Option Investor

Daily Newsletter, Wednesday, 8/23/2017

Table of Contents

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

Market Wrap

Some Whipsaws Followed By Today's Doji Day

by Keene Little

Click here to email Keene Little
The stock market has been whipping up and down since the August 8th highs and traders are probably getting tired. Tuesday's big rally on low volume (short covering) was followed by today's gap down and sideways trading that created a doji day. Traders are wondering which way to lean.

Today's Market Stats

The price results seen in the table above look decidedly bearish and that resulted from this morning's gap down. There was no follow through to the downside and the bounce off the initial low actually produced slightly bullish market internals. But it was just another low-volume day with no conviction by either side as each waits for the other to blink after the whipsaw gyrations this month.

Other than the noise from the White House and the even more distracting noise from the mainstream press, there was little to help guide investors today. Many are waiting to see what comes out of the Jackson Hole meeting of global bankers that starts tomorrow and today's trading volume was the lightest of the year when you exclude half-day sessions. There's probably not a lot that can be gleaned from today's price action.

This morning's gap down was the result of steady selling in the futures overnight, which was blamed on Trump's statement that he'll let the government shut down if Congress doesn't fund The Wall on the Mexican border. First of all, he's a negotiator and he'll start off asking for the moon and then figure out what has to be compromised. Why anyone reacts to his bluffing statements is beyond me. Second, if the government shuts down it would probably help the deficit so go ahead, make my day. Only kidding of course (?) but it does seem to me the press can make a mountain out of a molehill.

There's actually very little to report on since the geopolitical news was quiet and bankers are on their way to Jackson Hole so they weren't out there today trying to confuse the market. The market was left on its own and it didn't know what to do. I'll simply dive into the charts for some clues.

S&P 500, SPX, Weekly chart

The SPX weekly chart shows the bearish divergence at the August high vs. the March high and is now threatening to break down. It's struggling to hold onto the uptrend line from February-November 2016, currently near 2426, which was tested with last Friday's and this past Monday's lows. It's an important trend line for the bulls to continue defending.

The next important support line below the February-November 2016 uptrend line is 2400-2405. A drop below price-level support near 2400 would be stronger confirmation that an important high is already in place. But there's still bullish potential to the intersection of some important trend lines -- a trend line along the highs from November 2015 - March 2017, the midline of the up-channel from 2010-2011 and a trend line along the highs since April 2016 (excluding the March 1st high), all of which intersect near 2525 at the end of this month.

S&P 500, SPX, Daily chart

Tuesday's rally for SPX had it closing just above its broken 50-dma near 2450 but it then gapped back down below 2450, leaving a head-fake break. The bounce off this morning's gap down had it almost back up to the 50-dma but stopped about a point below it. The bulls want the 50-dma recaptured and then see a break of the downtrend line from August 8th, currently near 2460. The bears want to see a continuation lower (bearish kiss goodbye following the back-test) and a drop below Monday's low at 2417 in order to confirm a stronger selloff will likely follow.

Key Levels for SPX:
- bullish above 2475
- bearish below 2420

S&P 500, SPX, 30-min chart

Today's small sideways consolidation looks like a bearish continuation pattern following this morning's gap down. It might be good for just another leg down to about 2434, for two equal legs down from Tuesday's high, and then start another rally leg. The more bearish pattern is a series of 1st and 2nd waves to the downside, which would mean a much stronger decline to follow, one that would likely drop SPX to its 200-dma, maybe near 2360, before getting much of a bounce.

Dow Industrials, INDU, Daily chart

On August 17th the Dow broke its uptrend line from November-May and yesterday's rally was back up to the line and its broken 20-dma. It looks like a back-test followed by a bearish kiss goodbye (albeit with only a small decline so far). Back below its trend line along the highs from May 2011 - March 2015, where it closed today at 21812, would be more bearish while a rally above its 20-dma at 21921 would be more bullish.

Key Levels for DOW:
- bullish above 22,086
- bearish below 21,535

Nasdaq Composite index, COMPQ, Daily chart

Similar to the SPX and Dow patterns, the Nasdaq bounced up to resistance with Tuesday's rally, which is its uptrend line from November-July. It had closed slightly above the trend line but this morning's gap down left a head-fake break and possible bull trap. The bounce off this morning's low almost made it back up to the line, now near Tuesday's high at 6302, but is currently looking like a back-test that's ready for its bearish kiss goodbye.

Key Levels for COMPQ:
- bullish above 6424
- bearish below 6177

Russell-2000, RUT, Daily chart

The RUT was relatively strong today since it made it back into green following this morning's gap down. The bounce off its August 18th low also looks impulsive, which suggests just a little deeper pullback and then another leg up for a larger bounce correction to its July-August decline. For now I'm depicting a larger bounce up to the 38% retracement of its decline, near 1389. But it's possible we'll only see a bounce up to its broken uptrend line from March-May, currently near 1382, which would coincide with a back-test of its broken 200-dma.

Key Levels for RUT:
- bullish above 1413
- bearish below 1347

10-year Yield, TNX, Daily chart

Since the July 6th high for TNX I've been waiting to see what is going to develop. I've been thinking yields will head lower but the fact that it's building another descending wedge (similar to the May-June pullback) it has me wondering if we're going to first get another leg up like the June-July rally.

The difference with the current descending wedge is that it is not showing bullish divergence like that seen for the May-June wedge. I think we'll see a breakdown from the wedge, in which case the decline would likely accelerate following the breakdown from a bullish pattern (failed patterns tend to fail hard).

Below 2.14 would be a bearish heads up and below 2.10 would confirm a breakdown in progress. If we do see a breakdown, there will be time to evaluate the decline and figure out a downside objective. There will be potential support near 2.00, which is a downside objective following the double top between December 2016 and March 2017. That projection crosses the bottom of a larger descending wedge (almost a parallel down-channel) for the decline from December 2016 on September 1st.

High Yield Corporate Bond fund, HYG, Daily chart

A week ago I had shown the HYG chart, updated below, to point out how it had broken down from its shallow rising wedge pattern and bounced back up to the bottom of it. It then dropped back down on August 24th to its 200-dma, bounced and is now back up near the bottom of the rising wedge again, currently near 88.12. Two equal legs up for the bounce off the August 10th low also points to 88.12. The broken 50-dma is also now approaching 88.12 and it's likely HYG won't be able to do better than that. I expect to see HYG continue lower, which would show a reluctance to hold riskier bonds. That in turn would be a bearish warning to stock holders.

Baa Corporate bond yields vs. 10-year yield, chart courtesy St. Louis Federal Reserve

Following up the chart above, the chart below shows the spread between TNX and Baa Corporate bond yields, which has dropped below where it was in early 2014 (a high for HYG but not the stock market, which made it higher into a large rolling top pattern into mid-2015). The spread was even lower (near 1.6) in 2006-2007 before skyrocketing in 2008 when the financial world was falling apart.

So this is a good measure of sentiment in that chasing slightly higher yields in junk bonds is a sign of confidence in the economy and markets. When fear enters the arena those same junk bonds sell off hard and drives yields higher. At the same time Treasuries are bought (safe haven) and drives their yields lower. While this spread can always go lower and can stay low for a long time, it can provide a good warning sign when it starts back up.

Transportation Index, TRAN, Daily chart

The TRAN has been a leading indicator as far as showing us potential weakness in the broader stock market, peaking about a month before the Dow. Today it dropped below last Friday's low, something the Dow has not done yet (it will need to drop below 21641 in order to accomplish the same or about 170 points below today's close).

The TRAN looks bearish following the multiple back-tests and failures since first bouncing off its 200-dma on August 2nd. It back-tested price-level S/R near 9310 on August 8th (the Dow's high) and then a higher bounce into the August 16th high was a back-test of its broken 50-dma. It then dropped back down and broke its uptrend line from June 2016 - May 2017 as well as its 200-dma on August 17th. Yesterday's rally was good for a back-test of its broken 200-dma and its declining 20-dma and today's selloff leaves another bearish kiss goodbye.

This is all bearish price action and there's very little reason to want to buy the pullback. The next potential support level is the May 18th low at 8818 and the uptrend line from January-June 2016, near 8725 by the end of the month.

DJ US Home Construction index, DJUSHB, Daily chart

In addition to the transports, the home builders are good to watch to see if they support the idea of a growing or shrinking economy. Both are looking weak and that portends weak things for the economy and the stock market. The home builders had been working their way higher in a rising wedge since the March 16th high and showing bearish divergence along the way. The final part of the rally, following the July 10th high, was a choppy move with further bearish divergence.

The choppy ending pattern warned us of a top and now price has dropped below the bottom of the rising wedge as well as its 50-dma. This morning's report of weak new-home sales helped trigger more selling in the home builders. The risk now is that the rising wedge is likely to get retraced quickly if indeed the index has topped, which would mean a fast trip back down to the April low near 630. That would also be good for a test of its 200-dma.

U.S. Dollar contract, DX, Daily chart

Following the August 2nd low for the US$ I thought we'd see a multi-week consolidation over to the top of its steeper down-channel for price action since May. A wider down-channel from January was broken in mid-July and I thought we'd likely see the bottom of it act as resistance if back-tested, which it was last week. The dollar is now pinched between price-level support near 93 and the bottom of the wider down-channel and top of the steeper down-channel, which are currently near 93.65. It's possible we'll see a larger consolidation before heading lower but the risk is for another leg down sooner rather than later. The next downside target is near 90.

Gold continuous contract, GC, Daily chart

Gold is struggling at price-level resistance near 1298 (two previous highs in April and June) but consolidating near this level has it looking like we'll see a bullish breakout. It has already broken its downtrend line from September 2011 - July 2016 and it climbed back above its uptrend line from December 2016 - May 2017, both of which are bullish.

Assuming gold can break price-level resistance at 1308 (its January 2015 and November 2016 highs) we should see a nice rally. The upside target will be 1377 where the rally from December 2016 would achieve two equal legs up. That would also be good for a test of its July 2016 high at 1377.

Silver continuous contract, SI, Daily chart

Gold bulls would like to see support from silver and right now they don't have it. Silver has been struggling to get back above its broken uptrend line from December 2015 - December 2016, currently near 17.20. Silver is also currently struggling to get back above its broken 200-dma, which has been acting as resistance since first tested on August 10th. If silver bulls can break through 17.20 they'll then have to deal with the downtrend line from July 2016 - April 2017, near 17.55.

Oil continuous contract, CL, Daily chart

Since the low in June oil has been attempting a bounce and essentially ping-ponging between support and resistance at its moving averages and broken uptrend line (April-August-November 2016 was resistance to the high on August 1st. The pullback from the August 1st high found support at the 50-dma but the bounce stopped at the 20-dma. I think oil is heading lower but I can easily see another bounce higher to test its downtrend line from May 2015 - January 2017. Even the oscillators are currently neutral so there's no good trade setup here.

Economic reports

Thursday morning is another light one for economic reports, which will include the usual unemployment data, existing home sales (no change expected) and natural gas inventories. Nothing market moving there.


Today's doji day was on the lowest volume day of the year (excluding half-day sessions) and this followed a low-volume day for Tuesday's big rally. Short covering on Tuesday led to a gap down and not much else today. Investors are waiting for something and playing it cautious after this month's whipsaws. Maybe something out the Jackson Hole meeting will trigger a bigger move one way or the other.

The 3-wave pullback from August 8th could easily be viewed as just an a-b-c pullback correction that will now lead to another rally to new all-time highs (except the RUT). That means today's little pullback should see a reversal, either from here or after a little lower to create a small a-b-c pullback from Tuesday. In any case, the bulls will be weakened further if they don't get another rally going by Thursday afternoon and certainly on Friday.

The bears will be in good shape if Tuesday's rally is reversed since the more bearish wave count would then be in play, which calls for a much stronger decline in the coming week(s). We should know which direction will be the right one by Friday at the latest. Trade carefully since we're probably looking for a big move in the coming days.

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

Keene H. Little, CMT

New Plays

No Changes

by Jim Brown

Click here to email Jim Brown
Editor's Note

The bearish trend returned as hopes for tax reform faded once again. There was no race to the bottom but there was a definite return to a bearish bias. The S&P futures are down -4.50 and declining in the evening session. With the president at war with congressional leaders and threatening a government shutdown in September, the most likely direction for Thursday is down. I would be thrilled if the rally continued but the calendar is working against us. There is no reason to add additional risk without a good idea about market direction.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Volume Drought

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market rose on Tuesday and sank on Wednesday with lowest volume in months. Volume on Wednesday was barely 5.1 billion shares and the average for the last three days has been just over 5.2 billion. We all knew volume was going to be very light between the eclipse weekend and Labor Day but this is ridiculous.

Shares declined on Wednesday on bad housing numbers and President Trump's threat to shut down the government in September if there was no funding for the border wall. That was the starters gun to kick off the next six weeks of political brinksmanship and the market is not going to like it.

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

KTOS - Kratos Defense - Company Profile


No specific news. Only a minor 4 cent decline and still holding support.

Original Trade Description: August 14th.

Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.

Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.

China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.

Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.

Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense department spending.

Kratos unveiled its newest high performance class of military unmanned aerial system technology at the Paris Air Show. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.

Just over the last couple weeks Kratos announced a $2.9 million order for an airborne communications system, a $10 million order for a ballistic missile defense system, $23 million for a military radar system and $8 million for a GPS Satellite protection system. Analysts are expecting a record $800 million in revenue for 2018. They expect to do $150 million in unmanned revenues in 2018.

Kratos posted earnings of 1 cent and a $10.4% increase in revenue to $186 million. They guided to be free cash flow positive by $25 million in 2017.

Expected earnings Oct 26th.

With the daily new contract awards shares have risen $1.50 in the last week and closed at a 5-week high on Monday. They are very close to breaking out to a new high.

Position 8/15/17:

Long KTOS shares @ $12.78, see portfolio graphic for stop loss.
Alternate position: Long Nov $15 call @ 65 cents, see portfolio graphic for stop loss.

With shares just crossing the $12.50 strike price, we had to reach out to $15 and a distant month.

UCTT - Ultra Clean - Company Profile


No specific news. Minor decline but holding over recent support.

Original Trade Description: Augusy 12th.

Ultra Clean Holdings, Inc. designs, develops, prototypes, engineers, manufactures, and tests production tools, modules, and subsystems for the semiconductor capital equipment and equipment industry segments primarily in North America, Asia, and Europe. It offers precision robotic systems that are used when accurate controlled motion is required; gas delivery systems, which include one or more gas lines consisting of small diameter internally polished stainless steel tubing products, filters, mass flow controllers, regulators, pressure transducers and valves, component heaters, and an integrated electronic and/or pneumatic control system; and various industrial and automation production equipment products. The company also provides subsystems, such as wafer cleaning sub-systems; chemical delivery modules that deliver gases and reactive chemicals in a liquid or gaseous form from a centralized subsystem to the reaction chamber; frame assemblies, which are support structures fabricated from steel tubing or folded sheet metal; and top-plate assemblies. In addition, it offers liquid delivery systems; process modules, which are the subsystems of semiconductor manufacturing tools that process integrated circuits onto wafers; and other high level assemblies. The company primarily serves original equipment manufacturing customers in the semiconductor capital equipment, consumer, medical, energy, industrial, flat panel, and research industries. Company description from FinViz.com.

We have played UCTT several times before with varying results. The stock is volatile based on the direction of the chip sector. Since UCTT sells to chip makers, their good/bad fortune impacts UCTT. Fortunately, we are in a tech world where every year, more chips are required to make more gadgets including computers, tablets, phones, TVs and now the billions of IoT devices to be installed over the next several years.

The company reported earnings of 62 cents and analysts were expecting 51 cents. Revenues rose 75% to $228 million and beat estimates for $214 million.

They guided for earnings in the current quarter of 62-68 cents and analyst estimates were only 39 cents. At the midpoint of 65 cents that would be 66% higher than estimates. Very few companies are growing earnings that fast. Shares declined after the CEO said he was taking two months off to addess a treatable medical condition.

Expected earnings Oct 26th.

Shares are starting to rebound from the post earnings dip.

This is a short-term call because the next option series is December and options are too expensive. We have to buy just out of the money because the next strike at $25 requires a 10% move in the stock in only 4 weeks. That is very possible but we are entering a weak market period.

Position 8/14/17:

Long UCTT shares $22.70, initial stop loss $20.55, see portfolio graphic for stop loss.
Alternate position: Long Sept $22.50 call @ $1.50, see portfolio graphic for stop loss.

BEARISH Play Updates

DDD - 3D Systems - Company Profile


No specific news. Holding at the 52-week lows. Support still $12. Minor gain.

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. Closed at a 5-year low.

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.

FTR - Frontier Communications - Company Profile


No specific news. Minor rebound from Tuesday's 45-yr low close.

Original Trade Description: August 21st.

Frontier Communications Corporation provides communications services to residential, business, and wholesale customers in the United States. It offers broadband, video, voice, and other services and products through a combination of fiber and copper based networks to residential customers. The company also provides broadband, Ethernet, traditional circuit-based, data and optical transport, and voice services, as well as Multiprotocol Label Switching and Time Division Multiplexing services to small business, medium business, and larger enterprises, as well as sells customer premise equipment. In addition, it offers 24/7 technical support; wireless broadband services in selected markets; and frontier secure suite of products, including computer security, cloud backup and sharing, identity protection, and equipment insurance. Further, the company provides satellite TV video services; voice services, including data-based VoIP, and long distance and voice messaging services; and a package of communications services. Additionally, it offers a range of access services that allow other carriers to use facilities to originate and terminate their local and long distance voice traffic. As of December 31, 2016, it served approximately 5.4 million customers and 4.3 million broadband subscribers in 29 states. The company was formerly known as Citizens Communications Company and changed its name to Frontier Communications Corporation in July 2008. Company description from FinViz.com.

Frontier is simply being squeezed out by the competition. The CEO said with their recent earnings, they were facing "severe competition" in the telecom space. Revenue declined -12% in Q2 to $2.3 billion and missed estimates for $2.4 billion. They have missed revenue targets in 3 of the last 4 quarters. They posted an operating loss of $662 million, compared to $75 million in the year ago quarter. The loss this year was accelerated by a forced write down of goodwill for $532 million. Operating costs rose by $500 million to $2.8 billion for the quarter. The per share loss for the quarter was $1.10 and slightly better than the $1.10 analysts expected. Shares spiked temporarily but then resumed their downward trend.

Charter (CHTR), Comcast (CMCSA), AT&T (T) and Windstream (WIN) are eating their lunch. Bigger is better in the telecom space and Frontier is shrinking.

Shares are down 81% over the last year from a 52-week high of $75. On Monday they closed at a historic low. My charts only go back to 1972 and today's close was the lowest on record. I think Frontier is going to single digits. There is no light at the end of this competitive tunnel. Their only hope will be a takeout at some point. Free cash flow is shrinking from $250 to $205 million for the quarter. Liquidity is falling from $522 million to $387 million. They have a market cap of $995 million and debt of $17.8 billion. That is not a desirable picture of a takeout candidate. The more likely path is a continue slide into single digits.

Expected earnings Oct 31st.

Position 8/22/17:

Short FTR shares @ $12.72, see portfolio graphic for stop loss.
Alternate position: Long Oct $11 put @ 90 cents, see portfolio graphic for stop loss.

HIBB - Hibbett Sports - Company Profile


No specific news. Time for the minor rebound to fail.

Original Trade Description: August 19th.

Hibbett Sports, Inc., together with its subsidiaries, operates athletic specialty stores in small and mid-sized markets primarily in the South, Southwest, Mid-Atlantic, and the Midwest regions of the United States. Its stores offer a range of merchandise, including athletic footwear, team sports equipment, athletic and fashion apparel, and related accessories. The company also sells merchandise directly to educational institutions and youth associations. As of January 28, 2017, it operated 1,059 Hibbett Sports stores and 19 Sports Additions athletic shoe stores. Company description from FinViz.com.

Hibbett Sports shares hit a 14-year low after reporting a loss of 15 cents that actually beat estimates for a 20-cent loss. However, revenue declined from $206.9 million to $188 million and missed estimates for $190.3 million. Same store sales fell -11.7% and worse than estimates for a -10.0% drop. The carnage in the stock price came after they cut full year guidance from $2.35-$2.55 to $1.25-$1.35 and same store sales guidance from flat to down mid to high single digits.

The CEO said, "We experienced a very difficult retail environment in the quarter, with a significant decline in transactions and resulting pressure on gross margin." The drop in margins was driven by the increasingly promotional environment, markdowns taken to liquidate excess and aged inventory and logistics and store occupancy expenses associated with lower comparable store sales.

For the rest of 2017 Hibbett expects "the external environment to remain challenging."

Earnings expected Nov 15th.

HIBB shares actually rebounded significantly from their opening low on Friday. I suspect the rebound was due to the single sentence in the earnings release that said, "online sales appear promising and exceeded expectations." While the may be "promising" they did not prevent a dramatic cut to guidance. I believe this rebound attempt will fail.

Until it does fail, I am only recommending a put option and not a short on the stock. I am willing to risk 60 cents until the downtrend continues.

Position 8/21/17:

Long Oct $10 put @ 60 cents, see portfolio graphic for stop loss.

SABR - Sabre Corp - Company Profile


Shares were up slightly after the company announced the refinancing of their $570 million Term A and $1.89 billion Term B credit facilities and $400 million revolving credit facility. The interest rates were lowered and the due date on the Term A facility was extended 12 months.

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.

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