Option Investor

Daily Newsletter, Thursday, 7/6/2017

Table of Contents

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

Market Wrap

Tech Driven Selling, Again

by Thomas Hughes

Click here to email Thomas Hughes


Rotation persists as earnings season draws near. Today's round was led by Tesla as fears of bubble drive investors out of the stock. Adding to today's malaise was yesterday's FOMC minutes which revealed an FOMC as divided on interest rates as they've ever been. Earnings season begins next Friday with releases from Wells Fargo, Citigroup and JPMorgan, expect rotation to continue until then. Action today was light if bearish and did little to alter the near-term picture.

Asian indices were mostly flat if tilted to the downside following yesterday's FOMC minutes. Losses were led by the Nikkei's -0.47%. European indices were more firmly lower, closing with losses in the range of -0.5% as the G20 meeting gets underway. Speeches and comments from Trump concerning Russia and North Korea added to traders unease.

Market Statistics

Futures were down all morning but losses were limited to roughly -0.30%. The mornings economic data did little to inspire bullishness and left the indices drifting lower into the open. The SPX opened with a loss of -8 points and quickly extended that to -20 or -0.75%. Bottom was hit just after 10AM causing a fairly sharp bounce. The bounce cut losses in half, rising to meet resistance just below the opening level. Resistance drove the index back to the morning low just after 3PM where it languished for only a few minutes before extending the day's losses to -23 points.

Economic Calendar

The Economy

The Challenger Gray & Christmas report on planned lay off's fell -6% from the previous month to hit a 2017 low. The number of planned or announced lay off's totaled 31,105, -19% from this same time last year. On a year to date basis lay offs are running -28% below last year's level and are down -20% from the first quarter to the second. The hiring component shows the number of planned hirings at 40,095, down -48% from last month but up 190% YOY. This month's addition of jobs brings the YTD total to +487% over last year.

The ADP report on job creation says there were 158,000 new jobs created in June. This is below expectation and down from the previous month. Job creation was led by medium sized businesses and 100% services related. There was an increase in manufacturing jobs but it was offset by declines in natural resources and construction.

Initial claims for unemployment rose 4,000 to hit 248,000, last week's figure was not revised. The four week moving average of claims gained 750. On a not adjusted basis claims rose 4.5% versus an expectation of 3.8% and are down -6.3% YOY. Claims have been drifting higher over the past few weeks, in line with seasonal expectations, but remain consistent with long term labor market trends.

Continuing claims rose by 11,000 to reach 1.956 million, last week's figure was revised lower by -3,000. The four week moving average rose 6,750 to hit 1.944 million. Both of these figures have also been drifting higher in recent week's but not alarmingly so. Both remain consistent with ongoing labor market health and tightening conditions.

The total number of Americans receiving unemployment benefits gained 15,944 to hit 1.844 million. This is in line with seasonal expectations and consistent with long term trends, down – 9.9% from this time last year. We can expect to see the total number of claims continue to rise in the near term, topping out over the next couple weeks, and then resume its downward trajectory into the end of the summer and back to school/holiday shopping seasons.

The ISM Services Index came in at 57.4, above expectations and up 0.5% from the previous month. All components showed growth this month although the employment index declined. The employment index fell -2 points to 55.8 but remains strong relative to trend.

The Dollar Index

The Dollar Index fell on today's less than robust jobs creation numbers and FOMC uncertainty. The index shed a half percent to drop below the $96 level and looks like it could go lower. The indicators are both bearish and pointing lower, suggestive of lower prices, with a near term target of $95.50 and possibly move down to $95 and $94 short to long term. If the FOMC outlook for rate hikes remains weak or weakens while that of other central banks firms the dollar index is likely to continue moving lower.

The Gold Index

Gold prices held steady in today's trade despite mixed FOMC outlook and a weakening dollar. Spot prices hovered between $1,220 and $1,225 with little sign of breaking to one side or the other. Gold is not sitting on a support target waiting on tomorrow's NFP. A break below support could take it to $1,200 in the near term with a chance of breaking through to move lower. A bounce would confirm support but face resistance at $1,235.

The Gold Miners ETF GDX fell a little more than-0.5% and appears to be confirming resistance. Today's move lower begins at the $21.75 support/resistance line and is confirmed by the indicators. Both MACD and stochastic are ticking lower following bearish crossovers and consistent with lower prices. The caveat is that indications are a bit weak and remain consistent with range bound trading. Firm support should be in the range of $21, a break below that would be bearish with a target near $20.

The Oil Index

Oil prices tried to rally today but were not able to hold the gains. Surprisingly law drawdowns of crude and gasoline sparked a move of more than 3% but profit takers were ready to step in. WTI closed with a gain of only 0.33% as longer-term supply/demand reality capped gains. Support is now $45, a break back below there could easily send oil prices back to test the recent low.

The Oil Index fell a full percent and looks like it will continue to fall in the near-term. Today's candle is long, red and extends a fall from resistance begun yesterday. Resistance is the short-term moving average and previous support at the 1,120 level. The indicators are generally in line with the move but have not yet confirmed. Downside target is the current low near 1,080 and then 1,050 should that break down. The 1,050 level is the bottom of last year's long-term trading range and a likely target for support.

In The News, Story Stocks and Earnings

Tesla was the dog of the market today, falling another -5.5% as bubble fearing investors flee the market. The stock is now trading near $308.00 and entering bear market territory. Now down a little more than -20% from the peak set just a few week's ago Tesla is in danger of further downside. Although Tesla share prices are inflated with a glamour premium the move is likely overblown. This week's news was not overly encouraging but it wasn't bad enough to warrant a -20% decline, the stock has bounced back from profit taking in the past.

The financial sector has been strong in recent weeks but was not immune to today's selling. The Financial Sector SPDR XLF fell -0.75% creating a small red candle falling from resistance. Resistance is the current 9 year high just above $25.00. The indicators are weakly bullish suggesting resistance may be tested further but do not give strong indication a breakthrough is on the way. If the ETF is able to break through, perhaps on better than expected earnings, upside target is $26.50.

The VIX gained a little more than 13% today and looks like it will move higher into the near-term. Today's price action created a long green candle, the 2nd out of 5, and the completion of a Rising Three Methods continuation pattern. The indicators confirm the move as well, both creating bullish crossovers with today's action. Upside target is near $15. Despite the bullish outlook price action looks more methodical than driven on rising fear, for what that's worth.

The Indices

The NASDAQ Composite led the indices lower with a loss of -0.99%. The tech heavy index opened with a loss and then extended it but only created a small bodied red candle. Today's action tested support at the 6 week low and may continue to do so into the near-term. Both indicators confirm a move a lower with the possibility of moving down to firmer support at the long-term up trend line, just below today's close.

The S&P 500 made the 2nd largest decline in today's action creating a medium sized red bodied candle. Today's action confirms resistance at the short-term moving average with the caveat of support being just below today's close. The indicators are both confirming a move lower so support is likely to be tested further. Support is near 2,400, a break below that would be bearish for the near-term.

The Dow Jones Transportation Average comes in third today with a loss of -0.73%. The transports created a small red bodied candle falling from the just set all-time high. The index is cresting a peak within an up trend that may result in a correction of some form. The indicators are both consistent with a move up and touch to resistance although both are also divergent and suggestive of correction. A pull back from this level could go as low as the 9,500 level, about -1%, or below that to the short-term moving average, about -3%, in the near-term.

The Dow Jones Industrial Average brings up the rear in terms of losses. The blue chips shed -0.72% creating a small-to-medium sized candle moving down from resistance. Resistance is the bottom of the long-term up trend line and the current all-time high, support is however just below today's close at the short-term moving average and bottom of near-term range. The indicators are mixed, stochastic is pointing lower following a bullish crossover while MACD is making a weak bearish peak, but both suggestive of consolidation/test of support within an uptrend. A break below the moving average would be bearish in the near-term with downside target near 21,000. A bounce from here and break to new highs would be bullish with upside target near 21,600 and 22,000.

The market is still in rotation as we approach 2nd quarter earnings season. Considering the market has not sold off more than it has I'd say it was hopeful if not optimistic about results. We may see the indices pull back a little more before the season really gets underway but so long as forward outlook remains positive bull market conditions should continue. The question now is how good will earnings growth be this time around? The expectation is 6.6% with a chance of running as high as 10% and for double digit growth to continue for the next 6 quarters at least. With this in mind I have to be bullish for the long-term although I remain cautious for near-term trades. If there is a pull back I'll be ready, if not I'll still be ready.

I almost forgot, tomorrow is the NFP and a potentially market moving event. The ADP was a bit weak but never really gives clear indication of what the NFP will be. Other indications show that labor markets are firm and businesses are hiring so I expect the number will be at least positive. Consensus is 185,000, I'm going to guess 150,000 with a chance for positive surprise.

Until then, remember the trend!

Thomas Hughes



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New Plays

Patience Grasshopper

by Jim Brown

Click here to email Jim Brown
Editor's Note

There may be a buying opportunity in our future. The problem is we do not know if it will be Monday or a week from Monday. With the major indexes breaking critical support there is no reason to rush into any new positions. I wrote yesterday we need to be cautious rather than reckless. We need this holiday week volatility to end so we can get back to business as usual next week.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Loud and Clear

by Jim Brown

Click here to email Jim Brown

Editors Note:

After several days of alternating moves, the market gave clear directional signals today. The S&P and Nasdaq closed under critical support levels and appeared to confirm a bearish direction. However, S&P futures are up more than 2 points in the evening session. The market signals are turning more bearish every day but we still do not have a clear breakdown even though support failed today. The Dow is holding much of its gains but another day like today and it will also confirm a bearish direction.

The earnings start next week and the forecasts are good but we are heading into the weakest period of the year in August and September. I repeat, it is time to be cautious rather than reckless.

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

SHLD - Sears Holdings
The short stock position on Sears was entered 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

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BULLISH Play Updates

ACOR - Acordia Therapeutics - Company Profile


No specific news. Excellent relative strength with only a minor decline.

Original Trade Description: June 21st.

Acorda Therapeutics, Inc., a biopharmaceutical company, identifies, develops, and commercializes therapies for neurological disorders in the United States. The company markets Ampyra (dalfampridine), an oral drug to improve walking in patients with multiple sclerosis (MS); Zanaflex capsules and tablets for the management of spasticity; and Qutenza, a dermal patch for the management of neuropathic pain associated with post-herpetic neuralgia. It also markets Ampyra as Fampyra in Europe, Asia, and the Americas. In addition, the company develops CVT-301 that has completed a Phase III clinical trial for the treatment of OFF periods in Parkinson's disease; CVT-427, which has completed a Phase I clinical trial to treat migraine; Tozadenant that is in Phase III clinical trial for reduction of OFF time in Parkinson's disease; SYN120, which is in Phase II clinical trial to treat Parkinson's disease-related dementia; and BTT1023 (timolumab) that is in Phase II clinical trial for primary sclerosing cholangitis. Further, it develops rHIgM22, which is in Phase I clinical trial for the treatment of MS; Cimaglermin alfa that has completed a Phase I clinical trial in heart failure patients; and Chondroitinase Program that is in research stage for the treatment of spinal cord injury. The company has collaborations and license agreements with Biogen International GmbH; Alkermes plc; Rush-Presbyterian St. Luke's Medical Center; Alkermes, Inc.; SK Biopharmaceuticals Co., Ltd.; Astellas Pharma Europe Ltd.; Canadian Spinal Research Organization; Cambridge Enterprise Limited and King's College London; Mayo Foundation for Education and Research; Paion AG; Medarex, Inc.; and Brigham and Women's Hospital, Inc. Company description from FinViz.com.

Acordia took a fall at the end of March when two Multiple Sclerosis patents were invalidated by a court. This is normal stuff and happens all the time to biotech companies when competitors want to introduce a generic. Shares crashed but the outlook for Acordia did not.

They fell another 5% in late April when revenue of $112 million missed estimates for $121 million. The company did reaffirm guidance for ful lyear Ampyra sales in the range of $525-$545 million.

Recently, their experimental Parkinsons drug CVT-301 was named Inbrija. In early June they presented Phase III data which met its primary endpoint of improvement in motor function compared to a placebo. Multiple secondary endpoints were also met. The company plans to file a new drug application with the FDA by the end of this quarter.

Expected earnings July 27th.

Shares have been rebounding sharply and cleared resistance from the April/May decline. They have a long way to go to recover their highs and that is a potential for profit.

Position 6/22/17:

Long ACOR shares @ $18.80, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


No specific news. Good relative strength in a bad market with a minor gain.

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.

Update 6/27/17: KTOS received $16 million in radar and system contract awards from a national security systems provider. Due to the classified nature of the program, on additional information was given.

Update 6/28/17: KTOS announced the award of a $37 million initial production contract for subsonic target drones from the U.S. Navy. This is the initial annual order in a long term acquisition program so this represents a major win for KTOS. The company said the anticipated annual order for 2018 was expected to be 25% larger. The aircraft can carry electronic counter measures, active and passive radar augmentation, infrared, identification friend of foe, internal chaff and flare dispensing, threat emitter simulators, smoke and scoring devices. In addition, separate contracts for Peculiar Support Equipment, Initial Systems Spares, External Payload Systems and Flight Consumables will follow shortly.

Position 5/30/17:

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

BEARISH Play Updates

PPC - Pilgrims Pride Corp - Company Profile


No specific news. Closed at a new 3-month low.

Original Trade Description: June 26th.

Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, prepackaged case-ready chicken, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to Mexico, the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946 and is headquartered in Greeley, Colorado. Company description from FinViz.com.

I have started to play PPC several times because it is definitely directional. Every time I would read the headlines and the analyst commentary and everyone is saying good things and how the stock should rise. Apparently, nobody is listening.

Florida is currently probing PPC and Tyson (TSN) on price fixing on chicken. The initial review was broadened after the initial probe suggested there might be fire behind that smoke. There are currently civil lawsuits in progress claiming prices were fixed.

PPC reported earnings of 38 cents that missed estimates for 43 cents and the year ago earnings of 46 cents. Revenue of $2.020 billion did beat estimates for $2.014 billion. Margins shrank and costs rose. Cash on hand fell from $120.3 million to $30.8 million.

Expected earnings August 2nd.

Shares just broke below the May support at $23 and the next material support is $20. If the antitrust probe is going to continue, that support may not hold.

Update 6/28/17: PPC was hit with two animal cruelty suits from Texas and Georgia following an investigation by the Humane Society.

Position 6/27/17:

Short PPC shares @ $22.30, see portfolio graphic for stop loss.
Alternate position: Long Aug $21 put @ .60, see portfolio graphic for stop loss.

SHLD - Sears Holdings - Company Profile


Research firm CreditSights gave Sears a 20% chance of defaulting over the next year saying the company is being propped up by loans from CEO Eddie Lampert and asset sales. The firm said ultimately the stock is going to zero. The only question is when.

Original Trade Description: July 5th.

Sears Holdings Corporation operates as an integrated retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Craftsman, and Joe Boxer labels; Sears brand products, such as Kenmore and DieHard; and Kenmore-branded products. As of January 28, 2017, this segment operated approximately 735 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers merchandise, and parts and services to commercial customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; home improvement services, such as siding, windows, cabinet refacing, kitchen remodeling, roofing, carpet and upholstery cleaning, air duct cleaning, and garage door installation and repair; and protection agreements and product installation services. This segment provides merchandise under the Kenmore, DieHard, Bongo, Covington, Canyon River Blues, Simply Styled, Everlast, Metaphor, Roebuck & Co., Outdoor Life, and Structure brands, as well as under the Roadhandler, Levi's, Craftsman, and WallyHome brands. As of January 28, 2017, this segment operated 670 full-line stores and 25 specialty stores. Company description from FinViz.com.

Hardly a week goes by that some aspiring writer/researcher does not post a scathing article on the retail prospects of Sears and/or Kmart after a surprise visit to an actual location. The outlook for Sears to survive as a retailer is very dim. Sears Canada just filed bankruptcy and that should be a clue for the outlook in the U.S. as well. With a cash burn rate of as much as $2 billion a year, it is only a matter of time.

Expected earnings August 24th.

In the last week of June, the stock rose as board member Bruce Berkowitz began trying to pump up the shares by proclaiming Sears was worth $90 to $100 a share just because of their real estate. They do have a lot of real estate but they are mall anchors and the malls are dying. They have already spun off a large portion of their holdings to Seritage Growth Properties (SRG). Those were the locations without debt. They have recently done some sale leaseback transactions to raise cash but now they have to pay lease rentals and that increases their cash burn.

Most analysts do not believe the Berkowitz story and assume he is trying to rescue a drowning stock price, which is one of his largest holdings.

Shares rebounded from $6.20 to $9.20 on the Berkowitz claims. Short sellers ran for cover. Now that the stock has returned to resistance, the rebound should be over and reality will return.

I am writing this as a stock short. The options are expensive. The August $8 put is $1.30. I am not recommending it.

Position 7/6/17:

Short SHLD shares @ $8.60, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Minor uptick in volatility again as major indexes broke critical support.

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.

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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