Option Investor

Daily Newsletter, Monday, 10/2/2017

Table of Contents

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

Market Wrap

Fourth Quarter Starts On Somber Note

by Thomas Hughes

Click here to email Thomas Hughes


A resilient market sets new all time highs. Even so, trading was overshadowed by last nights events in Las Vegas.

Market action was broad. Advancers led decliners nearly 2 to 1 with 253 NYSE listed stocks making new highs versus less than 20 making new lows. Action was supported by today's economic data although there are new signs of inflation within the manufacturing PMI data.

Asian indices were mostly higher as news from Japan shows business confidence in the country has improved. The Tankan Survey, administered by the BOJ, shows that confidence among the largest manufacturers has risen over the past three months sending the Nikkei up by 0.22%. Indices in China and elsewhere were closed for a holiday. European indices cheered the news from Asia and were later buoyed by US bullishness although news at home and abroad put a damper on gains. A referendum on independence in the Spanish region of Catalonia was met by government crackdown on what they said was an illegal vote.

Market Statistics

Futures trading was positive all morning despite the news from Spain and Las Vegas. The indices were set to open with small gains going into the release of data and firmed a bit afterward. PMI, both Markitt and official, shows expansion in manufacturing with the red flag of rising input prices. The open was as expected, the SPX began the day with a gain of 2 points and then began to move higher from there. The first 45 minutes of trading saw steady buying which drove the broad market, blue chips and techs to new all time highs. The middle part of the day saw the indices trade within narrow ranges just below the newly set highs. By late afternoon the indices were testing the early highs where they remained into the close of trading.

Economic Calendar

The Economy

Economic data starts off with Markitt's final read on manufacturing PMI. According to them US PMI gained 0.3% in the last month to hit 53.1 showing further improvement within the economy. This gain is driven by increases in production, new orders and employment. On the employment front this month's read is a 9 month high, on the inflation front this month's read shows the fastest pace of input price growth in 5 years.

The ISM Manufacturing Index was released at 10AM and echoes data within the Markitt PMI. The ISM Index rose to 60.8%, well ahead of the expected 58.1% and at a +10 year high. Within the report new orders, backlogs and employment all grew and are driven by increased demand. The one red flag is rising prices, the prices paid index gained 9 points to hit 71.5%.

Construction spending was also released at 10AM and rose by 0.5%. This is slightly ahead of the 0.4% expected by economists and up 2.5% over this time last year. Gains were made primarily in resisdential construction, up 0.5% for the month and 11.3% over the past year. Non-residential construction spending is also up 0.5% this month but down more than -3% over last year.

Moody's Survey of Business Confidence fell -1.2% to hit 29.6%. This is the lowest level since late November last year. Mr. Zandi says the index shows no signs of wavering and that sentiment is strong and stable although I beg to differ. The definition in Websters says "to sway to and fro" and it looks to me like there is some swaying in the data. It has been a little erratic over the past year, appears to have peaked and is now sitting at levels not seen since just after the 2016 elections. Regardless, the index is still showing high levels of confidence relative to historical trends and consistent with economic expansion.

Third quarter earnings continue to trickle in. We've now seen 16 of the 500 S&P 500 reports and of those 13 have beaten revenue estimates and 13 have beaten earnings estimates. The blended rate of earnings growth is 4.2%, unchanged from last week. We are still expecting to see 8 of the 11 sectors post growth, led by energy, although estimates for 9 of the 11 are lower now than they were at the start of the quarter.

Full year 2017 estimates have held steady over the last week at 9.6% but forward outlook has firmed. Fourth quarter 2017 and first quarter 2018 estimates both increased by a tenth to 11.2% and 10.4% while second quarter estimate rose by 0.2% to 10.3%. Full year 2018 also gained a tenth to hit 11.1%. This is the third week of gains for 2018 earnings outlook.

The Dollar Index

The Dollar Index gained about a half percent on today's news. The rise in manufacturer's input prices is a warning sign to FOMC doves that the economy is expanding and maybe the Fed did indeed get inflation wrong. The CME's Fed Watch Tool strengthened on the news, showing a near 80% chance for rate hike by December. Today's move in the dollar tested resistance at $93.50 and looks like it could break through. This would be bullish in the near term with potentially long term implications should the Fed ramp up the tightening time line. A break above the down trend line near $94 would be more bullish with the possibility of full reversal in the dollar.

The Gold Index

Gold prices fell to a new low on dollar strength, the Trump Tax Plan and firming FOMC outlook. The spot price shed a little more than -0.50% to trade below $1,280 near $1,277. Now that gold had fallen below the $1,280 mark it could easily fall further. There are few catalysts on the calendar for the metal this week save the NFP which I think will support the dollar more so than gold. First target for support is near $1,275, a break below that level could take gold down to $1,250.

The Gold Miners ETF fell at the open but regained the loss and close with a small gain. Even so the ETF met resistance at the long term moving average and looks set to trend lower within its range. The indicators are both bearish and pointing lower in support of lower prices with first target just above $22.50 near the top of my down trend line. This line has provided resistance 4 times over the past year as the ETF trends within its range and will likely produce support on the way down. A break below the line and/or $22.50 would be bearish with target near the bottom of the range at $18.50.

The Oil Index

Oil prices fell more than -2% on signs of rising production. An increase in US rig counts coupled with news OPEC production rose last month sent prices down to test support near $50. Near term, prices are supported by hopes OPEC will extend the production cut along a small increase in demand expectation. This may keep prices above $50. The caveat is that higher prices will bring more supply onto the market and cap gains so it looks like oil will remain range bound whatever it does next. A drop below $50 would be bearish with the chance of moving down to $45, a bounce would be bullish with a chance of moving up to test $55.

The Oil Index fell in early trading, gapping down at the open, but there appears to be support just above 1,250. The index moved up from the open after a quick dip lower and created a long green bodied candle closing near recently set highs. Price action has been bullish over the past few weeks as oil prices have been on the rise, today's dip in prices offered up an entry point the market seemed to like. The indicators remain bullish although there is some sign of near term weakness consistent with a test of support within an uptrend. Near term support is just above 1,250, a break below there would be bearish with a possible target near the short term moving average. A bounce from this level would be bullish and in line with the near term trend with first target for resistance near 1,220. A break above that level may confirm continuation with target near 1,300 and a 1 year high.

In The News, Story Stocks and Earnings

Shares of gun companies rose on today's news but the move looks limited. American Outdoor Brands, formerly Smith & Wesson, gained close to 6% intraday but met resistance and formed a red candle. Today's action appears to confirm resistance at the short term moving average and top of a recently opened window. The indicators are bullish but have already begun to roll over in confirmation of resistance so a move higher doesn't look very likely. A break above today's high would be bullish but face additional resistance near $17.25. A fall from this level would be bearish and trend following with target near $13.25.

Ruger made a similar move. The stock jumped on the Las Vegas news as traders expect to see a rise in gun sales in response to fears of gun-right crack downs. Today's candle has formed a small doji confirming resistance at the midpoint of a recently opened window and the long term moving average. The indicators are a bit mixed in that they have ticked higher in response to today's move but also consistent with resistance at today's highs. Resistance is near $55 and the long term moving average, a break above which would be bullish. Support is near $50 and the short term moving average.

The VIX held relatively steady in today's trade with hardly a move in either direction. The index created a small red bodied candle to the side of Friday's candle and touching the low set then. The indicators persist in bearishness although momentum has subsided to near zero, perhaps in anticipation of upcoming earnings. Stochastic looks more bearish, firing a fairly strong bearish crossover low in the range and at the lower signal line. A move lower would be nice for us bulls but necessary for rally. At current levels the index is consistent with bull market conditions and new all time highs in the SPX. Resistance is near 10.50 and the short term moving average, a break above there would be bullish for fear in the near term.

The Indices

The indices proved resilient in the face of national crisis. Even the Dow Jones Transportation Average, which had been down more than -0.75% in early trading, was able to close with barely a loss. The index created a small doji candle testing near term support and may have entered into a pre-earnings season consolidation. The indicators remain bullish and consistent with an index in uptrend. Support is just below today's low near 9,800 with resistance just above today's high near 9,900. A move higher would be trend following with near term target in the range of 10,100, a move lower may find support near 9,600 and the short term moving average.

The Dow Jones Industrial Average gained nearly 0.70% to close at the high of the day and at a new all time high. The blue chips created a medium sized green bodied candle moving up from a trend line bounce and supported by the indicators. The indicators are a bit mixed but consistent with a move higher in line with the prevailing trend. Stochastic is the one area weakness having fired only a weak trend following signal (%D is still pointing lower). Upside target is near 23,000 near term.

The S&P 500 posted the 2nd largest gain, 0.34%, and closed at the highs of the day. The index created a small green bodied candle moving up to new all time highs in line with the prevailing trend. The indicators are both bullish having fired trend following bullish crossovers with the caveat the signal is still a bit weak. That being said there is little to stand in its way short of geopolitical news, Trump Agenda developments and economic data. Upside target is near 2,580 near term.

The NASDAQ Composite brings up the rear with a gain of 0.31% but is showing the most bullish signals. The indicators are in support of today's new high firing strong trend following bullish crossovers. Upside target is near 6,800 near to short term.

The markets are moving higher and nothing seems able to stop them. The good news is that these moves are supported by trends, current data and expectations which leads me to think there is room for the rally to run. I am bullish for the near, short and long term with an eye on earnings season. Better than expected earnings are virtually guaranteed, low estimates ensure that, it will be the guidance that truly moves the market. If the forward guidance remains stable the bull market should be fine. If the forward outlook improves we could see news highs persist into the end of the year.

Until then, remember the trend!

Thomas Hughes

New Plays

Big Cap, Small Price

by Jim Brown

Click here to email Jim Brown
Editor's Note

Big cap stocks can have small share prices along with big goals. Hewlett Packard Enterprise is large cap stock recovering from a long period of consolidation and reorganization.


HPE - Hewlett Packard Enterprise - Company Profile

Hewlett Packard Enterprise Company provides technology solutions to business and public sector enterprises. It operates through Enterprise Group, Software, Enterprise Services, and Hewlett Packard Financial Services segments. The Enterprise Group segment offers servers, management software, converged infrastructure solutions and technology services; hybrid cloud solutions, including private cloud platform; business critical systems; storage products, as well as 3PAR StoreServ, a Storage platform; and networking products comprising switches, points, controllers, routers, and wireless local area network and network management products. This segment also provides software-defined networking and communications capabilities; network access solutions for mobile enterprises; and consulting services. The Software segment offers software to capture, store, explore, analyze, protect, and share information and insights within and outside organizations; enterprise security, application delivery management, and IT operations management software products. This segment provides HP Vertica, an analytics database technology for machine, structured, and semi-structured data; and HP IDOL, an analytics tool for human information, as well as solutions for archiving, data protection, eDiscovery, information governance, and enterprise content management. The Enterprise Services segment offers consulting, outsourcing, and support services across infrastructure, applications, and business process domains; and application and business services that help clients to develop, revitalize, and manage their applications and information assets. The Hewlett Packard Financial Services segment provides leasing, financing, IT consumption and utility programs, and asset management services. Company description from FinViz.com.

Expected earnings Dec 5th.

HPE has been undergoing an intense reorganization for several years. That included splitting off from HPQ in an effort to separate the corporate business from the consumer business. Meg Whitman has done a superb job in trimming excess departments and selling off non-core assets.

Recently, she announced another 10% reduction in the workforce that would result in 5,000 job cuts. She said the reductions would result in fewer lines of business and a more streamlined decision process. The current 3-year plan calls for savings of $1.5 billion and shift the focus towards research and development.

When Whitman took over in 2011 Hewlett Packard had 350,000 workers before the spinoff. Now HPE has 52,000.

The company now specializes in cybersecurity, enterprise WiFi, cloud services, servers and other corporate technology. Whitman recently said the company is seeing rapidly growing demand across key areas of the business.

Shares closed at a new high on Monday after trading in a $2 range for almost a year. I believe the latest announcement on reductions and streamlined operations has finally struck a chord with investors.

Buy HPE shares, currently $14.98, initial stop loss $14.25.
Alternate position: Buy Jan $16 call, currently 52 cents, no 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


by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell added another 18 points to its already massive gains. The Russell 2000 has now rebounded 160 points or +12% from the August 21st low at 1,349. The gain today blasted through round number resistance at 1,500. The Russell chart is massively overbought and due for some serious profit taking later this week when the end of quarter cash flows fade.

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

The long position was entered 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

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


No specific news. No gain. Waiting for the next headline.

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.

DSW - DSW Inc - Company Profile


No specific news. Shares closed over initial resistance. Next target is $22.25.

Original Trade Description: Sept 30th

DSW Inc., together with its subsidiaries, operates as a branded footwear and accessories retailer in the United States. The company operates through two segments, DSW and Affiliated Business Group. The company offers dresses, casual and athletic footwear, and accessories under various brands for women, men, and kids. It also provides handbags, hosiery, jewelry, and other accessories. As of August 29, 2017, the company operated 511 stores in 43 states; dsw.com, an e-commerce site; and m.dsw.com, a mobile site, as well as supplied footwear to 379 leased locations in the United States. DSW Inc. was founded in 1917. Company description from FinViz.com.

The CEO recently said "we seen an opportunity to acquire market-share as the retail industry consolidates." "We have reinvigorated and positioned DSW to benefit, beginning with a new brand mission: We inspire self-expression."

They have reorganized their stores, updated their marketing, added customer merchandise and expanded their online presence. Marketing statement

They reported Q2 earnings of 38 cents compared to estimates for 29 cents. Revenue of $680.4 million beat estimates for $669.2 million. They guided for the full year for earnings of $1.45-$1.55 and analysts were only expecting $1.44.

They announced a new $500 million share buyback program on top of $33 million left over from the prior authorization.

Expected earnings Nov 21st.

Shares closed at a 5-month high on Friday and on the verge of breaking out of a 10-month consolidation period.

I really like the option on this position.

Position 10/2/17:

Long DSW shares @ $21.60, see portfolio graphic for stop loss.
Alternate position: Long Jan $22.50 call @ $1.50, see portfolio graphic for stop loss.

DVAX - Dynavax - Company Profile


Shares spiked nearly $2 on news it was considering strategic alternatives on its Hep-B vaccine. Those would include selling the drug to someone else or licensing it to a larger company. DVAX is a small company and does not have the infrastructure to market it on a worldwide basis. The drug Hellisav-B is expected to receive FDA approval in the coming weeks. Whichever route they take would provide upfront cash to enable them to continue development on their immuno-oncology pipeline.

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.

KTOS - Kratos Defense - Company Profile


No specific news. Shares closed at a 4-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. New intraday high with a 50 cent gain.

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

FDC - First Data - Company Profile


FDC and Live Oak Bankshares closed on a digital banking venture they announced earlier this year.

Original Trade Description: September 16th.

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.

Update 9/28/17: FDC announced a new service called Disburse-to-Debit to allow companies that hire temporary workers or "gig" workers to pay them instantly upon completion of a task by sending the money to their debit cards. This works for people like Uber drivers, part time workers at special events or even insuranve companies paying claims. An agent can upload the user data and the debit card payment arrives instantly. This is a smart service and FDC shares rallied 33 cents on the news.

Position 9/28:

Short FDC shares @ $17.56, see portfolio graphic for stop loss.
Alternate position: Long Jan $17 put @ 70 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.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now