Option Investor
Newsletter

Daily Newsletter, Thursday, 10/12/2017

Table of Contents

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

Market Wrap

Earnings!

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Earnings season has started with most beating top and bottom line expectations, and the market was nonplussed. In some cases the beats weren't quite as much as expected, in others internals within the reports gave cause for concerns. Regardless, the market was able to hold steady at all time highs while the market digest the news. Remember, it's just the first day of peak season, there is still a long way to go until this cycle is in the bag.

International markets were steady as well. Asian indices posted small gains in the wake of the FOMC minutes and new all time highs in the US. European indices were also mostly higher in a day of tepid trading as news of deadlock emerge from Brexit negotiations. The EU's chief negotiator has let slip talks are at an impasse and the UK is unwilling/unready to specify terms for fines and fees upon exit.

Market Statistics

Futures trading was tepid from the start this morning as traders were waiting on important earnings news from JP Morgan, Citigroup and others. The news was great on the headline but details within the reports, particularly in the cases of JPMorgan and Citigroup, left traders in doubt. At that point futures weakened to indicated a marginally lower open and held steady at that level into the opening bell. The opening bell was a bit hectic but not too bad, the SPX opened with a loss near -2 points and extended that to the days low of -5 points within the first 15 minutes of trading. This low turned out to be intraday bottom, the indices rallied back to recoup the days losses and by 12:15 was trending sideways just below the all time high. The rest of the day was much the same, tests of support and resistance within the range which left the indices sideways for the day.

Economic Calendar

The Economy

Weekly jobless claims show that there is little to no long-term and/or lingering impact from the recent storms. Initial claims fell by -15,000 to 243,000, the previous week's figure was revised lower. The 4 week moving average of claims fell by -9,500 to 257,000, the previous week's figure was also revised lower. On a not adjusted basis claims rose 11.4% versus an expectation of rising 18.1%. Not adjusted claims have also fallen back below last years level and are now down -4% YOY.


Continuing claims fell by -32,000 to hit 1.889 million and a new low dating back to December of 1973. The previous week's figure was revised lower, as was the 4 week moving average. If there were lingering effect from storm damage it surely would show up here. This data shows that not only are those displaced by storms back to work but an improvement in the overall employment situation.

The total number of claims fell by -1,390 to hit 1.652 million. This is a new seasonal and long term low consistent with ongoing improvement in the labor market. On a year over year basis total claims are down -7% and expected lower over the next couple of weeks. This figure should bottom by the end of October with an expected uptrend lasting into the end of the year.


The Producer Price Index was also released this morning and it supports slowly increasing inflation and a December rate hike. The headline came in as expected at 0.4% with a 2.6% increase YOY. This is well above the Fed's target rate and not surprising given the unexpected strength shown in the past month's ISM data. The 2.6% YOY increase is also the fastest pace of inflation since February 2012. Core prices are up only 0.2% MOM but rose to 2.1% YOY.


The Dollar Index

The Fed Minutes did little to strengthen inflation outlook, rate hike outlook or the dollar but remember this; the last Fed meeting was before the most recent round of ISM, NFP and today's PPI. Those reports show surprising increases in prices paid by manufacturers and service business, a surprise increase in hourly wages and core producer level inflation running at the 2% target. Based on this I would expect to see some changes in their next statement which is due in about 3 weeks. The Fed Watch Tool has barely budged all week and still holding steady at 88% for December rate hike.

The Dollar Index trend sideways from yesterday's candle in today's move. The index is below the short term moving average after having fallen from the short term down trend earlier this week. This fall was precipitated by stronger than expected trade data from Europe that has increased expectation for ECB policy tightening. The indicators are consistent with a bearish trend following entry with downside target at the recent lows near long term support in the range of $91.50. Tomorrow's CPI data is the next potential mover for the dollar and expected to be hot at 0.6%.


The Gold Index

Gold prices rose to a 2 week high on yesterday's FOMC minutes and a slightly weakened dollar. The metal gained about 0.75% in today's trading to settle near $1,297. Spot price is now approaching potential resistance at the $1,300 level. A break above this level would be bullish for the near term with target near $1,318. A failure to break above $1,300 would help confirm the September reversal with downside target near $1,275.

The Gold Miners ETF GDX trend sideways from yesterday's candle and just beneath resistance targets. The ETF is supported by firming gold prices but remains range bound over the short to long term. A break above current resistance a $23.90 would be bullish near term with upside target near the top of the long term trading range at $25. The indicators are bullish at the moment suggesting that current support will be tested at least.


The Oil Index

Oil prices fell more than -1% on new signs of oversupply. The latest news is a report from the IEA stating that sluggish demand and high production would continue to weigh on prices into next year. This report was echoed by another from Goldman Sachs saying stock draws have peaked this year and Brent would average $58 in 2108. The caveat is that the IEA report lends strength to the idea that OPEC will extend production cuts to further offset supply imbalances.

The Oil Index continues to trend sideways within the near term consolidation range. The indicators persist in bearishness and suggest support will be tested further, so long as the index remains above support this action is consistent with consolidation and potential continuation of the existing trend. Support is just above 1,200, resistance at the current high near 1,225. This range may hold into the near term up to and until earnings releases from major players in the sector and/or a significant move in oil prices occurs.


In The News, Story Stocks and Earnings

The big banks began reporting today and the news is mixed. The headline is that both JP Morgan and Citigroup beat top and bottom line expectations smartly. Both companies beat revenue outlook by roughly a billion dollars, 5% for Citi and 4% for JPM, and similarly on the earnings end. The mixed part is that trading volumes were down far more than expected and that charge-off's related to consumer credit were on the rise. The mitigating factors are that trading volume is offset by core business and credit charge-off's are likely related to the recent storms. Shares of both companies fell, led by Citigroups decline of -2.6%. The XLF Financial Sector SDPR fell a little more than -0.5% and looks like it could drift lower in the near term. Bank of American and Wells Fargo are on deck for tomorrow morning.


Domino's Pizza beat on the top and bottom lines but also failed to please investors. Revenue grew more than 13.5% YOY, beat expectations by 2.5% and delivered comps of 8.5% but it still wasn't enough. Shares fell more than 3.5% to test support at the short term moving average and support was there. This may be because the company is still increasing stores domestically and abroad, is experiencing continued organic and comp store growth in both segments and expected to continue producing positive results.


Rumors have emerged that GM will be idling its Detroit Hamtramck facility to due sluggish demand. The plant is GM's most sophisticated in NA and produces a number of car models. It is expected to close for 6 weeks beginning in mid-November and, when the plant reopens, it is expected to produce 20% less cars than before. Meanwhile, the company is threatening a Canadian autoworkers union with a plant shut down if they don't call off an expected strike. The company will instead shift production of the Equinox to Mexico. Shares of GM fell -3% on the news to test support at $44.


The Indices

The indices hit a hiccup today as earnings season begins to heat up; the broad market, industrials and techs all posted small losses on earnings seasons jitters. The transports however broke out to new all time highs as economics point to continued expansion. The Dow Jones Transportation Average gained 0.62% in a move creating a medium sized green candle breaking through the 10,000 level. The indicators are still weak but consistent with a trend following entry so I would expect to see higher prices in the near term. Tomorrow earnings from JB Hunt, one of North American's largest truckers, could drive it higher.


The NASDAQ Composite posted the largest loss, -0.18%, but set a new all time intraday high while doing so. The index created a small doji candle to the side of yesterday's small candle and the 6th such small candle in a row. It is consolidating at all time highs and setting up for its next move, the past week's action is beginning to look like a flag. The indicators have begun to roll over in confirmation of resistance but do not indicate bearishness. If the index were to fall support target is near 6,475 and the short term moving average. If not, a break to new highs will be bullish with upside target near 6,800.


The S&P 500 made the 2nd largest decline, -0.17%, and created a small red bodied candle just below the current all time high. The index is drifting higher but showing signs of pause within the trend. The indicators remain strong but have begun to roll over in confirmation of resistance. A fall from this level may find support at the short term moving average, near 2,515. A break to new highs would be trend following and bullish with upside target in the range of 2,580 to 2,600.


The Dow Jones Industrial Average made the smallest decline, only -0.14%, created a small doji candle and set a new all time intraday high. Price action was calm, quiet and otherwise positive in light of today's earnings releases and the start of peak season. The indicators are consistent with resistance and/or pause within an uptrend so this sideways action and chances of pullback may persist into the near term. A fall from this level may find support near 22,415 consistent with a long term uptrend line and the short term moving average. A consolidation at this level and/or move higher would be bullish and trend following with upside target near 23,400.


The markets have moved up in anticipation of earnings season and begun to consolidate. Now that earnings season is at hand this consolidation is likely to see some shake up, either in a break to new highs or volatility within near term ranges, depending on how the reports come in. If forward outlook remains positive but dims we may see come corrective action, if forward outlook remains positive and improves I'd expect to see some more rally. In either case the long term bull market remains intact and I firmly bullish for that time frame. Nearer term I am bullish but cautious with new money due to the signals.

Until then, remember the trend!

Thomas Hughes


New Plays

Event Risk Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

Suddenly bank earnings are more dangerous than North Korean missiles. Bank earnings provided disappointments today with more to come on Friday. JPM and Citi both disappointed on Thursday and the weakness in the financial sector weighed on the market. On Friday four additional major banks, BAC, WFC, PNC and FHN report before the open. If they report weakness in consumer loans and rising defaults, this could cause cascade selling in the financial sector and possibly damage sentiment for the overall market. Investors do not want to hear that consumers are suddenly defaulting on debt because that suggests the job market and the economy is weaker than we thought. There is no reason to add risk ahead of the weekend. North Korea still has a missile on the launch pad and The White House has let a few more crumbs slip about a possible military event. There is too much weekend event risk to add additional positions.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Rally Stalled

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes stalled at resistance once again as bank earnings disappointed. JPM and Citi both reported sharp hikes in loan loss reserves due to rising consumer defaults. The market did not take it well with a large decline in Citigroup and minor decline in JPM. The financial sector declined sharply to give back a week of gains. Surprisingly, the Russell decline was muted despite having a 17% weighting in financials.

The major indexes posted minor declines but this could continue on Friday if the next set of banks post similar results and loan loss concerns. Quite a few Russell stocks posted declines but they were minimal. There is no flight to quality yet.





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


JKS - Jinko Solar
The short stock position was entered at the open.

DVAX - Dynavax Tech
The short long position was stopped at $22.35.



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BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile

Comments:

No specific news. Shares continued higher on rumors and general excitement about the GPU sector.

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.

Update 11/10/17: AMD shares rallied after a processor conference and upgrade to Nvidia. Yesterday there was an article with a picture of a new Intel processor with "Vega Inside" but it has disappeared today. Intel has previously denied any licensing with AMD but the picture showed a mobile processor with Intel Outside, Vega Inside, which would mean AMD's Vega graphics on an Intel chip. This was for a mobile processor for a notebook or tablet. Apparently, Intel was not ready for the world to see that internal graphic and the article was removed from circulation. If/when Intel does announce a deal with AMD the stock is going to soar.

Update: I was able to go back and find the link I had saved even though it is no longer on the website. Vega Inside

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.



BOTZ - Global X Robotics AI - Company Profile

Comments:

No specific news. Long term position.

Original Trade Description: October 4th.

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.

Position 10/5/17:

Long BOTZ shares @ $22.10, see portfolio graphic for stop loss.
Alternate position: Long Mar $23 call @ 80 cents, see portfolio graphic for stop loss.



DVAX - Dynavax - Company Profile

Comments:

No specific news. Minor decline but support at $22.50 is holding.

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:

Closed 10/12: Long DVAX shares @ $21.10, exit $22.35, +1.25 gain.



HPE - Hewlett Packard Enterprise - Company Profile

Comments:

HPE will webcast its 2017 Securities Analyst meeting on Oct 18th at 4PM ET. 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. Only a minor gain but holding near the highs.

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. Minor decline in a weak market. Resistance at $18.50 still holding.

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:
Closed 10/9: Long Oct $18 call @ 64 cents, exit 64 cents, breakeven.



ON - ON Semiconductor - Company Profile

Comments:

ON announced to new System on a Chip (SOC) 1.0 Megapixel CMOS image sensing products for the automotive imaging sector. The company said annual shipments of cameras for use in cars will easily surpass 80 million units by 2020.

Original Trade Description: Oct 9th.

ON Semiconductor Corporation manufactures and sells semiconductor components for various electronic devices worldwide. It operates through three segments: Power Solutions Group, Analog Solutions Group, and Image Sensor Group. The Power Solutions Group segment offers discrete, module, and integrated semiconductor products for various applications, such as power switching, power conversion, signal conditioning, circuit protection, signal amplification, and voltage reference. The Analog Solutions Group segment designs and develops analog, mixed-signal, and logic application specific integrated circuits and standard products, as well as power solutions for a range of end-users in the automotive, consumer, computing, industrial, communications, medical, and aerospace/defense markets. This segment also provides trusted foundry, trusted design, and manufacturing services, as well as integrated passive devices technology. The Image Sensor Group segment offers complementary metal oxide semiconductors and charge-coupled device image sensors, as well as proximity sensors, image signal processors, and actuator drivers for autofocus and image stabilization for a range of customers in automotive, industrial, consumer, wireless, medical, and aerospace/defense markets. The company serves original equipment manufacturers, distributors, and electronic manufacturing service providers. Company description from FinViz.com.

Earnings Nov 6th, unconfirmed.

ON continues to power higher on a surge of new products as the IoT boom continues. The company completed the acquisition of Fairchild Semiconductor in September.

A major factor in the boom is the Advanced Driver-Assistance Systems. This market is expected to reach $42 billion by 2021 according to MarketsandMarkets. This is giving ON a tremendous boost in earnings and forecasts.

However, they missed earnings for Q2. They reported 26 cents and estimates were 33 cents. Revenue of $1.34 billion beat estimates for $1.31 billion. The company guided for the current quarter for $1.34-$1.39 billion.

Somebody believes they are going to beat those estimates by a mile. On Monday, somebody bought 11,000 of the November $20 calls at 65 cents. That is a $715,000 bet. I suggest we follow them.

Because of the steep gains over the last month, I am not recommending a stock position. We will do this with options only.

Update 10/11/17: ON and Fujitsu announced an agreement where ON will purchase 40% of Fujitsu's 8-inch wafer fabrication plant in Aizu-Wakamatsu. The purchase will be completed by April 1st. ON already had a 10% share and will acquire another 30%. ON said it planned to increase ownership to 80% in the second half of 2018 and 100% in the first half of 2020. By scaling into the ownership it will allow ON to add capacity as demand increases.

Position 10/10/17:

Long Nov $20 call @ 80 cents, see portfolio graphic for stop loss.




BEARISH Play Updates

JKS - Jinko Solar - Company Profile

Comments:

Jinko announced its annual meeting will be held November 15th. The announcement was before the open while there was nothing unusual in the press release, the stock gapped up sharply. Shares gapped up 5% to $23.72 before fading slightly to end with a 92-cent gain for the day. Fortunately, the gap higher at the open gave us a short entry at a higher than expected level and we missed half of the gain. Now we need the decline to continue.

Original Trade Description: October 11th.

JinkoSolar Holding Co., Ltd., together with its subsidiaries, engages in the design, development, production, and marketing of photovoltaic products in the People's Republic of China and internationally. It offers solar modules, solar cells, silicon ingots, silicon wafers, and recovered silicon materials. The company sells its products to distributors, project developers, and system integrators under the JinkoSolar brand, as well as on an original equipment manufacturer basis. JinkoSolar Holding Co., Ltd. was founded in 2006 and is based in Shangrao, the People's Republic of China. Company description from FinViz.com.

Expected earnings Dec 6th, unconfirmed.

Declining demand for certain types of solar panels, new requirements in China, new rules in China and an excess of supply in the market is depressing Jinko shares.

Of the last five analyst actions, 2 have been a cut back to hold and 3 have been a cut to sell. Axiom cut them to sell with a $10 price target.

To make matters worse, on Sept 27th, the company announced an "at the market" offering of $100 million in stock. That represents about 5 million shares in addition to their 27 million shares outstanding. At the market means the selling broker will simply sell the shares into the market at a time and pace of their own choosing. Average daily volume is about 800,000 so assuming they sold 100,000 shares per day it would take 50 trading days of continuous selling pressure.

Over the last month the consensus earnings estimates for the full year have declined from $1.99 to 77 cents. Estimates for the quarter have declined from 41 cents to 17 cents. Axiom said estimates should turn negative for Q4 and remain negative all the way through 2019.

Unfortunately, the outlook is so negative the put options are very high. This will be a stock only position.

Position 10/12:

Short JKS shares @ $23.03, see portfolio graphic for stop loss.



VIPS - Vipshop Holdings - Company Profile

Comments:

No specific news. Minor decline back to a new four-year low close.

Original Trade Description: October 7th.

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People's Republic of China. It offers a range of branded products, including women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories consisting of belts, fashionable jewelry, watches, and glasses for women and men. The company also provides handbags, such as purses, satchels, duffel bags, and wallets; apparel, gear and accessories, furnishings and decor, toys, and games for boys, girls, infants, and toddlers of all age groups; sports apparel, and sports gear, and footwear for tennis, badminton, soccer, and swimming; and skin care and cosmetic products, including cleansers, lotions, face and body creams, face masks, sunscreen, foundations, lipsticks, eye shadows, and nail polish. In addition, it offers home furnishing products comprising bedding and bath products, home decors, and dining and tabletop items; small household appliances; designer apparel, footwear and accessories; and snacks, health supplements, and occasion-based gifts, such as chocolates, moon-cakes, and tea. Further, the company provides consumer financing, supply chain financing, and wealth management services. The company provides its branded products through its vipshop.com, vip.com, and lefeng.com Websites, as well as through its cellular phone application. Company description from FinViz.com.

Vipshop is in the flash sale business. That means other retailers bring them products they cannot sell and Vipshop marks down the price and runs a special flash deal special to clear out the inventory. Vipshop has been around for nearly 10 years and did very well in the early years. Unfortunately, profits are fading because manufacturers and other retailers can now unload their products on Amazon and Alibaba without the valuation haircut that occurs with Vipshop.

Earnings for the recent quarter were 17 cents and estimates were 19 cents. Revenue rose 30% to $2.58 billion. They filled 84.8 million orders.

Expected earnings Nov 15th.

The problem was rising costs. Margins declined in what Vipshop called a highly promotional market with higher advertising costs in hopes of gaining market share. If you translate that sentence it means they had to cut prices to generate the sales and they had to pay more for advertising to lure customers into the sale process.

With Alibaba's growth surging well beyond the optimistic estimates by analysts, they are taking over the online sales channel in China. This does not bode well for Vipshop in the future. Add in the Amazon monopoly in the US and Vipshop has nowhere to go to escape the rapidly growing retail cloud. The flash sales business has died in the US after a flood of competitors surged into business and then quickly disappeared.

Shares closed at a four-year low on Friday at $8.35 with the next support level around $2.50.

Position 10/9/17:

Short VIPS shares @ $8.36, see portfolio graphic for stop loss.
Alternate position: Long Nov $8 put @ 40 cents, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

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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