Option Investor

Daily Newsletter, Wednesday, 11/8/2017

Table of Contents

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

Market Wrap

Priced for Perfection

by Keene Little

Click here to email Keene Little
The stock market is priced for perfection as earnings season winds down, the tax plan is debated and North Korea remains a thorn in the side of its neighbors and the U.S. Everything has to work out perfectly from here in order to keep the market from becoming disappointed and right now the bulls are betting on that outcome.

Today's Market Stats

The market celebrated the completion of one year following Trump's election with a little push higher for the rally (more so for the techs). Market participants continue to bet on a bullish outcome for the new tax plan that's now being debated. Trump is in Asia and one of the reasons is to figure out what to do about North Korea. Traders are betting on a bullish outcome. Earnings season has turned a little weaker but traders are betting on a bullish outcome. Priced to perfection, the market is vulnerable and could soon disappoint the bulls if some stronger buying pressure doesn't show up soon.

The one-year rally following Trump's election certainly has the momentum behind it, although that's been weakening, after completing a very good year. In fact it's the best post-election 1-year rally since 1945, which also happened to be the end of WWII and the launch of one of the strongest economies in the world. That can hardly be said about our economy today. In fact this time there is such a strong disconnect between the economy and the stock market that it makes one wonder why we've had such a strong rally.

The answer to the question about the rally over the years is of course liquidity. The Fed and other global central banks have created so much money and it continues to look for investment opportunities. Asset prices, especially the stock market and housing market, have enjoyed all that newly-created money that's looking for a home. The rally has less to do with fundamental values and more to do with simply looking for a place to invest the money. Take the money away and the house of cards stands vulnerable, which is one reason why there should be more concern about the Fed taking away the punch bowl. It's probably because all that drinking over the years and the inebriated effect on investors is going to take time to register. Money in -- assets rise, money out -- assets...

Today's rally was minor in the blue chips but it was good enough to tack on another "new all-time closing high." That keeps the sheeple coming in and buying more (the stock market is one of the few places where people get excited about paying higher prices for something). But there's also very little negative news and that helps people stay positive, which is what we see in sentiment surveys. As long as the people are feeling upbeat there will be a desire to stay bullish about the stock market.

The bullish sentiment is what the bears are fighting and it's the reason they've had to stay in their caves until there's evidence of a top to the current rally. Most analysts don't see what could derail the market and that also helps the bulls. While the market has a habit of surprising the most people at the most unexpected times, that's not something most investors are worried about at the moment. They'll keep paying the higher prices as long as they believe prices will only continue to go higher. What's amazing is how many investors today have not experienced the emotional angst when the stock market stops going up.

As for tonight's charts, the #1 takeaway is the fact that there's no threat to the establish uptrends in all the indexes. The RUT is weaker but there's no impulsive decline to say with certainty that a top is in place. As I'll show, there are reasons to suspect a top could be very close now (possibly by Friday) the fact remains that any attempt to pick a top is simply an attempt to catch all those rising knives. Getting cut is a real possibility if you attempt to sell this market.

S&P 500, SPX, Weekly chart

With the tiny little weekly candles, especially the last three weeks, there's been very little change to the SPX weekly chart. Price remains near the trend line along the highs since April 2016 and the midline of its up-channel from 2010-2011. With trendline resistance holding and the weekly MACD threatening to roll over it's looking vulnerable to topping at any time. SPX needs a strong break above 2610 to have it looking more bullish.

S&P 500, SPX, Daily chart

Since the October 25th low it's looking like we're into the 5th wave of the rally from August. It's forming a rising wedge pattern, which is common for 5th waves, especially following a move that has gone too far too fast. The EW term for the pattern is an ending diagonal and that's a fitting term for what I'm seeing here. But it's also why it would look more bullish if it breaks out of the pattern with a rally above 2610. Confirmation of a top doesn't come until SPX drops below the November 2nd low at 2566.

Key Levels for SPX:
- bullish above 2606
- bearish below 2566

S&P 500, SPX, 60-min chart

The 60-min chart shows a closer view of the rising wedge pattern for what should be the final leg of the rally. As always with these patterns, they can continue longer than it seems possible and I'm depicting a couple of ideas for how price might play out from here. My best guess at this moment is shown in bold green and red, which calls for a continuation of the rally on Thursday into a top by Thursday or Friday. But it will have to be watched carefully since it could chop its way higher into next week. Next week is opex and that will be one reason why the market might hold up a little longer (light-green dashed line up to about 2610 next week).

Dow Industrials, INDU, Daily chart

Since October 24th, when the Dow first reached the trend line along the highs from April 2016 - March 2017, it has remain stuck beneath the line. For the past six trading days it has tested the line but has been unable to break through resistance and now it has dropped out of its up-channel from the beginning of September. It would be accurate to say the Dow has dribbled out the side of the channel since it has not broken down.

If the Dow does manage to get above the trend line, near 23630, watch for a possible back-test of the bottom of the up-channel, which will be near 23740 on Friday. Another possibility is a dip on Thursday that could lead to one final test of the 2016-2017 trend line near 23640 on Friday. The bulls need to see a stronger move above 23800 in order to negate the bearish setup here.

Key Levels for DOW:
- bullish above 23,800
- bearish below 23,350

The techs have been out in front of this rally, helped of course by the FAANG and some other big-cap tech stocks. The sentiment is certainly behind the move, which can be seen graphically in the bottom chart below (NDX is the top chart). It's the Rydex Asset Ratio, which compares assets in bear funds plus money market funds and bull funds.

Rydex Asset Ratio, Monthly chart

The Rydex asset ratio has spiked up in the last month to new all-time highs, which now has it well above where it was at the height of the craziest dot.com high in 2000. When the retail crowd buys into a move (literally) it's usually a good time to be thinking about taking the other side of the trade.

Nasdaq-100 index, NDX, Daily chart

Since the November 2nd low for NDX it has been working its way higher as it finds support at its uptrend line from October 25th, which is where it closed today. If you look at the trend line on a 60-min chart you'd see how each hourly candle hugged the trend line. Any decline from here would break the uptrend line so the bulls can't let up. But the top of a parallel up-channel for the rally from July is now close, near 6370, which is the upside potential from here. NDX would be more bullish above 6400 and the first sign of trouble would be a drop below Tuesday's low near 6300.

Key Levels for NDX:
- bullish above 6400
- bearish below 6194

Russell-2000, RUT, Daily chart

The RUT is setting up for a big move. It has essentially been consolidating in a choppy pattern for over a month and the bullish interpretation of the pattern, calling it a bull flag, says we should see a breakout and potentially right from here. The bearish interpretation says we've had a series of 1st and 2nd waves to the downside and that it's now ready to break down.

A breakdown would actually be a stronger move than a rally but in either case it's likely going to be a strong move. At the moment it's a flip of a coin for direction but I'm leaning into the bear camp here (I'll quickly correct my leaning posture if I see an impulsive move back up since all we've seen so far are a bunch of 3-wave moves over the past month+).

The bullish setup here is the bullish hammer candlestick with the bounce off support this morning. Between its 50-dma at 1471 and its broken trend line along the highs from 2007-2015 (which the RUT had broken above with the big rally on September 27th), near 1465, the bulls have a strong reason to buy the pullback. This morning's low was 1469 and they'll need to drive the RUT below 1465 (and keep it below that level) to prove a top is likely already in place, in which case I would expect strong selling to follow.

Key Levels for RUT:
- bullish above 1515
- bearish below 1465

10-year Yield, TNX, Weekly chart

Last week I showed an expectation for TNX to pull back from resistance at its downtrend line from 1988-2007, which it did, but so far this week we have just a little doji. I could make the argument that we have a small impulsive decline from the October 25th high, which would mean the trend has changed to the downside and that any bounce in the coming days would be a good shorting opportunity (buying opportunity for bonds), using a stop above the October 25th high at 2.475. There is the potential for only a bounce up to a price projection near 2.51, above which TNX would turn more bullish.

High Yield Corporate bond fund, HYG, Weekly chart

Another bond fund to watch carefully is HYG since this is a good indicator of bullish sentiment. I last updated its weekly chart in August after it dropped out of its small rising wedge from March and the top on July 26th. It had found support at its 50-week MA and bounced back up to the bottom of the rising wedge where it hung on for another 3 months before falling away from its bounce high on October 23rd. Today's strong decline has it breaking support at its 50-week MA at 87.76 and it's now looking like a breakdown has started. The large split between SPX and HYG is likely to be corrected with an SPX decline rather than a rally in HYG.

KBW Bank index, BKX, Weekly chart

Yesterday the banks got hammered to the downside and that followed two weeks of struggling at its trend line along the highs from 2011-2014. It smashed through support at its 20-dma, at 100.79, which had supported the previous pullback into the mid-October lows, and appears headed for a test of its 50-dma, which is climbing and currently near 98 (it closed today at 98.78). A drop below its October 13th low at 97.79 would confirm a top is likely in place and the next level of support would be its 50-week MA and its uptrend line from June 2016, both currently coinciding at 94.13.

Transportation Index, TRAN, Weekly chart

The TRAN topped out on October 13th and closed back below its July 14th high on Monday. It's leaving a fairly large negative divergence compared to the Dow at this point and Dow Theory says the new highs for the Dow, without the TRAN confirming those highs, is bearish. The weekly oscillators for the TRAN have rolled over following bearish divergence since last December and it's not looking like the negative divergence with the Dow is going to be resolved with a rally in the TRAN. That leaves the Dow vulnerable.

U.S. Dollar contract, DX, Daily chart

On October 26th the US$ climbed about a neckline near 94, back-tested with a pullback on November 3rd and now appears ready to push higher. Unless it drops below 94 it now is on a bullish path and the up-channel for its rally from September is the guiding channel. A rally to the top of the channel would also have it testing its broken 200-dma, both of which will probably cross near 96.40 next week

Gold continuous contract, GC, Daily chart

I've been on the fence with gold but with the dollar now looking more bullish I think it's going to pressure gold to the downside. Between the dollar and bitcoin's (BTC) strength there seems to be less upside pressure on gold. The one big plus for gold is if the stock market tanks due to some kind of extraneous event we'll likely see a rush into gold.

Barring anything bad happening, gold's struggle to get off the mat following a bounce off its broken downtrend line from 2011-2016 (it's the second back-test) tells us it's weak, which increases the probability (not guarantee) that it's going to break down further. The larger bearish pattern continues to suggest we have not seen a long-term bottom for gold yet. A retest of the 2008 low at 681 is a real possibility over the coming years.

I've never been a strong proponent of buying gold as an alternate currency. I like owning a little bit of gold and silver for emergencies (for when North Korea sets off an EMP above us and shuts the lights off, wink) but I do like the digital currencies as an alternate currency. Long live the cryptos and prove the Jamie Dimons of the world spectacularly wrong (Disclosure: I own BTC and a few other alt coins). I've found the digital currencies to trade much better technically than do stocks, which are now highly manipulated. I'd also love to see the money power taken away from governments and central banks. But I digress and who knows, maybe gold will do better if BTC spectacularly fails.

Oil continuous contract, CL, Weekly chart

Oil has had a bullish three weeks and has firmly broken above a possible inverse H&S neckline (May 2015 - January 2018), which gives us a price objective of 85. There is of course no guarantee it will get there but that's the bullish potential over the next several months. But the bulls will not have an easy go of it. Oil is now nearing price-level S/R near 58.50 and its 38% retracement of its 2013-2016 decline, which is at 58.97. It's declining 200-week MA is also nearing 58.50 and with oil overbought on the daily chart I think it's going to be tough making much further progress before pulling back and resting.

If oil pulls back in small choppy consolidation patterns we could see a rally to the top of a possible rising wedge pattern, currently near 61 and which will be near 62 in mid-December. Above 62 would clearly be more bullish since a lot of resistance will have been broken by then. I'm not convinced oil is going to rally strong from here since the longer-term pattern looks bearish but it doesn't prevent a higher bounce pattern before turning back down next year.

Economic reports

Other than the Michigan Sentiment survey results on Friday the rest of the week remains a very quiet time for economic reports.


The market remains bullish as long as pullbacks remain corrective. There's no reason a bear should even think about shorting this market since there's no evidence yet that a top is in place. Based on the price pattern, trend lines, Fibs, wave count, bearish divergences, and more, I don't think there's much upside left to this rally. In fact I see plenty of reasons why the rally could finish on Thursday or Friday. I also see a reason why and how the market could remain buoyant through next week (opex). And of course my opinion about a nearby top is just that. Again, there's no evidence of a top and that's reason enough for bears to stay away.

That being said, I think it's a very risky time for bulls. We see lots of evidence of complacency, such as the Rydex Assets ratio shown at the beginning of this report, a low VIX, Investors Intelligence bullish sentiment, etc. This complacency combined with an overbought market that's showing weakening momentum and market breadth makes for a dangerous time to be long the market, especially since we have such a large air pocket below us and a huge problem with ETFs that could go no-bid when the selling starts. Most investors have no idea about these risks.

I keep harping on the use of portfolio insurance because I know a lot of investors, especially retirement account holders, won't sell. There are many analysts telling investors to simply hold on and buy the dips from here. That could work nicely if we're only looking for a short-term top but the risk I see is a more permanent top, one that could last for decades. I just think that kind of risk is too great to ignore. If we do get a larger decline that looks more like a pullback correction I'll be one of the first to warn about another rally coming. With that any portfolio insurance can be cashed in and go back to being a full investor. And with that I offer my soap box to the next speaker.

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

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Morgan Dollar

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New Plays

REIT Rally

by Jim Brown

Click here to email Jim Brown
Editor's Note

GEO Group manages prisons and rehabilitation facilities all around the world. There is never a shortage of criminals.


GEO - GEO Group Inc - Company Profile

The GEO Group, Inc. is a real estate investment trust. The firm invests in real estate markets of the United States, Australia, South Africa and the United Kingdom. It specializes in the ownership, leasing and management of correctional, detention and reentry facilities and the provision of community-based services and youth services. The firm own, lease and operate a broad range of correctional and detention facilities including maximum, medium and minimum security prisons, immigration detention centers, minimum security detention centers, as well as community based reentry facilities. It was formerly known as Wackenhut Corrections Corp. Company description from FinViz.com.

Earnings Jan 30th.

The company reported earnings of 31 cents on revenue of $566.8 million. Analysts were expecting $556 million. They guided for revenue of $557-$562 million for Q4. Funds from operations for the full year are expected to be $2.52-$2.54 with revenue of $2.25 billion. The funds from operations are a key metric for REITs and their ability to pay dividends. They declared a dividend of 47 cents in October and it was paid on Oct 30th.

GEO is the world's leading provider of diversified correctional, detention, community reentry and electronic monitoring services to government agencies around the world. They have 140 facilities with 96,000 beds.

Shares declined in August 2016 as President Obama was moving away from the private prison concept. When Trump won in November shares gapped open and rallied for six months. In May civil rights groups sued the government over private prisons for housing immigrants. Private pension funds withdrew investments from private prison companies. Shares declined for six months despite receiving new contracts from the government for multiple types of detention operations. The declines ended in August and a rebound began with the Oct 31st earnings.

There is resistance at $27.75 but based on the positive guidance and new Federal contracts, I believe that will be broken and we could see a return to $31-$32.

Buy GEO shares, currently $27.13, initial stop loss $24.85.
Alternate position: March $30 call, currently 80 cents. No initial stop loss.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps more than $1.00 at the market open.


No New Bearish Plays

In Play Updates and Reviews

Lackluster Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell rebounded only 2 points after the worst one-day decline in more than two months. To be fair the index did decline another 9 points intraday and the rebound retraced that loss and added 2 points at the close. However, the end result was a lower low, lower high and the index is still outside the recent trend channel.

The Dow and S&P only gained 6 and 3 points respectively so their performance was lackluster as well. The Nasdaq overcame some ugly post earnings drops to gain 21 points and close at a new high by 3 points.

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

ON - ON Semiconductor
The long position was entered at the open.

LE - Lands' End
The short position was stopped at $11.95.

SVU - Supervalu
The short position was stopped at $15.65.

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


AMD's head of the graphics chip unit, Raja Kordui, announced his resignation. This creates big sentiment problems for AMD. He said he was leaving to spend more time with his family but why would a highly successful department head exit right on the eve of a major product expansion? Of course AMD said this would not impact their direction and future goals but Kordui was credited with making AMD GPUs competitive with Nvidia and kept Nvidia from dominating the space. CEO Lisa Su will assume Kordui's role until a replacement is named. She is by far the most intelligent and dynamic CEO the company has ever had and she is more than capable of occupying both positions.

Original Trade Description: November 4th

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 Jan 23rd.

Nvidia (NVDA) shares were rocked again last week after news broke that Tesla was looking at options other than 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.

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.

AMD reported earnings of 10 cents compared to analyst estimates for 8 cents. Revenue of $1.64 billion rose 25.7% and beat estimates for $1.51 billion. Shares collapsed in afterhours after the company guided for a 12% to 18% decline in Q4 revenue to around $1.34-$1.44 billion and analysts were expecting $1.34 billion. Based on analyst expectations that lower guidance was not that bad but it is the principle of lower guidance that sends investors running for the exits.

The new CEO for AMD, Lisa Su, said in an interview last week that with 10 major product launches this year, AMD has completely restructured its product portfolio. "This shift is perhaps one of the most ambitious product ramps that has been done, certainly in AMD's lifetime."

The new Ryzen Mobile combines the best points of the Zen processor and the best of the Vega product and the most recent graphics architecture into a single product. No other company has been able to combine premium processor cores from both categories and merge them into a single chip that runs in an ultra-thin notebook.

HPQ, Lenovo and Acer have announced products that will ship this quarter in time for holiday shopping. AMD products have found new popularity in the key retailer market. Su said they had captured 50% of sales at Amazon and Newegg, the two biggest online computer marketplaces. Processor revenue rose 74% in the latest quarter. Their new AI product, MI25, is already shipping in quantity to data centers around the world and acceptance was accelerating.

I think analysts were wrong on the Q3 earnings. I believe AMD is right on the edge of a resurgence that will make the company a real competitor again.

I am using the April options to get us past their January earnings. When we exit before the event the options will still have an expectation premium.

Update 11/6/17: AMD and Intel could have waited one more day before announcing a partnership to combine AMD's graphics chip with an Intel processor and High Bandwidth Memory to create a thinner and lighter chip for laptops with top tier visual performance. This was rumored several weeks ago but Intel denied it at the time. On Oct 10th, I wrote this.

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 was no longer referenced on the website. Vega Inside

Position 11/6/17:

Long AMD shares @ $12.04, see portfolio graphic for stop loss.
Alternate position: Long April $12 call @ $1.50, see portfolio graphic for stop loss.

ARNC - Arconic - Company Profile


No specific news. Shares fell again on no news.

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 guidance 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. New record high close.

Original Trade Description: November 7th

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 Feb 6th.

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.

In October 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.

The company reported earnings of 30 cents that missed estimates for 40 cents. Revenue of $1.39 billion beat estimates for $1.37 billion. They guided for the current quarter for revenue of $1.33-$1.38 billion. They missed the estimates but that was a 976% rise in profits and 46% increase in revenue. Shares fell sharply at the open to stop us out but rebounded sharply in the afternoon. I am recommending we reenter this position using only the April option. This is the first available option series after their Feb 6th earnings. We will not hold it until April but being after their earnings the option will retain its premium better for when we do decide to exit. I am also listing the December $20 put because it is cheap and ON has been rising for 2 months. If the rally dies this would be cheap insurance.

Position 11/8:

Long Apr $22 call @ $1.60, see portfolio graphic for stop loss.
Optional position: Long Dec $20 put @ 20 cents, see portfolio graphic for stop loss.

SVU - Supervalu - Company Profile


No specific news. Shares dipped again and we were stopped out of the short stock position at $15.65. The long call position is still open and will move to the lottery play section this weekend.

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:

Closed 11/8: Long SVU shares @ $16.13, exit 15.65, -.48 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


Minor rebound from the new 8-yr closing low on Tuesday.

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.

LE - Lands End - Company Profile


No specific news. Shares exploded higher for a 13% gain in a mixed market on more than twice average volume. I could not find a reason for the rebound. We were stopped on the short stock position but we will hold the long put until after the Nov 30th earnings. This position will move to the lottery play section this weekend.

Original Trade Description: November 6th.

Lands' End, Inc. operates as a multi-channel retailer in the United States, the United Kingdom, Germany, and Japan. The company operates through two segments, Direct and Retail. It offers casual clothing, accessories, footwear, and home products. The company sells its products online through landsend.com, and affiliated specialty and international Websites; direct mail catalogs; and retail locations primarily at Lands' End Shops at Sears, Lands' End Inlet stores, and international shop-in-shops. As of January 27, 2017, it operated 216 Lands' End Shops at Sears; and 14 Lands' End Inlet stores. Lands' End, Inc. was founded in 1963 and is headquartered in Dodgeville, Wisconsin. Company description from FinViz.com.

Earnings Nov 30th. Hardly a month goes by without Sears (SHLD) announcing the closure of several dozen additional stores. The Lands End retail base is slowly eroding.

For Q2 they announced a loss of 12 cents and analysts were expecting 9 cents. Revenue of $303.3 million did beat estimates for $292.6 million only because analysts were so negative on the outlook. The company reported a 5.5% increase in direct sales but the retail segment posted a 7.4% decline in revenue. They blamed that decline on the hundreds of stores Sears has closed or announced to be closed in 2017. On the positive side the remaining retail stores produced a 3.8% increase in same store sales.

Unfortunately, the light at the end of the tunnel is a train coming right at them with Sears holding the equivalent of a going out of business sale from now through Black Friday with everything in the store marked down from 10% to 50%. I would not be surprised to see a drastic restructuring of Sears announced after the holidays. With Sears closing dozens of stores per quarter they only have about 450 left and those could be cut in half or worse at year end.

Every bounce in LE is sold and they are only about 20 cents from a record low close.

The plan would be to hold the put over the Nov 30 earnings.

Position 11/7/17:

Closed 11/8: Short LE shares @ $10.95, exit $11.95, -1.00 loss.
Alternate position: Long Dec $10 put @ $40 cents, 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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