Option Investor

Daily Newsletter, Thursday, 10/19/2017

Table of Contents

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

Market Wrap

Buying The Dip

by Thomas Hughes

Click here to email Thomas Hughes


Indices shed a half percent on news of weak iPhone 8 sales and the dip was bought. Today's action comes on the anniversary of the worst decline in US stock market history but bears little in common with that event. Today's volatility may persist into tomorrow as it is OPEX. Regardless, economic and earnings trends remain positive and today's data does nothing to change that.

International markets felt some pressure today as well. Asian indices closed mixed after the release of Chinese data; the Nikkei led with a gain of 0.40% while the Heng Send shed nearly -2%. The first read on third quarter GDP came in at 6.8%, as expected but down a tenth from last year while retail sales and industrial production for September were both above estimates. European indices were lower across the board on weak data from the UK, tepid earnings and political unease in Spain. The DAX led with a loss of -0.41% followed closely by the CAC's -0.29%.

Market Statistics

Futures trading was negative right from the start, indicating a decline of roughly -0.50% at the open. This held steady throughout the morning and was unaffected by positive reads on jobless claims and the Philly Fed's MBOS. The open was as expected, the indices posted large declines and extended those gains to the days lows by 10:15AM. This turned out to be intraday bottom, the market quickly began to reverse and spent the rest of the day moving to the upside. By 1:45PM the SPX had recovered nearly all of its losses and looked like it would continue moving higher. By late afternoon the index was brushing up against the all time high and by the close it had been exceeded, if barely

Economic Calendar

The Economy

Today's jobless claims is good and reveals no lingering or long term impact from last month's hurricanes. The initial claims fell 22,000 to 222,000 and a new low dating back to March 3,1973. The four week moving average of claims fell -9,500 and is fast approaching a new low. On a not adjusted basis claims -10.7% versus an expected -1.8% and are down more than -12% YOY. I have speculated over the past few months that the downtrend in claims may be been over, this data shows that it clearly isn't.

Continuing claims fell -16,000 to 1.888 million and a new low dating back to December 29th, 1973. The four week moving average of continuing claims fell -22,750 to hit a new low dating back to 1974.

The total number of jobless claims fell -40,371 to hit another new seasonal and long term low. This decline is as expected and brings the total figure within striking distance of my 1.5000 million target. On a year over year basis total claims are down -7.5%. We can expect to see this figure hit bottom soon though, with an expected uptick lasting into the end of the year.

The Philadelphia Federal Reserve Bank Manufacturing Business Outlook Survey rose in the last month and came in better than expected. The headline index gained 4 points to 27.9 and a 5 month high; the index is also trending above the post financial crisis average. The gains were made on broad improvement in the manufacturing sector although there was some slowing of growth. Both new orders and shipments remained positive but fell from last month's levels. Unfilled orders and delivery times both increased and have been positive for the past 12 months showing a prolonged period of expansionary pressures. Both the current employment indices rose, the employment index moving up to 30.6 and an all time high. Prices paid also increased, showing inflationary pressure, but subsided a bit from last month's spike. Looking forward the 6 month outlook dimmed a bit but remains high relative to the long term average.

The Index of Leading Indicators put a slight damper on things, breaking its 13 month positive trend. The index came in at -0.2%, a tenth worse than expected, and the lowest reading since last fall. The good news is that Conference Board economists say the decline is mostly due to hurricane impact with weakness seen primarily in labor and construction. If this is true and there is no reason to suspect it isn't, today's declines in unemployment claims could help the Index of Leading Indicators snap back in the next month. The report goes on to say that other areas of the economy continue contribute positively and that the economy should continue to expand into the end of the year. The Coincident Index gained 0.1% while the Lagging Index fell -0.1%.

The Dollar Index

The Dollar Index fell despite today's round of data. Although positive for the economy it still leaves a shadow of doubt in terms of FOMC rate hike expectations. Today's move saw the index shed about a quarter percent in a move the confirmed both resistance and support. This is consistent with action over the past few quarters as we approach each round of central bank meetings, the next starting with the ECB next week and then the FOMC and BOE the next. The ECB is not expected to change rates but it is expected to do something along the lines of tapering bond purchases which will likely move the Euro. For now, DXY resistance is just below $93.50 with a chance of moving lower. The index is still testing resistance along the down trend line with indicators showing divergence and suggestive of decline. Today's support is at the short term moving average, a break below that would be bearish and trend following with downside target near $91.

The Gold Index

Gold prices got a boost on today's weaker dollar but the gains were muted in light of central bank uncertainty. The spot price moved up about a half percent intraday and settled off the high. Gold is now trading near $1288 and near the middle of the 12 month trading range. There is potential for support and resistance within $20 of today's close and chance for price to jump in either direction. Support target is near $1,260 and resistance just above $1,300 with a break above either unlikely in the near term. There is little in the way of market moving data until the ECB meeting and even then no guarantee fundamentals will change enough to warrant a significant move in the price.

The Gold Miners ETF GDX held very steady and near the middle of its long term trading range. The ETF has been winding up on central bank expectations alongside of gold and likely to continue into the near term. The ETF is currently wedged tightly between the support at the long term moving average and resistance at the short term moving average with little sign it will break in either direction. Momentum is very weak and trending near zero at this time, consistent with listless markets and range bound trading, while stochastic shows some sign support will be tested but no real indication of strengt. A move lower may pierce the long term moving average and even touch to support at $22.50 but I wouldn't expect to much out of the move before the ECB at least, and maybe not until the FOMC in two weeks. A move up is likely to hit resistance at $24, about $0.50 above today's close.

The Oil Index

Oil prices fell -1.4% on profit taking as a wait-and-see attitude begins to creep into the market. There have been some sign of market rebalancing and expectation for an OPEC production cap extension to support prices until now. Now the market wants to see some proof. This week's data shows declines in output from many of the largest producing regions, the question is how long they will last. In the US production curbed due to the hurricanes is already coming back online while supply disruption in other areas may be equally short lived, or not. Today's action left WTI trading near $51.25 with a chance to move down to test $50. A move higher may find resistance at $52.50, if not my next target is near $53.50.

The Oil Index fell about -0.25% but remains within its near term consolidation range. The index has been in consolidation for about 3 week's now, following a massive run up from support, and will likely continue to do so into the near term. The indicators are bearish and show a fairly strong sell signal with the caveat that it is appearing within an uptrend. This means a sell-off is possible but not likely provided support remains firm. Support target is near 1,205 and so far buyers have stepped in above that level. A break below here could be bearish but likely a short term move unless oil prices crash. Longer term I remain bullish on oil due to robust earnings growth outlook.

In The News, Story Stocks and Earnings

Verizon surprised the market this morning with earnings that beat on the top and bottom line. Adjusted EPS of $0.98 is slightly below last year at this time but comes on substantial post-paid user growth. Net post-paid growth came in at 603,000 with churn rates on existing customers falling to 0.75%. Along with the beat news on the AOL/Yahoo integration was positive and provided investors with reason to hope results would continue to satisfy into the next year. Shares of the stock jumped more than 2% in the premarket, opened with a gap and moved higher from there only to unleash pent up resistance at the $50 level.

Apple was one of today's worst performers and a primary cause of today's sell-off. Shares of the stock fell -2.5% to below the short term moving average on reports demand for the iPhone 8 are not as expected. A report in the Taiwan Economic Times suggests orders for the phone could be cut by as much as 50% due to lingering use of iPhone 7's and the upcoming release of the iPhone X. Pre-orders for the X begin later this month with expected shipment of the first phones in early November.

United Airlines was another contributor to today's sell off. The airline reported better than expected earnings yesterday after the bell but today's conference call soured investor appetite. The company is suffering from increased competition by low cost carriers that it has not been able to keep up with. The Company CEO may have sparked the sell-off when he said the words "dug ourselves into a hole". Shares of the stock fell more than -12%.

After hours action was pretty active as well. Earnings reports from a number of companies including Sketchers and Paypal sparked big moves in share prices. Sketchers reported better than expected top and bottom line. Revenue of $1.1 billion rose 16.7% from last year and beat estimates by $0.030 billion and EPS was even better. Earnings of $0.59 beat by $0.15 or 25% and helped drive share prices up more than 7%. Paypal also beat with impressive numbers. Revenue is up 21.3% YOY, coming in ahead by $60 million, with earnings of $0.46 beating by $0.03. Shares of this stock rose more than 2.5% in the aftermarket.

The Indices

Today began on a sour note but ended with near term trends intact. The indices fell hard in the early hours, opened with not insubstantial losses but were able to recover most if not all of the declines. The NASDAQ Composite was hit the hardest, closing with a loss of -0.28%. The tech heavy index set a two week low with today's move but price action created a green candle and is within what I consider to be a near consolidation range so not overly bearish. Support set in without closing the gap formed on 10/5 but may be tested again. The indicators are both rolling over into bearish signals consistent with such a test. Support is at 5,550, a break below there could take the index down to 6,400. A bounce would be trend following and bullish.

The Dow Jones Transportation Average fell -0.13% in a move confirming support at the short term 30 day moving average. Today's candle formed a small green body with long lower shadow indicative of buyers, confirming support at the 9,000 level for the 2nd time in 2 days. The indicators remain bearish but MACD has begun to roll over suggestive of support at this level. A break below 9,000 would be bearish with target at 9,600 and 9,400, a bounce would be bullish and trend following with target at the current all time high.

The Dow Jones Industrial Average closed with a gain of 0.02% creating a small bodied green candle to the side of yesterday's candle and setting a new all time high. There is a small amount of lower shadow suggestive of support but not enough to close the gap formed yesterday. The indicators are bullish and on the rise, confirming the current uptrend and suggestive of higher prices. A fall from this level could be bearish but not necessarily, a move higher would be bullish and trend following. Support on a drop may be found just below today's low near 23,000, a move higher may go to 24,000 in the near to short term.

The S&P 500 closed with the largest gain, 0.03%, and set a new all time closing high. The index created a medium sized green bodied candle with visible lower shadow indicative of support and upward momentum. The indicators are consistent with this move although they are showing some near term weakening. This weakness is consistent with consolidation within an uptrend until support is broken. Support is at 2,550 and if broken next target is the short term moving average near 2,525. A move up from here/bounce from support would be bullish and trend following with upside target at 2,580 in the near term.

Today's action was a little alarming and some of the signals are still mixed but it looks like the market is consolidating within the near term up trend. The indices all fell to test support and in all cases support stepped in. Losses, for the most part, were isolated to specific sectors and stocks and highly reminiscent of rotation. The economic and earnings trends remain intact, forward outlook remains positive so I remain bullish.

Until then, remember the trend!

Thomas Hughes

New Plays

Russell Risk

by Jim Brown

Click here to email Jim Brown
Editor's Note

The Russell has spent three days under support at 1,500 but managed to rebound back over that level. While that is encouraging, it is also a warning sign that we spending the majority of the intraday hours under that level. This could change dramatically at any time if dip buyer sentiment changes.

Thursday's drop was caused by a minor comment by a Chinese official. People's Bank of China Governor Zhou Xiaochuan warned Thursday against excessive optimism that could spur a sudden collapse in asset prices. He cited a concept known as a "Minsky Moment" meaning a plunge in asset prices following unsustainable market gains or the exhaustion of credit growth. It was named for Hyman Minsky, an economist who argued that long bull markets can lead to major collapses. Since this current bull market is 8.5 years old and will be nine in March, there are always a number of analysts looking for the end.

His comments coming on the 30th anniversary of the historic October 1987 market crash, traders were especially reactive. Today's market hiccup could lead to further profit taking but the rebound back to positive territory suggests the dip buyers are alive and well. The 1987 market crash came after a 40% rally in the prior 8 months and with a strong economy. The markets never "need" an excuse to crash. With the potential for additional negative headlines over the next three days, I see no reason to add positions ahead of weekend event risk.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Dip Buyers Alive

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes recovered from the opening drop with the Dow and S&P positive. The Dow was very over extended and the comment out of China that tanked the market could have set off some chain reaction selling but it didn't. The Dow rebounded 111 points to close with a 5-point gain and a new record high. That is pretty amazing. The dip buyers are alive and well.

The Russell 2000 dropped to 1,491 intraday but rebounded 10 points to close back over 1,500 although it was still a minor 3-point loss. That is also amazing. This was the third consecutive day spend under 1,500 and the index still recovered to close above that level.

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

HAWK - Blackhawk Network
The long put position was entered at the open.

HPE - Hewlett Packard Enterprise
The long stock position was stopped at $14.25.

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. Shares rebounded from the market drop at the open but failed to regain positive territory.

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.

Update 11/10/17: AMD shares rallied after a processor conference and upgrade to Nvidia. Yesterday there was an article with a picture of a new Intel processor with "Vega Inside" but it has disappeared today. Intel has previously denied any licensing with AMD but the picture showed a mobile processor with Intel Outside, Vega Inside, which would mean AMD's Vega graphics on an Intel chip. This was for a mobile processor for a notebook or tablet. Apparently, Intel was not ready for the world to see that internal graphic and the article was removed from circulation. If/when Intel does announce a deal with AMD the stock is going to soar.

Update: I was able to go back and find the link I had saved even though it is no longer on the website. Vega Inside

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. Long term position.

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.

CONN - Conn's Inc - Company Profile


No specific news. Nice 4% gain in a weak market.

Original Trade Description: Sept 23rd

Conn's, Inc. operates as a specialty retailer of durable consumer goods and related services in the United States. It operates through two segments, Retail and Credit. The company's stores provide furniture and mattress, including furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses; home appliances comprising refrigerators, freezers, washers, dryers, dishwashers, and ranges; and home office products consisting of computers, printers, and accessories. Its stores also offer consumer electronics, such as LED, OLED, Ultra HD, and Internet-ready televisions; and Blu-ray players, and home theater and portable audio equipment. The company also provides short- and medium-term financing to its retail customers, as well as offers product support services, such as product repair services, repair service agreements, and various credit insurance products. As of January 31, 2017, it operated 113 retail locations in Alabama, Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, and Texas. Conn's, Inc. was founded in 1890 and is based in The Woodlands, Texas. Company description from FinViz.com.

Conn's reported earnings of 26 cents and analysts were expecting a loss of 2 cents. Revenue of $366.6 million missed estimates for $371.9 million. They are located outside of Houston and were forced to close 23 stores, distribution and service centers in Beaumont and Houston. They lost 100 selling days as a result of the storm.

The company said collections from customer financings would be impacted and sales were slow after the stores reopened. However, once utilities and transportation systems were restored, the business saw a large uptick in activity. People who were flooded out have to replace all of their furniture and electronics. Because the company is located in and has a heavy presence in Houston, they will benefit from the surge in replacing household items for months into the future. Shares are rebounding on this outlook.

Earnings Dec 7th.

I profiled this as a long position on Sept 28th but the stock gapped higher on the 29th on an analyst upgraded and that cancelled the entry. Oppenheimer raised their rating to an outperform with a $56 price target. He said investors were under appreciating the resurgence of the Conn's business model and credit portfolio. The crisis of confidence from September 2016 has long passed.

Late Monday an SEC Form 4 was filed showing Harriet Stevens, a 10% owner, purchased another 42,000 shares for $1,066,800 on Oct 13th. This is a strong vote of confidence in the stock. She already owns 5.984 million shares worth $152 million. She did not need to buy more unless she really felt the stock was going higher.

Update 10/18: KeyBanc reiterated and overweight rating and raised their price target from $24 to $42. Shares spiked to $28.35 on a short squeeze related to the upgraded but faded back to $26.85 at the close. That was still a 5.5% gain.

Position 10/17/17:

Long CONN shares @ $26.00, see portfolio graphic for stop loss.
Alternate position: Long Nov $28 call @ $1.06. Short fuse. see portfolio graphic for stop loss.

HPE - Hewlett Packard Enterprise - Company Profile


The company announced a $2 billion increase to $5 billion for their stock buyback but that was not enough to overcome the rest of the news. At their investor day the CFO said they expect 5% revenue growth for 2017 and "modest" growth in 2018. They guided for earnings of $1 in 2017 and $1.15-$1.25 in 2018. That matched analyst estimates. Shares imploded to stop us out. The option is nearly worthless and will more to the Lottery Play section.

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:

Closed 10/19: Long HPE shares @ $14.97, exit $14.25, -.72 loss.
Alternate position: Long Jan $16 call @ 50 cents, see portfolio graphic for stop loss.

MRVL - Marvel Technology - Company Profile


No specific news. I am encouraged that the stock did not collapse in the weak market. A 4 cent decline is nothing.

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:
Closed 10/9: Long Oct $18 call @ 64 cents, exit 64 cents, breakeven.

ON - ON Semiconductor - Company Profile


No specific news. Only a 4 cent drop from the new closing high.

Original Trade Description: Oct 9th.

ON Semiconductor Corporation manufactures and sells semiconductor components for various electronic devices worldwide. It operates through three segments: Power Solutions Group, Analog Solutions Group, and Image Sensor Group. The Power Solutions Group segment offers discrete, module, and integrated semiconductor products for various applications, such as power switching, power conversion, signal conditioning, circuit protection, signal amplification, and voltage reference. The Analog Solutions Group segment designs and develops analog, mixed-signal, and logic application specific integrated circuits and standard products, as well as power solutions for a range of end-users in the automotive, consumer, computing, industrial, communications, medical, and aerospace/defense markets. This segment also provides trusted foundry, trusted design, and manufacturing services, as well as integrated passive devices technology. The Image Sensor Group segment offers complementary metal oxide semiconductors and charge-coupled device image sensors, as well as proximity sensors, image signal processors, and actuator drivers for autofocus and image stabilization for a range of customers in automotive, industrial, consumer, wireless, medical, and aerospace/defense markets. The company serves original equipment manufacturers, distributors, and electronic manufacturing service providers. Company description from FinViz.com.

Earnings Nov 6th, unconfirmed.

ON continues to power higher on a surge of new products as the IoT boom continues. The company completed the acquisition of Fairchild Semiconductor in September.

A major factor in the boom is the Advanced Driver-Assistance Systems. This market is expected to reach $42 billion by 2021 according to MarketsandMarkets. This is giving ON a tremendous boost in earnings and forecasts.

However, they missed earnings for Q2. They reported 26 cents and estimates were 33 cents. Revenue of $1.34 billion beat estimates for $1.31 billion. The company guided for the current quarter for $1.34-$1.39 billion.

Somebody believes they are going to beat those estimates by a mile. On Monday, somebody bought 11,000 of the November $20 calls at 65 cents. That is a $715,000 bet. I suggest we follow them.

Because of the steep gains over the last month, I am not recommending a stock position. We will do this with options only.

Update 10/11/17: ON and Fujitsu announced an agreement where ON will purchase 40% of Fujitsu's 8-inch wafer fabrication plant in Aizu-Wakamatsu. The purchase will be completed by April 1st. ON already had a 10% share and will acquire another 30%. ON said it planned to increase ownership to 80% in the second half of 2018 and 100% in the first half of 2020. By scaling into the ownership it will allow ON to add capacity as demand increases.

Update 10/12/17: ON announced to new System on a Chip (SOC) 1.0 Megapixel CMOS image sensing products for the automotive imaging sector. The company said annual shipments of cameras for use in cars will easily surpass 80 million units by 2020.

Position 10/10/17:

Long Nov $20 call @ 80 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

BBBY - Bed, Bath and Beyond - Company Profile


No specific news. Shares holding at the 8-yr low.

Original Trade Description: October 14th.

Bed Bath & Beyond Inc., together with its subsidiaries, operates a chain of retail stores. It sells a range of domestics merchandise, including bed linens and related items, bath items, and kitchen textiles; and home furnishings, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables, and juvenile products. It also provides various textile products, amenities, and other goods to institutional customers in the hospitality, cruise line, healthcare, and other industries. As of February 25, 2017, the company had a total of 1,546 stores, includes 1,023 Bed Bath & Beyond stores in 50 states, the District of Columbia, Puerto Rico, and Canada; 276 stores under the names of World Market, Cost Plus World Market, or Cost Plus; 113 buybuy BABY stores in 35 states and Canada; 80 stores under the CTS name; and 54 stores under the Harmon name. It also offers products through various Websites and applications, such as bedbathandbeyond.com, bedbathandbeyond.ca, harmondiscount.com, christmastreeshops.com, buybuybaby.com, buybuybaby.ca, harborlinen.com, t-ygroup.com, and worldmarket.com. In addition, the Company operates Of a Kind, an e-commerce Website that features specially commissioned limited edition items from emerging fashion and home designers; One Kings Lane, an online authority in home decor and design that offers a collection of selected home goods, and designer and vintage items; PersonalizationMall.com, an online retailer of personalized products; Chef Central, an online retailer of kitchenware, cookware, and homeware items catering to cooking and baking enthusiasts; and Decorist, an online interior design platform that provides personalized home design services. Company description from FinViz.com.

It is a tough world when nearly every one of your products is listed on Amazon along with a dozen competitive products with free 2-day delivery. Bed, Bath and Beyond is stuck in that rut and it is painful.

In their recent earnings they reported 67 cents, down from $1.11 in the year ago quarter and missed estimates for 93 cents. Revenue of $2.9 billion also missed estimates for $3 billion. Same store sales declined -1.7%. The retailer said it was undertaking a number of "transformational initiatives." One of those initiatives was the termination of 880 manager positions. Shares fell 18% on the earnings.

With Toys-R-Us filing bankruptcy, there are now concerns about other stores possibly following suit. BBBY is in trouble even though they are buying back shares and paying a dividend. With sales and earnings declining those shareholder friendly efforts may have to be curtailed. They have 65,000 employees and 1,550 stores.

This is simply a case of a large brick and mortar retailer trying to compete with an all powerful Amazon and we know who is going to win this battle in the long run.

Expected earnings Dec 19th.

I am reaching out to January on the option because we can buy an extra 40 days of time for 21 cents. We can buy time but we do not have to use it.

Position 10/16/17:

Short BBBY shares @ $21.20, see portfolio graphic for stop loss.
Alternate position: Long Jan $20 put @ $1.10, see portfolio graphic for stop loss.

HAWK - Blackhawk Network Hldgs - Company Profile


No specific news. Shares spiked in a weak market after Newstar Financial was acquired by First Eagle Investment. They are not related to Blackhawk but M&A news always seems to stimulate a sector.

Original Trade Description: October 18th.

Blackhawk Network Holdings, Inc. provides a range of prepaid gift, telecom, and debit cards in physical and electronic forms; and related prepaid products and payment services in the United States and internationally. It operates through three segments: U.S. Retail, International, and Incentives & Rewards. The company distributes closed loop gift cards in the areas of digital media and e-commerce, dining, electronics, entertainment, fashion, transportation, home improvement, and travel; non-reloadable open loop gift cards; and prepaid wireless or cellular cards that are used to load airtime onto the prepaid handsets, as well as sells handsets. It also offers general purpose reloadable (GPR) cards; and Reloadit, a GPR reload network product that allows consumers to reload funds onto their previously purchased third-party GPR cards. In addition, the company provides incentives solutions comprising solutions, which allow businesses to manage consumer incentive programs, including in-store, online, or mail-in rebate processing; a hosted software platform for managing sales person and sales channel incentive programs; bulk prepaid card ordering systems and Websites to allow business and incentive program clients to use prepaid cards as part of their incentive and reward programs; and direct-to-participant fulfillment services for prepaid cards, checks, and merchandise. Further, it offers Cardpool that provides an online marketplace and various retail locations to sell unused gift cards; digital services for online and mobile applications; and card production and processing services to its prepaid gift and telecom content providers. The company distributes its products through grocery, convenience, specialty, and online retailers. Company description from FinViz.com.

Blackhawk is in trouble. The company reported Q3 earnings of 18 cents that beat estimates for 10 cents but revenue of $208.1 million missed estimates for $216.5 million. The company guided for the full year for earnings of $1.56-$1.70 and analysts were expecting $1.68. They cut revenue guidance to $940-$981 million and analysts were expecting $1.1 billion.

The CEO said, "We have recently seen increasing competitive pressures in some retail markets and believe this will result in lower growth in our U.S. retail physical channels going forward."

PayPal, Visa and MasterCard are making a big push into prepaid cards. Blackhawk is fighting the three giants in the market and apparently, they are losing market share.

Shares fell $10 on the earnings and have continued to bleed points in the days that followed. They are at a 52-week low and are approaching a 3-year low at $30. Investors tend to flee when companies warn of increased competition and falling market share. If the $30 level breaks, the next support is around $23.

Earnings January 10th.

Because the stock is over $30 this will be an option only position.

Position 10/19/17:

Long Dec $30 put @ .50, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Since this is a long-term ETF 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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