Option Investor

Daily Newsletter, Wednesday, 10/25/2017

Table of Contents

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

Market Wrap

Decision Time for Market

by Keene Little

Click here to email Keene Little
The small pullback from last Friday is showing signs of being something more than just a pullback but the jury is still out deciding whether or not a top is now in place. The bulls and bears each have their arguments and now we wait for the jury (price) to decide.

Today's Market Stats

The day started with a small gap down following some disappointing earnings reports and then proceeded to sell off more strongly. The selling was stronger than we saw last Friday and that has the pullback looking a little more bearish than just a pullback. It's still too early to call a top but the pieces are falling into place for one if the selling continues on Thursday.

The bulls might have one more rabbit to pull out the hat but they can't waste any time -- they need a rally on Thursday to save the market from breaking down. The bears need another low for the pullback to provide evidence a top is in place. As always, I'll identify on the charts what we're watching for so that we'll have some early clues.

This morning's economic reports included Durable Goods shipments, which climbed +2.2%, coming in better than the expected +1.3%. It was also an improvement from the upwardly revised +2.0% in August (revised up from the originally reported +1.7%). Subtracting transports, the number was +0.7%, which was also better than the expected +0.5% and matched the upwardly revised August number.

The new home sales report was released at 10:00 and it looks encouraging. September saw sales jump nearly +19% from August, doing well in all regions except the West (only +2.9%). The current sales pace drops the inventory to 5 months from 6 months in August. The new home sales and the Durable Goods reports didn't help the market today and the home builders sold off sharply after they gapped up this morning (selling good news are we?). But the reports at least showed the economy held up despite the South getting clobbered by hurricanes.

We all know the market is stretched to the upside and with only minor pullbacks along the way. Today was the worst selloff since September 1st but we're still talking only a minor decline. As of today's close the S&P 500 has now gone 245 days without a 3% intraday decline, breaking the previous record of 241 days set 21 years ago in 1996.

Jason Geopfert, who writes the SentimenTrader newsletter, wrote last Friday about the combination of records set with Friday's close. SPX had at that time closed at a record high every day of the week (5 days) and it closed at a new weekly high for each of the past six weeks. On top of that it had closed at a record monthly high for each of the past seven months, so 5/6/7 days/weeks/months. Yea, not too stretched to the upside. Geopfert noted that the trifecta (daily, weekly and monthly high closes) is something that has never been seen before.

All these record highs have finally caught the attention of retail traders who are now jumping in with both feet to ride this northbound train. As of last week equity funds attracted the largest inflow of money seen in the past 18 weeks. This is actually not a good sign for bulls since the retail crowd is always the last to react -- they are notorious for buying the top and selling the bottom. Actually I take that back, the government is always the last one to react.

We know fear has evaporated although there are signs that that's changing. Like the market's non-stop record highs, the VIX had set its own record when it last closed below 10 on October 5th. The VIX had managed to close below 10 a total of nine times between 1990 and 2016. But in 2017 the VIX has closed below 10 so far 33 times. Interestingly, as the market has continued higher since October 5th we've seen the VIX making its way higher and the Fear & Greed index has been coming down from its high reading of 95 (out of 100, showing an Extreme Greed reading).

As I had shown in recent wraps, market tops are generally made about a week or two after a low in the VIX and a peak in the F&G index. This is a result of fewer people participating in the rally to its final high and instead they start to hedge their bets. Hence the slow rise in the VIX as more put buying occurs (the put/call ratio has been working its way higher since the end of August). The market can continue to make new highs but when it's running out of participation it's generally not a good time to chase it higher.

Most of the bulls are still in buy-the-dip mode as they've been conditioned to expect the market to keep heading higher. This was evidenced today with the bounce off this morning's low. The initial decline in the market was accompanied with a spike higher in the VIX, which had jumped +18% (+2.04 to 13.20). But then the bounce off this morning's lows in the indexes saw the VIX drop back down to only +0.6% for the day (+0.07, closing at 11.23). In other words, all fear evaporated as the bulls believed there's nothing to worry about and the bounce will lead to higher highs (after all, the market always heads higher, which reminds me of the feelings about the housing market leading to the top in 2006-2007).

The bulls could be correct in their assumption that the market will head higher but if it does it's going to need more help than it's seen in the past month. Looking at market breadth, the rally is running on fumes and we could be seeing its last gasp here. The two charts below show market breadth and it's not encouraging for bulls. The first chart shows SPX compared to the number of new 52-week highs and lows. Keep in mind that these are not timing signals but instead they only show when we should be confident in a move vs. when we should be wary of it. Right now it's time to be wary.

SPX vs. 52-week highs and lows, Daily chart

I've drawn a vertical line through the peaks in new 52-week highs (middle chart) and the new 52-week lows (bottom chart), both of which occurred at the beginning of October. New highs have been in decline since then and new lows have been climbing. In other words, while SPX continued to tack on more points during the month it was doing so on the backs of fewer and fewer stocks while some stocks were probing lows not seen in the past year. On Tuesday, while the Dow spiked higher there were 12 Dow stocks in the red. The general is out in front of the troops but the ranks are thinning as the troops abandon their leader. Never a good thing in battle.

SPX vs. Advance-Decline line and volume, Daily chart

Another way to look at market breadth is with the advance-decline volume (middle chart below) and advance-decline line (bottom chart). This picture is actually a little worse than the chart above since the negative divergence started showing up in the middle of September. The number of advancing stocks and the amount of volume going into advancing stocks has been deteriorating for over a month while SPX has continued to march higher, oblivious to the fact that the number of participating stocks is declining.

Again, all of this doesn't mean the market will turn back down right away but the longer this goes the more vulnerable it becomes to a downside disconnect. There's already a big air pocket below us with a rally that hasn't had much in the way of backing and filling (as discussed above). Bulls need to have their eyes wide open here and not be complacent about the upside. The collapse back down in the VIX today says the bulls are complacent. Don't be one of them.

The Dow has been the stronger index so I thought I'd start with its charts tonight to see when we should start worrying about some potentially tough resistance areas. We should start worrying.

Dow Industrials, INDU, Weekly chart

The Dow has made it up to the trend line along the highs for the rally from January 2016 (the April 2016 - March 2017 highs). Both the weekly and daily charts are overbought as it hits this line of resistance and it's therefore a risky time to look for higher highs. It could happen but the setup looks good for at least a pullback.

Dow Industrials, INDU, Daily chart

In addition to its trend line along the highs from April 2016-March 2017 the Dow hit the top of a parallel up-channel for its rally from August. If the Dow can rally above 23500 and stay above that level there's a decent chance we'll see 24K but right now it's vulnerable to at least a larger pullback.

Key Levels for DOW:
- bullish above 23,500
- bearish below 23,000

Dow Industrials, INDU, 60-min chart

Looking a little closer at the Dow's leg up from early September, there are two parallel up-channels, the tops of which crossed the April 2016-March 2017 trend line on Monday and Tuesday. The pullback from there had the Dow dropping to the bottom of its smaller up-channel for this month's portion of the rally. We now wait to see if the rally will continue back up to the top of the channel, which will be near 23585 by the end of the day Thursday, or if instead today's bounce will lead to another drop lower. The bears want to see a drop below the October 19th low at 23052, which would also be a break of the uptrend line from September 8-27, which would confirm an important top is likely in place.

S&P 500, SPX, Daily chart

Today's decline for SPX had it breaking its uptrend line from August 29-September 25, currently near 2564. SPX looks more bearish than the Dow and my expectation is for it to continue lower. This market has fooled me more than once (OK, about a 1000 times) but I'll be surprised to see it make new highs from here. As noted on the chart, Monday finished with a bearish engulfing candlestick, which is an outside down day (gap up, make a higher high and then close lower than the previous day's open).

The bearish engulfing candlestick on Monday gave us a key reversal and the only way the bearish pattern can be negated is with a rally above Monday's high at 2578. It'll be interesting to see how this week closes since a close below last week's open at 2555 would leave a key reversal for the week. I expect we could see a little volatility for the rest of the week before heading more strongly lower next week.

Key Levels for SPX:
- bullish above 2580
- bearish below 2548

Nasdaq-100, NDX, Daily chart

The techs have been a little weaker than the blue chips but interestingly its pattern supports the idea for a new high into next week (hold the market up into the end of the month?) before topping out. A crossing of some trend lines near 6200 makes a good upside target if the rally continues from here. Today's low at 6011 was a test of price-level support at 6010 and the bounce back up to close near its 20-dma, at 6057, was a good showing by the bulls. They now need to hold it above 6010.

Key Levels for NDX:
- bullish above 6200
- bearish below 6010

Russell-2000, RUT, Daily chart

The RUT also has a pattern that supports the continuation of the bull run. This morning's low can be considered a throw-under completion of its expanding triangle consolidation pattern off the October 5th high. Another leg up, assuming it would be the 5th wave of the rally from August, could run up to about 1548 where it would equal the 1st wave. There would be lower targets to keep an eye on but for now that's the bullish potential if we see the RUT get above 1515. But if this morning's low at 1482 is broken it would support the bearish view that a top is now in place.

Key Levels for RUT:
- bullish above 1515
- bearish below 1481

10-year Yield, TNX, Weekly chart

The 10-year yield has rallied up to its long-term downtrend line from 1988-2007, which is where its rally into the March high also stopped. Currently near 2.47, TNX would be more bullish above that level, although there's a projection near 2.51 which could be tagged before TNX reverses back down. That price projection is for a possible a-b-c move up from June (not the lower low in September) where the c-wave is 162% of the a-wave. Based on that projection TNX would be more bullish above 2.51.

If bond yields have not seen their multi-decade low yet, which is the way I continue to lean, we'll see TNX reverse from resistance and start heading back down. One reason this could start is if the stock market is ready for a stronger pullback/decline. That would likely prompt rotation into the relative safety of the Treasuries and thus drive prices higher, yields lower.

KBW Bank index, BKX, Weekly chart

The weekly chart of BKX shows the past 3 weeks has seen resistance holding at the top of its parallel up-channel for its rally from 2009. There's also a short-term trend line along the highs of the bounce off the April low. Along with the high on March 1st, it's also testing the 78.6% retracement of its 2007-2009 decline (no new highs for the banks while the other indexes have done so). With the bearish divergence at the current high as it hits resistance I'm thinking BKX will at least pull back a little stronger before trying it again. The more bearish wave count calls for a major top here.

Transportation Index, TRAN, Weekly chart

The TRAN peaked with a closing high on October 12th and minor new intraday high on October 13th. Since then it has been coming back down while the Dow went on to make new highs. It's only short term but with the TRAN not confirming the Dow's new highs we have negative divergence. The TRAN was stopped by the trend line along the highs since December 2016 - March 2017 and is showing bearish divergence against those highs. It's not a bullish picture here.

U.S. Dollar contract, DX, Daily chart

The US$ is close to breaking out of its down-channel for this year's decline, the top of which is currently near today's close. Breaking out of the down-channel and getting above its October 6th high at 94.10 would be a bullish move. A short-term price projection points to 94.30 and therefore above that level would be good confirmation a low is in for the dollar. But until that happens there is still the potential for one more new low, near 90, before setting up a bigger rally into next year.

Gold continuous contract, GC, Daily chart

As with the dollar, gold is about to make a decision which way to go and it should be a strong move. Bullishly, gold broke its downtrend line from 2011- 2016 in August and then back-tested it in early October. It's now testing an uptrend line from July-October, near 1276, and if that leads to a rally above its high at 1308.40 on October 16th it should lead to a strong rally. That might happen if the dollar heads back down toward 90. But if gold drops below its October 6th low at 1262.80 it will likely lead to a strong decline. Flip a coin for direction from here but then it should be a strong move.

Oil continuous contract, CL, Daily chart

I see upside potential for oil to a price projection near 54 for two equal 3-wave moves up from June. It would be more bullish above 54 but at the moment, with bearish divergence against the highs at the end of September there is risk to the downside from here as it again approaches its broken uptrend line form April-August-November 2016, currently nearing 53.

Economic reports

Thursday morning we'll get some more housing data with the Pending Home Sales report. The number for August was a disappointing -2.6%. Other than Friday's final Michigan Sentiment number there isn't much left this week to report.


The market is weakening significantly and the decline since Monday morning's highs has the potential to develop into a much stronger pullback/decline. The bulls could pull another rabbit out of the hat with a rally on Thursday and into Friday. If that happens I suspect we'll see the market hold up at least through the end of the month. After that would be a coin toss. Unless we see strengthening in the market breadth, as discussed in the beginning of tonight's wrap, I think the higher this market goes the weaker it will become, which would make a coming correction that much worse. We already have a significant air pocket (more like a vacuum pocket) below us.

We have early signs that this week's pullback is the start of something bigger to the downside but no confirmation of that. The pullback to support for the techs, as well as a corrective-looking pullback pattern for the RUT, supports the idea for another rally leg, which would likely be the last one. But I think it's now especially risky to be thinking long.

If you believe in the longer-term bull and therefore do not want to sell your positions (perhaps for tax reasons or just because you hate selling and then looking for another entry point) then a good way to protect yourself is with put options, long inverse ETFs and/or short some weaker stocks. At least you'll be hedged and then later decide what you want to do with your positions.

If you're a bear itching to get in the fight, we are close to knowing whether or not it's time to enter the ring. A drop back down on Thursday, to test today's low or break slightly below it, could lead to a slightly stronger bounce into Friday, maybe Monday. From there that would be a good setup to get short for what would likely be a much stronger decline. We'll obviously know more this time next week. In the meantime both sides need to exercise caution since things could get a little more volatile.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Plays

No Luck

by Jim Brown

Click here to email Jim Brown
Editor's Note

The combination of a weak market and the earnings cycle is working against us. I looked at hundreds of small cap charts today and the vast majority were losing ground. This suggests the Russell decline could continue. The very few that had a decent chart had earnings over the next two weeks and could not be recommended. The combination of earnings and small cap weakness did not allow for a new recommendation today.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Beginning of the End

by Jim Brown

Click here to email Jim Brown

Editors Note:

Weakness in the Russell and Nasdaq could be telegraphing the end of this rally stage. I still believe the market will go higher because all the fundamentals are strongly positive. However, we have had an unbelievable rally over the last two months and this uptrend could be coming to a close. We need a period of profit taking that lasts more than one day to refresh the market and energize it for the next move higher. I would be perfectly happy if we duplicated today's decline on Thr and Fri and then began a new move higher on Monday.

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

No Changes

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

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. The gains continued even in a weak market.

I am going to tighten the stop loss again because this short squeeze may not last.

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.

Update 10/23: The company issued an operational update after the bell. They see the impact from the hurricanes as limited. Same store sales were impacted because of 100 lost selling days and reduced traffic associated with Harvey. However, starting in mid September they saw increased traffic and sales as consumers began to rebuild and replace everything they lost in the flood. October same store sales are up 15%. There were both positive and negative factors in the update and shares did not move in afterhours because the update was not released until 5:24 PM after the session closed.

I am recommending we close the long call position. It is a November call and any decline from the operational update would see the premium evaporate quickly.

Update 10/24/17: Yesterday after the bell CONN provided an operational update that contained some mixed details. October same store sales in hurricane areas was up 15% but nationwide sales were down -7%. I was worried about how this would play in today's market and recommended we close the November option position at the open because a drop in CONN shares could have negatively impacted that short-term option.

Hindsight is always 20:20 and CONN shares exploded higher with a $4.45 gain. We exited the option for a double so we cannot complain but the high for the day was double that. Fortunately, we kept the stock position and were richly rewarded.

Position 10/17/17:

Long CONN shares @ $26.00, see portfolio graphic for stop loss.
Closed 10/24: Long Nov $28 call @ $1.06. Exit $2.00, +.94 gain.

FINL - Finish Line - Company Profile


No specific news. Shares posted a minor gain in a weak market after Nike had positive things to say about the future during its investor day.

Original Trade Description: October 21st

The Finish Line, Inc., together with its subsidiaries, operates as a retailer of athletic shoes, apparel, and accessories for men, women, and kids in the United States. The company offers athletic shoes, as well as an assortment of apparel and accessories of Nike, Brand Jordan, adidas, Under Armour, Puma, and other brands. It engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. As of April 2, 2017, the company operated 573 Finish Line stores in 44 states in the United States and Puerto Rico. It also operates e-commerce site, finishline.com and mobile commerce site, m.finishline.com. The company was founded in 1976 and is based in Indianapolis, Indiana. Company description from FinViz.com.

This is a simple scenario. UK retailer Sports Direct has acquired an 8% interest in Finish Line as it tries to expand its presence in the USA. Sports Direct was acquiring additional shares through third parties in order to force an acquisition. In late August, Finish Line adopted a poison pill to prevent a forced takeover. Since that pill was enacted, the companies have been in discussions and insiders claim the deal is moving along nicely towards completion.

Wells Fargo said there was at least a 50% probability the deal would happen and they are targeting a sale in the $14 - $16 range. Shares are currently trading at $10.50 and EBITDA of 4.5. Wells Fargo said that would be the cheapest takeout in years. Staples was bought by Sycamore for 5.5 times in September. Since Staples had not posted positive comps in 10 years they believe Finish Line will be sold for more than the Staples rate.

Shares jumped on Friday after the company declared an 11-cent dividend.

I am recommending as own this stock ahead of earnings on Dec 22nd. If there is going to be a deal announced it should happen on or before earnings.

Position 10/23/17:

Long FINL shares @ $10.49, see portfolio graphic for stop loss.
Alternate position: Long Feb $12 call @ 75 cents, see portfolio graphic for stop loss.

MRVL - Marvel Technology - Company Profile


No specific news. Shares cannot seem to close over that $18.60 resistance. When a breakout comes it could be strong.

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


ON announced a CMOS image sensor platform that brings new levels of performance and image quality to automotive applications such as ADAS, mirror replacement, rear and surround view systems, and autonomous driving. The Hayabusa platform features a ground-breaking 3.0-micron backside illuminated pixel design that delivers a charge capacity of 100,000 electrons, the highest in the industry, with other key automotive features such as simultaneous on-chip high dynamic range (HDR) with LED flicker mitigation (LFM), plus real-time functional safety and automotive grade qualification. Shares declined only 15 cents in a weak market.

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.

TTS - Tile Shop Holdings - Company Profile


No specific news. Minor gain in a weak market.

Original Trade Description: October 23rd

The Tile Shop is a leading specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the United States. The Company offers a wide selection of high quality products, exclusive designs, knowledgeable staff and exceptional customer service, in an extensive showroom environment with up to 50 full-room tiled displays which are enhanced by the complimentary Design Studio – a collaborative platform to create customized 3D design renderings to scale, allowing customers to bring their design ideas to life. The Tile Shop currently operates 134 stores in 31 states and the District of Columbia, with an average size of 20,500 square feet and sells products online.

The Tile Shop reported earnings of 5 cents and revenue of $84.4 million. Analysts were expecting 4 cents and $84.1 million. It was a minor beat but the company had warned on revenues back in early October and analysts reduced their forecasts.

Shares have been severely beaten up since July with a drop from $20 to $8. The company blamed the highly promotional environment and customers shopping for "entry level" products. The company has rectified this deficiency by adding some cheaper products and said they were adjusting their advertising and promotions to meet demand.

Shares have been flat all month but ticked up slightly on Friday and then accelerated on Monday. After a month of consolidation, it may have formed a bottom.

Earnings January 16th.

I am using February options to provide some earnings expectations in the premium. The December options are cheaper but will decay faster.

Position 10/24/17:

Long TTS shares @ $9.65, see portfolio graphic for stop loss.
Alternate position: Long Feb $10 call @ 80 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

BBBY - Bed, Bath and Beyond - Company Profile


No specific news. New 8-yr low close.

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 posted 3 back to back declines.

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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