Option Investor

Daily Newsletter, Thursday, 12/14/2017

Table of Contents

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

Market Wrap

Growth Forecasts Raised, Market Holds Steady

by Thomas Hughes

Click here to email Thomas Hughes


The FOMC and ECB up their forward growth estimates but toned down their statements, and the market held steady. Counter intuitive as that may be it is consistent with economic trends; the data isn't quite as good now as we thought it would be a few months ago, but it still suggests growth is expanding ahead of us.

International indices closed the day lower on the FOMC, BOE and ECB policy statements. Losses in Asia were minor and in the range of -0.25%. Losses in the EU and UK were more substantial but still only in the range of -0.5% to -0.75%. The statement were more or less as expected, as were comments made by Janet Yellen and Mario Draghi, and did not provide stimulus for higher prices.

Market Statistics

Futures trading was flat to positive all morning. The trade held fairly steady through the data, 2 central bank statements (3 counting the SNB), and right into the opening bell. The open was calm, quiet and without remarkable event. Trading was flat until about 11AM when the market turned lower and then downward pressure persisted into the close. Losses were not great but the indices did close at or near the lows of the day.

Economic Calendar

The Economy

There was a fair amount of economic data released today and it was good. Starting with Retail Sales sales jumped 0.8% and more than 0.5% better than expected. Sales are up 5.8% YOY and 5.2% YTD driven by rising employment. The October figure was revised higher to 0.5% from 0.2%.

Initial claims for unemployment fell -11,000 to 225,000 and very near the historic low. The last week's figure was not revised. The four week moving average of claims fell -6,750 to 234,750 and is also just above the historic low. On a not adjusted basis claims fell by -13.7% versus an expected -9.10% and are down -7.7% from last year. Claims taking from Puerto Rico and the Virgin Islands has still not returned to normal but we've past the point at which they are expected to have noticeable impact. Regardless, claims continue to trend at the historic lows and are consistent with ongoing labor market health if not improvement.

Continuing claims fell -27,000 to 1.886 million from last week's upwardly revised figure. Last week's figure was revised higher by 5,000. The four week moving average of claims rose by 4,500 to 1.918 million but remains low and trending near the historic low, consistent with labor market health.

The total number of Americans filing for unemployment benefits jumped 346,039 in this week's data, remembering that this figure lags initial claims by 2 weeks. This figure would be a shock if not for the fact it is seasonally expected and well within trend. We can now expect total claims to trend sideways for a few weeks before spiking again in the first half of January. So long as the peak is lower than last years the labor market will still be in recovery mode. Total claims are down -5.8% over the same week last year and are expected to continue trending lower into the foreseeable future.

Flash PMI readings for both manufacturing and services were released by Markitt at 9:45AM. The manufacturing index came in at 55, above expectations and the previous month's 53.9. The services index came in at 52.4, expansionary but well below expectations of 54.6 and the previous month's 54.5.

Business Inventories fell -0.1% and as expected and consistent with the -0.1% drop in the previous month. On a year over year basis inventories are up 3.5%.

The Dollar Index

The Dollar Index steadied after yesterday's fall. The fall was due to a dovish tone in the Fed statement, concern over low inflation and a relaxed view of rate hikes in 2018. Today's bounce is due to a similarly dovish tone to the ECB and BOE meetings which consequently weakened the euro and pound. The index is still trapped within the near term trading range, near the middle of a short term trading and looking like it will remain near these levels for the foreseeable future. Now it's back to the data for hints, signs and portents of what the bankers will do in January.

The Gold Index

Gold prices edged up even as the dollar regained ground. The metal gained about $8 to trade near $1,255 to close at a 5 day high. Even so, the metal remains below resistance targets just above $1,263 and poised to move lower. Now that the central bank meetings are past with no unexpected changes to policy the market can focus on the data and tax reform. The combined House/Senate tax bill is expected to pass very soon, possibly tomorrow, and is potential catalyst for gold. Support target is near $1,240, a break below there would be bearish. A move higher will face resistance at $1,260-$1,265, a break above there would be bullish.

The Oil Index

Oil prices had a volatile day moving up sideways and down in turn. The day's action is a result of conflicting signals that show some signs of tightening with an otherwise well supplied market. WTI end the session with a gain near 0.75% as traders chose to focus on yesterday's surprise draw of crude, OPEC's production cap and pipeline outages. The EIA's upward revision to US production growth did little to dampen spirits although it is another indication of high capacity. According to both the EIA and IEA oil prices are expected to trend near $57.50 over the next few months and then fall sharply in the second half of 2018 as global supply outpaces demand.

The Oil Index tried to move higher but the gains were capped. Today's candle is a small green with visible upper shadow just to the side of yesterday's candle. Prices have been consolidating over the past 6 weeks as oil prices top out near $57.50 but look like they are heading higher now. The index has bounced from the short term moving average in line with the prevailing trend and that move is now confirmed by the indicators. Today's action looks like a small flag consolidation within the 6 week range with target near 1,290 to 1,300. Looking forward the sector is still expected to see substantial earnings growth over the next few quarters. I expect this to support prices if not drive them higher in the near to short term.

In The News, Story Stocks and Earnings

Disney confirmed it would be buying assets of Fox spun-off of the parent company. The deal include movie and TV studio properties alongside cable and international TV. According to the deal shareholders of FOX will receive 0.2745 shares of Disney in return for the assets. This values the deal at over $66 billion. Bob Eiger, also as part of the deal, will remain at the helm of Disney until the end of 2021. Shares of Disney gained more than 3% to close at a 7 month high.

The retail sector got a boost from today's Retail Sales data but the gains did not hold. The Retail Sector SPDR created a long red candle engulfing nearly two week's of trading and forming a potentially bearish dark cloud cover. There some signs of support within the candle but the indicators both show divergences consistent with lower prices. Support may be near $43.50 to $44.00, a break of which may go as low as the long term moving average before finding support again. A bounce from or near current levels would confirm the near term up trend with a possibility of moving higher. Resistance is at the top of the near term consolidation range, near $45, a break of which would be bullish.

Owners of Snyder's-Lance got a tasty treat today, the company is looking into a possible sale to Campbell's. An anonymous source leaked news that the company had hired investment bankers to assess the merits of such a sale and that there were possibly two companies interested. No terms were disclosed which left imagination to drive prices. Shares of Snyder's-Lance jumped more than 12% to hit a new all time high.

The after hours were active as well with several earnings releases from early reporters. Adobe, Oracle and Costco all reported better than expected top and bottom line results.

The Indices

The indices moved lower but action was weak. The Dow Jones Transportation Average led with a loss of -0.64% creating a red bodied with potentially bearish implications. The candle is technically a dark cloud cover but a very small one and within a near term consolidation range, more consistent with continuation of consolidation than reversal. Support may be found near 10,250 or just below at the short term moving average, a break below there would be bearish. The indicators are weakening after hitting bullish peaks, MACD a multiyear extreme peak, and setting up bullish continuation signals although those signals have not fired yet.

The tech heavy NASDAQ closed with a loss of -0.38% forming a small red bodied candle above the short term moving average. Today's action may indicate further downside but if so I expect it to be limited. The index is bouncing higher in the nearest term, within a near term consolidation range with mixed indicators. This combination is consistent with consolidation within an uptrend with no reason to end. MACD remains bearish but is very weak, if there is a move lower support is likely to be found near 6,800 and the short term moving average. A break below the moving average may be bearish but also likely to find support relatively quickly. A bounce from the moving average would be bullish and trend following.

The S&P 500 also created a small red candle and looks like it may move lower in the near term. The indicators are mixed but showing divergences that could lead to correction. A move lower may find support near 2,620 and the short term moving average. A break below the moving average would be bearish with targets near 2,600 and 2,550. The caveat is good news; good news could firm support and send the index up to set new highs. That would be bullish with target near 2,700.

The Dow Jones Industrial Average also created a small red candle just at the all time high and forming a weak dark cloud cover. The candle signal is weak but the indicators concur, both of which are showing divergences from the freshly set all time high. A pull back from this level may find support at 24,000, a break below there would be bearish.

Price action is looking a little tepid and no wonder; the market is trading at all time highs and is extended on earnings hope and tax reform. The candles and the indicators suggest a small pull back or consolidation is in the making but there is risk; earnings after the bell suggest strength in the upcoming cycle, tax reform news could hit the wires before the open tomorrow and GDP outlook is on the rise. The charts make me nervous for the near term because there could be correction. The underlying conditions make me nervous to be nervous because I just don't see a reason to sell other than rotation. I may be adding a brick to my wall of worry but I am cautious for the near term, still firmly bullish for the long.

Until then, remember the trend!

Thomas Hughes



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New Plays

Volatility Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

Today may have been a sample of what the next five days will look like. We have had a lot of weak Thursdays recently but today was still painful. As investors, we know the market does not go up in a straight line. Retracements happen. Today was worrisome because everything seemed to be lining up for a run to Dow 25,000 and 7,000 on the S&P by the end of December. The tax bill is getting closer to passage and most of the warts have been removed. The FIFO and corporate AMT have been dropped. Today could have been a sell the news event after months of run-up. There are still challenges. There are multiple senators still on the fence or a solid no and two senators are in the hospital. That makes Monday's expected vote questionable. They cannot put it off too long or the new democrat senator from Alabama will reduce their margin of victory to only 1 vote and with people still on the fence it could be touch and go. The next 3-5 days could be very volatile depending on events in Washington.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Russell Leading

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 posted the biggest decline with a -1.14% loss. With the Russell down so hard it should be no surprise that all our positions declined. This is especially troubling since the small caps should be outperforming to the upside in December. That is especially true because of the pending tax cuts. The Dow gained 87 points at the open but closed with a 77 point loss for a -164 point reversal. This is not a good sign but it was the first decline in six days. We have to give the big caps the benefit of the doubt. However, the next 3-5 days could be very volatile because of events in Washington and today's decline could have been cautionary selling.

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

RDN - Radian Group
The long stock position was stopped out at $21.45.

NGVC - Natural grocers Vitamin Cottage
The long position remains unopened until a trade at $8.75.

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

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. Shares down with the market.

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.

DEPO - Depomed - Company Profile


No specific news. Shares fell from the 4-month high in a weak market.

Original Trade Description: November 25th

Depomed, Inc., a specialty pharmaceutical company, engages in the development, sale, and licensing of products for pain and other central nervous system conditions in the United States. It offers Gralise (gabapentin), an once-daily product for the management of postherpetic neuralgia; CAMBIA (diclofenac potassium for oral solution), a non-steroidal anti-inflammatory drug indicated for acute treatment of migraine attacks in adults; Zipsor (diclofenac potassium) liquid filled capsule, a non-steroidal anti-inflammatory drug for the treatment of mild to moderate acute pain in adults; and Lazanda (fentanyl) nasal spray, an intranasal fentanyl drug used to manage breakthrough pain in adults. The company also provides NUCYNTA ER (tapentadol extended release tablets), a product for the management of pain severe enough to long term opioid treatment, including neuropathic pain associated with diabetic peripheral neuropathy (DPN) in adults; and NUCYNTA (tapentadol), a product for the management of moderate to severe acute pain in adults. In addition, it is involved in the clinical development of Cebranopadol for the treatment of chronic nociceptive and neuropathic pain. The company sells its products to wholesalers and retail pharmacies. It also has a portfolio of license agreements based on its proprietary Acuform gastroretentive drug delivery technology with Mallinckrodt Inc.; Ironwood Pharmaceuticals, Inc.; and Janssen Pharmaceuticals, Inc. Company description from FinViz.com.

Shares of Depomed fell from $11 to $6 in August and traded sideways until sinking before earnings in November. Shares fell to $4.31 ahead of earnings.

They reported earnings of 14 cents that beat estimates for 8 cents. Revenue was $95.4 million. They guided for full year revenue of $375-$380 million. Shares spiked from $4.50 to $6.50 on the news.

They reported the damage to their processing plant in Puerto Rico was less than initially feared and the lost production would be less than $10 million in revenue.

After three weeks of post earnings depression the stock began to rise again in a weak market and closed at a 4-month high on Friday.

Update 12/4: Depomed announced it was contracting with Collegium Pharmaceuticals (COLL) to market its most lucrative product, the Nucynta line of pain killers. The company plans to cut 40% of its workforce and move its headquarters to the Midwest or East Coast where overhead will be cheaper. They are currently in Newark California. They will eliminate all of its painkiller sales force and any brand advertising for the product and collect royalties from Collegium. The company said the layoffs and the move to a lower overhead location would be a significant step in reducing expenses and provide financial and strategic benefits. The company will receive a minimum of $135 million a year in royalties and they are cutting $70 million a year in expenses. Shares were up 5% intraday but faded with the market.

Update 12/6: Shares continued to rise after Depomed announced an exit from opioid sales. Depomed will receive $135 million annually for four years plus royalties from Collegium Pharmaceutical. After 4 years, they will receive a double-digit royalty on sales of Nucynta. This was a good deal for Depomed because they are now out of the opioid business as regulators come down on the sector.

Position 12/4/17:

Long DEPO shares @ $7.27, see portfolio graphic for stop loss.
Alternate position: Long March $8 call @ 65 cents, see portfolio graphic for stop loss.

NGVC - Natural Grocers - Company Profile


No specific news. This position remains unopened until a trade at $8.75.

Original Trade Description: December 13th.

Natural Grocers by Vitamin Cottage, Inc., together with its subsidiaries, operates natural and organic groceries, and dietary supplement retail stores in the United States. Its stores offer natural and organic grocery products, such as organic produce; bulk food and private label products; dry, frozen, and canned groceries; meat and seafood products; dairy products, dairy substitutes, and eggs; prepared foods; bread and baked products; and beverages. The company's stores also provide private label dietary supplements; body care products comprising cosmetics, skin care, hair care, fragrance, and personal care products containing natural and organic ingredients; pet care and food products; household and general merchandise, including cleaning supplies, paper products, dish and laundry soap, and other common household products; and books and handouts. As of July 27, 2017, it operated 140 stores in 19 states. The company operates its retail stores under the Natural Grocers by Vitamin Cottage trademark. Natural Grocers by Vitamin Cottage, Inc. was founded in 1955 and is headquartered in Lakewood, Colorado. Company description from FinViz.com.

Expected earnings Feb 15th.

Natural Grocers, more commonly known as Vitamin Cottage, was given up for dead after they reported earnings of only 3 cents in August. Shares fell 35% to $5.50 and traded sideways for the next three months. In mid November they reported earnings of 6 cents that beat estimates by a penny. Revenue of $198.5 million also beat estimates. They guided for full year earnings of 21-31 cents which was above estimates for 21 cents.

Shares rebounded on the earnings beat and positive guidance. They rallied to $8.50 and stalled at that level. They gained 5.6% on Wednesday. Any further gains targets the next resistance level at $10.50.

I am going to put an entry trigger on this position to make sure they are going to move higher before we jump in.

With a NGVC trade at $8.75

Buy NGVC shares, initial stop loss $7.65.
Alternate position: Buy March $10 call, currently 35 cents. No initial stop loss.

That strike price is well out of the money but we have 3 months and it is cheap. If you buy it, plan on holding it long-term.

RDN - Radian Group - Company Profile


No specific news. Shares declined for the second day with the weak market putting a drag on the stock. The stock hit a 9-year high on Tuesday. We were stopped out of the stock positionat the close when the stock hit $21.45. The option position will move to the lottery play section.

Original Trade Description: December 6th.

Radian Group Inc., through its subsidiaries, provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance and Services. The Mortgage Insurance segment offers credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders and third-party beneficiaries by mitigating default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It provides primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment offers outsourced services, information-based analytics, valuations, and specialized consulting and surveillance services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other consumer asset-backed securities. This segment provides loan review and due diligence, monitoring of mortgage servicer and loan performance, real estate valuation and component services, real estate owned asset management services, and outsourced mortgage services. It primarily serves financial institutions, government-sponsored enterprises, securitization trusts, investors, regulators, and other mortgage-related service providers. Radian Group Inc. was founded in 1977 and is headquartered in Philadelphia, Pennsylvania. Company description from FinViz.com.

Expected earnings Jan 25th.

Radian reported Q3 earnings of 46 cents that beat estimates for 42 cents. Revenue rose 3% to $270 million. Mortgage insurance written rose 3% to $15.1 billion. Total primary mortgage insurance in force rose 8% to $196.8 billion. Deliquent loans were flat for the quarter. The company said defaults were declining.

The company provides mortgage insurance for credit worthy buyers who do not have the 20% down payment to avoid the insurance requirement. This means more millennials are able to buy houses and they are the population sector with rising incomes and trying to build their credit while buying homes to raise a family.

The company just completed the sale of Clayton EuroRisk, a provider of outsourced mortgage services in Europe, to a global investment firm. Radian is trying to focus on its core business in order to reduce expenses and maximize profits.

Shares gained $1 on the news four days ago and then moved sideways until today. Shares posted a minor gain but closed at a new nine-year high. (post financial crisis)

Position 12/7/17:

Closed 12/14: Long RDN shares @ $21.89, exit $21.45, -.44 loss.
Alternate position: Long Feb $23 call @ 65 cents, see portfolio graphic for stop loss.

SFM - Sprouts Farmers Market - Company Profile


No specific news. Still holding at resistance.

Original Trade Description: December 4th.

Sprouts Farmers Market, Inc., a healthy grocery store, provides fresh, natural, and organic food in the United States. The company's stores offer fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli products, baked goods, dairy and dairy alternatives, frozen foods, body care and natural household items, and beer and wine. As of May 04, 2017, it operated 280 stores in 15 states. The company was founded in 2002 and is based in Phoenix, Arizona. Company description from FinViz.com.

Sprouts was written off as dead after Amazon bought Whole Foods. However, just like Whole Foods is not a competitor to Costco, they are not a competitor to Sprouts either. Sprouts is not a "grocery" store. They are an organic produce store with meat and dairy and a few other items. They are a specialty store for organic products. Whole Foods had this original concept but morphed into more of a full service grocery store with organic products.

Some readers may disagree with me on the comparison but Sprouts is making money and Whole Foods was struggling and that is the bottom line.

For Q3 revenue rose 16% and same store sales rose 4.6%. Gross margins of 29.1% are far superior to grocery store margins and only 40 basis points below the peak in 2016 before the competition heated up.

Expected earnings Feb 1st.

Why Amazon? Sprouts has 280 stores spread across the country but only 7% are on the east coast where Aldi and Lidl are turning grocery shopping into a competitive sport. They are not going to be hurt by those big chains.

The small footprint and market cap of only $3 billion makes Sprouts an add on to Whole Foods. Since the companies are similar in that they are all organic, it would be a slam dunk for Amazon to double the size of their footprint on the cheap. Organic buyers spend more money than normal shoppers. The stores are in upscale neighborhoods and customers are likely Amazon Prime members.

Sprouts already has a partnership with Amazon with 2 hour home delivery to Prime customers. They just expanded the service area from the original 8 cities and that is another reason Amazon could scoop them up and head for the express checkout isle.

Shares have recovered from their Whole Foods reaction dip in August and are very close to breaking out to a new high. There is resistance just under $25 but the stock is moving up aggressively on their good earnings and guidance.

In order to get an option after the Feb earnings we have to reach out to March. They are a little more expensive than those I normally recommend in this newsletter. However, while the January options are cheaper, they will decay faster as we approach the December expiration in two weeks. You get what you pay for. As a compromise, I am going to use the $27.50 call instead of the $25 call. You can choose which call strike/series you like.

Update 12/12: IBD upgraded SFM to a 95% composite rating and 80% relative strength rating.

Position 12/5/17:

Long SFM shares @ $24.09, see portfolio graphic for stop loss
Alternate position: Long Mar $27.50 call @ 80 cents, see portfolio graphic for stop loss.

YRCW - YRC Worldwide - Company Profile


No specific news. Shares retreated from the new 52-week high in a weak market.

Original Trade Description: December 9th.

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2016, this segment had a fleet of approximately 7,700 tractors comprising 6,200 owned and 1,500 leased; and 31,000 trailers consisting of 24,900 owned and 6,100 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, truck loading, and other specialized offerings; guaranteed and expedited delivery services that consist of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates hollandregional.com, reddawayregional.com, and newpenn.com, which are e-commerce Websites offering online resources to manage transportation activities. This segment had a fleet of approximately 6,600 tractors, including 5,000 owned and 1,600 leased; and 13,500 trailers comprising 10,800 owned and 2,700 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. YRC Worldwide Inc. was founded in 1924 and is headquartered in Overland Park, Kansas. Company description from FinViz.com.

YRCW reported Q3 earnings of 22 cents that missed estimates for 28 cents. Revenue of $1.25 billion matched estimates. Shipments were impacted by the hurricanes in Texas and Florida. Shares traded sideways on the miss.

Regional shipments increased 4.0% despite the hurricane impact. Revenue per hundredweight ros 3.4% and revenue per shipment rose 3.8%. That was the highest revenue per hundredweight increase in more than 3 years. They are refreshing the fleet to more economic tractors and transitioning 8 terminals to become regional distribution centers. This will add capacity and reduce costs.

Expected earnings Feb 1st.

The entire transportation sector crashed in late October and early November and that knocked 25% of YRCW shares. The rebound started in mid November and shares have recovered all the loss and are close to a breakout to a new 52-week high.

Update 12/11: After the bell, YRC provided an operational update for November. Tonnage per day increased 1.1%, revenue per hundredweight rose 3.7%. Revenue per shipment rose 5.0%. Regional tonnage per day rose 6.0%, revenue per hundredweight rse 0.8% and revenue per shipment rose 4.1%. Overall these were some good numbers.

Position 12/11/17:

Long YRCW shares @ $14.20, see portfolio graphic for stop loss.
Alternate position: Long Jan $15 call @ 71 cents, see portfolio graphic for stop loss.

This is a short-term call and we will need to be out of it by the end of December. The next available option series was April at double the cost.

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.

XONE - Exone Co - Company Profile


No specific news. Shares posted a nice decline to close below support at $9.70.

Original Trade Description: December 11th.

The ExOne Company develops, manufactures, and markets three dimensional (3D) printing machines, 3D printed and other products, materials, and services primarily in North America, Europe, and Asia. The company provides various machines that enable designers and engineers to design and produce industrial prototypes and production parts. Its machines include Exerial, S-Max/S-Max+, and S-Print, which are indirect printing machines; M-Print, M-Flex, and Innovent that are direct printing machines; and MWT industrial grade microwaves. The company also supplies associated materials comprising consumables and replacement parts; and other services, such as training and technical support services. It markets its products to industrial customers and other end-market users in the aerospace, automotive, heavy equipment, energy/oil/gas, and other industries under the ExOne brand name. The ExOne Company was founded in 2005 and is headquartered in North Huntingdon, Pennsylvania. Company description from FinViz.com.

Expected earnings Feb 8th.

The company reported a Q3 loss of 30 cents on revenue of $15.9 million. Those anemic numbers came after a 32% increase in machine revenue and 13% increase in non-machine revenues. It makes you wonder how bad it would have been if revenues had not surged.

The stock has rolled over and is heading lower at a rapid pace. With earnings on Feb 8th, we can buy a $10 February put for 90 cents. This is strictly a bet on the falling chart and the fact that investors are dumping this stock before year-end.

Poition 12/12/17:

Short XONE shares @ $10.39, see portfolio graphic for stop loss.
Alternate position: Long Feb $10 put @ 90 cents, see portfolio graphic for stop loss.

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