Option Investor

Daily Newsletter, Monday, 5/22/2017

Table of Contents

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

Market Wrap

The Bounce Goes On

by Thomas Hughes

Click here to email Thomas Hughes


US indices continue to move higher in an absence of negative news. Today's action was largely unhindered by news; no earnings reports, no political scandal and no economic data were released. The two headlines that did impact trading, Mark Fields getting fired from Ford and Trump in Israel, did little to inspire buying but at least did not inspire much selling either. Trading volumes were on the light side but breadth was decent, advancing stocks outnumbered decliners by a little more than 2 to 1.

International indices were largely cautious in the wake of last week's sell-off and The Donald's International Tour. Asian indices closed with small gains in the range of 0.5% but lagged by the Shang Hai with a loss near -0.5%. Another missile test in North Korea induced some volatility but was otherwise shrugged off. European indices were less buoyant, most closing with small losses in the range of -0.10%.

Market Statistics

Futures trading was flat to positive all morning. The SPX was indicated to open with a gain of 3 to 4 points and this held fairly steady into the opening bell. Trading after the open was calm but positive. The indices crept steadily higher for the first 15 minutes, putting on about 0.4%, before hitting an early top. This top held for the better part of the morning until being broken shortly after 12 noon. At that point the indices crept up to set a new intraday high before entering another trading range with the new high as resistance and the early high as support. This range held most of the rest of the day, up to the last 20 minutes, when the SPX moved up to set another intraday high near which the index closed for the day.

Economic Calendar

The Economy

No official economic data today and very little this week. Tomorrow look out for new home sales and then existing home sales the FOMC minutes on Wednesday. Thursday is jobless claims and then Friday is GDP, Durable Goods and Michigan Sentiment.

Moody's Survey of Business Confidence gained another 0.4% in the last week. The index is now sitting at 35.00% and a new 18 month high. Mr. Zandi says global business confidence is solid and growing at a pace above potential. He also notes that responses in Europe have shown improvement over the past few weeks. Regulatory and legal hurdles remain the biggest concern for business.

Earnings season continues to wind down. To date a little more than 95% of the S&P 500 has reported with another 17 (3.4%) scheduled to report this week. The results this quarter are good, much better than expected, but may be due more to low expectations than to actual strength in business. To date the blended rate of earnings growth for the quarter is 13.9%, up 0.3% from last week and nearly 5% from the beginning of the reporting season.

Looking forward growth remains in the forecast, this week all estimates held steady at last week's levels. Growth will slow to 6.3% next quarter but is expected to expand from there. Growth expectation expands to 7.5% in the 3rd quarter and then to 12.4% in the fourth. Full year 2017 growth should come in around 9.9% and then grow to 11.7% in 2018.

The Dollar Index

The Dollar Index continues to slip. A combination of diminished FOMC rate hike expectations and increasingly hawkish ECB expectation has the index moving lower. The ECB is not expected to do any actual tightening but it is expected to increase tapering and perhaps sound more hawkish in the statements and comments. Such a move would put the ECB on the same track as the FOMC and with data suggesting the FOMC will back off from aggressive rate hiking give the euro a chance to appreciate versus the dollar. Today's move in the Dollar Index took it to a 6 month low and to levels not seen since before the Trump election. The move also broke support at the 61.80% retracement level and looks like it is headed lower. The indicators are bearish and showing weakness, consistent with a test of support and/or lower prices. Next downside target is near $96.

The Gold Index

Gold prices moved higher today. Spot gold gained nearly $8 to trade above $1,260 and is supported by a weakening dollar. This move may continue higher into the near-term should FOMC outlook remain weakened and/or the ECB outlook should strengthen. This week the FOMC minutes, housing data or GDP revision could be a catalyst. Spot price looks like it is gearing up for a move higher, consolidating just below near term resistance, and could shoot up to $1,300 on political risk and/or tepid FOMC outlook.

The Gold Miners ETF GDX gained about 0.5% in today's session and created a small green bodied candle. Gains were capped at my down trend line leaving prices trapped within a narrowing range focused on the ECB/FOMC meetings 3 weeks away. The indicators are bullish and pointing higher, suggestive of higher prices, but weak and generally consistent with range bound trading in the short to long-term. Resistance at the down trend line is coincident with an important Fibonacci Retracement level and may be strong. A break above this level, near $23.50, would be bullish with upside target near $24.50. Support is at the bottom of the range near $21.

The Oil Index

Oil prices rose today after Saudi Arabia and Iraq reached agreement on extending OPEC production caps. WTI gained a little more than $0.40 or 0.8% to trade near $50.80 and a new one month high. Prices are being supported by anticipation for the deal which should be struck Thursday at the Vienna OPEC meeting. Unless the cuts are deeper or longer than expected it is possible this could be a buy-the-rumor-sell-the-news type of event as it has been expected for some time. Until then near-term outlook for oil is bullish with recent highs near $54 as target.

The Oil Index moved higher in early trading but gave up most of the gains by closing time. The index managed to remain positive at 0.03% and above the short-term moving average but created a red candle at resistance. The indicators are moving higher in support of rising prices but have not confirmed a strong bounce as yet. A break above resistance at 1,170 would be bullish in the near-term with short and long-term possibilities. Upside target would be just shy of 1,200 and, if reached, help confirm reversal from support levels. My long-term outlook remains bullish, near to short-term is starting to look good too but I am still wary of the OPEC deal and what may happen in the aftermath. Support is in the range of 1,120 to 1,150.

In The News, Story Stocks and Earnings

Ford was the talk of the day after the family dominated board voted to oust CEO Mark Fields. Fields took the helm only 3 years ago and tasked with growing the brand globally. In that time the company has seen record setting revenue and earnings, and a stock price down by roughly 40%. One reason for the decision is that the Ford family net worth is tied up in the company and has suffered greatly in the past years. Jim Hackett is confirmed as the new CEO and comes with glowing approval from the board. Shares of the stock jumped on the news gaining nearly 2% in premarket trading and confirming support at a 14 month low.

Defense stocks got a big boost from Trump's trip abroad. The Saudi stop included a new arms deal worth $110 billion to US companies. The Aerospace and Defense ETF ITA gained more than 2% on the news to set a new all-time intraday high. The high attracted profit takers who drove price below the previous all-time high but not low enough to reverse all of today's gains. The ETF closed with a gain near 1% and could easily keep rising. The sector was already supported by Trump and defense spending, this new deal will only add tailwinds to an already bullish sector.

The Volatility Index fell nearly -10% today and looks like it will return to recent lows. Today's action is the the second of two long red candles following last week's spike and bearish for the index. The indicators are rolling over, consistent with range bound trading and a move toward the bottom of the range. Support kicked in today at the $11 level consistent with the previous long-term low, a break below which would be bearish with target at the current long-term low below $10. Outlook for the SPX is bullish based on this read.

The Indices

The indices are moving higher after a bounce from support, in line with prevailing trends. Today's leader is the Dow Jones Transportation Average with a gain of 1.06%. The index created a medium sized green candle breaking through and closing above the long-term moving average. This move confirms support at the moving average and is bullish. The indicators are in support but mixed in confirmation. Stochastic is confirming with a weak bullish crossover (%D is moving lower) while MACD is bearish but showing evidence of support at current levels. A move higher would be bullish and trend following but face additional resistance at the short-term moving average just above today's close.

The NASDAQ Composite gained 0.82% in today's action and closed at the high of the day. Today's candle is a medium green candle with shaven top moving up following a bounce from support, in line with the underlying trend and closing just 30 points below the current all-time high. The indicators have yet to confirm the move but are beginning to roll over and consistent with a trend following bounce. A move higher may find resistance at the all-time high, a break above that would be bullish. Support is at 6,000.

The S&P 500 is 3rd today with a gain of 0.52%. The broad market index created a small bodied green candle moving up from the short-term moving average and extending the bounce from support began last week. Today's action was capped at the resistance of a long-term up trend line which was broken last week. The indicators are consistent with a trend following bounce but have yet to confirm the move, a break above the trend line would go a long way toward doing that. Resistance is 2,400, support is 2,350.

The Dow Jones Industrial Average brings up the rear with a gain of 0.43%. The blue chips created a small green bodied candle closing just below the daily high, and above the short-term moving average. Today's move extends the bounce from support begun last week but is showing signs the move is slowing. The indicators are consistent with a bounce from support but have not yet confirmed the move. Upside target is 21,000, about 105 points above today's close. A break above that would be bullish and take the index to new all-time highs. A failure to break will keep it range bound near-term.

The indices are moving higher and look like they will continue, at least enough to retest the most recently set all-time highs. A break above that would be bullish but whether or not it will happen now is questionable. Long-term outlook is for earnings growth so I am firmly bullish in that time frame. In the near-term growth will slow by half before it resumes an expansionary trajectory, an event that may give traders reason to pause. This, along with political risk and the sell-in-May attitude, could easily give traders an excuse to pause and send the indices into short-term trading ranges which makes me cautious in the near to short-term.

Until then, remember the trend!

Thomas Hughes

New Plays

Semiconductors are Hot

by Jim Brown

Click here to email Jim Brown
Editor's Note

The semiconductor sector is setting new highs because our future is powered by chips. Ultra Clean supplies the tools needed to build those chips.


UCTT - Ultra Clean Holdings - ETF Profile

Ultra Clean Holdings, Inc. designs, develops, prototypes, engineers, manufactures, and tests production tools, modules, and subsystems for the semiconductor capital equipment and equipment industry segments primarily in North America, Asia, and Europe. It offers precision robotic systems that are used when accurate controlled motion is required; gas delivery systems, which include one or more gas lines consisting of small diameter internally polished stainless steel tubing products, filters, mass flow controllers, regulators, pressure transducers and valves, component heaters, and an integrated electronic and/or pneumatic control system; and various industrial and automation production equipment products. The company also provides subsystems, such as wafer cleaning sub-systems; chemical delivery modules that deliver gases and reactive chemicals in a liquid or gaseous form from a centralized subsystem to the reaction chamber; frame assemblies, which are support structures fabricated from steel tubing or folded sheet metal; and top-plate assemblies. In addition, it offers liquid delivery systems; process modules, which are the subsystems of semiconductor manufacturing tools that process integrated circuits onto wafers; and other high level assemblies. The company primarily serves original equipment manufacturing customers in the semiconductor capital equipment, consumer, medical, energy, industrial, flat panel, and research industries. Company description from FinViz.com.

The company reported earnings of 47 cents that beat estimates for 42 cents. Revenue of $204.6 million also beat estimates for $192.1 million. They guided higher for the current quarter to earnings of 49 to 55 cents and revenue of $210 to $220 million.

Earnings July 26th.

The company said it was seeing "extraordinary demand" and they were ramping up production to meet this demand.

Shares had been moving up steadily and I wanted to add them as a play multiple times but kept waiting for a pullback. That happened last week with a 10% decline and now they are surging again. Any further gain from Monday's close will be a new high.

Buy UCTT shares, currently $22.43, initial stop loss $20.45.

Alternate position:

Buy July $25 call, currently .80, initial stop loss $20.45.

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


No New Bearish Plays

In Play Updates and Reviews

Overseas Problem

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets posted a decent rebound on Monday but the apparent terrorist attack in the UK has sent futures sharply lower. If there is not one reason for market volatility there is always another. There was an explosion at an Ariana Grande concert in Manchester and there are reports of confirmed fatalities. Nothing else is known but the S&P futures are down over 4 points. In theory, this should not impact the U.S. markets but there is always a knee jerk reaction to any negative headline.

The Dow gapped open to 20,900 and held in a tight 37 point range the rest of the day. The Nasdaq and Russell were the percentage leaders. Since this was the third day of the rebound it should be improving sentiment. We need to get back over prior resistance before we can celebrate.

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

TWLO - Twilio Inc
The long position was entered at the open.

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BULLISH Play Updates

BBRY - Blackberry - Company Profile


No specific news. New 52-week high. BBRY is exploding higher. I am not going to raise the stop loss because I think they have turned the corner and we could be looking at $20 in the future. $11.25 is two-year resistance and it closed just over that level today. Three-year resistance is $16. The next step up from there is $30. BlackBerry has completely changed its business model and is no longer a phone company. People are finally catching on and I am sure there are plenty of shorts left to cover. Now that a monster move has begun there will probably be a lot of price chasers as well.

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

Update 5/15/17: Blackberry is actually profiting from the WannaCry malware. The company pivoted to a software security firm a couple years ago and they offer security for both mobile and enterprise applications.

Update 5/16/17: Blackberry is working with at least two automakers on security software that would monitor the car's operating system and warn the driver if the system has been hacked. This is going to be very important in the future as self-driving cars become more plentiful. The system is currently being tested by Aston Martin and Range Rover. The virus software would cost drivers $10 a month. Blackberry software is already running in millions of cars. Shares exploded higher.

Update 5/17/17: Blackberry announced new mobile software to allow crisis managers, police forces, fleet managers, etc, to always know where their personnel are located. The AtHoc Account is an authorized solution for Federal government FedRAMP applications. The software merges inputs from managers, call center operators, data streams from HR and travel systems as well as self reporting by individuals.

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.

HZNP - Horizon Pharma - Company Profile


No specific news. Horizon is not performing and finished on the lows today. I am recommending we close the position. There is no reason to let it bleed away pennies a day.

Original Trade Description: May 15th.

Horizon Pharma Public Limited Company, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of orphan diseases, arthritis, pain, and inflammation and inflammatory diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and malignant osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; PROCYSBI for the treatment of nephropathic cystinosis; QUINSAIR for the treatment of chronic pulmonary infections due to pseudomonas aeruginosa in cystic fibrosis patients; and KRYSTEXXA to treat chronic refractory gout. Its products also include RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus, and multiple other indications; DUEXIS to treat signs and symptoms of osteoarthritis and rheumatoid arthritis; MIGERGOT for the treatment of vascular headache; PENNSAID 2% to treat pain of osteoarthritis of the knees; and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis. The company has collaboration agreements with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer; and Alliance for Lupus Research (ALR) to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus (SLE) patients. Company description from FinViz.com.

Horizon reported earnings of 21 cents that missed estimates for 25 cents. Revenue of $220.9 million rose 8% but missed estimates for $253 million. They guided for full year revenue of $1.0 to $1.035 billion, down from $1.26 billion. Analysts were expecting $1.4 billion. Shares were crushed for a 39% drop from $15.50 to $9.50.

Earnings July 31st.

However, the company said the declines in earnings and revenue were due to a change in business practices and how they contract with pharmacy benefit managers. To combat this change the company is changing its cost and pricing structure to better match the new contract requirements.

Secondly, they said they were expsnding investments in the drug Krystexxa and they raised sales expectations from $250 million to $400 million for the full year. They also signed a deal to acquire River Vision and its Thyroid Eye Disease drug for $146 million and the acquisition will close immediately. They also received approval from a supplemental New Drug Application (NDA) for Ravicti, a drug for urea cycle disorders in children.

Horizon has a portfolio of orphan drugs with more on the way. The shares were hammered but they are already rebounding strongly on what some investors are seeing as a buying opportunity.

Position 5/16/17:

Long HZNP shares @ $10.75, see portfolio graphic for stop loss.

Optional: Long June $11 call @ 55 cents, see portfolio graphic for stop loss.

IWM - Russell 2000 ETF - ETF Profile


The Russell was one of the strongest gainers today. The IWM gained nearly 1 point.

Original Trade Description: May 17th.

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities. Description from iShares.com

The Russell 2000 has been moving sideways since early December and has tested both sides of its range multiple times. The spike to a new high at the end of April was sold when the cat fight started in Washington. Fund managers were concerned the tax reform package would be delayed.

Unfortunately, that happened and the political headlines turned deadly with the selling climax on Wednesday.

Now that a special prosecutor has been appointed many months will pass before there is any material news out of that office. For all practical purposes the press and the democrats have lost a rallying cry. Now they have to wait like the rest of us. The market should rebound.

However, there could be volatility on Thr/Fri as margin calls are covered and weekend event risk causes traders to take profits in a shaky market.

I am bringing back the IWM option trade we tried to put on in the middle of April but could not get an entry point. I am recommending we go long at the open on Thursday and hang on through the volatility.

Position 5/18/17:

Long IWM July $138 call @ $2.00, no initial stop loss until next week.

STM - STMicroelectronics - Company Profile


No specific news. Minor decline but holding over support.

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 5/08/17: Long July $17.50 call @ 65 cents, no initial stop loss.

Position 5/18/17: Long STM shares @ $16.25, see portfolio graphic for stop loss.

Previously closed 5/17/17: Long STM shares @ $16.34, exit $16.25, -0.09 loss.

TWLO - Twilio Inc - ETF Profile


No specific news. Early morning bounce but faded slightly into the close.

Original Trade Description: May 20th.

Twilio Inc. provides cloud communications platform that enables developers to build, scale, and operate communications within software applications through the cloud as a pay-as-you-go service in the United States and internationally. It offers programmable communications cloud software that enables developers to embed voice, messaging, video, and authentication capabilities into their applications through application programming interfaces. The company also provides use case products, such as a two-factor authentication solution. Twilio Inc. was founded in 2008 and is headquartered San Francisco, California. Company description from FinViz.com.

Twilio has a messaging application that is built in to dozens of apps you probably use every day. When tech startups try to decide how to engineer a solution they normally find that imbedding Twilio messaging is much simpler in the beginning. The thought process is that once the company is running and profitable they will go back and build their own platform. For most businesses that never happens and they end up paying for Twilio forever.

When they reported earnings on May 3rd, they said revenue growth would slow because Uber was finally taking that step of engineering their own messaging platform and would be phasing out Twilio. When a company reaches the size of Uber they can afford to build their own interface. Only a few companies ever make the switch. Other major customers on their network with no plans to change are Nordstrom, Airbnb, Amazon, Facebook, WhatsApp to name a few.

Uber accounts for 12% of Twilio revenue so the exit is painful. Pacific Crest downgraded the stock saying they had underestimated the risk from Uber. JP Morgan reiterated its overweight rating and $36 price target saying Twilio would continue riding Amazon's coattails to success with Amazon Web Services. Their price target is $33.

Shares fell after Twilio guided for an adjusted loss of 10-11 cents on revenue of $86.5 million. Analysts were expecting 8 cents and $87.8 million.

Last week CEO Jeff Lawson bought 100,000 shares at an average price of $23.43 ($2.34 million). Board member Jim McGeever, VP of Oracle's Netsuite unit, bought 10,000 shares at $23.19. They do not appear to be worried about the business slowing.

Earnings August 1st.

Shares are ticking higher and closed at a three week high on Friday.

Position 5/22/17:

Long TWLO shares @ $25.01, see portfolio graphic for stop loss.

Optional: Long July $28 call @ $.75, see portfolio graphic for stop loss.

USO - US Oil Fund ETF - ETF Profile


Minor gain to a new 4-week high.

It is only a matter of time before we begin to see dramatic inventory declines as we approach the summer driving season.

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. Still fighting resistance at $9.

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.

WTW - Weight Watchers - Company Profile


No specific news. Only a minor 22 cent decline after the monster $2.37 spike on Friday.

Original Trade Description: May 13th.

Weight Watchers International, Inc. provides weight management services worldwide. The company operates in four segments: North America, United Kingdom, Continental Europe, and Other. It offers a range of products and services comprising nutritional, activity, behavioral, and lifestyle tools and approaches. The company also engages in the meetings business, which presents weight management programs, as well as allows members to support each other by sharing their experiences with other people experiencing similar weight management challenges. In addition, it offers various digital subscription products, including Weight Watchers OnlinePlus and a weight management companion for Weight Watchers meeting members to digitally manage the day-to-day aspects of their weight management plan, as well as provides interactive and personalized resources that allow users to follow weight management plan. Further, the company provides Personal Coaching, an online subscription product that offers one-on-one telephonic, e-mail, and text support and personalized planning from a Weight Watchers-certified coach, as well as offers access to other online tools. Additionally it offers various products, including bars, snacks, cookbooks, food, and restaurant guides with SmartPoints values, Weight Watchers magazines, SmartPoints calculators, and fitness kits, as well as third-party products, such as activity-tracking monitors. The company also licenses the Weight Watchers brand and other intellectual property in frozen foods, baked goods, and other consumer products, as well as endorses selected branded consumer products; and engages in publishing magazines, as well issues other publications, such as cookbooks, and food and restaurant guides with SmartPoints values. It offers products through its meeting and franchisee business, as well as online. Weight Watchers International, Inc. was founded in 1961. Company description from FinViz.com.

Weight Watchers posted a Q1 profit of 16 cents compared to estimates for a 4-cent loss. Revenue of $329.1 million rose 7.2% and beat estimates for $323 million.

Subscribers rose 16% to 3.6 million. Subscribers have now risen for 5 straight quarters. This is the first time since 2011 that they gained subscribers for a full year. The company raised guidance for the full year to $1.40-$1.50. Analysts were expecting $1.27. They said they were off to a strong start thanks to the Oprah Effect. The TV personality joined the brand late in 2016.

Earnings August 1st.

The stock has been a rocket since Oprah began pitching for the brand but it is showing no signs of fading. The post earnings spike to $25 saw some post earnings depression but shares are already moving back to that post earnings level. I believe female investors are betting on the Oprah Effect to continue driving profits. Even at this level the stock is not overly expensive with a PE of 17.

I am recommending it because it has refused to decline in a weak market. The risk is less with the option position.

Position 5/15/17:

Long WTW shares @ $24.48, see portfolio graphic for stop loss.
Optional: Long July $26 call @ 90 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

ERA - Era Group - Company Profile


No specific news. New 6-month low.

Original Trade Description: May 8th.

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


Shares are closing in on the prior lows at $13.61.

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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