Option Investor

Daily Newsletter, Thursday, 8/3/2017

Table of Contents

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

Market Wrap

Steady Market Waits On Data

by Thomas Hughes

Click here to email Thomas Hughes


The market held steady in a day of light action and heavy data ahead of the monthly NFP release. Today's releases were generally bullish, expectations for tomorrow's NFP is about the same. So long as there are no surprises bull market conditions should persist. The real risk, if there is one, is that the number will be too hot and bring a third 2017 rate hike back into play.

International markets were mixed. Asian indices fell with losses led by Korea. Shares in that country fell more than-1% while others in the region shed closer to -0.25%. Chinese Services Sector PMI came in a tenth below expectations and may have dragged on sentiment. European indices were firmly in the green save for the German DAX. Markets were bolstered by the BoE's decision to keep rates unchanged and indications they would only raise rates 2 times in the next 3 years. The DAX fell -0.22%, others in the region gained between 0.46% and 1.02%.

Market Statistics

Futures trading was flat to positive throughout the early morning. The trade firmed after 8:30AM data releases but not significantly. The open was like yesterday, positive with sellers quickly stepping to trim profits, and not very strong. After an initial downturn price action moved sideways the remainder of the day and winding within a very narrow range. The Dow Jones Industrial Average was the star of today's show, moving up to close with a gain and setting a new all time high.

Economic Calendar

The Economy

Today's first release was the Challenger, Grey & Christmas report on planned layoffs. The report shows 28,307 layoffs planned in July. This is a 10 month low, -9.7% from the previous month and -37% lower than this same month last year. It is also only the third time layoffs have been sub-30K in the last 10 years. In terms of hiring the report shows 88,000 planned hires last month, the 3rd highest level this year and the highest July total in 23 years. The July figure brings the full year 2017 YTD total to +84% over last year.

Initial claims for unemployment fell -5,000 to 240,000, as expected. The last week's figure was revised higher by 1,000. The four week moving average of claims fell -2,500 to 241,750. On a not adjusted basis claims fell -10.2% versus an expected -8.2% and are down -9.6% over last year. These numbers remain low relative to long term trends, near the 43 year low and consistent with ongoing labor market health.

Continuing claims rose by 3,000 to 1.968 million. Last week's number was revised higher by 1,000. Te four week moving average of continuing claims rose by 750. Despite all this continuing claims remain low relative to trend, near the long term low and consistent with ongoing labor market health.

The total number of claims fell -22,735 to 2.006 million. The total number remains elevated after last week's surge but also within seasonal expectations and in line with long term trends. We can expect to see it begin to fall off again as soon as next week, and then to hit another seasonal and long term low in early October. I would expect to see the October low come in below 1.750 million.

ISM Services PMI came in at 53.9% in July. This is the 91st month of positive reading but down -3.5% from the previous. The number shows continued economic expansion but at a slower rate than previous. Within the report activity fell -4.9% to 55.9%, new orders fell -5.4% to 55.1% and employment fell -2.2% to 53.6%.

Factory Orders rose 3.0% versus an expected 3.6%. The gains are driven on an increase in unfilled orders and inventories, shipments fell -0.2%.

Markitt's Flash Services PMI came in at 54.7, up 0.5% from last month. The increase shows a solid increase in business activity according to Markitt economists. Data within the report shows new business growing at the fastest pace in 2 years and the workforce growing at the fastest pace so far this year.

The Dollar Index

The dollar weakened slightly on today's data. While positive today's releases were a bit weaker than expected and do nothing to firm forward rate hike expectations. The Dollar Index fell in early action, dropping below the $93 level, but losses were paired by the end of the day. The index remains in downtrend and may continue lower provided the NFP data does not strengthen FOMC outlook. Next downside target is $92, a break below this level would be more firmly bearish with targets at $90 and $88.

The Gold Index

Gold prices held stead in today's action. Spot prices hovered near $1,275 and once again confirmed near term support at this level. Momentum remains bullish with upside targets near $1,290 and $1,300. Tomorrow's NFP is the likely catalyst.

The Gold Miners ETF GDX continues to trend sideways within the near term congestion band at the midpoint of a greater 7 month trading range. The ETF is up on rising gold prices and poised to move higher provided gold moves higher first. The indicators have weakened a bit since yesterday but still consistent with consolidation within the near term up trend. Support appears to be at the short term moving average and near today's closing price, a drop below here would be bearish. A bounce would be bullish and in line with the near term trend with upside targets near the upper boundary of the short term range.

The Oil Index

Oil prices fell more than -1.30% on signs of rising OPEC output. Yes, the cartel who is even now actively working to support prices with a production cap is seeing production rise among its members. The gains are led by Libya and Nigeria as their oil field come back on line. The two are expected to participate with future caps but at this time are not constrained. WTI shed $0.65 to trade below $49 but remains at the top end of the expected trading range. If nothing emerges to support prices a move down to the bottom of the range could be coming.

The Oil Index fell more than -1% in response to oil's decline. The index fell from resistance at the long term moving average and retreat to support just above the short term moving average. This move is alarming but at the same time a positive for the market, bringing prices back down to current realities. The indicators are rolling over in confirmation of resistance but do not yet indicate a sell. Stochastic is weakest but viewed in light of bullish momentum and positive convergence with recent highs suggests a buying opportunity may be developing. Support is likely to be found near the short term moving average in the range of 1,120 to 1,130, a break below there would be bearish. Longer term outlook remains positive so I am still bullish on the sector.

In The News, Story Stocks and Earnings

Another big day for earnings as the season begins to wind down. This morning Kellogg reported before the bell. The maker of delicious corn based cereals reported a -2.4% drop in revenue but still beat expectations. Revenue of $3.19 billion beat by $30 million, EPS of $0.97 beat by a nickel. The company CEO says they are on track to meet 2017 goals even amid challenging conditions for the industry. Full year guidance was reaffirmed and helped drive the stock up by 1% in the premarket. Bullishness persisted throughout the day adding another 4% to prices by the close of trading.

After hours action was busy as well. GoPro reported a top and bottom line beat that helped to send its stock moving higher. The camera company lost less money than was expected on better than expected revenue. Revenue was driven by above forecast shipments of cameras that led management to issue positive guidance. Shares of the stock jumped more than 15% on the news.

Shake Shack beat on the top and bottom lines as well but was not able to please investors. The burger joint was not able to improve comp store sales despite beating revenue and earnings estimates raising the question of valuation and forward growth prospects. Shares of the stock fell more than -3% on the news

The Indices

The indices continue to move out of sync. One moves higher to set a new all time high, another is bouncing from long term support and yet others are moving sideways within near term trading ranges. The Dow Jones Industrial Average, although it did not post the largest gain in today's session, moved higher to set another new all time closing and intraday high. The blue chips created another small doji like candle while doing so and appears set to creep higher into the near term. Both indicators are bullish and gaining strength in support of this move. Upside target is near 22,500 should upward movement continue.

The Dow Jones Transportation Average made the largest gain as it bounces from support at the long term moving average. Today's action gained 0.29% and created a small green bodied candle sitting on the moving average, the second such candle in a row. The indicators are consistent with a touch to and possible bounce from support although convergence with the recent low suggest it could be tested again. Upside target is near 9,300 in the near term, a break above that would be trend following and confirm the bounce from long term support with a potential target at the recently set all time high.

The NASDAQ Composite posted the largest decline as profit taking continues to ripple through the tech sector. The tech heavy index fell -0.35% creating a small red bodied candle. Today's action brings the index down to retest near term support above the short term moving average. The indicators remain bearish suggesting support will be tested again, they are also only weakly bearish which leaves them consistent with bullish entry within an up trend. A fall below the moving average would be bearish in the near term with downside target near the long term up trend line at 6,200. A bounce from this level would be trend following with upside target at the current and recently set all time high.

The S&P 500 posted the smallest decline, -0.21%, and created a small red bodied candle. This is the 12th day the index has traded sideways within the congestion band. Price action appears to be a consolidation within an uptrend with bullish outlook. The indicators are contrary to this outlook having pulled back to produced bearish crossovers. The caveat is that within an uptrend, and while the index is able to hold at/near high levels, such crossovers lead to bullish entry signals more often than not. If the index were to move lower support is likely at the short term moving average, just below current levels.. A move up would be bullish and trend following with upside targets near 2,550.

The indices remain mixed and in rotation. The good news is that forward economic and earnings outlook remains positive so this rotation is likely to lead to buying opportunities. Tomorrow's NFP report could be the catalyst to move the market but I am not expecting too much out of it. A shocking surprise may induce fear of economic slowdown (downside miss) or fear of FOMC rate hikes (upside surprise) but anything less will give the green light for business as usual. At this time that means trimming profits where you can, cutting losers where you need and getting ready for the fall trading season. We're only a month away from Labor Day and the start of the traditionally busy "trading" season. I remain bullish for the long term, cautiously bullish for the near.

Until then, remember the trend!

Thomas Hughes

New Plays

Why Risk It?

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Russell is setting up for a test of critical support at 1,400. The majority of small cap stocks are alreay trending lower. The market divergence is increasing with all the indexes negative except for the Dow. If you simply looked at all the other indexes it would appear the August decline has already begin. The Dow is the lone winner and it was a fight today to remain in positive territory. August has been down 5 of the last 7 years. August has only been up 5 of the last 20 years. Typically, the August decline begins in the second week of August. The S&P futures are down -3 points already tonight. There is no reason to add risk on a summer Friday.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Russell Fading Fast

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell is in crash mode with another 8-point decline despite the Dow's continued gains. The Russell has now declined -3.1% since the 1,450 high close Tuesday of last week. It is down 6 of the last 7 days. This is very negative for market sentiment but the Dow managed to squeeze out another 10-point gains. ALL the other indexes posted losses today with the exception of the Dow Transports.

The S&P lost 5 points but continues to hold near its recent highs. That is the only index left to breakdown other than the Dow. Once the majority of earnings are over this week, the S&P should weaken further. Eventually the Dow rally will fail.

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

RCII - Rent A Center
The long position was entered at the open.

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Short term Calls and Puts on equities = Option Investor Newsletter

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BULLISH Play Updates

GIII - G-III Apparel - Company Profile


No specific news. PVH was upgraded today and that helped lift GIII over support 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


Infosys signed a deal to acquire digital innovation and customer experience studio, Brilliant Basics for an undisclosed sum. The transaction is not expected to close until late 2018.

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. Shares dipped with the market to give back several days of gains.

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.

RCII - Rent A Center - Company Profile


No specific news. Shares posted a minor gain in a weak market.

Original Trade Description: August 2nd.

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.

Position 8/3/17:

Long RCII shares @ $13.63, see portfolio graphic for stop loss.
Alternate position: Long Sept $15 call @ 30 cents, 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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