Option Investor

Daily Newsletter, Tuesday, 11/22/2016

Table of Contents

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

Market Wrap

Flushing The TPP

by Thomas Hughes

Click here to email Thomas Hughes


Trump announced via YouTube video that he would withdraw the US from the TPP on day one, the market yawned. What I'm wondering is who is cashing in on the Adsense revenue the millions of views the video is sure to generate. Anyway, he also laid out his agenda for the first 100 days which is a mightily toned down version of his campaign rhetoric. Among the items pledged are a look into infrastructure security, immigration violations and banning lobbying by government employees; all items he can address with the stroke of his pen. As for the TPP, Trump just wants to renegotiate and we already knew this. My view; the US trade deficit runs at well over a half trillion dollars per year, in the negative, that's equal to more than 1% of GDP, would it be so bad if some of that business stayed home?

International markets were basically calm. Asia managed to eek out some gains in the aftermath of another Japanese earthquake. Damage assessments are so far positive, the Fukishima reactor had some problems but no leaks, and investors breathed a sigh of relief. The Hange Seng led with gains near 1.5%, the Nikkei was a laggard with gains closer to 0.3%. European indices were buoyed by positive action in Asia and yesterday's new all time highs in the US markets. Gains were posted across the board but they were muted, perhaps due to the holiday week or just waiting to see what happens with tomorrow's data dump.

Market Statistics

Futures trading indicated a higher open all morning and there was little in the way of news or events to move the market. The broad market opened with small gains, about 0.5%, and held them for the first hour or so but there was little strength and no follow through on yesterday's new highs. By 10:30AM the indices were in retreat and they remained under pressure until nearly 12 noon. An intraday bottom was put in during the lunch hour, about -0.25% below yesterday's close for the SPX, after which a rally sent the indices back up to approach the earlier highs, which by the way, were new all time highs in and of themselves. By late afternoon the indices were setting new intraday and all time highs, which they held into the close of the session.

Economic Calendar

The Economy

Only one economic release today, Existing Home Sales, and it was a nice follow up to last week's wickedly strong housing starts and permits data. Existing homes sales increased by 2.0% month to month to an annualized rate of 5.60 million. This is the 2nd month of gains and 5.9% above this same period last year. Lawrence Yun, NAR economist, says this is a convincing autumn revival for the housing market. The bad news, or good news for current home owners, is that prices are up more than 6% year over year and expected to rise at least 3% in 2017 as labor market and wage pressure increase pressure on already tight housing markets.

There will be a massive data dump tomorrow because of the holiday, all the releases ordinarily scheduled for Thursday and Friday are getting released on Wednesday. The FOMC minutes and New Homes Sales top the list.

The Dollar Index

The Dollar Index fell in overnight trading to make its first test of bounce from support. The index opened the session with a loss near -0.4%, just above the $101.50 support target, and was able to move up from there after a quick dip lower. The index managed to regain all of today's losses and more intraday, closing with gains near 0.00%. Today's candle is bullish and consistent with backing-and-filling following a rally/during a consolidation as the market prepares to move higher. The indicators remain bullish and convergent with new highs, if also consistent with a consolidation, peak or pull back. Consolidation is likely to continue into the next two weeks up to and until, no surprise here, the FOMC meeting. The index may break out the week before, at the ECB meeting, but I think the FOMC meeting is a better target for now.

The Oil Index

Oil prices closed flat after a day spent drifting sideways. The OPEC hope has helped lift prices and for now is supporting them, this hope may evaporate quickly at any time if the deal, whatever it is and if it even exists, appears to be falling apart, does not meet expectations or in fact fails to come to fruition. Supply remains high, demand remains tepid, that may change next year when the economy is booming but for now is the reality of the situation. Another reality is that OPEC is pumping at record levels and would have to produce a cut more than double the one first proposed earlier this year in order to even match its effect. I remain skeptical to say the least.

Once again the oil sector has been lifted on faith in OPEC's reliability to reach a deal, and then follow through on it. Once again that faith has led to a test of resistance, and a confirmation of that resistance, for the Oil Index. This time it is at a slightly higher level than last, at the very upper reaches of the 8 month trading range rather than at the upper boundary of a narrower range within the range, and that test has been confirmed. The Oil Index gained nearly 0.5% and actually set a new almost 12 month high only to have bears step in and drive prices lower. The index subsequently lost nearly a full percent to confirm resistance at the 1,190 level. How strong this resistance is is yet to be determined, the indicators continue to gain strength although there is little to show that the index has broken out or will break out of its range. Longer term outlook for earning growth in the sector remains positive, even with $45 oil, so it is possible a bull market is brewing with or without an OPEC deal.

The Gold Index

Gold prices tried to rise on early weakness in the dollar but later gave up the gains. By end of day spot price was back to break even and trading near the recent lows. With the dollar on the rise and outlook for a rate hike so strong it is hard to see gold rising. Next downside target is $1,200, a break below here would be bearish and could lead to a much larger downward movement.

The gold miners continue to consolidate near recent lows. The Gold Miners ETF GDX lost roughly -1% in today's session but recovered the loss and basically traded sideways for the the 7th day in a row. The ETF appears to be making a bear flag within a three month down trend, below the 50% retracement line, and this signal is confirmed by weakness in stochastic. MACD is bearish but consistent with a trough, test of support etc; stochastic is showing weakness by trending lower and crossing the lower signal line. A move in price action below support at the $20 level would be bearish and lead to a possible down to $16.50.

In The News, Story Stocks and Earnings

Lots of food companies in the news today. First up, Hormel. The maker of SPAM and Dinty Moore Beef Stew reported earnings before the bell and served up a tasty treat. Earnings and revenue were a company record. Earnings were in line with expectations, revenue slightly above. Forward outlook is good, guidance was raised to a range above the consensus $1.68. Shares of the stock jumped more than 3% but met resistance at the short term moving average.

Campbell's Soup Company reported before the bell as well, delivering a can full of results. GAAP EPS jumped 52%, adjusted EPS up 5%, on slightly lower revenue (still better than expected) to $1.00 per share. The company CEO says they are off to a solid start relative to expectations and has reaffirmed guidance to a range with consensus as the mid point. Shares of the stock jumped more than 3.5% to test resistance at the $57.50 level. Today's candle is a long legged doji with strong indications of higher prices.

Hewlett Packard Enterprises reported after the bell and gave mixed results, as did Hewlett Packard Incorporated. Both arms of the once whole Hewlett Packard also gave weak next quarter guidance. Both companies fell in after hours trading but the HPQ chart is more interesting. Shares fell a little more than 1% and confirming a near term double top. Downside target is $14, with a possible move to $13.

The Indices

The indices are still drifting higher on election momentum and have once again set new all time highs, except for the transports. The transports were laggard in today's session, gaining only 0.16%, but were at least able to make another new long term high. The Dow Jones Transportation Average created a very small doji candle in a slow creep up toward testing a 2 year high. The indicators remain bullish and suggest upward drift could continue but momentum is waning. Resistance could spark a sell off and near term correction, longer term outlook remains positive. Should the index make more than a cursory pull back, if it pulls back at all, 8,600 is my target for strong support.

The broad market S&P 500 made the next smallest move, just over 0.22%. Today's candle is a small doji testing support at the previous all time high which was broken yesterday. The indicators are both bullish and support higher prices. MACD is holding steady at the high of the move, stochastic moving up to the very upper reaches of the upper signal zone, both consistent with steady inflows to the market. Next upside target is 2,250.

The NASDAQ Composite is runner up in today's lineup with a gain of 0.33%. The tech heavy index created a small spinning top type candle, the 8th in a row of candles in a near perfect 45 degree uptrend, and looks set to continue drifting higher into the near term. It is moving steadily higher from the short term moving average and is confirmed by both indicators, which are showing strength. Stochastic is crossing the upper signal line while MACD is building to a peak that will be the highest in nearly a year. Upside target is 5,500.

The Dow Jones Industrial Average made the largest gains today, a stout 0.35%, and is the most bullish looking of all the major indices. Today's candle extends the flag pattern break-out begun yesterday and suggest a movement of up to 1,000 is likely in the near term. The candle is small but white and bullish, it is the flag pattern break and continuation, as it is a continuation signal, that is important. The move leading up to the flag is roughly 1,000 points, this means the move following the flag will be roughly the same. Upside target is Dow 20,000.

The market is coming to a slow boil. It's been simmering on the back burner for a long time, about 2 years, and has yet to come to full boil but I think that is on the way. Today's action was light, volume wasn't heavy, but we made new highs, resistance is yet to be seen, signals are present in all the major index charts and outlook is good. I can't think of a single thing that, right now, could derail the rally, which means that something is out there lurking to try and do just that, but that is a worry. The reality is that the market is moving to new highs, earnings outlook is positive, economic outlook is positive and it's likely to stay that way into the long term. I remain cautious, but cautiously bullish and more bullish by the day. I'm letting my winners run for now, and waiting for the next dip to start getting serious.

Until then, remember the trend!

Thomas Hughes

New Plays

Breadth Shrinking

by Jim Brown

Click here to email Jim Brown
Editor's Note

After two weeks of solid gains, the market breadth is beginning to fade. Advancing volume was only 59% today and many stocks only had fractional gains of a few cents. Thanksgiving week is typically bullish and that may help extend the gains but next week could be a challenge.

The Russell 2000 small caps have been up for 13 consecutive days. Nothing goes up forever. We know there will be significant profit taking in the very near future. The volume is going to decline sharply over the next two days and that means an increased potential for volatility. I am recommending we hold off on adding new positions for the rest of the week.


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 reversed its weak performance from Monday to blast off with a 12-point gain to a new high. The Russell posted its 13th consecutive daily gain and now has the best three week performance since 1996. Unfortunately, you know this cannot last.

The vast majority of the 300+ stocks on my small cap watch list only posted fractional gains today. The market breadth is shrinking and we are nearing the point where we should see several days of market declines.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

No Changes

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BULLISH Play Updates

FTK - Flotek - Company Profile


No specific news. No material movement.

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 gain to new 10-month high.

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. Minor gain. Still holding over prior resistance.

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


Only a penny gain 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


Minor gain in a positive market. This is probably due to investors buying puts ahead of next week.

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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