Option Investor

Daily Newsletter, Monday, 7/10/2017

Table of Contents

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

Market Wrap

Eagerly Awaiting Earnings

by Thomas Hughes

Click here to email Thomas Hughes


A quiet market held steady ahead of earnings season, the season kicks off this Friday with releases from Citigroup, Wells Fargo and JP Morgan. Expectation for the season remains high, based on the first 5% f the S&P 500 to report those expectations will likely be met. Today's action was very light, volume for the SPY was less than half the 30 day average, and may remain so until later in the week when economic and earnings releases hit the market.

Asian indices were mostly higher following the Friday jobs reports. Better than expected jobs and steady wage growth reinforced economic and FOMC expectations bolstering market sentiment. The Shang Hai composite stands out as a lone loser, shedding about -0.20% for the day. European indices also closed largely higher following a choppy session. Indices across the region gained in the range of 0.25% to 0.75% following last week's labor data and G-20 headlines coming out over the weekend. While little of substance was accomplished it seems like tensions between world leaders is easing.

Market Statistics

Futures trading was flat and mixed for most of the morning. The tech sector led with gains while the broad market held steady near break-even and the industrials lagged with small losses. There was no data or earnings to move early trading so these levels held fairly steady all morning. The open was calm and without event, the indices began trading as expected but quickly began to show signs of support. By 10AM it was clear that bias was to the upside however weak the market, intraday bottom was established and the market drifted higher from there. The SPX topped out at 2PM with gains in the range of +6 points and then made a brief retreat to test support. By 3:30 support was established and another run higher was made. New daily highs were made just before the close but they did not hold, selling just before the bell sent most back to break-even before the close.

Economic Calendar

The Economy

No economic data today but there is a bit later this week. Tomorrow is fairly light as well, wholesale inventories and JOLTs, with Wednesday bringing the Fed's Beige Book. Thursday picks up with PPI alongside the weekly jobless claims, Friday wraps the week with 6 major releases including CPI and retail sales.

Moody's Survey of Business Confidence rose 0.4 to hit 33.2%. The index has stabilized after falling from a peak mid-June. Even so confidence remains high relative to historic levels. Mr. Zandi's commentary is a bit less euphoric than it was a few weeks ago but still positive. He says global business sentiment is upbeat led by the US and lagged by South America. Asian sentiment is improving while Europe remains tepid.

Earnings season begins in earnest this Friday with reports from 3 of the worlds largest financial institutions. That being said the season is underway with a little more than 5% of the S&P 500 reporting. Of those 78% have beaten EPS estimates and 87% have beaten revenue estimates, both well above average. The blended rate of earnings growth for the quarter is now 6.5%, down a tenth from the beginning of the month, with a chance of rising 4% or more before the end of the cycle if the 4 year trends hold true.

Looking forward earnings growth expectations have held fairly steady over the past few weeks. Growth is expected to remain in the picture for the next 6 quarters or more with that growth expanding on a quarter to quarter basis. Third quarter growth is estimated at 7.3% and grows to 12.4% in the fourth quarter for a full year 2017 growth rate of 9.8%. Full year 2018 estimate is 11.6%.

The Dollar Index

The Dollar Index held steady in today's session, closing with a gain less than 0.05% and creating a small doji candle. The index is consolidating at a support target, $96, and was able to close above it today. The slide in value driven by diminished FOMC hawkishness and increasing ECB hawkishness has halted in the near term and supported by last week's NFP. The index is set to retrace back to the short term moving average near the $97 level. Data later in the week, particularly the CPI and PPI, could move the index higher provided they support economic outlook. If the index falls through $96 first target for support is $95.50, a bounce higher may find resistance at $97.

The Gold Index

Gold prices held steady today as well, steady near the 4 month low. Prices are sitting just above the $1,200 support level and poised to test that level again as political risk and flight-to-safety traders leave the market. A break below $1,200 would be bearish with downside target near $1,175. A bounce would be bullish in the near term but without a major dollar weakening event likely to be capped by resistance. Targets for resistance are $1,215, $1,235 and $1,250.

The Gold Miners ETF GDX rose from support at the bottom of the short-term trading range but was capped at the $21.75 resistance line. The ETF is trapped in a range with little sign of breaking out although that may change should gold prices continue to fall. The ETF is bouncing from a strong support level with indicators consistent with range bound trading and a move to support. Stochastic is divergent from the near-term low and trending in the middle portion of the range with %K pointing higher. MACD is divergent from the low over the short-term, hovering near the zero-line and rolling over from a bearish peak. A move higher would be bullish but only in the near-term. Resistance is just above today's close at $21.75 and then just above that at the short-term and long-term moving averages and then the top of the down sloping resistance line. Support is $21, a break below that would be bearish with downside target near $20 in the near-term.

The Oil Index

Oil prices firmed today but remain under pressure. Today saw WTI gain a half percent but still trading below $44.50. Today's rise was aided by the possibility OPEC will widen the production cap to include Nigeria and Libya, two countries currently excluded, but supply issues will persist regardless. On the domestic front rig counts rose again, adding supply to what is already robust production and high storage levels. Without a change to fundamentals, a real change, I see no reason for oil to sustain a rise in prices and lots of reason for further decline. Resistance is at $45 for now with a downside target is the recent low near $42.

The Oil Index gained about 0.20% today, moving up from Friday's test of support. Near term support is now just above 1,080 and the next possibility for my long awaited bottom. Price action over the last month is consistent with support, a bottom is not yet indicated or confirmed. The indicators persist in giving mixed signals which suggests the down trend is not as strong as it may look. MACD for one has been weak since February, ever since prices reentered the 2016 trading range between 1,080 and 1,200. In that time stochastic never truly entered bear market territory, trending in the middle portion of the range consistent with a trading range. Forward outlook for earnings growth remains positive for the sector, perhaps the earnings reports will confirm that and spark a rally. Until then the sector is likely to remain under pressure with gains capped at resistance. Upside target is near 1,120 and the short-term moving average.

In The News, Story Stocks and Earnings

Amazon was today's major headline due to the Prime Day crypto-holiday which begins tonight at 9PM. The Internet behemoth is expected to bring in up to a billion, $1,000,000,000, dollars in one day due to expanded and deeper discounts. Shares of the stock soared in today's action gaining nearly 18% on expectations of greatness. I for one am a little scared of Amazon and its penetration into our lives, but that's just my inner conspiracy theorist speaking out.

The banking sector held steady and looks poised to move higher on earnings releases. Today's action saw the XLF Financial SPDR close with a loss of -0.11% after trading sideways for the 7th day. The ETF appears to be waving a bullish flag just below the ten year high with eyes on moving higher. Resistance is just above $25 and based on the indicators will be tested or broken. MACD momentum is bullish but has retreat a bit from the most recent peak, stochastic is pointing higher but also showing signs of resistance. A break of resistance supported by earnings will be very bullish for this ETF with upside targets near $26 and $27.

TheVIX has retreat from last week's peak but has not quite decided it's ready to fall back below the 11 level. The fear index is poised to go either way, depending on earnings results most likely, with little indication of direction from the indicators. Both MACD and stochastic are technically bullish but both are also very weak and inconsistent with strong movement. The index may trend sideways over the course of the week with Friday a target for real movement, direction dependent on the banks and their earnings reports.

The Indices

Today's action was weak to say the least. The good news is that it was above support levels with no signs of deeper correction forming at this time. Tech led again, the NASDAQ Composite posting a gain of 0.37% and creating a small green bodied candle. Price action opened above the short term moving average, tested it and moved higher confirming support at that level. The indicators remain bearish but both are consistent with a test of support within an uptrend and rolling into bullishness. Support is along the long-term up trend line near 6,125. A move higher would be bullish and trend following with target at the all-time high. A move lower would find support along the up trend line, a break below that would be bearish.

The other indices all posted losses although they were minimal. The Dow Jones Industrial Average posted the smallest loss, -0.02%, but still created a green candle. Today's action is above the short-term moving average with little sign of breaking through support. The index is trapped within a near-term trading range a likely to remain so, at least until Friday. The indicators are weakly bearish, consistent with a pull back to support within an up trend, and showing early signs of rolling over. A move higher from this level would be bullish and trend following with upside target at the top of the near-term range and the all-time high. Support is at the bottom of the range near 21,250 and the short-term moving average, a break below that would be bearish.

The S&P 500 posted the 2nd largest decline, -0.09%. The broad market created a small bodied green candle and spinning top just above the short-term moving average. There is a bit of visible upper wick indicative of some resistance but price action as a whole is pretty weak. The indicators are also weak but generally consistent with a move to support within an up trend. Support is near 2,410. A move higher would be bullish and trend following with upside target at the bottom of the up trend line and the current all-time high. A break of support would be bearish and could lead to correction of -2% to -5%.

The Dow Jones Transportation Average brings up the rear with a loss of -0.21%. The transports created a small shooting star doji setting a new all-time intraday high and indicative of resistance to new all-time highs. The indicators are bullish and gaining strength however so I would expect to see resistance tested again and possibly broken. A failure to break resistance would be bearish in the near to short-term with downside target near 9,400.

The indices have retreat to what appears to be strong support levels ahead of earnings season. Price action over the past month or so has been choppy and directionless but did not do damage to long or short-term trends. This action was largely due to sector rotation, aided by politics the FOMC and other news, and has left the market ready and waiting for what comes next. Based on the charts it looks like the expectation is for the market to move higher, based on the VIX it looks like traders are protected in case it doesn't. I remain cautious for the near-term simply because the earnings cycle has yet to begin but I am bullish and ready to trade.

Until then, remember the trend!

Thomas Hughes

New Plays

Reverse Split Woes

by Jim Brown

Click here to email Jim Brown
Editor's Note

Reverse splits are a curse for the company's making them. If your stock is already falling and has reached penny stock status, doing a reverse split to keep from being delisted just allows more traders to short the stock.


No New Bullish Plays


FTR - Frontier Communications - Company Profile

Frontier Communications Corporation provides communications services to residential, business, and wholesale customers in the United States. It offers broadband, video, voice, and other services and products through a combination of fiber and copper based networks to residential customers. The company also provides broadband, Ethernet, traditional circuit-based, data and optical transport, and voice services, as well as Multiprotocol Label Switching and Time Division Multiplexing services to small business, medium business, and larger enterprises, as well as sells customer premise equipment. In addition, it offers 24/7 technical support; wireless broadband services in selected markets; and frontier secure suite of products, including computer security, cloud backup and sharing, identity protection, and equipment insurance. Further, the company provides satellite TV video services; voice services, including data-based VoIP, and long distance and voice messaging services; and a package of communications services. Additionally, it offers a range of access services that allow other carriers to use facilities to originate and terminate their local and long distance voice traffic. As of December 31, 2016, it served approximately 5.4 million customers and 4.3 million broadband subscribers in 29 states. The company was formerly known as Citizens Communications Company and changed its name to Frontier Communications Corporation in July 2008. Frontier Communications Corporation was founded in 1927. Company description from FinViz.com.

Earnings August 1st.

When a company's stock enters the terminal decline mode and reaches penny stock status, many will do a reverse split to avoid being delisted. The hope is that lifting the stock from $1 to $15 will entice funds to come back to your shares. Many funds are prohibited from holding stocks under $5 so they would have left the stock when that $5 level was broken. The problem with this strategy is that the stock is normally in a terminal decline and just bumping up the stock price does nothing to change the fundamentals.

Also, when a declining stock suddenly jumps back to $15 as is the case with Frontier, that encourages the shorting community to double down at the higher prices. Shorts that rode it down the first time, see the news and jump back in for another ride. FTR shares closed at $1.06 on Friday.

You cannot use options this soon after a reverse split. The premiums are crazy. After several days they will mellow and I will look at adding them to the recommendation.

Short FTR shares, currently $14.93, initial stop loss $16.65, just over Monday's high.

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

Weak Start

by Jim Brown

Click here to email Jim Brown

Editors Note:

Monday's market performance started the week off with a thud. The Dow and S&P both failed at downtrend resistance and the Dow gave back the intraday gains to close negative. The S&P managed to hold on to two points. The Nasdaq rebounded to resistance at 6,175 and closed just fractionally over that level.

This week got off to a slow start ahead of three Janet Yellen appearances on Wed/Thr. Traders are not going to add a bunch of longs ahead of those events after she warned of over priced stocks multiple times in the last two weeks. They are afraid of another "irrational exuberance" comment like the one Greenspan used to tank the market in his testimony December 5th, 1996.

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

CARA - Cara Therapeutics
The short position 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

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

ACOR - Acordia Therapeutics - Company Profile


No specific news. Minor decline from the new 3-month high.

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. Only a minor gain but a new high.

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

CARA - Cara Therapeutics - Company Profile


No specific news. Excellent entry into the position with a $1.41 drop.

Original Trade Description: July 8th.

Cara Therapeutics, Inc., a clinical-stage biopharmaceutical company, focuses on developing and commercializing chemical entities designed to alleviate pain and pruritus by selectively targeting kappa opioid receptors in the United States. It is developing product candidates that target the body's peripheral nervous system. The company's lead product candidate comprises I.V. CR845, which is in Phase III clinical trials for the treatment of patients with acute postoperative pain in adult patients, as well as in Phase II/III clinical trial for the treatment of uremic pruritus disease. It is also developing Oral CR845 that is in Phase IIb clinical trial to treat moderate-to-severe acute and chronic pain, as well as in Phase I clinical trial to treat uremic pruritus; and CR701, which is in preclinical trial for the treatment of neuropathic and inflammatory pain. The company has license agreements with Maruishi Pharmaceutical Co., Ltd to develop, manufacture, and commercialize drug products containing CR845 for acute pain and uremic pruritus in Japan; and Chong Kun Dang Pharmaceutical Corporation to develop, manufacture, and commercialize drug products containing CR845 in South Korea. Company description from FinViz.com.

Cara had two drugs in the pipeline. CR701 is a cannabis derivative for pain management that is not an opiod. It would seem to be a promising drug but the company is not pushing it towards acceptance.

Their hot new drug CR845 is a kappa-opioid receptor that is being studied for severe itching caused by chronic kidney disease and for various types of pain.

Last week they reported results for a phase 2b study on CR845 that were not statistically significant. The three levels of medication included 1.0 mg, 2.5 mg and 5.0 mg. The 1.0 and 2.5 failed to show any results. The 5.0 mg showed only a minute improvement in pain that could have been related to the placebo effect or simply random chance. The trial was a failure.

CARA had run up significantly on the hopes for the drug. Shares imploded over five days to give back half their value. I would not normally recommend a position with such a large decline but the six day rally before the results was roughly $9 so an $11 drop just erased that last bit of irrational exuberance. With CR845 in limbo until new trials and new uses can be developed and CR701 apparently on hold for some unknown reason, the company suddenly has no appeal for investors. If light support at $13.40 fails we could see $8.50 very quickly. Investors are suddenly fleeing this sinking ship.

Expected earnings August 3rd.

Position 7/10/17:

Short CARA shares @ $13.50, see portfolio graphic for stop loss.
Alternate position: Long Aug $12.50 put @ 1.05, see portfolio graphic for stop loss.

PPC - Pilgrims Pride Corp - Company Profile


No specific news. Closed at a new 4-month low. Approaching support at $20.25.

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


No specific news. Shares did not rebound on Friday's new loan news. That suggests nobody is buying the hype any more.

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.

Update 7/7/17: CEO Eddie Lampert announced on Friday they were closing 43 additional stores. That would be 8 Sears stores and 35 Kmart stores. He said Sears is still working to cut costs while trying to respond to the needs of a changing consumer. He also warned of reduced support from some vendors. That would mean they are not giving Sears credit terms on purchases.

Well after the close on Friday, the company announced a new "Line of Credit Facility" for $500 million with a maturity of not more than 179 days. The facility will be secured by a second lien on inventory, receivables and related assets. The announcement of the loan facility said Lampert's ESL Investments was considering participating in the loan but was under no obligation to do so. This is known as a tease to incentivize lenders.

The company also said it sold and closed on more than $200 million in real estate transactions and reduced the balance of the April 2016 $500 million real estate loan to $347 million. The announcements were made at 5:30 after the extended hours session ended so there was no stock movement.

Position 7/6/17:

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

VXX - Volatility Index Futures - ETF Description


Nice decline despite the mixed market. It will probably take several days of gains to return the VXX to its lows. We are entering a critical period for the markets and volatility could rise temporarily.

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.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now