Option Investor

Daily Newsletter, Tuesday, 11/28/2017

Table of Contents

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

Market Wrap

Never Short a Dull Market

by Jim Brown

Click here to email Jim Brown

Traders expecting the worst ahead of the tax vote were painfully surprised.

Market Statistics

The markets opened positive on the text of Jerome Powell's speech for the confirmation hearing even though there was a critical tax vote expected later in the day. After the confirmation hearing the market rallied again on the softball questions, good answers and no apparent roadblock to his confirmation. The market declined after news of a North Korean missile launch into the Sea of Japan and ahead of the committee vote on the tax reform bill in the senate.

After the bill was voted out of committee, a major step for the bill, the market exploded even higher to post a 255 point gain on the Dow. It was not a good day to be short.

Voting the tax bill out of the finance committee was a crucial step ahead of the full vote in the senate. This morning Goldman Sachs had said there was only slightly better than a 50:50 chance of getting a tax bill passed in 2017 and that rose to 80% in 2018. Cowen & Company said the passage of a tax bill was very unlikely in 2017 because of the various divisions in the republican senate. Morgan Stanley was also negative on the outlook. Two of the major holdouts Corker and Johnson voted to pass the bill out of committee after changes were promised before the vote by the entire senate. The six senators on the fence have now declined to 4 and with Corker and Johnson capitulating, we are likely to see some similar capitulation by others. While this was a crucial step, there are numerous future steps to be completed before it becomes law. We are not out of the woods yet despite the market reaction.

The North Korean missile problem rose in intensity because this launch went significantly higher suggesting they have the capability to hit the USA. The missile traveled 2,800 miles into space compared to the International Space Station, which orbits 250 miles into space. The missile returned to earth to land in the Sea of Japan only 625 miles from where it was launched. The UN called an emergency meeting of the Security Council but that will not accomplish anything.

President Trump was adamant when questioned during a briefing and said emphatically, "We will take care of this." His tone and manner was that of somebody that had been pushed past the breaking point and action could be imminent. What that could be is anybody's guess.

Something needs to be done soon because Kim Jong Un said this in his last public statement. "North Korea has harnessed a multi-functional thermonuclear nuke with great destructive power which can be detonated at high altitudes for super-powerful EMP (electromagnetic pulse) attack according to strategic goals." An EMP over the USA has the power to knock out all electronic power for months to years. It is estimated 80% of Americans would die if this were to occur. For him to brag he has "super EMP capability" should be the last straw for the USA. Of course, the American press has conveniently overlooked or ignored this critical piece of information as being too wild to even consider. Unfortunately, the United States is not preparing. On Sept. 30, the Congressional Commission to Assess the Threat of Electromagnetic Pulse to the United States of America shut down after a failure to secure funding from Congress.

The economic reports helped to power the market's gains. The Richmond Fed Manufacturing Survey for November rose from 12 to 30 and a record high. The major internal components posted strong gains. Shipments rose from 9 to 33 and the largest gain since 2001. Capacity utilization rose from 7 to 19. This was a very positive report.

Consumer confidence for November soared to 129.5 and the highest level since December 2000. That is up from 126.2 in October. The present conditions component rose from 152.0 to 153.9 and the highest level since 2001 and the expectations component rose from 109.0 to 113.3. The percentage of respondents planning on buying a vehicle declined from 14.0% to 12.6%. Prospective homebuyers rose slightly from 6.4% to 6.9% and appliance/TV buyers rose from 48.8 to 52.0. The booming economy and the potential for a tax cut seem to have lit a fire under consumers as well as the market.

Case Shiller existing home prices rose from 5.9% to 6.2% in September. Despite the constant rise in prices there seems to be no letup in demand.

The trade deficit for October increased from -$64.1 billion to -$68.3 billion. Exports of autos fell -2.1% and consumer goods declined -1.7%.

The API crude inventories after the bell showed a decline of -1.821 million barrels compared to estimates for a -3.15 million barrel drop. Gasoline declined -1.529 million barrels and just over estimates. Distillates rose 2.696 million barrels and well over the forecast for a 230,000 build. Crude prices only declined about 30 cents after the report.

Expectations for the OPEC meeting on Thursday are keeping prices high. Everyone expects them to announce an extension of the production cuts until the end of 2018.

The Q3-GDP revision is tomorrow and expectations are for 3.3% growth. Expectations for Q4 GDP are currently +3.4% growth. If the economy can maintain this pace before the tax cuts become effective, we could actually hit 4% at some point in the next year. Q1 is normally the spoiler so it remains to be seen if it will continue to be a laggard with another 1.2% gain like the one we saw this year.

Janet Yellen will speak at 10:00 and after today's confirmation hearing on Powell, her speech is likely to be ignored unless she goes off the beaten track and says something analysts are not expecting.

Emerson Electric (EMR) said it was dropping its $29 billion acquisition offer for Rockwell Automation (ROK). The company said it would focus on rebuilding the company in smaller steps using internal investment, partnerships and acquisitions to broaden the companies experience in automation. Currently Emerson focuses on the process side of business with software and equipment. Rockwell is the leading supplier of controls for assembly lines. Emerson shares rallied 3.7% on the news with investors breathing a sigh of relief. Emerson's market cap at $40 billion is only slightly larger than Rockwell's at $29 billion. Rockwell shares also surged over 3% on the cancelled bid.

Arby's just bought a massive amount of chicken wings. The roast beef sandwich company signed a deal to acquire Buffalo Wild Wings (BWLD) for $157 per share. Arby's is privately owned by Roark Capital Group, which owns a dozen or more fast food companies including Jimmy Johns, Auntie Annes, Cinnabon, McAlisters, Carl's Junior, Corner Bakery, Seattle's Best, Schlotzsky's and Hardees. They had originally bid $150 but Marcato Capital, an activist investor, had built up a stake in the mid $140s and had three seats on the board. Arby's had to sweeten the deal in order to induce Marcato to take the cash and go home. There were rumors last week that the price could go as high as $170 if Marcato decided to hold out on negotiating. Buffalo Wild Wings will continue to operate as an independent brand.

Thor Industries (THO) reported earnings of $2.43 compared to estimates for $1.80. Revenue of $2.23 billion beat estimates for $1.95 billion. This is an example of real blowout earnings. The CEO attributed his monster earnings to millennials buying RVs. Who knew? He said the demographic had changed from older couples taking vacations and visiting the grandkids to younger families that can do short camping trips on the weekends or even just drive it to kids soccer games and have all the comfort of home with air conditioning, refrigerators and a restroom. Shares spiked 13% on the news.

Autodesk (ADSK) reported a loss of 12 cents after the close. That was slightly better than the 13-cent loss analysts expected. Revenue of $515.3 million beat estimates for $514.1 million. The company guided for the current quarter for a loss of 10-14 cents on revenue of $537-$547 million. Analysts were expecting $544.8 million. Full year losses are expected to range from 49-53 cents with revenue of $2.04-$2.05 billion. Autodesk is shifting to a subscription model and that typically produces paper losses for up to 2 years but then a much stronger revenue stream in the future. Shares fell below $110 in afterhours but rebounded to $116 at the close.

Marvel Technology Group (MRVL) reported earnings of 34 cents that beat estimates of 33 cents. Revenue of $616.3 million beat estimates for $613.1 million. They guided for the current quarter for earnings of 29-33 cents on revenue of $595-$625 million. Analysts were expecting 27 cents and $590 million. Marvel announced last week it was buying Cavium for about $6 billion.

Nuance Communications (NUAN) reported earnings of 20 cents that beat estimates for 15 cents. Revenue of $474.7 million beat estimates for $455.7 million. Shares spiked about 5% in afterhours.

The earnings highlight for Wednesday is Jack in the Box followed by Ulta Beauty and VMWare on Thursday.

AMD and Nvidia (NVDA) were weak after Mizuho warned that mining for crypto-currencies would decline in 2018. Nvidia only gets about $80 million a year in revenue from GPU mining but AMD sees about $500 million. The analyst said Ethereum could move in early 2018 from "proof of work," which requires GPU mining to "Proof of Stake" protocol, which no longer uses GPU mining. The decline in AMD and NVDA continued to weigh on the chip sector, which has been down the last two days.

Bitcoin set a new record high Tuesday afternoon at just over $10,065. With exchange Coinbase adding 100,000 accounts a day and a technical limit of only 21 million bitcoins, the price is going to continue to rise. One analyst today said we could see $40,000 by the end of 2018. Former hedge fund manager at Fortress, Michael Novogratz, said bitcoin could quadruple in the next 12 months and Ethereum could triple. He said there was a big wave of institutional money coming and he was going to launch a $500 million digital assets fund. He correctly called the $10,000 level back on October 10th when bitcoin was $4,874. He said he bought just under $20 million in bitcoin when the price crashed to $6,000 in mid November.


I get hate mail all the time when I say a particular market move is a short squeeze. I am sorry, but that is what drives quite a few market gains. Investors did not suddenly decide today, after four days of stagnation, that they wanted to buy stocks $3-$4 higher than they could have bought them on Monday.

We had several days of low volume and declining internals with the indexes at new highs. The Dow had failed at 23,600 several times. With Goldman Sachs, Cowen and Morgan Stanley saying they doubted the tax bill would be passed in 2017, it was the perfect setup for the shorts. They expected negative headlines and a post Thanksgiving decline. Instead, they were hit with positive headlines and a monster short squeeze. These events are a fact of life in the market and happen routinely. We should thank the shorts for donating their money to the bullish cause.

If you look at the S&P chart below for the last four months there are no other candles like the one we got today. Shorting new highs is a favorite bearish pastime and this one bit them badly.

The S&P is again in blue-sky territory and without some unfortunate event, bullish sentiment could be locked in for the rest of the year.

Likewise, on the Dow there are no other candles over the prior four months like the candle we got today. This was a major breakout and there was a lot of price chasing, making it even more painful for the shorts. The Dow has gone from fighting resistance at 23,600 to well over 23,800 and the next target for December is round number resistance at 24,000. Let me be the first to say it. If we get a favorable tax deal signed into law, we could see 25,000 by the end of December. That is only about 4% over our current level.

The Nasdaq did not participate in the Dow rally. There were more big cap decliners than advancers and even Apple was lower for the day. The tech stocks powered the rally last week and while the indexes were positive today they were muted compared to the 1% gains on the Dow and S&P. This is actually good news. As long as there is consolidation on the way up, it allows for continued gains longer term.

The Nasdaq Composite closed over 6,900 and could easily reach 7,000 in the days ahead. There are no tech earnings to power the move but December normally provides a steady melt-up for the tech stocks.

The Russell 2000 was the leader for the day with a 1.5% gain of 23 points. After stalling at 1,520 for 4 days, the breakout was huge. However, it did not become huge until after the tax vote at 2:30. The index was under resistance at 1,520 at 2:00 and rallied 17 points into the close after the vote.

You can call today's move anything you want to call it. There may even have been some month end portfolio adjustments involved in the closing sprint. Big gains like these seldom continue back to back. We "should" see some consolidation but market sentiment has taken a giant leap higher and that could continue to lift the markets as long as the tax headlines continue to be positive. What goes up could come down just as fast if the news turns negative.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Russell Rally

by Jim Brown

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Editor's Note

The Russell 2000 gained 1.52% today and every bit came after 2:PM. This was a giant short squeeze on the tax bill being voted out of committee and it is not likely to be duplicated on Wednesday. The next hurdle will be the full vote in the Senate and that could go either way. There is also the North Korea missile launch. A military reaction by the US could be imminent and that would be market negative.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

That was a Surprise

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets exploded higher on multiple headlines as shorts were squeezed. Expectations for a flat to down market this week were obliterated and the major indexes raced to new highs. Never short a dull market.

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

CHGG - Chegg Inc
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

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BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile


Mizuho warned that cryptocurrency demand for chips could slow in 2018. The chip sector declined with Nvidia and AMD taking the heat. Nvidia only gets $80 million a year from GPU sales for currency mining. AMD gets nearly $500 million.

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.

Update 11/27/17: 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.

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.

CHGG - Chegg Inc - Company Profile


No specific news. Nice gain to a 4-week high.

Original Trade Description: November 27th

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.

Position 11/28/17:

Long CHGG shares @ $15.07, see portfolio graphic for stop loss.
Alternate position: Long Apr $17.50 call @ 85 cents, see portfolio graphic for stop loss.

DLTH - Duluth Holdings - Company Profile


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


The company will make presentations at various conferences on Dec 6th, and Dec 12th. This could provide a boost.

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


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


No specific news. Sector still weak after down grade of AMD.

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 were down with the sector again.

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.

Update 11/27: 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.

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.

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


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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