Option Investor

Daily Newsletter, Wednesday, 8/2/2017

Table of Contents

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

Market Wrap

Dow 22,000

by Thomas Hughes

Click here to email Thomas Hughes


The Dow Jones hit a new all time intra day high above 22,000 but was not able to hold the gain into the close. The index was lifted by Apple which reported earnings after the bell last night. Other indices were not so buoyant as traders keep a close eye on this week's economic data and earnings reports. Today's data was in the Goldilocks zone, not too hot and not too cold with the tailwind of positive upward revisions.

Asian indices closed flat and mixed. Japan, Hong Kong and Korea closed with gains in the range of 0.20% to 0.50%, mainland China and Australia both posted small losses. The tech sector helped to support the region in the wake of Apple's release, those participating directly in Apple's supply chain posting the largest gains. European indices were mostly lower in the wake of earnings releases. The tech sector saw some favor but some high profile misses in basic materials and financials dragged the broader markets lower.

Market Statistics

Futures trading was mostly positive this morning although the broader market flirted with break even. Economic data was positive and helped to support prices which moved slightly higher going into the opening bell. The open was calm, the Dow set a new all time high, but selling quickly set in. The industrials and transports moved mostly sideways while the SPX and Comp both moved modestly lower. By early afternoon the selling was mostly over. The Indices stabilized at intraday support and move sideways into the late afternoon. The last hour of trading saw the indices move back to reclaim most if not all of the days losses and hold that level into the close.

Economic Calendar

The Economy

The ADP report on labor estimates the creation of 178,000 new jobs in July. This is in line with expectations and in the sweet spot. If job creation runs too hot rate hike expectation may come back to a simmer, if they are too cold then economic growth comes into question. When in the sweet spot economic growth can continue as expected with little to no expectation of interest rate increases for the near to short term. The CME Fed Watch Tool indicates chances of another rate hike at less than 50/50 until January 2018 and only just above 50/50 until late spring next year. NFP expectations have not been altered by the news and stand pat near 180,000.

The Dollar Index

The Dollar Index moved marginally higher in today's action but remains low relative to recent trends. The index is moving lower on a rebalancing of central bank expectations and in danger of moving lower. The $93 level is potential support, the $92 level looks like a probably target as well. Today's ADP did little to alter outlook, if Friday's NFP is the same I would not expect to see the index move higher. A break below $93 has a target at $92 in the near to short term, a move below $92 would be bearish and set a 2.5 year low.

The Gold Index

Gold prices moved lower on dollar firmness but the dip was bought. Spot price ended the session near break even after opening with a small loss and falling more than -1% intraday. Today's candle a medium sized green bodied candle with long lower shadow making new highs within an uptrend. It is bullish, indicative of near term support and positive upward momentum. Support appears to be at $1275 with next upside targets near $1290 and $1300.

The Gold Miners ETF GDX moved within a very tight range and exactly sideways from yesterday. The ETF appears to be forming a near term consolidation within an uptrend that could take it up to test resistance near $24 and the middle of the 7 month trading range. The indicators are bullish, stochastic more firmly so, and consistent with upward movement within the range. Support is at the short term moving average near $23.85, a break below which would negate my near term bullish outlook.

The Oil Index

Oil prices fell hard in early trading on expectations of a draw down in US stockpiles. We did indeed get a draw down but nearly as much as was expected. Spot price for WTI rebound from the early low to recover all the losses and close with a gain near 0.5%. Despite the rebound price remains below the $50 resistance level reached in the last few days. A break above $50 would be bullish with potential upside target of $55. While near term trends are bullish a break above $50 may need an additional catalyst.

The Oil Index opened with a loss but moved higher throughout the day to recover it and more. The index finished the day with gains near 0.25% and created a medium sized candle. Today's action tested support at the short term moving average and support was confirmed. The indicators are bullish and convergent with the near term up trend so further upside can be expected. Upside target is near 1,170 in the near term. The 1,170 level is the top of last years trading range and a target of potentially strong resistance, a break above here would be bullish longer term. Until then it looks like the index may be reversing, or at least re-establishing its previous trading range.

In The News, Story Stocks and Earnings

Autonation reported earnings this morning before the bell and results were not good. The company is suffering from sluggish auto sales that are not expected to recover this year. Revenue is down nealry -3% over last year and missed expectations by more than -5%. Earnings of $.86 missed by more than -11%. Other data within the report was equally depressing. Comp store sales are down -3%, vehicle revenues are down more than -4.5% and sales units declines nearly -3%. Shares of the stock were down more than -6% in the pre market and held those losses into the close.

Molson Coors reported before the bell and gave mixed results. The brewer of banquet beer reported a slight miss for earnings on revenue in line with expectations. Shares drifted higher despite the weak results on signs of improving business fundamentals. Brand volume increased globally by 2.7% while revenue per hectoliter increased 1.7% on a successful pricing increase. Shares jumped more than 5% pre-market and opened with a nice gap higher. Shares sold off intraday but were still able to close with gains near 5%.

Earnings action after the bell was active. Square, the card reader for small business, reported top and bottom line beats on higher transaction volume. Shares moved higher on the news.

Fitbit, the Internet of Things connected fitness device, reported top and bottom line beats that drove shares up by more than 10% in after hours action.

Tesla reported better than expected revenue and earnings, smaller than expected loss, that drove shares higher in after hours action. Shares of the stock gained more than 4% on the news.

AIG reported revenue and earnings well above expectations. EPS of $1.53 blew past estimates of $1.20 as global business grows. Shares of the stock moved up by more than 1.5%.

The Indices

The indices tried to make gains today but action was hesitant; early gains were given up, later in the day losses were recovered leaving the indices hovering near break even. In terms of percent the Dow Jones Transportation Average made the largest gain today, 0.31%. The transports created a small green bodied candle sitting on the long term moving average but support is dubious. The indicators are consistent with a touch to support but are not indicative of reversal. The recent bearish peak in MACD is in fact convergent with the latest low which suggests it will be retested or bested in the near future. Upside target for resistance is near 9,320, downside target should support fail is near the long term up trend line at 8,900.

The Dow Jones Industrial Average was the day's leader with a gain near 0.20%. The blue chips created a very small doji spinning top and set a new all time high above 22,000. The indicators are both pointing higher in confirmation of the move although price action looks weak. The move may continue higher but caution is due.

The SPX closed with a gain of 0.05% and created a small hammer doji. Today's action is the 11th day of sideways consolidation at current all time highs and beginning to take on some near term bearishness. The indicators are both rolling over into bearish crossovers that could result in near term correction. A break below 2,460 may find support at the short term moving average, a break below there could go as low as 2,420. Short and long term trends remain bullish so any dip that may occurs is a likely buying opportunity.

The NASDAQ Composite brings up the rear with no gain and no loss. The tech heavy index created a small red bodied candle with visible lower shadow testing support at the short term moving average. The indicators have turned bearish in confirmation of this test and suggest that it may continue into the near term. A break below 6,300 would be bearish and could take the index as low as 6,200 in the near term. Short and long term trends remain bullish so this dip would be a buying opportunity if it were to develop. A bounce from here would be bullish and trend following with first upside target at the current all time high.

The indices remain mixed. Where one is making new all time highs another is sitting on long term support while two more are moving sideways within near term ranges. At face value it looks like earnings driven rotation and until something changes that is the stance I am taking. Earnings have come in well above expectations, forward earnings growth outlook remains strong and economic conditions are accommodating so I see no reason to get overly bearish. There may be more rotation and it may result in near term correction, if it does I will be ready to buy on the dip.

Until then, remember the trend!

Thomas Hughes

New Plays

Long Shot

by Jim Brown

Click here to email Jim Brown
Editor's Note

Are the tough times over for this consumer finance stock? They recently declined an acquisition saying the offer significantly undervalued the company.


RCII - Rent A Center - Company Profile

Rent-A-Center, Inc., together with its subsidiaries, leases household durable goods to customers on a rent-to-own basis. The company operates through four segments: Core U.S., Acceptance Now, Mexico, and Franchising. It offers durable products, such as consumer electronics; appliances; computers, including tablets; smartphones; and furniture, including accessories under rental purchase agreements. The company also provides merchandise on an installment sales basis; and offers the rent-to-own transaction to consumers who do not qualify for financing from the traditional retailer through kiosks within retailer's locations. It operates retail installment sales stores under the Get It Now and Home Choice names; and rent-to-own and franchised rent-to-own stores under the Rent-A-Centre, ColorTyme, and RimTyme names. As of December 31, 2016, the company owned and operated approximately 2,463 stores in the United States, Canada, and Puerto Rico, including 45 retail installment sales stores; 1,431 Acceptance Now kiosk locations in 40 states and Puerto Rico; 478 Acceptance Now virtual (direct) locations; and 130 stores in Mexico, as well as franchised 229 rent-to-own stores in 31 states under the Rent-A-Center, ColorTyme, and RimTyme names. Company description from FinViz.com.

Earnings were not good. The company posted a loss of 1 cents compared to estimates for earnings of 7 cents. Revenue of $677.6 million did beat estimates for $664.7 million. The problem was a number of new initiatives that take time to manifest into gains. This is a company with a portfolio of loans on household goods and there is not much they can do to change that on a qtr to qtr basis. The new initiatives only apply to new business so it takes a while to generate a large portfolio under the new rate plan. Core U.S. sales rose 230 basis points in Q2. Acceptance Now, a new initiative, saw sales rose 380 basis points. The average monthly rate of new finance agreements rose 5.7%. Higher end products now compromise 65% of store inventory. Same store sales in existing stores rose 6.7%.

Expected earnings Oct 25th.

Hedge fund Marcato Capital Management demanded the company sell itself or it would start a proxy war to replace the entire board. Hedge fund Engaged Capital has already been demanding a company sale arguing that a restructuring could best be done by new owners. Engaged won a proxy fight and now has 3 board members. RCII turned down offers from HIG Capital, Lone Star Funds and Vintage Capital over the last several months. Marcato said the $15 offer from Vintage was the opening offer and would rise if RCII would negotiate with Vintage and open its books.

The stock appears to be rising on takeover interest. Resistance is $16 and the stock traded as high as $37 in the last couple of years. If Vintage does raise their offer it would probably be in the $16-$16.50 range. Whether RCII would accept it is unknown.

With multiple sharks circling and two hedge funds demanding a sale, there could actually be competing offers once RCII decides to negotiate. The downside would appear limited.

Buy RCII shares, currently $13.60, initial stop loss $12.25.
Alternate position: Buy Sept $15 call, currently 30 cents.

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

End of the Rally?

by Jim Brown

Click here to email Jim Brown

Editors Note:

Obviously, nobody can call a market top until a week later but I would be shocked if we move higher. It took some market manipulation in the last 4 min of trading to close the Dow over 22,000 after fighting resistance at that level all day. On the positive side, the Nasdaq and S&P came back from decent intraday declines to close flat. However, the Nasdaq made a 2-week intraday low and closed fractionally negative. Even with Apple's 7-point gain they could not lift it into positive territory.

The Russell 2000 posted a 1.1% decline of -15 points and broke convincingly through the support at 1,425. This should poison market sentiment if the decline continues.

The only positive index for several days has been the Dow. Now that the 22,000 target has been achieved, traders could lose interest because there is no obvious secondary target. Earnings are starting to wind down and next week is when the August volatility normally arrives.

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

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BULLISH Play Updates

GIII - G-III Apparel - Company Profile


No specific news. Shares gave back Tuesday's gain to fall back to resistance at $26.

Original Trade Description: June 29th.

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It operates in two segments, Wholesale Operations and Retail Operations. The company's products include outerwear, dresses, sportswear, swimwear, women's suits, and women's performance wear; and women's handbags, footwear, small leather goods, cold weather accessories, and luggage. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under the G.H. Bass brand; and proprietary products under the DKNY, Donna Karan, Andrew Marc, Marc New York, Black Rivet, Wilsons, Eliza J, Jessica Howard, G-III Sports by Carl Banks, and G-III for Her brands. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, Tommy Hilfiger, Karl Lagerfeld Paris, Guess?, Kenneth Cole NY, Cole Haan, Levi's, Vince Camuto, Ivanka Trump, Ellen Tracy, Kensie, and Jessica Simpson brands, as well as has licenses with the National Football League, National Basketball Association, Major League Baseball, National Hockey League, Hands High, Touch by Alyssa Milano, Collegiate Licensing Company, Major League Soccer, Starter, and Warrior by Danica Patrick, as well as approximately 140 U.S. colleges and universities. The company offers its products to department, specialty, and mass merchant retail stores in the United States and internationally. As of January 31, 2017, it operated 411 leased retail stores, which included 190 Wilsons Leather stores, 163 G.H. Bass stores, 50 DKNY stores, 5 Calvin Klein Performance stores, and 3 Karl Lagerfeld Paris stores. The company also operates Wilsons Leather, G.H. Bass, and DKNY branded online stores. Company description from FinViz.com.

G-III shares were pressured in May by the weakness in the retail sector in general. They rebounded in early June on better than expected earnings but were hit again in early July by the next wave of retailer warnings.

In the last quarter, G-III saw sales rise 16% to $529 million. Because of costs associated with the acquisition of Donna Karan they posted a loss of 18 cents but analysts were expecting a loss of 37 cents. Wholesale sales are growing by double digits in most brands. The Wilsons Leather and Bass Stores are the exception and they said they were closing some stores and repurposing some others. The Donna Karan brand is rapidly expanding with new merchandise and G-III thinks it could eventually be their biggest brand. The company is expected to earn $1.27 in 2017 and $1.72 in 2018.

Expected earnings September 5th.

Shares have risen over the last three weeks despite the market volatility. They closed only 20 cents below a five-month high on Friday. A breakout could trigger short covering and additional buying.

Position 7/31/17:

Long GIII shares @ $26.10, see portfolio graphic for stop loss.
Alternate position:
Long Sept $30 call @ 72 cents, see portfolio graphic for stop loss.

INFY - Infosys - Company Profile


No specific news. Still fighting resistance.

Original Trade Description: June 26th.

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.

Position 7/27/17:

Long INFY shares @ $15.66, see portfolio graphic for stop loss.
Alternate position: Long Oct $17 call @ 25 cents. See portfolio graphic for stop loss.

KR - Kroger - Company Profile


No specific news. Minor gain but still a gain.

Original Trade Description: July 31st.

The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food for sale in its supermarkets. The company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of January 28, 2017, the company operated 2,796 retail food stores, including 1,445 fuel centers; 784 convenience stores; and 319 fine jewelry stores and an online retail store, as well as franchised 69 convenience stores. The Kroger Co. was founded in 1883. Company description from FinViz.com.

Expected earnings September 14th.

Shares crashed from $30 to $20 on the Amazon announcement but over the last week a strong rebound has begun. Whole Foods has 340 stores. Kroger has 2,796 stores. Whole Foods sells to a high dollar consumer, thus the nickname Whole Paycheck Foods. They have an estimates 12 million potential customers. Kroger sells to everyone with a potential customer base of more than 200 million. Amazon is not going to be a threat to Kroger for a long time even if the acquisition gets approved and that is still an unknown with multiple committees researching antitrust issues and the current administration clearly anti-Amazon.

I am recommending we ride the stock back up until reality returns to the price.

Position 8/1/17:

Long KR shares @ $24.50, see portfolio graphic for stop loss.
Alternate position: Long Sept $25 call @ $.98, see portfolio graphic for stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


Only a minor gain in a mostly down market. The Dow continues to color expectations.

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.

Shortsqueeze.com is reporting current short interest at 63 million shares out of 88 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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