Option Investor

Daily Newsletter, Tuesday, 9/26/2017

Table of Contents

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

Market Wrap

Easy Come, Easy Go

by Jim Brown

Click here to email Jim Brown

The Dow spiked 73 points at the open but it quickly evaporated.

Market Statistics

The Dow rose on the strength of Apple and declined on the weakness in McDonalds. Apple added 18 Dow points and McDonalds subtracted 20 Dow points. This was the Dow's 4th consecutive loss after 9 consecutive days of gains. Intraday, Janet Yellen was alternately dovish and hawkish in her speech and that confused the market. I am paraphrasing, "Maybe we need more policy accommodation, no wait, maybe we need to continue hiking rates, the Fed really does not know what inflation is doing." The Dow closed 85 points below its intraday high.

The economic news was mixed without any high profile reports. State personal income for Q2 rose +0.7% after a +1.0% in Q1. Utah and Nevada had the highest growth at 1.3% and 1.1% respectively, thanks to high activity in the construction business. The two worst performing states were Iowa and Nebraska because of losses by farmers.

The Case Shiller 20-City Home Price Index rose 5.8% for July, up from 5.7% in June. This was the first gain in prices in four months. Housing inventory is currently at 4.2 months, up from the decade low of 3.5 months back in January.

New home sales fell from 580,000 in July to 560,000 in August. The median sales price fell from $326,500 to $302,100. New homes under $300,000 accounted for more than 50% of sales. The inventory on the market rose from 5.7 months to 6.1 months. There are 284,000 homes listed for sale, up 3.6% from July and 17.8% from August 2016.

Consumer confidence for September declined slightly from 120.4 to 119.8. The present conditions component declined from 148.4 to 146.1 and the expectations component rose from 101.7 to 102.2. Those respondents who thought jobs were plentiful declined from 34.4% to 32.6%. Respondents expecting to buy a car declined from 12.9% to 12.1%. Homebuyers declined from 7.3% to 6.9% while potential appliance/TV buyers rose from 50.5% to 54.0%.

The Richmond Fed Manufacturing Survey for September rose from 14 to 19 and the highest level since February. New orders rose to 20 and the highest level since April. Backorders fell from 11 to 8 and the lowest level in 3 months. Employment fell 2 points to 15. Overall, the report suggests activity remains sluggish but increasing slowly.

After the close, the API inventory report showed oil supplies unexpectedly fell by 761,000 barrels. Gasoline inventories rose 1.5 million barrels but distillates fell by 4.5 million barrels. There is a strong recovery cycle in progress on refined products and exports are increasing significantly with Brent prices $5 over WTI prices.

Crude prices were up on worries the Kurdish election results could create some oil production and transport problems in Iraq. Some Iraqi oil is transmitted through Kurdistan and the Kurds took control of some northern Iraq oil fields when they were threatened by ISIS and Iraq could not defend them. The results from the Kurdish vote on independence on Monday have not been announced but it is widely expected to be overwhelmingly in favor of creating a new country.

Turkey, Iran and Iraq are very hostile to that outcome and Iraq is threatening military action, demanding airports be immediately returned to Iraqi military control and they are demanding all money from oil revenues to be returned to Iraq. Iran setup missile batteries on the border. Turkey is threatening to move troops into the region to overthrow any rebellions. They are also threatening to prevent any oil from flowing across the Kurdistan border into Turkey. Iraq has halted international flights into the region. The Kurdish government is democratic and the surrounding countries are afraid a vote to create a new country could cause unrest in the neighboring countries which are ruled by dictatorial regimes, with the exception of Iraq.

The calendar for Wednesday does not have any market moving events. The Pending Home Sales Index is informational but normally ignored. The oil inventories could lift energy stocks if the EIA report shows a decline in inventories.

There were a few earnings events today and Darden Restaurants (DRI) reported before the bell. The company reported earnings of 99 cents that beat estimates by a penny. Revenue of $1.94 billion barely beat estimates of $1.93 billion. They guided for the full year for earnings of $4.38-$4.50. However, shares declined on weak same store sales of 1.7%, which missed estimates for 2.1%. Olive Garden sales rose 1.9% compared to estimates for 2.5%.

FactSet (FDS) reported earnings of $1.90, beating estimates by a penny but significantly lower than the $3.55 in the year ago quarter. Revenue of $326.6 million rose 14% from the comparison quarter. The company added 115 clients to raise their total to 4,750. Users rose 2,800 to more than 88,800. Shares spiked $9 on the news.

After the bell Dow component Nike (NKE) reported earnings of 57 cents that beat estimates for 48 cents. Revenue of $9.10 billion narrowly beat estimates for $9.08 billion. Gross margins fell -1.8% to 43.7%. Inventories rose 6%. Revenue from North America declined -3% and the first decline in 10 quarters. Sales in Europe rose 5%, China 12%, Asia 6% and Middle East/Africa 4%. The company is suffering after Sports Authority and Sports Chalet filed bankruptcy earlier this year and eliminated two major outlet chains. Nike said sales revenue in Q3 would grow in the low single-digit range. Shares spiked immediately after earnings but finished the session down -$1.20.

Micron (MU) reported earnings of $2.02 that beat estimates for $1.84. Revenue of $6.14 billion rose 90.8% and beat estimates for $5.96 billion. Prices for DRAM rose 5% and NAND 3%. Volumes sold rose 8% and 5% respectively. Shares rose $1.30 in afterhours.

Twitter (TWTR) shares rose fractionally in afterhours after the company said it was testing a doubling of the characters in a tweet from 140 to 280. The company said it was starting with a random sampling of users in most languages. Twitter said it still wanted to focus on brevity in messages but some thoughts will not fit in 140 characters. Previously Twitter tested tweets as big as 10,000 characters but passed on that upgrade. The current test will run for an "unspecified number of weeks" in all languages except Chinese, Japanese and Korean.

Alibaba (BABA) said it was raising its stake to 51% in logistics unit Cainiao and would invest $15 billion to create a global logistics giant. Cainiao had been losing money and Alibaba already had a 47% interest. Alibaba said the goal was to build the most efficient distribution network in China and around the world. Cainiao had been under investigation by the SEC related to Alibaba accounting issues.


The market had several problems today and one of them was the biotech sector. The Biotech Index fell -1.1% to close at a four week low. This weighed on the Nasdaq and the Russell to some extent. The index has been declining since the high at the end of August.

The S&P continues to struggle to hold its gains but it is doing a good job. The index only posted a fractional advance but it is still clinging to the psychological 2,500 level. For three weeks now, the S&P has traded in a very narrow 18-point range with daily gains and losses of only 2-3 points. There are no sellers but buyers lack the conviction to push the index to a new high. It is as though everyone is just waiting for September to be over before they put new money to work.

The Dow struggled almost immediately after the 75-point opening spike. The prior winners were losers and losers were winners but not in big numbers. Apple rebounded with a nice gain to keep the index from closing significantly lower. McDonalds and the entire restaurant sector declined after the Darden earnings and weak guidance. The hurricanes in Texas, Florida and Puerto Rico are expected to depress restaurant sales for Q3 and investors are fleeing before the earnings.

Oil was flat for the day and energy stocks gave back some of their prior gains. I have to point out that only two Dow stocks gained or lost more than $1. There was no heavy selling and there were buyers nibbling on the dips but no volume on either side.

The Dow is slowly building new resistance at 22,350 after three days of testing that level and closing lower. Above that will be the round number resistance at 22,500.

The big cap techs were mostly positive but only slightly. There were no major gains or major losses. Everything was just trading in place while we wait for September to end. After the major drops on Monday, tech traders were probably still in shock.



The index traded down to 6,350 on Monday and rebounded. That rebound continued this morning but the index could not punch back through resistance at 6,400 and closed 25 points below its intraday highs.

The most bullish event for the day was the spike on the Russell 2000 to nearly 1,461 when prior resistance was 1,452. That was a major push after five weeks of decent gains. The Russell has outperformed the big cap indexes and is now at a breakout high. I have a hard time thinking this will continue without a pause because of the strength and duration of the recent rally. However, I am sure the shorts are being squeezed and there is no telling where it will stop. This is bullish for the market because it means portfolio managers are not scared of any future decline. I am sure there is some rotation in progress from the big caps with massive profits into small caps for the Q4 rally.

Despite the minor declines from day to day in the various indexes, the market appears to be bulletproof. There have been numerous things that could have caused a significant decline and the market keeps shaking them off and crawling slowly higher. The Dow's 9-day rally has been followed by a 4-day decline. That is not a big deal in my book. I would take that 650-point gain for a 128-point decline over 4 days every time.

I would continue to keep some cash in reserve just in case a buying opportunity does appear. The next 13 days are typically the most volatile of the year.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Dead End Research

by Jim Brown

Click here to email Jim Brown
Editor's Note

You know there is a golden nugget out there but where? With the Russell 2000 creeping slowly higher for the last five weeks you would think there would be a lot of stock just waiting to be bought. Unfortunately, all my scans are showing is a lot of volatility with very few trending companies. I want to find some hidden jewels but so far they have remained hidden. As we move closer to October the markets should become more directional. With the big cap indexes choppy over the last four days there is no reason to rush into any mediocre positions.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 caught fire and broke out with a nice gain. After a couple days of minor new highs, the Russell surged nearly 9 points intraday and closed with a gain of 5 for an actual breakout over prior resistance. The Dow closed 85 points below its intraday high and the Nasdaq 25 points below its high.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

DF - Dean Foods
The short stock position was stopped at $10.95.

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

AMD - Advanced Micro Devices - Company Profile


Still declining on the sector downgrade by Susquehanna.

Original Trade Description: Sept 23rd

Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. Its primarily offers x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete graphics processing units (GPUs), and professional graphics; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. The company provides x86 microprocessors for desktop PCs under the AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; and microprocessors for notebook and 2-in-1s under the AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brand names. It also offers chipsets with and without integrated graphics features for desktop, notebook PCs, and servers, as well as controller hub-based chipsets for its APUs under the AMD brand; and AMD PRO mobile and desktop PC solutions. In addition, the company provides discrete GPUs for desktop and notebook PCs under the AMD Radeon brand; professional graphics products under the AMD FirePro brand name; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. Further, it offers microprocessors for server platforms under the AMD Opteron; embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, and G-Series brand names; and semi-custom SoC products that power the Sony Playstation 4, Microsoft Xbox One, and Xbox One S game consoles. Company description from FinViz.com.

Expected earnings Oct 24th.

Nvidia (NVDA) shares were rocked last week after news broke that Tesla was looking at moving to AMD and away from Nvidia for the chips to power the autonomous driving functions. The initial headline saw AMD spike and Nvidia decline. The actual story is that AMD and Nvidia are partnering on creating a chip solution for Tesla. It is no surprise that AMD is in the mix because Tesla hired Jim Keller to lead development of Autopilot. Keller previously worked at AMD and led the development of the Zen architecture and the new Ryzen processors.

It appears that Nvidia and AMD have a team of about 50 engineers working to develop a comprehensive solution for Tesla. Here is where it gets interesting. I would not be surprised to see Tesla make an acquisition bid for AMD. The company only has a $13 billion market cap compared to $110 billion for Nvidia. AMD has a lot of products that are different from the Nvidia product line even though they both make GPUs. AMD has only existed for years as a foil for Intel. The bigger company could not be considered a monopoly as long as AMD existed. Now with Qualcomm getting into the processor market and AMD and Nvidia in a high tech partnership, it would make sense for Nvidia to acquire AMD. Since GPUs are a small part of AMD's product line, there may not be that much regulatory concern. Is it a long shot? Absolutely, but definitely in the realm of possibilities.

Even if there is never an acquisition bid, just the combination of AMD and Nvidia in a partnership validates the technical capabilities of AMD and lifts them into the big league. Where AMD has always been a low cost alternative to Intel and always 1-2 generations behind in technical expertise, they have dramatically improved their game in the last 12-18 months. Instead of being road kill on the Intel superhighway to state of the art processors, they have surged to be a real competitor. Partnering with Nvidia is a real step up for the company.

The chart is ugly with no apparent trend but there is decent support at $12. They could easily catch fire as investors begin to understand the ramifications of the partnership and we could see another leg higher like the one that started the prior May. There are no guarantees but I do not believe anyone sees AMD's future as anything but positive given recent events.

Update 9/25/17: AMD and Nvidia declined after Intel announced the next generation in the Core CPU line for desktops. This 8th generation Core-i7-8700K is the bet gaming processor ever with an internal clock frequency of 4.7 Ghz and Intel's fastest ever. They will also support 4K video. This is a challenge for AMD but the company is still ahead of Intel in the GPU race.

Position 9/25/17:

Long AMD shares @ $13.25, see portfolio graphic for stop loss.
Alternate position: Long Jan $14 call @ $1.25, see portfolio graphic for stop loss.

DVAX - Dynavax - Company Profile


No specific news. RBC Capital reiterated an outperform and $28 target.

Original Trade Description: Sept 20th

Dynavax Technologies Corporation, a clinical-stage immunotherapy company, focuses on leveraging the power of the body's innate and adaptive immune responses through toll-like receptor (TLR) stimulation. Its product candidates are being investigated for use in multiple cancer indications, as a vaccine for the prevention of hepatitis B and as a disease modifying therapy for asthma. The company's lead product candidates include HEPLISAV-B, an investigational adult hepatitis B vaccine, which is in Phase III clinical trials; and SD-101, an investigational cancer immunotherapeutic that is in Phase I/II studies. Its product candidates also comprise AZD1419, which is in Phase II clinical trial for the treatment of asthma; DV230F that is in preclinical stage for the treatment of liver tumors; and DV1001, a TLR 7&8 agonist, which is in preclinical stage for the treatment of for multiple malignancies, as well as DV281 for the treatment of non-small cell lung cancer. It has collaboration and license agreements with AstraZeneca AB to develop AZD1419 for the treatment of asthma; and Merck & Co. to develop SD-101 for varios immuno-oncology therapies. Company description from FinViz.com.

Dynavax has a vaccine for Hepatitis B. Shares crashed on August 10th when the FDA asked for more information despite a 12-1 vote to approve it. The results of the request for info will be released no later than November 10th according to the company. They are confident the drug will be approved and they are already targeting an early 2018 release date.

Cathy Reese of Empire Asset Management said investors should use the current volatility to buy the stock and she has a $38 price target.

Earnings Nov 1st.

Shares have rebounded from the early August dip as investors become more confident the vaccine will be approved. Shares peaked a $21.85 on September 11th and then faded for a week as profit taking appeared. Wednesday's close was a 7-day high.

I am not planning on holding this position into the announcement. I would like to exit by the end of October to avoid any unplanned declines.

Options are very expensive because of the big expectations. This will be a stock only position.

Postion 9/21/17:

Long DVAX shares @ $21.10, see portfolio graphic for stop loss.

ETSY - Etsy Inc - Company Profile


No specific news. Nice rebound from support but still no uptrend.

Original Trade Description: Sept 13th.

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.

Position 9/14/17:

Long ETSY shares @ $17.79, see portfolio graphic for stop loss.
Alternate position: Long Dec $20 call @ 70 cents, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


Kratos received a $9.7 million contract to provide high performance aerial drone aircraft.

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.

Update 9/18/17: Kratos deployed the first fully autonomous vehicle in Colorado with the Colorado Dept of Transportation. The robot vehicle replaces the trailing vehicle in a work construction crew. It follows the crew throughout the day and acts as a mobile crash barrier. Previously, a CDOT employee had to drive a specially built truck mounted with impact absorbing rear bumpers. Basically, this protects the work crew on the road by giving erratic drivers something to hit other than the work crew. There is still the problem of the driver in this truck when a car, truck or semi plows into the truck at 70 mph. In Colorado these bumper trucks were hit an average of 7 times per year, sometimes with injury to the CDOT drivers. The Kratos robotic crash guard truck has no driver so nobody is injured with an errant civilian vehicle crashes into it. The robot vehicle monitors the work crew and maintains a safe distance behind them with enough lane coverage to keep them from getting hit.

Update 9/21/17: KTOS successfully completed the third test of AN/SPY-6(V) Air and Missile Radar (AMDR) against a live ballistic missile target. The new radar is slated to begin service on the Navy's next generation Arleigh Burke Class Guided Missile Destroyer currently under development. This is a big step for Kratos.

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. No movement, which means we were not stopped. There is still a chance for a rebound.

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.

BEARISH Play Updates

DF - Dean Foods - Company Profile


No specific news. Shares rallied 6% intraday to stop us out on the short stock position. The option position is still open and will move to the Lottery Play section next weekend.

Original Trade Description: September 16th.

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 CEO warned, that volume and mix challenges are occurring at a higher-than-planned rate. As such, given the resulting volume shortages, they lowered their full-year guidance from $1.35-$1.55 to 80-95 cents. That is a major haircut.

On August 22nd the CFO resigned unexpectedly, effective Sept 1st. That is never good when a CFO exits with only one-week's notice.

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.

We shorted this stock on August 10th at $11.37 and shared dipped about 60 cents then rebounded to take us out of the short. The long put ended 6 cents in the money after shares began to roll over again. I believe we are going to see new lows.

Position 9/18/17:

Closed 9/26: Short DF shares @ $11.02, exit $10.95, +.07 gain.
Alternate position: Long Dec $10 put @ 40 cents, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


No specific news. Since this is a long-term position, there will not be daily commentary.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally into year-end we could see a sharp decline in the VXX over the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:

Short VXX shares @ $40.95, see portfolio graphic for stop loss.

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