then but likewise strong or strengthening data in the EU could lift ECB outlook and undermine the dollar. Today's action shaved about -0.17% off the index which is trading just above long term 15 month lows. This level may prove strong enough to stop or even reverse the dollar but I expect to see it tested once or twice before giving that kind of signal.


The Gold Index

Gold prices hovered at a one week low. The metal fell last week on a surge in the dollar that today looks like it could be a knee-jerk counter trend movement. Spot price trade around $1264 in a very tight range while traders try and decide what to do next. This is a low impact data week save for Friday's CPI release so sentiment more than anything will drive prices. A break below $1260 may find support at $1250 or $1235, a bounce from this level will likely retest the recent high just above $1280 with a chance of moving up to the short term highs just above $1300.

The Gold Miners ETF GDX fell -0.15% to sit just above support targets at the bottom of the 7 month trading range. The ETF failed to move up from the bottom of the range and is now hanging just below the long term moving average and indicated lower. Both MACD and stochastic are showing bearish crossovers and stochastic showing a bit of strength. The stochastic signal now qualifies as a strong signal albeit one within a trading range and just above potentially strong support. This support is near $22, a break below which would be bearish.


The Oil Index

Oil prices trend sideways today in a volatile session. Prices were pushed lower on rising output and high supply levels and then later supported by economic growth outlook, demand hopes and this week's OPEC compliance meeting. OPEC ministers are meeting today and tomorrow to discuss the production cap and how to encourage compliance. OPEC has been struggling with its self imposed cap because member nations sneak oil onto the market. Most recently ramping production in violence plagued Libya and Nigeria are impacting overall supply from the cartel. If they aren't able to stem the flow in some way prices are sure to fall back below $45. WTI fell more than -1.0% intraday and closed with a loss of -0.5% but the daily range was within the near term 7 day range. A break below this range, bottom near today's low at $48.40, would be bearish.

The Oil Index shed -0.75% today but price remained within the near term consolidation pattern. The index appears to be in consolidation within a near term up trend and posed to move higher. The indicators are currently pointing lower in confirmation of resistance levels but convergences with recent highs suggest those levels will be tested again. A break above those highs, just above the long term moving average, would be bullish but face additional resistance near 1,170. If OPEC fails to support prices and the index falls support is likely to be found near 1,120 and the short term moving average.


In The News, Story Stocks and Earnings

Tyson Foods reported before the bell. The supplier of all things meat delivered juicy results beating on the top and bottom line. EPS of $1.28 beat by more than 6% on revenue that grew 4.8% YOY and beat estimates by 3.7%. Gains were driven by volume and pricing increases that led management to raise forward guidance to a range above consensus. Shares of the stock jumped more than 5% on the news but were capped at the top of a short term trading range.


CBS reported after the bell and beat on the top and bottom lines. According to CEO Les Moonves the skinny bundles work. He went on to say that Showtime had a terrific quarter and that 2018 would be even better (for CBS). EPS of $1.04 beat by $0.06 and helped drive share prices up by more than 1% in after hours trading.


The VIX continues to trend at/near long term and historic lows. It has in fact moved down to set a new long term low since the last time I looked at it. Today's action saw the index move down from the short term moving average in a move that looks like it will continue going lower to retest the new long term low. The indicators are consistent with an asset trading within a range and possibly moving lower within that range. If so, downside target is near 9.00. A move up may indicate a near term rise in fear but would not be significant until breaking above resistance at the long term 150 day moving average. Until then the index is consistent with bull market conditions.


The Indices

The indices moved higher but once again the move was not very strong. The days leader was the S&P 500 with a gain of 0.16% but the index has still not set another new high. Today's action created another small bodied candle trading within the near term consolidation range. The indicators are consistent with consolidation within an uptrend and have begun to roll over into what may become the next trend following entry. A break to new highs would be bullish with upside target in all time territory.


The Dow Jones Industrial Average posted the 2nd largest gain in today's action, 0.12%, and did set a new all time high. The blue chips created a small bodied candle at new all time highs in a move that continues to drift higher. The indicators are bullish and pointing higher so this move may continue into the near term.


The NASDAQ Composite made the 3rd largest move, 0.11%, and may have begun to move higher after its recent drop to support. Today's action is still within the 7 day trading range but bullish and moving toward the top of the range. The indicators have begun to roll over into bullish trend following signals which would support such a move. A break above 6,400 would be bullish and take the index up to the current all time high with the possibility of reaching new all time highs.


The Dow Jones Transportation Average brings up the rear with a gain of only 0.08%. The transports created a very small spinning top doji just below resistance and looks like it may trade sideways for the next day or so. The indicators are a bit mixed but rolling into a bullish signal that would reverse the near term down trend and confirm the short and long term up trends. Resistance is at 9,300, near a former all time high, a break above which would be bullish. Support is currently along the long term moving average, a break below which would be bearish.


The indices are moving higher and there doesn't seem to be much in their way. The moves, while weak in the near term, are continuations of long and short term trends that are themselves supported by economic growth, earnings growth and positive outlook for both. I am firmly bullish for the longer terms and cautiously bullish for the nearer because it's better to be cautious than busted. When the next sell-off correction occurs I'll be ready.

Until then, remember the trend!

Thomas Hughes


New Plays

Losing Market Share

by Jim Brown

Click here to email Jim Brown
Editor's Note

Companies with new technology are supposed to gain not lose market share. 3D Systems missed on earnings and revised guidance lower.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

DDD - 3D Systems - Company Profile

3D Systems Corporation, through its subsidiaries, provides 3D printing products and services worldwide. The company's 3D printers transform data input generated by 3D design software, CAD software, or other 3D design tools into printed parts using a range of print materials, including plastic, nylon, metal, composite, elastomeric, wax, polymeric dental materials, and Class IV bio-compatible materials. It offers various 3D printing technologies, such as stereolithography, selective laser sintering, direct metal printing, multijet printing, and colorjet printing. The company also develops, blends, and markets various print materials, such as plastic, nylon, metal, composite, elastomeric, wax, polymeric dental materials, and Class IV bio-compatible materials. It offers its printers under the Accura, DuraForm, LaserForm, CastForm, and VisiJet brand names. In addition, the company provides digital design tools, including software, scanners, and haptic devices, as well as products for product design, mold and die design, 3D scan-to-print, reverse engineering, and production machining and inspection. Further, it offers proprietary software and drivers that provide part preparation, part placement, support placement, build platform management, and print queue management; and 3D virtual reality simulators and simulator modules for medical applications, as well as digitizing scanners for medical and mechanical applications. Additionally, the company provides warranty, maintenance, and training services; on-demand solutions; and software and healthcare services. Company description from FinViz.com.

3D reported adjusted earnings of 8 cents compared to 12 cents in the year ago quarter. Revenue rose less than 1% to $158.4 million but sales of 3D printers declined -4%. Analysts were expecting 12 cents and $162.5 million.

The company guided for the full year for revenue of $643-$671 million, down from $643-$684 million. They guided for earnings of 46 cents, down from 51-55 cents.

3D keeps talking about new products adding to revenue in 2018 but that is a long way off and could be wishful thinking.

Expected earnings November 1st.

Shares fell $5 on the earnings and guidance miss but I expect them to fall further. If shares break support at $12, they could fall to $6 and a 7-year low.

Sell short DDD shares, currently $12.96, initial stop loss $14.25.
Alternate position: Buy Sept $12 put, currently 45 cents. No stop loss.



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



In Play Updates and Reviews

All Calm

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the indexes posted gains but they were far from exciting. The Dow added another 25 points to its 9th consecutive record close but the momentum is slowing. The index hit its high at noon of 22,121 but traded almost perfectly flat the rest of the day to close 4 points lower. There was no excitement. The S&P gained 4 points to close at a new record high of 2,480.91 but no excitement there either. The index is still 4 points below its intraday high of 2,484 on July 27th. The Russell gained only 1 point. The Nasdaq gained 32 but failed to reach resistance at 6,395.

The broader indexes, S&P and Russell gained 4 points or less suggesting a lack of conviction in the broader market. The Dow gained thanks to 3 stocks. With the normally weak Aug/Sep period ahead there may be some fear about putting more money in the market.





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


SABR - Sabre Systems
The short position was entered at the open.

INFY - Infosys
The long stock position was stopped at $15.55.



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BULLISH Play Updates

GIII - G-III Apparel - Company Profile

Comments:

No specific news. Another minor gain but a new 5-month high.

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 but shares finally declined enough to knock us out of the long stock position. The long call position is still open and will move to the Lottery Play section next weekend.

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:

Closed 8/7: Long INFY shares @ $15.66, exit $15.55, -.11 loss.
Alternate position: Long Oct $17 call @ 25 cents. See portfolio graphic for stop loss.



KR - Kroger - Company Profile

Comments:

No specific news. Another decent 1% rebound but not yet recovered from Thursday's drop.

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.



RCII - Rent A Center - Company Profile

Comments:

No specific news. Shares dropped back to prior resistance, which should now be support.

Original Trade Description: August 2nd.

Rent-A-Center, Inc., together with its subsidiaries, leases household durable goods to customers on a rent-to-own basis. The company operates through four segments: Core U.S., Acceptance Now, Mexico, and Franchising. It offers durable products, such as consumer electronics; appliances; computers, including tablets; smartphones; and furniture, including accessories under rental purchase agreements. The company also provides merchandise on an installment sales basis; and offers the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks within retailer's locations. It operates retail installment sales stores under the Get It Now and Home Choice names; and rent-to-own and franchised rent-to-own stores under the Rent-A-Centre, ColorTyme, and RimTyme names. As of December 31, 2016, the company owned and operated approximately 2,463 stores in the United States, Canada, and Puerto Rico, including 45 retail installment sales stores; 1,431 Acceptance Now kiosk locations in 40 states and Puerto Rico; 478 Acceptance Now virtual (direct) locations; and 130 stores in Mexico, as well as franchised 229 rent-to-own stores in 31 states under the Rent-A-Center, ColorTyme, and RimTyme names. Company description from FinViz.com.

Earnings were not good. The company posted a loss of 1 cents compared to estimates for earnings of 7 cents. Revenue of $677.6 million did beat estimates for $664.7 million. The problem was a number of new initiatives that take time to manifest into gains. This is a company with a portfolio of loans on household goods and there is not much they can do to change that on a qtr to qtr basis. The new initiatives only apply to new business so it takes a while to generate a large portfolio under the new rate plan. Core U.S. sales rose 230 basis points in Q2. Acceptance Now, a new initiative, saw sales rose 380 basis points. The average monthly rate of new finance agreements rose 5.7%. Higher end products now compromise 65% of store inventory. Same store sales in existing stores rose 6.7%.

Expected earnings Oct 25th.

Hedge fund Marcato Capital Management demanded the company sell itself or it would start a proxy war to replace the entire board. Hedge fund Engaged Capital has already been demanding a company sale arguing that a restructuring could best be done by new owners. Engaged won a proxy fight and now has 3 board members. RCII turned down offers from HIG Capital, Lone Star Funds and Vintage Capital over the last several months. Marcato said the $15 offer from Vintage was the opening offer and would rise if RCII would negotiate with Vintage and open its books.

The stock appears to be rising on takeover interest. Resistance is $16 and the stock traded as high as $37 in the last couple of years. If Vintage does raise their offer it would probably be in the $16-$16.50 range. Whether RCII would accept it is unknown.

With multiple sharks circling and two hedge funds demanding a sale, there could actually be competing offers once RCII decides to negotiate. The downside would appear limited.

Position 8/3/17:

Long RCII shares @ $13.63, see portfolio graphic for stop loss.
Alternate position: Long Sept $15 call @ 30 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

SABR - Sabre Corp - Company Profile

Comments:

Bank of America downgraded the stock from neutral to underperform (sell) and shares fell sharply at the open. It would have been nice if they had waited until after we were in the position. Shares fell about $1 at the open, rebounded slightly and then rolled over again in the afternoon. I think BAC helped us overall since it will put added pressure on the stock.

Original Trade Description: August 5th.

Sabre Corporation, through its subsidiary, Sabre Holdings Corporation, provides technology solutions to the travel and tourism industry worldwide. It operates through two segments, Travel Network, and Airline and Hospitality Solutions. The Travel Network segment operates as a business-to-business travel marketplace that offers travel content, such as inventory, prices, and availability from a range of travel suppliers, including airlines, hotels, car rental brands, rail carriers, cruise lines, and tour operators with a network of travel buyers comprising online and offline travel agencies, travel management companies, and corporate travel departments. The Airline and Hospitality Solutions segment provides a portfolio of software technology products and solutions through software-as-a-service and hosted delivery models to airlines, hoteliers, and other travel suppliers. This segment offers SabreSonic Customer Sales & Service, a reservation system that provides capabilities around managing sales and customer service across an airline's diverse touch points; Sabre AirVision Marketing & Planning, a set of airline commercial planning solutions; and Sabre AirCentre Enterprise Operations, a set of solutions for planning and management of airline, airport, and customer operations. The Airline and Hospitality Solutions segment also provides software and solutions to hoteliers through SynXis, a central reservation system; SynXis Property Manager Solution for property management; and marketing, professional, and revenue management services. Company description from FinViz.com.

American Airlines founded the company in 1960 and spun it off in 2000. Texas Pacific Group and Silver Lake Partners acquired it in 2007. They listed on the Nasdaq in 2014. Sabre is the largest global distributions systems provider for air bookings in North America.

Sabre closed its first week of trading at $16.50 in April 2014. The odds are good we are going to see that level again soon. They recently reported earnings of 35 cents that matched estimates. Revenue rose 6.6% to $900.7 million and beat estimates for $895 million.

The company announced a new "cost reduction and business alignment program" with the goal of saving $110 million a year in expenses. They are going to reduce global headcount by 9%. They reiterated their full year guidance of $3.54-$3.62 billion and earnings of $1.31-$1.45. However, they said earnings would likely come in at the lower half of guidance. Think about that for a minute. We are going to affirm our guidance but earnings will be at the low end of that guidance. Did they actually affirm guidance of lower guidance?

They said the poor results were related to multiple factors. They halted work on the implementation of their new SabreSonic reservation system, no reason given but clearly it was not going well. They said they were seeing higher stability, security and technology costs related to a "security incident" in their Sabre Hospitality central reservation system during the quarter. Were they hacked? They did not say. Lastly, they said they were dealing with accounting changes for revenue collected from customer Alitalia, which is going through a bankruptcy process. Typically that means you get pennies on the dollar for receivables. The guidance was not good. Shares crashed from $22 to $19.50.

There was a dead cat bounce over the next couple days and now they are heading lower again. I do not see any reason why anyone would want to own Sabre when there are much better companies like Priceline, Tripadvisor, Trivago, Expedia, etc.

Expected earnings Oct 31st.

Shares closed at a two-year low on Friday at $19.73 and could be headed for a retest of the post IPO low at $15.

In addition to the short on the shares we have two ways to play the option. We can buy the October $17.50 put for 10 cents and forget about it. It will expire before earnings so it will have to be in the money at some point in the future to make any money. It is $2 OTM now and October has 75 days until expiration. If we want to roll the dice, the January $17.50 put is only 45 cents. That lets us hold over the October earnings, which should be disappointing. And gives us an extra 90 days to profit. The difference is $35 in cost. The key here is that January is well out of our normal 30-45 day play scenario. I am going to recommend the October option but you should choose the one that best suits your risk reward profile.

Position 8/7/17:

Short SABR shares @ $19.02, see portfolio graphic for stop loss.
Alternate position: Long Oct $17.50 put @ 40 cents, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Despite all the indexes closing positive, the volatility did not decline appreciably. Investors are still worried about the Aug/Sep period.

The CBOE's Russell Rhoads, said this is the least volatile market since the 1960s. 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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