Option Investor

Daily Newsletter, Wednesday, 1/3/2018

Table of Contents

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

Market Wrap

Santa Arrived

by Keene Little

Click here to email Keene Little
He might have been late, due to fighting off the bears attacking his reindeer, but Santa arrived for the final two days of the period when we typically get the Santa Claus rally. January has started off on a bullish hoof and that bodes well for the rest of the month and year (maybe).

Today's Market Stats

The late-day selling last Friday was followed by a big gap up Tuesday morning, thanks again to the overnight rally in the futures, and that left more than a few bears trapped at Friday's lows. With another overnight rally in the futures we started the day with another gap up and the bulls kept the rally going. Some initial upside targets have now been met so it's going to be important what follows the conclusion to the Santa Claus rally period.

There wasn't much in the way of economic reports today to influence the market or to change the bullish intention. This morning we got the ISM Index and Construction Spending, both of which came in slightly better than expected but nothing extraordinary. ISM for December was 59.7, an improvement from 58.2 in November and better than the expectations for 58.0. Construction Spending for November was +0.8%, which was a small drop from the +0.9% in October but better than the +0.7% that had been expected.

Auto and truck sales were in line with expectations and changed little in December. There was also no response to the FOMC minutes that were released this afternoon. If anything, there was some concern over the lack of agreement about how many rate hikes there should be this year but that had no effect on the market. The market did rally a little more following the report since it was one less thing to worry about.

For a long time we've seen volatility bleed out of this market and it's one of the measures of complacency that's been both bullish as well as worrisome. It's bullish of course because it says investors are not worried about significant market corrections and therefore they feel comfortable putting more money to work in the market. We can also see this in investor surveys (which are actually now getting too bullish from a contrarian perspective). Since the big spike in the VIX back in August 2016 we've seen it work its way lower over time as the spikes created lower highs and the lows dropped marginally lower each time before spiking back up.

The pattern that the VIX has created is a large bullish descending wedge, as seen on its weekly chart below. The bottom of the wedge is currently at 8.27, which if reached would have it dropping below is December 2006 spike low and which was tested with the spike low this past November 24th. It will be interesting to see if the VIX will in fact drop to a new all-time low with a rally to more new all-time highs for the stock indexes.

The worrisome thing for bulls with what we see with the VIX chart is the bullish interpretation of the pattern. It's a bullish pattern with confirming bullish divergence at the new lows over the past two years. A bullish VIX is of course bearish for the stock market and the only question is when this bullish pattern will see a bullish breakout, starting with a rally above its 200-week MA and the top of the descending wedge, at 14.28 and 13.92, respectively. A close above 14.28 would be strong confirmation that a bottom is in for the VIX and a top for the stock market.

Volatility index, VIX, Weekly chart

The very low VIX is a result of a steady rise in the stock market with little to no retracements along the way. Every month of 2017 finished positive, a first, and the market has now gone 428 days with a correction of 3% of more. For SPX a 3% correction would be about 80 points, or a drop to about 2630 from the current level. That would only be back to about where SPX was trading in early December. With so few corrections since November 2016 and the nearly straight-up ride since the small pullback last August, it's no wonder investors are feeling fearless.

The absolute daily percentage change for SPX in 2017 was just 0.3%, which makes it the tightest range since 1964 (53 years). Along with the continuing stream of new all-time highs for the indexes, the VIX closed lower 47 times last year. Of the 56 lowest closes since 1990 the majority of them were just last year.

This period of calm could continue much longer than most think possible but it's also true that the time to be afraid is when fear has left the building. The Minsky Moment is when stability leads to instability, as it always does, when that last snowflake falls (a seemingly insignificant event that normally would not shake the market) and the avalanche takes out everyone in its path. Do have your protective gear in the event of an avalanche? For us that would mean methods of protecting against a strong decline, such as puts, short positions or inverse ETFs. If you don't want to sell then it's at least a good time to buy some insurance (and then hope you don't need to use the insurance, like all the other insurance plans we buy).

The stock market rally is stretched to the upside, which I think we can all agree on. If you don't believe that statement then I'll suggest you're not investing with your eyes wide open and looking for danger. Most of the fundamental measures of the stock market, such as P/E ratios (both forward and trailing) are extraordinarily high and the highest among other nations as well (Europe, UK, Asia and Emerging Markets). The CAPE (Cyclically-Adjusted Price-to-Earnings multiple) is accepted by most as one of the more accurate measures of stock value and it's not at a comforting level if you're leverage long the market.

The CAPE compares the S&P 500 to its average, annual inflation-adjusted earnings over the past 10 years and its current reading is 31. This is well above its 15-year average of 25 and almost twice its long-term average (since 1881) of 16.8. At 31 it joins only two other times it got above 30 -- in 1929 and between 1997 and 2002. Both of those times were not good times to be complacent about the upside and while it could certainly continue higher, it's prudent to be cautious. It's kind of like playing with the cryptocurrencies right here.

And with that I'll move to the charts. As I had mentioned a week ago, I was looking for the rally to continue into this week and a possible high by January 3rd, today. The consolidation went a little longer than I had expected (into the end of last week) and therefore there's a possibility we'll see the rally continue into the end of this week. But at this point I think we're very close to putting in an important high and it could soon be the bear's turn at the feeding trough.

S&P 500, SPX, Weekly chart

With today's rally SPX achieved its first and second upside targets that I've been watching for. The first one is near 2705, which is where the extended 5th wave of the rally from 2009 is 162% of the 1st wave. As shown on the daily chart further below, that's also where the extended 5th wave of the leg up from August equals the 1st through 3rd waves. So that check is now in the block. The second target is 2711, which I'll point out on the 60-min chart further below and it's a potentially important level on the Gann Square of 9 chart, also discussed further below.

On the weekly chart I show a projection at 2718, which is where the 5th wave of the rally from February 2016 equals the 1st wave and with today's high at 2714 it's only 4 points higher. A little higher is the trend line along the highs of the rally from February 2016, currently near 2727. With the market overbought on all time frames I think it's a good time to pull up your stops on trading positions as SPX reaches potentially strong resistance.

S&P 500, SPX, Daily chart

Last week's break of the uptrend line from November 15th turned into a head-fake break (bear trap) as it recovered back above the line today. As mentioned above, the trend line along the highs from April 2016 - March 2017 is now near 2727 and the trend line along the highs of the rally from August is also near 2727 and it will be near 2732 by the end of the week. As shown on the 60-min chart further below, there's a projection at 2734, which I consider the highest we'll see but if we're into a true blow-off top then it could go much higher. Above 2740 would tell me to watch in awe as the blow-off rally continues. Just watch out for the reversal back down if that happens. A drop below last Friday's low near 2673 is what would tell us a top is in place.

Key Levels for SPX:
- more bullish above 2740
- bearish below 2673

S&P 500, SPX, 60-min chart

As mentioned above, 2711 is an upside target and that was achieved today. That level is where the 5th wave of the rally from December 1st is 62% of the 1st wave. At this point all the pieces are now in place to call a top at any time. The rally could stretch higher but now is a good time to be extra cautious on the long side and start preparing for what you want to play on the short side (but not yet). As shown on the 60-min chart, there's further upside to the trend line along the highs from September-October, near 2730 by midday Friday, and then the projection at 2734, which is where the 5th wave of the rally from December would equal the 1st wave.

The reason I keep mentioning all these 5th wave projections is because we're in 5th waves at multiple degrees of the pattern (each 5th wave consists of its own 5-wave move, right down to the intraday patterns). The 5th wave of the rally from December 1st is the leg up from last Friday and it will complete the larger 5th wave of the rally from August, which will complete the 5th wave of the rally from February 2016, which will complete the 5th wave of the rally from 2009. If I have the wave count correct, this is going to be an important high, one which will stand for a very long time.

Besides the wave, Fib and trendline projections for SPX, and why I'm interested in watching the upside targets carefully for signs of topping, I have the Gann Square of 9 chart also highlighting potentially important levels in the same area. I don't want to get into the weeds with this technical tool (I can see your eyes already glazing over with all this Elliott Wave talk) but I think it's important to try to cover it. Many will poopoo this Gann chart and just throw it into the same bin as Elliott Wave and Fibonacci, or maybe astrology, but these tools can be very enlightening, as the Gann Sof9 chart was at the October 2007 high and March 2009 bottom.

The confluence of similar levels is always a reason to pay attention and while they don't predict a trend reversal they are reason to watch for the possibility of one. The portion of my Gann Sof9 chart below is squished to fit it onto the page so I apologize for the tiny print. I added some larger numbers to point out the potentially important levels.

Gann Square of 9 chart

The red vector pointing to 11:00 is the one through the October 2002 low at 768 and the October 2007 high at 1576. There was clearly a direct relationship between those two numbers, especially being 6 "circles" away from each other. There are six squares or sides of a cube and the relationship between these two numbers was one of the reasons I was pounding the table back in October 2007 to watch out for a potentially important high, which it was.

The blue vector pointing to 1:00 goes through the March 2009 low at 666. A little harder to see, there's a green vector just to the right of the blue one and it is square to March 6th (just visible at the bottom right side of the chart). The green vector goes through 667 and the March 6, 2009 low was 666.79, arguably closer to 667 than 666. There was clearly a Gann reason to look for that low on March 6th to be an important one, which it was.

To the right, the red vector pointing to 2:00 is "square" to the red one through the October 2007 high. These square relationships are often very important and it goes through 2711, which was achieved today. Not visible at the bottom of my Gann Sof9 chart is the end of the red vector pointing to 5:00. The date that it's pointing to is January 3rd, which of course is today. That makes the square at 2711 especially important and it's possible today's rally is all we'll see but there's still a little higher potential to the 2721-2723 area on the chart.

If the rally continues on Thursday, the blue vector pointing to 4:00 is square to the 2009 low at 666 and it crosses through 2721. The green vector that is square to 667 crosses through 2723, all of which gives us the next Gann target zone at 2721-2723. Again, this is not a prediction that the market will top at any of these levels but in combination with what I'm seeing on the SPX charts I think it's very important to stay aware of the potential for an important market high this week.

And now back to our regularly scheduled charts.

Dow Industrials, INDU, Daily chart

Since early December I've been watching for an upside target zone for the Dow at 24775-25026. That's a fairly wide zone and once the Dow reached 24775 and consolidated sideways near that level it began to look like the higher target was in play. This week's rally has made the upper target at 25026 likely and it could head even higher if it's going to reach for the top of a rising wedge for the rally from December 1st, which will be near 25340 by the end of the week. I don't think we'll see the Dow that high but with this market I certainly wouldn't rule out the possibility.

The Dow is back-testing the bottom of the rising wedge, which it broken below last Friday. The short-term pattern for the rally can be considered complete at any time and if the market gaps down on Thursday, instead of the usual gap up, we could selling pick up speed in a hurry. There are a lot of fund managers with their fingers resting on the sell button to protect profits, especially now that we're into the new year and the lower tax rates. A drop below last Friday's low at 24719 would tell us a top is in place.

Key Levels for DOW:
- bullish above 25,026
- bearish below 24,719

Nasdaq Composite index, COMPQ, Daily chart

The Nasdaq made it through a price projection at 7006, where the 5th wave of the rally from August equals the 1st wave, where it had stopped on December 18th and again yesterday, and today it made it up to the next resistance level, near 7070 (today's high was 7069). A trend line along the highs since August 2016 and a shorter-term one along the highs from November 28 - December 18 are both near 7070 and will be near 7086 by the end of the week. Not shown on the daily chart below, there's also a price projection at 7070, which is where the 2nd leg of the rally from December 6th is 62% of the 1st leg up.

As with the other indexes, the pieces are now in place to be able to call a top at any time and any sharp reversal back down would be reason to believe a top is in place. In the meantime there's further upside potential to at least the top of its parallel up-channel for the rally from August, which will be near 7130 by the end of the week. A strong rally much above 7140 would indicate the blow-off top is in progress and don't get in its way.

Key Levels for COMPQ:
- more bullish above 7140
- bearish below 6903

Russell-2000, RUT, Daily chart

The RUT has been acting weak since last Friday and that's a bit concerning if you're a bull. It has barely been able to make a new high above its December 18th high at 1552, with today's high at 1555, but it has not been able to climb above its December 4th high near 1560. A trend line along the highs from December 2016 - October 2017 is currently near 1559 and there's a price projection at 1562, which is where the 5th wave of the rally from February 2016 would equal the 1st wave. I think 1559-1562 is a good upside target zone for the RUT and then more bullish above 1562.

Key Levels for RUT:
- bullish above 1562
- bearish below 1535

U.S. Dollar contract, DX, Daily chart

The US$ is at an interesting place and it's time to flip a coin for direction. Once it dropped back below 94 and back-tested it in mid-December I've been short-term bearish with an expectation for a decline to the $90 area to complete a 5-wave move down from January 2017. But where it dropped to yesterday and now with today's bounce I'm beginning to wonder if we'll see the start of the next rally leg.

Notice where yesterday's low stopped -- it could be viewed as a bullish back-test of the top of the broken down-channel for the decline from January 2017. Granted it's the 2nd back-test and that's often a sign of weakness, not impending strength. But it also achieved two equal legs down from November 7th, at 91.57, and that could be the completion of an a-b-c pullback correction in a new bull market for the dollar, starting off its September low. Daily RSI is curling up from oversold and that's another supporting factor for the bulls.

If the dollar does continue lower I'll be looking for $90, especially if any bounce/consolidation looks choppy and corrective. But if the bounce turns into a sharp rally then it would support the idea that the pullback is complete and a new rally leg has started. Back above 94 would confirm the new rally but there should be confirming evidence before that line is crossed.

Gold continuous contract, GC, Daily chart

Gold has rocketed higher over the past 3 weeks, from a low at 1238.30 on December 12th to a high today at 1323.0 (+$85, +6.9%) and broke through several layers of resistance with the strong rally, the last of which was price-level resistance at 1300. It certainly looks like it's in breakout mode and could very well be but short term I think it's ready for at least a pullback correction before heading higher.

Paradoxically, the strong 3-week rally could turn into a bull trap since the leg up from December 12th fits well as the c-wave of an expanded flat correction off the higher low on October 6th. This kind of pattern, with the lower low in December and then the blast higher out of that, is a common completion to a correction to the initial decline from September. It's too early to tell if this is the correct pattern interpretation but if it is then we're going to see gold start back down.

If we see a corrective pullback over the next week or so that finds support at or above its moving averages, which should be near 1280, it would be a good setup for a continuation of the rally. But back below its nested 20-, 50- and 200-dmas and it will be stronger confirmation that that the 3-week rally was only completing a correction to the decline and not something more bullish.

Oil continuous contract, CL, Weekly chart

Commodities look like they could be starting a bullish move and that would very likely include oil. If oil can get above resistance near 62.30 (today's high so far in after-hours trading is 61.97) we could see a continuation of its rally from June and potentially up to the $85 area to achieve its inverse H&S price objective. But there is a corrective pattern inside a rising wedge for the rally from February 2016 that suggests its rally is about to end. Interestingly it bottomed in February 2016 with the stock market and now it could be putting in a top at the same time as the stock market.

The top of the rising wedge is the resistance near 62.30 that oil needs to get through (with something more than a quick pop above that level and then a collapse back down, which would then give us a sell signal. Daily and weekly oscillators are overbought and therefore it's a risky time to bet on further upside until it can prove it can get through resistance and stay above it.

Economic reports

Thursday morning's economic reports will include the ADP Employment Change, which is expected to show only a minor gain in December -- up 5K from the 190K in November. Unemployment data and oil and gas inventories will also be reported and therefore nothing much in the way of market moving reports. Friday we'll get the NFP and other employment data before the opening bell and then Factory Orders and ISM Services at 10:00. The NFP is expected to show +195K (same as ADP expectations) in December, which would be a drop from the +228K in November.


As Ronald Reagan said to Jimmy Carter in the presidential debates, "there he goes again." That would be me trying to pick a top and in this market that has been an exercise in frustration. All I can do is point out where I think a top could occur but actually predicting a top is a fool's errand. And right now I see plenty across the indexes, and even for oil, gold and the dollar, that tells me I should be looking for reversals and potentially major reversals. I'm not predicting a top; I'm warning you of one.

That would mean a reversal back down for the stock market, oil and gold (and possibly other commodities) and a rally for the dollar. The stock market indexes look especially vulnerable until they can power through some important resistance/target levels, which I outlined above and are shown on the charts. If you're long and looking to exit trading positions I would pull stops up real tight right now. If you're in longer-term hold (otherwise known as hodl in the crypto world) positions and you don't want to liquidate them then I'd think very seriously about hedging your positions. Buy the insurance and hope you never need to use it.

As mentioned above, the pieces are now in place to be able to call a market top at any time but I do see further upside potential at least into Friday. I'd be surprised if I'm still looking for higher highs this time next week (but of course I've been surprised by this market more than a few times).

Picking a top in a bull market is obviously a challenging thing to do and obviously trying to catch rising knives is not for the risk averse. I challenge myself to pick tops and bottoms because I like to play reversals (put options are cheaper on the way up than on the way down at the same price level). Others prefer to play just the trend until the trend breaks and take whatever loss there is (hopefully only a loss of some of the profits) when that trend is confirmed broken.

We have a long way to go before the uptrend is broken and therefore it's important to understand what I'm attempting to do. If you're sticking with the trend (obviously a winning strategy for a very long time) then you're still good. If you like to play reversals and/or hedge yourself against reversals, now is a good time to watch very carefully since I think an important one is about to hit us.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying



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New Plays

Sector Crashing

by Jim Brown

Click here to email Jim Brown
Editor's Note

After years of boom times, the firearms sector is imploding.


No New Bullish Plays


AOBC - American Outdoor Brands - Company Profile

American Outdoor Brands Corporation, formerly Smith & Wesson Holding Corporation, is a manufacturer of firearms and a provider of accessory products for the shooting, hunting and outdoor enthusiast. The Company operates through two segments. The Firearms segment manufactures handgun and long gun products sold under the Smith & Wesson, M&P and Thompson/Center Arms brands, as well as providing forging, machining and precision plastic injection molding services. The Outdoor Products & Accessories segment provides shooting, hunting and outdoor accessories, including reloading, gunsmithing, gun cleaning supplies, tree saws, vault accessories, knives, laser sighting systems and tactical lighting products. Brands in Outdoor Products & Accessories include Crimson Trace, Caldwell Shooting Supplies, Wheeler Engineering, Lockdown Vault Accessories, BOG POD and Golden Rod Moisture Control, as well as knives and specialty tools under Schrade, Old Timer, Uncle Henry and Imperial. Company description from FinViz.com.

AOBC is a great company but times have changed. Under the 8-years of Barack Obama as president the firearms sector boomed because Obama never missed a chance to blame firearms for every act of violence rather than the criminal acts of the violent offenders. He had said numerous times he would ban firearms if he could and enacted policies that pressured gun dealers including limiting their access to banking. With a potential new gun control law behind every event, gun sales boomed to all time records. In the last year of his presidency he bragged several times that he had become the best gun salesman ever.

President Trump is pro gun and there are multiple pro gun laws making their way through congress. There is no fear of any gun bans even after the Las Vegas shooting. With no urgency to buy new guns, sales are falling. AOBC said rising inventories were a problem and they are being forced to reduce production.

Investors looking for promising stocks for 2018 with rising revenue and earnings, will likely avoid AOBC because they have neither. In their Q3 earnings report, revenue declined -36% to $148.4 million and earnings fell -90% from $32.5 million to $3.2 million. With 3 years left in Trump's term, the outlook for rising sales is weak at best.

They guided for 2018 for earnings of 57-67 cents and will include write downs of acquired assets.

Sell short AOBC shares, currently $12.14, initial stop loss $13.15.
Alternate position: Buy March $10 put at 35 cents. No stop loss and we will hold over earnings.

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.

In Play Updates and Reviews

No Doubt Now

by Jim Brown

Click here to email Jim Brown

Editors Note:

The second day of big gains by the major indexes left no doubt the bulls are in control. The Dow, Nasdaq, S&P and Russell all closed at new highs with the Dow, Nasdaq and S&P surging past prior resistance. The Russell gained only 2 points and remains under the spell of the prior resistance at 1,550. There was a data feed error on the Russell and all charts from multiple vendors are showing seventeen point gain. You can clearly see on the chart it was only 2 points from yesterday's 1,550 close.

The surge by the three big cap indexes has erased fears of an early January decline on profit taking. The expectations for strong earnings and guidance is floating all boats.

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

No Changes

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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. Minor gain to a new high close.

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.

HIMX - Himax Technologies - Company Profile


No specific news. Nice 4% gain.

Original Trade Description: December 27th.

Himax Technologies, Inc. is a fabless semiconductor solution provider dedicated to display imaging processing technologies. Himax is a worldwide market leader in display driver ICs and timing controllers used in TVs, laptops, monitors, mobile phones, tablets, digital cameras, car navigation, virtual reality (VR) devices and many other consumer electronics devices. Additionally, Himax designs and provides controllers for touch sensor displays, in-cell Touch and Display Driver Integration (TDDI) single-chip solutions, LED driver ICs, power management ICs, scaler products for monitors and projectors, tailor-made video processing IC solutions, silicon IPs and LCOS micro-displays for augmented reality (AR) devices and head-up displays (HUD) for automotive. The Company also offers digital camera solutions, including CMOS image sensors and wafer level optics for AR devices, 3D sensing and machine vision, which are used in a wide variety of applications such as mobile phone, tablet, laptop, TV, PC camera, automobile, security, medical devices and Internet of Things. Founded in 2001 and headquartered in Tainan, Taiwan, Himax currently employs around 2,150 people from three Taiwan-based offices in Tainan, Hsinchu and Taipei and country offices in China, Korea, Japan and the US. Himax has 3,011patents granted and 441patents pending approval worldwide as of September30th, 2017. Himax has retained its position as the leading display imaging processing semiconductor solution provider to consumer electronics brands worldwide. Company info from Himax Technologies.

Himax was setting new highs in early December and Citron Research tweeted the company was a fraud and the story behind the company was bogus. Citron never followed up with any facts but that was enough to crash the stosk from $13.50 to $10.

Himax immediately posted a news release denying anything in the tweet. After trading sideways for the last couple of weeks they may be starting to rebound.

Himax reported Q3 earnings of 5 cents and revenue of $197.1 million which beat estimates for 4 cents and $191.3 million. Himax makes the wafer level optics (WLO) that powers the facial recognition in Apple's iPhone X. Since Apple is probably going to make that a standard feature in all future iPhones this is a good deal for Himax. Because of the iPhone shipping cycle, they should post good Q4 earnings. The company said WLO shipments would accelerate in Q4 and beyond. They also said they were working on several new development projects with Apple that would be announced in the future. Apple is also expected to bring the facial recognition technology to the iPad Pro products.

The company guided for Q4 earnings of 13-15 cents, which would be a major jump from the 5 cents in Q3.

They also announced a new partnership with Qualcomm to bring 3D sensing and facial recognition to Android devices and expects to mass produce and ship the technology in Q1-2018.

Expected earningss February 8th.

Because HIMX shares declined so sharply, they could be immune from any early month volatility in January. There is no guarantee it is a plausible scenario.

Update 1/2/18: Himax announced the industry's first AI based human presence IoT visual sensor for consumer applications, called WiseEye. The sensor can detect, localize, count and profile humans. The sensor would work in offices to turn on/off lights, heat/AC when humans are not present, work on household appliances to perform functions when humans are present and sleep when they are absent.

Position 12/28/17:

Long HIMX shares @ $10.25, see portfolio graphic for stop loss.
Alternate position: Long Feb $11 call @ 75 cents, see portfolio graphic for stop loss.

IMMU - Immunomedics Inc - Company Profile


No specific news. Holding at the recent highs.

Original Trade Description: December 23rd.

Immunomedics, Inc., a clinical-stage biopharmaceutical company, focuses on the development of monoclonal antibody-based products for the targeted treatment of cancer, autoimmune disorders, and other diseases. The company engages in developing antibody-drug conjugate (ADC) products comprising IMMU-132, an ADC that contains SN-38, which is in Phase II trials used for the treatment of patients with metastatic triple-negative breast cancer, and small-cell and non-small-cell lung cancers; IMMU-130, an anti-CEACAN5-SN-38 ADC that is in Phase II trials for the treatment of solid tumors and metastatic colorectal cancer; and IMMU-140 that targets HLA-DR for the potential treatment of liquid cancers. It also develops products for the treatment of cancer and autoimmune diseases, including epratuzumab, anti-CD22 antibody; veltuzumab, anti-CD20 antibody; milatuzumab, anti-CD74 antibody; and IMMU-114, a humanized anti-HLA-DR antibody. The company also provides LeukoScan, a diagnostic imaging product to determine the location and extent of infection/inflammation in bone. In addition, it offers other product candidates for the treatment of solid tumors and hematologic malignancies, as well as other diseases, which are in various stages of clinical and pre-clinical development. The company has a research collaboration with The Bayer Group to study epratuzumab as a thorium-227-labeled antibody. Immunomedics, Inc. was founded in 1982 and is headquartered in Morris Plains, New Jersey. Company description from FinViz.com.

Immunomedics recently announced a blinded trial on breast cancer drug sacituzumab govitecan showed positive results. The drug is an anti-TROP-2 antibody that can target multiple tumor types including breast cancer, lung cancer and colorectal cancers. This would be a holy grail of cancer treatment if the drug continues to post solid results. The drug is being tested to treat triple negative breast cancer, a tough-to-treat indication with limited treatment options. These cases represent 15% of the 246,660 new cases of breast cancer reported each year resulting in 40,450 deaths per year. In the recent trial the "objective response rate" or ORR was 31% or nearly double the historical rate for the standard treatment of these patients. The company plans to file for an accelerated FDA approval in early 2018. An independent study of this drug by an outside firm estimated it could produce $3 billion in annual sales by 2025.

Obviously, there is no guarantee the drug will be approved or be successful in the real world but the outlook is promising and it is lifting the stock price. Shares broke out to a new 15-year high on Friday and could continue to make new highs as long as the research on this drug and others continues to be positive. Seattle Genetics (SGEN) owns 7.3% of the company and executed warrants to acquire 8.6 million shares on December 5th for $42.4 million. They obviously believe the drug has potential.

Hopefully the potential for a blockbuster drug will insulate us from any market negativity in January.

Position 12/26/17:

Long IMMU shares @ $14.69, see portfolio graphic for stop loss.
Alternate position: Long Feb $16 call @ $1.15, see portfolio graphic for stop loss.

NGVC - Natural Grocers - Company Profile


No specific news. Shares are not moving. I am recommending we close the position.

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.

Position 12/15/17 with a NGVC trade at $8.75

Long NGVC shares @ $8.75, see portfolio graphic for stop loss.
Alternate position: Long March $10 call @ 35 cents, see portfolio graphic for 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.

YRCW - YRC Worldwide - Company Profile


No specific news. I tightened the stop loss. Shares have been making new highs but not holding their momentum. Support is $14.35.

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

SNAP - Snap Inc - Company Profile


Shares rallied again despite news that Constellation Brands (STZ) had removed its ads from SnapChat. We were stopped on the stock position and the put option will move to the lottery play section.

Original Trade Description: December 30th.

Snap Inc. operates as a camera company. It offers Snapchat, a camera application that helps people to communicate through short videos and images. The company also provides a suite of content tools for partners to build, edit, and publish snaps and attachments based on editorial content; and Spectacles, which are sunglasses that capture video from a human perspective. The company was formerly known as Snapchat, Inc. and changed its name to Snap Inc. in September 2016. Snap Inc. was founded in 2010 and is headquartered in Venice, California. Company description from FinViz.com.

There is no magic to this position. Shares are declining ahead of their Jan 23rd earnings. The company has failed to increase users in a meaningful way. Facebook is killing them with their similar product. CNN recently cancelled their daily Snapchat News show called "The Update" because it was not making any money. Advertisers had abandoned the feature. Everything is negative for SNAP's outlook.

Evercore ISI rated them an underperform, the equivalent of a sell rating, with a price target of $7 on December 6th. SNAP shares are already about 50% below their post IPO peak and they were trading at $15 at the open on Friday. The Evercore rating is looking for another 50% decline.

Over the last 12 months the company had revenue of $705 million but lost a whopping $3.2 billion when stock grants were included. If you back out the onetime expenses they still lost $818 million on revenue of $705 million. They cannot continue doing this. You cannot operate at a 100% loss forever.

The Facebook program Instagram copied most of the SnapChat features and has 700 million daily active users. SnapChat only had 178 million in Q3 and that number had only risen 3% for the quarter. SNAP is four times more expensive than Twitter on a price to sales ratio and even Twitter is struggling to succeed.

SNAP has a market cap of $13 billion and it is a failing company. That market cap is going to shrink as the losses continue to pile up. Earnings are Jan 23rd and the odds are very good they will miss estimates again.

Update 1/2/18: The 27-year old founder of Snap Inc hosted a New Years Eve party for employees that cost $4 million with the rapper Drake the headline performer. The news probably helped SNAP shares post a 30 cent gain but investors overall were hostile that he could spend that kind of money with SNAP shares in the tank. Position 1/2/18:
Closed 1/3/18: Short SNAP shares @ $14.69, exit $15.25, -.56 loss.
Alternate position: Long Feb $14 put @ 84 cents, see portfolio graphic for stop loss.

VXX - Volatility Index Futures - ETF Description


Since this is a long-term slow moving ETF position, there will not be daily commentary.

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last five reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16), $12.77 (8/22/17). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

We know from experience that the VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally into year-end we could see a sharp decline in the VXX over the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 million. You have to tell your broker you really want to short it and make them find the shares. Sometimes it takes days or even a week before your broker will find you the shares. Trust me, be persistent and it will be worth the effort.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:

Short VXX shares @ $40.95, see portfolio graphic for stop loss.

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