Option Investor

Daily Newsletter, Monday, 11/20/2017

Table of Contents

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

Market Wrap

Resilient Market Shakes Off Politics

by Thomas Hughes

Click here to email Thomas Hughes


Global markets creep higher amid signs of change. Two new threats to the global status quo have emerged; Angela Merkel was not able to form a coalition and the Saudi succession could happen as soon as next week. While neither is likely to reverse the markets both will affect sentiment and possibly induce volatility. Add to this the already present possibility of US tax reform and there is a lot for traders to keep an eye on going into the holiday weekend.

Asian indices were mixed in today's action, holding steady near break even with a near even split between gainers and losers. The Shang Hai Composite led with a gain near 0.30%, Japan lagged with a loss of-0.60% as traders look west at possible trouble in Europe and the eventuality of tax reform in the US. In Europe markets were rattle by news Angela Merkel was not able to form a coalition leaving her grip on Germany tenuous at best. Equities were able to move higher, led by the DAX +0.50%, as traders chose to focus on economics and earnings.

Market Statistics

Futures trading was a little wobbly this morning but not too bad. Early indications had the major indices down less than -0.25%, as the morning wore on those numbers crept slowly higher until turning positive just before the opening bell. The open was a bit volatile but trading held in positive terrritory until 10AM when surprisingly good Leading Indicators helped them move firmly into the green. Trading was positive and moved higher through the day but it was not strong. The SPX was up 0.20% at 2:35 and near the high of the day. Trading remained positive for the rest of the day leaving the indices near the middle of their daily ranges at the close of the session.

Economic Calendar

The Economy

There was not a lot of economic data today but what we got was really good. Leading indicators jumped 1.2% in October on top of an upward revision to September. September had been a negative 0.2%, it is now +0.10%. Today's read is more than double the expectations and the largest gain since before the housing bubble burst. The coincident and lagging indicators both increased as well, 0.2% and 0.3% respectively. Economists at the Conference Board say the index points to continued expansion into the end of the year and next year. I say it looks like a period of increased and expanding growth could be upon us.

Moody's Survey of Business Confidence jumped 2.2% in the last week and is now at a 2 month high. Mr. Zandi says that business confidence has firmed in the last week but still low compared to the post election high. Sentiment if strongest in the US, followed by Asia, Europe and South American where political unrest is still stifling economics.

With 95% of the S&P 500 reporting the blended rate of earnings growth has crept up a tenth to 6.2%. This week there is another 3% expected to report. Of those who have reported 74% have beaten EPS and 64% have beaten revenue expectations, both figures above average. In terms of sector there are 7 showing growth versus an expected 6 at the beginning of the cycle. Growth is led by the energy sector which is expected to lead growth into the next few quarters.

Looking forward growth is expected to remain in the forecast and that growth is strong. This week the estimates held steady on a quarterly basis while full year 2017 ticked higher by a tenth. Fourth quarter 2017 is expected to grow earnings 10.0%. First quarter 2018 is expected to grow earnings 10.5%. Second quarter 2018 is expected to grow earnings 10.1%. Second half 2018 is expected to see growth expand above 12%. Full year 2018 is expected to come in around 11.1%. If trends hold up estimates for each of the forward quarters is likely to fall as we approach the onset of each reporting cycle.

The Dollar Index

The Dollar Index got a nice little boost from today's data. The leading indicators helped reinforce current economic outlook and FOMC expectations which supported the dollar if not strengthened it. Offsetting this is increased geopolitical risk but it appears to be the lesser force at this time. The DXY gained more than 0.50% in a move confirming the $93.50 support line and setting a new 1 week high. It also takes the index back above the short term moving average and puts it in position to move higher. Next resistance is just above today's close, near $94.15, a break of which would be bullish. The FOMC meeting could strengthen the dollar significantly, if the other world central banks do not do anything to offset that strength. There isn't much expectation of that happening but the data has been a bit better than expected lately, especially in the EU, and could lead to a firmer outlook for the EUR.

The Gold Index

Spot gold prices took a dive today, falling more than -1.5% from Friday's high. The comes on a firming dollar and an apparent lack of concern over the myriad geopolitical concerns facing the market today. Spot gold has now confirmed resistance above $1,290 and near $1,300, settling below $1,280 with today's action. This may lead to further downside with targets near $1,260 although range bound trading is likely to prevail until the next FOMC meeting.

The Gold Miners ETF GDX fell a full percent in today's action and is now back at the $22.50 support line. The ETF is winding up between the support line and the moving averages with a likely focus on the FOMC meeting. In the near term world headlines will drive day to day moves, longer term FOMC interest rates and strong dollar could push gold prices lower and take the mining complex down with it. A break below $22.50 would be bearish with targets near $22 and $21. A bounce would be bullish with targets near $23 and $24.

The Oil Index

Oil prices fell today on caution ahead of the OPEC meeting in Vienna later this month. The cartel is expected to extend its production cap and, hopefully, help to tighten the oil markets. This hope is offset by signs of currently high production and ample supply. The Saudi succession news, that Prince Mohamad Bin Salman would take control of the country next week, did not seem to affect oil prices. WTI shed -0.80% to trade near $56.25.

The Oil Index shed a half percent in today's action but is relatively steady for the past 4 days. The index is sitting on support at 1230 on last week's retreat in oil prices and looks like it may continue to consolidate at this level. The indicators are both bearish and suggest a further test of support but neither indicate reversal at this time. Support is also consistent with the 30 day moving average so may be strong. A bounce from this level would be bullish and trend following, a break below it would be bearish. Considering the high price of oil and forward earnings outlook I remain bullish on the sector.

In The News, Story Stocks and Earnings

ATT and Time Warner were moving on rumors the DOJ was going to announce an anti-trust decision about their proposed merger/takeover. The DOJ is apparently set to sue ATT to prevent such a merger and that was confirmed in the after hours. Both ATT and TWX came out in opposition to the move claiming it's not different than other mergers within the sector. ATT moved up on the news but only slightly and remains within recent ranges. Time Warner fell more than -1% and looks perilously close to falling down to long term lows. Support is near $86, a break below could take TWX down to $80 or $75 in the next few weeks.

Urban Outfitters reported after the bell and beat on the top and bottom lines. The hip retailer of urban survival gear reported revenue grew 3.5% YOY with EPS roughly 25% better than expected. The gains are driven by a 1% increase in comp store sales and an 8.7% increase in wholesale revenue. Ex-hurricane impact net comparable sales are up 2% and a company record. Shares of the stock gained more than 5% in after hours trading.

The VIX is falling fast after spiking in the last week. This spike came in tandem with a test of support during OPEX week that was driven by earnings cycle rotation, economic data and geopolitical issues. The index is now retreating from that peak and has fallen below both moving averages. The indicators have rolled over in line with the prevailing trend and are consistent with lower fear levels. Based on all this it looks like the minor dip to support we saw in the SPX may be all we get for now.

The Indices

The indices tried to push lower in the premarket but the bulls wouldn't have it. They kept prices hovering at break even and to the positive side of break even all day through the open session. Price action was not strong but it is consistent with ongoing consolidation efforts within the market. The day's leader is the Dow Jones Transportation Average with a gain of 0.40%. The transports created a small green bodied candle to the side of Friday's candle and sitting on the long term moving average. Today's action also close above support at a previous all time high and a long term up trend line. The indicators remain weak but are rolling over and consistent with support at this level. A bounce from here would be bullish and confirm the long term trend.

The Dow Jones Industrial Average made the second largest gain in today's session, 0.30%. The blue chips created a small green bodied candle to the side of Friday's candle and well within the near term consolidation range. The indicators remain weak but are showing signs of support at this level, a move up from which would be bullish and trend following. Resistance is at the current all time high, a move above there could go to 24,000.

The S&P 500 comes in third with a gain of 0.11%. The broad market created a small bodied green candle to the side of Friday's candle and within the near term consolidation range. The indicators remain weak but do show signs of support at this level and are consistent with consolidation within this range. A continued move higher would be bullish but face resistance at the current all time high. A break above there would be bullish with target at 2,660 in the near term.

The NASDAQ Composite brings up the rear with a gain of 0.11%. The tech heavy index created a small doji like spinning top candle just below the current all time high and to the side of Friday's candle. Price action is at the top of a near term consolidation range and looks bullish. The indicators are still a bit weak but showing signs of support at this level, consistent with last week's bounce from the short term moving average. The current bounce is trend following and bullish but faces resistance at the all time high. A break to new all time highs would confirm upward continuation with a near term target at 7,000.

This week is going to be a full one with Thanksgiving in the mix. This means a holiday shortened week on top of all the market has to contend with. The good news is that price action in the broad market remains bullish and the VIX suggests whatever correction was due to come has come and gone. That being said there is still reason to be careful, it's a long time until the next earnings cycle. Between then and now is Black Friday, Cyber Monday, the entire holiday season, a round of central bank meetings, myriad data points and a lot of politics. I remain bullish for the near and long term.

Until then, remember the trend!

Thomas Hughes

New Plays

Retail Exception

by Jim Brown

Click here to email Jim Brown
Editor's Note

Some retailers have escaped the Amazon curse. Duluth is a specialty retailer that has avoided the market share black hole that is Amazon.


DLTH - Duluth Holdings - Company Profile

Duluth Holdings Inc. markets clothing, tools, and accessories under the Duluth Trading brand via Website and catalogs for contractors and serious do-it-yourselfers in the United States. It offers shirts, pants, casual wear, workwear, underwear, outerwear, footwear, accessories, and hard goods for men and women. The company markets its products under the various trademarks, trade names, and service marks, including Alaskan Hardgear, Armachillo, Ballroom, Bucket Master, Buck Naked, Cab Commander, Crouch Gusset, Dry on the Fly, Duluth Trading Company, Duluthflex, Fire Hose, Longtail T, No Polo Shirt, and Wild Boar Mocs. It also operates six retail stores and an outlet store across Minnesota, Iowa, and southern Wisconsin. The company was formerly known as GEMPLER'S, Inc. and changed its name to Duluth Holdings Inc. Duluth Holdings Inc. was founded in 1989 and is headquartered in Belleville, Wisconsin. Company description from FinViz.com.

Duluth reported Q2 earnings of 13 cents and beat estimates for 10 cents. Revenue of $86.2 million also beat estimates for $82.8 million. The company guided for the full year for earnings of 66-71 cents and revenue in the range of $455-$465 million.

Shares traded sideways to slightly higher for the last two months. On November 1st, BMO Capital downgraded the company from outperform to market perform and lowered their price target to $20. The analyst said they were seeing increased fall promotions and early season specials by brands they considered to be peers to Duluth.

Whether this will impact Duluth or not is unknown until they report earnings on Dec 7th. Shares have ticked up over the last three days as investors buy retailers ahead of the holiday season.

I also see Duluth as an acquisition target but that is not likely over the next three weeks.

This is going to be a short play. We are going to exit before the Dec 7th earnings. I am looking for a continued rise to $20 over the next three weeks.

Buy DLTH shares, currently $18.20, initial stop loss $17.20.
Alternate position: Buy Jan $20 call, currently 75 cents, no initial stop loss.

We could hold the call over earnings depending on stock movement over the next three weeks.

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

Bullish Week

by Jim Brown

Click here to email Jim Brown

Editors Note:

This is normally a bullish week and we are off to a good start. However, the Dow and S&P came to a dead stop at resistance. The Nasdaq Composite pulled to within 4 points of a new high and the Russell 2000 caught fire again with an 11-point gain. I am sure we would all be very happy if the rest of the week continues this pace.

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

SYNT - Syntel
The long position was entered at the open.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile


No specific news. Shares rose at the open again but faded intraday.

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

Update 11/8/17: 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.

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.

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.

INVA - Innoviva Inc - Company Profile


No specific news. Shares closed at a 4-week high.

Original Trade Description: November 15th

Innoviva, Inc. engages in the development and commercialization of bio-pharmaceuticals. Its portfolio of respiratory products include RELVAR/BREO ELLIPTA, (fluticasone furoate/ vilanterol, FF/VI) and ANORO ELLIPTA (umeclidinium bromide/ vilanterol, UMEC/VI). The company, under its the Long-Acting Beta2 Agonist (LABA) collaboration agreement and the strategic alliance agreement with Glaxo Group Limited (GSK), is entitled to receive royalties on the sales of RELVAR/BREO ELLIPTA; and a 15% of any future payments made by GSK under its agreements relating to the combination FF/UMEC/VI and the Bifunctional Muscarinic Antagonist-Beta2 Agonist program, as monotherapy and in combination with other therapeutically active components. It has LABA collaboration agreement with GSK to develop and commercialize once-daily LABA products for the treatment of chronic obstructive pulmonary disease and asthma. The company was formerly known as Theravance, Inc. and changed its name to Innoviva, Inc. in January 2016. Innoviva, Inc. was founded in 1996 and is headquartered in Brisbane, California. Company description from FinViz.com.

Expected earnings January 24th.

Innoviva reported earnings of 21 cents ($23.8 million) compared to estimates for 33 cents. Revenue was $48.6 million. Yes, earnings were nearly 50% of revenue. Adjusted EBITDA rose 39% to $46.0 million. Cash onhand was $168.2 million. They received $51.9 million in royalties from Glaxo Group (GSK).

Shares crashed nearly $3 on the earnings miss despite very positive business comments from the company. Their new drugs now being marketed by Galxo were dowing well. The sales of Relvar/Breo Ellipta rose 40% to $297.4 million. Sales of Anoro Ellipta rose 51% to $111.9 million. They received a positive opinion in September from the EU Medicine Agency for Trelegy Ellipta for COPD. They received approval for the same drug from the FDA. Read further business updates in their release HERE.

Everything looks bright for INVA and their strong relative strength in a weak market suggests they will do well when the market recovers.

Position 11/16/17: Alternate position: Long March $15 call @ 60 cents, see portfolio graphic for stop loss.

ON - ON Semiconductor - Company Profile


No specific news. Still holding at the highs.

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.

STM - ST Microelectronics - Company Profile


No specific news. Shares moving with the markets.

Original Trade Description: November 11th

STMicroelectronics N.V., together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products, and subsystems and modules worldwide. The company offers a range of products, including discrete and standard commodity components, application-specific integrated circuits, full-custom devices and semi-custom devices, and application-specific standard products for analog, digital, and mixed-signal applications, as well as silicon chips and smartcards. It also provides subsystems and modules, including mobile phone accessories, battery chargers, and ISDN power supplies for the telecommunications, automotive, and industrial markets; and in-vehicle equipment for electronic toll payment. The company sells its products through its distributors and retailers, as well as through sales representatives. STMicroelectronics N.V. was founded in 1987 and is headquartered in Geneva, Switzerland. Company description from FinViz.com.

STM reported earnings of 28 cents rose 136% on revenue of $2.14 billion, which rose 19%. Analysts were expecting 24 cents and $2.09 billion. Earnings were boosted by multiple products in the Apple product line. All product groups reported double-digit revenue growth with strong demand across all geographies. The CEO said "we continue to see strong demand in Q4 across all products and all geographies with strong booking activity and the expected acceleration of growth serving wireless applications. Revenue should increase 10% in Q4."

Expected earnings January 25th.

Demand is surging for their new "time of flight" sensors, which Apple is buying as a proximity or motion detector for the iPhones.

Last week STM announced a new, faster wireless charging QI extended power chip for phones and tablets. The chip supports the very latest QI standard for faster charging. By raising the power from 5W to 15W phones can charge three times faster.

I have looked at playing STM a dozen times over the last several months and kept waiting for a pullback that never came. Shares dipped on Thursday with the chip sector but immediately rebounded. I believe the chip sector will remain hot and STM will continue higher. With the earnings beat and strong guidance there should be nothing holding it back.

Position 11/13/17:

Long STM shares @ $23.56, see portfolio graphic for stop loss.
Alternate position: Long April $25 call @ $1.70, see portfolio graphic for stop loss.

April is the only option series that allows us to exit before earnings but still have the expectation in the option price.

SYNT - Syntel - Company Profile


No specific news. Shares posted a minor gain and neared the recent high.

Original Trade Description: November 18th

Syntel, Inc. provides digital transformation, information technology (IT), and knowledge process outsourcing (KPO) services worldwide. The company operates through Banking and Financial Services; Healthcare and Life Sciences; Insurance; Manufacturing; and Retail, Logistics, and Telecom segments. It offers managed services, including software applications development, maintenance, and digital modernization testing, as well as IT infrastructure, cloud, and migration services. The company also provides a range of consulting and implementation services built around enterprise architecture; data warehousing and business intelligence; enterprise application integration; and SMAC technologies, including social media, Web and mobile applications, big data, analytics, and Internet of things. In addition, it offers KPO services that provide outsourced solutions for knowledge and business processes; and business intelligence, enterprise resource planning, and business and technology consulting services. The company offers its products to various companies in the banking and financial services, healthcare and life sciences, insurance, manufacturing, retail, logistics and telecom, and other industries. Syntel, Inc. was founded in 1980 and is headquartered in Troy, Michigan. Company description from FinViz.com.

Syntel reported earnings of 51 cents that beat estimates for 41 cents. Revenue of $231.3 million also beat estimates for $218.2 million. For the full year they guided for earnings of $1.81-$1.88 and revenue of $890-$902 million. They ended the quarter with $109 million in cash.

Business is good and a highly qualified labor force has allowed them to reduce their employee coult from 23,055 last year to 21,928 at the end of Q3. The CEO said the demand for digital services was robust and the insurance segment continued to post healthy growth.

Shares spiked from $19 to $25 on the earnings in mid October. After a month of post earnings depression the uptrend has returned with the stock back at $25.

Because the stock is a few pennies over $25 the next available option strike is the $30 level. There is no open interest in Dec/Feb series. I am going to reach out to May where there is open interest of 415 contracts and there is actually a bid and ask quote. We do not have to hold the position until May but should we get lucky and Syntal makes a breakout, the long dated options will inflate relatively quickly.

Position 11/20/17:

Long SYNT shares @ $25.00, see portfolio graphic for stop loss.
Alternate position: Long May $30 call @ $1.05, see portfolio graphic for stop loss.

BEARISH Play Updates

IWM - Russell 2000 ETF - ETF Profile


The Russell posted its 3rd consecutive day of gains but is approaching strong resistance at 1,508 and 1,513.

Original Trade Description: November 16th.

The Russell 2000 ETF is reflective of 2,000 small cap stocks. Financials have the largest weighting at 18.3%, technology 17.1%, industrial 15.0%, healthcare 14.8% and consumer discretionary 12.0%. This is the primary way for individual investors to participate in the direction of the Russell 2000.

I am going to make this as simple as possible. The Russell rebounded 23 points on Thursday in a massive short squeeze after closing at a 2-month low the day before. It is very overbought from the rebound that began in August. Today's spike is sure to be sold. It is due for a rest.

The earnings cycle is over. Post earnings depression is here. The short squeeze is likely to fail. The tax plan faces an uphill battle and January could see a major market decline. It has been over 500 days since the market had a 5% decline and we average twice a year. We are due.

This is highly speculative. I am using February options because I want to have as much time as possible for this scenario to play out and I expect a market decline in Janaury, if not before then.

This is an option only position.

Position 11/17:

Long Feb $145 put @ $3.63, see portfolio graphic for stop loss.
OPTIONAL: Short Feb $135 put @ $1.51, see portfolio graphic for stop loss.
Net debit $2.12.

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.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now