Option Investor

Daily Newsletter, Tuesday, 2/14/2017

Table of Contents

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

Market Wrap

Considerable Progress

by Thomas Hughes

Click here to email Thomas Hughes


Janet Yellen's testimony before congress began today and was largely uneventful. She used the words "considerable progress" in relation to the Fed's mandate and the market liked what it heard. And then it marched right on up to set another brand new all time high. I have to say that these are pretty exciting times to be in the market, how high the market will go is always hard to pinpoint but going higher it is, and we're watching it happen.

International indices were hesitant in the overnight session as participants were waiting on Janet Yellen's testimony. In both cases, Europe and Asia, indices closed mostly flat with one notable exception. Japan sank more than a full percent on talk from the finance minister and news from Toshiba. The Japanese finance minister says it may take some time to establish positive trade talks; Toshiba says it will delay the release of earnings by a month at least while they investigate something to do with their US nuclear operations.

Other news that did not go unnoticed was the confirmation of Steve Mnuchin as Treasury Secretary and the resignation of Flynn in the wake of his inappropriate Russian contact. Mnuchin's first acts were to label Venezuelan politicians as drug traffickers.

Market Statistics

Today's action was a tale of two markets, one before/during Yellen's testimony and one after. Before and during the testimony the indices tread water in sideways action at or slightly below yesterday's closing prices. Toward the end of testimony the indices began to move up from near the lows of the day, reaching break even right as the session was coming to a close. The verdict, pretty much as expected with absolutely no fireworks. In other words it was Goldilocks testimony and the market moved up, and up, and up.

Economic Calendar

The Economy

Two bits of economic data today, PPI and Janet Yellen's testimony. PPI came in hot at 0.6%, double expectations, but remains tepid over the long term. The more important core PPI, ex food and energy, was a much cooler 0.2% and in line with expectations. Year over year not adjusted PPI is running at a rate of 1.6%, core is running the same. While not too high the concern is that inflation has picked up noticeably over the past 6 months and is on a trajectory to reach the Fed's 2% target over the next 6 to 12 months.

Janet Yellen's testimony went on for about 3 hours and was largely uneventful, aside from the usual grandstanding senators trying to trip her up or make some kind of point. To keep it short I'll simply list the important bullet points that I got from the statements and Q&A. First, fiscal policy with the current administration is a source of uncertainty. However, the economy is sustaining moderate growth, the labor market is getting stronger, wage growth has picked up and business sentiment is improving. The FOMC expects to see inflation gradually rise to the 2% target rate and rate hikes will be evaluated on a meeting by meeting basis. In terms of the dual mandate, she says the FOMC has made considerable progress and that waiting too long to raise rates is a growing risk.

The Dollar Index

The Dollar Index gained on today's news, rising nearly 0.35% and extending its move above the shot term moving average. Yellen's testimony and the PPI data helped to firm rate hike expectations and subsequently the dollar. The CME's FedWatch tool shows this as well, expectations for rate hikes have risen in each of the next 3 months with June rising above 70%. Near term outlook is now bullish, upside target is $102.50. Looking forward economic data, here and abroad, will be the drivers until the next round of central bank meetings. Tomorrow is a non-policy meeting of the ECB, next policy meeting is March 9. The next BOJ meeting is March 15th, the next FOMC meeting is also March 15th.

The Gold Index

Gold prices were able to hold steady in today's action despite the rise in dollar value. Spot prices closed the session very near flat for the day, just above $1,226. Lingering uncertainty over the FOMC rate hike timeline and President Trump may be supporting prices in the near term but longer term fundamentals remain skewed to the downside.

The gold miners were also supported in today's session, opening with a small gap to the upside and then falling from there. Today's candle is small and black with a long lower shadow, falling from and confirming resistance at $25.50. Price action is also confirmed by the indicators, both of which are showing bearish crossovers in the near term, and divergence in the short. Resistance is $25.50, down side target is $23.50 in the near term.

The Oil Index

Oil prices held steady today as well, WTI gaining a half percent to trade just above $53 and near the middle of the near term range. US supply and rising production continue to offset the OPEC deal, tomorrow's storage data could tilt the scales one way or the other. Oil prices may remain in this range indefinitely and until there is more clarity concerning oil fundamentals. Until then rising US rig counts will continue to put pressure on prices.

The Oil Index continues to hang below resistance while the indicators continue to support higher prices. Today's action created a small hanging man doji just below the short term moving average and looks like it is having a hard time with resistance. The indicators however are consistent with a bullish buy and suggest that resistance will break down. The general trend in the index is up which makes the current set up trend following. Stochastic is the strongest indication right now, the two recent bounces from the lower signal line are divergent from the latest low, indicative of support and showing a strong bullish entry signal. MACD has not yet confirmed but is fast approaching the zero line from below, about to make a bullish crossover of its own. A break above the moving average and resistance at 1,230-1,250 would be bullish and supported by forward earnings outlook, upside target is 1,300.

In The News, Story Stocks and Earnings

The health insurers made headlines today when first one and then another major merger was scrapped. Early in the day Aetna and Humana announced they mutually agreed to end their merger talks following on anti-trust grounds. Later in the day Cigna pulled out of its deal with Anthem and delivered a lawsuit worth nearly $15 billion. Shares of Aetna jumped a little more than 3%, the others closed flat on the day.

ITT reported before the bell and beat on the top and bottom lines. Despite the beat revenue and earnings are down year over year and forward guidance is weak. The silver lining is that the dividend was increased but not enough to send shares moving higher. Shares of the stock fell in the premarket session but were able to regain some of the loss before the closing bell.

AIG reported after the closing bell and delivered mixed results. The net loss per share increased more than 100% from last year but due to increases in prior year adverse reserve development. Other positive highlights include faster than expected cost reductions and an increase to the current buyback program. Under the new terms there is approximately $4.7 billion to be used on share repurchases. Shares moved higher during the open session and then fell more than -2% after the release of earnings.

The Indices

The indices had a good day today. Early trading was cautious as traders waited on Yellen's testimony, later it was risk-on once the market realized there were to be no shocking surprises. The Dow Jones Transportation Average is the only one to not move higher, and the only to not set a new all time high. The transports created a small doji spinning top just below resistance at the current all time high and looks like resistance will be tested again. The indicators have both rolled into a trend following buy signal, consistent with a test of resistance and possible break to new highs. Resistance is 9,500, a break above this level would be bullish.

The Dow Jones Industrial Average made the largest gain in today's session, 0.45%. The blue chips created a medium sized white candle, setting a new all time closing and intraday high, and looks like it could continue higher. Both indicators are bullish and moving higher, consistent with a trend following entry, and support higher prices. Upside target is 21,000.

The S&P 500 made the 2nd largest gain in today's session, 0.40%. The broad market created a medium sized white bodied candle and set a new all time intraday and closing high. The index is moving higher, extending the Trump induced rally, and the indicators support higher prices. Both MACD and stochastic are moving higher following bullish, trend following, crossovers and stochastic is on the verge of showing strength by crossing over the upper signal line. Upside targets are 2,350 and 2,500 in the near to short term.

The NASDAQ Composite made the smallest gain today, just over 0.30%, but was able to set new all time highs, closing and intraday. The indicators are both bullish and moving higher, suggesting higher prices although divergence in MACD persists and stochastic is approaching overbought in both the short and long term. The indicators give reason for caution, there is a chance for correction, but until that happens the trend is up. Upside target is near 6,000.

The market is moving higher and that is going to start building some euphoria and start attracting new money, the "revolution" may not be televised but the rally certainly will. I expect to start seeing more and more positive coverage in the news, and that I think will draw in new money and to lead to further upside for equities. I am bullish, excited, and cautiously looking to add to my positions.

Until then, remember the trend!

Thomas Hughes

New Plays

New Indicator Please

by Jim Brown

Click here to email Jim Brown
Editor's Note

There are no indicators you can add to a chart that trigger an alert when a market has peaked. We need that indicator to be developed soon. If there were a bell at the top, it may have been rung today. All the big cap indexes are hitting RSI highs that have not been seen in several years. The Nasdaq 100 at 79.63 is the highest level since July 2014. Indicators can continue to be overbought for days or weeks but the higher they rise the more likely we will see a dramatic fall.

I am not recommending anything today. I do not feel good about adding long positions when the market is this overbought and potentially setting up for a decline, even if it is just a minor bout of profit taking. Bullish stocks are setting new daily highs and the rate of climb is nearly vertical. Even stocks with bearish charts are in rally mode. Be patient, a buying opportunity will appear.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Slightly More Bullish

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market rally actually picked up some speed today and the Russell farther over resistance. Janet Yellen's dovish, noncommittal testimony appears to have given the bulls new hope that the rally as farther to run. The S&P actually accelerated its breakout and the Russell moved ever closer to round number resistance at 1,400 and farther away from prior resistance at 1,388.

The Nasdaq 100 became even more overbought with a 14 point gain but nobody seems to care. All the emails I get question the market's sanity at this point but we should not complain about a bullish gift.

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

BRKS - Brooks Automation
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

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BULLISH Play Updates

AKS - AK Steel - Company Profile


No specific news. The steel sector was flat today.

Original Trade Description: February 4th

AK Steel Holding Corporation, through its subsidiary, AK Steel Corporation, produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled, and hot-rolled carbon steel products; and specialty stainless and electrical steels in sheet and strip forms. The company also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial, and construction markets; buys and sells steel and steel products, and other materials; and produces metallurgical coal from reserves in Pennsylvania. It sells its flat-rolled carbon steel products primarily to automotive manufacturers and to customers in the infrastructure and manufacturing markets, including electrical transmission, heating, ventilation and air conditioning equipment, and appliances; and coated, cold-rolled, and hot-rolled carbon steel products to distributors, service centers, and converters. The company sells its stainless steel products to manufacturers and their suppliers in the automotive industry; manufacturers of food handling, chemical processing, pollution control, and medical and health equipment; and distributors and service centers. It also sells electrical steel products to manufacturers of power transmission and distribution transformers, as well as for use in the manufacture of electrical motors and generators. Company description from FinViz.com.

Shares spiked from $5 to $11 after the election on hopes for a surge in infrastructure projects, lower regulations and a growing economy. AK shares peaked early and traded sideways for a month. The week before earnings they began to decline as analyst said the market gains were overdone.

The reported earnings of 25 cents on January 24th that beat estimates for 7 cents. Revenue of $1.42 billion was slightly lower than estimates for $1.43 billion. Shares spiked on the earnings news and collapsed on guidance that shipments to automakers had declined in Q4. The next day a spokesman clarified that saying the "decline in shipments compared to 2015 was primarily the result of a 41% decline in shipments to the distributor and converters market as the company intentionally reduced sales of commodity products." In other words, AK wanted to focus its efforts on the higher margin products and reduce exposure to low margin products.

Shares quit declining after the clarification and bottomed just under $8. Friday's close was right on the verge of a 7-day high. One more positive day and we could see a rebound begin.

Earnings April 25th.

The optional option position is for a longer-term holder with a June expiration. Very limited risk in terms of dollars invested and could be a decent winner if AKS returns to the $11.25 highs or higher on infrastructure stimulus headlines.

Position 2/6/17:

Long AKS shares @ $8.18, see portfolio graphic for stop loss.

Optional long-term option:

Long June $10 call @ 59 cents. No stop loss.

BOX - Box Inc - Company Profile


No specific news. Minor decline after new 52-week high close on Monday.

Original Trade Description: January 21st.

Box, Inc. provides cloud-based mobile optimized enterprise content collaboration platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries. Company description from FinViz.com.

Box is rapidly growing its customer for document management for companies with a global workforce. They are competing with other companies for cloud collaboration and access. More than 69,000 companies worldwide now use Box. They have broken into the media sector and now many production companies use Box for storing and distributing their production content. This has given Box a new niche in the market. Box has partnered with Salesforce.com, IBM and Microsoft in the cloud space. Their goal is to partner and grow with them rather than compete with those giants.

The company reported a smaller than expected loss for Q3 and expect to post an even narrower loss for Q4. Their guidance for Q4 is a loss of 13 cents on revenue of $109 million. That is better than the 26 cents loss in Q4-2015.

Earnings March 1st.

Shares broke out to a new 52-week high on January 12th before pulling back slightly with the market. They closed 5 cents below a new 52-week high on Friday.

Position 1/23/17 with a BOX trade at $17.10

Long BOX shares @ $17.10, see portfolio graphic for stop loss.

BRKS - Brooks Automation - Company Profile


No specific news. Only a minor gain but a new high close.

Original Trade Description: February 13th

Brooks Automation, Inc. provides automation and cryogenic solutions for various applications and markets. It operates through two segments, Brooks Semiconductor Solutions Group and Brooks Life Science Systems. The Brooks Semiconductor Solutions Group segment offers critical automated transport, vacuum, and contamination controls solutions and services. This segment's products include atmospheric and vacuum robots, robotic modules, and tool automation systems that provide precision handling and clean wafer environments; automated cleaning and inspection systems for wafer carriers, as well as reticle pod cleaners and stockers; and vacuum pumping and thermal management solutions for use in critical process vacuum applications. This segment also provides support services, including repair, diagnostic, and installation, as well as spare parts and productivity enhancement upgrades. The Brooks Life Science Systems segment provides automated cold storage systems; consumables, including various formats of racks, tubes, caps, plates and foils; and instruments used for labeling, bar coding, capping, decapping, auditing, sealing, peeling, and piercing tubes and plates. This segment also provides sample management services, such as on-site and off-site sample storage, cold chain logistics, sample relocation, bio-processing solutions, disaster recovery, and business continuity, as well as project management and consulting. In addition, this segment offers sample intelligence software solutions and customer technology integration; and laboratory work flow scheduling for life science tools and instrument work cells, sample inventory and logistics, environmental and temperature monitoring, and clinical trial and consent management, as well as planning, data management, virtualization, and visualization services. The company sells its products and services in approximately 50 countries. Company description from FinViz.com.

Brooks reported earnings of 25 cents that beat estimates for 20 cents. Revenue of $160 million also squeezed by estimates for $159.7 million. For the current quarter they guided to earnings of 24 to 27 cents and revenue from $165 to $170 million.

The company provides automation and cryogenic solutions for various markets. Their expected growth rate for 2017 is 105% compared to the industry rate of 19.5%. Consensus estimates for the current year rose from 82 cents to 96 cents over the last 30 days. Estimates for the current quarter rose from 21 to 24 cents and the company guided for 24 to 27 cents.

Shares spiked from $17.50 to $21.00 on the earnings beat on February 1st. After three days of consolidation and profit taking, shares have started to rise again. They closed at a new high on Monday. I know this chart is over extended but the strong earnings, guidance and expected growth rate suggests they can continue climbing, market permitting.

Earnings May 3rd.

Position 2/14/17:

Long BRKS shares @ $21.58, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

FEYE - FireEye - Company Profile


No specific news. Minor gain after an opening spike over $12.

Original Trade Description: February 11th

FireEye, Inc. provides cybersecurity solutions for detecting, preventing, analyzing, and resolving cyber-attacks. The company offers vector-specific appliance solutions that provide threat protection from network to endpoint for inbound and outbound network traffic that may contain sensitive information. It also offers Central Management System that provides cross-enterprise threat data correlation to identify and block attacks across multiple attack vectors; and Threat Analytics Platform to identify and respond to cyber threats by correlating enterprise-generated security event data from any security product with real-time threat intelligence, as well as Malware Analysis System to manually execute and inspect advanced malware, zero-day, and other advanced cyber-attacks embedded in files, email attachments, and Web objects. In addition, the company offers Network Forensics Platform that helps in detecting threats and view specific packets and sessions before, during, and after the attack to confirm what may have triggered a malware download or callback; Investigation Analysis System, a centralized analytical interface to the Network Forensics Platform; and Mandiant Intelligent Response that enables remote investigation of endpoints and allows security teams to collect targeted forensic data to identify attacker behavior, tools, and techniques. Further, it provides cloud-based subscription services; Security-as-a-Service; and incident response, compromise assessments, and related consulting, as well as training and professional, and customer support and maintenance services. Company description from FinViz.com.

FireEye is transitioning from a firewall appliance vendor to a cloud service and as always happens when companies go this route, the revenue slows temporarily. They reported Q4 results of a loss of 3 cents. Analysts were expecting a loss of 16 cents. This compares to a loss of 55 cents in the year ago quarter. Revenue of $184.7 missed estimates for $191.1 million.

For the current quarter the company guided to earnings of 26 to 28 cents and revenue of $160-$166 million. Analysts were expecting $177.5 million.

The company said several large deals had been expected to close in Q4 and they were pushed into Q1 versus being "lost."

They added 330 net new customers during the quarter. They closed 34 deals for more than $1 million each, including one of their largest SaaS deals ever. They announced a new product called Helix and more than 250 customers have already signed up to get the product as soon as it is released.

Other onetime negatives from the earnings release was news the CFO was leaving to pursue another opportunity and Chairman David Dewalt resigned from the board.

Earnings May 4th.

Cisco (CSCO) recently acquired AppDynamics and that is expected to start a flurry of acquisitions in the cybersecurity space. The space is fragmented today and highly competitive with each player commanding its own niche. The quickest way to expand your product offerings is to acquire somebody else that is a leader in their niche. FireEye is a leader in intrusion detection and tracking. Their recent fall from grace should make them an attractive target with only a $2 billion market cap.

Regardless of whether an acquisition cycle has begun, the stock decline to support is a buying opportunity.

Position 2/13/17:

Long FEYE shares @ $11.75, see portfolio graphic for stop loss.

No options recommended because of price.

BEARISH Play Updates

GNC - GNC Holdings - Company Profile


The company has earnings on before the open on Thursday. The earnings outlook is negative because of recent marketing changes that will have reduced sales significantly. I have decided to exit the position with a minor gain rather than risk a gap high on Thursday. We may be giving up a gap lower on bad news but "a gain in the hand is worth more than a potential gain later." If readers want to hold over, I understand perfectly. It is your money.


Original Trade Description: January 28th

GNC Holdings, Inc., together with its subsidiaries, 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.

On January 19th GNC was cut to a sell by Goldman saying the already reduced earnings estimates were still too optimistic. GNC tried to sell itself last year and the deal fizzled. Then they announced a restructuring of the brand and the store format. As part of the relaunch of GNC they slashed prices across half their product line and discontinued many products entirely. The company also ended its Gold Card loyalty, which had been in effect for more than a decade. Six million members were paying $15 a year in exchange for discounted prices.

The GNC CEO said "the new GNC leaves the old, broken model behind" but we know "it will take time for the changes to take hold and translate into improved financial results." That is an implied earnings warning for the next couple quarters.

Earnings Feb 9th.

With earnings in two weeks this will be a short-term position. After looking at the cart I doubt many investors will want to hold the stock into the earnings event and that should cause a further decline next week.

Updare 1/31/17: The NFL rejected GNC's proposed advertisement. The NFL said they had a standing policy not to promote supplements. The NFL said GNC was on a list of prohibited companies because they promote products banned by the league.

FOX has been getting an average of $5 million per 30 seconds of airtime and that is a fee GNC will no longer have to pay but the ad was supposed to be a kickoff of their new marketing campaign.

Position 1/30/17:

Short GNC shares @ $8.77, see portfolio graphic for stop loss.

IWM - Russell 2000 ETF - ETF Profile


This position will expire on Friday. This was a bet on the historical trend for stocks to decline in January. The Trump rally negated that trend and even though the Russell was the weakest index over the last month, it has not declined enough to make a difference. With the market breaking out, the odds of seeing $134 again are very slim.

Original Trade Description: December 10th

The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.

The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.

I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 14 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,150 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.

Dow - January 2016

We also have the potential for a really messy inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.

I am recommending a long put on the Russell ETF. There is no stock vehicle we can use other than the VXX to capitalize on a market sell off. The VXX is flawed and while it may go up, it may not go up enough to make it worthwhile and it is volatile from day to day. I chose the Russell ETF because the premiums are cheap and the volatility should work in our favor. If you cannot use options then I suggest you buy the VXX shares at the first sign of market weakness after Christmas.

There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.

Because the market could still rise, I want to follow the IWM higher and enter the position only when the ETF rolls over.

The ETF has short-term support at 137.75 and again at $137.25. I am recommending we enter the position with a dip to $137. If the Russell continues higher, I will continue raising the entry point as needed.

Position 12/12/16 with an IWM trade at $137.00

Long Feb $134 put @ $3.38, see portfolio graphic for stop loss.

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