Option Investor
Newsletter

Daily Newsletter, Tuesday, 1/2/2018

Table of Contents

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

Market Wrap

Strong Bullish Rebound

by Jim Brown

Click here to email Jim Brown

The major indexes overcame strong bearishness at Friday's close to rally back to the resistance highs.

Market Statistics

The markets charged out of the gate this morning but the Dow stumbled after hitting 24,864 at the open. The resistance at 24,850 immediately took control again and the index declined to 24,741 at 11:AM and -123 points below the opening high. The +145 gain at the open turned into only a 22-point gain for about an hour. However, the surging Nasdaq reenergized the other indexes and the last couple hours were bullish.

The S&P made a new high about 1 point over its prior intraday high. Resistance at 2,694 is still intact. The Nasdaq made a new closing high at 7,007 and 4 points above its prior intraday high. The Dow closed at resistance without making a new high but the Russell 2000 posted a fractional new closing high.

These resistance lines will be the line in the sand for the market. If the Dow and Russell can push through this strong resistance, we should see a strong rally because there has been a lot of shorting at those levels over the last couple of weeks.



The market was fueled by some analyst upgrades and several high profile calls on potential M&A activity in 2018. Noted tech analyst, Gene Munster, rocked Target's (TGT) stock when he predicted Amazon would buy the retailer in 2018. Munster believes the future of retail is a combination of both online and bricks and mortar. Amazon already saw this future when they bought Whole Foods. With that acquisition under their belt, they have learned the pros and cons and could be ready to go all in on a $50 billion acquisition that would give them 1,800 large footprint stores all across the US plus a major retail warehousing and distribution business. Target has large warehouses and large stores with plenty of backroom space. This would allow Amazon to ramp up its same day, next day delivery business all across the country instead of just in major population centers. It would also provide them with major retail outlets for its Amazon branded products of which there are quite a few. A quick search of Amazon produced 1,826 results for their private label brand.

An acquisition of Target would be a major step forward for Amazon and a major challenge to other retailers. There could be significant regulatory challenges to the deal. President Trump already believes Amazon is a monopoly and has far too much power. Going after Target could put Amazon squarely in the spotlight of the Trump tweet machine and the regulatory agencies.

While this would be a great deal for Amazon, I would not hold my breath.



The other potential acquisition making the headlines was a repeat of the Apple buys Netflix scenario. Citi analysts Jim Suva and Asiya Merchant said there was at least a 40% chance Apple would buy Netflix. Apple needs to buy the streaming video company to compete with Disney and their acquisition of the Fox movie assets. Disney is going big into streaming and Apple is going to be a distant third despite their recent efforts.

Apple has about $260 billion in cash overseas. After repatriation taxes they would have about $225 billion. If they gave $50 billion back to investors in dividends and buybacks they would still have more than enough to acquire Netflix, current market cap of $75 billion, and have plenty of cash left over to generate new content. Apple is struggling. Their phone business is growing old even with the new models. The higher the prices the less they are going to sell because of the dozens of less expensive models offered by competitors. Apple can continue to have the best high tech phone in the space but not everybody can afford to buy a BMW. Apple knows it needs to diversify and Netflix would provide them with a steady stream of rising revenue to offset the peaks and valleys of the phone business.


The analysts also said Disney (DIS) could be an Apple target but at $175 billion, that would be a huge deal and Apple is not a big deal company. That would solve a lot of Apple's future problems and dramatically diversify income but I do not see that happening. Activision Blizzard (ATVI), Electronic Arts (EA), Take Two Interactive (TTWO) and even Tesla (TSLA) were mentioned as possible candidates. Apple wants to get into the electric, autonomous car business and buying Tesla ($54 billion) would be a giant leap into the business. Apple has the cash to fund the growing pains and the Tesla brand is the equivalent of the iPhone X in its space. That would be something Apple might find appealing. It would be cheaper to buy Tesla than continue down the development road on their own.

All of the companies mentioned in the Citi note saw a big jump in their share price. There was massive short covering after Friday's closing lows.




Analysts were breaking out a significant number of ratings changes for 2018.

LB - upgraded from neutral to outperform at Baird.

JNJ - downgraded from overweight to neutral by JP Morgan.

LEN - upgraded from market perform to outperform by Wells Fargo.

ABT - upgraded from neutral to overweight by JP Morgan, Morgan Stanley.

GCO - upgraded from hold to buy at Jefferies with $40 target.

ALL - downgraded from market perform to underperform at Keefe Bruyette & Woods.

JWN - Upgraded from underweight to neutral at JP Morgan.

PLNT - downgraded from buy to hold at Jefferies.

DECK - downgraded from buy to hold at Jefferies.

SIRI - downgraded from neutral to underweight at JP Morgan.

Will the last employee please turn out the lights? We learned today that Sears (SHLD) and subsidiary Kmart has not run any national TV ads since November 24th. This covered the critical holiday shopping season where competition is brutal. Not running any ads is the equivalent of throwing in the towel. Ad research firm iSpot said Sears did not pay for any ads in that period compared to $8.4 million for Sears and $6.5 million for Kmart in the year ago period. When questioned, Sears said they were devoting more effort to digital and social network channels.

By comparison, Macy's (M) spent $32 million from Dec 1st-31st and JC Penny (JCP) spent $27 million. Sears shares are slowly drifting towards zero as their store count is declining by about 200 per year. The 118 year-old retailer is heading for an ugly end because they were unable to make the timely transition to online sales.


There was only one economic report of note on Tuesday. The PMI Manufacturing Index for December rose from 53.9 to 55.1 and the highest level of growth since 2015. New orders improved and employment hit a 3-year high. Business conditions were described as "robust."

On Wednesday, we get the ISM Manufacturing. Estimates are for a reading of 58.0 compared to 58.2 in November.

The FOMC minutes at 2:PM will be of interest since analysts are split between 2 and 3 rate hikes in 2018. The minutes could shed more light on the outlook.

The ADP Employment report has shifted to Thursday because of the holiday and expectations are for a gain of 190,000 jobs.

The government funding deadline of January 19th is still the biggest potential pothole for the market. The House will be back at work on Monday and that is when the headline activity will increase. Both sides appear to be growing farther apart rather than closer to agreement.


Markets

Volume was moderate at 6.5 billion shares and the most since December 19th. The advance/decline line was 2:1 in favor of advancers and volume was 3:1 in favor of advancing volume.

Despite the strong gains, the volume appeared to be concentrated in the tech sector and on those stocks with headlines.

The rally was encouraging, especially after the big selloff at Friday's close. However, that sharp decline may have set the stage for today's short covering.

We need to remember that one day does not make a trend. 2018 has started with a bang and the S&P futures are positive again tonight. We all hope this will turn into a new trend higher and the Dow and Russell will begin posting new highs on Wednesday.

The S&P closed just barely over prior resistance at 2,594 and just enough to claim a new closing high. This was not a breakout and more of a minor break of resistance right at the close. The S&P gained 4 points in the last 15 min on a surge of buying.

Resistance remains 2,694-2,695 until there is a breakout. With S&P futures up +3.50 right now, that could happen at the open but there is a lot of darkness left before the dawn.


The Dow remains stuck below strong resistance at 24,850 as it has been for the last two weeks. Strong support remains 24,720. The Dow is still targeting 25,000 and I still expect a major sell the news event when that level is touched. I could be completely wrong and time will tell. Apple and Disney were the biggest gainers thanks to the various headlines about the pair.



The Nasdaq Composite exploded higher thanks to strong gains in the big cap tech stocks. This is a completely different graphic than what we have been seeing over the prior two weeks where the big caps were choppy and trending lower. You may remember the Nasdaq closed at two-week low on Friday with a 45 point loss. The choppy decline over the last two weeks setup a lot of short positions expecting an implosion of profit taking once we entered January. Those who were short were not happy campers.

The index closed at 7,007 and +4 points over the 7,003 intraday high on December 18th. While this was a new record high, it was not a breakout high. It was just a minor peek over that resistance to see what would happen. The Nasdaq surged 12 points in just the final minutes of the day on a sudden surge of volume.

Resistance remains that 7,000 level until the index can break away and add some more points. Gravity is still in play until a real breakout occurs.



The Russell 2000 small caps came to a dead stop once again at 1,550 BUT it was a new closing high. The index closed just a fraction of a point over the 1,550 level as it tried to post its own breakout. The index surged 6 points in the final minutes on a burst of buying.

A real breakout over 1,550 would be very bullish for the broader market because the Russell is the fund manager sentiment indicator for the market. If they are buying small caps they are not concerned about a future decline.


The Santa Rally is now in progress. There is one more day in the normal 7-day rally period and it would take a complete reversal of today's gains to negate the rally. In theory, as the first day of the year goes, so goes January. As January goes, so goes the year. That only works out about 50% of the time but the saying persists.

I am thrilled to see the gains because I was dreading a sharp bout of profit taking ahead of Q4 earnings. However, one day does not make a trend. Once we get through Friday's close, we will have a lot better idea of what January will look like because everyone will want to be invested before Q4 earnings begin on the 16th and we will be a week closer to that earnings deadline. If there is going to be any profit taking it should begin this week. If we can escape into next week, we should be good to go for an earnings rally.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


 

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New Plays

Time Will Tell

by Jim Brown

Click here to email Jim Brown
Editor's Note

Was Tuesday a real rally with legs or just a short covering head fake? The market rally today was on moderate volume mostly on big cap tech stocks. I am thrilled with the rally but I am not convinced it is real. All the major indexes stopped right at resistance, even the ones that made new highs by a couple points. There is no rush to buy something. If the market continues higher, our existing positions will benefit. Let's see what happens on Wednesday before adding new positions.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Head Fake?

by Jim Brown

Click here to email Jim Brown

Editors Note:

We will not know until Friday's close if Tuesday's rally was a bear trap or previews of things to come. The Russell 2000 came to a dead stop once again at 1,550. The Dow slammed into resistance at 24,850 and failed once again. The S&P and Nasdaq both made new highs with the S&P closing 1 points over its prior intraday high and the Nasdaq +4 points higher.

There was a lot of short covering and volume was moderate at 6.5 billion shares. That was the most since December 19th. We just need to remember, one day does not make a trend.





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


SNAP - Snap Inc
The short position was entered at the open.



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BULLISH Play Updates

BOTZ - Global X Robotics AI - Company Profile

Comments:

Since this is a long-term slow moving ETF position, there will not be daily commentary.

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.

Update 10/26: Shares of BOTZ fell 50 cents for the biggest one-day drop since the ETF began in September 2016. There was no news but volume of 4.16 million shares was the largest ever and well over the 964,000 historical average.

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.



CHGG - Chegg Inc - Company Profile

Comments:

No specific news. Minor gain to a new high close.

Original Trade Description: November 27th

Chegg, Inc. operates student-first connected learning platform that help students transition from high school to college to career. The company's products and services help students to study for college admission exams, find the right college to accomplish their goals, get better grades and test scores while in school, and find internships that allow them to gain skills to help them enter the workforce after college. It offers print textbook and eTextbook library for rent and sale; and provides eTextbooks, supplemental materials, Chegg Study service, tutoring service, writing tools, textbook buyback, test preparation service, internships, and college admissions and scholarship services, as well as enrollment marketing and brand advertising services. The company has a strategic alliance with Ingram Content Group Inc. Chegg, Inc. was founded in 2005. Company description from FinViz.com.

Expected earnings Jan 29th.

The company reported Q3 earnings of 1 cent, up from a loss of 3 cents and beat earnings for a loss of 1 cent. Those are not big numbers but the company is investing for the future. Revenue of $62.6 million beat estimates for $57.7 million. The company guided for the full year for revenue of $251-$252 million, up from prior guidance of $241-$243 million.

The company just acquired Cogeon GmbH, a provider of AI driven adaptive math technology and the math app, Math42.com. With access to new original content, they can launch their own math courses to provide self-guided and individualized solutions to more students. This will increase their market share in the high school market. The company is growing at a 26% annual rate.

The company said recent studies showed 64% of high school graduates were not prepared for college level math courses. Some 40% of college freshmen have to take at least one remedial math course.

Citigroup just initiated coverage with a buy rating. With Chegg's 4% penetration into a very large addressable market, there is plenty of room to grow. The analyst said Chegg's business model is a positive feedback loop that aids in new subscriber acquisition and cross-selling. They have a pipeline of new products aimed at expanding the addressable market.

Shares declined after earnings but are rebounding from the post earnings depression.

Position 11/28/17:

Long CHGG shares @ $15.07, see portfolio graphic for stop loss.
Alternate position: Long Apr $17.50 call @ 85 cents, see portfolio graphic for stop loss.



HIMX - Himax Technologies - Company Profile

Comments:

Himax announced the industry's first AI based human presence IoT visual sensor for consumer applications, called WiseEye. The sensor can detect, localize, count and profile humans. The sensor would work in offices to turn on/off lights, heat/AC when humans are not present, work on household appliances to perform functions when humans are present and sleep when they are absent. Shares were flat on the day.

Original Trade Description: December 27th.

Himax Technologies, Inc. is a fabless semiconductor solution provider dedicated to display imaging processing technologies. Himax is a worldwide market leader in display driver ICs and timing controllers used in TVs, laptops, monitors, mobile phones, tablets, digital cameras, car navigation, virtual reality (VR) devices and many other consumer electronics devices. Additionally, Himax designs and provides controllers for touch sensor displays, in-cell Touch and Display Driver Integration (TDDI) single-chip solutions, LED driver ICs, power management ICs, scaler products for monitors and projectors, tailor-made video processing IC solutions, silicon IPs and LCOS micro-displays for augmented reality (AR) devices and head-up displays (HUD) for automotive. The Company also offers digital camera solutions, including CMOS image sensors and wafer level optics for AR devices, 3D sensing and machine vision, which are used in a wide variety of applications such as mobile phone, tablet, laptop, TV, PC camera, automobile, security, medical devices and Internet of Things. Founded in 2001 and headquartered in Tainan, Taiwan, Himax currently employs around 2,150 people from three Taiwan-based offices in Tainan, Hsinchu and Taipei and country offices in China, Korea, Japan and the US. Himax has 3,011patents granted and 441patents pending approval worldwide as of September30th, 2017. Himax has retained its position as the leading display imaging processing semiconductor solution provider to consumer electronics brands worldwide. Company info from Himax Technologies.

Himax was setting new highs in early December and Citron Research tweeted the company was a fraud and the story behind the company was bogus. Citron never followed up with any facts but that was enough to crash the stosk from $13.50 to $10.

Himax immediately posted a news release denying anything in the tweet. After trading sideways for the last couple of weeks they may be starting to rebound.

Himax reported Q3 earnings of 5 cents and revenue of $197.1 million which beat estimates for 4 cents and $191.3 million. Himax makes the wafer level optics (WLO) that powers the facial recognition in Apple's iPhone X. Since Apple is probably going to make that a standard feature in all future iPhones this is a good deal for Himax. Because of the iPhone shipping cycle, they should post good Q4 earnings. The company said WLO shipments would accelerate in Q4 and beyond. They also said they were working on several new development projects with Apple that would be announced in the future. Apple is also expected to bring the facial recognition technology to the iPad Pro products.

The company guided for Q4 earnings of 13-15 cents, which would be a major jump from the 5 cents in Q3.

They also announced a new partnership with Qualcomm to bring 3D sensing and facial recognition to Android devices and expects to mass produce and ship the technology in Q1-2018.

Expected earningss February 8th.

Because HIMX shares declined so sharply, they could be immune from any early month volatility in January. There is no guarantee it is a plausible scenario.

Position 12/28/17:

Long HIMX shares @ $10.25, see portfolio graphic for stop loss.
Alternate position: Long Feb $11 call @ 75 cents, see portfolio graphic for stop loss.



IMMU - Immunomedics Inc - Company Profile

Comments:

No specific news. Minor decline from the new 15-year high close.

Original Trade Description: December 23rd.

Immunomedics, Inc., a clinical-stage biopharmaceutical company, focuses on the development of monoclonal antibody-based products for the targeted treatment of cancer, autoimmune disorders, and other diseases. The company engages in developing antibody-drug conjugate (ADC) products comprising IMMU-132, an ADC that contains SN-38, which is in Phase II trials used for the treatment of patients with metastatic triple-negative breast cancer, and small-cell and non-small-cell lung cancers; IMMU-130, an anti-CEACAN5-SN-38 ADC that is in Phase II trials for the treatment of solid tumors and metastatic colorectal cancer; and IMMU-140 that targets HLA-DR for the potential treatment of liquid cancers. It also develops products for the treatment of cancer and autoimmune diseases, including epratuzumab, anti-CD22 antibody; veltuzumab, anti-CD20 antibody; milatuzumab, anti-CD74 antibody; and IMMU-114, a humanized anti-HLA-DR antibody. The company also provides LeukoScan, a diagnostic imaging product to determine the location and extent of infection/inflammation in bone. In addition, it offers other product candidates for the treatment of solid tumors and hematologic malignancies, as well as other diseases, which are in various stages of clinical and pre-clinical development. The company has a research collaboration with The Bayer Group to study epratuzumab as a thorium-227-labeled antibody. Immunomedics, Inc. was founded in 1982 and is headquartered in Morris Plains, New Jersey. Company description from FinViz.com.

Immunomedics recently announced a blinded trial on breast cancer drug sacituzumab govitecan showed positive results. The drug is an anti-TROP-2 antibody that can target multiple tumor types including breast cancer, lung cancer and colorectal cancers. This would be a holy grail of cancer treatment if the drug continues to post solid results. The drug is being tested to treat triple negative breast cancer, a tough-to-treat indication with limited treatment options. These cases represent 15% of the 246,660 new cases of breast cancer reported each year resulting in 40,450 deaths per year. In the recent trial the "objective response rate" or ORR was 31% or nearly double the historical rate for the standard treatment of these patients. The company plans to file for an accelerated FDA approval in early 2018. An independent study of this drug by an outside firm estimated it could produce $3 billion in annual sales by 2025.

Obviously, there is no guarantee the drug will be approved or be successful in the real world but the outlook is promising and it is lifting the stock price. Shares broke out to a new 15-year high on Friday and could continue to make new highs as long as the research on this drug and others continues to be positive. Seattle Genetics (SGEN) owns 7.3% of the company and executed warrants to acquire 8.6 million shares on December 5th for $42.4 million. They obviously believe the drug has potential.

Hopefully the potential for a blockbuster drug will insulate us from any market negativity in January.

Position 12/26/17:

Long IMMU shares @ $14.69, see portfolio graphic for stop loss.
Alternate position: Long Feb $16 call @ $1.15, see portfolio graphic for stop loss.



NGVC - Natural Grocers - Company Profile

Comments:

No specific news. Still flirting with resistance at $8.90.

Original Trade Description: December 13th.

Natural Grocers by Vitamin Cottage, Inc., together with its subsidiaries, operates natural and organic groceries, and dietary supplement retail stores in the United States. Its stores offer natural and organic grocery products, such as organic produce; bulk food and private label products; dry, frozen, and canned groceries; meat and seafood products; dairy products, dairy substitutes, and eggs; prepared foods; bread and baked products; and beverages. The company's stores also provide private label dietary supplements; body care products comprising cosmetics, skin care, hair care, fragrance, and personal care products containing natural and organic ingredients; pet care and food products; household and general merchandise, including cleaning supplies, paper products, dish and laundry soap, and other common household products; and books and handouts. As of July 27, 2017, it operated 140 stores in 19 states. The company operates its retail stores under the Natural Grocers by Vitamin Cottage trademark. Natural Grocers by Vitamin Cottage, Inc. was founded in 1955 and is headquartered in Lakewood, Colorado. Company description from FinViz.com.

Expected earnings Feb 15th.

Natural Grocers, more commonly known as Vitamin Cottage, was given up for dead after they reported earnings of only 3 cents in August. Shares fell 35% to $5.50 and traded sideways for the next three months. In mid November they reported earnings of 6 cents that beat estimates by a penny. Revenue of $198.5 million also beat estimates. They guided for full year earnings of 21-31 cents which was above estimates for 21 cents.

Shares rebounded on the earnings beat and positive guidance. They rallied to $8.50 and stalled at that level. They gained 5.6% on Wednesday. Any further gains targets the next resistance level at $10.50.

I am going to put an entry trigger on this position to make sure they are going to move higher before we jump in.

Position 12/15/17 with a NGVC trade at $8.75

Long NGVC shares @ $8.75, see portfolio graphic for stop loss.
Alternate position: Long March $10 call @ 35 cents, see portfolio graphic for stop loss.

That strike price is well out of the money but we have 3 months and it is cheap. If you buy it, plan on holding it long-term.



YRCW - YRC Worldwide - Company Profile

Comments:

No specific news. Transports hit a new high and YRCW posted an intraday high.

Original Trade Description: December 9th.

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2016, this segment had a fleet of approximately 7,700 tractors comprising 6,200 owned and 1,500 leased; and 31,000 trailers consisting of 24,900 owned and 6,100 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, truck loading, and other specialized offerings; guaranteed and expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates hollandregional.com, reddawayregional.com, and newpenn.com, which are e-commerce Websites offering online resources to manage transportation activities. This segment had a fleet of approximately 6,600 tractors, including 5,000 owned and 1,600 leased; and 13,500 trailers comprising 10,800 owned and 2,700 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. YRC Worldwide Inc. was founded in 1924 and is headquartered in Overland Park, Kansas. Company description from FinViz.com.

YRCW reported Q3 earnings of 22 cents that missed estimates for 28 cents. Revenue of $1.25 billion matched estimates. Shipments were impacted by the hurricanes in Texas and Florida. Shares traded sideways on the miss.

Regional shipments increased 4.0% despite the hurricane impact. Revenue per hundredweight ros 3.4% and revenue per shipment rose 3.8%. That was the highest revenue per hundredweight increase in more than 3 years. They are refreshing the fleet to more economic tractors and transitioning 8 terminals to become regional distribution centers. This will add capacity and reduce costs.

Expected earnings Feb 1st.

The entire transportation sector crashed in late October and early November and that knocked 25% of YRCW shares. The rebound started in mid November and shares have recovered all the loss and are close to a breakout to a new 52-week high.

Update 12/11: After the bell, YRC provided an operational update for November. Tonnage per day increased 1.1%, revenue per hundredweight rose 3.7%. Revenue per shipment rose 5.0%. Regional tonnage per day rose 6.0%, revenue per hundredweight rse 0.8% and revenue per shipment rose 4.1%. Overall these were some good numbers.

Position 12/11/17:

Long YRCW shares @ $14.20, see portfolio graphic for stop loss.
Alternate position: Long Jan $15 call @ 71 cents, see portfolio graphic for stop loss.

This is a short-term call and we will need to be out of it by the end of December. The next available option series was April at double the cost.




BEARISH Play Updates

SNAP - Snap Inc - Company Profile

Comments:

The 27-year old founder of Snap Inc hosted a New Years Eve party for employees that cost $4 million with the rapper Drake the headline performer. The news probably helped SNAP shares post a 30 cent gain but investors overall were hostile that he could spend that kind of money with SNAP shares in the tank.

Original Trade Description: December 30th.

Snap Inc. operates as a camera company. It offers Snapchat, a camera application that helps people to communicate through short videos and images. The company also provides a suite of content tools for partners to build, edit, and publish snaps and attachments based on editorial content; and Spectacles, which are sunglasses that capture video from a human perspective. The company was formerly known as Snapchat, Inc. and changed its name to Snap Inc. in September 2016. Snap Inc. was founded in 2010 and is headquartered in Venice, California. Company description from FinViz.com.

There is no magic to this position. Shares are declining ahead of their Jan 23rd earnings. The company has failed to increase users in a meaningful way. Facebook is killing them with their similar product. CNN recently cancelled their daily Snapchat News show called "The Update" because it was not making any money. Advertisers had abandoned the feature. Everything is negative for SNAP's outlook.

Evercore ISI rated them an underperform, the equivalent of a sell rating, with a price target of $7 on December 6th. SNAP shares are already about 50% below their post IPO peak and they were trading at $15 at the open on Friday. The Evercore rating is looking for another 50% decline.

Over the last 12 months the company had revenue of $705 million but lost a whopping $3.2 billion when stock grants were included. If you back out the onetime expenses they still lost $818 million on revenue of $705 million. They cannot continue doing this. You cannot operate at a 100% loss forever.

The Facebook program Instagram copied most of the SnapChat features and has 700 million daily active users. SnapChat only had 178 million in Q3 and that number had only risen 3% for the quarter. SNAP is four times more expensive than Twitter on a price to sales ratio and even Twitter is struggling to succeed.

SNAP has a market cap of $13 billion and it is a failing company. That market cap is going to shrink as the losses continue to pile up. Earnings are Jan 23rd and the odds are very good they will miss estimates again.

Position 1/2/18:
Short SNAP shares @ $14.69, see portfolio graphic for stop loss.
Alternate position: Long Feb $14 put @ 84 cents, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Since this is a long-term slow moving ETF 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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