Option Investor

Daily Newsletter, Monday, 4/24/2017

Table of Contents

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

Market Wrap

A Sigh Of Relief

by Thomas Hughes

Click here to email Thomas Hughes


The market breathed a sigh of relief in the wake of Le Pen's first-round loss. Le Pen is slated to run-off against Macron but not to win. The news helps to alleviate fears of further instability within the EU and takes a major worry off the minds of traders. With that weight gone indices around the world were able to move higher. Now it's time to look toward the rest of the week, and next, for the next round of major market-moving events.

This week the economic calendar is light with the ECB meeting on Thursday and 1st estimate for 1st quarter GDP Friday topping the list. Next week's calendar promises lots of potential catalysts including the FOMC meeting and a host of monthly macroeconomic data. Between then and now will be two of the busiest weeks of the earnings season and the possibility of Trump news including healthcare reform, tax reform, trade deals, a possible government shut-down and Korea.

Global markets cheered the Le Pen loss. Asian indices were mostly higher led by the Nikkei's 1.37%. Chinese indices were mixed, Hong Kong posted smalls gains while the mainland index posted a loss near -1.40%. European indices were more firmly bullish with gains in the range of 2% to 4%. The DAX was strong at 3%, the FTSE a little less so at 2%, the French CAC gained nearly 4% and all led by the pan-European FTSE MIB's near 4.25% gain.

Market Statistics

Futures trading was indicating a strong open all morning, in the range of 1% for US indices. There was no economic data and little earnings to move markets before the bell so the trade was fairly steady. At the open the SPX gained just over 22pts and then proceeded to drift higher before entering a tight sideways trading range. The index held gains of 1% all morning, pulling back from the highs a bit after lunch, but holding strong all day.

Economic Calendar

The Economy

No data today and only a little this week, relative to the massive amount due out next week anyway. Tuesday is New Home Sales and Consumer Confidence, nothing on Wednesday, Thursday is weekly jobless claims, Durable Orders and Pending Homes Sales and then Friday wraps it up with GDP, Michigan Sentiment, Chicago PMI and the Employment Cost Index.

Moody's Survey Of Business Confidence gained a half percent to hit 33.3. This is not a new high but is trending near a multi-month high. Mr. Zandi says responses indicate global business sentiment is strong and stable, supported by buoyant financial markets and growing above its potential.

There was no update from Factset or Reuters on earnings this week, they both tend to take a week off early in the reporting season. That being said the general run of reports that came in last week was positive and gave no indication the season would not end at least as good as expected. Forward outlook remains positive with growth expanding into the end of next year.

The Dollar Index

The Dollar Index fell a full percent in today's action as the anticipated Le Pen loss led to an unwinding of flight-to-safety. The dollar was able to gain versus the yen but both the dollar and the yen fell versus the euro, leading to today's declines. The index has now reached the bottom of its 6 month trading range and support target at the $99 level, a break of which would be bearish. The indicators are pointing lower, suggesting a further test of support, but are not strong and do not suggest a break of support. The current MACD peak is consistent with potential support, making a higher low while the index makes an equal low, while stochastic is showing a weak bullish crossover while in overbought territory.

This week the ECB is most likely to move the index, one way or the other, and is not expected to make a policy move. The FOMC meeting is next week and also not expected to make a move. The combination of the two is likely to cause volatility however the long-term outlook remains tilted in favor of the dollar. The next meeting still carries a low probability of FOMC hike, about 4%, but longer term the chances are rising. June and July are now both near 70%.

The Gold Index

Gold prices extended their slide from recent highs on declining risk-off flight-to-safety trading. The spot price fell a little more than -1% to trade near $1,275, the lowest price in over 2 weeks. Now that geopolitical fears are subsiding gold prices can revert back to more normalized levels in line with dollar trends, perhaps as low as $1,250 in the near term.

The Gold Miners ETF GDX created a white bodied candle today, but had to fall more than -2% to do it. The ETF opened with loss, and below the short and long-term moving averages, and then tried to move higher from there. The market was able to regain a small portion of the loss but no more. The indicators are consistent with lower prices, MACD reconfirming today with another bearish crossover. Downside target is near $22 and the low end of the short-term trading range.

The Oil Index

Oil prices tried to hold their ground today but were not able to do it. Rising US production, rising US rig counts and high levels of global capacity continue to outweigh the OPEC production cut and any hopes of further cutting. Now that WTI has fallen below the $50 level and begun to move lower a deeper decline is likely with downside target near $45.

The Oil Index gained a little more than 1.25% despite the fall in oil prices. Today's move reconfirms support at the top end of last year's trading range but did not move high enough to escape potential resistance. The sector is being supported by forward earnings outlook which, despite this most recent fall in oil prices, remains robust. I remain bullish on the sector long-term, very very cautious in the near.

In The News, Story Stocks and Earnings

Hasbro reported after the bell and is not playing around. The toy maker blew away results reported last week by Mattel, beating on the top and bottom lines. Sales in NA were up 2% while international was flat, however, there was regional strength such as 16% growth in Latin American. Gaming revenue was strongest in terms of product segment, growing more than 43%. The news was well received and helped drive the stock up by more than 6%, as well as sparking speculation of when Hasbro may make a bid to take over Mattel.

T-Mobile reported after the closing bell delivering results hard to compare with last year, which led the exchange to halt trading long enough for the market to dig into the details. The company reported another year of +1 million in customer growth, record low churn in post-paid and pre-paid customers, total revenue growth in excess of 11% and service revenue growth of 11%. EPS of $0.80 per share is well above consensus of $0.35. The stock fell in after hours trading, marginally, but remains at a new all-time high.

The VIX fell a whopping -25.9% today, reversing the April increase and coming to rest just above the 11 level. Today's action reveals a major unwinding of “fear” in response to the French elections and may indicate the Trump Rally is back on. The indicators confirm today's move with a strong sell signal indicative of lower prices so I would not be surprised to see the VIX make a new low in the near to short-term.

Alcoa reported after the bell and crushed it, despite falling short in terms of revenue growth. Revenue growth came in at a stellar 24.99% YOY but fell short of consensus by -11%. EPS came in at $0.63; about 20% better than expected, a full $0.10 better than consenus and reversing last years loss of ($0.62). Shares surged on the news, adding another 2% to an already strong day.

Humana reported after the bell and beat top and bottom lines. The company was also able to raise full year guidance but there are caveats. Much of the quarter's gains can be attributed to strength in the consumer segment but fees accrued in the wake of the failed merger attempt played a role. Shares of the stock jumped 2% on the news.

The Indices

The indices were buoyant today. Relief Europe would not see increased turmoil paved the way for economic and earnings fundamentals to lead stocks higher. The day's leader was the Dow Jones Transportation Average with a gain near 1.75%. The transports gapped up from the short-term moving average and created a small white bodied candle just under potential resistance. This move breaks the baseline of a head&shoulders pattern formed along the moving average over the past month and reversing the near-term correction. The indicators confirm this move with a strong buy signal that was itself confirmed today by an up-tick in the stochastic. A break above 9,300 will be bullish in the near to short-term and trend following with upside target at the current all-time high.

The NASDAQ Composite also gapped up from the short-term moving average, closing with a gain near 1.30% and at a solid new all-time high. This move is confirmed by the indicators which are indicating a strong trend-following buy with upside targets near 6,400 in the short to long-term.

The S&P 500 made the third largest gain, just shy of 1.20%. The broad market gapped up to open above the long-term trend line that had been providing near-term resistance, moving up from the short-term moving average. The indicators confirm the move with a trend-following strong buy signal that fired today with stochastic's tic higher and MACD's zero-line crossover. Upside target is the current all-time high with the potential for additional new all-time to come.

The Dow Jones Industrial Average brings up the rear with a gain of only 1.10%. The blue chips were able to regain the upper side of a long-term up trend line in a trend-following move confirmed by the indicators. Both MACD and stochastic are both set-up for the strong trend-following entry with only MACD left to confirm, and confirm it will provided tomorrow's action is not a major reversal of today. Upside target is the current all-time high, just above 21,000, with the possibility of new all-time highs to come.

I think it a little too soon to declare the correction over and the Trump Rally back on. That being said, today's action was very promising and the market looks set to rally on, providing nothing too scary emerges over the next two weeks. The next two weeks are going to be action packed. There is a lot of data due out, a lot of earnings, a lot of central bank meetings and a lot of potential for Trump news; all potential market movers. I remain firmly bullish in the short to long-term, cautiously bullish in the near. As for this week, be wary of negative earnings surprises, the ECB meeting and economic data on Friday.

Until then, remember the trend!

Thomas Hughes

New Plays

Ignore China

by Jim Brown

Click here to email Jim Brown
Editor's Note

Raymond James said not to fret over China's economic growth. The optical sector is exploding. China is roughly 30% of global demand for optical networking components.


FNSR - Finisar Corp - Company Profile

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

We played Finisar several weeks ago and got caught in the downdraft on China worries. Reports out of the sector suggested orders from China had slowed. Shares crashed from $35 to $21 over the period of about six weeks. Raymond James said the selloff is overdone and the worries over China are overblown.

China is on track to network 120 major cities with populations of more than one million. That will take a lot of networking gear. The directives have been given from the governmental level but the actual orders will come from the provincial level. Bids for routing and wireless components have already been submitted and optical equipment is expected to be next in line.

Raymond James said Finisar has the most upside potential with a target of $39 and is cheap with a PE of only 9 times 2018 earnings estimates.

Shares have rebounded the last two days after the Raymond James note to investors.

Earnings June 8th.

Buy FNSR shares, currently $23.00, initial stop loss $21.50.

Optional: Buy June $25 call, currently $1.20

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.


No New Bearish Plays

In Play Updates and Reviews

Major Short Squeeze

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets rocketed higher on the end of French event risk but there was no follow through buying. The indexes closed almost exactly where they opened when additional buyers failed to show up at market highs.

This is more than likely a one-day wonder and we could see some significant profit taking if the budget process in Washington appears to be heading for a deadlock and a government shutdown on Saturday. If lawmakers passed a short term resolution to avoid a disaster the market could potentially move higher on the hopes a long term deal could be worked out.

We did not enter the Russell ETF call at the open this morning. Nobody should ever enter a position on a big opening gap in either direction and that is especially true for market index ETFs. The option premiums will rocket higher and you would likely be filled at the high for the day. The IWM play has been cancelled until a new opportunity presents itself.

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

USO - US Oil Fund
The June long call position was entered at the open.

IWM - Russell 2000 ETF
The June long call position was NOT entered on the opening gap.

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

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

HABT - Habit Restaurants - Company Profile


No specific news. Gapped up over resistance at $18. If we can continue higher, the next challenge would be $21 and then $24. The historic high in 2014 was $44.

Original Trade Description: March 22nd.

The Habit Restaurants, Inc., a holding company, operates fast casual restaurants under The Habit Burger Grill name. It specializes in offering fresh made-to-order char-grilled burgers and sandwiches featuring choice tri-tip steak, grilled chicken, and sushi-grade albacore tuna cooked over an open flame; and salads, as well as sides, shakes, and malts. As of March 2, 2017, the company operated approximately 170 restaurants in 15 locations in California, Arizona, Utah, New Jersey, Florida, Idaho, Virginia, Nevada, Washington, and Maryland, the United States; and the United Arab Emirates. The Habit Restaurants, Inc. was founded in 1969 and is headquartered in Irvine, California. Company description from FinViz.com.

Habit reported earnings of 7 cents that beat estimates for 3 cents. Revenue rose 21.8% to $73.9 million. Same store sales rose 1.7%. This was the 52nd consecutive quarter of positive same store sales. They opened 11 company stores and 2 franchises in Q4. The CEO said they were proud of their strong beat considering it is a fiercely competitive environment.

For full year 2017, they guided to revenue of $338 to $342 million, which represents 19.8% growth at the midpoint. The guided for 2% same store sales and the opening of 31 to 33 new company stores alony with 5 to 7 franchised stores. Analysts were expecting $339.2 million.

Earnings June 1st.

Shares spiked from $14 to $16 on the news and then pulled back for two weeks on post earnings depression. They have since recovered that $16 level and are about to break out to a new three month high. Shares dipped on Tuesday but very little and the rebound today erased the dip completely.

Position 3/23/17:

Long HABT shares, currently $15.95, see portfolio graphic for stop loss.
Optional: Long June $17 call @ 70 cents, no initial stop loss.

ILG - ILG Inc - Company Profile


No specific news. Minor gain but a new 52-week high.

Original Trade Description: April 8th.

ILG, Inc., together with its subsidiaries, provides non-traditional lodging covering a portfolio of leisure businesses from vacation exchange and rental to vacation ownership. The company operates through two segments, Exchange and Rental, and Vacation Ownership. The Exchange and Rental segment offers leisure and travel-related products and services to owners of vacation interests and others primarily through various membership programs, as well as related services to resort developer clients; and allows owners of vacation ownership interests to exchange their occupancy rights for alternative accommodations at another resort and/or occupancy period. This segment also provides vacation property rental services for condominium owners, hotel owners, and homeowners' associations. The Vacation Ownership segment engages in the management of vacation ownership resorts; and the sale, marketing, and financing of vacation ownership interests, as well as in the provision of related services to owners and associations. As of December 31, 2016, it provided management services to approximately 250 vacation ownership properties and/or their associations. The company was formerly known as Interval Leisure Group, Inc. and changed its name to ILG, Inc. Company description from FinViz.com.

ILG reported earnings of 48 cents on revenue of $455 million. Net income rose from $16 million to $61 million. Earnings rose from 27 cents to 48 cents. Free cash flow was $180 million. Analysts had expected revenue of $464 million and shares fell sharply over the next week. The company guided for full year revenue of $1.72 to $1.86 billion.

They repurchased 6.5 million shares and paid $52 million in dividends to return $153 million to shareholders. They currently pay a 2.83% dividend.

The company has been on an acquisition and renovation binge. They sometimes acquire properties in great locations that have issues and then spend a few million on renovations to turn them into star attractions. In May they completed the acquisition of Vistana Signature Experiences, formerly known as Starwood Vacation Ownership for $1.15 billion in cash and stock. With the transaction, they acquired an 80-year global license for the use of the Westin and Sheraton brands.

Despite their vast holdings and strong revenue they are still a relative unknown in the investment community. However, with their Vistana acquisition along with the Hyatt and St Regis vacation brands they are starting to become known.

Shares have risen $3 in the last four weeks and have begun to accelerate. The company is a member of the S&P-600 but with the acquisition of Vistana it has a market cap over $3 billion and is eligible for inclusion into the S&P-500. That could provide a nice boost to the stock price but it would be pure speculation.There are many companies with a higher market cap that have not been included.

Earnings May 4th.

Position 4/10/17:

Long ILG shares @ $21.28, see portfolio graphic for stop loss.

Optional: Long June $22 call @ 60 cents.

JUNO - Juno Therapeutics - Company Profile


Head of research at Celgene joined Juno's board.

Original Trade Description: April 17th.

Juno Therapeutics, Inc., a biopharmaceutical company, engages in developing cell-based cancer immunotherapies. The company develops cell-based cancer immunotherapies based on its chimeric antigen receptor and T cell receptor technologies to genetically engineer T cells to recognize and kill cancer cells. Its CD19 product candidates include JCAR017 that is in Phase I/II trials for adults with relapsed or refractory (r/r) B cell aggressive non-Hodgkin lymphoma (NHL) and pediatric patients with r/r B cell acute lymphoblastic leukemia (ALL); JCAR014, which is in Phase I/II trials to treat various B cell malignancies in patients relapsed or refractory to standard therapies; and JCAR015 that is in Phase II trials for adult patients with r/r ALL. The company's CD22 product candidate comprise JCAR018, which is in Phase I trial for pediatric and young adult patients with CD22-positive r/r ALL or r/r NHL. Its additional product candidates include CD171, a cell-surface adhesion molecule to treat neuroblastoma; Lewis Y for the treatment of lung cancer; JCAR023, which is in Phase I trial for patients with refractory or recurrent pediatric neuroblastoma; MUC-16, a protein for treating ovarian cancers; IL-12, a cytokine to overcome the inhibitory effects; ROR-1, a protein for the treatment of non-small cell lung, triple negative breast, pancreatic, and prostate cancers; WT-1, an intracellular protein that is in Phase I/II clinical trials to treat adult myeloid leukemia and non-small cell lung, breast, pancreatic, ovarian, and colorectal cancers; and IL13ra2 for treating glioblastoma. Juno Therapeutics, Inc. has collaboration agreements with Celgene Corporation, Fate Therapeutics, Inc., Editas Medicine, Inc., MedImmune Limited, and Memorial Sloan Kettering Cancer Center. Company description from FinViz.com.

Juno shares were hammered in March after they reported they were ending a trial early on a hot new CAR-T drug they had expected to do well. The Phase II Rocket Trial of JCAR015 was paused twice and finally ended early after two patients died from swelling in the brain. The CAR-T process involves removing T-cells from their blood and reengineering them to recognize cancer cells from acute lymphoblastic leukemia and kill them. Once the modification is complete, they are re-injected into the patient so they can go to work. In this particular case the brain swelling was a side effect.

However, that is not the only drug in process at Juno. They will have more than 20 trials in progress by the end of 2017 on a variety of anticancer drugs. The company has nearly $1 billion in cash and a burn rate of about $200 million a year. They are in no danger of running out of money and they have dozens of partnerships and collaborations contributing money for research.

Earnings May 31st.

Over the last three weeks Juno has not declined. The stock is continuing to move slowly higher with resistance currently at $25. Once through that level the next resistance is $33.

With the biotech sector selling off every other day you would have expected JUNO to be reactive to those moves but the stock continues to climb.

Position 4/19/17 with a JUNO trade at $24.55

Long JUNO shares, see portfolio graphic for stop loss.

No options due to price and strike availability.

KRNT - Kornit Digital - Company Profile


No specific news. Big spike intraday but faded almost immediately. Two in a row. Time to raise the stop loss.

Original Trade Description: April 5th.

Kornit Digital develops, manufactures and markets industrial digital printing technologies for the garment, apparel and textile industries. Kornit delivers complete solutions, including digital printing systems, inks, consumables, software and after-sales support. Leading the digital direct-to-garment printing market with its exclusive eco-friendly NeoPigment printing process, Kornit caters directly to the changing needs of the textile printing value chain. Kornit’s technology enables innovative business models based on web-to-print, on-demand and mass customization concepts. With its immense experience in the direct-to-garment market, Kornit also offers a revolutionary approach to the roll-to-roll textile printing industry: Digitally printing with a single ink set onto multiple types of fabric with no additional finishing processes. Founded in 2003, Kornit Digital is a global company, headquartered in Israel with offices in the USA, Europe and Asia Pacific, and serves customers in more than 100 countries worldwide. Company description from Kornit.

The company description pretty much says it all. They have developed a process to print on fabric that is fast and cheap and the company is setting new highs as the demand for their product increases.

The company reported earnings of 16 cents on a 33.4% increase in revenue to $34 million. There was a secondary offering in January that raised $38 million for the company and was very oversubscribed.

The big spike in early January was news the company granted Amazon warrants to buy up to 2.9 million shares at $13. Since KRNT only has 31 million shares outstanding that is nearly a 10% position in the company. The warrants came after Amazon placed an order for a "large number" of textile production systems for Amazon's own use in the Merch by Amazon program.

Earnings May 16th.

Shares made a new high on March 31st and they closed within 10 cents of that high on Thursday. Shares have risen over the available option strikes so this will be a stock only position.

Position 4/7/17:

Long KRNT shares @ $19.00, see portfolio graphic for stop loss.

PTCT - PTC Therapeutics - Company Profile


No specific news. Company revised earnings date to May 8th.

Original Trade Description: April 19th.

PTC Therapeutics, Inc., a biopharmaceutical company, focuses on the discovery, development, and commercialization of orally administered, small molecule drugs that target post-transcriptional control processes. The company's lead product is Translarna (ataluren), for the treatment of nonsense mutation Duchenne muscular dystrophy in ambulatory patients; and which is in phase III clinical trials to treat cystic fibrosis caused by nonsense mutations. It also develops Translarna, which is in Phase II clinical trials for the treatment of mucopolysaccharidosis type I caused by nonsense mutation, nonsense mutation aniridia, and nonsense mutation Dravet syndrome/CDKL5; and RG7916 that is in Phase I clinical trials to treat spinal muscular atrophy. In addition, the company's product candidate in cancer stem cell program include PTC596, an orally bioavailable and potent small molecule, which has completed phase I clinical trials that targets tumor stem cell populations by reducing the activity and amount of a protein called BMI1. PTC Therapeutics, Inc. has collaborations with F. Hoffman-La Roche Ltd and Hoffman-La Roche Inc., and the Spinal Muscular Atrophy Foundation to develop and commercialize compounds identified under its spinal muscular atrophy sponsored research program; and research collaboration with Massachusetts General Hospital for the treatment of rare genetic disorders resulting from pre-mRNA. Company description from FinViz.com.

PTC suffered two hits in March. The first was a failed drug trial on a Cystic Fibrosis drug. That drop knocked shares down from $13 to $10. Drug trials fail all the time and that is just the risk of owning a drug company.

On March 15th, the company announced it was buying a Duchenne Muscular Dystrophy (DMD) drug named Emflaza from Marathon for cash and stock. Companies buy rare drugs from other companies all the time. This particular drug had just created a hornet's nest of controversy after Marathon priced it at $89,000 per year. There had been a monster uproar over the pricing and even Bernie Sanders got into the act saying it should be $1,000 a year. For PTC to jump into the hornet's nest with a $140 million upfront purchase before the drug even succeeds in the market caused investors to flee the stock.

Here is the key point. The drug is in a class called corticosteroids that are anti inflamatories used all around the world to treat DMD as well as other diseases. The drug can be cross marketed and sold for multiple applications besides DMD.

The drug is new and was just approved by the FDA in February. When Marathon priced it at $89,000 right in the middle of the drug price happenings in Washington, they were forced to pause the launch to re-evaluate the price. PTC arrived on the scene and solved their problem.

Now PTC is evaluating the "correct" pricing for the drug and shares are rebounding from their headline induced crash.

Update 4/20/17: The company announced they had completed the acquisition of Emflaza earlier than expected.

Earnings June 15th.

PTC shares broke through resistance on Wednesday to close at a two month high at $11.39. Resistance is now $14 to give us a potential $2 window.

Position 4/20/17:

Long PTCT shares @ $11.43, see portfolio graphic for stop loss.

No options due to prices and wide spreads.

USO - US Oil Fund ETF - ETF Profile


Crude prices fell again on a lack of confirmation that OPEC will continue their production cuts. Russia aggravated the situation when it said it planned to raise output to the most in 30 years if there was no extension.

Original Trade Description: April 22nd.

The United States Oil Fund LP (USO) is an exchange-traded security designed to track the daily price movements of West Texas Intermediate ("WTI") light, sweet crude oil. USO issues shares that may be purchased and sold on the NYSE Arca.

The investment objective of USO is for the daily changes in percentage terms of its shares NAV to reflect the daily changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the daily changes in price of USO's Benchmark Oil Futures Contract, less USO's expenses.

USO's Benchmark is the near month crude oil futures contract traded on the NYMEX. If the near month futures contract is within two weeks of expiration, the Benchmark will be the next month contract to expire. The crude oil contract is WTI light, sweet crude oil delivered to Cushing, Oklahoma.

USO invests primarily in listed crude oil futures contracts and other oil-related futures contracts, and may invest in forwards and swap contracts. These investments will be collateralized by cash, cash equivalents, and US government obligations with remaining maturities of two years or less.

Oil prices fell -6% last week after Wednesday's inventory report failed to show a significant decline in crude inventories. Complicating the problem was the expiration of crude futures on Thursday. That means everyone long for the EIA report had to dump their position immediately to avoid expiration.

I expect the price of crude to return to $54 over the next several weeks. That equates to $11.25 or higher on the USO ETF. The ETF closed at $10.32 on Friday. I am recommending we buy the $10.50 call, currently 42 cents and plan to double our money and exit.

Oil prices will rise because refineries are restarting production after their normal two-month maintenance period centering on March. Oil inventories will begin to decline sharply in the coming weeks as they begin to fill the system with summer blend fuels before Memorial Day.

You could also just buy the USO ETF for $10.32 but you will get a better return using the option. I would not recommending buying a $10 stock with the intention of making 75 cents.

Buy Jun $10.50 call, currently 42 cents, no stop loss.

BEARISH Play Updates

FSLR - First Solar - Company Profile


No specific news. Minor short covering in a very bullish market.

Original Trade Description: March 30th.

First Solar, Inc. provides solar energy solutions in the United States and internationally. It operates through two segments, Components and Systems. The Components segment designs, manufactures, and sells cadmium telluride solar modules that convert sunlight into electricity. This segment offers its products to solar power systems integrators and operators. The Systems segment provides turn-key photovoltaic solar power systems or solar solutions, such as project development; engineering, procurement, and construction; and operating and maintenance services to utilities, independent power producers, commercial and industrial companies, and other system owners. The company was formerly known as First Solar Holdings, Inc. and changed its name to First Solar, Inc. in 2006. Company description from FinViz.com.

First Solar shares have been under pressure for months. On March 20th they were removed from the S&P-500 and investors are still selling the shares.

They reported a Q4 loss of $6.92 per share compared to estimates for $1.00 in earnings. The earnings included a $729 million restructuring charge compared to only $4 million in Q3. If we back out the restructuring charges the company would have earned $1.24 and shown a sizeable beat. However, revenue declined from $480 million in Q3 to $208 million in Q4.

Earnings May 23rd.

First Solar is building quality projects but they are facing a stiff headwind. Tax incentives around the world are shrinking and it is becoming increasingly harder to make a profit. Whenever they get a big power generation facility completed they are forced to sell it to recover their money rather than sit back and let the long term profits roll in.

On Thursday, March 30th, they sold the 250-megawatt Moapa Southern Pauite Solar Project in Nevade to Capital Dynamics, a Swiss private equity firm. The facility supplies power to the Los Angles Dept of Water and Power. They did not disclose the terms of the sale and the stock tanked again. By not disclosing the terms, investors always fear the worst, that they were forced to sell at a big discount.

The stance taken by the new Trump administration on EPA restrictions on coal and gas fired electric generation plants will make power cheap again and these massive solar developments will find it harder to break even. Solar power generation is getting cheaper to build but it cannot compete with gas fired plants at $3 or coal fired plants that operate even cheaper.

Shares broke to a five-year low last week and today's decline is a lower low. The prior low back in 2012 was $11.50 and we could be headed to that level long term.

Update 4/7/17: Reportedly FSLR wants to exit its joint venture with Sunpower (SPWR). The two companies package completed utility scale solar farms into a "Yield Co" for sale to investors. Yield Cos have lost favor with the investing public after SunEdison filed bankruptcy in 2016. Shares posted a minor gain.

Update 4/10/17: Despite a negative article on Bloomberg shares still posted a strong gain of $1.16.

Position 3/31/17:

Short FSLR shares @ $27.50, see portfolio graphic for stop loss.

Optional: Long June $25 put @ $1.15, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Excellent move on the market short squeeze. If the market bullishness continues the VXX should continue to bleed points. However, ee should expect the potential for a 2-point rise if the market tanks on the fiscal battles later this week. Long term, the VXX always goes down.

Original Trade Description: April 12th.

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.

The VXX has rebounded $3 over the last week as the volatility returned. The VIX traded over 16 today and could hit 18 if there are any geopolitical events over the Easter weekend.

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 market 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 know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.

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