Option Investor

Daily Newsletter, Wednesday, 7/26/2017

Table of Contents

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

Market Wrap

Strong Earnings Powers Market Higher

by Keene Little

Click here to email Keene Little
This month's rally has been in anticipation of stronger earnings announcements and the market has not been disappointed. As long as the announcements remain positive we could see the market continue higher. But things are getting a bit frothy and there are reasons for concern.

Today's Market Stats

Today's relatively strong rally in the Dow was brought to us courtesy of Boeing's (BA) nearly +10% rally. AT&T (T) also received a positive response, up +5%, to its earnings report and the two companies easily compensated for some weaker stocks in the Dow 30. The banks struggled again, which kept the S&P 500 flat for the day, while techs continued to march higher. A good chunk of the RUT's strong rally on Tuesday was given back today and its chart is telling us there's a reason for bulls to be a little concerned about any further rally potential.

Earnings announcements have driven the stock market higher with upside surprises, or at least without significant downside surprises. It's a busy week for companies' announcements and the expectation is for continued good news. Not that it currently matters to most market participants, but earnings aren't actually as good as they seem on the surface. The surface results sound fantastic though - since 2009 earnings for U.S. companies have increased +265%.

SPX is up about +271% since its low in March 2009, so that's pretty good correlation with the growth in earnings. But the trouble with earnings is that the growth has been mainly accomplished through the use of smoke and mirrors. Sales for these same companies have increased only +32%. Either companies have been extremely efficient in cutting costs (since prices haven't increased much) or else they've done some financial engineering to accomplish earnings growth that is nearly 9 times sales growth.

The smoke and mirrors is of course stock buybacks, which reduces the number of shares outstanding and that in turn drives EPS higher, even if in fact earnings did not improve. With the use of nearly zero-cost borrowing companies have been the primary driver behind the buying of their own stock and hence higher prices. One could argue whether or not it's smart for companies to be paying top dollar for their stock right now.

Unfortunately the borrowed money has not been put to productive use, such as capital investments, but instead only to buy their own stock as a way of "improving" their earnings announcements (which of course helps executive pay compensation from their stock grants/options). When that buying stops we have to wonder who will be available to buy the stock in place of the companies' purchases. I know, the Fed will step in and start buying (wink).

For now the stock market likes the new and improved earnings announcements and this month's rally has been in anticipation of good earnings. Comparing results to Q2 2016 is an easy comparison but comparing the coming quarter to Q3 2016 is not going to be nearly as rosy. Therefore this quarter's earnings run (remember those in the dot.com era?) could see at least a temporary peak in the bull run.

There were no surprises from the FOMC announcement this afternoon. The rates stayed the same and the Fed is promising (threatening?) to start reducing its balance sheet soon. With the Fed's worry that inflation is not ticking higher it is hinting that rate hikes could be slowed down from what they had previously discussed. The result following the announcement was a small pop up from this afternoon's pullback in the stock market, another spike down in the US dollar, a spike up in gold and a spike down in Treasury yields, all of which was a reaction to the possibility that the Fed will have to stand still on further rate hikes.

The Dow was relatively strong today and it made yet another new all-time high. As mentioned above, its rally was primarily due to the positive earnings reaction in Boeing (BA, +9.9%) and AT&T (T, +5.0%). BA is very bullish with its gap up and higher run to new all-time highs whereas T looks like short covering following an oversold decline from February. BA's 21-point rally added more than 140 points to the Dow, which more than accounted for the Dow's 97-point rally today.

BA has had a nice run up from January 2016 where it has more than doubled its price from a low at 102 to today's high at 234. Interestingly, and what is a common theme in the indexes, it's possible today's positive reaction will be the icing on the cake for its rally from 2009. Looking at the chart of BA shows a clean 5-wave move up from March 2009 and while it could stair-step a little higher, the wave count is suggesting caution about expectations for further upside. McDonald (MCD) had a similar bullish gap up yesterday but gave up about half of it today.

Boeing Company, BA, Monthly chart

The monthly chart of BA, shown below, is using the log price scale but if you view it with the arithmetic price scale you'll see the rally from February 2016 has gone bullistic (purposely misspelled) and a parabolic climb usually doesn't end well. It's particularly vulnerable here as it tests its trend line along the highs from April 2010 - February 2015 (waves 1 and 3, which is often where the 5th wave terminates), so far with a slight poke above the line near 231. A small throw-over followed by a close back below the line would create a sell signal so the bulls need to keep the rally going on Thursday.

With its 30 components the Dow can be easily swung up and down by one or two good or bad companies and a lot of people don't like following the Dow because of this. But it's still the number one reported index that people hear about and it's a good indicator of sentiment. Starting off with its weekly chart there are some warning signs dead ahead.

I could easily argue for higher prices and in fact I think there's a good chance for higher prices on Thursday. But I also see a strong possibility that only minor new highs, if any, could complete the big rally from January/February 2016. I think it's a risky time to be chasing the market higher.

Dow Industrials, INDU, Weekly chart

The Dow is getting pinched between its uptrend line from November 2016, which has been supporting all minor pullbacks since May, currently near 21515, and its trend line along the highs from May 2011 - March 2015, near today's close at 21711. The significant bearish divergence against its March 1st high suggests it's not a good time to bet on a bullish breakout. It could happen and a rally that stays above 21800 would be a bullish move.

Dow Industrials, INDU, Daily chart

The Dow has been chopping its way higher since the June 29th low, which is normally an indication it's in an ending pattern. That interpretation if further supported by the waning momentum (bearish divergence). I mentioned above that the Dow would be more bullish above 21800 but perhaps not for much more. There's a price projection at 21888 (where the 5th wave of the rally from April would equal the 1st wave) and that projection crosses the trend line across the highs of the rally from April on the 1st of August.

The Dow would therefore be more bullish above 21900 and as long as the bulls can keep the Dow above Monday's low at 21496 it stays bullish. Just be aware that the form of the wave pattern can be considered complete at any time, including right here.

Key Levels for DOW:
- More bullish above 21,900
- bearish below 21,496

Dow Industrials, INDU, 60-min chart

This morning's quick high for the Dow was a test of a trend line along the highs from June 20 - July 14 (gray line on the 60-min chart below), as well as the trend line along the highs from May 2011 - March 2015 (purple line), which is one of the reasons why I say the rally could be considered complete here. There's also a 5-wave move up from June 29th in a rising wedge (ending diagonal) to complete the 5th wave of the rally from April. However, it would look "prettier" with a pop up to the top of the rising wedge identified as the trend line along the highs from July 3-14, near 21830 by the end of the week.

S&P 500, SPX, Daily chart

A little different wave count for SPX has me looking for the completion of the leg up from June 29th, like for the Dow, to complete the larger rally pattern. Two equal legs up from May 18th points to 2506.80, which crosses a trend line along the highs for the rally from March (April 26 - June 19) on August 7th. That trend line is currently near 2494 so depending on how quickly SPX rallies up to the line (assuming it will) we could see a top at roughly 2594-2507. The first sign of trouble for the bulls would be a drop below last Friday's low at 2465.

Key Levels for SPX:
- more bullish above 2507
- bearish below 2435

S&P 500, SPX, 60-min chart

Today's consolidation following the morning high has it looking like we should get another leg higher. Another small rally would then do a good job completing a 5-wave move up from last Friday and I have projections for it near 2485 and then 2498. The short-term pattern suggests SPX might have trouble making it much above 2485. A drop below last Friday's low at 2465 would suggest a high is in place.

Volatility index, VIX, Weekly chart

If nothing else it's at least entertaining to see how low the VIX is going to go before bottoming. The weekly chart below shows this week's poke below the bottom of its 2-year bullish descending wedge (with bullish divergence) and the bounce back up inside the wedge. Normally this creates a buy signal (for the VIX) so we'll soon find out if this week's low (8.84 this morning) will be the final one. A rallying VIX doesn't mean the stock market has to reverse back down but a rising VIX with a rising stock market would be a warning sign.

In addition to the uber-low VIX we have the CNN Fear & Greed index hitting Extreme Greed (79 today, 81 yesterday). The COT report shows dumb money sitting in a historically large net short position, meaning they're expecting even lower VIX. Hmm, a very low VIX with a large net short position by dumb money and a bullish sentiment extreme -- what could possibly go wrong? Long vol seems like a good play here.

CNN Fear & Greed index, chart courtesy money.cnn.com/data/fear-and-greed/

Nasdaq-100, NDX, Daily chart

Like the other indexes I see the potential for techs to push a little higher. NDX could make it up to its trend line along the highs from November 2014 - July 2015, which will be near 6015 by the end of the month. But I'm seeing waning momentum on the short-term charts and oscillators threatening to roll over on the daily chart. The wave count can be considered complete at any time and it's a big reason I'm suggesting not chasing this higher. Pull stops up tighter if in long positions since the coming correction could be a doozy.

Key Levels for NDX:
- more bullish above 6020
- bearish below 5725

Russell-2000, RUT, Daily chart

Following last Friday morning's spike above the trend line along the highs from 2007-2015, the RUT immediately dropped back below the line. On Tuesday the RUT had a strong rally and made it back up to Friday's high (practically to the penny). Today's high at 1452.02 was to the penny. I thought Friday's spike high was a fat-finger trade since IWM did not do the same thing and it's amazing how many times a fat-finger trade is followed by a test.

With two failures to hold above the long-term trend line (which fits as the top of a large megaphone topping pattern) it becomes riskier to hold long positions here. A sustained rally above 1462 (a short-term price projections I have for the current move) would be more bullish but at the moment it's looking like a setup for a reversal back down.

Key Levels for RUT:
- more bullish above 1462
- bearish below 1415

S&P Midcap 400 index, MID, Daily chart

Occasionally I show a chart of MID because it's an index that shows nice form. Perhaps because it's not as easily manipulated as the other indexes but whatever the reason, it has been showing a nice setup for an ending pattern, which might have been triggered today.

The choppy rally from March formed a shallow rising wedge (ending diagonal 5th wave) and following the July 6th low I thought we'd see one more leg up to the top of the wedge, which occurred on Tuesday. Today's decline follows yesterday's little throw-over (a classic finish to the pattern) and creates a sell signal. The only way to negate the sell signal is a rally above yesterday's high at 1795. Confirmation of a top would be a drop below the bottom of the wedge, currently near its 50-dma at 1747.

A short-term rising wedge, for the final leg up from July 6th, was broken today as well and that helps confirm a top is likely in place. The broader averages could continue to rally a little more but this index has "SELL!" written all over it. We should see a fast retracement down to the May low near 1683 (and its 200-dma) before getting a decent bounce correction and then another leg down.

Transportation Index, TRAN, Daily chart

The TRAN has been acting weaker than the Dow since its high on July 14th. Last week the TRAN dropped back below its highs since last December and left behind a failed break-out attempt. The Dow's new highs since July 14th has not been confirmed by the TRAN and Dow Theory says that could be a problem (all the pundits were all over the Dow Theory buy signal when the Dow and TRAN made new highs together in early July but they've been strangely quiet since the TRAN's reversal).

The little bounce off last Friday's low has so far only resulted in a back-test of price-level S/R near 9490. A drop below the 50-dma, currently near 9378, and the November 2014 high at 9310 would be further confirmation that a high is in place for the TRAN. The bulls really need the TRAN to pick itself up and at least get back above its broken 20-dma near 9591.

U.S. Dollar contract, DX, Daily chart

The poor dollar has fallen and can't get up. It's been nearly a non-stop decline this month and once it broke below the bottom of a parallel down-channel for the decline from January, near 94.75 last Tuesday, it's making a bee line for possible support near 93.

The bottom of a down-channel for the leg down from May is currently near 92.90 so the dollar would clearly be more bearish with a sustained break of support near 93. In that case the next support level is near 90 (a trend line along the lower lows since early 2015). The dollar is due at least a bounce off support but at this point it's looking like we should expect lower lows after a bounce correction.

Gold continuous contract, GC, Daily chart

The only thing surprising about gold is how little it has rallied while the dollar gets punished. It did rally today while the dollar declined and that has gold testing its 62% retracement of its June 6 - July 10 decline, at 1262.59 (today's high was 1263.40).

A little higher is the broken uptrend line from December 2016 - May 2017, currently nearing 1270. It's possible gold is starting another rally leg but that wouldn't become more apparent until it's able to break its downtrend line from September 2011 - July 2016, which stopped the rally into the June 6th high and is currently near 1284.

Oil continuous contract, CL, Daily chart

Oil spiked up yesterday and then added a little more today. The result is that oil now has achieved two equal legs up from its June 21st low, at 48.92 (today's high was 5 cents shy of that projection). A little higher is its 200-dma and downtrend line from April-May, both near 49.40. If oil makes it above 50 it would look more bullish but at the moment it looks like a bounce correction that will lead to a continuation lower.

Economic reports

Thursday's economic reports are not likely to be market moving unless the Durable Goods report comes in much weaker than expected. It's expected to improve from May's -1.1% to +2.9% in June.


The bull market continues and the uptrend is still intact. There are cracks showing in the foundation and some indexes are flashing strong warning signs (such as MID) but there is no proof that the market is topping. I see evidence that suggests a top could be forming here or in the next day or two but obviously that's speculation and an attempt to see through the snow in my crystal ball (I need to learn to stop shaking it first).

The stock market is rallying in anticipation of good corporate earnings reports and so far the market has not been disappointed. What happens after the earnings, especially with a more difficult comparison with Q3 2016, is anyone's guess but it could prove challenging for the bulls to attract more buyers. The stock market is after all a "greater fools" market that's always in search of people willing to buy it for a higher price than the person before them.

We have a very low VIX and very high bullish sentiment. Stability breeds instability (waiting for a Minsky moment). Wave patterns suggest the market is topping, either here or in just days if not hours. But don't try to catch rising knives since we could be in a bona fide melt-up phase where the Dow will rally thousands of points more. Liquidity is strong and the cumulative advance-decline line supports the continuation of the rally. The trouble is it's sentiment driven and sentiment can turn on a dime, especially if you're the one feeling like the greater fool. Trade carefully here.

Good luck and I'll be back with you on Monday as Tom and I switch days next week.

Keene H. Little, CMT

New Plays

Beat and Raise

by Jim Brown

Click here to email Jim Brown
Editor's Note

Posting strong earnings is good. Raising guidance if better. Infosys posted an earnings beat and raised guidance.


INFY - Infosys - Company Profile

Infosys Limited, together with its subsidiaries, provides consulting, technology, and outsourcing services in North America, Europe, India, and internationally. It provides business information technology services, including application development and maintenance, independent validation, infrastructure management, and business process management services, as well as engineering services, such as engineering and life cycle solutions; and consulting and systems integration services comprising consulting, enterprise solutions, systems integration, and advanced technologies. The company's products include Finacle, a banking solution that provides analytics, core banking, consumer e-banking, corporate e-banking, Islamic banking, mobile banking, origination, payments, SME enable, treasury, wealth management, and youth banking solutions. Its products also comprise Infosys Mana, a knowledge-based AI platform; Infosys Information Platform, an analytics platform that enables to get insights from various data sources for decisions across industries; AssistEdge, CreditFinanceEdge, ProcureEdge, and TradeEdge that are cloud-hosted business platforms; Panaya that enables various SAP and Oracle EBS changes; and Skava, which are digital experience solutions, as well as analytics, cloud, and digital transformation services. The company serves clients in the financial services, manufacturing, retail, consumer packaged goods and logistics, energy and utilities, communication and services, hi-tech, life sciences, healthcare and insurance, and other industries. Company description from FinViz.com.

Infosys reported earnings of 24 cents that rose 5.8% and beat estimates by a penny. Revenues of $2.651 billion beat estimates for $2.629 billion. Revenues rose 6.3% on a constant currency basis. The company announced numerous wins of high profile contracts.

The company is dilligently following its "Renew Now" program with three offerings. Those are Artificial Intelligence, Knowledge-based IT and Design Thinking. During the reported quarter, Infosys continued to renew traditional services and rolled out others in areas such as Cloud Ecosystem, Big Data and Analytics, API and Micro Services, Cyber Security, and IoT Engineering Services. Also, during the quarter, Infosys launched Boundaryless Data Lake, an offering powered by the Information Grid Solution on Amazon Web Services (AWS).

The company raised 2018 guidance with revenue growth in the range of 7.1% to 9.1%, up from 6.1%-8.1%.

Earnings October 13th.

Shares rebounded over the last week to close at a new 9-month high on Wednesday.

Buy INFY shares, currently $15.91, initial stop loss $15.25.
Alternate position: Buy Oct $17 call, currently 30 cents. No initial stop loss.


No New Bearish Plays

In Play Updates and Reviews

Market Crosscurrents

by Jim Brown

Click here to email Jim Brown

Editors Note:

Multiple indexes were moving in opposite directions and the S&P was only fractionally positive. The Dow gained 97 points because Boeing spiked $20 and added 143 points to the Dow. Without Boeing the Dow would have decline about 50 points. This was a one stock rally. The Nasdaq gained 10 points ahead of the Facebook earnings, which were positive. The Nasdaq futures are up 30 points tonight.

The S&P-400 Mid Cap index fell 15 points and the Russell 2000 lost 8. Add that to the breakeven trading on the S&P and the outlook was shaky until after the Facebook results. FB shares only rose 6 points in afterhours.

With the Fed on hold, Facebook beat and Amazon due out after the close on Thursday, the market "should" be positive on Thursday. However, the conflicting crosscurrents are advising caution.

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

No Changes

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

ARNC - Arconic Inc - Company Profile


No specific news. Minor decline with the steel sector.

Original Trade Description: June 24th.

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.

Position 7/25/17 with an ARNC trade at $25.35

Long ARNC shares @ $25.35, see portfolio graphic for stop loss.
Alternate position: Long Oct $27 call @ $.95, see portfolio graphic for stop loss.

BOX - Box Inc - Company Profile


Gartner names BOX a leader in the Gartner Magic Quadrant for Content Collaborations Platforms. Still testing resistance at $20.

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.

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.

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. Teased us with that breakdown on Monday but no follow through.

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 intraday low. Volatility rose slightly in the afternoon as the early index gains started to fade.

The VIX historical low close was 9.31 on Dec 22nd, 1993. We are at those levels now.

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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