Option Investor

Daily Newsletter, Wednesday, 8/9/2017

Table of Contents

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

Market Wrap

War Worries

by Keene Little

Click here to email Keene Little
We all know President Trump likes to be boastful and plays a hard negotiation game. Doing both with North Korean's Kim Jong Un is a game fraught with danger and uncertainty, which of course the market dislikes. It's the excuse du jour for some profit taking and now the question is how much profit taking we'll see.

Today's Market Stats

Starting with Tuesday's comments by President Trump about treating North Korea to "fire and fury," which is similar to the "shock and awe" threats made before attacking Irag, the stock market has reacted negatively to the idea that we could get into a more significant pissing match. Threats of war with a lunatic at the helm (not Trump but Kim Jong Un, wink) is unsettling to the market, especially one with big profits to protect as we enter a typically weak period (August-September). It's that uncertainty factor that the market must now deal with.

Following Tuesday's sharp reversal, which created an outside down day for many indexes and key reversals, equity futures continued to sell off Tuesday night and into Wednesday morning. A gap down started the day but the dipsters are still out there and looking for good deals. While the bounce off this morning's low was weak, it nevertheless stopped a more significant selloff. SPX even managed to get back within a point of closing in the green (after being down -13 in the morning).

Obviously it would be bullish if the bounce off this morning's low get some follow-through buying on Thursday but at the moment it's looking more like a bounce correction. The bounce could get a little higher pop up Thursday morning but the bearish interpretation of the pattern off Tuesday's high suggests shorting the bounce will be the better trade. I'll show the setup on the charts below.

Most analysts recognized the Dow had become significantly overbought, especially after the rally from the small pullback into the July 24th low. That rally produced positive gains for 11 days and new all-time highs for 10 of those 11 days. Monday's positive close had been the 15th one out of the previous 20 days (starting from July 10th), which is another sign of overbought and using the indicator shown below, it pointed to potential exhaustion for the move.

The chart below is from a trading buddy (hat tip to Mark Ungewitter) that shows the Dow in the upper portion of the chart and the number of "up closes out of the past 20 days" at the bottom of the chart. The red dots placed on the Dow's line shows each time the Dow exceeded 14 up closes in the previous 20 days. This indicator doesn't flag every top but it does a decent job of it so Monday's achievement of 15 days was a warning sign and Tuesday's sharp intraday reversal was a sign that a top of some kind was likely in place.

DJIA up closes in previous 20 days, chart courtesy Charter-Trust-Company

Another sign of potential trouble for the market comes from Stan Harley at HarleyMarketLetter, who does very nice cyclical work. He recently shared the chart below, which shows a coincidence of the 93-day and 112-day cycles showing up around August 8th (+/- 4 days). Cycles point to potential turns in the market, not the direction of the turn. The trend into the turn tells you the direction of the turn, if it's to happen, and that means we should be on the lookout for a turn back down.

, chart courtesy harleymarketletter.com

Another reason to expect a possible top for the market, at least for a little longer than a day, comes from Tom McClellan and is shown with his chart below. It shows the difference between the bulls and bears according to the Investors Intelligence report. McClellan then plots that number and places a 50-dma band around it. As he notes on the chart, when the indicator pops out the top of the 1-standard deviation band and then drops back inside the band it tends to offer a good topping signal.

The reasoning behind this warning is that once investors start to become less bullish the market loses the buying power it needs to continue to push the indexes higher (the greater fool theory runs out of greater fools). Selling then begets more selling and the market experiences at least a larger pullback. That's where we are currently according to this chart, or at least that's the bearish potential.

When we combine the message from the three charts above it's hard to be a dipster here. I think it will probably be better to sell bounces for what is likely to be at least a larger pullback before heading higher. The more bearish interpretation of the larger rally pattern is that we have put in a significant high, one which could stand for years to come.

It is this bearish interpretation, which needs a lot more price action to verify/negate, that has me recommending investors play defense and protect profits. If the larger pullback, assuming one's coming, then looks like a correction instead of something more bearish, it would then offer a better buying opportunity than we have here. If you don't want to sell for tax reasons then at least hedge your positions with some shorts and/or puts. Think of it as insurance that hopefully you won't need (like car, house, life insurance).
The RUT has done a good job warning us that the market was likely much closer to a top than most wanted to believe, having topped out July 25th. The shape of the pattern for its decline suggests we should get a stronger decline and I'll therefore kick off tonight's chart review with a top-down look at the RUT to highlight some downside targets to watch for (and where the bulls would likely be back in control).

Russell-2000, RUT, Weekly chart

Since early December 2016 we've been watching the RUT trade up against its trend line along the highs from 2007-2014-2015 but not be able to punch up through it. After repeated attempts every month since February and a small pop above the line on July 25th (for a stop run), the RUT reversed and has now given up about -4% from its high. That doesn't sound like much but when compared to the other indexes, it's a monster decline (wink).

The RUT is currently testing price-level support near 1396 and looks ready for at least a small bounce but I'm not seeing enough in the shorter-term charts to suggest anything more than just a relatively small bounce correction before heading lower. I think better support will be down near 1296 by the end of the month.

Russell-2000, RUT, Daily chart

The RUT's daily chart depicts a bearish pattern for its decline this month but obviously it's just a guess until we see more price action. I'm showing an expectation for a sharp 5-wave decline and for that pattern we're in just the start of the 3rd wave down. This pattern suggests a strong decline back down to the May 18th low at 1351 before the next decent consolidation/bounce and then lower into the end of the month. The first sign of trouble for the bears would be a rally back above Tuesday's high at 1426, which is price-level S/R.

Key Levels for RUT:
- bullish above 1426
- bearish below 1402

Russell-2000, RUT, 60-min chart

The best wave count for the RUT's decline is a 1st wave down into the August 3rd low (it could be wave-a instead of a 1st wave) and then a 2nd wave (or wave-b) bounce correction into Tuesday's high. That puts us into the strongest part of a move -- the 3rd or c-wave and following an expected bounce correction on Thursday we should see the selling accelerate into the meat of the 3rd wave down. Anything less than very strong selling in the coming days would be a clue that something less bearish, and potentially bullish, is playing out.

S&P 500, SPX, Daily chart

SPX has been in a choppy sideways trading range since July 20th. The high-to-low of that range is about 2491 to 2460 and today's low at 2462 remains inside that range. Today's bounce got SPX back above its 20-dma, currently near 2473, which held yesterday's decline as well. Bulls obviously want to see SPX remain above this intermediate moving average since a break of it would have fund managers thinking about profit protection.

It's possible this morning's low completed a consolidation pattern off the July 20th low and an impulsive rally back up would tell us new highs are coming. At the moment we have a 3-wave bounce correction off this morning's low, shown more clearly further below on the 60-min chart, so we should find out quickly Thursday morning whether or not the bulls are going to grab the reins back.

Key Levels for SPX:
- bullish above 2491
- bearish below 2448

S&P 500, SPX, 60-min chart

It's all short-term stuff but the leg down from Tuesday's high is an impulsive 5-wave decline. That's either the completion of a sideways consolidation that it's been in since July 20th or it's the 1st wave of what will become a larger decline. What follows will tell us which it is.

The bounce off this morning's low is a 3-wave move at the moment and two equal legs up points to 2476.05, which is practically on top of the 50% retracement of the decline from Tuesday, at 2476.47. A little pop up Thursday morning would achieve this level and it would also result in a back-test of the short-term uptrend line from July 27th.

For these reasons it's going to be tough resistance near 2476 and worthy of a shorting opportunity. By the same token it would be more bullish above 2477, especially if it stays above 2477 and the bounce turns into an impulsive rally. That would be the signal for the bears to go back into their caves and wait until they're called for supper.

Dow Industrials, INDU, Daily chart

Other than the key reversal on Tuesday, which created a shooting star for the Dow, it doesn't look particularly bearish. The Dow hasn't even made it back down to the broken trend line along the highs from April-June, currently near 21980. Watch for a possible back-test of the trend line and a bullish kiss goodbye to follow. Below 21980, especially if it stays below that level, would look more bearish. It takes a drop below 21770 to prove a significant top is likely in place.

Key Levels for DOW:
- bullish above 22,200
- bearish below 21,770

Nasdaq-100, NDX, Daily chart

The pattern for NDX looks similar to SPX with the sideways consolidation following the spike down on July 27th. This looks like a bearish continuation pattern but that's of course no guarantee. The expectation is for at least another leg down to match the size of the July 27th decline but that expectation would be at least questionable if it rallies above Tuesday's high near 5973.

Key Levels for NDX:
- bullish above 5973
- bearish below 5800

Transportation Index, TRAN, Daily chart

The TRAN was another index providing fair warning to bulls about the health of the stock market rally. Following its high on July 14th it dropped sharply to its uptrend line from June 2016 - May 2017, currently at today's low near 9180 (arithmetic price scale). If the bounce off this support line continues to say below price-level S/R near 9310 it will stay bearish.

Another drop lower would give us an impulsive 5-wave decline from the July 14th high. That would then suggest an important double (triple?) top was made following the December 2016 high. But back above 9310 would start to have things looking a tad more bullish, at least for a larger bounce pattern.

U.S. Dollar contract, DX, Daily chart

Last week the US$ dipped slightly below price-level support near 93 and found support at the bottom of a narrow down-channel for price since May. It has bounced back up to its broken 20-dma, currently near 93.70, tagging it yesterday and today but has been unable to climb back above it.

At the moment it's tough to tell whether the dollar will get a bigger bounce but keep an eye on the bottom of the wider down-channel from January, the bottom of which was broken on July 18th and is currently near 94.10. Since the bottom of a broken down-channel like this should act as resistance if back-tested it will be important to see how the dollar behaves there (if tested). I see the potential for a sideways consolidation over to the bottom of the broken down-channel and the top of the narrow down-channel, near 93.80, in about two weeks before heading lower to stronger support near 90.

Gold continuous contract, GC, Daily chart

Gold is threatening to final break free of its downtrend line from September 2011 - July 2016, currently near 1280. At the same time it's recovering back above its broken uptrend line from December-May, now also near 1280. A continuation of its rally above 1281 would be bullish whereas another failure from this level could ignite stronger selling. The next few days should answer the question for both sides of the argument.

Oil continuous contract, CL, Daily chart

Oil's consolidation following the high on August 1st looks like a bullish continuation pattern, which suggests we'll get another leg up for its rally from June. Based on a couple of price projections from its wave pattern and the downtrend line from May 2015 - January 2017 I think we'll see a rally to about 52.50 (depicted in bold green). From there we'd have to wait to see whether price consolidates or starts an impulsive move back down

Economic reports

Thursday morning's economic reports include PPI and unemployment claims. The PPI data is expected to show some inflation growth from June to July, which would keep the Fed on track to raise rates in September but if there's no increase in inflation there could be another pause by the Fed. How the market would react to such a thought is anyone's guess.


The reversal off Tuesday's high has the makings of something more bearish but it's obviously we don't have much price action to help verify that. As was obvious following this morning's gap down, the dipsters are still active (never let a good little pullback go ignored). But we'll have a better idea after Thursday when we'll get to see whether or not the bounce off this morning's low turns into something more bullish or just a correction to the decline.

If today's bounce is to be just a correction, which is the way I'm leaning, we should not see much higher for the bounce before it turns back down into stronger selling. The bearish pattern calls for a sharp decline into next week, which means we'll have a good risk:reward setup for a short trade Thursday morning (if the bounce rolls over, which for SPX should be from about 2476).

If today's bounce develops some legs and keeps going for most of Thursday we'd then have a bullish signal that new highs are probably coming. Trading Thursday's direction should provide a good trade for the next several days at least. But in the land of chop, trade carefully and with discipline.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

New Plays

Milk Demand Falling

by Jim Brown

Click here to email Jim Brown
Editor's Note

The constant negativity about the harmful effects of milk is taking its toll. Dean Foods posted seriously negative numbers and blamed it on milk.


No New Bullish Plays


DF - Dean Foods - Company Profile

Dean Foods Company, a food and beverage company, processes and distributes milk, and other dairy and dairy case products in the United States. The company manufactures, markets, and distributes various branded and private label dairy case products, such as fluid milk, ice creams, cultured dairy products, creamers, ice cream mixes, and other dairy products; and juices, teas, bottled water, and other products. It sell its products under approximately 50 national, regional, and local proprietary or licensed brands, and private labels, including DairyPure, TruMoo, Alta Dena, Berkeley Farms, Country Fresh, Dean's, Friendly's, Garelick Farms, LAND O LAKES, Lehigh Valley Dairy Farms, Mayfield, McArthur, Meadow Gold, Oak Farms, PET, T.G. Lee, Tuscan, and others. The company sells its products to retailers, distributors, foodservice outlets, educational institutions, and governmental entities through its sales forces. Company description from FinViz.com.

Dean Foods reported earnings of 21 cents that declined -47.1% and missed estimates for 31 cents. Revenue of $1.93 billion, which also missed forecasts. The lowered their full-year guidance from $1.35-$1.55 to 80-95 cents. That is a major haircut.

Expected earnings Nov 8th.

Dean Foods handles a lot of milk brands and the USDA said milk sales nationwide declined -2.9% in May alone. Management said competitive and volume pressures are hurting the company and the negative dynamics are expected to continue the rest of the year.

Milk has been found to cause diabetes or at least make it worse and the news is spreading fast. I have a friend that has been taking insulin for 20 years. I talked him into dropping milk from his diet and he was able to get off insulin within 3 weeks. A year later he backslid and began to drink milk again and he had to go back on insulin. He was quickly convinced and has sworn off forever and now leads a normal life with no diabetes meds.

Shares fell sharply to a 5-year low but given the severity of the guidance warning and the size of the earnings miss, the stock could continue to decline.

Sell short DF shares, currently $11.39, initial stop loss $12.45.
Alternate position: Buy Sept $11 put, currently 40 cents. No initial stop loss.

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

In Play Updates and Reviews

Two-Month Low

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the indexes rebounded sharply except the Russell 2000, which closed at a two-month low. The sell off was not as bad as it could have been but all the indexes closed lower. The Russell was the worst performer and closed under support at 1,400. The next target should be 1,350 if the decline continues. A declining Russell puts a drag on the big cap indexes.

The Dow rebounded from a 90 point drop to close down -36. The Nasdaq recovered from a 61 point drop to lose only 18 points. The S&P recovered from a 13 point drop to close only fractionally negative. Most of the rebound came in the last hour of trading. Tomorrow will be decision day. If the markets rally, the decline was just a knee jerk reaction. If they move lower, it means the sentiment was damaged and the August decline may be beginning.

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

GIII - G-III Apparel - Company Profile


No specific news. The weak market knocked off 2 days of gains but support held.

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.

KR - Kroger - Company Profile


No specific news. Shares dipped only slightly in a weak market.

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. Only an 8 cent decline.

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

DDD - 3D Systems - Company Profile


No specific news. SSYS reported earnings that beat estimates but gave weak guidance. Shares spiked at the open but faded to close fractionally negative. The weak guidance will probably weigh on DDD in the days ahead.

Original Trade Description: August 7th.

3D Systems Corporation, through its subsidiaries, provides 3D printing products and services worldwide. The company's 3D printers transform data input generated by 3D design software, CAD software, or other 3D design tools into printed parts using a range of print materials, including plastic, nylon, metal, composite, elastomeric, wax, polymeric dental materials, and Class IV bio-compatible materials. It offers various 3D printing technologies, such as stereolithography, selective laser sintering, direct metal printing, multijet printing, and colorjet printing. The company also develops, blends, and markets various print materials, such as plastic, nylon, metal, composite, elastomeric, wax, polymeric dental materials, and Class IV bio-compatible materials. It offers its printers under the Accura, DuraForm, LaserForm, CastForm, and VisiJet brand names. In addition, the company provides digital design tools, including software, scanners, and haptic devices, as well as products for product design, mold and die design, 3D scan-to-print, reverse engineering, and production machining and inspection. Further, it offers proprietary software and drivers that provide part preparation, part placement, support placement, build platform management, and print queue management; and 3D virtual reality simulators and simulator modules for medical applications, as well as digitizing scanners for medical and mechanical applications. Additionally, the company provides warranty, maintenance, and training services; on-demand solutions; and software and healthcare services. Company description from FinViz.com.

3D reported adjusted earnings of 8 cents compared to 12 cents in the year ago quarter. Revenue rose less than 1% to $158.4 million but sales of 3D printers declined -4%. Analysts were expecting 12 cents and $162.5 million.

The company guided for the full year for revenue of $643-$671 million, down from $643-$684 million. They guided for earnings of 46 cents, down from 51-55 cents.

3D keeps talking about new products adding to revenue in 2018 but that is a long way off and could be wishful thinking.

Expected earnings November 1st.

Shares fell $5 on the earnings and guidance miss but I expect them to fall further. If shares break support at $12, they could fall to $6 and a 7-year low.

Position 8/8/17:

Short DDD shares @ $13.00, see portfolio graphic for stop loss.
Alternate position: Long Sept $12 put @ 44 cents, see portfolio graphic for stop loss.

SABR - Sabre Corp - Company Profile


No specific news. Shares declined 2.5%.

Original Trade Description: August 5th.

Sabre Corporation, through its subsidiary, Sabre Holdings Corporation, provides technology solutions to the travel and tourism industry worldwide. It operates through two segments, Travel Network, and Airline and Hospitality Solutions. The Travel Network segment operates as a business-to-business travel marketplace that offers travel content, such as inventory, prices, and availability from a range of travel suppliers, including airlines, hotels, car rental brands, rail carriers, cruise lines, and tour operators with a network of travel buyers comprising online and offline travel agencies, travel management companies, and corporate travel departments. The Airline and Hospitality Solutions segment provides a portfolio of software technology products and solutions through software-as-a-service and hosted delivery models to airlines, hoteliers, and other travel suppliers. This segment offers SabreSonic Customer Sales & Service, a reservation system that provides capabilities around managing sales and customer service across an airline's diverse touch points; Sabre AirVision Marketing & Planning, a set of airline commercial planning solutions; and Sabre AirCentre Enterprise Operations, a set of solutions for planning and management of airline, airport, and customer operations. The Airline and Hospitality Solutions segment also provides software and solutions to hoteliers through SynXis, a central reservation system; SynXis Property Manager Solution for property management; and marketing, professional, and revenue management services. Company description from FinViz.com.

American Airlines founded the company in 1960 and spun it off in 2000. Texas Pacific Group and Silver Lake Partners acquired it in 2007. They listed on the Nasdaq in 2014. Sabre is the largest global distributions systems provider for air bookings in North America.

Sabre closed its first week of trading at $16.50 in April 2014. The odds are good we are going to see that level again soon. They recently reported earnings of 35 cents that matched estimates. Revenue rose 6.6% to $900.7 million and beat estimates for $895 million.

The company announced a new "cost reduction and business alignment program" with the goal of saving $110 million a year in expenses. They are going to reduce global headcount by 9%. They reiterated their full year guidance of $3.54-$3.62 billion and earnings of $1.31-$1.45. However, they said earnings would likely come in at the lower half of guidance. Think about that for a minute. We are going to affirm our guidance but earnings will be at the low end of that guidance. Did they actually affirm guidance of lower guidance?

They said the poor results were related to multiple factors. They halted work on the implementation of their new SabreSonic reservation system, no reason given but clearly it was not going well. They said they were seeing higher stability, security and technology costs related to a "security incident" in their Sabre Hospitality central reservation system during the quarter. Were they hacked? They did not say. Lastly, they said they were dealing with accounting changes for revenue collected from customer Alitalia, which is going through a bankruptcy process. Typically that means you get pennies on the dollar for receivables. The guidance was not good. Shares crashed from $22 to $19.50.

There was a dead cat bounce over the next couple days and now they are heading lower again. I do not see any reason why anyone would want to own Sabre when there are much better companies like Priceline, Tripadvisor, Trivago, Expedia, etc.

Expected earnings Oct 31st.

Shares closed at a two-year low on Friday at $19.73 and could be headed for a retest of the post IPO low at $15.

In addition to the short on the shares we have two ways to play the option. We can buy the October $17.50 put for 10 cents and forget about it. It will expire before earnings so it will have to be in the money at some point in the future to make any money. It is $2 OTM now and October has 75 days until expiration. If we want to roll the dice, the January $17.50 put is only 45 cents. That lets us hold over the October earnings, which should be disappointing. And gives us an extra 90 days to profit. The difference is $35 in cost. The key here is that January is well out of our normal 30-45 day play scenario. I am going to recommend the October option but you should choose the one that best suits your risk reward profile.

Update 8/7/17: Bank of America downgraded the stock from neutral to underperform (sell) and shares fell sharply at the open. It would have been nice if they had waited until after we were in the position. Shares fell about $1 at the open, rebounded slightly and then rolled over again in the afternoon. I think BAC helped us overall since it will put added pressure on the stock.

Position 8/7/17:

Short SABR shares @ $19.02, see portfolio graphic for stop loss.
Alternate position: Long Oct $17.50 put @ 40 cents, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


It is showtime! Baclay's announced a 1:4 reverse split of the VXX to be effective on August 23rd. Here is the problem. We definitely want to be short at the higher 1:4 level which would be about $47 at today's closing price. However, the reverse split will reduce the float by 75%. There are currently 92.91 million shares outstanding. There will only be 23.23 million after the split. Shortsqueeze.com claims there are more than 60 million shares short. That means if we close our short before the split, it may be extremely hard to enter a new short position because of the lack of shares. We can either maintain our current short and end up with 1/4 the number of shares we have now, but at a much higher price OR we can close the position and try to buy a put option on the $47 shares a week or two after the split. The premiums will be insane in the days that immediately follow the split. The benefits to the put option for $3-$4 is that we know the $40 VXX is going to decline to $10 once again. If we buy a long term option we can earn 3-5 times our premium. If we short the stock again we are only guaranteed a $30 drop, which of course is not bad. The option requires less margin and there is no upside risk. Shorting the $47 ETF has risk if we get a sudden burst of volatility and it shoots up to $70-$80 temporarily. It definitely can happen.

I am going to recommend we close the current short because the odds are good we are going to see some volatility over the next couple weeks before the split. Let's exit now at the bottom.

The best case would be a burst of volatility just before or immediately after the split to pump up the price of the VXX. That would let us buy a higher strike put and maximize our future gains.

The CBOE's Russell Rhoads, said this is the least volatile market since the 1960s. 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.

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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