Option Investor

Daily Newsletter, Wednesday, 11/1/2017

Table of Contents

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

Market Wrap

Bullish First of Month

by Keene Little

Click here to email Keene Little
The first of the month tends to be positive, attributed to new investments that come into the market (retirement accounts and other monthly distributions from paychecks), and at least for the blue chips, that held true today. The tech indexes and RUT did not do as well as the blue chips today and there are some stronger hints of possible trouble for the bulls.

Today's Market Stats

The first of the month for SPX has been bullish 10 out of 11 times this year and that's been attributed to the new-month money that comes in from paycheck deductions for investments, especially retirement accounts. It's become somewhat of a self-fulfilling prophecy as well since traders are now expecting the first day or two to be bullish.

Another statistic the bulls have on their side is the fact that the first of November has been bullish 2/3 of the time since 1976 (hat tip to Tom McClellan). The blue chips kept the streak going with their positive close today, although the selloff following the morning gap up is not a bullish sign.

The tech indexes and RUT suffered a stronger selloff following this morning's gap up for the market, which could be a warning sign. There might be some rotation out of the riskier stocks into the relatively safety of the blue chips (easier to sell in a downturn, lower beta if riding the market down) and this could be hinting there's trouble ahead for the rally. But the bears have some work to do before they've proven the bulls are done.

This morning's economic reports were largely ignored (very little price action in the pre-market futures) since there were essentially no surprises. The ADP employment picture improved with the +235K vs. the +110K in September (which was revised lower from the originally reported +135K). The number was a little better than the +215K that the market expected.

The ISM Index came in a little lower at 58.7, vs. 60.8 in September, but near what the market expected (59). Construction spending for September was +0.3%, which was an improvement over the +0.1% in August and much better than the -0.2% that had been expected. Unfortunately the year-over-year% continues to decline since peaking in the spring of 2016.

Crude inventories declined -2.4M last week but that didn't help oil prices today since they declined after an overnight rally. As I'll show in oil's chart, the overnight high has the potential to be the top of its rally from June.

The FOMC rate decision this afternoon was a no-surprise hold on rates. The Fed's announcement left the door wide open to an expected December rate hike since the economy is "solid." There was no further discussion of the "QER" (QE Reversal), which remains on track to slowly reduce the amount of bonds that are rolled over, thereby removing some of the liquidity the Fed has been providing over the years.

One of the things that's not registering with the market yet is the fact that major central banks are now talking about and implementing plans to reverse some of the stimulus they've been providing with uber-low interest rates and lots of free money. The stock markets of the world (along with many other assets) have benefitted greatly from the extreme levels of stimulus from the central banks and most recognize this to be true. So why is QER not striking fear into market participants? Because right now the market is not paying attention to any bad news. As my granddaughter (3 years old at the time) used to say, when she didn't want to be told something she didn't want to hear, "Don't say any something." That's what the market is telling us right now.

Cora sent me an email with the following observation about all of this:

"This market does not sell off or take profits for any reason whatsoever.
- Manhattan terrorist attack during market hours - same old, same old...it didn't take out any of the 1% that makes our market
- President threatened with impeachment - whatever, it's just another day of politics
- Fed unwinding Quantitative Easing - eh, they will take care of us in some other way
- Korea threatening with [a nuclear] bomb - he has funny hair
- Catalonia declaring independence, Venezuela on the brink of falling apart - who, what, where, why should we care?
The disconnect is getting scary."

The market is obviously bullish when it ignores bad news and just keeps rallying. The time for the bulls to worry is when good news is sold. These both are sentiment indicators -- you want to be bullish when bad news is bought and you want to be a seller when good news is sold.

While some bullish sentiment indicators have backed off, such as VIX and the Fear & Greed index, the Investors Intelligence report shows a 30-year record high level of bulls (63.5%) vs. bears (14.4%). The spread (49.1) is above a level that has been associated with major market highs in the past. This in combination with a slowly rising VIX (higher lows) and declining Fear & Greed index while the stock market indexes continue higher is a dangerous sign for the late-comers to the market. The retail crowd is shedding its fear of the market and jumping in with both feet, which typically means the market is nearing a top (when they're all in).

The Investors Intelligence reports the results of a survey of 100 investment advisors and newsletter writers. Their answers are categorized as either bullish, bearish or "correction" and when the majority swing to one side of the boat it's a good time to high side the other side of the boat before it tips over.

It reminds me of sailing our Hobie Cat -- we'd love getting one pontoon out of the water and up high, hanging out over the side and enjoying the ride up high as we flew along the surface of the water. We'd then wait for the bow of the low side to dig into the water, which immediately stopped the boat. It would then flip over and cartwheel, throwing us all into the water. If you knew it was coming you could prepare for it but for those we gave rides to, who were simply enjoying the ride, well, let's just say they weren't happy campers when they were suddenly ejected without warning.

My sense is that the market is up high on one pontoon and the bow of the low side is starting to dip under the surface. The hapless bulls, especially those who don't suspect the danger, will not be happy with what's coming next. The 30-year high reading for bullish sentiment in the Investors Intelligence survey is clearly a warning sign that the "most hated bull market" is not hated so much anymore. When everyone gets in the pool it's usually a good time to get out.

And with that let's see if the charts are providing any warning signs that our boat is about to dig in and suddenly stop.

S&P 500, SPX, Weekly chart

Last week SPX finished with a dragonfly doji (more bearish version of a hanging man doji) at a trend line along the highs since April 2016 and at the midline of an up-channel for the rally from 2010-2011. So far this week's candle is a small doji cross that's down 2 points from last Friday's close. Obviously a lot can change before this week completes but with the weekly oscillators threatening to roll over from overbought with price up against trendline resistance it's a good time to be cautious about the upside. There's no evidence this is going to be a top but the wave count also supports the idea that we could be putting in a final high here.

S&P 500, SPX, Daily chart

SPX has been struggling near the price projection at 2579.14, which is where the rally from April achieved two equal legs up. This is an important price projection for a final 3-wave move up in the rising wedge pattern for the rally from February 2016. Last Friday SPX closed at 2581, which was exceeded slightly with this morning's high at 2588, but it closed back down near the 2579.14 projection.

We have bearish divergence since the October 5th high, which is another warning sign but again, no proof yet that a high has been made, just a warning. The first sign of trouble for the bulls would be a drop below the 20-dma, currently near 2563, which would also be a break below its uptrend line from August. Until SPX drops out of its up-channel it's obviously still in an uptrend.

Key Levels for SPX:
- bullish above 2590
- bearish below 2544

S&P 500, SPX, 60-min chart

This morning's high for SPX also tagged 2587.62, shown on the 60-min chart below, which is the 127% extension of its previous pullback October 23-25. This is a common reversal Fib level to watch and this morning's strong reversal off the gap-up start to the day is not a bullish sign. We could see SPX chop its way higher in a small ending pattern, in which case I see upside potential to 2590-2595 and maybe just above 2600. A drop below Monday's low at 2568 would be the first indication that a top is likely in place.

Dow Industrials, INDU, Daily chart

Other than the fact that the Dow has been unable to get through the trend line along the highs from April 2016 - March 2017, currently near 23550, I see more upside potential to about 24K. The daily chart below is using the arithmetic price scale since that shows the referenced trend line acting as resistance. When the chart is viewed with the log price scale the trend line is higher and now nearing 24K. But like the short-term pattern for SPX (60-min chart), I see the possibility for just one more minor new high to complete a small ending pattern, which could result in one more test of the trend line.

Key Levels for DOW:
- bullish above 23,500
- bearish below 23,100

Nasdaq-100, NDX, Daily chart

NDX gapped up this morning and tagged the price projection at 6270.35 (with a high at 6276.66), which is where the 5th wave of its rally from August equals the 1st wave. That 5th wave, which is the leg up from October 25th, is also a 5-wave move and its 5th wave has also achieved equality with the 1st wave. There's at least a little more upside potential to the top of its up-channel from July, currently near 6312, but the pieces are now in place to be able to call a top. Whether or not it will be a top awaits confirmation. An impulsive decline (vs. the choppy pullbacks we've seen since Jesus was a little boy) would be our first clue that the bulls are done. Confirmation of a high doesn't come until NDX drops below 6010.

Key Levels for NDX:
- bullish above 6270
- bearish below 6010

A big driver behind the tech rally has of course been the FAANG stocks. Other big-cap stocks benefit greatly from the buying of the QQQ and other tech ETFs. The SOX has also been strong and INTC has been particularly strong. But going through many of the tech charts is further evidence (to me) that a high for the techs might have been this morning's. AAPL gapped up and ran into trendline and Fib resistance and then reversed strongly back down. Today's created a bearish engulfing candlestick, which is a reversal candlestick.

Updating my weekly chart of MSFT that I showed over the weekend, I had noted that Friday's high reached an upside target zone at 84.65-87.20 with its high at 86.20.The target zone is based on a throw-over above its up-channel that equals how much it was below the channel at the start of its rally from June 2016. Friday's high was the positive reaction to its earnings and that created the gap up and throw-over finish to its rally (potentially). There's been no follow through since that high and while it's a little early to call a high for MSFT that's the current setup -- short against Friday's high.

Microsoft Corp., MSFT, Weekly chart

Russell-2000, RUT, Daily chart

The RUT has continued its entrapment inside its expanding triangle off the October 5th high. The choppy consolidation inside this pattern should be bullish and a rally out of this pattern could see the RUT run up to a price projection near 1548 (for the 5th wave of the rally from August), which is where it would also hit the intersection of the broken uptrend line from August and a trend line along the highs from July-October (the trend lines cross on November 10th).

It's possible the RUT will break down from this pattern, in which case it would be a failed bullish pattern and that would mean a strong decline to follow. The first sign of trouble for the bulls would be a drop below the bottom of the expanding triangle near 1477. Stronger confirmation of a high would be a drop below its 50-dma, which is rising towards the trend line along the highs from 2007-2015, currently near 1465.

Key Levels for RUT:
- bullish above 1515
- bearish below 1477

10-year Yield, TNX, Weekly chart

Last week TNX made it up to its downtrend line from 1988-2007 and stopped a little shy of a price projection at 2.508, which is where the c-wave of an expanded flat a-b-c bounce off the June low would be 162% of the a-wave. The October 25th high was 2.475 and the turn back down from there is a small 5-wave decline into today's low. That's our first clue that TNX has reversed back down and once a bounce correction to the decline from October 25th completes we should see a continuation lower.

There is of course further upside potential, especially if a pullback holds above the 200-week MA and its uptrend line from July 2016 - September 2017, both of which will cross near 2.20 in a few weeks. A climb above 2.51 would also be bullish. The big question is what will happen if and when the stock market starts back down, especially if it becomes a scary pullback. If fund managers scurry into the relative safety of Treasuries it would spike yields down.

KBW Bank index, BKX, Daily chart

BKX looks toppy with its new high above its October 6th high and bearish divergence. It's also struggling to get through the trend line along the highs from July-October. There's Fib correlation at 103.03-103.24 so if BKX presses a little higher keep an eye on this area for a possible high. The Fibs come from a 127% extension of the March-April 2017 pullback (103.03) and the 162% extension of the July-September pullback (103.24). The first sign of trouble for the banks would be when BKX drops below its 20-dma, currently at 100.60.

Transportation Index, TRAN, Weekly chart

With its October 13th high the TRAN tagged the trend line along the highs from December 2016 - March 2017 and has since rolled back over, leaving a bearish divergence at the new high. For an ending pattern for the rally from January 2016, a 3-wave move up from May 2017 fits well as the completion of the rally. Therefore we have a good setup for an important high for the TRAN but a new high can't be ruled out until it drops below the August low at 9010.

Dow Jones US Home Construction index, DJUSHB, Monthly chart

One sector that's been particularly hot this past year is the home builders. But as with the broader market, the home builders could be reaching a peak, as shown with the monthly chart below. There is an up-channel for the rally from the November 2008 low, based on the uptrend line from October 2011 - February 2016 and the parallel line attached to the first highs off the 2008 low. DJUSHB has now reached the top of the channel and there are hints of topping in the oscillators. If the index turns back down from here it would be a signal that the housing market is slowing, which would be a negative for our economy. It's too early to tell what will follow here but it'll be worth watching over the coming weeks.

U.S. Dollar contract, DX, Daily chart

At the moment the US$ has a bullish breakout in progress. On October 26th it broke out of its down-channel from January and above 94, which fits as a neckline for an inverse H&S bottoming pattern. A pullback to 94 and then higher would be bullish as would a pullback to the top of its down-channel, near 92.90 next week. Either would be a bullish back-test and a continuation higher would confirm the bullish breakout. The new up-channel from September could also contain the rally up to the H&S price objective, near price-level resistance at 97.50.

Gold continuous contract, GC, Daily chart

With last Friday's low gold again tested its broken downtrend line from 2011-2016 and its 200-dma. It's showing bullish divergence against its October 6th low and now all it has to do is get back above its broken 20-dma and its broken uptrend line from July-October, both crossing near 1283. The next hurdle for the bulls would be price-level resistance at 1300 and its broken 50-dma, also near 1300 (it was unable to hold above both after its rally into the October 16th high). Gold bulls would in trouble if gold drops below the intersection of the broken downtrend line from 2011-2016 and the uptrend line from December 2016 - July 2017, near 1257.

Oil continuous contract, CL, Daily chart

Oil's overnight rally had it tagging the top of a parallel up-channel for the rally from June and it then proceeded to sell off sharply today. The corrective bounce pattern off the June low is one thing that keeps me bearish longer-term for oil but short term I see at least a little more upside potential. Two equal legs up from the pullback into the August 31st low points to 56.38 so that remains a possibility. But the minimum projection that I had expected to see, at 53.96 (for two equal 3-wave moves up from June), has been met and now with the rally up to the top of the up-channel there is the potential for a turn back down from here.

There is the possibility that the downtrend line from March 2015 - January 2017 is the neckline of an inverse H&S bottoming pattern (the June low is the right shoulder). The upside price objective out that bullish pattern is near 84. So it would be bullish to see a pullback that holds support at or above the neckline, currently near 51.50.

Economic reports

Thursday will be a quiet day for economic reports but Friday will be important with the employment data. This morning's ADP report showed an improvement in the employment gains for October so the market will want to see confirmation of that with Friday's NFP report.


We have more than a few signals that a market top could be here with this morning's gap up and selloff. Between trend lines, Fib projections, the wave count, bearish divergence and a slew of other technical indicators there's enough evidence to suggest the bulls could soon be in trouble. But the bulls have been in trouble many times before and the market just keeps rallying. The quote from Cora says it all -- this market continues to rally on all kinds of bad news and that's bullish. When we see the market sell off on good news we'll know market sentiment has shifted.

Bullish sentiment, as described with the Investors Intelligence survey, tells us it's risky to be thinking bullish (you want to be very careful when you're with the crowd since you can get trampled when everyone is trying to get out at the same time). The bottom line is we have a good setup for an important market high but without the confirmation.

The challenge for those in long positions and those wanting to get short is that a coming correction could start very quickly and violently, catching both sides flat footed or back on their heels. Getting out could be a challenge, especially if the market becomes no-bid as the computers turn into selling machines and can't find buyers.

Those who want to get short could find themselves faced with having to short in the hole, which is always challenging since there's always the fear that the market will come roaring back at any time, even if it's just going to be a quick short-covering rally. It's a big reason why I think it's prudent to trim long positions and/or hedge your positions with some short positions. Bears can use longer-dated OTM put options and hope to get in cheap and out with inflated premiums.

Bottom line is that it's a good time for both sides to play it safe and be cautious. I think upside potential is dwarfed by downside risk and I'd trade accordingly.

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

Slip Sliding Away

by Jim Brown

Click here to email Jim Brown
Editor's Note

Wednesday may have been a top for the market. The S&P futures are down -10.50 as I type this. The new record highs at the open on Wednesday were erased by the close and the majority of the earnings after the close were a disappointment. I spent 3 hours looking at charts trying to find something to recommend for Thursday. The futures were only down -2 when I started. The longer I researched the farther the futures dropped. With the futures down -10 there is nothing I can recommend for tomorrow that would not get a terrible fill at the open. Maybe this is going to be the profit taking decline we have been looking for.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Small Cap Weakness

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell has traded below prior support at 1,500 for 8 consecutive days. The length of the candles is growing with alternating swings between gains and losses. The small cap indecision is growing. The Dow spiked 140 points at the open and gave it all back to trade just barely over the flat line by 1:PM. The Nasdaq closed 45 points off its high with a 19 point loss. Biotechs and chip stocks were both negative. Most of the earnings reports after the bell were disappointments with only Facebook, Shake Shak and Qualcomm posting afterhours gains. TSLA, FEYE, GPRO, YELP, CAKE and SYMC all tradeddown sharply. We may be reaching a point where traders are going to take a pause. Beware the tax proposal release on Thursday for a sell the news event.

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

ARNC - Arconic - Company Profile


No specific news. Shares holding at a 2-week high.

Original Trade Description: October 28th

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Company description from Arconic.

Arconic is the old Alcoa. The aluminum mining company was split off as Alcoa Corp and the original Alcoa was renamed Arconic. This company manufactures parts and complicated assemblies from aluminum. They take the raw aluminum and add value to it by creating high tech, high value parts like turbine blades for engines and gas turbines. They are moving into 3D printing of aluminum parts. They have dozens of remote offices close to large industrial clusters where they can provide immediate service to large manufacturing companies.

Shares fell after earnings because they announced the appointment of a new CEO with their earnings report. Charles Blankenship will replace David Hess on January 15th.

The company reported earnings of 25 cents that missed estimates for 27 cents. Revenue of $3.24 billion beat estimates for $3.09 billion. The company guided for the full year for revenue of $12.6-$12.8 billion, up from prior guidane of $12.3-$12.7 billion. Full year earnings are now expected to be $1.15-$1.20 per share.

Expected earnings January 22nd.

Shares fell $3 on the earnings miss and CEO change. After bottoming at $24, they are trying to move higher with resistance at $25.15. I believe ARNC will return to pre earnings levels at $28.

Position 10/31/17:

Long ARNC shares @ $24.76, see portfolio graphic for stop loss.
Alternate position: Long Jan $26 call @ 95 cents, see portfolio graphic for stop loss.

BOTZ - Global X Robotics AI - Company Profile


Since this is a long-term slow moving ETF position, there will not be daily commentary.

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.

Update 10/26: Shares of BOTZ fell 50 cents for the biggest one-day drop since the ETF began in September 2016. There was no news but volume of 4.16 million shares was the largest ever and well over the 964,000 historical average.

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.

ON - ON Semiconductor - Company Profile


No specific news. Another new intraday high but slightly negative at the close.

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.

Update 10/25/17: 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.

Update 10/26/17: ON announced a new 1/2.7-inch 2.3 Megapixel (Mp) CMOS digital image sensor with an active-pixel array of 1936H x 1188V. The AR0239 produces extraordinarily clear and sharp digital images in challenging bright and low light conditions. This, along with its ability to capture continuous video and single frames, makes it an ideal choice for many applications, including security and surveillance systems, body cameras and vehicle DVRs (dash cameras).

Position 10/10/17:

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

SVU - Supervalu - Company Profile


No specific news. Closed at a 2-week high.

Original Trade Description: October 28th

SUPERVALU INC., together with its subsidiaries, operates as a grocery wholesaler and retailer in the United States. The company operates through two segments, Wholesale and Retail. The Wholesale segment engages in the wholesale distribution of various food and non-food products to independent retail customers, such as single and multiple grocery store operators, regional chains, and the military. This segment also provides various services, such as retail store support, advertising, couponing, e-commerce, network and data hosting solutions, and training and certification classes, as well as administrative back-office solutions. As of February 25, 2017, this segment operated approximately 1,902 stores with a network spanning 40 states. The Retail segment operates retail stores that provide groceries and various additional products, including general merchandise, home, health and beauty care, and pharmacy products. This segment operated 217 stores under the Cub Foods, Shoppers Food & Pharmacy, Shop 'n Save, Farm Fresh, and Hornbacher's banners, as well as 2 Rainbow stores. The company's stores offer a range of branded and private-label products comprising perishable and nonperishable grocery products. SUPERVALU INC. was founded in 1871 and is headquartered in Eden Prairie, Minnesota. Company description from FinViz.com.

Supervalu has morphed into more of a wholesaler of groceries than a retailer. Given the movement by Amazon and Walmart into online groceries that may be the way to go.

For Q3 they reported adjusted earnings of 46 cents that beat estimates for 36 cents. Revenue of $3.8 billion narrowly beat estimates for $3.79 billion. Wholesale sales rose 63% from $1.7 billion to $2.7 billion while retail and corporate sales were flat. They announced the acquisition of Associated Grocers of Florida for $180 million. Associated had revenue of $650 million for the trailing 12 months. This is a major bolt on acquisition where they can add value and scale and increase their presence in Florida, the Caribbean, South America and Asia. In June they completed the acquisition of Unified Grocers, an active distributer on the West Coast for $390 million. Unified had revenue of $3.8 billion in 2016.

Shares of SVU have been declining since their high of $84 in April 2015. With these two acquisitions and the sale of the Sav-A-Lot division in 2016, the company is turning the business around. I like that they are reducing their exposure to retail and all the expenses and employee related hassles that go with running a retail grocery store. By focusing on the wholesale business they can reduce overhead and expand their reach and their profit margins.

Who knows, maybe Amazon will decide they need to buy a wholesale grocery distributor.

Earnings Jan 17th.

Position 10/30/17:

Long SVU shares @ $16.13, see portfolio graphic for stop loss.
Alternate position: Long Jan $18 call @ $1.05, see portfolio graphic for stop loss.

BEARISH Play Updates

BBBY - Bed, Bath and Beyond - Company Profile


No specific news. Shares rebounded sharply from the 8-yr closing 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. Only a minor rebound.

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 slow moving 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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