Option Investor

Daily Newsletter, Thursday, 8/10/2017

Table of Contents

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

Market Wrap

The Korean Correction

by Thomas Hughes

Click here to email Thomas Hughes


US indices pulled back on mounting tension with North Korea, is it time for correction or is this the next entry point within the Trump Rally? The answer to that question will likely come down to how the North Korean situation plays out. If it continues to escalate the correction could deepen, if it begins to blow over the rally may resume. Regardless, underlying fundamentals remain bullish with positive forward outlook so a major reversal is likely not in the cards.

International indices moved lower on mounting tensions with North Korea. Asian markets were the least affected, shedding less than a half percent on average. The Heng Seng led with a loss of -1.13%. Losses in Europe were much sharper in the range of -1.0% on average. Downward pressure was exacerbated by weakness here at home despite positive showing on the earnings front.

Market Statistics

Futures were down all morning indicating an open about -.35% below yesterday's close. This held fairly steady throughout the morning with little movement on earnings or economic releases. The open was active but not crazy, the indices began trading with small losses and quickly turned those into moderate losses. The SPX hit -1% around 10AM, bounced before moving a bit lower, and then hit intraday bottom near -1.25% just after 12:30. The market crept steadily higher over the next hour but did not recover more than about 0.25% of the loss before resistance was hit. Late in the day selling resumed and took the indices down to the lows of the session where they lingered into the close.

Economic Calendar

The Economy

Weekly jobless claims continue to reflect tight labor market conditions. Initial claims rose by 3,000 on top of an upward revision of 1,000 to hit 244,000. The 4 week moving average of claims fell by -1,000 to hit 241,000. On a not adjusted basis claims rose 6.5% versus an expectation of only 5.1% and are down -8.5% year over year. While the downtrend in initial claims has stabilized over the past 6 months it has done so near historic lows and is consistent with labor market health.

Continuing claims fell by -16,000 to hit 1.951 million. The headline number of continuing claims has made a near term top and fallen below the moving average so may be headed lower in the near term. The 4 week moving average of claims rose by 500 but remains well below 2.0 million, near historic lows and consistent with labor market health.

The total number of Americans receiving unemployment fell by -35,172 to hit 1.971 million. On a year over year basis total claims are down -8.0%. This week's decline is in line with seasonal and long term trends, and consistent with ongoing labor market improvement. Now that the total number has crested it's seasonal mid-summer peak we can expect to see it fall over the next 2.5 to 3 months. Downside target is between 1.5 and 1.75 million.

The Producer Price Index came in at -0.1% and below expectations. Consensus target was 0.3%. Ex-food/energy inflation is unchanged month to month. On a year over year basis headline producer level inflation is running at 1.9%, just shy of the Fed's 2% target. In terms of market reaction this report was perfectly neutral as it did not raise fear of the Fed or of a slowing economy.

The Dollar Index

The Dollar Index was able to creep higher by 0.15% despite safe haven flows to the yen and the Swiss franc. The index created the fourth of four small bodied candles that have formed since the NFP induced bottom last week. The index may be in reversal but this may mean a change to sideways from down and not down to up. The indicators are bullish and moving higher although stochastic may be said to be overbought within a downtrend. If the index is in reversal there will likely be a test/retest of support with additional signal so I see no need to rush into anything. Support is at the recent low, near $92.75 and the 15 month low. Resistance is just below $94, a break above which would help confirm bullish reversal. On the economic front data is in support of growth and the dollar, but not strong enough to increase the FOMC rate hike outlook.

The Gold Index

Gold prices surged to a 2+ month high of safe haven inflows. In the near term resistance is near $1,300 with spot prices trading just below at $1,292. Today's action saw the metal gain nearly a full percent and confirm support near $1,280. If the Korean Situation escalates further it could send gold even higher with the caveat the move is driven on fear and taking gold to an upper extreme it may not have otherwise reached. Sooner or later the situation underlying the move will blow over and prices will return to a more normal level. That said I'd be more interested in selling at resistance than getting on board with the rally.

The Gold Miners ETF GDX jumped nearly 2% on the move in gold but the move was capped at near term resistance. Resistance is near $22, the top of near term trading range and the mid-point of a short/long term trading range. The indicators remain consistent with range bound trading and do not suggest change is coming. If the ETF does move higher it will hit next resistance near $23.60 and the 38.2% retracement level. Support may be found just below today's candle near the long and short term moving averages, in the range of $22.50 to $22.75.

The Oil Index

Oil prices had another volatile day, first moving up to test resistance and then later falling from that resistance to close with losses greater than 1.30%. While US inventory data was bullish yesterday new data confirming rising production within OPEC and indications Russia is thinking about increasing production weighed on prices. On the OPEC front today's data included details on last month's production, a 2017 peak driven largely by Nigeria and Libyan increases but also attributable to tenuous compliance with the production cap. On the Russia front Gazprom said in a statement that it was economically feasible to resume production in fields now dormant once the OPEC/Russia production cap expired. Fundamentals remain supply side heavy and likely to remain so into the foreseeable future.

The Oil Index fell a little more than -0.80% to hit the 1,120 level. This has been a significant support/resistance level for over a year whose test as support now may confirm bottom and reversal in the energy sector. I've been anticipating such a reversal for some time now, primarily due to forward earnings growth outlook, but not yet ready to pull the trigger. The indicators have only just rolled over and oil looks like it might move lower within the range near term so a test of support at 1,120 is likely. A move below this level would be bearish near term with target neat 1,100. A confirmation and/or bounce from support may find resistance near 1,150 and the long term moving average.

In The News, Story Stocks and Earnings

Earnings, and specifically retail earnings, were front and center this morning. Reports from Kohl's, Macy's, Dillards and others failed to soothe fears of slow down in the brick & mortar operators. Macy's reported earnings and revenue slightly above consensus but also comp store sales down -2.5% and full year guidance for -4% sales growth. Kohl's also reported above expectations but internals within the report show declining sales and struggling business. Dillard's revenue beat by a fraction, due to massive mark downs that I myself took advantage of, but declining YOY revenue and comp store sales weighed on share prices. The group as a whole moved lower led by Dillard's -16% and followed up by -10% for Macy's and -6% for Kohl's. The XLF Retail Sector SPDR fell -3% and below near term support levels.

Snap reported after the bell and the social media app reported less than expected. Less than expected revenue, less than expected earnings and less than expected user growth. The good news is that revenue did grow, by a whopping 153%, but the net loss also widened calling into question profitability factors. Shares of the stock fell more than -6% on the news.

The VIX jumped nearly 40% today. The gain is caused by a combination of declining index prices and increasing options prices, and driven on near term fear. It is possible this fear will develop into something longer term but there is no sign of that at this time. Today's spike takes the index up above 15 and to levels it has peaked at 4 times before in 2017. At this level put options begin to become attractive, a test and/or confirmation of resistance could be the trigger for a fade.

The Indices

The indices moved lower today and there was no doubt about it. The North Korea situation is the catalyst but I think the market was ready to sell and just waiting for an excuse. Today's move was led by the tech sector and the NASDAQ Composite with a loss of -2.1. The index created a long red candle with flat bottom coming to rest just above my long term up trend line. It looks like it will continue lower to test support near the trend line at 6,200. The indicators are bearish and indicating strength in the near term, confirming this outlook. A break below 6,200 would be more firmly bearish but still not damage the long term up trend. Downside target in that case would be near 6,000 and the long term moving average.

The S&P 500 made the 2nd largest decline in today's session, -1.31%. The broad market index created a long red candle with bearish indications. Today's action falls below the short term moving average and is confirmed by bearish indicators. Both MACD and stochastic are moving lower in confirmation of the fall although longer indications remain bullish. If selling persists into the near term downside target is near 2,400 and the long term moving average.

The Dow Jones Transportation Average made the 3rd largest decline, -1.25%. The transports created a medium sized red candle falling below the long term moving average that looks poised to move lower. The indicators are mixed and suggest the move lower may be losing steam although downside momentum prevails. Target is near 9,000 or just below along the long term up trend line which has provided strong support several times in the past.

The Dow Jones Industrial Average fell -0.92% and created a medium sized red bodied candle. The index fell to support at a long term uptrend line and broke through. The indicators are consistent with a a peak within an uptrend but have not yet confirmed a move lower. Downside target is just below along the short term moving average, if the transports are leading the market we can expect that target to be exceeded.

The markets are moving lower and those moves may continue into the near term. The bottom line is that moves in the dollar, gold and equities are being driven by fear and not fundamentals. The Korean Situation is scary, poses a risk to the market and may result in WWIII but more likely to be resolved in a less dramatic way. What I am trying to say is that it is an excuse for profit taking and an extension of rotations already underway. Risk-off safe haven flows will eventually reverse and the markets will reverse with them. I've been waiting for a dip and this is it. I am firmly bullish long term and cautiously bullish near term waiting and watching for the dip to be bought.

Until then, remember the trend!

Thomas Hughes

New Plays

Geopolitical Tensions

by Jim Brown

Click here to email Jim Brown
Editor's Note

One day does not make a trend. The S&P posted a 5-point loss on Tuesday, 1 point on Wednesday and 36 points today. Today is the only day that counts. There have been other one day drops this year on March 21st (-29) and May 17th (-43) and neither decline saw the market continue to drop. The May rebound was immediate and the March period saw some volatility for a couple weeks but no meaningful declines. What should we expect this time?

The market is much more over overbought this time and we are entering into the normally weak Aug/Sep period. In theory, the market should continue lower but there is so much pent up demand from investors waiting on a buying opportunity that dip buyers could appear at any time. In a normal environment, I would be tempted to nibble on some positions today but this is not normal. With the geopolitical headlines surrounding North Korea and an impulsive and non-political president, there could be a show of military force at any moment. We know he is a counter puncher and Kim Jong-un knows he is getting under Trump's skin. This is a dangerous situation.

For that reason, investors probably do not want to be adding longs ahead of the weekend in a traditionally weak period. Of course, I could be wrong. We could see a dead cat bounce at the open on Friday and then another bout of selling.

I do not see any reason to be adding risk ahead of the weekend. There is a strong opportunity for heightened volatility. There is always time to enter new trades as long as you have cash in your account.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Russell Down -6%

by Jim Brown

Click here to email Jim Brown

Editors Note:

Since the current Russell decline began on July 26th, the index has fallen -6%. In those 12 trading days, the index has only closed positive on 3 days. This has been a pretty solid decline and we closed at the lows for the day. We are very close to being stopped out on all our long positions as a result of this index decline. With the big cap indexes following the Russell lower today, the overall market has turned notably bearish.

The Dow declined -205 points, Nasdaq -135 and S&P -36. We could see a dead cat bounce at the open on Friday but the increase in the verbal war between North Korea and President Trump could cause investors to pass on the dip buying and avoid being long over the weekend.

Make no mistake. Once the market finds a bottom there will be a significant bounce. There is plenty of pent up demand that has been waiting for a correction.

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

DF - Dean Foods
The short position was entered at the open.

VXX - VIX Futures ETF
The short position was closed at the open.

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. Earnings misses from other retailers like Kohls (KSS) plus the weak market caused a 61 cent drop in GIII shares.

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 fell sharply in a weak market and weak retail sector. Kroger closed only 7 cents above our stop loss. I am lowering it slightly since the $23.60 level was support intraday. Another 15 cents will not kill us.

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. RCII fell -3% in a weak market. Only 22 cents above our stop loss.

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. Shares continued to drop as we approach support at $12.

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.

DF - Dean Foods - Company Profile


No specific news. Shaes found buyers as traders piled into stocks that were already depressed as a safe harbor in the current storm.

Original Trade Description: August 9th.

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.

Position 8/10/17:

Short DF shares @ $11.37, see portfolio graphic for stop loss.
Alternate position: Long Sept $11 put @ 30 cents, see portfolio graphic for stop loss.

SABR - Sabre Corp - Company Profile


No specific news. Shares declined 3.5%.

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


We exited the position at the open and that was the low for the day. Volatility has really spiked over the last two days and we got out just in time. I am repeating my comments from yeaterday just in case any readers missed them.

Previously 8/9: 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:

Closed 8/10/17: Short the VXX @ $17.98, exit $12.00, +$5.98 gain.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now