Option Investor

Daily Newsletter, Wednesday, 8/30/2017

Table of Contents

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

Market Wrap

Stock Market Continues to Thwart the Bears

by Keene Little

Click here to email Keene Little
Sell in May didn't work for the bears and now the seasonally weak period of August-September might disappoint them as well. The pullback from the August highs for the major indexes looks more like a correction to the rally than something more bearish and the bulls continue to hold the reins to this market.

Today's Market Stats

The strong rally off Tuesday's gap-down start to the day, followed by more rally today suggests the bulls couldn't stand it any longer and decided to jump in with both feet and buy the dip. It's a little too early to tell whether or not the 2-day rally is going to lead to something more bullish or is instead just another bounce in what has been a choppy price pattern this month. But the failure of the bears to push the market below some strong support levels leaves the bulls in charge until proven otherwise.

August is on track to decline less than -1% for August (the Dow is on track to close near the July closing price at 21891) and it's hardly the kind of correction bears were hoping to see. Following the nervousness about what N. Korea is up to, or more accurately, nervousness about how the U.S. will react, geopolitical concerns have died back down and the stock market has experienced a relief rally the past two days.

But while the major indexes are showing resilience, there are several indicators that tell us not all is well under the surface of the market. Whether it's the number of stocks trading above their 200-dma (bearish divergence there) or the number of advancing vs. declining stocks or how much money is flowing into and out of stock funds, the resilience in the major averages looks to be more of an effort to hold the indexes up for show (for public consumption) than real strength.

The chart below (sorry for the black background for those who still like to print out these reports) shows the fund flows over the past three weeks for Government Bonds, Gold, High Yield (junk) Bonds and U.S. Equities. Basically the message is that investors are taking risk off the table by moving some money into government bonds and gold while withdrawing money from junk bonds and equities.

The move out of equities (probably a lot of money has simply been moved to cash) is significant and yet the major indexes are holding up reasonably well. That probably won't be true for September if outflows from equities continues once most people are back from vacation next week.

Flow of Money To/From Funds, chart courtesy Bloomberg.com

Trading volume has been especially slow and this could be factor in the whippy price action we've seen this month. This week we might be seeing more of an effort to simply hold the market up into the end of the month, which is easier to do when the volume is light. Once most traders return to their desks next week (after Monday's Labor Day holiday) we should get a better idea as to whether or not the past 2-day rally has more meaning than just a bounce correction.

Helping the bulls today were some positive economic reports, although there was actually a brief selloff in the futures following the reports in the pre-market session and the market actually opened down. But at least the reports didn't hurt the bulls' efforts to continue yesterday's rally. The ADP report showed stronger employment growth in August (237K) than was expected (180K) and an improvement over the 201K for July. The other pre-market report was the 2nd GDP estimate, which came in at +3.0% and better than the expected +2.7% and an improvement from the previous estimate of +2.6%.

The market hasn't moved much this month and therefore not much has changed on the charts. As far as determining the next big move following this month, we're left with confusing and diverging signals and since price is king we're simply going to have to let the market show us the way. We can get some more hints from the charts but even they're not helping much at the moment. Flip a coin for direction from here, which means traders need to stay cautious and recognize that this is not the best time to trade (knowing when not to trade can "make" you more money than what you trade).

I'll start off tonight's chart review with one of the best market proxies we have, the S&P 500 index.

S&P 500, SPX, Weekly chart

SPX started August at 2470 and closed today at 2457, down -13 (-0.5%), which means not a whole lot has happened on the weekly chart. But still holding as support is the uptrend line from February-November 2016 and this is an important trend line for the bulls to defend. If the bulls can continue to put pressure on the bears we could see another rally leg to the trend line along the highs from November 2015 - February 2017. SPX had nuzzled up to just below this trend line multiple times since May and it currently sits near 2525.

Also near 2525 is the location of the mid-line of the up-channel for price action since 2010-2011, which has been acting as resistance since March. Another trend line along the highs since April 2016 (excluding the March 1, 2017 high) is also near the same 2525 level. It makes for a good upside target area as well as strong resistance if reached.

S&P 500, SPX, Daily chart

The leg up from March 27th, labeled green wave-4 on the weekly chart above, is shown in more detail on the daily chart below. It has created a parallel up-channel for the move, the top of which will be near 2525 on September 19th, just after opex Friday on the 15th. The top of the channel is currently near 2510 so depending on how long it takes to reach it (if it does) we'll be able to see how it's setting up for a possible high.

The bearish pattern calls for the resumption of selling as soon as the leg up from Tuesday completes since it will be a 3-wave bounce pattern off the August 21st low and potentially lead to a stronger decline as part of a larger pullback pattern. The lack of impulsivity in the moves up and down since the August 8th high unfortunately leaves us guessing which direction will be the next big move (50-100 points).

Key Levels for SPX:
- bullish above 2470
- bearish below 2428

S&P 500, SPX, 60-min chart

Dialing in closer to the price action since the August 8th high shows the 3-wave decline to the August 21st low and the 3-wave bounce to the current high. Two equal legs up from August 21st points to 2465.62, which could be the extent of the rally from Tuesday and then back down for a larger pullback from August 8th. But for now it's bullish with SPX breaking its downtrend line from August 8-16 and getting back above price-level S/R near 2454 (it did a quick little back-test just before today's close so a continuation higher on Thursday would be bullish, especially if it can get above 2466.

Dow Industrials, INDU, Daily chart

The Dow was a little weaker than the other indexes today but it has the same pattern as SPX. It was unable to get through its broken 20-dma, which SPX managed to do, and a turn back down from here would leave a bearish kiss goodbye following the back-test. But if the bulls keep up the pressure into the weekend we could see the Dow make it up to its broken uptrend line form November 2016 - May 2017, which will be near 22040 on Friday. A drop back below price-level S/R near 21680 would be the first sign of trouble for the bulls since it would also be a break of its 50-dma, currently near 21695, and the bottom of an up-channel for price action since April.

Key Levels for DOW:
- bullish above 21,000
- bearish below 21,000

Nasdaq-100, NDX, Daily chart

Strength in the semiconductors and biotechs, along with the FAANG stocks (especially NFLX, +3.5%), helped the tech indexes outperform the other indexes today. NDX made it slightly above its downtrend line from July 27 - August 8, near 5925, and unless that break turns into a head-fake break with a strong decline back down on Thursday it's looking like the tech indexes could push to new highs in the coming weeks.

I show a rally back up to its trend line along the highs from November 2014 - July 2015, which will be near 6100 by mid-September. This is the trend line that stopped the rallies in June and July and another attempt would create a 3-drives-to-a-high topping pattern. The bulls need to hold NDX above the downtrend line from July and then get RSI to break its downtrend line from May. The first sign of trouble for the bulls would be price below Tuesday's low at 5785.

Key Levels for NDX:
- bullish above 5945
- bearish below 5750

Russell-2000, RUT, Daily chart

The RUT also broke its downtrend line today, this one from July-August, which had stopped the RUT's rally on Tuesday. It has also climbed firmly back above its broken uptrend line from March-May, currently near today's open at 1383. With today's high near 1393 it came within about 4 points of price-level S/R near 1397. There's higher potential to the 50% retracement of its decline, near 1401, and then a neckline at the lows in June-July and then August 3rd, which is nearing its broken 50-dma at 1407.

Back above its 50-dma would be a more bullish move but at the moment the bounce off the August 18th low fits as just a correction to an impulsive decline, which suggests lower prices once the bounce correction completes. This is obviously different from the projection I show above for NDX so we'll have to let the market tell us which one is correct. The short-term patterns over the next week should help resolve the difference.

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

10-year Yield, TNX, Daily chart

For the past several updates on TNX I've been showing a bullish descending wedge for the pullback from July. But the bullish pattern was missing the bullish divergence, which suggested it would break down instead and that's what it did on Tuesday. Today it bounced back up to the bottom of the wedge and if it makes it back inside the wedge, with a close above today's close at 2.143, it would leave a head-fake break and that could lead to a rally.

If TNX continues lower from here (with a rally in bond prices) we would likely see TNX drop down to the bottom of a larger descending wedge pattern for the pullback from December 2016, which will be near 2.00 in the first week of September. I would expect to see this happen if the stock market declines.

KBW Bank index, BKX, Daily chart

BKX has pulled back from its August 8th high in what could be interpreted as a bullish descending wedge with maybe a hint of a bullish divergence. It successfully held its 200-dma yesterday after dropping below it at the open. Today's rally got it further away from support but it hasn't been able to test the top of its wedge yet (downtrend line from August 8-25, currently near 93.86).

A drop back below support at its trend line along the highs from April 2010 - July 2015, near 91.90, would be more bearish and then we'd have to watch for the possibility of bullish divergence at a new low for the pullback, especially if it holds inside its descending wedge. The bottom of wedge will be near 90.30 after the first week of September.

Transportation Index, TRAN, Daily chart

The Transports have had a nice bounce off the August 24th low and I see additional upside potential to price-level resistance near 9490. But first it has to deal with potentially tough resistance where it closed today near 9309. The November 2014 high at 9310 has been price-level S/R since then. The downtrend line from July-August crosses the 9310 level today and its broken uptrend line from June 2016 - May 2017 is also now near 9310.

The 9310 area is tough resistance to break through but obviously it would be more bullish if it does. The next line of resistance is its broken 50-dma, currently near 9374, and then above that is its August 16th high near 9448. After getting through those levels it would then be looking at 9490. Failure of the current rally could happen at any time.

Relative Strength of TRAN vs. INDU, Daily chart

The TRAN has been doing a little better than the Dow this month, as can be seen on the relative strength (RS) chart below. This chart shows the relative weakness since last December and as with many RS charts we can use technical analysis to help determine when weakness will continue or reverse. There's a nice EW pattern playing out and it looks like we could see the TRAN outperform the Dow for at least a little longer.

When one index outperforms another it's not always because it's rallying. It could be that it sells off slower than the other so it's important to note that this is only RS we're looking at. But if you're a pairs traders (long one, short the other), this tool can be helpful. The longer-term EW pattern for this looks bearish for the TRAN, which means the TRAN will could rally slower than the Dow or decline faster. Once the bounce correction off the August 2nd low completes I expect it to continue lower (as depicted).

Relative Strength of RUT, TRAN and BKX vs. SPX, Daily chart

I track a few indexes against SPX to look for warning signs and the chart below compares the RUT, TRAN and BKX against SPX. All have been underperforming SPX since last December and that's not a healthy sign for the market. Clearly it hasn't mattered to the market's rally but eventually it will catch up and right now it's just a warning sign.

I have the starting point for this chart in December 2016 when they all peaked together. You can then see the TRAN has more significantly underperformed SPX and I think this is important since it's a sign of economic slowing, which the broader market hasn't shown any concern about yet. The weakness in the RUT is also a concern because it shows weakness in the bullish spirit that drives markets higher.

If I showed a chart of HYG (junk bond index) against TNX you'd see the same thing. Again, weakness in an index like the RUT is the canary that's fallen off its perch but the coal miners haven't noticed yet. Soon they too will run out of oxygen. Lastly, the weakness in the banks is always a concern since following the money is usually the right way to go. It will all matter at some point but this market remains extremely distorted by easy credit.

U.S. Dollar contract, DX, Weekly chart

Keeping the big picture in mind for the US$, the weekly chart below shows the big expanding triangle that has formed since the March 2015 high. The bottom of the triangle is near 90 and it's the reason I've been looking for a drop to that level before it will be ready to bounce back up. The next rally should take the dollar back up to the 106 area by mid-year next year.

Gold continuous contract, GC, Weekly chart

Gold's weekly chart below shows the bullish break of its downtrend line from September 2011 - July 2016, which happened August 9th. I have some upside price projections to watch carefully and the first ones have now been met. Looking at the bounce pattern off the December 2015 low, the 2nd leg up (the rally from December 2016) is 62% of the 1st leg at 1329.54, which was met with Tuesday's high at 1331.90. If the bounce off the December 2015 low is to achieve two equal legs up then we're looking for a rally to 1456.40.

The leg up from December 2016 is also a 3-wave move and the 2nd leg (the rally from July 10th) is 62% of the 1st leg near 1311, which has also been met. Two equal legs up from December 2016 points to 1377.10. There's also price-level resistance at 1308 and 1347. Therefore there are multiple levels of potential resistance to a further rally between 1308 and 1377 and the rally could fail at any time.

I don't show the daily chart but the leg up from July 10th has formed a rising wedge and Tuesday rally created a potential reversal pattern with the pop above the wedge, near 1322, and then a close back below it, leaving a shooting star candlestick at resistance. With the minimum price projections having been met and a daily pattern that's warning of a reversal back down, it's going to be important for gold bulls to hold the line if we see a drop back down to the broken downtrend line from September 2011 - July 2016, currently near 1274.

Oil continuous contract, CL, Daily chart

Oil's pattern has been nothing but a bunch of overlapping choppy corrective moves all year and that makes projections very difficult. Using trend lines, which are often excellent trading guides in this environment, the nearest support level is the uptrend line from February 2016 - June 2017 (untested), currently near 44.50. Only slightly higher is a price projection for two equal legs down from August 1st, which points to 4478. Oil looks weak after breaking its 50-dma, currently near 47, and that follows the bounce off this support on August 17th. The oscillators also support further downside for now. It takes a drop below 44.50 to turn oil more bearish.

Economic reports

Thursday morning will be busy for economic reports, some of which could sway the market. Personal income and spending are both expected to show an increase while the PCE prices are expected to stay at the same +0.1% The Chicago PMI is expected to stay about the same as July while pending home sales are expected to decline. Kind of a mixed bag of numbers that probably won't move the market.


Whether or not there's an "agenda" this week to rally the market and close August with a minimal decline, or maybe a slight gain, the end result for the month is rather neutral. The whippy price action could resolve either way and while the bulls remain firmly in control of this market we still need to consider the seasonally weak period that we're in.

Once most traders are back at their desks next week (Tuesday) we'll have stronger trading volume and with volume we should get a stronger conviction for whatever move happens. We're heading into a holiday weekend, which is typically bullish and the bulls therefore have that tailwind to work with. Just keep in mind that the bounce pattern off the August 21st lows could be just that, a bounce that will be followed by another drop lower.

There's a lot of weakness under the surface of this market so be careful and don't get complacent about the upside. There's still plenty of upside potential for this market but I remain unconvinced we'll see it head higher from here. September has a reputation for being cruel to bulls but we do have to wonder if it will be just another seasonal pattern that gets ignored by the bulls. The tough thing to ignore will be the budget/debt ceiling debate. Congress has proven themselves incapable of getting anything done (not that that's a bad thing) and the headlines could be depressing. It's that "uncertainty" thing.

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

Keene H. Little, CMT

New Plays

Beat and Beat

by Jim Brown

Click here to email Jim Brown
Editor's Note

This chip company beat on earnings and revenue and metrics are improving rapidly.


MRVL - Marvel Technology - Company Profile

Marvell Technology Group Ltd. designs, develops, and markets analog, mixed-signal, digital signal processing, and embedded and standalone integrated circuits. It offers a range of storage products, such as hard disk drive (HDD) and solid-state drive controllers, as well as HDD components, such as HDD preamps components; and develops software enabled silicon solutions consisting of serial advanced technology attachment port multipliers, bridges, serial attached SCSI, and non-volatile memory express redundant array of independent disks controllers and converged storage processors for enterprise, data centers, and cloud computing businesses. The company also provides networking products comprising Ethernet solutions comprising Ethernet switches, Ethernet physical-layer transceivers, and single-chip network interface devices; and embedded communication processors. In addition, it offers a portfolio of connectivity solutions, including Wi-Fi, and Wi-Fi/Bluetooth integrated system-on-a-chip products, which are integrated into a variety of end devices, such as enterprise access points, home gateways, multimedia devices, gaming products, printers, automotive infotainment and telematics units, and smart industrial devices. Further, the company provides printer-specific standard products, as well as full-custom application-specific integrated circuits; and communications and applications processors. Company description from FinViz.com.

Marvel reported earnings of 30 cents that beat estimates for 28 cents. Revenue of $605 million beat estimates for $601 million. Free cash flow more than doubled from $38 million to $89 million. Core revenues rose 6%, storage controller revenues rose 13%. SSD chips rose from 20% to 25% or revenue. The new SSD products are rapidly gaining market share and remain a high profit item. Gross margin was 60.4%. They guided for Q3 for revenue of $595-$625 million with earnings of 30-34 cents per share.

Expected earnings Nov 23rd.

The company is in the midst of a restructuring process while they are changing their product mix for the better. Apparently it is working.

Shares spiked from $15.75 to $17.25 after earnings then pulled back slightly on post earnings depression. They rebounded today to a new 2-month high and very close to a new high.

Buy MRVL shares, currently $17.75, initial stop loss $16.75.
Alternate position: Buy Oct $18 call, currently 63 cents. No initial stop loss.


No New Bearish Plays

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

Surprising Strength

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the indexes except the Dow showed surprising strength on Wednesday. The Russell eased through initial resistance at 1,388. The Nasdaq pushed through 6,300 and reached 6,375 before fading slightly into the close. The S&P pushed well though resistance at 2,450 to 2,457. Only the Dow was a laggard.

This could be a trend change in progress. Pushing through resistance ahead of the normal September weakness and rebounding strongly from the Tuesday dip suggests the buyers are getting restless and there are no sellers.

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. Nice breakout to another new high.

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.

SYMC - Symantec - Company Profile


No specific news. Shares recovered their Tuesday loss and moving higher again.

Original Trade Description: August 26th.

Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Digital Safety and Enterprise Security. The Consumer Digital Safety segment provides Norton-branded services that provide multi-layer security services across desktop and mobile operating systems, public Wi-Fi connections, and home networks to defend against online threats to individuals, families, and small businesses. This segment also offers LifeLock-branded identity protection services, such as identifying and notifying users of identity-related and other events, and assisting users in remediating their impact; and digital safety platform designed to protect information across devices, customer identities, and the connected homes and families. The Enterprise Security segment provides endpoint protection products, endpoint management, messaging protection products, information protection products, cyber security services, Website security, and advanced Web and cloud security offerings. Its enterprise endpoint, network security, and management offerings supports evolving endpoints and networks, as well as provides an integrated cyber defense platform. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. Company description from FinViz.com.

Symantec is the largest provider of security products for retail buyers. They have an excellent suite of firewalls and antivirus programs. I have used everyone in the market at one time or another and Symantec has always been the best for me.

Last week they announced something different. They announced a secure router that handles everything in your house. It has special security for smartphones, tablets, PCs, IoT devices, etc. It has a handy user friendly interface and you can set at the router level, individual passwords for everyone in the family with individual settings by password. Say you have a 12 year old boy in the house. You can set different parental exclusions for him than you would for an 8 year old in the same house. You are in charge of everyone's access regardless of what device they are using.

The secure router blocks attacks before they get to your PC and before Windows has to deal with them. The router is not cheap but compared to what it does, it is cheap for the number of functions. How much does it cost to have your PC compromised? The router is $300 and comes with a year of service. After the year is up it goes to $10 a month. That is an entirely new revenue stream for Symantec. Obviously, it will not show up in their earnings for several quarters but the stock is rising on the news.

You can read the full press release HERE.

Expected earnings Nov 1st.

The stock is at the upper end of the range that I recommend in Premier Investor. With the potential for volatility in September, I am not recommending we go long the shares. This will be an option only position so we can try and ride out some of the volatility with minimum risk.

Update 8/28: Symantec said over the weekend they have identified a sustained cyber spying campaign, likely state sponsored, against Indian and Pakistani entities. The espionage effort began in October. India, China and Pakistan have raised military readiness over the last several weeks.

Position 8/28/17:

Long Oct $31 call @ 48 cents, see portfolio graphic for stop loss.


BEARISH Play Updates

DDD - 3D Systems - Company Profile


No specific news. Came within a penny of being stopped out. Support still $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. 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.

SABR - Sabre Corp - Company Profile


No specific news. Shares are fighting resistance at $18.50. Missed being stopped by 7 cents.

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.

Update 8/23/17: 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.

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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