Option Investor

Daily Newsletter, Thursday, 5/25/2017

Table of Contents

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

Market Wrap

Lower GDP And New All Time Highs

by Thomas Hughes

Click here to email Thomas Hughes


Weak trade data led economists to cut 2nd quarter GDP estimates and the broad market moved up to a new all-time high. Leading the move was big tech; the FANG stocks putting on an average 2% each, led by Netflix 3.6% advance. The streaming movie giant was boosted by positive comments from Piper Jaffray analysts issued a report suggesting 2020 EPS has been underestimated by 50%.

International indices were mixed. Asian markets rose in response to the FOMC minutes and rally in US stocks, led by the Shang Hai's 1.43% increase. European indices closed mostly flat with a few in negative territory after the OPEC failed to impress traders and sent oil prices diving.

Market Statistics

Futures were up all morning with barely a flicker when OPEC announced it would in fact extend production caps. Economic data was a bit mixed but also did little to move early trading. The open was positive, as expected, with the SPX gaining close to 6 points from the get-go and setting a new all-time high. The index dipped from there but only briefly, and then proceeded to advance until just after 11AM. The early intra-day high was hit at 11:10AM, just shy of +12 for the SPX. This high held until late afternoon when it was tested and breached. The new high did not hold, prices pulled back from it slightly, but the index was able to close with a new all-time high and near the high of the day.

Economic Calendar

The Economy

Two major economic reports today and giving conflicting view on the economy. The jobless figures show continued improvement in labor, the advance trade report for April was weaker than expected and led to a downgrade of 2nd quarter GDP expectation.

Initial jobless claims gained 1,000 on top of an upward revision to last week of 1,000 to hit 234,000. The 4 week moving average of initial claims fell -5,750 to 235,250 and a new 44 year low. On a not adjusted basis claims rose 1.4% versus an expected 0.8% and are down -12.8% year over year. These figures are consistent with ongoing labor market health and show further improvement in conditions. I expect next week's Challenger report will show low levels of job cuts.

Continuing claims for unemployment rose by 24,000 to hit 1.932 million, last week's figure was revised higher by 1,000. The four week moving average of claims fell by -16,000 to hit a new 44 year low, consistent with improvements in hiring/job creation and demand for employees. Based on this I expect to see strong hiring numbers from Challenger and steady to strong NFP figures.

The total number of Americans receiving unemployment benefits fell by -71,968 to hit 1.819 and a new seasonal low. This low is below my target and shows a deeper draw-down of the unemployed population than at this same time in years past, consistent with ongoing improvement in the labor market and a decline in overall unemployment. Based on this figure it is very possible we will see next week's unemployment rate come in at historically low levels. The only offsetting factor I can think would be an increase in the participation rate which in itself would be another positive for the economy.

The Advance Report for April trade data was weaker than expected but some data points showing positive improvement on a YOY basis. The trade deficit grew by 3.8% in April, widening to -$67.6 billion dollars. Wholesale Inventories declined by -0.3% after advancing by 0.1% in March, the March data revised down from 0.2%, but up 1.8% YOY. Retail Inventories also fell by -0.3% in April following gains in the previous month. March retail inventories was revised down to 0.3% from 0.5% but remain up 3% on a YOY basis.

The Dollar Index

The Fed Minutes and today's economic data suggest the economy is not growing quite as strongly as first thought but neither caused the dollar to plummet. In fact, it looks as if the Dollar Index could swing higher and next week's round of monthly macro-data could do it. Today the index tested support at the $97 again and moved up off of it again, ending the day with a small gain and creating a green bodied candle. The indicators are a bit mixed but consistent with such a possibility. MACD is still bearish but rolling over at a support level and stochastic is forming a strong bullish crossover deep in oversold territory, both consistent with support levels and a possibly swing in momentum.

The risk is two-fold. First is that an upswing may be short-lived, upside target is near $98.75 and a zone of potentially strong resistance, and may end up becoming a selling opportunity ahead of the FOMC meeting. The second is that tomorrow's GDP and economic releases, data from abroad, Trump antics or Fed-speak could send the index crashing through support at $97 in a continuation of the near-term down trend. Downside target on that move is near $95.

The Gold Index

Spot gold held steady near $1255 in today's trade as political fear and dollar value kept trading in check. Gold has been trending sideways in an increasingly narrow range for 7 days now and looks like it is winding up for another big move. Strong data could strengthen the dollar and send gold back to retest the lows, weak data the opposite. At the same time political risk is still a concern; if fear increases gold will likely move up, if it diminishes the reverse. A break in either direction could take gold as much as $45 in the near term, upside target is $1300 downside $1,215.

The Gold Miners ETF GDX held steady in today's trading, very near the middle of it's short-term trading range and wedged between the short and long-term moving averages. The indicators are rolling over in confirmation of resistance at the declining resistance line, near $23 at this time. Stochastic is already firing a sell with MACD close to confirming, consistent with range bound trading a possible move to the bottom of the range near $21.

The Oil Index

OPEC met, they decided to extend production caps and the price of oil fell. WTI fell more than -5.25% on a deal that was nothing more than the market expected. The extension is for 9 months, taking the cap out to March of next year, and far less than what the market really wanted which was a deeper cut to help rebalance the market. The first 6 months of capped production didn't do much to help, the next 9 month's isn't likely to do much either unless global demand also picks up. WTI is now trading below $49 and could easily drop back to $45.

The Oil Index fell -1.5% on the news and created a long red candle. The index is moving lower from resistance at the top of last years trading range and both the short and long-term moving averages. The index looks set to move down to the bottom of last years trading range and recent support near 1,125. Stochastic confirms this move with a strong sell signal yet to be confirmed by MACD. MACD momentum remains bullish at this time but rolling over, and has been generally weak for the past month or so. Down side target is 1,125, a break below which would be bearish. Longer term I remain bullish and the 1,125 level is beginning to show potential as a bottom.

In The News, Story Stocks and Earnings

GM made headlines today when Bloomberg reported the company used emissions test beating devices in some of its trucks. Bloomberg became aware of the story when a class action lawsuit was filed against the company. The suit alleges GM's trucks "spew" more than double the allowed amount of emissions. GM responded saying the accusations were baseless and would be fought. Shares of the stock fell more than -2% to test support at the 6 month low of $32.

Netflix surged 3.5% on an upgrade from Piper Jaffray. The firm upped their target to $190, +16.5% to today's close, based on forward earnings potential. They say that 2020 EPS is undervalued based on expected US and international subscription levels. The stock is now trading at an all time with bullish indications on both the weekly and daily charts.

Abercrombie & Fitch reported earnings before the bell and, despite a less than positive report, shares moved up by nearly 10%. The company reported a big miss on EPS due to decreased leverage in retail prices but was able to beat revenue and margin expectations. The caveat is that sales were down YOY, the beat is nice but only terms of not being as bad as expected. Shares are moving higher on news there could be a bidding war for the brand between a pair of top investment firms.

After hours action was busy, multiple earnings reports were released and many were much better than expected. Costco beat on the top and bottom line sending the stock up by more than 2%. Ulta Cosmetics rose more than 5% after it beat EPS estimates by 14%. The mall based retailer says comp store sales rose 14.3% beating expectations for 11%. Deckers Outdoors gained 11% after reporting a profit when analysts had been expecting a loss.

The Indices

The indices all moved higher today, led by the Dow Jones Transportation Average which is the only to not be trading at all-time high levels. The transports gained 1.57% today, creating a long green candle moving up from the short-term moving average. The index appears to be moving up toward resistance targets at 9,320 in line with the underlying long-term trends. The indicators confirm this move with bullish crossovers, MACD forming its crossover today. A break above 9,320 would be bullish with a target at the current all-time high.

The NASDAQ Composite made the 2nd largest gain today but still less than half the move seen in the more volatile transportation average. The tech heavy NASDAQ gained 0.69% in move creating a small green bodied candle and setting a new all-time high. The index continues to drift higher in line with prevailing trends and looks like it could keep doing so into the nearer term. The indicators are both consistent with trend following entry with upside target near 6,400.

The S&P 500 made the third largest gain in today's trading, 0.44%. The broad market average created a small green bodied candle moving up from a long-term trend line in line with the prevailing bull market. The indicators both confirm this move and suggest higher prices are on the way. Stochastic has rolled over and pointing higher following a bullish crossover earlier in the week and this has been confirmed today by a bullish crossover in the MACD. Upside target is 2,480 in the near-term.

The Dow Jones Industrial Average is today's laggard with a gain of only 0.34%. The blue chips created a very small green bodied candle, almost a doji, and spinning top just beneath resistance at the current all-time high. Today's action was able to break above the long-term up trend line and is confirmed by the indicators suggesting resistance will at least be tested again. Both indicators are forming bullish crossovers, MACD confirms today, with upside target near 21,500.

The indices are drifting higher and look like they want to go higher. All four major indices I track are showing signs of bullishness if not strength that could carry them up to new all-time highs in the near-term. Long-term outlook remains bullish but I remain cautious for new near and short-term trades due to expected slow-down in corporate earnings growth for the 2nd quarter cycle and a lack of real strength in the signals being fired. A correction may not come but I think it's better to keep trades small now, you can always add more later when the signals get stronger.

Until then, remember the trend!

Thomas Hughes

New Plays

Going Out of Style

by Jim Brown

Click here to email Jim Brown
Editor's Note

Fashion trends come and go and this one is struggling. Watches from Fossil Group are no longer in demand and earnings estimates are dropping fast.


No New Bullish Plays


FOSL - Fossil Group - Company Profile

Fossil Group, Inc., together with its subsidiaries, designs, develops, markets, and distributes consumer fashion accessories. The company's principal products include a line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, and soft accessories. It offers its products under its proprietary brands, such as FOSSIL, MICHELE, MISFIT, RELIC, SKAGEN, and ZODIAC, as well as under the licensed brands, including ADIDAS, ARMANI EXCHANGE, BURBERRY, CHAPS, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, KATE SPADE NEW YORK, MARC JACOBS, MICHAEL KORS, and TORY BURCH. The company sells its products through department stores, specialty retail stores, specialty watch and jewelry stores, mass market stores, e-commerce sites, licensed and franchised FOSSIL retail stores, and retail concessions, as well as sells its products on airlines and cruise ships. As of December 31, 2016, it owned and operated 94 retail stores and 129 outlet stores located in the United States, as well as 230 retail stores and 132 outlet stores internationally. Company description from FinViz.com.

Fossil reported an adjusted loss of 35 cents compared to estimates for a loss of 21 cents. Revenue of $581.8 million missed estimates for $596.5 million. For Q2 they guided for a loss of 23 to 40 cents.

Analyst expectations for Q2 have declined from a loss of 6 cents to a loss of 25 cents and has declined three times in the last couple of weeks. For the full year analysts are now expecting earnings of 90 cents, down from $1.11 a month ago.

Earnings August 8th.

Fossil is struggling despite the decent revenue. Costs and marketing are too high and they are losing market share to the rapidly expanding number of brands.

Shares closed at an 8-year low on Thursday and under $11.30 would be a 14 year low. I believe Fossil is going to single digits with $6 the likely target.

Sell short FOSL shares, currently $11.78, initial stop loss $12.85.

Alternate position: Buy July $11 put, currently 55 cents, initial stop loss $12.85.

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.

In Play Updates and Reviews

No Participation

by Jim Brown

Click here to email Jim Brown

Editors Note:

The S&P and Nasdaq closed at new highs and the Dow is close. The Russell closed barely positive. The big caps are in rally mode and the S&P broke out to a new high with an 11-point gain and well above prior resistance at 2,400. The Nasdaq also broke out to a new high with a 42-point gain. The Dow closed well above 21,000 with a 70-point gain and only 33 points below a new high as well.

The Russell and the S&P-600 both closed only fractionally positive and failed to participate in the rally. This is bad for market sentiment. However, portfolio managers appear to be throwing cash at the highly liquid big cap stocks because they want to profit from the gains but they also want to be able to exit quickly if the market rolls over.

Recently, whenever the big caps were strong, the small caps were weak and vice versa. If the big caps slow, maybe that trend will repeat. Gains were lackluster and far between in the small cap portfolio.

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

VSI - Vitamin Shoppe
The short position was entered at the open.

USO - US Oil Fund
The long position was stopped at $10.50.

WLL - Whiting Petroleum
The long position was closed at the open.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

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. Shares are still holding at the highs despite the weak small cap sector.

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.

Update 5/22/17: 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.

Update 5/24/17: BlackBerry currently has more than 60 million QNX operating systems installed in late model cars and expects to license another 36 million in 2017. With U.S. auto rates around 18 million a year, that shows how BlackBerry has infiltrated the overseas markets as well. Shares were down slightly after an article in Forbes suggested Microsoft and Apple could compete for this marketplace in the years ahead.

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.

IWM - Russell 2000 ETF - ETF Profile


Despite the new highs on the S&P and Nasdaq, the Russell 2000 barely broke even. I am going to keep the stop loss tight.

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, see portfolio graphic for stop loss.

STM - STMicroelectronics - Company Profile


No specific news. Minor gain but still 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. The company announced Twilio Functions, a web server infrastructure backend that is managed by Twilio to allow developers freedom to be creative rather than be tied down to server maintenance and security. Basically, Twilio provides a managed cloud to customers for their own use.

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.

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

UCTT - Ultra Clean Holdings - ETF Profile


Ultraclean will present at the Stifel Technology comference on June 6th at 10:55 PT.

Original Trade Description: May 22nd.

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.

Poaition 5/23/17:

Long UCTT shares @ $22.60, see portfolio graphic for stop loss.

Alternate position:

Long July $25 call @ .59, see portfolio graphic for stop loss.

USO - US Oil Fund ETF - ETF Profile


The OPEC announcement became a sell the news event and we were stopped out at the open at $10.50. The stop was tight for just this type of reaction.

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:

Closed 5/25/17: Long Jun $10.50 call @ 40 cents, exit 29 cents, -.11 loss.

WLL - Whiting Petroleum - Company Profile


No specific news. The stock was crushed by the OPEC news and the drop in oil prices but we got lucky. Shares actually opened higher and we closed the position at the open for only a minor loss.

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:

Closed 5/25/17: Long WLL shares @ $8.55, exit $8.53, -.02 loss.
Closed 5/25/17: Long June $9 call @ 60 cents, exit .37, -.23 loss.

WTW - Weight Watchers - Company Profile


WTW will attend the 14th Annual Craig Hallum Institutional Investor Conference on May 31st. Hopefully they can attract some additional investors. New closing high.

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.
Alternate: Long July $26 call @ 90 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

ERA - Era Group - Company Profile


No specific news. Shares accelerated to the downside. Support is $7.25.

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.

VSI - Vitamin Shoppe - ETF Profile


No specific news. Minor rebound from Wednesday's historic low.

Original Trade Description: May 24th.

Vitamin Shoppe, Inc., through its subsidiaries, operates as a multi-channel specialty retailer and contract manufacturer of nutritional products in the United States and internationally. It operates through three segments: Retail, Direct, and Manufacturing. The company provides custom manufacturing and private labeling services for VMS products, as well as develops and markets own branded products. It offers vitamins, minerals, herbs, specialty supplements, sports nutrition, and other health and wellness products of approximately 900 brands, such as own brands comprising Vitamin Shoppe, BodyTech, True Athlete, Mytrition, plnt, ProBioCare, Next Step, and Betancourt Nutrition; and national brands, including Optimum Nutrition, Cellucor, Garden of Life, Quest Nutrition, Solaray, Solgar, and Nature's Way. The company sells its products through Vitamin Shoppe and Super Supplements retail stores; and catalogs, as well as through its vitaminshoppe.com Website. As of December 31, 2016, it operated 775 company-operated retail stores; and 7 franchise stores in Panama, 5 franchise stores in Guatemala, 3 franchise stores in Costa Rica, and 2 franchise stores in Paraguay. Company description from FinViz.com.

Vitamin Shoppe reported earnings of 37 cents that missed estimates for 58 cents. Revenue of $316.9 million missed estimates for $326.7 million. Same store sales fell -6.3% while e-Commerce sales fell -9.1%. The stock fell 32% on the news.

Bad earnings happen all the time to many companies. However, they normally try to be upbeat about the future. That was not the case at VSI. The company warned that weak traffic and sales would continue because of changes to their loyalty program and intensifying promotional environment in the Sports nutrition category.

The best thing they could say was that they could continue their cost reduction initiatives. They Guided for the full year for sales to decline in mid single-digits and earnings of $1.50-$1.75. They guided for the quarter to earnings of 32-42 cents. Analysts were expecting $1.76 and 42 cents. The odds are good VSI will come in at the low end of their guidance and that is weighing on the stock.

Earnings August 9th.

They have another problem because only 7 stockholders own 50% of the stock. If one of those stockholders decides to stop the bleeding and cut their losses, there is not enough daily volume to sustain a major exit. That could push shares significantly lower.

Shares are approaching $10 and are already at a historic low. The outlook is grim and once that $10 level is broken we could see a sharp decline as funds race to exit before the $5 level where most funds can no longer hold the shares.

Position 5/25/17:

Short VSI shares @ $11.55, see portfolio graphic for stop loss.

Alternate position:
Long Aug $10 put @ 49 cents, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Minor decline but a new historic closing low.

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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