Option Investor

Daily Newsletter, Monday, 7/24/2017

Table of Contents

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

Market Wrap

Oh What A Week

by Thomas Hughes

Click here to email Thomas Hughes


The market is waiting on OPEC, the FOMC and 38% of the S&P to report earnings, oh my! The OPEC meeting turned out to be a bit of a dud so far, as for the rest we've to wait a bit to see they all play out. The FOMC meeting begins tomorrow, they aren't expected to raise rates so it will be the statement that drives trading. Earnings reporting is lightest today and heaviest on Friday with some of the biggest names in the market on the list. Today's highlight was Alphabet/Google after the bell.

Asian indices were mixed; China moved higher, Japan lower. The moves were driven by the week's upcoming FOMC meeting, ongoing political scandal in the US and the falling dollar. European indices were mostly lower although there were a few indices to close positive. The FTSE led with a loss near -1.0% followed by the DAX's -0.25%.

Market Statistics

Futures trading indicated a flat to mildly negative open for most of the morning. There was no economic data and little in the way of earnings to disturb trading in the early session. The open was as expected although selling quickly set in, within a few minutes of the open the SPX was down a quarter point. Selling persisted throughout the morning although action turned out to be rather light. Intraday bottom was reached just before 11:30AM, a little more than -0.50% for the broad market, and held the rest of the day. The indices crept higher from there in jerky action until recovering the early high late in the day. A rally in the final minutes of trading sent shares up to set a new intraday high but it did not hold into the close.

Economic Calendar

The Economy

No economic data before the opening bell but there were 2 shortly after it. The first was Markitt's Flash PMI reading for July. The reading for industrials came in at 53.2, up 1.2 points from last month, and is a new 4 month high. This month's advance is driven by new orders, employment and inventory growth. The reading for services sector was unchanged from the previous month at 54.2 and shows continued expansion in the sector.

Existing Home Sales was released at 10AM and came in slightly weaker than expected. The number of existing homes sold fell by -1.8% to 5.52 million on an annualized basis. The reason for the fall is continued lack of inventory. Despite the fall sales remain robust at near record highs and up 0.7% from last year.

Moody's Survey of Business Confidence gained 0.8% this week, rebounding from last week's lows. Despite the rise confidence appears to be in correction after hitting 2 year highs less than 2 months ago. Mr. Zandi says global confidence is still solid and positive but has softened on lower than expected sales and moderated forward outlook.

As of last Friday about 19% of the S&P 500 had reported earnings. Of those 73% have beaten EPS estimates and 77% have beaten revenue estimates, both above average. The blended rate of earnings has crept up in the last week, gaining 0.4% to hit 7.2%, with 9 of 11 sectors beating expectations. Looking to this week there are 191 companies expected to report, about 38% of the entire S&P 500 index, 13 of them are also Dow components.

Looking forward the earnings growth outlook remains positive but continues to dim. Declining oil prices and uncertainty in the oil sector have forward outlook plunging which is the main cause. Even so, outlook remains strong both for the sector and the index. The 3rd quarter estimate fell -0.7% to 6.4%, the 4th quarter estimate fell -0.5% to 11.7% which combined to bring full year blended rate down -0.3% to 9.3%.

The Dollar Index

The Dollar Index opened with a small gain but fell throughout the day. The index is under pressure from a rebalancing of central bank expectations and may move lower. Tomorrow's FOMC meeting and the Wednesday policy announcement is the next potential catalyst. The index is now trading at a slightly greater than 1 year low below $94. If support does not step in at these levels a move to $93 and $92 looks likely.

The Gold Index

Spot prices were up nearly a full percent in early trading but those gains were not held. FOMC expectations have prices inching higher with the possibility of retesting highs near $1300. There is no expectation of a rate hike, CME estimates chances at slightly more than 3%, so the statement will be key for the dollar and gold. If they continue to back off of their outlook for rate hikes, the time line and/or the target rate the dollar could continue its fall and send gold shooting higher.

The Gold Miners ETF GDX fell more than -1.70% in today's session. The Index created a medium size red candle confirming resistance still exists at the top of the ever narrowing trading range. I thought the last FOMC meeting would be the one to move the index out of this range, maybe it will be this one. That being said, there is a little evidence of break out to the upside or at least a continuation of sideways trading. Recent action has broken the down sloping resistance line which could lead to a move higher to next resistance target within the greater 6 month trading range. Support appears to be strong at the bottom of the range along the $21/$22 level, a move higher could go to $24 or $25.

The Oil Index

WTI gained a little more than 1.30% following today's OPEC/non-OPEC meeting in St Petersburg. There was no movement on speculated plans to extend the production cut already in place but comments emerged to the effect that OPEC and its allies in oil were committed to doing so if the need arose. Saudi Arabia pledged to curb exports next month in another attempt to limit supply but that supply remains above ground nonetheless. WTI is now trading near $46.40.

The Oil Index fell -0.6% to trade at the short term moving average. Today's action is the third of three down days since the index surged to a one month high and helps confirm support at this level. The indicators are bullish but consistent with a pullback so there is a chance of them reversing. A break of support would be bearish and could go as low as 1,100. A bounce from this level would be bullish and help confirm short term reversal in the sector. Whichever the case is likely to happen this week as the big oil companies begin to report.

In The News, Story Stocks and Earnings

Shares of Nintendo fell -2.5% in early trading on news of a major failure for Pokemon Go. Nintendo is not responsible for Pokemon Go but is a major shareholder in the company. Regardless, there was a huge Pokemon event where attendance was so great it crashed the servers. Needless to say there was very little game play done that day. The Nintendo charts are choppy due to their primary listing in Japan but they are not so choppy you can't see patterns forming, the one I see forming now is a possible Head and Shoulders.

Arconic, formerly the downstream unit of Alcoa, reported earnings before the bell. The company reported top and bottom line beats that led management to raise forward guidance. Even so the big news commentary about the use of flammable panels in the devastating London fire. Interim CEO (filling in for ousted Klaus Kleinfeld) says the company had no control of the supply chain which resulted in the panels use the building. Shares of the stock popped in early trading only to sell off during the day to close with a small loss. Today's price action closes a gap formed following the Grenfell Tower disaster and may help clear the way for future upside.

Google reported after the bell and delivered strong top and bottom line results. EPS came in 11.35% above estimates driven by cloud revenues. Total revenues grew by 21% over last year. The company reported growth in revenue and earnings for all segments, click growth coming in at +52% over last year at this same time. The news first drove shares higher but the move did not last. After the release was read a little more thoroughly shares fell -2.75%.

The Indices

The NASDAQ Composite was today's leader, driven higher on hopes for tech earnings this week and Google earnings this evening. The tech heavy index gained a little more than 0.35% to set a new all time high. It is creeping higher with strong bullish momentum and rising stochastic which has just crossed the upper signal line. Unless something emerges to reverse the move I would expect to see it continue higher into the near term at least.

The S&P 500 posted the smallest loss, only -0.11%. The broad market tried to set a new all time high but just wasn't able to do it. Today's action created a small spinning top doji just beneath resistance and this action may continue over the next day or so. Resistance is the underside of my up trend line and the current all time high, a break above which would be trend following and bullish. The indicators are both bullish and showing some strength although there is also some sign of resistance at current levels. A move up from here could go as high as 2,530 in the near term, a move lower may find support at the short term moving average.

The Dow Jones Industrial Average posted a loss of -0.31%. The blue chips created a small red bodied candle the 9th candle of near sideways action just above support along the short term moving average. The index appears to be in consolidation within a near term up trend and could be setting up for another push higher. The indicators are a little mixed, stochastic is bullish and pointing higher while momentum has shifted to the downside, so outlook is hazy. A move higher would set new all time highs but also face technical resistance at the underside of the up trend line. A move lower may find support at the short term moving average, a break below that could go as low 21,250 in the near term.

The Dow Jones Transportation Average made the largest decline, -0.45%. The transports have been in near term retreat and today created a small red bodied candle below resistance with bearish indicators. Resistance is the short term moving average, both indicators are pointing lower with targets near 9,325 and 9,155.

Depending on which index you take for your lead the market is heading higher or lower. If the transports lead the market it looks like we're in for near term correction, if you take cues from the NASDAQ it looks like the indices will keep drifting higher. Considering the number of earnings reports coming out this week I'd say there is a good chance we'll know which one is right by the end of the week. I remain cautiously bullish in the near term and firmly bullish for the long, waiting to see what happens with the FOMC, earnings and the GDP release. A triple shot of good news could spark a new round of buying.

Until then, remember the trend!

Thomas Hughes

New Plays

Precision Aluminum

by Jim Brown

Click here to email Jim Brown
Editor's Note

There is an art and a science to manufacturing precision aluminum components. Arconic, formerly Alcoa Inc, has mastered them both.


ARNC - Arconic Inc - Company Profile

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Arconic Inc develops and manufactures engineered products and solutions for the aerospace, industrial gas turbine, commercial transportation and oil and gas markets. (description from company release)

For Q2, Arconic reported earnings of 32 cents that beat estimates for 27 cents. Revenue of $3.261 billion beat estimates for $3.233 billion. Since the breakup of Alcoa, Arconic has been focused on reducing costs, reducing debt and expanding their product line. They guided for the full year for revenues of $12.3-$12.7 billion, up from prior guidance at $11.8-$12.4 billion. Earnings guidance was raised to $1.15-$1.20, up from $1.10-$1.20. They ended the quarter with $1.8 billion in cash. They declared a 6-cent quarterly dividend payable August 25th to holders on August 4th.

Expected earnings Oct 24th.

After the breakup of Alcoa, Arconic saw their share price double because this was the high tech portion of the business. They make complex aluminum components for airplanes, aerospace, autos and just about everything that needs a high performance, lightweight component. After the big ramp higher they traded sideways for three months along with the market, Shares declined sharply after the high rise fire in England because one of their components was used in the cladding that had recently been added to the building. Investors did not know if Arconic had any liability risk. The answer is probably not.

The contractor on the building combined multiple components in an unsafe manner to cover the outside of the building. It was not an Arconic component that failed and their products conformed to all the building codes. Once that was established shares began to rise again in late June.

Shares closed at $25 on Monday and resistance is $28. They reported earnings before the bell and after a pre-market spike they traded flat for the day with an uptick at the close. I am going to put an entry trigger on this position just in case there is a delayed reaction to the earnings.

With an ARNC trade at $25.35

Buy ARNC shares, initial stop loss $23.85.
Alternate position: Buy Oct $27 call, currently $1.05. Initial stop loss $23.85.

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


No New Bearish Plays

In Play Updates and Reviews

Nasdaq still Leading

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq was the leader today despite Google's impending earnings. The Nasdaq pushed through resistance at 6395-6400 to close at a new high. Tomorrow will be a pivotal day. Google disappointed on and shares fell -$33 in afterhours and dragged down Amazon, Netflix, Facebook and others. Yes, FAANG stocks can disappoint. The Nasdaq futures are only down about 6 points but the Dow futures are down -26 because of the 5 Dow stocks reporting before the open on Tuesday. Investors are hedging their bets.

The Russell 2000 gained slightly but the biggest news is that they are holding the gains from last week and the short-term uptrend is still intact. The S&P closed down a couple points on the Dow fears for Tuesday.

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

AOBC - American Outdoor Brands
The short position was entered at the open.

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BULLISH Play Updates

BOX - Box Inc - Company Profile


No specific news. Shares tested support at $19.50 and held.

Original Trade Description: July 17th.

Box, Inc. provides cloud content management platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Company description from FinViz.com.

Expected earnings August 30th.

Box is making a lot os smart moves lately. The recently partnered with Microsoft to jointly offer Box cloud management to Azure enterprise customers. Box will use Azure as a strategic public cloud platform and the companies have committed to share go-to-market investments, including initiatives to co-sell Box with Azure. Any time you can get Microsoft to partner with you, share the expenses and market your product, it was a good move.

Last week Box appointed Stephanie Carullo as the new COO. Carullo led U.S. sales for Apple's education business. Before that whe led the data center and virtualization architecture group at Cisco Systems. That is a good pedigree.

Shares have ticked up since both of those events last week and could be headed for a breakout over $19.50.

Position 7/18/17:

Long BOX shares @ $19.21, see portfolio graphic for stop loss.
Alternate position: Long Sept $20 call @ 90 cents, see portfolio graphic for stop loss.

HZNP - Horizon Pharma - Company Profile


No specific news. Sellers tried to take it down at the open but buyers immediately bought the dip.

Original Trade Description: July 15th.

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

Expected earnings August 7th.

Horizon posted and earnings disappointment in May that saw the stock collapse from $15.50 to $9.50. They reported earnings of 21 cents that missed estimates for 25 cents. Revenue was $220.9 million and missed estimates for $248 million. They guided for the full year for revenue of $1.0 to $1.03 billion. The problem was a shift in the contracting model with pharmacy benefit managers that was not performed in accordance with expectations.

That contracting problem has been solved. They also announced that three patents cases against Dr Reddy's, Lupin Ltd and Mylan Labs were upheld by a US District Court, which will prevent generics for VIMOVO until 2022 at the earliest.

Horizon is small company with numerous drugs in the pipeline and in trials. Shares are recovering from the May disaster and there is still $2.50 to gain to fill the gap from the post earnings crash.

Position 7/17: Alternate position:
Long Aug $14 call @ $.50, see portfolio graphic for stop loss.

NTNX - Nutanix - Company Profile


No specific news. Shares are still consolidating their gains from last week.

Original Trade Description: July 19th.

Nutanix makes infrastructure invisible, elevating IT to focus on the applications and services that power their business. The Nutanix enterprise cloud platform leverages web-scale engineering and consumer-grade design to natively converge compute, virtualization and storage into a resilient, software-defined solution with rich machine intelligence. The result is predictable performance, cloud-like infrastructure consumption, robust security, and seamless application mobility for a broad range of enterprise applications.

Expected earnings August 24th.

Nutanix announced last week that its business in Canada had grown 75% over the 12 months prior to the quarter end. They increased their customer base from 179 customers to 313. There was also a record number of customers that invested $1 million or more into Nutanix infrastructure products.

Goldman added the stock to their conviction buy list saying there was a 53% upside potential. Goldman called Nutanix a '"hyperconverged infrastructure company," a "once-in-a-decade tech infrastructure story," as they see strong adoption of the technology among chief information officers. Based on a survey Goldman did in June they found that 18% of CIOs expected to move to this technology over the next two years with Nutanix the leader in the field. They also said the company could easily be an acquisition target because of their size and revolutionary technology.

Position 7/20/17:

Long NTNX shares @ $24.48, see portfolio graphic for stop loss.
Alternate position: Long Oct $30 call @ $1.50, see portfolio graphic for stop loss.

BEARISH Play Updates

AOBC - American Outdoor Brands - Company Profile


No specific news. Shares continued to decline after breaking support at $21 on Friday.

Original Trade Description: July 22nd.

American Outdoor Brands Corporation, formerly Smith & Wesson Holding Corporation, is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and outdoor enthusiast. The Company operates through two segments. The Firearms segment manufactures handgun and long gun products sold under the Smith & Wesson, M&P and Thompson/Center Arms brands, as well as providing forging, machining and precision plastic injection molding services. The Outdoor Products & Accessories segment provides shooting, hunting and outdoor accessories, including reloading, gunsmithing, gun cleaning supplies, tree saws, vault accessories, knives, laser sighting systems and tactical lighting products. Brands in Outdoor Products & Accessories include Crimson Trace, Caldwell Shooting Supplies, Wheeler Engineering, Lockdown Vault Accessories, BOG POD and Golden Rod Moisture Control, as well as knives and specialty tools under Schrade, Old Timer, Uncle Henry and Imperial. Company description from FinViz.com.

Smith and Wesson saw the future when they changed names to American Outdoor Brands. President Obama was the best firearms salesman ever. He never missed an opportunity to talk down firearms and talk up gun control. Consumers, worried there would be a change in policy, rushed out to buy guns every time there was a new verbal assault on the second amendment. Gun sales hit record levels year after year.

When President Trump was elected as a pro-gun president, the urgency to buy more guns, faded. 2017 is still going to be another record year but only by a thin margin.

Smith & Wesson realized while President Obama was in power they needed to rebrand themselves to avoid the curse of being a prominent gun company in case the laws changed. They changed names to American Outdoor Brands and began a concentrated campaign to acquire a bunch of outdoor brands for products that had nothing to do with the shooting sports but they acquired some of those as well. Scopes, knives, safes, reloading, camping supplies, etc. Unfortunately, their main product line still depended on a continuing rise in firearms sales.

They reported earnings in late June of 57 cents that easily beat estimates for 37 cents. Revenue of $229.2 million beat estimates for $211 million. However, they guided for the current quarter for earnings of 7-12 cents and revenue in the $140-$150 million range. For the full year, they guided for $1.42 to $1.62 and revenue of $750-$790 million. Analysts were expecting $1.61 and $827.8 million. They said gun sales had slowed because of the new president. Secondly, they said they were going to use their unused portion of their $500 million line of credit to acquire additional growth opportunities. That means they were going to leverage up to their max debt to acquire new brands.

The CEO said, "Although good for the long-term viability of the industry, we believe that the election results coupled with a Republican Congress and choice of Supreme Court justice(s) could be a net-negative for [American Brands] as it eliminates any realistic fear of gun regulation, which has been a major driver of gun sales over the past eight years."

Shares declined sharply to $21. Over the last three weeks they have tried to rebound from that level but there is no excitement left. There have been a series of lower highs and Friday's close was below support and a three-month low.

Expected earnings September 24th.

I believe AOBC is going to retest the March lows at $18 if not lower. There are no positive catalysts on the horizon.

Position 7/24/17:

Short AOBC shares @ $20.78, see portfolio graphic for stop loss.
Alternate position:
Long Sept $20 put @ $1.00, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


New closing low. Fundstrat said "go long volatility" because there is a 50% chance of a 10% correction in the S&P over the next three months.

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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