Option Investor

Daily Newsletter, Thursday, 6/15/2017

Table of Contents

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

Market Wrap

Consolidation Continues

by Thomas Hughes

Click here to email Thomas Hughes


The Fed gets aggressive with their balance sheet reduction plans and the market falters. A raft of economic data came in as or better than expected, reinforcing the Fed's hawkish tone and forward economic outlook, adding to volatility. Today's action saw many of the indices shed close to -1% intraday but the losses were pared as bargain hunters stepped in to scoop up cheap stocks. I wouldn't call today's bullish, but I wouldn't call it overly bearish either.

International indices were lower in today's actions with few exceptions. Asian indices were mostly lower with losses in the range of -1.0%, the Shang Hai managed to eek out a gain of 0.06%. In Europe safe haven Switzerland was able to post gains, 0.04%, after its central bank held rates steady but most indices fell. Losses were greater than -1.0% intraday but late day bargain hunting reduced them by the close. The DAX was a loss leader posting a decline of -0.89% at the end of day. In England the BOE held rates steady as well.

Market Statistics

Early morning futures trading showed losses for the major indices from the start. The SPX was indicated down about -0.7% in the earliest part of the session with that falling to nearly -1.00% following the release of economic data at 8:30AM. Downward pressure persisted into the opening bell but slowly diminished. The SPX opened with a loss of roughly 12 points or -0.5% and fought hard to maintain that level. Trading was choppy over the first few hours of the day resulting in an intraday low of -18 points for the SPX set just before 10:30AM. By noon intraday volatility had begun to subside and allow the indices to drift upward. The remainder of the day saw the indices drift sideways to up, slowly creeping higher until they were within spitting distance of yesterday's close.

Economic Calendar

The Economy

Lots of data today and all at least as expected if not better. Initial claims for unemployment fell slightly more than expected to 237,000, down -8,000 from last week's not revised figure. The four week moving average of claims rose by 1,000 to hit 243,000. On a not adjusted basis claims rose 10% month to month versus an expectation of +13.6% and are down -12.25% YOY, consistent with ongoing labor market health.

Continuing claims rose by 6,000 to hit 1.935 million, last week's figure was revised higher by 12,000. The four week moving average of claims rose by 9,000. Regardless the revision or increase this week continuing claims remains in downtrend and hovering just above the recently set 44 year low. This figure is consistent with labor market health and ongoing labor market tightening.

The total number of claims fell by nearly -10,000 to hit 1.785 million, a new seasonal low. The total claims figure remains in downtrend and is now down -16% from this same time last year. Jobs creation may not be robust but this figure, along with the initial and continuing claims numbers, show that hiring/job retention remain strong and consistent with healthy economic conditions.

The Philadelphia Federal Reserve Manufacturing Business Outlook Survey retreat in May but not as much as expected. The index fell to 27.6 from 38.8 showing growth but less growth than the month before. Within the report all components remain positive but have moderated from previous highs. The shipments index fell -11, new orders was unchanged and employment fell -1. Hours worked continues to expand as well but it too decreased by -1 this month. The 6 month forward outlook also fell, hitting a 2 year low, but remains positive.

The Empire State Manufacturing Survey rose a much stronger than expected 21 points to 19.8. This is a +2 year high, forward outlook also rose. Within the report new orders rose 23 to 18.1, shipments rose to 22.3 and inventories to 7.7 while employment and hours worked both rose modestly.

Import prices were unchanged in May while export prices fell -0.6%.

Industrial production was unchanged in May after substantial increases in the previous month and smaller increases in February and March. Year over year production is up 2.2%. Capacity utilization fell a tenth to 76.6% and -3.3% below its long running average.

The NAHB Index of Home Builder Sentiment fell 2 points to 67 from last month's revised 69. This is below expectations and driven by a lack of traffic. All components within the report fell, led by buyer traffic which fell below the expansionary 50 level to 49. Despite this sentiment remains positive and stable at 67 with sales of single family homes running at 73 and forward outlook for sales at 76.

The Dollar Index

The Fed raised rates as expected, delivered a slightly more hawkish than expected statement and addendum, and put the bull back into the dollar. The Dollar Index gained nearly 0.60% today and appears to be reversing the Jan/Jun down trend. With the ECB backing off from hawkish expectations and the FOMC sticking to their guns policy is back in divergence, if only mildly, weakening the euro and strengthening the dollar. The indicators support today's move with a strong buy signal that could easily carry the index up to test resistance at the short-term moving average. A break above the moving average, near $97.65, would be bullish and confirm reversal if not rally. Don't forget, reversal signals could mean a switch from down to sideways as easily as down to up.

The Gold Index

Gold prices fell in tandem with a rising dollar and firming FOMC outlook. The Fed may not be set to raise rates again this year but they are set to begin trimming the balance sheet and that is seen as dollar strong, at least for now. Spot gold fell more than -1.5% or $21 to trade below $1, 260 and is heading down to test support at $1,250 and maybe lower.

The Gold Miners ETF GDX lost about -0.65% and created a small doji candle sitting just above potential support. The ETF is now near the bottom of its rapidly narrowing trading range and set to trend along this level, or move lower. The indicators are both weak and pointing lower following bearish crossovers and consistent with a move lower within a trading range. Support may be at $22 or just below but more likely near $21. A break below this level would be bearish with downside target near $18.50.

The Oil Index

Oil prices continue to plunge. WTI fell another -0.5% in today's action and is now trading near $44.50. The latest data shows supply levels did not fall as much as expected adding to oversupply concerns. No matter what OPEC tries to do they just can't alter the fact that there is more than enough oil and production capacity to offset demand. I don't think this is going to change without increased demand or a serious disruption to supply and/or production.

The Oil Index fell nearly a full percent in a drop below the 1,120 support level. The index continues to experience volatility and is retreating to the recently set low. The indicators have begun to roll over into bearish signals consistent with this move but have not confirmed with crossovers. Support is near the current low just above 1,100, a break below this would be bearish and a continuation of the near-term down trend with target near 1,050. The near-term outlook for the oil sector is bearish and driven by falling prices. The market may move down from here but how much lower it can go is questionable since it is well within a solid zone of support. Long-term I remain bullish due to forward earnings growth outlook, waiting for the bottom I know is down there somewhere.

In The News, Story Stocks and Earnings

Wells Fargo, the once unblemished mega-bank, has fallen prey to scandal once again. The bank has been accused of making improper changes to mortgages held by those in bankruptcy. A series of lawsuits allege that while the bank was dealing with the account scandal last year mortgage staff were pushing loan modifications that lowered monthly payments while extending terms and increasing the amount paid over time. The bank responded saying it did nothing wrong and all involved parties were notified beforehand. Shares of the stock fell nearly -1% on the news but do not appear as if it is overly damaging at this time.

Kroger reported earnings this morning and did not deliver what the market wanted to hear. Quarterly results were good, revenue gains and better than expected EPS, but forward guidance was weak. Guidance has been chopped by nearly -9%, blamed in part on competition from Walmart, and sent shares diving in the premarket session. The stock opened with a loss greater than -10% and extended that to near -20% by the end of day to trade at a 2.5 year low.

The VIX rose today but still doesn't look like it is ready to spike higher. The index gained about 5% creating a small green bodied candle with long upper shadow signifying resistance. Today's high was 12.01 and just below the long-term moving average, two potential resistance areas. The indicators are mixed in the near-term but consistent with range bound trading and resistance in the long. A move above 12 would be bullish for volatility, bearish for the market, with upside targets near 14 and 16. Failing to break above resistance would be bullish and consistent with market rebound.

The Indices

Rotation from tech and into more promising sectors continues. Today's action say the indices fall to support levels, and find it. The Dow Jones Transportation Average led and was able to close with a gain. The index moved up by roughly 0.20% to create a medium sized green bodied candle rising up from support. Support is the 9,325 resistance-turned-support and previous all-time high. The indicators were bullish in confirmation of the break above resistance but stochastic is now showing weakness and bearish crossovers consistent with topping action. If the index is able to move higher it will face additional resistance at the current all-time high near 9,650. A break above there would be bullish.

The Dow Jones Industrial Average closed with a loss less than -0.10% after opening much lower. The blue chips created a small green bodied candle moving up from a long-term up trend line. The index had been struggling to break above the trend line and did so Tuesday. The indicators have confirmed the break with bullish crossovers and are both on the rise in support of higher prices. Upside target is 21,500 although caution is warranted because the move looks weak and the index a bit extended.

The S&P 500 closed with a loss near -0.20% and just behind the industrials. The broad market index gapped lower to create a small green bodied candle with long lower shadow confirming support at the long-term up trend line and short-term moving average. Price action appears bullish and trend following although the indicators do not confirm. Both MACD and stochastic have formed bearish crossovers and signals consistent with consolidation and pull-back. The index may not go below the trend line, or far below it, but I don't think the test of support is over. In fact, it may just be starting as there is still quite a bit of time until the next earnings season and very little economic data over the next week. Near-term support is 2,415 and 2,400, a break below there would be bearish with targets near 2,350.

The NASDAQ Composite brings up the rear with a loss near -0.50%. The index also opened with a gap lower, tested support and then moved higher from there to create a small green bodied candle with visible lower shadow. The candle helps confirm support at the 6,115 level but price action over the last week and the indicators lead me to think this move is not over. Both indicators are bearish and gaining strength in support of lower prices with target near 6,000.

The indices look mixed. One is going up while another is going down and two more going sideways at best. Basically, we're in a big sector rotation and tech is the loser. Market leading sectors include industrials, real estate, materials and energy which are all up more than 1% over the past 5 days while the NASDAQ and XLK Technology SPDR are down -2.5% and -3.5% in the same time. Rotation is likely to continue into the near-term. The next catalysts for movement other than political or random one-off news will be the NFP in 2 weeks and then the beginning of Q2 earnings season 2 week's after that. I am neutral for the near-term, cautious for the short and bullish for the long watching and waiting for the next great entries.

Until then, remember the trend!

Thomas Hughes



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New Plays

Small Caps Fading

by Jim Brown

Click here to email Jim Brown
Editor's Note

Tech stocks crashed again at the open to drag down the Russell small caps. The markets rebounded from a retest of the Fri/Mon lows but it could have been better. The small caps are not rebounding and the tech stocks were hit and miss. There is no need to add risk unless we have a directional market. Friday should be a pivotal day for direction.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Retest of the Lows

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major tech indexes retested the lows in a slower version of the Friday flash crash. This was a mini version of the crash from Friday. Most of the big cap tech stocks rebounded from the lows but the excitement was lacking.

All the indexes rebounded but as of 3:30 none are in the green.

Friday is my 50th wedding anniversary and I have to post this early today because plane schedules are conflicting with newsletter schedules. I did not update any news and I will catch up in the weekend newsletter.

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.

Portfolio snapshot as of 3:30

Current Position Changes

BBRY - Blackberry
The long position was closed at the open.

UCTT - Ultraclean
The long position was stopped at $21.25.

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


Position closed at the open ahead of earnings next week.

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.

Update 5/27/17: Blackberry and Qualcomm reached a final agreement on the arbitration award on overpaid royalties. The final award will be $940 million and wil be paid to Blackberry on May 31st. Qualcomm will deduct some royalties due from 2016 and Q1-2017 but Blackberry will receive most of the money. That includes $125 million in interest and attorney's fees. Qualcomm had originally agreed to cap certain royalties under their original licensing deal years ago but then demanded Blackberry pay anyway. In this case Blackberry prevailed.

Update 6/1/17: Short seller Citron Research issued a buy recommendation on Blackberry saying their automotive software is a game changer for the company. With an installed base of 60 million, QNX already has four times the number of cars as Mobileye when Intel bought them for $15 billion. Citron thinks BlackBerry shares could double and they could be an acquisition target now that their focus has changed to software. Shares rallied 8% to a new 52-week high.

Update 6/6/17: Blackberry downplayed the shift by Toyota away from the company's QNX software in favor of an open source Linux version for driving the console functions in the 2018 Camry sedans. Blackberry said it was focusing more on the faster growing market for autonomous driving technology.

Update 6/13/17: Blackberry is getting a lot of press over its $400 device that collects and transmits data on movement, temperature and physical contents of trailers for 1,300 truck trailers belonging ot Titanium Transport. The trucking company reduced labor costs, tracked lost trailers and helped provide maximum utilization of the fleet. Tracking trailers both empty and full is a major headache for trucking companies. Raymond James believes BlackBerry could easily scale to 10% of the addressable market of 8 million trailers in North America.

Earnings June 23rd (revised)

Position 5/1/17:

Closed 6/15/17: Long BBRY shares @ $9.34, exit 10.45, +$1.11 gain.

Closed 6/15/17: Long July $10 call @ 35 cents. Exit .95, +.60 gain

KTOS - Kratos Defense - Company Profile


I will update the news in the weekend newsletter.

Original Trade Description: May 24th.

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.

China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.

Kratos expects to build $30 to $40 million in unmanned target drones for the Navy in the 2017 budget. That is per batch of BQM-177 drones and there is the potential for multiple batches.

Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.

Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense depart spending.

I am not recommending a stock position given the sharp gains already.

Update 6/13/17: Kratos said it was going to unveil its newest high performance class of military unmanned aerial system technology at the Paris Air Show next week. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.

Position 5/30/17:

Long August $12.50 call @ 59 cents, see portfolio graphic for stop loss.

UCTT - Ultra Clean - Company Profile


Position stopped at the opening market drop.

Original Trade Description: June 12th.

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 and beat estimates for 42 cents. Revenue of $204.6 million beat estimates for $192.1 million. They guided for the current quarter to earnings in the range of 49-55 cents and revenue in the $210-$220 range. Those were above analyst estimates for 33 cents and $183.3 million.

Estimated earnings July 26th.

We played UCTT recently for a minor gain. The tech sell off has provided an ideal entry point at uptrend support and the lows from late May.

Position 6/13/17:

Closed 6/15/17: Long UCTT shares @ $22.52, exit $21.25, -1.27 loss.

WTW - Weight Watchers - Company Profile


I will update the news in the weekend newsletter.

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.

YRCW - YRC Worldwide - Company Profile


I will update the news in the weekend newsletter.

Original Trade Description: June 13th.

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2016, this segment had a fleet of approximately 7,700 tractors comprising 6,200 owned and 1,500 leased; and 31,000 trailers consisting of 24,900 owned and 6,100 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, truck loading, and other specialized offerings; guaranteed and expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates hollandregional.com, reddawayregional.com, and newpenn.com, which are e-commerce Websites offering online resources to manage transportation activities. This segment had a fleet of approximately 6,600 tractors, including 5,000 owned and 1,600 leased; and 13,500 trailers comprising 10,800 owned and 2,700 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. YRC Worldwide Inc. was founded in 1924 and is headquartered in Overland Park, Kansas. Company description from FinViz.com.

For the 4th time in 7 years, Walmart selected YRC Freight as the National LTL Carrier of the Year. YRCW delivers to Walmart stores, Sams Club facilities and distribution centers all across North America. Walmart said the extensive YRCW network offers significant coverage to Walmart and their suppliers.

The company reported a loss of 70 cents for Q1 compared to estimates for 27 cents. Revenue of $1.17 billion did beat estimates for $1.14 billion. Shares imploded on the earnings miss and fell from $10.69 to $7.36.

Next estimates earnings August 3rd.

The company announced a restructuring plan to reduce management headcount and "de-layer" operational overhead. They announced several initiatives to reduce costs.

Last week they released metrics for the last two months. In April, freight tonnage per day rose 6.2% with May tonnage rising 3.3% over year ago levels. Regional tonnage increased 1.4% in April and 5.5% in May.

The business is growing and a reduction in costs will be positive. Investors seem to like the news with a rebound to pre-earnings levels. Resistance is $11.25 and a breakout there could easily run to $14.00 if the story and the market remains positive.

Position 6/14/17:

Long YRCW shares @ 10.70, see portfolio graphic for stop loss.
Alternate position: Long July $11 call @ 55 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

FOSL - Fossil Group - Company Profile


I will update the news in the weekend newsletter.

Original Trade Description: May 25th.

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.

Update 6/13/17: Shares crashed on news the CEO sold 520,000 shares last week and 1.074 million shares on May 30th. A Macquarie research note also said that 3.8 million shares were pledged as security for a note of around $75 million and they could be sold at any time. With FOSL shares at $11 the pledge was already in the red by $30 million. At today's close at $10 that value dropped by another $3.8 million. The CEO only has 4.426 million shares after his sales last week and with 3.8 million pledged, that leaves him with roughly 600,000. It appears the CEO is bailing on his holdings and that is never good for the stock price. If the price declines further he may be forced to sell his remaining 600,000 shares to make up the shortfall on the pledged shares. Shares are now at 16-yr lows.

Position 5/26/17:

Short FOSL shares @ $11.78, see portfolio graphic for stop loss.

Alternate position:
Long July $11 put @ 55 cents, see portfolio graphic for stop loss.

SNAP - Snap Inc - Company Profile


I will update the news in the weekend newsletter.

Original Trade Description: June 10th.

Snap Inc. operates as a camera company. It offers Snapchat, a camera application that helps people to communicate through short videos and images. The company also provides a suite of content tools for partners to build, edit, and publish snaps and attachments based on editorial content; and Spectacles, which are sunglasses that capture video from a human perspective. The company was formerly known as Snapchat, Inc. and changed its name to Snap Inc. in September 2016. Snap Inc. was founded in 2010 and is headquartered in Venice, California. Company description from FinViz.com.

Snap went public on March 2nd, the day after the prior market highs. Excitement was high and the stock spiked to $29.44 the day after the IPO. Since then, Snap's optimistic future has dimmed considerably. Facebook copied almost every Snap feature in an effort to keep members from straying out of the Facebook fold. It was outright war and Snap lost.

They reported their first earnings as a public company on May 10th and missed estimates and provided weak guidance. Shares fell from $23 to $18. After a couple days of dead cat bounce rebound, they returned to $22 but that is when the trouble began. Nearly every day an analyst would cut their price target and rating.

Estimated earnings August 9th.

Citigroup, a previous backer of SnapChat (SNAP) has had a change of heart. On Friday, Citi downgraded the company from buy to neutral saying they are not sure when SNAP will turn profitable. They downgraded the 2018 earnings estimate from a loss of 42 cents to a loss of 46 cents. Citi said monetization was slower than previously expected because of a slower than expected rollout of new channels and opportunities. "Given issues with Android, summer seasonality, heightened competition and the nature of Snap's social network, we expect user growth to remain modest near term."

Nearly 70% of analysts have something other than a buy rating on SNAP.

The company is also facing a large lockup expiration in August. Currently SNAP has 404 million shares available to trade and on July 29th another 663 million Class A shares will be unlocked along with 281.1 million Class B shares and 215.9 million Class C shares. Those convert to Class A shares if the holders decide to sell them. Snap recently tried to get existing insider shareholders to commit to a one-year holding period but were unsuccessful. That suggests many are planning to dump shares when the lockup expires.

I am recommending a short on SNAP but I am not recommending an option. The August put premiums are too expensive.

Position 6/12/17:

Short SNAP shares @ $18.05, see portfolio graphic for stop loss.

SNCR - Synchronos Technologies - Company Profile


I will update the news in the weekend newsletter.

Original Trade Description: June 1st.

Synchronoss Technologies, Inc. provides cloud solutions and software-based activation for connected devices worldwide. The company's products and services include cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, and identity/access management that enable communications service providers, cable operators/multi-services operators, original equipment manufacturers with embedded connectivity, and multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices. It also provides Synchronoss Enterprise solutions, such as secure mobility management, data and analytics, and identity and access management solutions for the financial, telecommunications, healthcare, life sciences, and government sectors; and Synchronoss Personal Cloud platform that delivers an operator-branded experience for subscribers to backup, restore, synchronize, and share their personal content across smartphones, tablets, computers, and other connected devices. In addition, the company offers software as a service for the organizations to securely manage, control, track, search, exchange, and collaborate on sensitive information inside and outside the firewall. Its products and platforms are designed to enable multiple converged communication services to manage across a range of distribution channels, such as e-commerce, m-commerce, telesales, customer stores, indirect, and other retail outlets. The company markets and sells its services through direct sales force and strategic partners. Synchronoss Technologies, Inc. was founded in 2000 and is headquartered in Bridgewater, New Jersey. Company description from FinViz.com.

SNCR was supposed to report earnings on May 9th. Instead, on April 27th they announced that the new CEO and CFO were leaving unexpectedly after only a few months on the job. The prior CEO and founder and the prior CFO would return to help get the company through some rough times.

The company also announced that expected revenue for Q1 would be $13-$14 million less than prior guidance. Operating margins of 8% to 10% would also be less than prior guidance. Earnings will be on May 9th and everything will be explained on the call.

On May 8th the company announced it was rescheduling the earnings date for May 15th.

On May 15th, they announced they would not be releasing earnings and they had no projected date. Apparently, the founder and CEO for 17 years along with his partner the prior CFO were having problems reconciling some items and the auditor Ernst & Young was "suggesting" additional reviews of critical accounting procedures.

This is just speculation but when a new CEO and CFO suddenly depart after only a few months, it may have been because they uncovered a hornets' nest of problems and determined they did not want to be associated with the company. We will never know if that is correct or not. However, when the prior CEO for 17 yrs and CFO for 13 yrs, cannot immediately reconcile the books after only being away for a few months, that suggests additional problems. These are the kinds of things that get auditors really interested and they start poking into things they glossed over before.

On May 22nd, the company received the warning of impending delisting by the Nasdaq. This is a boilerplate type event triggered by the failure to file and they have until November to correct the problem, but itis just one more thing on their plate.

Shares had already been falling since the weak earnings in January. They closed around $25 before the first announcement broke. They declined to $11 then rebounded to $19 on the hope that the prior CEO/CFO would quickly get the company back on track. Now the stock is back at 7 year lows and the bad news just keeps piling up.

If they had a projected earnings date, I would feel better about their recovery. We are now nearly a month late on the financials and no news is flowing. SNCR could be headed a lot lower because the eventual news could be bad. Rarely do earnings delays result in positive news.

This has to be a stock only play because the options are too expensive.

Update 6/14/17: The company disclosed in a SEC filing that the audit committee had informed the board that financial statements for 2015 and 2016 would have to be restated. May earnings have already been postponed and the restatement could take months. Support broke and today was a 17 year closing low.

Position 6/2/17:

Short SNCR shares @ $12.64, see portfolio graphic for stop loss.

SYNT - Syntel Inc - Company Profile


I will update the news in the weekend newsletter.

Original Trade Description: June 7th.

Syntel, Inc. provides digital transformation, information technology (IT), and knowledge process outsourcing (KPO) services worldwide. The company operates through Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; and Retail, Logistics, and Telecom segments. It offers managed services, including software applications development, maintenance, and digital modernization testing, as well as IT infrastructure, cloud, and migration services. The company also provides a range of consulting and implementation services built around enterprise architecture; data warehousing and business intelligence; enterprise application integration; and SMAC technologies, including social media, Web and mobile applications, big data, analytics, and Internet of things. In addition, it offers KPO services that provide outsourced solutions for knowledge and business processes; and business intelligence, enterprise resource planning, and business and technology consulting services. The company offers its products to various companies in the banking and financial services, healthcare and life sciences, insurance, manufacturing, retail, logistics and telecom, and other industries. Syntel, Inc. was founded in 1980 and is headquartered in Troy, Michigan. Company description from FinViz.com.

Syntel has been around for a long time but there is far more competition today than just a decade ago. Cloud sourcing has overtaken outsourcing. Companies do not need to maintain their own server farms and services like SalesForce.com and Automatic Data can handle all the service issues of running a business.

Syntel reported earnings of 46 cents and analysts were expecting 44 cents. Those estimates had dropped from 51 cents over the prior four weeks. Revenue of $225.9 million beat estimates for $225.1 million.

The company guided for the full year for earnings of $1.57 to $1.77. Analysts were expecting $2.32 but had revised their estimates lower over the prior 4 weeks to $1.90. Syntel still missed the lowered targets.

Estimated earnings July 20th.

Shares are sinking fast and are very close to a new 7-year low at $16.35. There is very little buying activity.

Position 6/8/17:

Short SYNT shares @ $16.65, see portfolio graphic for stop loss.

Alternate position: Long August $15 put @ .43, no stop loss.

VXX - Volatility Index Futures - ETF Description


Minor gain in a weak market.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.

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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