Option Investor

Daily Newsletter, Monday, 11/21/2016

Table of Contents

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

Market Wrap

All Time Highs Across The Board

by Thomas Hughes

Click here to email Thomas Hughes


The major indices, ex-Transports, all set new all time highs in today's session; the transports set a new a new 19 month high and is fast approaching its all time high. Today's move is an extension of the Trump rally, there was no economic data, earnings or other to move the market, but is on light holiday-trading-week volume. Thanksgiving is this week, another year is fast coming to a close, so that means no trading on Thursday, early closure on Friday and low low volume throughout the week. International trading was light as well. Markets in Asia and Europe closed with small gains as rising oil prices helped support them.

Market Statistics

Futures trading indicated a flat to slightly positive open all morning and this held into the opening bell. At the bell traders took the bull by the horns and rode it to up to test current all time highs and then an hour later to new all time highs. Today's rally lasted until about 1:30PM at which time an intraday top was put in, leading to a small pull back to test for support which did not last long. By 2:30 the indices were back at the highs of the day and by 4PM were setting new highs, closing at the highs of the day.

Economic Calendar

The Economy

There is no official economic data on the calendar today but there is quite a bit this week. Because of the holiday most of it comes out on Wednesday, including the weekly jobless claims and the Minutes To The FOMC Meeting. Wednesday could be a little wild due to a combination of low volume and economic overload going into a holiday.

Moody's Survey of Business Confidence fell for the first time in 6 weeks but is still holding near a 7 month high. The index fell by -0.5% to 32.1 and, according to Mr. Zandi, shows a global economy that is expanding at the "high end of its potential", what I interpret to mean near full speed. The takeaway is that sentiment has rebound from summer lows, global businesses have been able to move past events like Brexit, The Turkey Coup, South American political instability and the US election.

Third quarter earnings season is nearly over, 95% of the S&P has reported so far with another 2.5% reporting this week. Of those that have reported 72% have beaten earnings estimates, 55% have beaten revenue estimates with a blended rate of earnings growth (includes estimates for those yet to report) is now 3.0%, at the high end of the expected range. Unless something major changes this number is likely to stand, breaking the 5 quarter earnings recession.

Looking forward earnings growth is expected to continue and expand into the coming quarters. Fourth quarter estimates have fallen once again, shedding a tenth, but remain positive and expansionary at 3.4%. Take into account that the final rate of earnings growth for the quarter is likely to rise by +4% by the end of the reporting season and 4th quarter growth could be as much as 7.5% to 8%. Looking out into next year the first whispers I've heard for 1st quarter growth is +10%, full year 2017 estimates held steady at 11.4%.

The Dollar Index

The Dollar Index took a breather today, not surprising and not unwelcome following the 5.5% run it has undertaken over the past 2 weeks. The index is trading at new long term highs, about 1% above resistance-now-turned-possible-support, and in need of a consolidation or test of support in order for the rally to remain healthy. This action may last for the next few weeks, up to and until the next round of central bank meetings. The next FOMC meeting is December 13-14th, the ECB meeting is the week before. Target for support is $101.50, based on convergence with MACD and strength in stochastic I do expect to see these highs retested again at least. The FOMC meeting is likely to bring a rate hike, and that will be followed up by Trumponomics and expected increases to inflation and more rate hikes.

The Oil Index

Oil prices got a big boost today from renewed expectations that OPEC will reach a deal to cut production. Today's move was aided by support from Russia who says they are in favor and supportive of such a deal. WTI surged nearly 5% intraday, settling up nearly 4%, to trade near $47.50. The meeting is next week so prices may stay high until then but be careful, the cartel will have to deliver and deliver BIG in order to really move the market. Last month's production data has them at a new high, much higher than when the talk of curbing production began, so anything less than the difference leaves supply/demand tilted to supply.

The Oil Index surged to a new 7 month high but remains within the 8 month trading range. The index is supported by rising prices and intense hopes that OPEC will reach agreement, and that the agreement will stick. The index gained 2.5% but fell short of resistance at the 1,195 level. The indicators are on the rise but remain weak and consistent with range bound trading so a break to new highs doesn't look likely, yet. Next week things may change.

The Gold Index

Gold prices rose slightly today as dollar values backed off. Spot gold gained about 0.25% but was not able to hold early gains, settling up only 0.15% and near $1,210. The near and short term trend in gold is down, and with dollar outlook bullish it looks like those trends will continue. Strong support may exist at $1,200 but it has yet to be touched.

The gold miners remain under pressure although they were able to bounce back somewhat today. The Gold Miners ETF GDX gained a little over 2% but the chart does lot look bullish. The ETF appears to be making a bear flag, beneath the 50% retracement level, with a downside target near $16.50. This move may come even without another big drop in gold prices, forward earnings in the sector have been hurt enough as it is.

In The News, Story Stocks and Earnings

Tyson Foods reported before the bell and did not deliver what the market expected. The supplier of delicious chicken reported earnings and revenue well below estimates, lowered full year guidance, the CEO is stepping down further depressing a stock hurting from a class action lawsuit related to manipulation of broiler hen prices. Shares of Tyson fell -15% to trade at a potential support level near $55. Tyson is a good company, (almost) everybody eats chicken, I think this one will recover.

Jack In The Box served up a hit when it reported results after the bell. The hamburger chain beat EPS by a dime, more than 10%, raised full year guidance to be in line with consensus and raised the dividend by 33%. The caveat is that results are driven more by cost savings than improved traffic, trends within the industry are described as sluggish. Shares of the stock fell -2% on the news.

The VIX continues to move lower. Today the index dropped below 12.50 and looks like it will hit long term lows near 10 over the next few weeks.

The Indices

Today was a relatively light day of trading. The indices made a quick move higher at the open, consolidated mid day and then moved back to the highs later in the day and held those levels in to the close. Volume was light but new all time highs were set, just about across the board. Today's leader was the NASDAQ Composite which closed with a gain near 0.89%. The tech heavy index created a medium sized white candle, extending the rally and move up from the short term moving average, and set a new all time high. The indicators are on the rise and support the move so it could very well continue into the near term. The indicators are not yet showing strength but an upside target of 5,500 is not out of the question.

The S&P 500 is runner up today, gaining about 0.75% and breaking out to a new all time high. The broad market created a smallish to medium sized white candle, extending the election bounce and move up from the short term moving average, and is supported by the indicators. Both MACD and stochastic are on the rise, suggesting higher prices are on the way, stochastic confirming the break out by breaking above its upper signal line. This move looks set to continue into the near term, upside target near 2,250.

The Dow Jones Industrial Average came in third in today's session, about 0.47%, but did manage to set a new all time high. The blue chips look like this could be the first move higher from a consolidation band but if so, has yet to show strength. The indicators are bullish and on the rise, in support of the move, so a continuation looks very possible. The caveat is that here, like with the transports, MACD has peaked and may be indicating an end to the rally is near, or at least that momentum is running low during this leg of the rally. The thing to keep in mind about this signal is that now that the market has broken to new highs there may be several bullish MACD peaks within a longer term movement, this may be just the first. Stochastic is showing strength and does not confirm resistance, weakness or impending pullback. It may be considered overbought but this condition could easily persist for a long time during a bull market.

The Dow Jones Transportation Average comes in last today with a gain near 0.46%. The transports did not set a new all time high but it did set a new long term nearly 20 month high and looks set to test the all time high very soon. The indicators are bullish and support rising prices although MACD has peaked. This peak may be an intermediate peak within a longer uptrend but nonetheless raises a red flag. Upside target is the all time high, about 4% above today's close, and may provide significant resistance.

Trading was light but today's action was still important, the indices moved up to new highs. The first forays to such lofty levels may have been tepid but there were not met by resistance. This does not mean the bears are not there, just that they weren't waiting to pounce. If things play out the according to expectations the bears may not come in force for a while yet. The signs are still pointing to a period of long term economic growth, earnings outlook remain positive and the world seems happy about it.

We've yet to see a really strong follow through on the Trump rally but in the end I think a nice, slow, steady follow through may be better. A sharp drive to some crazy high level would be cool, for a while, but likely to come crashing back to reality. A slow build of market pressure will allow stocks to build solid support and prices to rise in a sustainable way. I am still cautious, not quite ready to go all in, but also getting more and more bullish by the day and looking to buy on the dips, and where I see strength.

Maybe, just maybe, next week's dump of data or the next week's FOMC meeting could spark a true Santa Rally, maybe it's already here.

Until then, remember the trend!

Thomas Hughes

New Plays

Intelligent Investing

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Russell 2000 small caps have been up for 12 consecutive days. That tied the record for the longest streak set in 2003. Nothing goes up forever. Even though this week is typically bullish, we know there will be significant profit taking in the very near future. The volume is going to decline sharply over the next three days and that means an increased potential for volatility.

I could not find anything today that I was willing to play. My entire watch list of small cap stocks is full of broken charts with 10%, 15% and in some cases more than 20% gains over the last two weeks. There is no future in buying these stocks at those levels. I am going to pass on adding a play tonight and probably tomorrow as well unless something pops up that just has to be bought. We need to wait on the market to come to us.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 underperformed the other indexes today but still managed to gain 6 points to a new high. The Russell has now posted gains for 12 consecutive days. That ties the longest streak set in 2003, One more gain will be a record.

The Dow broke out of its flag formation and also closed at a new high. The S&P and Nasdaq Composite indexes also closed at new highs. With every day that passes we become even more overbought so you know there is a bout of profit taking in our future.

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

OCLR - Oclaro Inc
The long stock position was entered at the open.

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

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BULLISH Play Updates

FTK - Flotek - Company Profile


No specific news. Big 6% gain on the $2 rise in oil prices.

Original Trade Description: November 12th.

Flotek Industries, Inc. develops and supplies oilfield products, services, and equipment to the oil, gas, and mining industries in the United States and internationally. The company's Energy Chemistry Technologies segment designs, develops, manufactures, packages, and markets chemistries under the Complex nano-Fluid brand for use in oil and gas well drilling, cementing, completion, stimulation, and production activities, as well as for use in enhanced and improved oil recovery markets. This segment also constructs and manages automated material handling facilities; and manages loading facilities and blending operations for oilfield services companies. The company's Drilling Technologies segment inspects, manufactures, sells, markets, and rents down-hole drilling equipment that are used in energy, mining, and industrial drilling activities through direct and agent-based sales. Company description from FinViz.com.

In the Q3 cycle they reported a loss of 5 cents on revenue of $73.7 million. That was slightly more than the estimates for a 3-cent loss. Revenue estimates were for $79.5 million. The company explained their 16.2% decline in revenue saying there was a 43.2% reduction in the active rig count in Q3 compared to Q3-2015. In other words, their available business was cut nearly in half but they only recorded a 16% decline in revenue. That was actually a 1.0% increase sequentially from Q2.

Flotek services oil wells and especially new wells with their down hole products including their patented Complex nano-Fluid (CnF) technology that is used in fracking wells. Unlike fracking chemicals used by others, the Flotek CnF chemicals are completely non-toxic and have been proven to provide a slippery surface in the reservoir so that oil flows freely. This nontoxic chemical mix made from citrus oils is seen as a plus for producers constantly under fire for potential ground water contamination.

With rigs going back to work and drilled but uncompleted wells being brought online, the company said they were seeing signs of recovery in the sector. The drop in crude prices to $43 last week failed to depress the stock.

FTK has put in a bottom at $11 and could be ready to move towards the September highs at $16.

If OPEC actually announces some kind of production agreement on Nov 30th, the sector could respond aggressively.

Earnings Feb 1st.

Position 11/14/16:

Long FTK shares @ $11.72, see portfolio graphic for stop loss.

No options recommended because of price.

GNC - GNC Holdings - Company Profile


No specific news. New 3-week high.

Original Trade Description: November 15th.

GNC Holdings, Inc., operates as a specialty retailer of health, wellness, and performance products. The company operates through three segments: Retail, Franchise, and Manufacturing/Wholesale. Its products include vitamins, minerals, and herbal supplement products; and sports nutrition products, diet products, and other wellness products. The company sells its products under the GNC proprietary brands, including Mega Men, Ultra Mega, Total Lean, Pro Performance, Pro Performance AMP, Beyond Raw, GNC Puredge, GNC GenetixHD, and Herbal Plus, as well as under third-party brands. It operates a network of approximately 9,000 locations under the GNC brand worldwide. The company sells its products through company-owned retail stores; Websites, including GNC.com and LuckyVitamin.com, as well as Drugstore.com; domestic and international franchise activities; third-party contract manufacturing; and e-commerce and corporate partnerships. Company description from FinViz.com.

Just over a month ago there was a contingent of Chinese buyers circling GNC when it had a market cap of about $4 billion. When they reported earnings and lowered guidance that market cap fell to about $1 billion. Shares fell from $22 to $13 making the company even more attractive for the Chinese buyers.

The key here is not the U.S. or European business. The key point in a Chinese acquisition is the health conscious Chinese consumer. In China there are plenty of health products but most are scams or poorly processed with large amounts of unknown fillers. The health food and vitamin market is not well managed and all sorts of scary products exist.

GNC as a global brand is the answer. Chinese consumers would feel comfortable buying the brand and knowing there were no harmful ingredients.

Over the last several days, GNC shares have started ticking up again. GNC has hired Goldman Sachs to find a buyer and it is only a matter of time before that happens. The uptick in the shares could be due to rumors leaking out about a potential transaction. Option prices have also escalated suggesting something in progress.

Earnings Jan 26th.

Position 11/16/16:

Long GNC shares @ $14.75, see portfolio graphic for stop loss.

No options recommended because of price.

IDTI - Integrated Device Technology - Company Profile


No specific news. Minor profit taking after the breakout.

Original Trade Description: November 14th.

Integrated Device Technology, Inc. designs, develops, manufactures, and markets a range of semiconductor solutions for the communications, computing, consumer, automotive, and industrial end-markets worldwide. It operates in two segments, Communications; and Computing, Consumer, and Industrial. The Communications segment offers communication timing products, such as clocks and timing solutions; flow-control management devices comprising Serial RapidIO switching solutions; multi-port products; telecommunications products; static random access memory products; first in and first out memories; digital logic products; radio frequency products; and frequency control solutions. The Computing, Consumer, and Industrial segment provides clock generation and distribution products, programmable timing devices, computing timing solutions, high-performance server memory interfaces, PCI Express switching solutions, power management solutions, and signal integrity products, as well as sensing products for mobile, automotive, and industrial solutions. Company description from FinViz.com.

IDTI reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $184.1 million barely edged ahead of estimates for $184.0 million. Revenue rose 8% making the 12th consecutive quarter of revenue growth.

They announced multiple new products for the quarter including a new 5G product in corporation with IBM for the connected car. They also obtained certification for their second production facility for automotive capabilities.

Earnings Jan 30th.

Shares spiked from $21 to $24 on the earnings then settled in for two weeks of post earnings depression. Over the last two days shares has ticked higher again and closed at $23.60 on Monday. This has been resistance from early October and from back in June. With the positive earnings and a positive market I expect the stock to breakout this time.

Position 11/15/16:

Long IDTI shares @ $23.69, see portfolio graphic for stop loss.

No options recommended because of price.

OCLR - Oclaro Inc - Company Profile


No specific news. Analyst consensus estimates for earnings have risen 34.2% over the last month.

Original Trade Description: November 19th.

Oclaro, Inc. designs, manufactures, and markets lasers and optical components, modules, and subsystems for the optical communications, industrial, and consumer laser markets worldwide. The company's products generate, detect, combine, and separate light signals in optical communications networks. It offers client side transceivers, including pluggable transceivers; line side transceivers; tunable laser transmitters, such as discrete lasers and co-packaged laser modulators; lithium niobate modulators to manipulate the phase or the amplitude of an optical signal; transponder modules for transmitter and receiver functions; and discrete lasers and receivers for metro and long-haul applications. Company description from FinViz.com.

Oclaro posted strong earnings of 14 cents compared to estimates for 10 cents. Revenue of $136 million also beat estimates for $132 million. The company raised guidance for Q4 to revenue in the $146-$154 million range.

Piper Jaffray said Oclaro will be the only company shipping products in volume in the next two quarters. They cited a lack of price competition today that will appear in mid 2017 as new competitors enter the market in volume. The industry is currently under capacity constraints. PJ also said there was strong demand from China and traction in the U.S. was accelerating due to the surge in IoT devices and video streaming.

Earnings Jan 31st.

Shares surged after earnings then faded the prior week in the Nasdaq uncertainty. Last week the stock broke over resistance at $9.25 and is now breaking out to five-year highs. I believe the rally will continue now that it is in breakout mode.

Position 11/21/16:

Long OCLR shares @ $9.86, see portfolio graphic for stop loss.

No options recommended because of price and spreads.

XLF - Financial SPDR ETF - ETF Profile


The XLF only gained 8 cents but it was another new high.

Original Trade Description: November 16th.

The Financial Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Financial Select Sector Index.

The ETF is comprised of 44% banks, 20% capital markets, 19% insurance, 11% diversified financial services and 6% consumer finance.

All of those sectors will do better as rates rise. As of today the CME FedWatch Tool shows a 91% chance of a rate hike in December as well as a 91% chance for the February meeting and 92% for March. If they do hike in December the odds will decline for February but depending on their commentary the March meeting will still be on the table. Multiple Fedwatchers have speculated there could be 3-4 rate hikes in 2017 if the economy continues to improve.

The Fed has to hike rates in 2017 in order to have some room to maneuver if the business cycle rolls over and a recession appears. We are in the third longest expansion in history and we are due for another recession soon.

The banks rallied on the rise in treasury yields and the expectations for the December rate hike as well as the potential for decreased regulation. President elect Trump has said he would kill regulations harming the banking industry. There is even talk of modifying Dodd-Frank.

Banks have rallied significantly and I would not suggest buying the actual ETF after the big gain. However, I do not believe the gains are over. The gains last week spiked the ETF to a 7-year high but the 2007 highs were over $30.

On Tuesday, somebody bought 300,000 contracts of the March $23 call at an average of 55 cents. That was $16.5 million in option premiums. That takes some serious conviction. I am recommending we follow them and buy the same call option. That way our risk is limited to $50 per contract. I am willing to bet $50 that the ETF will be over $23 by March. This is a long term position and there will not be a stop loss.

Position 11/17/16:

Long March $23 call @ 29 cents. No stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


New historic low after a 4.4% decline.

Since this is a long-term play, I am not going to comment on it every day. Just forget it is in your portfolio and hope for a strong market rally in Q4.

Original Trade Description: September 6th.

The VXX is a short term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. I think everyone was waiting for the typical August volatility. When it did not show up and the market rallied on Friday that support broke. And the decline has begun.

Because there may be some September volatility, anyone in this position must understand that it may move higher before it moves lower BUT it will always move lower. We just have to wait it out. Volatility never lasts forever.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

Position 9/7/16:

Short VXX shares @ $33.88, no initial stop loss.

No options recommended because of price.

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