Option Investor

Daily Newsletter, Thursday, 10/5/2017

Table of Contents

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

Market Wrap

New All Time Highs, Again

by Thomas Hughes

Click here to email Thomas Hughes


As often as it's been happening it's still not old saying it. The market has hit new all time highs. The buzz on the street now is melt-up, as in the opposite of melt-down. The move is unexpected in the sense that September is quite often a volatile and directionless month, it is not unexpected in the sense that economic data, earnings and technical signals have been leading us here for some time. Among today's headlines is plug for tax reform from Philadelphia Federal Reserve President Patrick Harker and the first positive step toward achievement. He said in early morning statements we'll be stuck at 2% growth until tax reform happens, later in the day the House passed Trump's $4.1 million dollar budget.

Asian trading was a bit muted as holidays in China, South Korea and Hong Kong have some markets closed. The Nikkei closed with nearly no movement at +0.01% while the Australian ASX fell -0.01% on a surprise decline in retail sales. European indices were muted as well on developments out of Catalonia. The region continues to buck Spanish sovereignty and is planning to declare independence on Monday. The DAX shed -0.02% while most other indices gained in the range of 0.25% to 0.50%

Market Statistics

Futures trading was slightly negative in the wee hours of the early session but later gained strength on economic data. The open was slightly positive and without incident leading to a slow and steady rally lasting most of the day. By 12:30 some resistance was hit, near 0.05% for the SPX, but it was caused by profit taking and turnover, not major selling. The next few hours saw the indices trend sideways just below the new high and testing it several times along the way. By late afternoon it was clear the market wanted to move higher and it did, breaking through resistance to set new all time highs by the close.

Economic Calendar

The Economy

Today's data starts off with the Challenger Gray & Christmas report on planned lay-offs and from what I see the data is good. According to them the number of planned lay-off's fell -4.4% from the previous month to 32,346 (this includes storm affects). On a year over year basis the September read is down -27% from September of 2016. The September addition leaves the 3rd quarter total down -6.2% from the 2nd quarter of this year and -22.5% from the 3rd quarter of last year. Finally, the year-to-date total for 2017 is down -26.7% from last year showing a sharp decline in job cuts as employers seek to hang on to those they have. The best part of the report though is the number of planned hirings. According to Challenger data the number of planned hirings year-to-date is up nearly 70% over last year at this time and already exceeds 2016 full year hiring.

Initial jobless claims fell -12,000 to 260,000 from last weeks unrevised figure. The four week moving average of claims fell -9,500 to 268,250. On a not adjusted basis claims fell -3.9% versus an expected gain of 0.5% but are still up by 3% YOY. This week's data is still elevated from the impacts of 3 recent storms but quickly falling back to normalized levels. Looking forward I would expect to see this figure continue to fall into the coming weeks.

Continuing claims rose a modest 2,000 to hit 1.938 million and has yet to show any real impact from the hurricanes, if it ever will. The four week moving average of continuing claims fell -3,250 to 1.947 million and is also not showing affects from storm caused work interruptions.

The total number of claims for unemployment assistance fell -90,765 to 1.674 million. This is a new seasonal and long term low, in line with prevailing trend. It also shows little to no long term impact from the hurricanes although it'll be a few more week's before I can say that definitively. On a year over year basis claims are down -6.7% and well on the way toward reaching my target near 1.500 million.

The ISM Services PMI shows continued expansion following last month's surprise gains. It also echoes signs of upward inflationary pressures adding to expectations of a December rate hike. The headline index came in at 59.8, up 4.5% from the previous month with all sub indices showing gains. The activity index rose to 61.3, new orders to 63 and employment to 56.8 while prices paid jumped 8.4% to hit 66.3% and the highest level since February 2012. The data is good, not too hot, but does indicate inflation creeping into the economy.

The Dollar Index

The Dollar Index gained another half percent today on signs of economic health and growing chances of a December rate hike. The CME's Fed Watch Tool now shows an 88% chance for at least 1 hike in December. Today's action created a medium sized green bodied candle moving up from a resistance-turned-support line to break through my down trend line. The indicators are bullish in confirmation of this move and suggest higher prices to come. The break is bullish but may indicate a new trading range rather than full reversal. The next target for resistance is near $94.

The Gold Index

Gold prices tried to move higher in early trading but were later weighed down by economic data, FOMC outlook and the dollar. With no geopolitical news to support it prices had no choice but to fall. Spot prices fell roughly -0.50% to trade near $1,270 and look like they will continue to fall. Tomorrow's NFP is more likely to support the idea of economic stability than deterioration even if job gains are curbed by the storms. The expected increase in average hourly earnings is 0.3% and enough to support the idea of tight labor markets and at least the possibility of rising inflation. A break below $1,270 will be bearish for the near term with targets near $1,250 and $1,260.

The Gold Miners ETF GDX fell in response to golds decline, shedding about a half percent in the process. The ETF moved down to sit on support at the long term moving average, pressured lower by resistance at the short term moving average. The indicators are iffy, suggestive of support within a trading range but also set up to fire a bearish signal should support break. A move below the long term moving average, near $23.20, would be bearish while a bounce would be bullish. Short to long term the ETF remains within a range with little hope of breaking out.

The Oil Index

Oil prices bounced from the $50 support level in response to renewed hope of an extension to OPEC's production cap. The move was sparked by news that Russia and Saudi Arabia are expected to agree to the deal very soon. On the flipside, rising US production and the resumption of production at Libya's Sharara field continue to cap gains. In a sidebar, a Saudi minister has been quoted saying that Russia "breathed life back into OPEC", a statement that leads me to think the cartel was/is on even shakier footing than I thought. Regardless, prices are elevated on hopes the cut will be extended and continue to aid market rebalancing and this may continue in the near to short term.

The Oil Index added another 0.35% to its nearly 2 month rally. The index and sector are being driven higher on rising oil prices, forward earnings outlook and rising forward earnings outlook driven by rising oil prices and appears to be in full reversal. That being said the indicators continue to weaken even as price action begins to cool off, suggesting a pull back/correction may be forthcoming. If so I will view that as an entry for short and long term positions. First target for support on such a move is $1,220 or -1.66% from today's close. A move below that may go as low as the short term moving average near 1,175 or -4% from today's close.

In The News, Story Stocks and Earnings

Constellation Brands reported earnings before the opening bell and served up a treat for investors. The maker of adult beverages beat on the top and bottom lines on business that allowed management to raise full year guidance. Revenue of $2.08 billion beat by 3%, earnings of $2.47 beat by 14% as pricing, margins and volume combine to deliver bottom line results. Beer and wine are both up double digits, led by beer, while gross margin increases to near 51%. Shares of the stock jumped more than 5% in premarket trading to gap up at the open and trade at a new all time high.

Shares of both Fed Ex and UPS fell on news that Amazon is testing its own deliver service to rival the two shipping giants. I'm not surprised to hear this news, a little surprised that Amazon didn't choose to purchase existing infrastructure. I guess they think they can do things better. The plan, being tested now in high density areas, is intended to increase the number of items available for 2 day shipping by delivering direct from the warehouse. Shares of both Fed Ex and UPS were hit although UPS was hit hardest. The stock fell more than -1.5% in premarket trading to open with a gap lower, just below the short term moving average. This was seized as a buying opportunity by some, driving the price back up to close with a loss of only -0.67%.

Costco reported after the bell and beat on the top and bottom line. Revenue of $42.3 billion is up nearly 16% over last year and beat expectations by 1.8%. EPS came in $0.06 ahead of expectation or +3%. Sales for the full fiscal 2016 grew by 8.7% with the caveat that the 4th quarter and full year had one more week than the comparable period in 2016. Shares of the stock responded positively nonetheless rising more than 0.5% in the post market session.

The Indices

The indices marched higher today in steady action. The indices, save one, made new all time highs as well. The one laggard is the Dow Jones Transportation Average with a loss of -0.12%. The index extended a fall begun yesterday but confirmed near term support in the process. Today's candle is small but green bodied with visible lower shadow indicative of buyers. That being said both price action and the indicators suggest a peak has been reached with the possibility of consolidation and continuation. Near term support is near 9,850, a break of which could be bearish for the near term. A bounce from this level would be bullish and trend following with the caveat of resistance at the all time high.

The NASDAQ Composite posted the largest gain, 0.77%. The index created a medium sized green candle moving up and in line with prevailing trends. The move is supported by earnings and economic outlook along with bullish indicators. Both MACD and stochastic are moving higher following trend confirming bullish crossovers and suggestive of strengthening within the market. Upside targets are 6,600 and then 6,800.

The broad market S&P 500 made the 2nd largest gain, 0.56%, and created a medium sized green bodied candle moving up to a new all time high. This move is confirmed by the indicators which are both moving higher following bullish trend following crossovers. Today's move exceeds near term targets at 2,550 which brings the next target of 2,580 into play.

The Dow Jones Industrial Average brings up the rear in terms of gainers. The blue chips added 0.50% in today's action and created a medium sized green candle. The indicators are both bullish in confirmation of the move to new highs and suggest that more new highs may follow. Next target is 23,000 and may be reached before peak earnings season.

The indices are moving higher whether you want to call it a rally, a melt-up or whatever else you may want to name it. If there is a lack of sellers it's because we're still in a period of growth with positive forward expectations. Yes, there are still areas of weakness and underperformance within the economy and the market but the general trends are positive and strengthening. The jobs report tomorrow is likely to show some weakness as well but this due to the recent storms, there is as yet no signs of long term or long lasting damage to the economy and I do not expect there to be any. I am bullish in the near, short and long term and greatly anticipating earnings season. I sure hope it doesn't disappoint.

Until then, remember the trend!

Thomas Hughes

New Plays

Russell Struggling

by Jim Brown

Click here to email Jim Brown
Editor's Note

After a 162-point rally in 33 trading days, the Russell is struggling. The index recovered the 4 points it lost on Wednesday but that was anemic compared to the large cap indexes. After an eight-day rally in the Dow, we are now in overbought territory. We can always become more overbought as diehard shorts are forced to cover and portfolio managers are forced to chase prices, but there is no reason for us to add to the portfolio on a Friday morning. There is always the weekend event risk and the potential for traders to take some money off the table ahead of the weekend.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Tax Reform Ahead

by Jim Brown

Click here to email Jim Brown

Editors Note:

The first step in the tax reform process occurred today. The House passed a $4.5 trillion budget, which now goes to the Senate to be butchered by their budget committee. Eventually, there will be a modified budget bill and once signed it becomes the stepping-stone to tax reform. Without a budget being passed, the republicans cannot use the reconciliation process to pass tax reform with only a simple majority. The Dow was up 40 when the news broke and immediately shot up to a triple digit gain.

The Russell is still struggling. The index lost 4 points on Wednesday and gained those back today but it was a fight. Given the 162-point gain, I would expect nothing less. There is risk for Friday given the weekend event risk and some traders may want to take some chips off the table.

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

BOTZ - Global X Robotics and AI ETF
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

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Iron Condors = Couch Potato Trader

BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile


No specific news. Only a minor move but holding the gains from 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.

Update 10/3/17: AMD announced a new embedded GPU requiring less power and capable of driving five simultaneous 4K displays. The GPU requires less than 40 watts TDP and comes in a smaller, thinner package. The chip has a 1.25 TFLOPS speed and comes in three form factors including MCM, MXM and PCI Express. The 4K and 3D support works for games, medical imaging, advertising signage and industrial uses. The GPU has 4 GB of GDDR5 memory. Shares gained more than 5% on the news.

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.

BOTZ - Global X Robotics AI - Company Profile


No specific news. Only a minor decline after a string of gains. We should be prepared for a decline as far back as $21.20 if the prior pattern holds.

Original Trade Description: October 4th.

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Robotics & Artificial Intelligence Thematic Index. The fund invests at least 80% of its total assets in the securities of the underlying index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that are involved in the development of robotics and/or artificial intelligence as defined by Indxx, the provider of the underlying index. The fund is non-diversified. Company description from FinViz.com.

Robots of every description are taking over the manufacturing sector, service sector, etc. Drones are automated. Autos are becoming autonomous.

Even more important to this ETF is the sudden arrival of Artificial Intelligence or AI. That is the buzzword for everything. Everybody is trying to get into the AI business.

This ETF took off last January and while there have been several mild hiccups along the way, the chart is nearly vertical as investors become aware of it.

I am going to lag back on the stop loss because this could be a long-term position.

Position 10/5/17:

Long BOTZ shares @ $22.10, see portfolio graphic for stop loss.
Alternate position: Long Mar $23 call @ 80 cents, see portfolio graphic for stop loss.

DSW - DSW Inc - Company Profile


No specific news. Minor rebound but the good news is that support held.

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


No specific news. Another minor gain to a new 52-week high.

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.

Update 10/2/17: 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.

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.

HPE - Hewlett Packard Enterprise - Company Profile


No specific news. Shares are holding at the resistance highs.

Original Trade Description: Oct 2nd

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.

Update 10/3/17: Shares down slightly on news they allowed Russia to examine the source code of security software used to guard Pentagon secrets. The review was required by Russia and other countries prior to those countries considering HPE as a cybersecurity vendor for their secrets. However, by letting Russian software engineers view the source code, supposedly to make sure there was no hidden back door access for US spies, they learned how the code worked, what the software was guarding against and gave them insights as to how they could defeat it. The top White House cyber security official said this was becoming a bigger problem because everyone (other countries) was demanding to see the source code and that has now become a security risk.

Position 10/3/17:

Long HPE shares @ $14.97, see portfolio graphic for stop loss.
Alternate position: Long Jan $16 call @ 50 cents, 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. Another resistance test at $18.60.

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


No specific news. The earnings date was revised to Oct 30th.

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


New historic low. 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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