Option Investor
Newsletter

Daily Newsletter, Monday, 11/27/2017

Table of Contents

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

Market Wrap

Just Another Cyber Monday

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market held steady near Friday's close as traders wait on data and testimony from Janet Yellen. Today's action is not surprising coming out a holiday weekend and with so much for the market to be wary of. There is not an overwhelming amount of data but what there is carries some weight. These include today's New Homes Sales, Q3 GDP revision and the all important PCE Price Index. Then there are several members of the FOMC set to speak. These include Janet Yellen on Wednesday in a regularly scheduled report to congress.

International indices were a bit negative but losses were, for the most part, limited. In Asia South Korea led with a decline of -1.44% on weakness in the tech sector. Chinese markets were also a bit weaker than most others as officials reduce tariffs on nearly 200 consumer items. European markets were more uniformly lower with declines in the range of -0.5%. The region was hit by weakness in tech and financials offset by renewed hopes Angela Merkel could form a coalition government.

Market Statistics

Futures trading was wishy washy throughout the early hours. The indices were indicated to open near break even with prices meandering above and below the flat line going into the opening bell. The open was flat with a slight push into positive territory for most indices setting new all time intraday highs. The rest of the day saw them trend sideways around break even level and closing the day with little to no movement.

Economic Calendar

The Economy

Only 1 economic release today, New Homes Sales. New Home Sales came in above expectations with a 6.2% gain over the previous month. The previous month was revised lower but not enough to overcome this month's strength. The October gains put sales up 18.7% over last year and at a new 10 year high. Sales are being driven by low inventory in existing homes but there is a problem, inventory is low in new home sales too.


Moody's Survey Of Business Confidence jumped 2.6 to hit 34.8 and a 5 month high. Mr. Zandi warns that the results may be skewed by last week's holiday but responses to survey questions are generally good nonetheless. We'll have to wait until next week to see if sentiment is able to hold up, today's preliminary results for Cyber Monday may help support it. Early reports had sales up 17% over last year with strength expected in the afternoon and evening.


The third quarter earnings cycle is all but done with 98% of reports logged. Of those 76% beat bottom line estimates and 66% beat on the top, both above average. A total of 8 sectors are showing growth with 8 also reporting better than expected by analysts. These results are more or less what was expected by traders although down from the previous quarter.


The good news is that forward growth remains positive despite some declines in the estimates. Next quarter earning growth estimate has declined the most falling to a mere 10.0% from highs near 14% earlier in the year. If trends hold true we can expect to see this number continue to decline into the start of the reporting season. Looking to next year Q1 and Q2 estimates ticked up in the last week and have been trending sideways over the past 3 months. Full year 2017 and 2018 estimates both held steady in the last week at 9.5% and 11.1% respectively.


The Dollar Index

The Dollar Index gained marginally in today's trade, moving up from Friday's 1 month low to create a small doji in the middle of a near term trading range. The index is trapped within the range and winding up on data ahead of an upcoming round of central bank meetings. This week could see it continue to move within this range as central bankers in the US tell us what's on their minds. This, along with the PCE, is likely to drive markets but not to the point of breaking out. Resistance is near the recently broken $93.25 level, support target is near $91.35.


The Gold Index

Gold prices edged higher to test resistance at the $1,300 level and that resistance was present. The move is however weak and inconclusive, a first foray in a greater attempt to move higher most likely. The move is driven by a weakening dollar and may continue into the near term. While US data and FOMC expectations are strengthening the dollar signs of economic improvement are appearing in other currencies as well, undermining dollar gains and boosting gold. How high this goes is yet to be seen, this week could send the metal moving but I'd expect it to remain range bound until the CB meetings next month. Resistance remains at $1,300, $1,280 looks like firm for support in the near term.

The Gold Miners ETF GDX gained close to 1% on today's move in gold but it was capped by the long term moving average. Today's move sets a one month high that is supported by the indicators. Both MACD and stochastic support the idea of higher prices if neither are strong or suggestive of a trending market. Resistance is the moving average, near $23, a break of which would be bullish with upside target of $24. A failure to break would leave the ETF range bound with support near $23.50.


The Oil Index

Oil prices fell a little more than -1.71% on OPEC fears. The semi-annual meeting is being held this week and now, amid firm belief the cartel would extend its production cap, there are rumors Russia will back out. If this happens, or any negative unexpected news, and the market is flooded with oil we could see prices back in the low $40's or high $30's real quick. That being said no nation involved with the cut can afford lower prices so I doubt the rumor will pan out. Looking to the fundamentals supply, production and capacity remain high and well able to provide for world needs. When that changes oil prices will move up and stay up. In the nearer term I expect we'll hit a top sooner or later, we might be seeing one now.

The Oil Index fell a little more than -1% in today's action. The index moved down from Friday's peak and created a medium sized red candle sitting on the short term moving average. Price action looks bearish and could take the index lower but it will have to break through the 1,230 level which is emerging as a potentially strong support level. The indicators are mixed but consistent with support at current levels, support that may be tested again. A break below 1,230 would be bearish and could take the index down to 1,200. A bounce would be bullish with target near the recent high. I remain bullish on the sector long term due to forward earnings outlook but wary ahead of the OPEC meeting. Even if they do what the market expects it may not be enough to hold oil prices up and that could drag the index down in the near term.


In The News, Story Stocks and Earnings

Amazon hit a new all time high as data shows that retail sales are shifting to on-line, shocking as that sounds. Shares of the stock jumped in the early morning session, gapping up at the open, and set the high above $1,200. The down side is the highs were not held and the stock formed a small shooting star candle. This candle is not likely indicative of reversal or even a pull back but it could cap gains into the near term. The indicators are bullish but showing significant divergences that may indicate an underlying weakness and the possibility of consolidation/correction.


Wal-Mart has emerged as perhaps the only company able to challenge Amazon for on-line marketshare. The company just reported digital sales up 50% in the last quarter on its efforts to match Amazon's scope and pricing. A report today shows Wal-Mart prices are just 0.03% higher than Amazon's, one of the reasons it is able to compete. Shares of the stock barely budged on Cyber Monday hooplah but that may be a good thing. The stock gapped up on the last earnings report and is now in consolidation at new all time highs.


The VIX gained a fraction in today's action but is indicated lower. The fear index created a small red candle testing resistance at the $10 level and looks set to retest Friday's lows. The indicators are both bearish and pointing lower in support of such a move. This move is consistent with current bull market conditions, the recent push to all time highs and a continuation of those same trends.


The Indices

The indices all flirted with positive moves today but only one was able to close with gains, the Dow Jones Industrial Average. The blue chips posted a gain of 0.09% and created a small spinning top doji to the side of Friday's candle. Price action set a new all time high if barely but also looks like it will continue to move higher. The indicators are mixed but consistent with a bullish shift in momentum and a trend following move higher. A break to new highs would be bullish with target near 24,000. A fall from this level could be bearish but likely to find support at the short term moving average.


The Dow Jones Transportation Average posted the largest decline, -0.25%. The transports created a small red bodied candle moving down from Friday's test of resistance but confirming support along the long term up trend line. The indicators remain bullish and pointing higher, suggesting higher prices, making today's price action look like a prime entry for bullish positions. The only caveat is the short term moving average which is acting as resistance, a break above that would be bullish.


The NASDAQ Composite posted the second largest decline, -0.15%. The tech heavy index created a small red spinning top to the side of Friday's candle and set a new all time high while doing so. This action may be bearish in the near term but not indicative of any kind of large move just yet. The indicators remain bullish and consistent with new highs so it is more likely today is merely a day of consolidation. A fall from here may go as low as 6,800 or just below to the short term moving average. A move up would be bullish and trend following with target near 7,000.


The S&P 500 posted the smallest decline, only -0.03%. The broad market index created a small spinning top doji to the side of Friday's doji and set a new all time high while doing so. The indicators are both bullish, MACD having formed a crossover today, and support higher prices although the signal is still weak. A firm move higher would be bullish and trend following with upside target near 2,660. A fall from this level could be bearish but likely to find support at the short term moving average.


Today's action was OK despite the obvious lack of movement. It helps by giving the market a day to consolidate and gives no sign of traders fleeing the market. This action could continue tomorrow as there is little to move the market but starting on Wednesday things could start changing. Early in the morning is the first revision to 3rd quarter GDP along with Yellen's testimony, later in the day is the Fed's Beige Book and the latest read on national economic progress. I remain firmly bullish for the long term, I see no place for the market to go but up. In the nearer term I am also bullish but a little wary of correction with so much news inducing material on the schedule.

Until then, remember the trend!

Thomas Hughes


New Plays

New Market Entrant

by Jim Brown

Click here to email Jim Brown

CHGG - Chegg Inc - Company Profile

Chegg, Inc. operates student-first connected learning platform that help students transition from high school to college to career. The company's products and services help students to study for college admission exams, find the right college to accomplish their goals, get better grades and test scores while in school, and find internships that allow them to gain skills to help them enter the workforce after college. It offers print textbook and eTextbook library for rent and sale; and provides eTextbooks, supplemental materials, Chegg Study service, tutoring service, writing tools, textbook buyback, test preparation service, internships, and college admissions and scholarship services, as well as enrollment marketing and brand advertising services. The company has a strategic alliance with Ingram Content Group Inc. Chegg, Inc. was founded in 2005. Company description from FinViz.com.

Expected earnings Jan 29th.

The company reported Q3 earnings of 1 cent, up from a loss of 3 cents and beat earnings for a loss of 1 cent. Those are not big numbers but the company is investing for the future. Revenue of $62.6 million beat estimates for $57.7 million. The company guided for the full year for revenue of $251-$252 million, up from prior guidance of $241-$243 million.

The company just acquired Cogeon GmbH, a provider of AI driven adaptive math technology and the math app, Math42.com. With access to new original content, they can launch their own math courses to provide self-guided and individualized solutions to more students. This will increase their market share in the high school market. The company is growing at a 26% annual rate.

The company said recent studies showed 64% of high school graduates were not prepared for college level math courses. Some 40% of college freshmen have to take at least one remedial math course.

Citigroup just initiated coverage with a buy rating. With Chegg's 4% penetration into a very large addressable market, there is plenty of room to grow. The analyst said Chegg's business model is a positive feedback loop that aids in new subscriber acquisition and cross-selling. They have a pipeline of new products aimed at expanding the addressable market.

Shares declined after earnings but are rebounding from the post earnings depression.

Buy CHGG shares, currently $15.06, initial stop loss $13.95.
Alternate position: Buy Apr $17.50 call, currently 85 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.


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Just Passing Time

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets traded sideways as we wait for the tax reform headlines to move the market. There was no material movement with the Dow slightly positive and the Nasdaq, S&P and Russell 2000 slightly negative. Only one post Thanksgiving week in the last 7 years has been positive.





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


EXTR - Extreme Networks
The long position was entered at the open.



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BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile

Comments:

Benchmarks on AMD's new Ryzen 5 5200U processors showed they beat Intel's 7th generation counterparts by a wide margin and came close to the newest 8th generation Kaby Lake products for a significantly lower price point. Their GPU products outperformed Intel's and maintained parity with Nvidia. That means their performance gap did not increase.

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

Comments:

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.



DLTH - Duluth Holdings - Company Profile

Comments:

No specific news.

Original Trade Description: November 20th

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.

Position 11/21/17:

Long DLTH shares @ $18.26, see portfolio graphic for stop loss.
Alternate position: Long Jan $20 call @ $1.10, see portfolio graphic for stop loss.

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



EXTR - Extreme Networks - Company Profile

Comments:

No specific news. Minor move but holding last week's gains.

Original Trade Description: November 25th

Extreme Networks, Inc. provides software-driven networking solutions for enterprise customers worldwide. The company designs, develops, and manufactures wired and wireless network infrastructure equipment; and develops the software for network management, policy, analytics, security, and access controls. It offers edge/access Ethernet switching systems that delivers Ethernet connectivity for edge of the network; aggregation/core Ethernet switching systems for aggregation, top-of-rack, and campus core environments; data center switching systems for enterprises and cloud data centers; and wireless access point products, as well as distributed Wi-Fi networks. The company also provides ExtremeControl, a network access control solution that allows the enterprises to unify the security of their wired and wireless networks with visibility and control over users, devices, and applications; and ExtremeAnalytics, a network-powered application analytics and optimization solution, which captures, aggregates, analyzes, correlates, and reports network data that enables in decision making and enhancing business performance. In addition, it offers ExtremeCloud, a wired and wireless cloud network management solution, which offers advanced visibility and control over users and applications. The company sells and markets its products through distributors, resellers, and field sales organizations. It serves enterprises and organizations in education, healthcare, manufacturing, hospitality, transportation, and logistics, as well as government agencies. Company description from FinViz.com.

Over the last year Extreme bought the networking assets of Avaya after they went bankrupt. They also bought the networking assets from Brocade, a company that is being acquired by Broadcom. They also acquired the wireless networking unit from Zebra Technologies (ZBRA) in a restructuring move. Each of these assets they acquired for less than half annual sales. This is a bargain in the tech world. They also acquired the customers from these acquisitions and have begun cross selling to them from their other product lines. Extreme is no longer a bit player in the networking sector but has grouped together end to end solutions.

In the last quarter, they grew revenue by 73%. Earnings rose from 7 cents to 16 cents and beat estimates for 14 cents. They are targeting margins of 60% in future quarters. Revenue was $211.7 million and they guided for $236-$246 million in the current quarter.

Expected earnings Feb 6th.

The key to Extreme's progress is software networking. The industry is moving from hard coded command line interface routers and switches to Windows like interfaces that can be operated by lower skilled operators rather than high dollar network technicians proficient in Cisco router code.

Shares have rallied sharply over the last two weeks but I believe they have farther to go because the recent earnings surprised investors.

Position 11/27/17:

Long EXTR shares @ $13.81, see portfolio graphic for stop loss.
Alternate position: Long Mar $15 call @ $1.15, see portfolio graphic for stop loss.



INVA - Innoviva Inc - Company Profile

Comments:

No specific news.

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

Comments:

No specific news. Down with the sector on the downgrade of WDC by Morgan Stanley. The $SOX fell 17 point.

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

Comments:

STM created a tiny motor driver chip that brings finer motion control to laboratory automation, industrial robots, 3D printers and other applications. The chip offers a smaller size, lower power consumption and precise micro stepping delivering greater precision.

Shares were down with the sector on Monday.

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

Comments:

No specific news.

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

VXX - Volatility Index Futures - ETF Description

Comments:

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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