Option Investor

Daily Newsletter, Thursday, 5/11/2017

Table of Contents

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

Market Wrap

Retail Sinks Stocks

by Thomas Hughes

Click here to email Thomas Hughes


A poor showing from the retail sector sends traders to the sidelines. Stronger than expected economic data and political upheaval lent a hand. Morning news included a raft of weak earnings from brick-and-mortar retailers with Macy's at the fore. The company managed to make money but not as much as expected and on declining revenue and store closures. Economic data included better than expected jobless claims and hotter than expected producer level inflation, both of which helped to increase expectations for a June interest rate hike.

International markets were cautious in anticipation of data, earnings, central bank meetings and political hooplah. Asian indices closed mostly higher and in the range of 0.30% following a meeting of the Reserve Bank of New Zealand. The bank held rates steady and sent the kiwi to 12 month lows. European indices had moves of similar proportion but to the downside. The FTSE managed to eek out a small gain, 0.02%, after the Bank Of England held rates steady.

Market Statistics

Futures trading was flat to negative for the most of the morning but did gain a little strength just after the 8:30AM release of economic data. The bounce did not last long, just into the open of the session, at which time the market began to sell off. Selling intensified into the first hour of trading and hit bottom just after 10:30. Bottom was fairly definitive and resulted in a quick consolidation and bounce back to recover more than half of the day's losses. Bottom for the SPX was about -0.75%, closing price closer to -0.25%.

Economic Calendar

The Economy

Initial claims for unemployment fell -2,000 from a not revised figure to hit 236,000, analysts had been expecting a gain of 10,000. The four week moving average of claims rose 500 to 243,000 and has been trending around this level for several months. On a not adjusted basis claims rose by 1.8% versus an expectation for 2.5% and are down -17.84% from last year at this time. Despite recent volatility the initial claims figure remains consistent with labor market health.

Continuing claims fell -61,000 to 1.918 million and has hit a new low dating back to November 1988. Last week's figure was revised higher by 15,000, the four week moving average fell -27.500 to 1.965 and also set a new low. The four week moving average of continuing claims is now at the lowest level since February of 1974, a 43 year low, and is consistent with ever-tightening labor market and labor market health.

The total number of claims fell by -64,720 to hit 1.987, in line with expectations and down -7% from last year. The total number of claims continues to fall in-line with seasonal and long-term trends and is expected to continue falling for the next 4 to 5 weeks. This figure along with new lows in continuing claims suggests that people who are out of work are finding it and at a faster pace than last year.

The Producer Price Index came in more than double expectations and is running at the hottest pace YOY since February 2012. Headline PPI is 0.5%, core ex-food and energy is 0.7%. On a year over year basis headline is up 2.5% with core running just over 2.1%, both above the FOMC 2% target. This data, along with strong labor data, helped to increase FOMC outlook. The CME Fedwatch tool shows expectations for a June rate hike up 4.6% in the last day and a near certainty at 87.7%. The caveat is that there is a lot of data coming out of the EU as well. Stronger or even just OK data could intensify ECB expectations, strengthen the euro and send the dollar index lower or at least keep it range bound at current levels.

Tomorrow's data includes CPI, expected to come in a mild 0.2% over last month, along with Retail Sales and Business Inventories. Next week is light on data but includes the first of this months real estate figures.

The Dollar Index

The Dollar Index gained strength on the data but flight-to-safety capped gains. The index gained nearly a half percent in early trading but closed virtually flat on the day, just below the short-term moving average. The index has been bouncing from short-term support levels and could be moving higher. The near-term outlook is bullish, tomorrow's CPI data is likely to show rising inflation as well, with upside target near $100. The indicators are bullish and pointing higher in support of this move. The only thing holding it back is the short-term moving average, a break of which would be bullish.

The Gold Index

Gold prices held relatively steady today on stable dollar values. Spot price was able to move higher on flight-to-safety but less than 0.5% and not above resistance. Prices are under pressure from dollar outlook and getting stronger. Tomorrow's CPI could easily tipped the scale and send gold back to retest the $1,200 level.

The Gold Miners ETF GDX gained a little more than 2% in today's session and look set to move higher within the short-term trading range. Support has been confirmed at the bottom of the range, near $21, with upside targets at $23.50 and $25.0.

The Oil Index

Oil prices continued to bounce higher today amid conflicting reports. Conflicting in that one shows tightened supply while another shows increased. Topping the list in support of higher prices is the expected extension of the OPEC production cut due to be decided later this month. Helping this is yesterday's bigger than expected draw of US inventory and a Saudi cut to Asian supply. Balancing these out are rising global production, a report that the Saudis themselves pumped more last month than the month before and an OPEC forecast upping the estimate for non-OPEC production. WTI gained a little more than 1% to trade just shy of $48 and likely to move higher. Some resistance is probable at $50.

The Oil Index did not move higher in today's session. It opened slightly higher but quickly gave up those gains to close with a small loss, near 0.05%. The index is at a near-term top and just beneath resistance targets but otherwise looks bullish. Today's candle closed above the short-term moving average while within an upward movement and is supported by bullish signals in both indicators. Stochastic is forming a strong buy confirmed by a MACD zero line crossover and suggestive of higher prices. A move higher will face resistance at 1,170, a break above that will face next resistance at 1,200. I'm still bullish long-term, still cautious in the near-term.

In The News, Story Stocks and Earnings

Macy's was the big earnings news this morning. The company reported a -30% earnings miss on a -7.5% fall in YOY revenue and it was not the only one ailing. Kohl's was equally burdened by the challenging retail environment and failed to live up to expectations. The company manged to beat on the earnings end but that was luck, revenue and comp store sales both fell in the YOY period and more than expected. The company CEO says sales have picked up in the quarter-to-date period and encouraging after a weak start. Shares of the stock opened with a gain but fell under heavy pressure to shed more than -6%.

The XRT Retail Sector SPDR fell more than -2.25% in today's session. The ETF fell from the middle of a long-term trading range and looks like it could go lower. There is some support at the long-term moving average as evidenced by the long lower shadow on today's candle and the indicators suggest it will be tested. Stochastic in particular looks bearish and firing a fairly strong sell signal. Downside target would be the bottom of the range, near $40.50.

The VIX popped today but met resistance in the process. The index jumped about 10% to move above the $11 level but fell back to create a shooting star type candle at resistance. The indicators are mixed, stochastic suggests resistance will be tested while momentum remains bearish, so a major reversal in sentiment is not likely at this time.

The Indices

Markets tense with political intrigue and FOMC speculation sold off in a knee jerk reaction to poor earnings from the retail sector. The dip hit a low in the range of -0.75% for most of the indices but only resulted in a buying opportunity for some traders. By the end of the day most the losses had been regained and price action had confirmed support.

The days loss leader is the Dow Jones Industrial Average which fell more than -1% at the low. The transports closed the day with a loss closer to -0.4% creating a doji candle above support. Support is the long-term 150 day moving average and has been confirmed twice before in the past two months. The indicators are bearish and pointing lower suggesting support could be tested again but also near the middle of their respective ranges and consistent with range-bound trading. A move up from the moving average is trend following and bullish, a move below would be bearish with downside target near 8,500.

The S&P 500 was a close second with a loss of -0.27%. The broad market created a medium sized tombstone doji at support. Support is a long-term uptrend line that is confirmed by the short-term moving average. The indicacors are bullish but have rolled over consistent with a touch and fall from resistance. Support at the trend line could be tested further tomorrow and next week, a bounce from which would be bullish and trend-following. A break of support would be bearish with downside targets at 2,350 and 2,330.

The NASDAQ Composite shed about -0.25% in a small retreat from fresh all-time highs. The index created a small to medium sized doji candle within the near-term congestion band and at near-term support. The index is extended above the long and short-term moving averages and showing signs of consolidation and/or topping. The indicators are both bullish but consistent with resistance to higher prices. A move up from here would be trend following and bullish, a break below 6,050 would be bearish in the near to short-term with downside target near 6,000 and 5,800.

The Dow Jones Industrial Average shed the least in today's session, a mere -0.2%, and created a small doji candle sitting on support. Support is a long-term trend line confirmed by the short-term moving average at 20,800. The indicators are both consistent with a retreat from higher prices within an uptrend and suggest support may be tested again. A bounce from this level would be bullish and trend-following, a break of support would be bearish. Upside target is new all-time highs, downside target is 20,500 in the near term.

The markets have retreat from recently set all-time highs on renewed political angst and weak earnings from the retail sector. On the one hand political angst comes and goes and seldom affects the maket long term, on the other weak retail earnings were expected and not all the news from that sector is bad. Some retailers are making money and growing, you just have to look for the right ones.

That being said, the markets are looking like they could spring higher, the indices have pulled back to support levels within established up trends with indicators poised to fire trend following signals. I am bullish but very cautious, the indices could just as easily fall through support as bounce from it, depending on what happens tomorrow and over the next week. Longer term I remain firmly bullish and would view correction as the next starting point for long-term positioning.

Until then, remember the trend!

Thomas Hughes

New Plays

Event Risk Rising

by Jim Brown

Click here to email Jim Brown
Editor's Note

Just when you thought it was safe to go back into the market a new problem arises. The event risk this weekend is political but it still counts. Earnings are slowing, the markets are weakening and Washington is in an uproar. While the political risk can cause a market reaction, it is sometimes slow to actually get started. Investors don't always pay close attention to Washington and the events can sneak up on the market. It is not like Apple missing an earnings report because that is a focus event and everyone is watching. The market reacts, investors buy the dip and life goes on.

Political events can begin slowly and then snowball into a firestorm. The current Comey termination has evolved into that firestorm over the last four days. It is only likely to get worse because the White House has now given multiple excuses, multiple time lines and multiple responsible parties. The press is having a field day playing up all the contradictions and the House and Senate committees and members are bordering on all out war. This could be a pivotal turning point in the Trump administration. Fortunately, the president is leaving town for a week and maybe the uproar will die down before he returns.

The S&P futures are slowly bleeding points, now at -2.50. Given the day's intraday weakness and the potential for another downdraft on Friday, I am not recommending plays tonight.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Weakness Increasing

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow rebounded from a -150 point drop and the Nasdaq from -53 but it was still a bearish day. The Dow's candle is bearish despite the afternoon rebound. The Dow traded under 20,800 intraday and a three-week low. The Nasdaq big caps are also starting to weaken.

The Russell 2000 gave back all its gains from Wednesday to close right on support after trading down to 1,379 intraday. The 11-point rebound was strong but it was not enough.

The outlook for Friday is negative.

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

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

BBRY - Blackberry - Company Profile


No specific news. Minor decline from Wednesday's 52-week high.

Original Trade Description: April 28th.

Research In Motion Limited designs, manufactures, and markets wireless solutions for the mobile communications market worldwide. The company was renamed Blackberry Ltd in an effort to change its public identity. The company's products include BlackBerry smartphones and accessories, including bundles, cases, audio and memory products, Bluetooth, chargers, batteries and doors, and card readers; SureType, a keyboard technology, which allows users to compose messages using single-handed operation or two-handed thumb-typing; and SurePress, a touch screen that helps in navigation and typing. Its products provide access to time-sensitive information, including email, phone, short messaging service, and Internet and intranet-based applications. The company's products also enable third party developers and manufacturers to enhance their products and services with wireless connectivity to data. Blackberry Limited markets and sells its products directly, as well as through strategic partners and distribution channels. It has a strategic alliance with Hewlett-Packard Company to deliver a portfolio of solutions for business mobility on the BlackBerry platform. Company description from FinViz.com.

Blackberry has evolved from a hardware vendor to a software company. They no longer produce their own phones and their main product is a secure software interface that is used by security conscious governments and firms everywhere.

Blackberry has moved from just a phone company to multiple product lines including software packages for automobiles. Blackberry just signed a new deal with Ford to use the Blackberry QNX software. The software has been deployed in more than 60 million vehicles. BlackBerry is a mobile-native security software and services company dedicated to securing people, devices, processes and systems for today's enterprise.

The Blackberry phones now run an Android operating system. The Blackberry KeyONE was just launched in the UK with a 4.5 inch screen above a traditional Blackberry keyboard. The device will go on sale in May in the rest of the world. The phone has a Qualcomm Snapdragon 625 chipset, 3gb of RAM, 12MP rear camera, 8MP front camera, Android 7.1 and a 3,505mAh battery for long life. Blackberry phones fill a niche for those who want an actual keyboard and/or greater security than you can get in other phones.

In their recent earnings the CEO said Blackberry was looking at opportunities for branded tablets, wearables, medical devices, appliances, point of sale terminals and other smartphones. The key point is that Blackberry security software will be integrated into all Blackberry branded items even though they will be made by over companies. That makes them low risk, all reward, opportunities.

They announced a couple weeks ago they had been awarded $814 million in royalty overpayments plus attorney's fees and interest from Qualcomm. The arbitration proceeding has been in process for a long time. This is a major infusion of cash for Blackberry.

Shares spiked to $9 on the award. After some initial profit taking they have started to rise again and closed at a new 52-week high on Friday.

Update 5/1/17: CEO was on CNBC this morning talking about accelerating transition to a software service company. Video of interview

Update 5/4/17: TechCrunch reviewed the new BlackBerry phone and said it was the one they should have introduced 10 years ago. CNBC also did an article on it. Read it Here

Earnings June 30th.

Position 5/1/17:

Long BBRY shares @ $9.34, see portfolio graphic for stop loss.

Optional: Long July $10 call @ 35 cents. No stop loss.

FNSR - Finisar Corp - Company Profile


No specific news. Minor decline from the new two-week high.

Original Trade Description: April 24th.

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.

Update 4/26/17: The U.S. government expanded its investigation regarding compliance with sanctions programs against Iran, Cuba, Sudan and Syria. The target is China-based Huawei but OCLR, ACIA, LITE and FNSR have similar operations. Last month ZTE, a peer to these companies, pleaded guilty and faces fines of $1.2 billion. If the government is going name by name in their investigation, investors may reconsider their ownership of these companies. At least one analyst said today's dip on sector related news rather than company specific, was overdone.

Update 4/28/17: Stifel Nicolaus lowered their price targets on LITE, FNSR, FN and OCLR but maintains a buy rating. The new target on FNSR declined from $39 to $33 with shares at $23. The analyst cut the targets based on the slowness in bid requests from China's governments on the 120 city networking project.

Update 5/5/17: Nice gain on unusual option activity. More than 6,800 May $24 calls traded against an open interest of 2,800, which means they were bought at around 75 cents each. Another 2,000 May $25 calls were bought at 45 cents. That is a total of $600,000 in premium when the normal volume is only a couple hundred contracts. Somebody is betting big on a short fuse with only two weeks to go.

Position 4/25/17:

Long FNSR shares @ $23.10, see portfolio graphic for stop loss.


Long June $25 call @ $1.20, see portfolio graphic for stop loss.

HABT - Habit Restaurants - Company Profile


No specific news. Market drop spoiled the imminent breakout but the decline was only 10 cents.

Original Trade Description: May 10th.

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 revenue of $78.6 million that increased 17.4%. Earnings were 9 cents. Same store sales rose +0.9% despite the flooding in California in Q1. That is where they have the most stores. This was their 53rd quarter of consecutive same store sales growth. They opened 3 new stores in the quarter to total 165 company operated locations and 13 franchised locations.

They guided for the full year for revenue of $338-$342 million. Same store sales of 2%. They will open 31-33 company operated stores and 5-7 franchised stores.

The company had $49.5 million in cash and no debt other than $9 million in short term lease-financing costs for stores under construction.

Earnings August 2nd.

Habit dies not suffer from the same discounting problem afflicting other QSR chains. Habit has a solid repeat customer base and they keep this base faithful by offering new premium menu items on a limited time basis every few weeks. By introducing short term premium specials they attract customers back into the stores every time. That creates repeat business between the announcement of new menu items. By not continuing them on the menu, it keeps their inventory costs lower and causes people to rush in to get the next special because they know it is going away.

They implemented digital advertising program during the quarter and expanded their email mailing list from 278,000 to 538,000 using a promotion for a free Charburger. The redemption rate was 49%, which is unheard of in fast food retailing. The average amount spent when customers redeemed the special was $3.85, which consisted of additional high profit items like fries and drinks. In reality, the special had no material cost and doubled the size of their email list.

It appears HABT shares are about to break out to a new leg higher after the two week pause for earnings.

Position 5/11/17:

Long HABT shares @ $19.50, see portfolio graphic for stop loss.

Optional: Long Sept $21 call @ $1.15, see portfolio graphic for stop loss.

STM - STMicroelectronics - Company Profile


No specific news. Minor decline with the market.

Original Trade Description: May 6th.

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. Company description from FinViz.com.

STM is Europe's third largest semiconductor maker. They posted a surge in revenue growth after six years of declines thanks to IoT, phones, automotive and industrial demand. Revenue is expected to grow 12.3% in Q2 and the company said it was on track to meet 2017 objectives. The CEO said, "Entering the second quarter, we continue to see healthy demand, with strong booking trends across all our product groups and regions."

They reported revenue of $1.821 billion that rose 12.9% and matched analyst estimates. Earnings of 12 cents missed estimates for 14 cents. The company said it would webcast its Capital Markets Day on Thursday.

Earnings July 27th.

Shares closed at a new high on Friday and the turnaround excitement is building. A positive analyst day on Thursday could send it higher. Shares rallied from November through February and then went dormant in Mar/Apr. Now that the consolidation is complete, they are surging again.

Position 5/8/17:

Long STM shares @ $16.34, see portfolio graphic for stop loss.

Optional: Long July $17.50 call @ 65 cents, no initial stop loss.

USO - US Oil Fund ETF - ETF Profile


No material news. Crude is holding at $48.

It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season. Hopefully those declines will begin soon and the repair process can begin.

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.

Update 5/8/17: Saudi's oil minister, Khalid al-Falih, said "after conversations with participants, I am confident the production cut agreement will be extended for another six months and possibly beyond." The OPEC meeting is May 25th and we should be getting almost daily headlines ahead of that event.

Position 4/24/17:

Long Jun $10.50 call @ 40 cents, no stop loss.

WLL - Whiting Petroleum - Company Profile


No specific news. Minor decline in a weak market.

Original Trade Description: May 1st.

Whiting Petroleum Corporation, an independent oil and gas company, engages in the development, production, acquisition, and exploration of crude oil, natural gas liquids, and natural gas primarily in the Rocky Mountains region of the United States. It sells oil and gas to end users, marketers, and other purchasers. As of December 31, 2016, the company had total estimated proved reserves of 615.5 million barrels of oil equivalent; and interests in 1,917 net productive wells on approximately 517,200 net developed acres. Whiting Petroleum Corporation was founded in 1980 and is based in Denver, Colorado. Company description from FinViz.com.

Whiting reported an adjusted loss of 15 cents and analysts were expecting a loss of 22 cents. Revenue of $371.3 million beat estimates for $361.4 million. Production of 10.6 million Boe beat guidance of 10.4 million Boe. Lease operating expenses declined from $9.00 to $8.56. General and administrative expenses declined from $3.15 to $2.34 and interest expenses declined from $4.80 to $3.83 per share.

Earnings July 26th.

The company raised guidance for the year for multiple reasons. They just completed a three-well Loomer pad in North Dakota using advanced completion models with longer laterals and 8.9 million pounds of sand in each well. The resulting production suggests each well will produce 1.5 million Boe over their productive life. That is 50% higher than other wells in the area. That equates to roughly $75 million in revenue from each well with an initial cost of about $9 million each.

Whiting plans to apply this completion method to all its 2017 wells while continuing to test and improve on the model.

Also helping Whiting is the recently completed Dakota Pipeline that President Trump approved a couple months ago. That makes it considerably easier to transport oil out of the Bakken and at a lower cost.

Whiting raised full year guidance to 45.2 to 46.2 million Boe but did not raise the capex expectations. The production guidance was raised because of the better completion methods. This will be a 23% increase in production from Q1 start to Q4 end.

Energy companies have been hammer recently with oil prices falling back under $50. This is a temporary situation. The refinery maintenance cycle was longer than normal and the restart just accelerated over the last two weeks. Inventories last week declined -3.6 million barrels and they should continue to decline sharply over the next four months. Prices will rise as the summer driving season begins.

I think the September $9 option is too expensive at $1.13 and the $10 option is expensive as well. The June options are a short fuse with earnings after expiration. The tradeoff suggests the short term June would be the best play.

Position 5/2/17:

Long WLL shares @ $8.55, see portfolio graphic for stop loss.
Optional: Long June $9 call @ 60 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

ERA - Era Group - Company Profile

Era Group Inc. provides helicopter transportation services primarily to the oil and gas exploration, development, and production companies. Its helicopter services include emergency response search and rescue; air medical services; Alaska flightseeing tours; and other services, as well as utility services to support firefighting, mining, VIP transport, power line, and pipeline survey activities. The company also leases helicopters to third parties and foreign affiliates; engineers, manufactures, and distributes after-market helicopter parts and accessories; and provides classroom instruction, flight simulator, and other training services. As of December 31, 2016, the company owned, leased, or managed a total of 136 helicopters, including 13 heavy helicopters, 49 medium helicopters, 33 light twin engine helicopters, and 41 light single engine helicopters. It also serves cruise line passengers. Company description from FinViz.com.

Era reported a loss of 27 cents on revenue of $54.5 million. This was the second quarterly revenue decline but revenues have been weakening for the last two years. The last quarter they posted positive earnings was June 2016 and the losses are growing. In this table from Capital Cube all the numbers look terrible.

Earnings August 1st.

I am frustrated because I almost recommended them in the weekend newsletter. I decided to wait until support broke at $11.50. That support failed today with a big drop. I believe the shares are going to retest the November lows at $7.50. After looking at that table above would you buy this stock?

Position 5/9/17:

Short ERA shares @ $10.69, see portfolio graphic for stop loss.

No options recommended because of wide spreads.

VXX - Volatility Index Futures - ETF Description


Only a minor decline thanks to the market rebound. If the market bullishness continues, the VXX should continue to bleed points. 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.

WLB - Westmoreland Coal - Company Profile


No specific news. We closed the position at the open after they moved the earnings date to May 15th and the stock was not declining.

Original Trade Description: May 3rd.

Westmoreland Coal Company, through its subsidiaries, operates as an energy company. The company operates through Coal - U.S., Coal - Canada, Coal - WMLP, and Power segments. It produces and sells sub-bituminous coal and lignite to power plants. The company owns and operates coal mines in Montana, North Dakota, Ohio, and Texas, the United States; and Alberta and Saskatchewan, Canada. It has total proven or probable coal reserves of approximately 888,202 thousands of tons. The company is also involved in the production of electricity. It operates two coal-fired power generating units with a total capacity of approximately 230 megawatts in Weldon, North Carolina. Westmoreland Coal Company was founded in 1854. Company description from FinViz.com.

Westmoreland shares spiked from $8 to $20 post election and the excitement has left the stock in the recent months. Westmoreland was trading below $4 when Trump began his rise in the polls talking about putting coal miners back to work. Now that the excitement is fading I would not be surprised to see shares return to $4.

The coal sector is on life support. Cheap natural gas burns cleaner, is easier to transport and there is no storage required. Coal is dirty, requires long trains traveling halfway across the country and large rail yards and storage yards to hold the inventory. As long as gas remains under $5, currently $3.22, that will be the fuel of choice.

Westmoreland has a little more going for it because it owns two power plants but it is still losing money on coal.

They recently reported a loss of 41 cents on revenue of $392.7 million. For the full year they lost -$1.47 per share. They are being forced to restate earnings because of past problems.

They guided for a weak 2017 and said two supply contracts had expired. Warmer weather was also weakening demand.

Earnings June 27th. (revised to May 15th)

Shares are $10.25 with support at $8.50 but that support was based on expectations for Trump to win the election. The expectations that coal use would somehow miraculously rebound have now evaporated.

Position 5/4/17:

Closed 5/11/17: Short WLB shares @ $10.16, exit $10.04, +.12 gain

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