Option Investor

Daily Newsletter, Wednesday, 9/6/2017

Table of Contents

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

Market Wrap

Whippy Prices Beating Up Both Sides

by Keene Little

Click here to email Keene Little
You can tell the market is nervous since every little news item causes a knee-jerk reaction that then gets reversed a day or two later. Both sides have been frustrated by not getting a trade to stick and stops are getting hit before many have an opportunity to take profits. Welcome to September.

Today's Market Stats

It was a relatively quiet day for the stock market today, especially considering the number of whipsaw moves we've seen since the August highs for the indexes. Today finished with a doji and as an inside day (mostly inside Tuesday's wider range). All of this points to an indecision day as traders try to figure out which way is up or down.

It was also quiet for economic reports this morning. The trading day started with a gap up, thanks to an overnight rally in the futures, but immediately sold off following the gap up. The selling didn't stick and the market rallied to new intraday highs before pulling back in the afternoon session. Equity futures have dropped back this evening and completed a round trip off this morning's lows.

Sticking a wet finger up into the wind I think the market will head lower before possibly setting up another rally into the end of the year but with all the choppy price action it's a challenge trying to get a bead on this market. All the jinking and jiving is making it difficult for traders and it could get more volatile this month. Even the VIX is jumping all over the place. It's certainly time for a little more caution than usual.

This afternoon's Fed Beige report was followed by a little more rally in the market but that was given up in the final 30 minutes. The report was basically neutral for the market since it didn't shed any new information. The language was the same -- "moderate growth" and wage pressures are "moderate." Inflation is less than their 2% target and they're not sure why wage pressures, and therefore inflation, isn't higher.

The Fed is stuck in their old thinking (e.g., Philips Curve) and they're essentially baffled by this economy. If they raise rates at their September meeting it will be because they're simply desperate to get rates higher in order to provide a cushion (to lower rates again) for the next recession. And if they raise rates and we soon get confirmation of a recession they'll get the blame. Couldn't happen to a finer group of people (wink).

Instead of worrying about wage pressures (and inflation) perhaps the Fed should pay attention to a rather simple indicator that shows tax receipts from wages. The chart below shows year-over-year growth in payroll tax receipts and the message is not supporting the Fed's concerns about wage pressure.

If employment is growing we should see an increase in payroll tax receipts but since May there has been a reduction in the growth in receipts. The employment numbers have been questionable over the years and while they've been showing growth in employment we have actual tax receipt data that suggests otherwise. If employment has reversed it means trouble ahead for our economy and therefore the stock market.

Payroll Tax Receipts, July 2016 - August 2017, chart courtesy Michael Carr, Peak Velocity Trader

Moving to the charts, the techs have been the strong indexes recently and are the only ones to have made new all-time highs this month. So I'll start tonight's chart review to see where NDX might be headed next.

Nasdaq-100, NDX, Weekly chart

After a brief dip below its uptrend line from June-November 2016 NDX popped back above it last week. Currently near 5862 I think it's an important trend line for the bulls to defend. Another break probably won't recover. The other important trend line is the one along the highs since November 2014, which stopped the rallies into the June and July highs. It's currently near 6077 and is upside potential if the rally keeps going.

If that upper trend line is tagged again we'd then have a 3-drives-to-a-high setup for a top. Whether or not NDX rallies that high is currently a big question mark since there are lower possible targets, as explained below, but if NDX does push higher from here I think we could see a top anywhere between a test of last Friday's high near 6010 and the upper trend line, which will be closer to 6100 by the end of next week.

Nasdaq-100, NDX, Daily chart

Unlike the blue chip indexes, the pullback from last Friday into Tuesday's low for NDX did not result in an overlap of its August 22nd high and therefore it could still be in what will become a 5-wave move up from August 21st. We could therefore see another push higher to at least 6019 where the 5th wave would equal the 1st wave. There's higher potential to the trend line along the highs since November 2014, currently near 6077 but it's important to keep in mind that we could get just a minor new high and then a reversal back down.

There is also still the potential for the bounce off Tuesday's low to be just a correction to the decline and will be followed by a resumption of selling on Thursday. It could go either way but I see upside as limited while downside risk is significant.

Key Levels for NDX:
- bullish above 6010
- bearish below 5890

Nasdaq-100, NDX, 60-min chart

The bounce off Tuesday's low is a 3-wave move with the 2nd leg being the recovery off this morning's low. Two equal legs up points to 5979 so watch for that possibility Thursday morning. But the minimum expectations for an a-b-c bounce correction off Tuesday's low has now been met and therefore there is the potential for more selling to kick into gear right away Thursday morning. The bulls would be in better position, even if only for a rally to a minor new high (6019) if NDX makes it above 5980.

S&P 500, SPX, Daily chart

At the moment SPX has a 3-wave move down from August 8-21 and a 3-wave move back up from August 21st. That leaves us hanging as far as what direction the next big move will be. I think the higher-probability move will be down but we'll need additional price action to verify which way this is going to go next. If the bulls keep control we could see SPX rally up to the trend line along the highs from March 1 - July 27, which will be near 2514 by the end of next week (currently near 2509).

If there's going to be at least another leg down to create a larger 3-wave pullback we should see SPX drop down to at 2407 where it would achieve two equal legs down and test price-level support, also near 2407. More bearish potential is down to a price projection at 2361, possibly slightly above that where it would test its 200-dma, something it hasn't done since the November 2016 low.

Key Levels for SPX:
- bullish above 2481
- bearish below 2428

S&P 500, SPX, 60-min chart

While NDX did not drop below its August 22nd high, thereby keeping alive a possible 5-wave move up from August 21st, SPX (and the Dow) did drop below its August 22nd high at 2454.77 and by doing so it negated the bullish 5-wave count. It leaves a 3-wave bounce in its wake and that turns things more bearish. We could have some kind of complex wave structure that will take us higher but at the moment I think the higher-odds play is to short the current bounce with a stop just above last Friday's high at 2480. The bounce could make it a little higher before turning back down but it's not required.

Dow Industrials, INDU, Daily chart

The Dow has the same pattern as SPX and if anything it looks a little more bearish. Friday's high was a back-test of its broken uptrend line from November 4 - May 18 and Tuesday's selloff was the bearish kiss goodbye. It is therefore bearish against last Friday's high at 22039. Tuesday's low found support at its 50-dma, currently near 21740, which is also the location of the bottom of a parallel up-channel for price action since the April low.

The Dow could find support slightly lower at price-level S/R near 21680 but a break of that would be bearish and below 21600 would be confirmation that another leg down is in progress. At that point I'd watch to see if the Dow finds support near 21449 where it would achieve two equal legs down from August 8th. Below that is minor support near 21300 and then a price projection for a larger decline at 21091, possibly down to price-level support near 21000.

Key Levels for DOW:
- bullish above 22,039
- bearish below 21,600

Russell-2000, RUT, Daily chart

The RUT has had the more bearish price pattern since its July 25th high (it peaked before the others, which was a bearish warning sign). The move down into its August 18th low counts well as a 5-wave move, which sets the trend (unless it was the completion of a larger sideways consolidation). The sharp bounce into Tuesday morning's high is a 3-wave bounce correction and it should lead to another leg down.

Tuesday's reversal from the 62% retracement of its decline, near 1413, should be the start of the next leg down and short against Tuesday's high near 1415 looks like a good play from here. Another leg down equal to the July-August decline gives us a downside target at 1311 and there's price-level support only slightly lower at 1296 (its June 2015 high).

Key Levels for RUT:
- bullish above 1415
- bearish below 1385

10-year Yield, TNX, Daily chart

The banks got hit hard with Tuesday's selling because there's concern that the Fed does not have as much economic support as they want in order to justify another rate increase. They'll probably do it anyway in this month's meeting but they really don't have the numbers backing that decision. It doesn't really matter anyway since the bond market is a lot smarter than the Fed and if large institutional fund managers see a lower probability for inflation and evidence of a slowing economy they're going to be investing more in the safer bonds instead of riskier stocks.

Banks do better in a higher interest rate environment (it helps their spreads between money lent vs. paid on deposits) and yesterday's steep decline in yields (TNX dropped 4%) sent shivers down the spines of the big banks. TNX has dropped out of its bullish descending wedge that it was in since its July 6th high and that's bearish. Since a failed pattern tends to fail hard we could see bond yields tumble lower from here and head quickly for a downside target zone (for now) at roughly 1.95%-2.00%. The bearish potential would be at least in question if TNX gets back above last Friday's high at 2.167%.

If TNX does drop down to support near 2.0% it will be interesting to see what the Fed decides.

KBW Bank index, BKX, Daily chart

The banks are slightly behind the decline in yields since BKX made a slightly higher high in August whereas TNX made a lower high at that time. Like TNX we can see a bullish descending wedge for the decline from the high on August 8th but so far there isn't the confirming bullish divergence I like to see before depending on this pattern. It's looking more likely we'll see a drop below the wedge and that would leave another failed pattern.

Tuesday's strong decline dropped BKX to the bottom of its descending wedge, which was again tested with today's midday low. So support is still holding but at the moment it's looking like it will drop below the wedge and then watch for a back-test to confirm a larger decline is in progress (or not if there's a recovery back inside the wedge, since a throw-under followed by a climb back inside the wedge is actually a good buy signal).

Transportation Index, TRAN, Daily chart

The battle of the trend lines and moving averages -- that's how I'd label the TRAN daily chart. The August 24th low was a test of support at its uptrend line from January-June 2016. Last Friday's high was a test of resistance at its broken uptrend line from June 2016 - May 2017 after it broke through its short-term downtrend line from its July 14th high.

Tuesday, and again this morning, the TRAN then back-tested that short-term downtrend line and it held as support. It also back-tested its 200-dma following the rejection at its 50-dma last Friday. Today's bounce brought the TRAN back up to price-level S/R at 9310, which held as resistance. For now it's just ping-ponging between support and resistance and it's a tough call as to which way this will resolve. At the moment I think it's going to head lower but I could easily argue for a higher bounce back up to resistance near 9490 before turning back down. As an economic indicator this is an important index to watch.

U.S. Dollar contract, DX, Daily chart

After falling out of its down-channel from January, in mid-July, the US$ has back-tested the bottom of the channel as well as the top of a steeper down-channel from May. It is now below price-level support near 93 and looks like its vulnerable to the trend line along the lows since February 2015, near 90.20, and then the bottom of its steeper down-channel, which will be near 89.80 by the end of next week.

Since the dollar rolled over from its January high I've been looking for a drop down to the trend line along the lows and it's the reason I've been projecting a decline to the $90 area. We're starting to see bullish divergence and that's supporting the idea that the dollar will find support between here and 90. A rally above 94 would tell us a low is in place.

Gold continuous contract, GC, Daily chart

The N. Korean scare tactics are working for gold bulls as they seek a safe haven investment. The dollar's decline is also helping drive gold higher and it's looking like we could see gold reach a price projection at 1377 for two equal legs up from December 2016. This would also be a test of the July 2016 high at 1377.50.

I'm still looking at the 3-wave bounce as a correction to the 2011-2016 decline and not something more bullish but it would start to look more bullish if it gets above its March 2014 high at 1393. A 38% retracement of the 2011-2016 decline is near 1381, making the 1377-1393 area a good upside target as well as strong resistance. But a drop below 1300 would likely bring out the sellers sooner rather than later.

Oil continuous contract, CL, Daily chart

Oil has rallied up to its downtrend line from February and its broken 200-dma, both near 49.50. It would obviously be more bullish above this resistance, in which case we could be looking for a rally to about 54 where it would achieve two equal legs up from June and back-test its broken uptrend line from April-August-November 2016 later this month. In order to accomplish that though it would first have to break its downtrend line form May 2015 - January 2017, near 52.30. I think the higher-odds pattern calls for the decline to continue from here.

Economic reports

Thursday's economic reports include the unemployment data and a few others but nothing market moving. The market will be left to react to overseas news.


The stock market is looking vulnerable to more selling following the bounce off Tuesday's low. That picture would change if the indexes rally above last Friday's highs, in which case we could be looking for the rally to extend into at least mid-September (opex Friday is the 15th). That would likely get SPX above 2500 but as long as the current bounce stays below last Friday's high (2480) I think we'll see 2400 before we see 2500. Below 2400 would likely trigger stronger selling.

The longer-term pattern from here is up for grabs. I could just as easily argue we've seen THE high for the stock market as I could for another rally to new highs following a larger pullback into September. Short-term I lean bearish from here but another week of strong selling would then turn me more cautious until I can see whether or not some strong support levels start breaking. Play it short term until we get some longer-term clarity.

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

Keene H. Little, CMT

New Plays

Risk Avoidance

by Jim Brown

Click here to email Jim Brown
Editor's Note

Failure to avoid risk can be detrimental to your financial health. The S&P futures are down -5.50 tonight and falling. They could turn around by morning but they could also worsen. This is September. Volatility happens. The Russell only rebounded 2 points today after a 13 point drop on Tuesday. All but one of our long positions declined today. It appears the small cap bounce could be fading. Waiting another day to add positions will not hurt us. Adding one into a gap lower open could hurt. We just need to be patient. An opportunity will eventually arise.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Clouds Evaporating

by Jim Brown

Click here to email Jim Brown

Editors Note:

The storm clouds hovering over the September market appear to be evaporating. The biggest cloud could evaporate before the weekend. There are signs of political compromise in Washington that would push the debt ceiling and the budget process 90 days into the future and eliminate the threat of a government shutdown in September. President Trump is supporting a move by democrat leaders to tie those together with hurricane relief and buy 3 additional months of negotiating time before the risk of a shutdown. The republicans are furious so it remains to be seen if the measures will pass. If they were passed, it would remove all the political drama from September and that would be bullish for the market. North Korea still exists and they are expected to test another missile on Saturday.

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

CIEN - Ciena Corporation - Company Profile


No specific news. Still holding over support. No rebound yet.

Original Trade Description: Sept 2nd

Ciena Corporation provides equipment, software, and services that support the transport, switching, aggregation, service delivery, and management of voice, video, and data traffic on communications networks worldwide. The company's Networking Platforms segment offers hardware networking solutions optimized for the convergence of coherent optical transport, optical transport network switching, and packet switching. Its products include 6500 Packet-Optical Platform and the 5430 Reconfigurable Switching System, Waveserver stackable interconnect system, CoreDirector Multiservice Optical Switches, and OTN configuration for the 5410 Reconfigurable Switching System, as well as Z-Series Packet-Optical Platform; 3000 family of service delivery switches and service aggregation switches, and the 5000 family of service aggregation switches, as well as 8700 Packetwave Platform and the Ethernet packet configuration for the 5410 Service Aggregation Switch; and 4200 Advanced Services Platform, Corestream 5100/5200 Advanced Services Platform, Common Photonic Layer, and 6100 Multiservice Optical Platform. This segment also sells operating system software and enhanced software features embedded in each of these products. The company's Software and Software-Related Services segment offers network management solutions, including the OneControl Unified Management System, ON-Center Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release, and Planet Operate; and Blue Planet network virtualization, service orchestration, and network management software platform, as well as related installation, support, and consulting services. Its Global Services segment provides consulting and network design, installation and deployment, maintenance support, and training services. Company description from FinViz.com.

Ciena reported earnings of 51 cents that beat estimates of 49 cents. Revenue rose 9% to $728.7 million and beat estimates for $726.9 million. Gross margins were 45% with an 11.3% operating margin. They ended the quarter with $854.1 million in cash and generated free cash flow of more than $50 million. Shares were knocked for a 15% loss on the news.

They guided for Q3 revenue of $720-$750 million and a record quarter. Analysts were expecting $766 million.

The CEO talked to a Barron's analyst after the earnings call and was very upbeat. He said we are still in bullish mode with 7% annual growth and 5% growth in North America. Compound growth over the last five years is 9%. The Q3 guidance takes into account two factors. Government spending overall has slowed. That means less spent on networking equipment. Secondly, Tier One telecom operators get a lot of government business and the slowing government spend has affected them as well. There has been a lot of regional M&A that is being digested. This impacts the entire networking market not just Ciena. We are still predicting 7% growth and a record quarter despite the temporary government slowdown.

Piper Jaffray reiterated an overweight rating saying they understood the government and regional provider problem and Ciena had a lot of positive signs despite this government slowdown. Ciena is executing well, new product acceptance is good. We believe Ciena is the best positioned system supplier for the two hottest segments of the optical market.

Citi upgraded from neutral to buy. Doughtery reiterated a buy and $27 price target.

Earnings Nov 30th.

Shares declined after earnings to support at $21.50 and rebounded 2% on Friday.

Position 9/5/17:

Long CIEN shares @ $21.89, see portfolio graphic for stop loss.
Alternate position: Long Nov $23 call @ 93 cents, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


Outstanding! There was a sharp dip at the open as expected but shares rebounded to close with only a 28 cent loss after the announcement of the secondary offering. It appears the offering is not going to be a drag but it will take another week before we know for sure.

KTOS announced a $46 million contract with the Saudi Royal Navy to assist in increasing military communications and preparedness. They also announced the QWK Integrated Solutions LLC, a partnership of multiple defense firms had won a $3.038 billion five year contract. The partnership will provide for rapid development and integration of space, missile defense, cyber, directed energy and related technologies to support SMDC/ARSTRAT and the warfighter.

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.

Update 9/5/17: New high in a weak market. Unfortunately, after the close they announced a secondary offering of 12.5 million shares that will increase the float by 14%. If I recommended we sell at the open on Wednesday, we are going to get hit with the normal "sell the news" decline. If we retain the position, stocks normally rise after a secondary is completed. We can either take a loss on Wednesday or hang on for a bigger gain later. I am recommending we hold the position. I am removing the stop loss to avoid being knocked out of the position for a loss. Shares declined to $12.80 in afterhours, a drop of $1. If that is all the decline we get, I would be very happy.

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.

MRVL - Marvel Technology - Company Profile


No specific news. Still volatile as it battles resistance at $18. Minor decline.

Original Trade Description: August 30th.

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.

Position 8/31:

Long MRVL shares @ $17.79, see portfolio graphic for stop loss.
Alternate position: Long Oct $18 call @ 64 cents, see portfolio graphic for stop loss.

SYMC - Symantec - Company Profile


Symantec said the US and EU power grid had been hacked by state actors and they had gained access to core systems that would have allowed them to be shutdown. The hacks were loosely tied to a recently dormant group called Dragonfly with links to Energetic Bear or Kola, widely believed to be sponsored by Russia.

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

DF - Dean Foods - Company Profile


No specific news. Holding at the 5-year lows.

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. Only a 3 cent rebound.

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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