Option Investor
Newsletter

Daily Newsletter, Monday, 9/25/2017

Table of Contents

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

Market Wrap

North Korea At It Again

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

North Korea says we've declared war on them, and the market didn't really care. Aside from that there was so much to digest I don't know where to start other than at the beginning. Asian markets were mixed on election results in New Zealand and Germany. New Zealand's Nationalist Party won their election although by a smaller than expected margin while in Germany Angela Merkel's won here election with similar results. Both causing their respective currencies to fall versus the dollar as political uncertainty remains.

Japanese politics didn't help any as PM Shinzo Abe has announced a $17 billion dollar stimulus package and the dissolution of the lower house of parliament. He is seeking a stronger mandate to push further reforms. Indices throughout both regions made small moves for the most part; results were mixed, some closing up and some down. Japan led in Asia with a gain near 0.5% while Germany led in Europe with a more modest 0.03%. The Hang Send led losses with a decline of -1.36% while losses in Europe were closer to -0.30%.

Market Statistics

Futures trading indicated a slightly lower open for most of the morning. The SPX was indicated to lose about 3 points at the open with little to support it in the early hours. The open was calm, surprisingly calm in retrospect, trading near perfectly flat for a half hour before a brief rally moved up to test break even. About this time, just before 10:30AM, news from North Korea hit the wires with comments from a minister that Trump had declared war on it. This news caused a fast and rapid sell-off that left the index down about -12 points. Bottom was hit at 2,490 at which level a double bottom formed. This resulted in a move higher but less than half the days losses were recouped. By 2:45 the index was heading lower again but support was quickly found. Another bounce had it moving up by the close but still not enough to recoup the days losses.

Economic Calendar

The Economy

Not much in the way of data this morning, just the Chicago Fed's Activity Index. The index came in at -0.31%, falling from last month's 0.03%, but remains in line with economic trend. The indicator is a composite of some 85 indicators and a broad measure of the economy. It is reported in four broad categories of which 2 fell this month and 2 provided negative impact. The categories are Production and Income, Spending and Housing, Employment/unemployment and hours, and Sales, Orders and Inventories. Production and spending both contributed negatively, production fell. Employment and sales both contributed positively but employment fell.


Moody's Survey of Business Confidence gained 0.1% this week to hit 30.8%. This is a 3 week high and the 2nd week of recovery since the last dip. Mr. Zandi says the index shows global business sentiment is strong and stable as it has been all year, and that forward outlook is even stronger.


The 3rd quarter earnings cycle has begun but there are still a few weeks until peak season. So far 6 S&P 500 companies have reported with 4 beating on earnings and 4 beating on revenue. The blended rate of growth is now 4.2%, the lowest it's been in the 6 month's of data I have available. Now that the season has started, based on long running averages, we can expect to see this rise over the next 2 months with a final rate somewhere in the range of 8.5% to 9.5%.


Forward earnings outlook has firmed and likely to rise soon. This is because the energy sector is expected to lead with earnings growth in the range of 110%. With oil prices on the rise forward outlook will likely rise as well, dragging the all-index expectation with it. That being said 4th quarter outlook held steady at +11.1%, as did Q1 2018 at 10.3%. Q2 2018 fell from 10.2% to 10.1%. Full year 2017 held steady at 9.6% while full year 2018 ticked lower to 11%. Bottom line, estimates have fallen from their highs and may fall further but forward outlook is positive and strong.


The Dollar Index

The Dollar Index got a boost today that only threats from North Korea could contain. The elections in Germany and New Zealand both weakened their currencies versus the dollar while the stimulus package and snap-elections in Japan have driven another wedge between BOJ and FOMC policy. The dollar index gained a little more than a half percent to trade at the $92.50 resistance line. The index is in a consolidation within a down trend that may turn out to be a bottom. A break above resistance would be bullish in the near term at least with a chance of moving higher short to long term. If it is able to break out of this pattern and move higher next resistance is at $92.75 and then near $93.50.


The Gold Index

Gold prices had been down and trading under $1300 on a strong dollar. Then the North Korea news sent a jolt through the market and unleashed a small flood of safe-haven seekers. This drove the metal up more than 1% to trade above $1,310 but the move does not look sustainable. More North Korea news could support in the near term but near to short term outlook for the dollar is bullish so gains in gold will likely be limited and could easily reverse.

The gold miners got a boost from gold's gains. The miners ETF GDX rose nearly 1.5% creating a long green candle moving up from support and capped by resistance. Support is the long term moving average near $23, resistance is the short term moving average near $23.75 and a previous level of resistance within the long term trading range. The indicators are rolling into a bullish signal that has yet to confirm. A move above resistance would be bullish but only near term with next target at $24.75. Gold may move higher near term, longer term it looks firmly range bound.


The Oil Index

The oil price move up today and set a 5 month high. The price gained nearly 3% to trade above $52 as a number of bullish catalyst work their way through the market. The first is expectations for OPEC to extend its production cut. The second is an increase of demand forecast by OPEC and others for this year and next. Third are signs from the CFTC that hedge funds are getting increasingly bullish on oil prices. Long term prices may remain low relative to the peak but near term is bullish with upside target at $55.

The Oil Index gained about 1.5% to create a long green bodied candle and set another new high. The index has now moved higher for 22 of 25 days and showing evidence of steady, continued and strong buying within the sector. There may be a pullback, if there is it'll be a buying op, but I don't know that it's going to happen anytime soon without a dip in oil prices. The sector was expecting 100% earnings growth on $45 oil, now that prices are moving up forward expectations for the sector will grow. The play for now may be to sell puts, make some cash up front with a chance to buy on a dip.


In The News, Story Stocks and Earnings

Apple fell another -1% today as reportedly tells it suppliers to slow down on iPhoneX production. The news is yet another slam to iPhone bulls who were betting on a big roll out. Today's action brings the stock down to just above support targets at the long term moving average and in a range where long term investors may begin to get interested again. The indicators are bearish and gaining strength so I would expect to see support tested and possibly retested before bouncing. The long term trend is still up and this is Apple we're talking about.


Target announced it would raise its minimum wage to $11 in October and to include seasonal holiday employees in the new wage. The company is going to raise it further over the next few years with a target of $15 by 2020. The news did not seem to phase investors, I'd have thought the idea of lower profits or higher prices for product would scare people off. The stock fell early, opened at support and then rose throughout the day. The candle is small but green, confirming support at the long term moving average. The short term moving average is just below the longer term and looks like it could crossover in the near term.


The VIX spiked today but it doesn't look like it will develop into much yet. The move created a medium sized candle with long upper shadow testing resistance near the short term moving average and the $11 level. The indicators are rolling over and showing a bullish buy signal so resistance may be tested again. A move above $12 would be bullish and consistent with correction. So long as it doesn't go above $16 any correction that may come will likely be short and shallow.


The Indices

The indices began the day tentatively, there is a lot going on without North Korean antics and reason enough to be wary. The North Korean news sent the market moving lower but the move was a head-fake. By the end of the day the candles were looking optimistic and one index in particular set a new high. The Dow Jones Transportation Average gained 0.11% and is now a hairs breadth away from tickling its all time high. The index is drifting up following the break of a near term continuation pattern. The indicators are bullish and on the rise with positive forward economic outlook so I am bullish. That being said resistance is at the all time high and may cause consolidation or pull back, if so I would view it as a buying opportunity.


The NASDAQ Composite fell the hardest, -0.87%, and created a smallish red bodied candle with visible lower shadow. Today's candle tests support at the short term moving average and at least indicates there is some there. I'd say it confirms if not for the close below the moving average and the bearish indicators. The indicators are pointing lower after bearish crossovers and consistent with a test of support and/or move lower. A confirmed break of the moving average would be bearish with downside target near 6,250 and the long term up trend line. A bounce form the short term moving average would confirm support, be bullish and trend following.


The Dow Jones Industrial Average made the 2nd largest decline, -0.23%. The blue chips created a small hammer doji sitting on a long term up trend line and a small test of support. The indicators are consistent with a crest within an up trend but have not yet turned bearish. Support is the up trend line in the near term, a break below there may not fall far as the short term moving average is just below. A break below that would be more bearish with downside target near near 21,750. A bounce from the up trend line would be bullish, trend following and confirm support.


The S&P 500 closed with a loss of -0.22% and just ahead of the blue chips. The broad market created a small hammer like doji candle just above the short term moving average. Today's action is bearish in the near term and a test of support. The indicators are consistent with this test and suggest a move down to the moving average at 2,380 may be possible. A break below 2,380 could take it down to the long term trend line near 2,450. A bounce from current levels and/or the short term moving average would be bullish and trend following.


Today's news was mainly geopolitical, had little impact on economic or growth outlook and was shrugged off by the market. The indices themselves are a bit mixed but generally consistent with consolidation and rotation within an up trend. We may see today's weakness develop into a stronger test of support but at this time it does not look like a major correction is brewing. With earnings season at hand and expectations for this quarter, next quarter and all of next year I just don't see any reason to sell other than on news or some development that hasn't happened yet (to my knowledge). I am bullish for the long term and eyeing this dip as a buying opportunity for the near term.

Until then, remember the trend!

Thomas Hughes


New Plays

Patiently Waiting

by Jim Brown

Click here to email Jim Brown
Editor's Note

There is a buying opportunity in our future if we are patient. Using better judgment means not rushing into weak markets. The indexes retreated farther away from the recent highs and there are a lot of broken charts. We are in the most volatile three-week period of the year and even without the political cliffhangers, there is plenty of risk. I am glad to see the market pullback but that does not mean I want to catch a falling knife. S&P futures are down -3.50 as I type this. There is no rush to enter new positions and I saw nothing in my scans today that was screaming buy me.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Another New High

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 only gained 1 point but it was a new high. The Russell posted a gain when all the rest of the indexes were down. The Dow lost 53 points and Nasdaq 56 points. The S&P was slightly better at -5 points. The Russell was the star performer but posted only minor gains.

The Nasdaq was down hard with all the big cap tech stocks posting large losses. A noted analyst warned he was seeing a slowdown in the semiconductor sector and all the chip stocks crashed.





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


AMD - Advanced Micro
The long call position was entered at the open.

HIMX - Himax
The long stock position was stopped at $9.65.



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BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile

Comments:

AMD and Nvidia declined after Intel announced the next generation in the Core CPU line for desktops. This 8th generation Core-i7-8700K is the bet gaming processor ever with an internal clock frequency of 4.7 Ghz and Intel's fastest ever. They will also support 4K video. This is a challenge for AMD but the company is still ahead of Intel in the GPU race.

Original Trade Description: Sept 23rd

Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. Its primarily offers x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete graphics processing units (GPUs), and professional graphics; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. The company provides x86 microprocessors for desktop PCs under the AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; and microprocessors for notebook and 2-in-1s under the AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brand names. It also offers chipsets with and without integrated graphics features for desktop, notebook PCs, and servers, as well as controller hub-based chipsets for its APUs under the AMD brand; and AMD PRO mobile and desktop PC solutions. In addition, the company provides discrete GPUs for desktop and notebook PCs under the AMD Radeon brand; professional graphics products under the AMD FirePro brand name; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. Further, it offers microprocessors for server platforms under the AMD Opteron; embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, and G-Series brand names; and semi-custom SoC products that power the Sony Playstation 4, Microsoft Xbox One, and Xbox One S game consoles. Company description from FinViz.com.

Expected earnings Oct 24th.

Nvidia (NVDA) shares were rocked last week after news broke that Tesla was looking at moving to AMD and away from Nvidia for the chips to power the autonomous driving functions. The initial headline saw AMD spike and Nvidia decline. The actual story is that AMD and Nvidia are partnering on creating a chip solution for Tesla. It is no surprise that AMD is in the mix because Tesla hired Jim Keller to lead development of Autopilot. Keller previously worked at AMD and led the development of the Zen architecture and the new Ryzen processors.

It appears that Nvidia and AMD have a team of about 50 engineers working to develop a comprehensive solution for Tesla. Here is where it gets interesting. I would not be surprised to see Tesla make an acquisition bid for AMD. The company only has a $13 billion market cap compared to $110 billion for Nvidia. AMD has a lot of products that are different from the Nvidia product line even though they both make GPUs. AMD has only existed for years as a foil for Intel. The bigger company could not be considered a monopoly as long as AMD existed. Now with Qualcomm getting into the processor market and AMD and Nvidia in a high tech partnership, it would make sense for Nvidia to acquire AMD. Since GPUs are a small part of AMD's product line, there may not be that much regulatory concern. Is it a long shot? Absolutely, but definitely in the realm of possibilities.

Even if there is never an acquisition bid, just the combination of AMD and Nvidia in a partnership validates the technical capabilities of AMD and lifts them into the big league. Where AMD has always been a low cost alternative to Intel and always 1-2 generations behind in technical expertise, they have dramatically improved their game in the last 12-18 months. Instead of being road kill on the Intel superhighway to state of the art processors, they have surged to be a real competitor. Partnering with Nvidia is a real step up for the company.

The chart is ugly with no apparent trend but there is decent support at $12. They could easily catch fire as investors begin to understand the ramifications of the partnership and we could see another leg higher like the one that started the prior May. There are no guarantees but I do not believe anyone sees AMD's future as anything but positive given recent events.

Position 9/25/17:

Long AMD shares @ $13.25, see portfolio graphic for stop loss.
Alternate position: Long Jan $14 call @ $1.25, see portfolio graphic for stop loss.



DVAX - Dynavax - Company Profile

Comments:

No specific news. Back over the upper end of the consolidation range.

Original Trade Description: Sept 20th

Dynavax Technologies Corporation, a clinical-stage immunotherapy company, focuses on leveraging the power of the body's innate and adaptive immune responses through toll-like receptor (TLR) stimulation. Its product candidates are being investigated for use in multiple cancer indications, as a vaccine for the prevention of hepatitis B and as a disease modifying therapy for asthma. The company's lead product candidates include HEPLISAV-B, an investigational adult hepatitis B vaccine, which is in Phase III clinical trials; and SD-101, an investigational cancer immunotherapeutic that is in Phase I/II studies. Its product candidates also comprise AZD1419, which is in Phase II clinical trial for the treatment of asthma; DV230F that is in preclinical stage for the treatment of liver tumors; and DV1001, a TLR 7&8 agonist, which is in preclinical stage for the treatment of for multiple malignancies, as well as DV281 for the treatment of non-small cell lung cancer. It has collaboration and license agreements with AstraZeneca AB to develop AZD1419 for the treatment of asthma; and Merck & Co. to develop SD-101 for varios immuno-oncology therapies. Company description from FinViz.com.

Dynavax has a vaccine for Hepatitis B. Shares crashed on August 10th when the FDA asked for more information despite a 12-1 vote to approve it. The results of the request for info will be released no later than November 10th according to the company. They are confident the drug will be approved and they are already targeting an early 2018 release date.

Cathy Reese of Empire Asset Management said investors should use the current volatility to buy the stock and she has a $38 price target.

Earnings Nov 1st.

Shares have rebounded from the early August dip as investors become more confident the vaccine will be approved. Shares peaked a $21.85 on September 11th and then faded for a week as profit taking appeared. Wednesday's close was a 7-day high.

I am not planning on holding this position into the announcement. I would like to exit by the end of October to avoid any unplanned declines.

Options are very expensive because of the big expectations. This will be a stock only position.

Postion 9/21/17:

Long DVAX shares @ $21.10, see portfolio graphic for stop loss.



ETSY - Etsy Inc - Company Profile

Comments:

No specific news. Not a big decline but initial support failed.

Original Trade Description: Sept 13th.

Etsy, Inc. operates as a commerce platform to make, sell, and buy goods online and offline worldwide. Its platform includes its markets, services, and technology, which enables to engage a community of sellers and buyers. The company offers approximately 45 million items across approximately 50 retail categories to buyers. It also provides various seller services, including direct checkouts, promoted listings, and shipping labels, as well as Pattern by Etsy to create custom Websites; and seller tool and education resources to start, manage, and scale businesses to entrepreneurs primarily through Etsy.com. In addition, the company operates A Little Market, a handmade and supplies market for sellers and buyers. Company description from FinViz.com.

For Q2, the company reported earnings of 10 cents that rose from a 6-cent loss in the year ago quarter. Revenue rose 19.1% to $101.7 million. Active sellers rose 10.9% to 1.83 million. Gross merchandise volume rose 11.7% to $748 million. Sales on mobile devices rose 47%. International sales rose 31% to 32% of gross sales. The number of employees in the workforce declined 23% thanks to an aggressive push by the CEO to expand profitability.

They guided for gross merchandise sales to rise 12% to 14% for the full year, up from prior guidance of 11.7%. Full year revenue is expected to rise 18% to 20% and in line with the 19.1% in Q2.

The company is growing rapidly, especially internationally and they are reducing costs significantly. Over the last several months, they replaced the CEO, CFO and CTO in their push to grow the company and profits quickly.

Expected earnings Nov 2nd.

On Sept 7th a Davidson's analyst, Tim Forte, went all in on ETSY with a glowing forecast. Shares spiked to $17.50 and then faded for a couple days. They have rebounded over the last three days and closed at a new high on Wednesday.

Position 9/14/17:

Long ETSY shares @ $17.79, see portfolio graphic for stop loss.
Alternate position: Long Dec $20 call @ 70 cents, see portfolio graphic for stop loss.



HIMX - Himax - Company Profile

Comments:

Susquehanna warned they see a semiconductor slowdown in progress. Shares if HIMX declined to our stop loss to take us out of the stock position. The option position is still open and will move to the Lottery Plays next weekend.

Original Trade Description: Sept 9nd

Himax Technologies, Inc., a fabless semiconductor company, provides display imaging processing technologies to consumer electronics worldwide. The company operates through Driver IC and Non-Driver Products segments. It offers display driver integrated circuits (ICs) and timing controllers used in televisions (TVs), laptops, monitors, mobile phones, tablets, digital cameras, car navigation, and other consumer electronics devices. The company also designs and provides controllers for touch sensor displays, liquid crystal on silicon micro-displays used in palm-size projectors and head-mounted displays, light-emitting diode driver ICs, power management ICs, scaler products for monitors and projectors, tailor-made video processing IC solutions, and silicon IPs. In addition, it offers digital camera solutions, including complementary metal oxide semiconductor image sensors and wafer level optics, which are used in various applications, such as mobile phone, tablet, laptop, TV, PC camera, automobile, security, and medical devices. The company markets its products to panel manufacturers, agents or distributors, module manufacturers, and assembly houses; and camera module manufacturers, optical engine manufacturers, and television system manufacturers. Company description from FinViz.com.

Himax produces video drivers for 4K TVs and that accounted for 36% of total revenue in Q2. However, the big news comes from the 3D sensing chips. They are expecting a 90% increase in revenue from this technology in Q3. There are rumors that Himax is going to supply the 3D sensing technology for the new iPhones. Since several companies are rumored to have been selected, somebody is riding the rumor wave.

Since Himax guided for a 90% increase in revenue in Q3 from those sensors, it would suggest there is a surprise in store for the chip community.

They also provide chips for vehicle display panels and they recently guided for demand to jump from 135 million units in 2016 to 200 million by 2022.

On August 30th, Qualcomm and Himax jointly announced a new high resolution, low power, active 3D depth sensing camera system to enable conputer vision capabilities such as biometric face authentication, 3D reconstruction and scene perception for mobile, IoT, surveillance, automotive and AR/VR. They specifically said it would enable Android smartphones to have unparalleled 3D experiences. They called it "game changing technology for smartphones." This technology is the culmination of 4 years of research and development by these two firms.

Shares rallied on the announcements but then faded last week. The company issued a press release suggesting an Oppenheimer analyst had become too excited about the prospects and they reaffirmed their recent guidance. The fading excitement erased $1.50 in gains but support appeared at $10 and the overall uptrend should resume.

Expected earnings November 7th.

Position 9/11/17:

Closed 9/25/17: Long HIMX shares @ $10.31, exit $9.65, -.66 loss.
Alternate position: Long Dec $11 call @ $1.20, see portfolio graphic for stop loss.



KTOS - Kratos Defense - Company Profile

Comments:

No specific news. Minor retracement.

Original Trade Description: August 14th.

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.

China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.

Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.

Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense department spending.

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

Just over the last couple weeks Kratos announced a $2.9 million order for an airborne communications system, a $10 million order for a ballistic missile defense system, $23 million for a military radar system and $8 million for a GPS Satellite protection system. Analysts are expecting a record $800 million in revenue for 2018. They expect to do $150 million in unmanned revenues in 2018.

Kratos posted earnings of 1 cent and a $10.4% increase in revenue to $186 million. They guided to be free cash flow positive by $25 million in 2017.

Expected earnings Oct 26th.

With the daily new contract awards shares have risen $1.50 in the last week and closed at a 5-week high on Monday. They are very close to breaking out to a new high.

Update 9/5/17: New high in a weak market. Unfortunately, after the close they announced a secondary offering of 12.5 million shares that will increase the float by 14%. If I recommended we sell at the open on Wednesday, we are going to get hit with the normal "sell the news" decline. If we retain the position, stocks normally rise after a secondary is completed. We can either take a loss on Wednesday or hang on for a bigger gain later. I am recommending we hold the position. I am removing the stop loss to avoid being knocked out of the position for a loss. Shares declined to $12.80 in afterhours, a drop of $1. If that is all the decline we get, I would be very happy.

Update 9/6/17: KTOS announced a $46 million contract with the Saudi Royal Navy to assist in increasing military communications and preparedness. They also announced the QWK Integrated Solutions LLC, a partnership of multiple defense firms had won a $3.038 billion five year contract. The partnership will provide for rapid development and integration of space, missile defense, cyber, directed energy and related technologies to support SMDC/ARSTRAT and the warfighter.

Update 9/11/17: The company announced it had successfully completed a required number of missions with their jet powered unmanned drone system. The missions are part of the performance demonstrations prior to delivery of ten drones over the next six months. The customer was not announced for security reasons. However, a program they announced with the Navy several months ago called for delivery of 10 drones in 2017 with the potential for multiple follow on orders in 2018. This could be part of that project.

Update 9/18/17: Kratos deployed the first fully autonomous vehicle in Colorado with the Colorado Dept of Transportation. The robot vehicle replaces the trailing vehicle in a work construction crew. It follows the crew throughout the day and acts as a mobile crash barrier. Previously, a CDOT employee had to drive a specially built truck mounted with impact absorbing rear bumpers. Basically, this protects the work crew on the road by giving erratic drivers something to hit other than the work crew. There is still the problem of the driver in this truck when a car, truck or semi plows into the truck at 70 mph. In Colorado these bumper trucks were hit an average of 7 times per year, sometimes with injury to the CDOT drivers. The Kratos robotic crash guard truck has no driver so nobody is injured with an errant civilian vehicle crashes into it. The robot vehicle monitors the work crew and maintains a safe distance behind them with enough lane coverage to keep them from getting hit.

Update 9/21/17: KTOS successfully completed the third test of AN/SPY-6(V) Air and Missile Radar (AMDR) against a live ballistic missile target. The new radar is slated to begin service on the Navy's next generation Arleigh Burke Class Guided Missile Destroyer currently under development. This is a big step for Kratos.

Position 8/15/17:

Long KTOS shares @ $12.78, see portfolio graphic for stop loss.
Alternate position: Long Nov $15 call @ 65 cents, see portfolio graphic for stop loss.

With shares just crossing the $12.50 strike price, we had to reach out to $15 and a distant month.



MRVL - Marvel Technology - Company Profile

Comments:

No specific news. Down on analyst warning about slowdown in the sector.

Original Trade Description: August 30th.

Marvell Technology Group Ltd. designs, develops, and markets analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It offers a range of storage products, such as hard disk drive (HDD) and solid-state drive controllers, as well as HDD components, such as HDD preamps components; and develops software enabled silicon solutions consisting of serial advanced technology attachment port multipliers, bridges, serial attached SCSI, and non-volatile memory express redundant array of independent disks controllers and converged storage processors for enterprise, data centers, and cloud computing businesses. The company also provides networking products comprising Ethernet solutions comprising Ethernet switches, Ethernet physical-layer transceivers, and single-chip network interface devices; and embedded communication processors. In addition, it offers a portfolio of connectivity solutions, including Wi-Fi, and Wi-Fi/Bluetooth integrated system-on-a-chip products, which are integrated into a variety of end devices, such as enterprise access points, home gateways, multimedia devices, gaming products, printers, automotive infotainment and telematics units, and smart industrial devices. Further, the company provides printer-specific standard products, as well as full-custom application-specific integrated circuits; and communications and applications processors. Company description from FinViz.com.

Marvel reported earnings of 30 cents that beat estimates for 28 cents. Revenue of $605 million beat estimates for $601 million. Free cash flow more than doubled from $38 million to $89 million. Core revenues rose 6%, storage controller revenues rose 13%. SSD chips rose from 20% to 25% or revenue. The new SSD products are rapidly gaining market share and remain a high profit item. Gross margin was 60.4%. They guided for Q3 for revenue of $595-$625 million with earnings of 30-34 cents per share.

Expected earnings Nov 23rd.

The company is in the midst of a restructuring process while they are changing their product mix for the better. Apparently it is working.

Shares spiked from $15.75 to $17.25 after earnings then pulled back slightly on post earnings depression. They rebounded today to a new 2-month high and very close to a new high.

Position 8/31:

Long MRVL shares @ $17.79, see portfolio graphic for stop loss.
Alternate position: Long Oct $18 call @ 64 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

DF - Dean Foods - Company Profile

Comments:

No specific news. Shares closed at a new 5-year low.

Original Trade Description: September 16th.

Dean Foods Company, a food and beverage company, processes and distributes milk, and other dairy and dairy case products in the United States. The company manufactures, markets, and distributes various branded and private label dairy case products, such as fluid milk, ice creams, cultured dairy products, creamers, ice cream mixes, and other dairy products; and juices, teas, bottled water, and other products. It sell its products under approximately 50 national, regional, and local proprietary or licensed brands, and private labels, including DairyPure, TruMoo, Alta Dena, Berkeley Farms, Country Fresh, Dean's, Friendly's, Garelick Farms, LAND O LAKES, Lehigh Valley Dairy Farms, Mayfield, McArthur, Meadow Gold, Oak Farms, PET, T.G. Lee, Tuscan, and others. The company sells its products to retailers, distributors, foodservice outlets, educational institutions, and governmental entities through its sales forces. Company description from FinViz.com.

Dean Foods reported earnings of 21 cents that declined -47.1% and missed estimates for 31 cents. Revenue of $1.93 billion, which also missed forecasts. The CEO warned, that volume and mix challenges are occurring at a higher-than-planned rate. As such, given the resulting volume shortages, they lowered their full-year guidance from $1.35-$1.55 to 80-95 cents. That is a major haircut.

On August 22nd the CFO resigned unexpectedly, effective Sept 1st. That is never good when a CFO exits with only one-week's notice.

Expected earnings Nov 8th.

Dean Foods handles a lot of milk brands and the USDA said milk sales nationwide declined -2.9% in May alone. Management said competitive and volume pressures are hurting the company and the negative dynamics are expected to continue the rest of the year.

Milk has been found to cause diabetes or at least make it worse and the news is spreading fast. I have a friend that has been taking insulin for 20 years. I talked him into dropping milk from his diet and he was able to get off insulin within 3 weeks. A year later he backslid and began to drink milk again and he had to go back on insulin. He was quickly convinced and has sworn off forever and now leads a normal life with no diabetes meds.

Shares fell sharply to a 5-year low but given the severity of the guidance warning and the size of the earnings miss, the stock could continue to decline.

We shorted this stock on August 10th at $11.37 and shared dipped about 60 cents then rebounded to take us out of the short. The long put ended 6 cents in the money after shares began to roll over again. I believe we are going to see new lows.

Position 9/18/17:

Short DF shares @ $11.02, see portfolio graphic for stop loss.
Alternate position: Long Dec $10 put @ 40 cents, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

No specific news. Since this is a long-term position, there will not be daily commentary.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF 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 five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

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 into year-end we could see a sharp decline in the VXX over 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.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:

Short VXX shares @ $40.95, see portfolio graphic for stop loss.





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