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Daily Newsletter, Wednesday, 10/4/2017

Table of Contents

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

Market Wrap

October Off To A Bullish Start

by Keene Little

Click here to email Keene Little
October has continued the uptrend from August and it has most feeling very bullish about the market. Oddly enough, the bulls would have a better chance for a bullish month if it had started in a downtrend. There's a lot that's conspiring against the bulls this month but most are not considering the risk.

Today's Market Stats

The day started a little weaker than most recent days by gapping down instead of up. But the little dip was immediately bought and the indexes were pushed to new highs. That was followed by a steeper pullback for the RUT and tech indexes but only a partial pullback for the blue chips. As can be seen in the table above, the volume was on the low side and market breadth was about as neutral as it can get.

Following a long run higher, today's price action is either a bullish consolidation day or it's part of a topping process, even if the top will only lead to a multi-day pullback before heading higher. As I'll get into, there are a few reasons why October might not be kind to all those who are expecting the rally to continue this month, but it's also clear it's not a good time to try catching rising knives. I think it's a good time for both sides to exercise some caution.

Before the bell we got the ADP Employment report and at +135K it came in weaker than expectations for 160K and less than the +228K in August (which was lowered from the initial report of +237K). There was virtually no reaction in the futures after the release of the report and the same thing might happen with the nonfarm payrolls report this Friday. The impact from the recent hurricanes will get the blame and therefore any number will likely be ignored.

But with a continuation decline in Federal tax receipts there's reason for worry about a slowing economy, regardless of any government employment numbers. And it seems there's still only one concern -- WWFD (What Will the Fed Do). Any signs of economic weakness, which is not good for the stock market, is trumped by a Fed that will be forced into remaining accommodative to the stock market, I mean economy.

The ISM Services report was released at 10:00 and showed an improvement to 59.8 from 55.3 in August. It was also better than the 55.3 that was expected. Again, no reaction from the market. Economic reports are simply being ignored right now.

It's a quiet time for the market as it waits for earnings season to kick off and in this quiet period it's been good to be a bull. Just keep buying the little dips (that's all we're getting) and stay long. We're entering a typically volatile month so staying long through larger price swings could be a challenge for some, especially if they're late buyers. Each trader/investor needs to know where you want your stop levels (or none if you believe in the longer-term bull market) and then be sure to honor them. Or buy some puts for downside protection and then hope you don't have to use them (like all insurance we buy, we hope we'll never have to use it but it's nice when it's needed).

We made it through August and September unscathed by the bears and now it seems most everyone is looking forward to a bullish conclusion to the year as we enter the typically bullish 7-month period (October-April). But in a year that has defied the typical seasonal patterns should we be careful about the next seasonal pattern? Perhaps we should be a little more careful than the bullish masses right now and keep checking our six (behind us) now and then to be sure a bear attack doesn't sneak up on us.

For one thing, Octobers in the years ending in 7 have a reputation as bull killers, not the normal bear killer associated with the month. For another, entering the month of October in an uptrend tends to end up being a bearish month. October is known for its volatility so we should at least be prepared for a little more price swings than we've seen since August. That alone could jar more than a few bulls who have come to expect nothing but up.

What should be worrisome to bulls right now is that they're not alone. From a contrarian perspective, there are simply too many bulls (and therefore likely already invested in the stock market) and not enough bears. Trading in the direction of the majority works well (the trend is your friend) but it's important to identify when that trend could be in trouble. In a volatile month a reversal of the trend could lead to a whipsaw move to the downside and the fast move would likely come from panic selling.

The CNN Fear & Greed index following yesterday's close hit 92, a high not seen since before 2015 (as far back as the chart goes). The index closed a point lower at 91 today.

To give a sense for where we are with this Fear & Greed index, the chart below shows the past 3 years and compares the F&G highs with highs for SPX. The last time it was this high (above 90) was in July 2016, which was followed by a decent pullback into November. But notice that the highs for the index tend to be a little early in indicating when a market top is found. This chart tells us we're in countdown mode into a market top, even if for just a larger pullback/consolidation.

The bulls would certainly like to see nothing more than a flat consolidation this month and then higher into the end of the year. But there are additional reasons why the bulls might not want to test that theory, as I'll discuss further below.

CNN Fear & Greed index vs. SPX, October 2015 - October 3, 2017

As I mentioned earlier, the month of October tends not to do well when it starts off in an uptrend. I read some interesting statistics from Paul Schatz, Heritage Capital, where he discussed October stats that are dependent upon how it starts. Overall the month of October averages +0.5% since 1950, so not bad. But as Schatz notes, the average doesn't tell the whole story, especially for a month with October's reputation for volatility (and we're entering the month with nearly record-low volatility, which means put protection is cheap). He notes that any month typically does well when it starts in an uptrend and it's above the 200-dma, but October tends to fight this trend.

Statistics can't be used solely for trading but they do offer some heads-up information for what to be aware of. When the S&P 500 begins October in an uptrend, here are the stats:

-- First 5 days average return +0.66%
-- Second 5 days average return -0.26%
-- Third 5 days average return -0.30%
-- Last 5 days average return -0.25%

As opposed to the above stats, October tends to perform very well when it starts in a downtrend, which is typically how October starts when following a weak September. That did not happen this year.

From this, what we should be aware of is weakness for this October after the first 5 days. We're into the 3rd trading day, with lower performance than the average, and the statistics show that following this week it could be a more challenging environment for the bulls.

Combining October's stats with the extreme greed indication from the Fear & Greed index has me thinking October could be a lot worse than most expect. Add in the fact that we're now in October in a year ending in 7 (think October 1987, 1997 [Asian crisis] and 2007), mix in the problem with passive investing through ETFs and we might find out how difficult a "normal" pullback might be this month. That's all speculation but I see a tremendous amount of risk in this market right now. And I realize I'm in the minority with my opinion and I'm quite OK with that.

I think it's worth reviewing again the similarity between this October and October 2007, which I showed in my weekend wrap, since I also now see similar price projections have been met. To review, the next two charts below focus on the price action for SPX between July and October. Flip back and forth between them to focus on the price patterns and their similarity.

S&P 500, July-January 2007, Daily chart

Following a 3-wave pullback correction, July-August, another rally for the bull market continued into the October high. What I'm focusing on is the wave count for the rally from August into that October high, which is labeled i-ii-iii-iv, etc. An impulsive count is 5 waves and then multiples of 4 thereafter and the completion of an impulsive count is when to expect at correction of the move, if not a reversal.

The rally into the October 11th high was the 7th wave (wave-vii on the chart) and the expectation was for a pullback (wave-viii) and then one more push higher to complete the 9th wave (wave-ix). That final little 9th wave (the 5th wave of the series) was a no-show and I find this to be a common occurrence after a long run.

Back then I was pounding the table for bulls to get defensive (like I am now) and for bears to get ready. This was based on a long-term EW count and a price projection at 1576 (tagged to the penny on October 11th) and a shorter-term price projection based on the wave pattern for the August-October rally. The shorter-term projection is shown at 1571.52, which is based on a 5-wave move up from the August 28th low (the first pullback following the jump up off the August 16th low).

Adding to my bearishness at the time was the rising wedge pattern for the August-October rally (common in the final wave of a rally). But notice there was no bearish divergence at the October high, which is an example of why you can't always use bearish divergence/no divergence as proof of a trend's continuance.

With both price projections having been met, at 1571 and 1576, along with the reputation for the final little 5th wave (wave-ix) being a no-show, the break of the uptrend line from August was a key trigger event since it was the first indication the rally had completed. Now review the present chart further below.

S&P 500, SPX, Daily chart

The 3-wave pullback from July into August, like in 2007, has been followed by a rally into October. The wave count for the rally is labeled like above and shows we're now into the 7th wave (wave-vii), which has reached the top of a rising wedge pattern for the rally. It's also at the top of a parallel up-channel from April and it has met the price projection at 2540. That price projection is again based on the wave pattern and is like the 1571 projection in 2007. It's where the 5th wave of the leg up from August 29th (the first pullback low following the bounce off the August 21st low) equals the 1st wave.

So far the pattern is just like it was into the 2007 high. Now we wait for the next pullback to see if it will lead to one more push higher (wave-ix) or if instead the final little wave higher will also be a no-show. The next pullback will provide the clues needed -- a choppy pullback that holds above the uptrend line from August, currently near 2515, should lead to another push higher. The upside projection would be close to 2550. But a sharp decline that breaks the uptrend line could be another trigger event like it was in 2007.

Given the statistics about this month, discussed above, which suggests the rest of this month will be negative, now is a good time to take advantage of cheap put protection. The risk for those long the market is that a move down could accelerate quickly and possibly start with big gaps to the downside. Any sharp decline would spike the VIX and the cost of puts. Just some food for thought as you evaluate your own risk profile. The bigger risk, as I see it, is for the start of the next bear market, like 2007-2009 but maybe worse.

Key Levels for SPX:
- bullish above 2540
- bearish below 2488


S&P 500, SPX, 60-min chart

A closer look at SPX, with the 60-min chart below, shows the 2540 price projection was met today. If the rally continues on Thursday (it's been a steady accumulation since the September 25th low) I see upside potential to the top of a parallel up-channel for the leg up from the end of August, which is now near 2550. This is a slightly different look than the rising wedge shown on the daily chart above. But the bottom of the wedge (the uptrend line from August 29th) and the bottom of the up-channel from September 5th are close, both near 2520.

A multi-day choppy sideways/down pullback (from wherever a top is made) would provide us a clue that another new high should be expected (not guaranteed). A sharp break below 2520 would be the first clue that a major high could be in place (as significant as the October 2007 high).


Dow Industrials, INDU, Daily chart

There's a rising wedge pattern for the Dow and the top of it, currently near today's high at 22685, was hit yesterday and today. It did a little throw-over above the line today but closed below it. That's a very short-term sell signal and we'll see if we'll now get at least a little larger pullback correction before heading higher (depicted with the bold green lines).

The bottom of the wedge is near 22500, as is the uptrend line from November 2016 - May 2017, and therefore that's an important level for the bulls to defend. A break below 22500 would be the first indication a major high could be in place. Better confirmation of that would be a drop below the August high at 22179. The Dow is clearly in an uptrend and that needs to be respected until proven otherwise.

Key Levels for DOW:
- bullish above 22,820
- bearish below 22,179


Nasdaq-100, NDX, Daily chart

NDX is also sporting a rising wedge pattern but much shallower than the blue chips. It's currently near the top of the wedge, at 6023, and while the NDX could rally much higher, it's a good place to watch for a reversal. The bearish divergence since July supports the bearish interpretation of the wedge. If the bulls can keep the rally going and NDX makes it above 6027, for two equal legs up from September 25th, maybe we'll see a melt-up to the trend line along the highs since November 2014, currently near 6140.

Key Levels for NDX:
- bullish above 6027
- bearish below 5840


Russell-2000, RUT, Daily chart

If you want to see what a melt-up looks like just looks at the RUT's rally from August. If you look at an intraday chart you'll see the uptrend lines have been getting steeper and only yesterday did it break its steepest uptrend line (from September 26th). It's now showing bearish divergence since the September 27th high (not on the daily chart) and with it up against the top of a steep and narrow up-channel it's looking ready for at least a consolidation.

For the bullish potential I show just a consolidation over to the bottom of its up-channel where it intersects the uptrend line from February-November 2016, near 1496 next Tuesday. From there (assuming it will chop its way over to there) another leg up into mid-October would give us a 5-wave move up from August. But will get the final 5th wave? A drop out of the up-channel and below 1485 would have me thinking a top is already in place.

Key Levels for RUT:
- bullish above 1485
- bearish below 1452


Biotechnology index, BTK, Weekly chart

I was looking through other indexes to see if any are providing clarity to what we should expect next. The banks are in a choppy pattern and not much help. The TRAN has reached the top of a parallel up-channel and looking ready for a rollover but no clear signals there either. I then noticed an interesting weekly pattern for the biotech index. The strength in this index (+40% this year) has helped the RUT and therefore is worthy of a look-see in order to help determine what could drive the RUT higher (or not).

Following a 3-wave pullback from July 2015 into its February 2016 low it now has a 3-wave rally (both the pullback and the rally are labeled a-b-c). The c-wave of the rally, which is the leg up from November 2016, is a rising wedge and the 5th wave of it looks like the leg up from August 21st. The c-wave would be 162% of the a-wave at 4348, which is not far from today's high at 4297. It's near the top of the wedge and if the rally fails from anywhere near here it's going to look like a double top.

The downside projection out of this pattern is well below the February 2016 low at 2575 since a big C-wave in the A-B-C pullback pattern off the July 2015 high is 162% of the A-wave. That projection is near 1304 and would result in a test of a longer-term uptrend line from 2002-2008 by mid-year next year. That would be a 3000-point drop from 4300 (70% decline). This is the kind of downside risk I see in the next bear market and the risk for the RUT is equally as severe. That's not so much a prediction as a warning about the risk for those who simply hang on during the next decline because "it always comes back." Maybe in two decades.


U.S. Dollar contract, DX, Weekly chart

The US$ might have bottomed and started a reversal back up. I thought it would make it down to 90 to hit the trend line along the lows since 2015 (the bottom of an expanding triangle), and it still might. It will be important to see what happens in the coming week since a continuation higher would be a clear breakout from its down-channel from April. It would leave a head-fake break below its 200-week MA in September and with the weekly oscillators turning back up we could soon see a stronger rally.

A stronger dollar, if it continues to rally from here, could hurt stocks, especially the large international companies. Also likely to get hurt would be commodity prices since most are priced in dollars. A higher dollar would also hurt emerging markets since many countries have debt priced in dollars and a higher dollar devalues their local currencies. So it's important what the dollar does from here.


Gold continuous contract, GC, Weekly chart

Gold is nearing a critical support level, which is the broken downtrend line from 2011-2016, currently near 1263. If gold is to remain bullish it will use a back-test of the trend line as support and then continue rallying. A drop below 1263 would be a heads up warning and then below its uptrend line from December 2016 and its 50-week MA, both near 1244, would a further bearish sign. We'll have to let price lead the way from here before we'll have more clues about the larger pattern. If silver is any indication, it's looking more likely gold will break down.


Oil continuous contract, CL, Daily chart

Oil looks ready to reverse back down, which supports the idea that the dollar is ready to rally stronger. Oil's weekly chart shows it bounced back up to its downtrend line from May 2015 - January 2017, its broken uptrend line from 1998-2008 and its broken uptrend line from April-November 2016, all of which were between 52 and 53 last week. Two equal legs up for the rally from June is near 54 and therefore a rally above 54 would be a bullish break of several layers of resistance. But until that happens I think there's a greater likelihood for oil to break down and head for the January-February 2016 lows near 26.


Economic reports

Thursday's economic reports will likely be ignored, especially if there are no surprises. Friday's nonfarm payrolls report could spark a little volatility but the bar has already been set low, with expectations for only +100K, so there likely will be little reaction to whatever the number is.


Conclusion

I've outlined my reasons for why I think we could be facing a major bear market following a high this month. I think the risk of it happening is a good reason for using some downside protection (puts, shorts, inverse ETFs, etc.). Or stop out on a breakdown and get into cash and wait for the next buying opportunity.

But many are calling for this rally to not just continue but to continue into a melt-up, similar to what was seen in the late 1990s. That's certainly a possibility, in which case our technical indicators essentially need to be thrown out the window. Just get long and hang on for the ride. It's a big reason why bears need to be super cautious here and be sure to honor stops if short and the market keeps rallying. Or buy some cheap call options for insurance. Another 100-200 points for SPX could happen quickly.

I lean bearish but I'm waiting for confirmation from price and right now we do not have any indication that a high is in place. I see the risk for a high in place here but stick with the trend (up) while leaving the exit door propped open for a quick exit before the crowd jams the doorway. I sense an early Halloween boo scare in the next few days. Stay on your toes!

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT


New Plays

Robot Workforce?

by Jim Brown

Click here to email Jim Brown
Editor's Note

Analysts keep telling us humans will be out of work by 2025. As fast as the manufacturing sector is being taken over by robots, that could be true for a lot of workers.



NEW BULLISH Plays

BOTZ - Global X Robotics AI - Company Profile

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that are involved in the development of robotics and/or artificial intelligence as defined by Indxx, the provider of the underlying index. The fund is non-diversified. Company description from FinViz.com.

Robots of every description are taking over the manufacturing sector, service sector, etc. Drones are automated. Autos are becoming autonomous.

Even more important to this ETF is the sudden arrival of Artificial Intelligence or AI. That is the buzzword for everything. Everybody is trying to get into the AI business.

This ETF took off last January and while there have been several mild hiccups along the way, the chart is nearly vertical as investors become aware of it.

I am going to lag back on the stop loss because this could be a long-term position.

Buy BOTZ shares, currently $22.14, initial stop loss $20.85.
Alternate position: Buy Mar $23 call, currently 80 cents. No stop loss.



NEW BEARISH Plays

No New Bearish Plays


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

Right on Schedule

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell traded slightly lower as the end of quarter cash flows faded. After a 162 point rally, it was not surprising to see the Russell take a rest. However, at -4 points, I seriously doubt if the decline is over. The end of quarter cash flows are over and now portfolio managers are faced with decisions about what they want to hold through the Q3 earnings cycle. We could see some window undressing the rest of the week.





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


No Changes



If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader



BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile

Comments:

No specific news. Only a minor decline.

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.

Update 9/25/17: 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.

Update 10/3/17: AMD announced a new embedded GPU requiring less power and capable of driving five simultaneous 4K displays. The GPU requires less than 40 watts TDP and comes in a smaller, thinner package. The chip has a 1.25 TFLOPS speed and comes in three form factors including MCM, MXM and PCI Express. The 4K and 3D support works for games, medical imaging, advertising signage and industrial uses. The GPU has 4 GB of GDDR5 memory. Shares gained more than 5% on the news.

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.



DSW - DSW Inc - Company Profile

Comments:

No specific news. Back to back declines. Not a good sign.

Original Trade Description: Sept 30th

DSW Inc., together with its subsidiaries, operates as a branded footwear and accessories retailer in the United States. The company operates through two segments, DSW and Affiliated Business Group. The company offers dresses, casual and athletic footwear, and accessories under various brands for women, men, and kids. It also provides handbags, hosiery, jewelry, and other accessories. As of August 29, 2017, the company operated 511 stores in 43 states; dsw.com, an e-commerce site; and m.dsw.com, a mobile site, as well as supplied footwear to 379 leased locations in the United States. DSW Inc. was founded in 1917. Company description from FinViz.com.

The CEO recently said "we seen an opportunity to acquire market-share as the retail industry consolidates." "We have reinvigorated and positioned DSW to benefit, beginning with a new brand mission: We inspire self-expression."

They have reorganized their stores, updated their marketing, added customer merchandise and expanded their online presence. Marketing statement

They reported Q2 earnings of 38 cents compared to estimates for 29 cents. Revenue of $680.4 million beat estimates for $669.2 million. They guided for the full year for earnings of $1.45-$1.55 and analysts were only expecting $1.44.

They announced a new $500 million share buyback program on top of $33 million left over from the prior authorization.

Expected earnings Nov 21st.

Shares closed at a 5-month high on Friday and on the verge of breaking out of a 10-month consolidation period.

I really like the option on this position.

Position 10/2/17:

Long DSW shares @ $21.60, see portfolio graphic for stop loss.
Alternate position: Long Jan $22.50 call @ $1.50, see portfolio graphic for stop loss.



DVAX - Dynavax - Company Profile

Comments:

No specific news. Another nice gain to a new 52-week high.

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.

Update 10/2/17: Shares spiked nearly $2 on news it was considering strategic alternatives on its Hep-B vaccine. Those would include selling the drug to someone else or licensing it to a larger company. DVAX is a small company and does not have the infrastructure to market it on a worldwide basis. The drug Hellisav-B is expected to receive FDA approval in the coming weeks. Whichever route they take would provide upfront cash to enable them to continue development on their immuno-oncology pipeline.

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.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

No specific news. Shares are holding at the resistance highs.

Original Trade Description: Oct 2nd

Hewlett Packard Enterprise Company provides technology solutions to business and public sector enterprises. It operates through Enterprise Group, Software, Enterprise Services, and Hewlett Packard Financial Services segments. The Enterprise Group segment offers servers, management software, converged infrastructure solutions and technology services; hybrid cloud solutions, including private cloud platform; business critical systems; storage products, as well as 3PAR StoreServ, a Storage platform; and networking products comprising switches, points, controllers, routers, and wireless local area network and network management products. This segment also provides software-defined networking and communications capabilities; network access solutions for mobile enterprises; and consulting services. The Software segment offers software to capture, store, explore, analyze, protect, and share information and insights within and outside organizations; enterprise security, application delivery management, and IT operations management software products. This segment provides HP Vertica, an analytics database technology for machine, structured, and semi-structured data; and HP IDOL, an analytics tool for human information, as well as solutions for archiving, data protection, eDiscovery, information governance, and enterprise content management. The Enterprise Services segment offers consulting, outsourcing, and support services across infrastructure, applications, and business process domains; and application and business services that help clients to develop, revitalize, and manage their applications and information assets. The Hewlett Packard Financial Services segment provides leasing, financing, IT consumption and utility programs, and asset management services. Company description from FinViz.com.

Expected earnings Dec 5th.

HPE has been undergoing an intense reorganization for several years. That included splitting off from HPQ in an effort to separate the corporate business from the consumer business. Meg Whitman has done a superb job in trimming excess departments and selling off non-core assets.

Recently, she announced another 10% reduction in the workforce that would result in 5,000 job cuts. She said the reductions would result in fewer lines of business and a more streamlined decision process. The current 3-year plan calls for savings of $1.5 billion and shift the focus towards research and development.

When Whitman took over in 2011 Hewlett Packard had 350,000 workers before the spinoff. Now HPE has 52,000.

The company now specializes in cybersecurity, enterprise WiFi, cloud services, servers and other corporate technology. Whitman recently said the company is seeing rapidly growing demand across key areas of the business.

Shares closed at a new high on Monday after trading in a $2 range for almost a year. I believe the latest announcement on reductions and streamlined operations has finally struck a chord with investors.

Update 10/3/17: Shares down slightly on news they allowed Russia to examine the source code of security software used to guard Pentagon secrets. The review was required by Russia and other countries prior to those countries considering HPE as a cybersecurity vendor for their secrets. However, by letting Russian software engineers view the source code, supposedly to make sure there was no hidden back door access for US spies, they learned how the code worked, what the software was guarding against and gave them insights as to how they could defeat it. The top White House cyber security official said this was becoming a bigger problem because everyone (other countries) was demanding to see the source code and that has now become a security risk.

Position 10/3/17:

Long HPE shares @ $14.97, see portfolio graphic for stop loss.
Alternate position: Long Jan $16 call @ 50 cents, see portfolio graphic for stop loss.



KTOS - Kratos Defense - Company Profile

Comments:

No specific news. Shares closed at a 4-week high.

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. Another resistance test at $18.60.

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

FDC - First Data - Company Profile

Comments:

No specific news. Shares down again.

Original Trade Description: September 16th.

First Data is a global leader in commerce-enabling technology, serving approximately six million business locations and 4,000 financial institutions in more than 100 countries around the world. The company's 24,000 owner-associates are dedicated to helping companies, from start-ups to the world's largest corporations, conduct commerce every day by securing and processing more than 2,800 transactions per second and $2.2 trillion per year. Company description from FDC.

First Data earnings will be impacted by the three hurricanes because retail activity was slowed significantly over the weeks following the hurricane impacts. FDC said retail activity declined 72% in the first three days and was not expected to resume significantly for weeks. Stores need to recover from the floodwaters and flooding. They need electricity restored in order to run registers and POS terminals.

Expected earnings Nov 6th.

FDC also had the unfortunate luck of filing for a secondary offering of 85 million shares with an overallotment allowance of another 12.75 million on September 11th, just after the twin storms. The shares were sold by New Omaha Holdings, a major shareholder in FDC. With only about 300 million shares actively traded that is close to a 25% increase in the float. The shares were priced on Sept 18th at $17.75 each.

Selling nearly 100 million shares when your shares are already depressed would be expected to depress them even further. Shares closed at $17.55 on Wednesday and the 4-month low close is $17.47. Any further decline could put them into free fall to major support at $15.

There is always the potential for an earnings warning over the next several weeks.

Update 9/28/17: FDC announced a new service called Disburse-to-Debit to allow companies that hire temporary workers or "gig" workers to pay them instantly upon completion of a task by sending the money to their debit cards. This works for people like Uber drivers, part time workers at special events or even insuranve companies paying claims. An agent can upload the user data and the debit card payment arrives instantly. This is a smart service and FDC shares rallied 33 cents on the news.

Position 9/28:

Short FDC shares @ $17.56, see portfolio graphic for stop loss.
Alternate position: Long Jan $17 put @ 70 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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