Option Investor

Daily Newsletter, Wednesday, 9/13/2017

Table of Contents

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

Market Wrap

Another Bullish Opex Week

by Keene Little

Click here to email Keene Little
While we haven't had a strong rally in the first part of opex week it has nevertheless stayed bullish. The choppy move higher with bearish divergence suggests caution but maybe not until after opex. The buyers are still buying the dips and the bears are still running for cover, which tells us to stick with the bulls until things change.

Today's Market Stats

It was another quiet day in the market (only a 63-point swing for the Dow all day) but the slow choppy move higher was good enough for another new all-time high for the indexes (except the RUT). There are enough warning signs that the opex-induced rally could run into trouble soon but for now the message is clear -- don't fight the (up)trend.

It was also a very quiet day for news, earnings and economic reports, which left the market on its own and with very few catalysts to move the market there wasn't much movement.

This morning's PPI numbers showed inflation a little lower than expectations but an increase from July's -0.1% for both PPI and Core PPI. August came in at +0.4% and +0.1% for PPI and Core PPI and since it's the Core PPI that the Fed is most concerned about, it continues to give them a green light for another rate increase. The next rate increase is not expected until happen until December (one more to finish the year and before some Fed heads leave the Fed, possibly Yellen included).

Last Wednesday I showed a chart of Federal tax receipts, which highlighted the fact that tax receipt growth has been in decline since May of this year. Despite the attempt to make it sound like we have employment growth we are actually seeing a decline in employment wages (and therefore tax receipts).

Lower tax receipts could mean more people have gone off the payroll and are now working for themselves (and under-reporting income?) so it's difficult to judge the actual employment picture just from tax receipts. But it's just one more metric that calls into question the employment picture.

The Fed makes many (most) of its rate decisions on inflation expectations according to the Philips Curve (the stronger the employment picture, the stronger the wage pressures, the stronger the inflation) and therefore it's important to see what kind of wage pressures we actually have. The Fed probably doesn't look at the Federal tax receipts because that would make too much sense.

Another metric for how the economy is doing is growth in credit. The chart below shows the growth/decline in global credit and it's been in decline since the end of 2016. Thanks to abnormally low interest rates (including negative rates in other parts of the world), it was easy for companies and people (not to mention governments) to borrow more money. Credit greases the economy's skids and without it the economy has a much more difficult time growing.

When credit contracts (less borrowing, paying down debt, defaulting) it's often followed by a contraction in the economy and that's the message from the chart below. When credit started contracting in 2011 and 2015 we had the largest market corrections that we've seen in the rally from 2009. We now have the largest credit contraction since 2009 and yet the market hasn't reflected it (yet).

Credit Contraction

In my opinion this is a major warning sign since I believe the market is being held up on hopes and dreams for something constructive from our Congress. When the stock market correction comes it will likely be bigger than anything we've seen since the rally started in 2009, possibly much worse since the credit contraction will likely continue during the next economic/market contraction. We need to keep in mind the level of debt this time around and the fact that it's likely the bubble that's going to pop and take the market down with it.

While we should be looking over our shoulder for potential trouble, the market has been ignoring the troubling signs and that could continue longer than most think possible. Don't fight the trend is clearly the message after just a 3-wave pullback in August. The pattern of the rally off the August 21st low is not clean but the choppy move higher fits as an ending pattern. So I would definitely not get complacent about the current rally. Don't fight it but be careful joining it. I have a feeling the reversal from it could happen quickly and strongly.

If the market does hold up into October it would fit a pattern for years ending in 7, which is what we're currently in. In the past, with August and September being typically weak months, it's been common to see some ugliness into September. October has been known as the bear killer since a strong rally into the end of the year has typically started from a stronger pullback into October.

But in the more recent years ending in 7 (1987, 1997, 2007) we've seen market highs in October and strong declines follow. There was the stock market crash in October 1987 (down -34%), the mini-crash in October 1997 (-13%), which started in Asia, and the peak in October 2007, which led to the crash into the 2009 low. Instead of being bear killers, the past three Octobers in the year ending in 7 have been bull killers (even if for only just a scary pullback before heading higher again).

The way the price pattern is setting up I think this October (if not a couple weeks before it) will be another bull killer. The market is so badly distorted right now (excess credit) and the rally from last November has been built primarily on hope (for government tax and regulation changes). Sentiment is a fickle thing and when it changes it's likely to induce panic quickly, which is the reason for watching over your shoulder while enjoying the ride higher.

The blue chips have a similar pattern but slightly different reasons to suspect the rally could soon run into trouble. But each also shows why the rally could hold up into the end of the month. I'll start tonight's chart review with the weekly chart of the Dow.

Dow Industrials, INDU, Weekly chart

The previous high for the Dow was on August 8th when the Dow poked above the trend line along the highs from May 2011 - March 2015. It then dropped back below the trend line in mid-August, back-tested it on September 1st and is now back up to it (marginally above the line, currently near 22094. There's a broken uptrend line from November-May, currently near the August 8th high at 22179, which is also close to being back-tested.

If the bulls can power through these multiple resistance levels at roughly 22100-22200 it will be more bullish but in the meantime watch for a possible reversal from resistance, especially seeing the bearish divergence against the March 1st high.

Dow Industrials, INDU, Daily chart

The Dow is at risk of creating a double top with the August high if it's unable to keep the rally going. As stated above, there's resistance at the broken uptrend line from November-May, which crosses the August 8th high at 22179 on Thursday. Crossing the same level is the mid-line of the parallel up-channel for the rally from April (dotted green line). There are a couple of short-term price projections for the current leg up that point to the possibility of a rally to about 22300 so I think the Dow would be more bullish above that level but between here and there I think we'll see a top to this rally.

Key Levels for DOW:
- More bullish above 22,300
- bearish below 21,680

Dow Industrials, INDU, 60-min chart

The wave pattern is not clear enough to get some good price projections but the 60-min chart shows my best guess for how this rally could play out. A pullback followed by one more leg up into next week, potentially stopping near 22200 but maybe up to about 22300, and then down. As long as the pullbacks/consolidations remain choppy we should see higher prices but an impulsive decline (clear 5-wave move down) would tell us to short the subsequent bounce. For now, stay long as long as we see corrective pullbacks.

S&P 500, SPX, Daily chart

SPX is nipping at the heels of 2500 as it approaches it carefully, almost as if afraid it's going to get slapped back down from this important number. It's like a dog running after a car -- what does it do with it when it catches it?

There's actually higher potential to 2516, which is a projection for the rally from January 2016 (5th wave of the rally from 2009 where it would equal the 1st wave). September 22nd is when that projection crosses the trend along the highs from March-July, which is currently near 2512. There's a shorter-term price projection for the leg up from September 5th near 2510 so we have roughly a tight 2510-2516 target zone for a top. It also means SPX would more bullish above 2156.

Key Levels for SPX:
- bullish above 2491
- bearish below 2446

Nasdaq Composite Index, COMPQ, Daily chart

The tech indexes have also climbed above their September 1st highs and new all-time closing highs above their July/August highs. The Nasdaq looks like it could make it up to at least its trend line along the highs from April 2016 - March 2017, currently near 6505 (arithmetic price scale, while higher if using log price scale). With a 5-wave move up from the August 21st low the rally can be considered complete at any time.

Key Levels for COMPQ:
- more bullish above 6515
- bearish below 6334

Russell-2000, RUT, Daily chart

The RUT was the more bearish index with its July-August decline but it's had the most bullish bounce back. Whether or not it can join the other indexes at new highs remains the question. I'm thinking it won't but I'll more seriously consider that possibility if it rallies over 1434. There's a price projection for the 2nd leg of the bounce from August 18th that overlaps price-level S/R at 1434 so that's a level of interest if reached. At the moment I'm looking for the completion of a 3-wave bounce correction off the August low that will then lead to a stronger 3rd wave decline into October.

Key Levels for RUT:
- more bullish above 1434
- bearish below 1393

10-year Yield, TNX, Daily chart

While the stock market has been rallying the bond market started to sell off strongly following the high last Thursday. The selloff has spiked the 10-year yield back up and TNX has now made it back up to the broken downtrend line from June 2007 - December 2013, just above 2.02% (today's high was 2.197). At the same location is the downtrend line from July-August.

If TNX can climb above 2.02 it would be more bullish but then it will have to deal with its broken 50-dma, near 2.23, and then its downtrend line from March-July, currently near 2.27. A drop back down from resistance here, with buying in the bond market, would likely be happening with a selloff in the stock market, even if not timed together.

KBW Bank index, BKX, Daily chart

With the strong rebound in Treasury yields the banks have followed in pursuit. BKX leaves us wondering which way it's going to go at the moment but it's at least looking potentially bullish. The breakdown from its descending wedge, on September 7th, was followed by a gap back up into the wedge on Monday, which left a head-fake break to the downside (bear trap).

Now it's broken its downtrend line from August and is sitting back above its broken 200-dma, which was recovered on Tuesday. A back-test of the downtrend line, near 92.30 on Thursday, would be a bullish setup if it holds. But if TNX pulls back from resistance (yet to be determined) we could find BKX leaving a head-fake break to the upside if it drops back into the wedge (as below, so above). Careful trading the banks until this settles on a direction.

U.S. Dollar contract, DX, Daily chart

The US$ should be very close to a bottom if last Friday's low wasn't it. For a long time I've been looking for a drop down to about 90 to then set up a big rally into next year. Last Friday's low at 90.99 might have been close enough and if it can rally through resistance at roughly 92.50 to 93.50 we'd have a strong signal that a bottom is in place. But the bounce into today's high has brought the dollar back up to the top of its down-channel from May so we'll see if the rally can continue the rest of this week.

Gold continuous contract, GC, Daily chart

As the dollar rallies back up to the top of its down-channel from May gold has pulled back to the bottom of its up-channel from July and is approaching its rising 20-dma, near 1320. If the dollar does drop down to 90 we should see gold reach its price projection at 1377 for two equal legs up from December 2016. From that level I'd be looking to short gold, assuming of course it cooperates and rolls back over.

Gold would be more bullish above its March 2014 high at 1393 (maybe). But if the dollar breaks through resistance and continues higher from here then we've probably seen the high for gold's bounce. The silver COT report shows commercials are betting on the downside, which is not a good sign for gold bulls either.

Oil continuous contract, CL, Daily chart

Oil is threatening to break its downtrend line from February, where oil closed today. Today's high at 49.40 is also just below its broken 200-dma at 49.54. The dollar's next move from here will either help lift oil up and over resistance (if the dollar sells off) or slap it back down (with a dollar rally).

Economic reports

Thursday morning we'll get the CPI data and see if shows the same increase in inflation that this morning's PPI report showed. How the market interprets it is always a guessing game. On Friday we'll get some more retail numbers, which are expected to be a little less than July, the Empire Manufacturing survey (looking for slower), Capacity Utilization (same) and Michigan Sentiment (no significant change).


The market is in rally mode and with opex week it's looking like it could continue into Friday and maybe even into next week. A choppy pullback on Thursday or Friday would be a good indication higher highs are coming. The uptrend remains intact and traders should be sticking with the trend. While we have plenty of signs and reasons to expect a market high at any time, picking tops is always an exciting adventure (and usually painful). Stick with the trend but don't get complacent -- I think the end of this rally is near and the reversal could be fast and painful for those who don't take profits and get out of the way.

The price pattern supports the idea of a top soon (potentially within days but maybe not until October). As mentioned earlier, we are in a year that ends in 7 (2017) and the past three Octobers in the year ending in 7 were painful for bulls. Either October was painful (1987 and 1997) or the year following that October was painful (2007).

I believe we're going to have another painful time for the bulls, either in October or in the coming year. I think it would be foolish to simply ride out the decline in hopes it will simply rally higher. It might not this time. Bulls have been conditioned to simply buy all dips and/or ride all pullbacks with the expectation the market will go higher. I believe we're now near the point where that attitude is going to hurt a lot of bulls. Stay disciplined, set your stops (pay taxes on gains) and wait for the all-clear sign to get back in if stopped out.

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

Keene H. Little, CMT

New Plays

Time to go Shopping

by Jim Brown

Click here to email Jim Brown
Editor's Note

Brick and mortar retailers are losing share to online shopping sites. Etsy is surging on strong earnings and guidance.


ETSY - Etsy Inc - Company Profile

Etsy, Inc. operates as a commerce platform to make, sell, and buy goods online and offline worldwide. Its platform includes its markets, services, and technology, which enables to engage a community of sellers and buyers. The company offers approximately 45 million items across approximately 50 retail categories to buyers. It also provides various seller services, including direct checkouts, promoted listings, and shipping labels, as well as Pattern by Etsy to create custom Websites; and seller tool and education resources to start, manage, and scale businesses to entrepreneurs primarily through Etsy.com. In addition, the company operates A Little Market, a handmade and supplies market for sellers and buyers. Company description from FinViz.com.

For Q2, the company reported earnings of 10 cents that rose from a 6-cent loss in the year ago quarter. Revenue rose 19.1% to $101.7 million. Active sellers rose 10.9% to 1.83 million. Gross merchandise volume rose 11.7% to $748 million. Sales on mobile devices rose 47%. International sales rose 31% to 32% of gross sales. The number of employees in the workforce declined 23% thanks to an aggressive push by the CEO to expand profitability.

They guided for gross merchandise sales to rise 12% to 14% for the full year, up from prior guidance of 11.7%. Full year revenue is expected to rise 18% to 20% and in line with the 19.1% in Q2.

The company is growing rapidly, especially internationally and they are reducing costs significantly. Over the last several months, they replaced the CEO, CFO and CTO in their push to grow the company and profits quickly.

Expected earnings Nov 2nd.

On Sept 7th a Davidson's analyst, Tim Forte, went all in on ETSY with a glowing forecast. Shares spiked to $17.50 and then faded for a couple days. They have rebounded over the last three days and closed at a new high on Wednesday.

Buy ETSY shares, currently $17.79, initial stop loss $16.50.
Alternate position: Buy Dec $20 call, currently 70 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

Investors Cautious

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes made new highs but the gains were minor. The Nasdaq was negative until the last few minutes and the S&P traded in and out of negative territory all day until buying at the close lifted it positive. The Dow closed at a new high but remains 19 points below the record intraday high. Investors were buying some stocks but not in volume. Apple and its suppliers all traded lower. The lackluster gains in the S&P do not give me much confidence about Thursday but maybe today was just consolidation.

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

GE - General Electric
The short position was entered at the open.

CIEN - Ciena
The long stock position was closed at the open.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

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3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

CIEN - Ciena Corporation - Company Profile


No specific news. We closed the long stock position at the open for a breakeven and will retain the long call. This will move to the Lottery Play section on Saturday.

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.

Update 9/7/17: Good article in Barron's on what Wall Street is missing about the Ciena outlook. Full Article

Position 9/5/17:

Closed 9/13: Long CIEN shares @ $21.89, exit $21.98, +.09 gain.
Alternate position: Long Nov $23 call @ 93 cents, see portfolio graphic for stop loss.

HIMX - Himax - Company Profile


No specific news. Shares of Apple suppliers are still declining.

Original Trade Description: Sept 9nd

Himax Technologies, Inc., a fabless semiconductor company, provides display imaging processing technologies to consumer electronics worldwide. The company operates through Driver IC and Non-Driver Products segments. It offers display driver integrated circuits (ICs) and timing controllers used in televisions (TVs), laptops, monitors, mobile phones, tablets, digital cameras, car navigation, and other consumer electronics devices. The company also designs and provides controllers for touch sensor displays, liquid crystal on silicon micro-displays used in palm-size projectors and head-mounted displays, light-emitting diode driver ICs, power management ICs, scaler products for monitors and projectors, tailor-made video processing IC solutions, and silicon IPs. In addition, it offers digital camera solutions, including complementary metal oxide semiconductor image sensors and wafer level optics, which are used in various applications, such as mobile phone, tablet, laptop, TV, PC camera, automobile, security, and medical devices. The company markets its products to panel manufacturers, agents or distributors, module manufacturers, and assembly houses; and camera module manufacturers, optical engine manufacturers, and television system manufacturers. Company description from FinViz.com.

Himax produces video drivers for 4K TVs and that accounted for 36% of total revenue in Q2. However, the big news comes from the 3D sensing chips. They are expecting a 90% increase in revenue from this technology in Q3. There are rumors that Himax is going to supply the 3D sensing technology for the new iPhones. Since several companies are rumored to have been selected, somebody is riding the rumor wave.

Since Himax guided for a 90% increase in revenue in Q3 from those sensors, it would suggest there is a surprise in store for the chip community.

They also provide chips for vehicle display panels and they recently guided for demand to jump from 135 million units in 2016 to 200 million by 2022.

On August 30th, Qualcomm and Himax jointly announced a new high resolution, low power, active 3D depth sensing camera system to enable conputer vision capabilities such as biometric face authentication, 3D reconstruction and scene perception for mobile, IoT, surveillance, automotive and AR/VR. They specifically said it would enable Android smartphones to have unparalleled 3D experiences. They called it "game changing technology for smartphones." This technology is the culmination of 4 years of research and development by these two firms.

Shares rallied on the announcements but then faded last week. The company issued a press release suggesting an Oppenheimer analyst had become too excited about the prospects and they reaffirmed their recent guidance. The fading excitement erased $1.50 in gains but support appeared at $10 and the overall uptrend should resume.

Expected earnings November 7th.

Position 9/11/17:

Long HIMX shares @ $10.31, see portfolio graphic for stop loss.
Alternate position: Long Dec $11 call @ $1.20, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


No specific news and the secondary offering has closed. The opening dip was bought quickly and hopefully the uptrend will resume.

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.

Update 9/6/17: 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.

Update 9/11/17: The company announced it had successfully completed a required number of missions with their jet powered unmanned drone system. The missions are part of the performance demonstrations prior to delivery of ten drones over the next six months. The customer was not announced for security reasons. However, a program they announced with the Navy several months ago called for delivery of 10 drones in 2017 with the potential for multiple follow on orders in 2018. This could be part of that project.

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. Decent rebound and back to resistance at $18.

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


No specific news. Minor decline after a string of gains to a new high.

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.

Update 9/6/27: 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.

Update 9/11/17: Shares of Symantec continue to soar after Google reported that searches for "LifeLock" had exploded and surged even higher than after the Anthem hack in 2015. Symantec's LifeLock monitors the credit bureaus and notifies you if anyone tries to open an account in your name. It carries a $25,000 reimbursement for stolen funds and retails for $9.95 a month. This is going to be a boost to Q3 earnings.

Position 8/28/17:

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


BEARISH Play Updates

GE - General Electric - Company Profile

General Electric Company operates as an infrastructure and technology company worldwide. Its Power segment offers gas and steam power systems; maintenance, service, and upgrade solutions; distributed power gas engines; water treatment, wastewater treatment, and process system solutions; and nuclear reactors, fuels, and support services. The company's Renewable Energy segment provides wind turbine platforms, and hardware and software; onshore and offshore wind turbines; and solutions, products, and services to hydropower industry. Its Oil & Gas segment offers surface and subsea drilling and production systems, and equipment for floating production platforms; and compressors, turbines, turboexpanders, reactors, industrial power generation, and auxiliary equipment. The company's Aviation segment designs and produces commercial and military aircraft engines, integrated digital components, and electric power and mechanical aircraft systems; and provides aftermarket services. Its Healthcare segment offers diagnostic imaging and clinical systems; products for drug discovery, biopharmaceutical manufacturing, and cellular technologies; and medical technologies, software, analytics, cloud solutions, and implementation services. The company's Transportation segment provides freight and passenger locomotives, and rail and support advisory services; and parts, integrated software solutions and data analytics, software-enabled solutions, mining equipment and services, and marine diesel and stationary power diesel engines and motors, as well as overhaul, repair and upgrade, and wreck repair services. Its Energy Connections & Lighting segment offers industrial, grid, power conversion, automation and control, lighting, and current solutions. The company's Capital segment provides industrial and energy financial services; and commercial aircraft leasing, financing, and consulting services. Company description from FinViz.com.

GE has been struggling for the last several years. They manufacture hundreds of products from $10 items to $10 million items. After the financial crisis they did everything possible to exit their financial divisions and escape the "too big too fail" SIFI designation. They accomplished that in 2016.

Their biggest problem today is negative cash flow. It is a great company and is in no danger of failing but they are not generating enough cash to cover operating expenses, a 4% dividend and a whopping $21.1 billion stock buyback authorization through 2018.

They have been downgraded by almost everyone and JP Morgan said last week the stock needs to fall to the mid to high teens before it will be investible again. Shares closed at $23.72 today. With the stock nearing a three-year low, the odds are good, once that happens, we will see a continued drop into the teens.

JP Morgan suggested they would be forced to A) cut the dividend, which is not going to happen, B) sell something to raise cash, C) stop the $21.1 billion remaining on their stock buyback. Shares closed negative on Monday with the Dow up +259.

Earnings Oct 20th.

Position 9/13/17:

Short GE shares @ $23.93, see portfolio graphic for stop loss.
Alternate position: Long Dec $23 put @ 58 cents, see portfolio graphic for stop loss.

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