Option Investor

Daily Newsletter, Wednesday, 9/27/2017

Table of Contents

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

Market Wrap

Tax Reform Lifts Markets

by Thomas Hughes

Click here to email Thomas Hughes


The Trump Tax Plan was unveiled today and the market liked it. It's still a little sketchy on some details but there are a lot more specifics than we've seen in the past. On the corporate side the tax rate would be lowered to 20%, a bit higher than the 15% target Trump set during the campaign but a much more reachable one. On the individual side the number of tax brackets will be reduced to 3 from 7 with a provision for a 4th higher bracket should the final negotiations require it. A number of tax credits will be removed but offset with a higher standard deduction and increased Child Tax Credit.

Asian markets were cautious following Janet Yellen's comments of yesterday and ahead of anticipated tax plan news today. Most indices made small moves, less than a half percent. The Nikkei fell -0.31% despite a sharp drop in the yen versus the dollar while indices in China moved higher. European markets were mostly higher in early trading and extended those gains a bit before the close. The DAX led with a gain of +0.41%, followed by a 0.40% gain in the FTSE.

Market Statistics

Futures trading was flat to mildly positive in the early hours and then strengthened a bit going into the open as leaked tax plan information made its way through the market. The SPX opened with a gain of 0.20% and then quickly extended that to 0.40%. The initial surge higher tapered off over the course of the morning giving up some but not all of the early gains. The middle part of the day saw the index trend sideways and slowly build a base from which to move higher. By 1PM it was up off the lows and by 2PM it had started to rally. By 2:30PM it was at the highs of the day and setting a new all time high.

Economic Calendar

The Economy

Pre-opening action was affected by Durable Goods orders. The headline 1.7% is about twice expectations and driven by transportation and core capital goods. The x-trans figure is 0.2%, in line with expectations, while the x-defense figure is 2.2% and the core figure is 0.9%. Core capital goods, at 0.9%, is well above expectations of 0.3%. Shipments gained 0.7%.

Pending Home Sales data was released at 10AM and is not good. Pending sales fell -2.6% versus expectations for a gain. Sales are unchanged from a year ago but forecast to fall below last years levels by the end of the year. The driving problem is a lack of new homes which itself is in turn driven by a lack of buildable land close to major metropolitan areas.

The Fed's triennial Survey of Consumer Finances shows the median income has risen $10,000 in the latest period, mean income grew $14,000. Surprisingly, families without a high school diploma saw the biggest increases in income.

The Dollar Index

The Dollar Index moved higher on today's news, extending gains made on yesterday's news. The combination of hawkish Fed and potential for tax-based economic stimulus has the index set up to reverse on strengthening rate hike outlook. According to the CME's Fed Watch Tool the chances of a December rate hike jumped more than 10% overnight to 83%. The question now is how hawkish are they really? And what will the PCE tell us on Friday? The DXY is gained about a half percent to test resistance at $93.50. The indicators are bullish and gaining strength so a further test should be expected. A move above this would be bullish but face additional resistance just above near $94 and a short term down trend line. If the PCE is weak and/or the index falls support target is near $91.50.

The Gold Index

Gold prices fell a full percent on stronger dollar, hawkish fed, tax plan hopes and receding geopolitical fear. Spot prices are now just below $1,290 with a possibility of moving lower in the near term. Economic data and positive news/response on taxes could add momentum into the short term. Next target for support is near $1,280, then $1,275 and $1,250. Two risks that I see are political and the ECB. If the ECB gets more hawkish they could undermine dollar strength. If Kim Jong Un gets missile happy again, or some other event, flight to safety could support prices.

The Gold Miners ETF GDX gapped lower to close with a loss near -1.5%. The ETF has fallen below the long term moving average and is in danger of moving lower. The indicators are consistent with potential support at this level but not yet confirming it. A move lower may find support near $22.50 depending on gold and the dollar. Short to long term the ETF is still trapped within its range.

The Oil Index

Oil prices were iffy today but managed to close with a gain. Early trading saw them bob along break even with a small push lower that was later met by weak buying. Buying was triggered by today's storage data which painted a mixed picture. Crude supplies fell by more than 1.8 million barrels while gasoline stockpiles rose by a million. WTI is trading above $52 once again with an eye on hitting $55.

The Oil Index gained another 0.32% in today's action and set another new high. The index has been moving steadily higher driven by forward earnings outlook, rising oil prices and improving forward outlook driven by rising prices. The index is supported by the indicators which are both bullish and strong. I assume this run will hit a peak soon, the market is up more than 12% in a month and ripe for correction. If and when it does will be the time to get serious about long term positions.

In The News, Story Stocks and Earnings

Micron reported after the bell yesterday and beat on revenue and earnings driven by strong demand and higher pricing. The company also raised forward guidance above consensus. Sales in all four broad segments were up more than 70% led by Computer&Networking at 128%. Shares of the stock moved sharply higher in the after hours session and continued the move today. The stock climbed more than 8% to close at a new 15 year high.

The semiconductor index also move higher. The index gained a little less than 2.4% in a bounce up from the short term moving average. The sector is driven by strong year on year sales and positive forward outlook that could push it higher into the short term. The indicators are a bit mixed but set up to fire a trend following signal should market support follow through on today's move. Upside target is the current 17 year high, a break above which would be bullish.

The VIX moved lower today but it looks like it may be at a near term bottom. The indicators have begun to move higher in confirmation of support but do not yet indicate a reversal. The index is below resistance levels at $10 and the short term moving average that may keep it contained. That being said the indicators are also set up to fire bearish signal that could be considered trend following.

The Indices

The NASDAQ Composite led today's move with a gain of 1.14% as bargain hunters scooped up FANG stocks and the semiconductors outperformed. The index created a medium sized green candle moving up from the short term moving average and approaching the current all time high. The move is trend following but not yet backed up by the indicators. The indicators are rolling into a trend following signal led by MACD and lagged by stochastic. Current target is the all time high, a break above that would be bullish with targets at 6,550 and 6,600 in the near to short term.

The Dow Jones Transportation Average made the 2nd largest move, 0.63%, and set another new all time high. Today's action created a medium sized green candle supported by the indicators. Both MACD and stochastic are bullish and pointing higher indicative of underlying market strength. Near term targets are near 9,900, short to long term target is closer to 10,600.

The broad market S&P 500 made the 3rd largest gain in today's trading, 0.47%. The index created a small green bodied candle that set a new all time intraday high but not a new all time closing high. The move is trend following but not yet supported by the indicators. Both MACD and stochastic have made bearish crossovers that are only showing the merest hint of reversing. That being said they are set up to fire trend following signals should the index break to new highs. A break to new highs would be bullish with upside target near 2,600 in the near term.

The Dow Jones Industrial Average is today's laggard with a gain of only 0.25%. The blue chips created a small hammer doji sitting on the long term up trend line and did not set a new all time high. The index remains in consolidation above support levels and just below current all time highs with weak indicators. Both MACD and stochastic are showing weakness consistent with a test of support but not full reversal. Support is the long term up trend line, a bounce from which would be bullish and trend following. A break to new all time would confirm with upside targets near 22,900.

The stealth market has done it again. It has quietly moved higher on current conditions and forward outlook to set new highs. This move is trend following in the near, short and long term with little in the way to stop it short of economic slowdown, which I don't see coming. I am bullish for the long and short term with an eye on the upcoming earnings season for additional catalysts.

Until then, remember the trend!

Thomas Hughes

New Plays

Hurricane Impact

by Jim Brown

Click here to email Jim Brown
Editor's Note

Some companies benefit from disasters but others are severely impacted. First Data said retail spending in Florida fell 72% in the three days after the storm passed.


No New Bullish Plays


FDC - First Data - Company Profile

First Data is a global leader in commerce-enabling technology, serving approximately six million business locations and 4,000 financial institutions in more than 100 countries around the world. The company's 24,000 owner-associates are dedicated to helping companies, from start-ups to the world's largest corporations, conduct commerce every day by securing and processing more than 2,800 transactions per second and $2.2 trillion per year. Company description from FDC.

First Data earnings will be impacted by the three hurricanes because retail activity was slowed significantly over the weeks following the hurricane impacts. FDC said retail activity declined 72% in the first three days and was not expected to resume significantly for weeks. Stores need to recover from the floodwaters and flooding. They need electricity restored in order to run registers and POS terminals.

Expected earnings Nov 6th.

FDC also had the unfortunate luck of filing for a secondary offering of 85 million shares with an overallotment allowance of another 12.75 million on September 11th, just after the twin storms. The shares were sold by New Omaha Holdings, a major shareholder in FDC. With only about 300 million shares actively traded that is close to a 25% increase in the float. The shares were priced on Sept 18th at $17.75 each.

Selling nearly 100 million shares when your shares are already depressed would be expected to depress them even further. Shares closed at $17.55 on Wednesday and the 4-month low close is $17.47. Any further decline could put them into free fall to major support at $15.

There is always the potential for an earnings warning over the next several weeks.

Sell short FDC shares, currently $17.55, initial stop loss $18.55.
Alternate position: Buy Jan $17 put, currently 85 cents. No initial stop loss.

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

What the Heck?

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 had a blowout move of 28 points into new high territory. I wrote in Option Investor on Tuesday, "Russell shorts are getting squeezed and there is no telling where this rally will end." I did not expect a nearly 30 point blowout on triple the average volume. This is a 2,000 stock index and moving it 28 points in one day is a major accomplishment. Every critical sector was positive including banks, biotechs and semiconductors.

The Dow spiked 85 points at the open to stall at 22,360 for the third consecutive day and then fall back into negative territory. A late afternoon rally added 56 points for the day. The S&P also stalled at 2,508 once again and the Nasdaq Composite stalled at strong resistance of 6,460. With all the other indexes holding below resistance the Russell was the extreme outperformer.

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

ETSY - Etsy Inc
The long stock position was stopped at $16.75.

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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Iron Condors = Couch Potato Trader

BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile


No specific news. Minor gain despite the new chip announcement by Intel on Tuesday.

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. Only a minor gain with the consolidation band seeing a lot of traffic.

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. Shares dipped at the open to stop us out of the long stock position. The option position is still open and will move to the Lottery Play section this weekend.

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:

Closed 9/27: Long ETSY shares @ $17.79, exit $16.75, -1.04 loss.
Alternate position: Long Dec $20 call @ 70 cents, see portfolio graphic for stop loss.

KTOS - Kratos Defense - Company Profile


No specific news but a decent gain to a two-week high.

Original Trade Description: August 14th.

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

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

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

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

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

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

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

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

Expected earnings Oct 26th.

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

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.

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

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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