Option Investor

Daily Newsletter, Wednesday, 1/10/2018

Table of Contents

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

Market Wrap

Uncharacteristic Weakness

by Keene Little

Click here to email Keene Little
We've all become accustomed to a stock market that only knows how to rally and therefore it was unusual to see the indexes gap down this morning. It was only a minor move and the bounce back up could easily lead to additional new highs, but it also might have been a shot across the bow of the USS Bullship as a warning not to proceed any further.

Today's Market Stats

I had to rub my eyes this morning when I first looked at the open and saw the gap down. Surely it must be a mistake -- this market only knows how to gap up. And the gap down was followed by a little more selling (stop run) and by the time the selling finished (all of 20 minutes) SPX had dropped 15 points from Tuesday's close. But the dipsters saw their opportunity, stepped back in and drove the indexes back up for most of the day.

So far the dipsters have only been able to achieve a lower high since the indexes finished in the red, but I'm sure they'll try again. It's been a winning strategy for a long time so why not? But the bears just might get a shot at this market since the bearish pattern and an important timing cycle have been suggesting a possible high of importance could be this week. It's possible Tuesday's high was the final one for this rally but we'll need the next day or two to help answer that question.

This morning's gap down resulted from a selloff in the futures last night, which began after the Asian markets started trading and continued after the European markets opened. There was a rally attempt from the early-morning low but that pre-market low was quickly retested after the regular trading session opened.

The morning retest of the pre-market low then led to a stronger bounce into the afternoon and the Dow and RUT (strange bedfellows since the Dow has been relatively strong while the RUT has been relatively weak) were able to close this morning's gaps before succumbing to a little more selling in the afternoon. A bounce into the close managed to get the RUT back near the flat line while the other indexes closed marginally in the red.

The techs were the weak indexes today but not as a result of any heavy selling in the FAANG stocks. The semiconductor stocks got hit a little harder (SOX finished -1.2%) and that hurt the tech indexes. But the bulls could easily recover today's weakness and a rally Thursday morning could lead to another push higher. Only time will tell how much higher this market can go before taking at least a larger breather.

Today's trading volume was a little heavier than we've seen recently and the market breadth was mixed, which sends a mixed message. There was a lot of churning with both selling and buying and no clear winner. If today's little pullback is followed by more buying Thursday morning we could see another push higher. But if the bounce off this morning's lows is followed by a drop lower then we'd have more convincing evidence that at least a larger pullback is in progress.

Prompting some of the today's weakness resulted from news out of China. The Treasury market sold off this morning (prices gapped down), spiking yields, after China announced that is considering halting its purchases of U.S. Treasuries. Many have been worried about this for some time as China has run up a huge debt (financing projects, paying for programs to keep people busy, etc.) and the fear is that China could halt their Treasury purchases and then start selling in order to free up capital and pay down some of their debt. The US$ also took a hit today for the same reason.

The gap down in Treasury prices was followed by a rally and the 10-year closed the gap by the end of the day. The recovery in Treasury prices probably helped the stock market recover as well so both the bond and stock markets traded in synch today. That could continue and it will be worth watching carefully in the coming weeks.

The worry over China's announcement comes from the worry about what a lack of demand for our Treasuries could mean. And if China starts selling it could cause prices to drop further, which would of course spike yields. Higher interest rates could stall our economy and even drive us into recession (there's worry that the Fed will make that mistake) since, like the Chinese, we are so highly indebted and even more so than at the October 2007 market high. The Fed would like to slowly raise rates but the market could have a different idea than the Fed (it usually does).

If rates do start to accelerate higher, which is not yet clear on the charts, it would make it very difficult for the economy since there's such a huge debt burden by so many businesses and individuals (and of course the state and federal governments). Even dividend-paying stocks would have to compete with higher yields from the safer Treasury bonds. Investors would once again have a choice for yield and could take some money out of the riskier stock market and put it into bonds. That's part of the worry that came from China's announcement so the market will be watching carefully for further developments in this area.

Countering the theory that higher bond yields would hurt the stock market is the idea that selling in the bond market could free up even more money that will rotate into the stock market. While that's certainly a possibility, one which supports the idea that the stock market's melt-up will continue for much longer, I believe higher yields will have more of a negative impact on the stock market. This morning's selling and then bounce by both bonds and stocks suggests we could see them trade in synch again. It will be an interesting development to watch over the next weeks/months.

Other than the China news it was a quiet day, including a lack of important economic reports. This morning we got some export/import price data, wholesale inventories and crude inventories but again, nothing market moving. Most market participants are simply focused on prices and enjoying the bullish run. Very few are looking ahead to see if there's any danger in the road but perhaps they should be.

Bullish sentiment has reached a dangerous level (from a contrarian perspective) and Mom and Pop have finally, literally, bought into the rally. We know the retail traders typically buy the top and sell the bottom so the very large and fast swing into the bullish camp by the public and investment newsletter writers should be a warning sign.

Trump's "the stock market is a bubble" has turned into "I'm great and the stock market is reflecting that." That's not a political statement but more of a statement about how everyone believes in the current uptrend and how it can only go higher. Right now we only have warning signs but of course price is king and the king has been happy with higher prices. Whether or not the trend is in trouble will be known from the charts so they're what we'll look to for our clues.

The bullish sprint continues and the streak of days without at least a 3% pullback continues, now at 432 days (the Trump rally that started November 4, 2016). Trump is now the market forecaster-in-chief and is calling for Dow 30,000 next. It's no wonder the moms and pops are getting themselves fully invested.

I'm going to start tonight's chart review with a top-down look at the RUT since I like it as our canary index. I've been watching and reporting on the RUT almost exclusively for the past week because it will be the index that tells us whether or not the uptrend will remain intact or instead provides an early warning when the trend breaks. The canary fell off its perch this morning but it then worked hard to climb back up on it. It's looking a little woozy from hypoxia but could take at least a few more big breaths before succumbing to the lack of oxygen from the high altitude.

Russell-2000, RUT, Weekly chart

A trend line along the highs from December 2016 - October 2017, currently near 1560, has been acting as resistance since the end of November and it's essentially where the RUT closed today. So far we have a little star doji for the week and it could be just an indecision candlestick or it will turn into the middle candle of a 3-candle reversal pattern (with a red candle next week). It's too early to tell but with the bearish divergence over the past year it would be a tough call to say it's bullish here. I think the higher-odds play here is to short it and keep your stop tight -- just above Tuesday's high at 1565.58.

Russell-2000, RUT, Daily chart

The trend line resistance mentioned above is shown in purple on the daily chart and you can see how the RUT has been unable to break through it. The daily candlesticks show a fight to keep from selling off but I think the churning near resistance, along with the bearish divergence, is a bearish signal that it's getting ready to break down. But because it's looking bearish, a sustained rally above 1565 would likely trigger a lot of stops and the short covering could help propel the RUT up to the trend line along the highs from October-December, which will be nearing 1600 by the end of opex week (January 19th).

Key Levels for RUT:
- bullish above 1565
- bearish below 1535

Russell-2000, RUT, 60-min chart

A short-term uptrend line for the RUT, from December 14-29, is currently near 1558 and it held on a closing basis today. A drop below 1558 would be a bearish heads up and it would look more bearish below this morning's low at 1551 since that would be a confirmed break of price-level support near 1552 and its uptrend line from November-December, currently near 1550. A drop below Monday's low at 1548 would confirm a top is in place. In the meantime I see the potential for at least one more pop up to a minor new high to complete a rising wedge pattern for the leg up from December 29th.

S&P 500, SPX, Daily chart

On January 5th SPX made a bullish break above its trend line along the highs from April 2016 - March 2017 and it also broke above a shorter-term trend line along the highs from September-October. This morning's low was a back-test of the line of the longer-term trend line and has so far produced a bullish kiss goodbye off that line. It then closed back above the short-term trend line after this morning's break. This looks bullish and if nothing else it should keep the bears away until it's at least proven to be a head-fake bounce back up today, starting with a drop below this morning's low at 2733.

Key Levels for SPX:
- bullish above 2733
- bearish below 2695

In last week's wrap I had shown a (squished) copy of my Gann Square of 9 chart and showed why 2721-2123 were important levels to watch. The next day (Thursday) SPX blew through those levels, which told me the market didn't think much about them. So that opened the door to the next important level on the SOf9 chart, which is 2760-2763. Tuesday's high was 2759 so was that close enough for government work?

I don't have a squished chart to show you tonight but I had mentioned a red vector that goes through 768 and 1576, which was the October 2002 low and October 2007 high, respectively. Opposite those numbers on the chart is 2763 and the high so far (yesterday's) is 2759. Tomorrow, January 11th, is where 2760 points to and when there's a price/time alignment Gann would often say it's far more important than just price. Maybe a test of Tuesday's high on Thursday?

The Gann Sof9 levels could also be coinciding with a time cycle that the market has responded to since the 2009 low. Again, Gann was more in favor of time than price and this week is the completion of the next 23-week period in a 23-week cycle that has typically resulted in a market turn (usually a pullback). There's also an Earth-Sun-Venus alignment this week but I won't go all astrological woohoo on you.

SPX weekly chart with 23-week cycle since 2009

And here's one more numbers thing to throw at you, this from Jeff Cooper, who often quotes Gann's work. This Friday is the 45th anniversary of the 1973 high. So what you say. That high led to the greatest downturn since the Great Depression and the 1973 high was 45 years from the 1929 high. Something to think about.

Quoting Gann, "Thus, I affirm, every class of phenomena, whether in nature or in the stock market, must be subject to the universal law of causation and harmony. Every effect must have an adequate cause. If we wish to avert failure in speculation we must deal with causes. Everything in existence is based on exact proportion and perfect relationship. There is no chance in nature, because mathematical principles of the highest order lie at the foundation of all things."

Will this week be a high of significance? We of course can't know that at this time but if nothing else, Gann's work should have you pausing to think about what it could mean here. I often say price is king but Gann would argue with me and say time is king. And now back to our regularly scheduled charts

Dow Industrials, INDU, Daily chart

The Dow has rallied up to the top of a possible rising wedge for it rally from November and if it's to complete a 5-wave move it can't go much higher. Since the 3rd wave in the rally from November, as I have it counted, is shorter than the 1st wave the 5th wave must be shorter than the 3rd wave, which means it can't rally above 25483. Ideally, from an EW perspective, Tuesday's high was it and now down we go. Otherwise the wave count will have to be redone and that could open it up to much higher prices (which would say the melt-up could accelerate higher). So Mr. Bear, are you feeling lucky here?

Key Levels for DOW:
- bullish above 25,440
- bearish below 24,876

Nasdaq-100, COMPQ, Daily chart

Like SPX, the Nasdaq made a bullish break last week above its trend line along the highs from April 2016 - March 2017 and above its shorter-term trend line along the highs from September-October. This morning's low was a back-test of its longer-term trend line and the bounce back up looks bullish. It only managed to close on the shorter-term trend line so it remains to be seen whether or not the bulls can recapture that line on Thursday, which will be only marginally above today's close. A better test for the bulls will be better than closing this morning's gap, near 7164.

Key Levels for COMPQ:
- bullish above 7182
- bearish below 7000

10-year Yield, TNX, Weekly chart

The 10-year yield has made it back up near its December 2016 and March 2017 highs near 2.62%, with a high so far (this morning's) at 2.595. TNX would turn more bullish (bearish for bond prices) with a rally above 2.62 but I'm not convinced yet that we'll see that, or that it will be bullish if it happens.

There's a corrective bounce pattern for the rally from September that drive TNX up to 2.75-2.78 and still be part of what will be a larger pattern to the downside. But a little more short-term oriented says a rally above 2.62 would be potentially bullish. However, at the moment we're seeing a possible double top with bearish divergence so we'll have to see whether or not TNX can maintain its upward momentum.

KBW Bank index, BKX, Daily chart

Banks outperformed today on the theory that higher yields would help the banks' bottom line. When yields fell back down from this morning's high it wasn't matched by a pullback in the banks but there was an afternoon pullback. We'll have to see if the banks can hold up if yields do reverse back down.

BKX ran up to the top of its parallel up-channel from September, did a little throw-over and then dropped back inside the channel. That can be interpreted as a sell signal but it would become a stronger signal if it continues to drop back down on Thursday. There's bearish divergence on both the daily and weekly charts, which at the very least suggests caution by the bulls. BKX would be more bullish with a sustained rally above 113.

U.S. Dollar contract, DX, Weekly chart

Taking a step back from my usual daily chart of the US$, it's good to see where it is in the larger pattern. The reason I keep thinking we might see a drop down to the $90 area is because of the large megaphone pattern that it might be in since 2015, the bottom of which is currently near 89.80. If the dollar continues to slide down the top of its broken down-channel we could see it reach the bottom of its megaphone by mid-February.

The bullish interpretation of its pattern calls for the resumption of the rally off its September low. The pullback from November is only a 3-wave move so far and could be an a-b-c pullback correction, which achieved two equal legs down at 91.57 last week, and now we'll see it rally from here. Whether from here or after it drops a little lower, I think we're looking for a rally in the dollar this year.

Gold continuous contract, GC, Weekly chart

Gold sits in the middle of its price range since last September and in fact, as can be seen on its weekly chart below, in the middle of its range since the July 2016 high. The big choppy sideways consolidation could go either way and there's not a lot to help us figure out the odds of one way vs. the other. It remains bullish with the strong rally off the December 12th low since that was a successful back-test of its broken downtrend line from 2011-2016. But that was the 2nd back-test and without bullish divergence so I'm not sure it's that trustworthy.

The daily oscillators are overbought and turning down while the weekly oscillators have room to "grow." That's a recipe for more chop and consolidation so at this point I'm not expecting much in the next few weeks. That could change quickly and I'll keep updating the charts.

Oil continuous contract, CL, Weekly chart

Oil is about to make a bullish breakout from a bearish rising wedge or lese this week's rally is completing a little throw-over above the top of the wedge and will soon collapse back inside. A drop back below the January 4th high at 62.21 would create a sell signal. But if oil's rally continues from here we could see a continuation of the rally to the $85 area. That would put the economy into a tight squeeze and bears a close watch here.

Economic reports

Thursday morning's economic reports, like this morning's, will likely not be market moving. We'll get some inflation data with the PPI numbers, followed by CPI numbers on Friday, but no big swings are expected.


The bears put a tiny little dent in the bull's armor today and we'll soon find out if he only angered the bull or if instead the dent is pushing against a major artery and causes the bull some more pain. The indexes have once again run up to potentially important price levels and as discussed above, there are some important timing reasons why this week could be an important turn week. We've rallied into the turn window and therefore the expectation is that the market will turn down.

But it's important to know that sometimes a turn window results in an acceleration of the current move and not a reversal. That would mean the current melt-up could actually pick up speed to the upside and go truly parabolic on us. Higher prices beget higher prices until the music stops and then look out below. I can't know what will happen from here but the setup is for a reversal back down and if the indexes drop below this morning's lows I think that would be a strong clue that an important high could already be in place.

Considering the melt-up potential it's not a good time to be thinking aggressively about the short side. The upside risk is too great. But I do like the potential for a profitable trade on the short side as long as Tuesday's highs are not exceeded (they therefore make a good stop level if you try a short play).

While there remains significant upside potential I think that's a risky bet. Just as it's risky to trade an expected market crash, it's just as risky betting on a continuation of a melt-up. Stay long for as long as the market confirms new highs but hedge your positions just in case we wake up to a surprise gap down and a no-bid market. Trying to sell/hedge at a time like that will cost you big time. Bottom line for both sides is to trade cautiously, if at all, while we wait for some sanity to return.

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

New Plays

Strong Holiday Sales

by Jim Brown

Click here to email Jim Brown
Editor's Note

The 2017 holiday shopping season was very strong for several retailers. The sector is rebounding on high expectations ahead of earnings.


JCP - JC Penny Company - Company Profile

J. C. Penney Company, Inc., through its subsidiary J. C. Penney Corporation, Inc., sells merchandise through department stores. The company sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products, home furnishings, and appliances, as well as provides various services, including styling salon, optical, portrait photography, and custom decorating. As of November 10, 2017, it operated approximately 874 department stores in the United States and Puerto Rico. The company also sells its products through its Website, jcpenney.com. J. C. Penney Company, Inc. was founded in 1902 and is based in Plano, Texas. Company description from FinViz.com.

This is going to be a short play description. JCP had been left for dead as the next retailer to disappear after Sears because they are both anchor tenants in dying malls across America. A funny thing happened on the way to bankruptcy court. JCP actually began to recover.

The company raised guidance last week saying same store sales rose 3.4% thanks to strong demand for home goods, beauty products and jewelry. The company said their ecommerce sales rose double digits. They reaffirmed their full year earnings forecast and the CFO warned Sears, "we are coming after your appliance business." That is pretty cocky and suggests JCP is a long way from dead.

Expected earnings Feb 9th.

Shares are suddenly recovering and the outlook has improved significantly.

The best thing about this position is that the May option is very cheap since investors have not really caught on to the recovery yet. We can slip in and take a position and hold the option over earnings and we could have a big long term winner.

Buy JCP shares, currently $3.97, initial stop loss $3.35.
Alternate position: Buy May $4 call, currently 59 cents. No stop loss.


No New Bearish Plays

In Play Updates and Reviews

Close but Not Quite

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell's recovered from the 8-point drop at the open but could not close positive. The index closed with a 0.29 fractional loss but it could not get back to positive territory. The Dow recovered from -128 point loss to close down -16 and the Nasdaq recovered from a -55 point drop to close down -10 points. This was a bullish day. The markets had a good opportunity to take profits but investors bought the dip.

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

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

BB - Blackberry Ltd - Company Profile


No specific news. Sharp drop with the market at the open and did not recover.

Original Trade Description: January 8th.

BlackBerry Limited operates as security software and services company in securing, connecting, and mobilizing enterprises worldwide. The company operates in three segments: Software & Services, Mobility Solutions, and Service Access Fees (SAF). The Software & Services segment offers enterprise software and services, including mobile-first security, productivity, collaboration, and end-point management solutions for the Enterprise of Things through the BlackBerry Secure platform; BlackBerry technology solutions, such as BlackBerry QNX, Certicom, Paratek, BlackBerry Radar, and intellectual property and licensing; AtHoc, which provides secure, networked crisis communications solutions; SecuSmart that offers secure voice and text messaging solutions with encryption and anti-eavesdropping facilities; licensing and services related to BlackBerry Messenger; and cybersecurity consulting services and tools. The Mobility Solutions segment engages in the development and licensing of secure device software and the outsourcing to partners of design, manufacturing, sales, and customer support for BlackBerry-branded handsets. This segment also develops software updates for its legacy BlackBerry 10 platform, and delivers BlackBerry productivity applications to Android smartphone users via the Google Play store; and sells its DTEK60, DTEK50, Priv, Leap, and Passport smartphones and smartphone accessories, as well as offers non-warranty repair services. The SAF segment consists of operations related to subscribers using mobile devices with its legacy BlackBerry 7 and prior operating systems. The company was formerly known as Research In Motion Limited and changed its name to BlackBerry Limited in July 2013. BlackBerry Limited was founded in 1984 and is headquartered in Waterloo, Canada. Company description from FinViz.com

Expected earnings March 21st.

BlackBerry started out as a smartphone manufacturer under the name Research in Motion (RIMM). Over the years they failed to keep pace with Apple and Android and the BlackBerry phones are now just a niche market and they contract with another company to have them made.

BlackBerry has evolved into a software and services company with security software, mobility solutions, and dozens of other categories. The company is now the largest provider of automobile operating systems with tens of millions of cars using their QNX software.

They are using their experience in auto OS to build the next generation of autonomous vehicles. They announced last week that Baidu had chosen them to help develop self-driving technology. Baidu said "by integrating the QNX OS with the Apollo platform, we will enable carmakers to leap from prototype to production systems." BlackBerry radar, an asset tracking solution, is already available at more than 2,800 heavy-duty truck dealerships across North America. This software and equipment tracks trucks, loads, trailers, containers, heavy machinery and other transportation assets. Trucking companies and shippers can track the location of their cargo and vehicles in real time all the time.

Last week they reported earnings of 3 cents that beat estimates for a breakeven quarter. Revenues of $226 million beat estimates for $212 million. The company guided for the full year for revenue of $920-$950 million with software revenue up as much as 15%. This was the second quarter of positive earnings surprises after a long drought of weak results. The company promised positive EPS and cash flow for the future.

There are rumors in the market that BlackBerry could suddenly become an acquisition target because of their small size of $8 billion market cap and vast array of growing software services. Shares spiked to a new 4-year high on the earnings and guidance and the stock is suddenly hot once again. This is not some new fad company. There is history and there is a remarkable turnaround in progress.

I am going out to June with the option to get past the March earnings. There is likely to be some profit taking from the recent gains, so we need to buy some time.

I am going to recommend the stock but I am adding a March put, just in case the rebound fails. I fully expect the stock to be significantly higher a couple months from now but I am recommending a 50 cent insurance policy.

Position 1/9/18:
Long BB shares @ $14.22, see portfolio graphic for stop loss.
Long Mar $13 put @ 50 cents, see portfolio graphic for stop loss.

Alternate position: Long June $15 call @ $1.30, 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.

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.

IMMU - Immunomedics Inc - Company Profile


No specific news.

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.

Update 1/8/18: Royalty Pharma bought $75 million of IMMU shares at $17.15 per share, 15% over the current price. They also paid $175 million for the rights to market Sacituzumab Govitecan (IMMU-132) on a global basis. They will pay a royalty of 4.15% on a step down basis until sales reach $6 billion annually then the rate will be 1.75%. The $250 million in cash will allow IMMU to fund its next phase of growth with expenses covered well into 2020. Shares declined slightly since the stock sale added to the shares outstanding.

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.

TEVA - Teva Pharmaceutical - Company Profile


Teva said it had reached an agreement with employees regarding closing two plants in Israel. Workers had been protesting since the closures were announced to occur by the end of 2019. Teva made some concessions to the workers and they are returning to work on Thursday. The closures are part of a restructuring that will save Teva $3 billion a year in expenses, which are currently about $16.1 billion a year. In other news directors agreed to cut their compensation in half. Shares rallied 3.5%.

Original Trade Description: January 6th.

Teva Pharmaceutical Industries Limited develops, manufactures, markets, and distributes generic medicines and a portfolio of specialty medicines worldwide. It operates through two segments, Generic Medicines and Specialty Medicines. The Generic Medicines segment offers sterile products, hormones, narcotics, high-potency drugs, and cytotoxic substances in various dosage forms, including tablets, capsules, injectables, inhalants, liquids, ointments, and creams. This segment also develops, manufactures, and sells active pharmaceutical ingredients. The Specialty Medicines segment provides branded specialty medicines for use in central nervous system and respiratory indications, as well as the women's health, oncology, and other specialty businesses. Its products in the central nervous system area comprise Copaxone for multiple sclerosis; Azilect for the treatment of Parkinson's disease; and Nuvigil for the treatment of excessive sleepiness associated with narcolepsy and certain other disorders. This segment's products in the respiratory market include ProAir, ProAir Respiclick, QVAR, Duoresp Spiromax, Qnasl, Braltus, Cinqair/Cinqaero, and Aerivio Spiromax for the treatment of asthma and chronic obstructive pulmonary disease, as well as Treanda/Bendeka, Granix, Trisenox, Lonquex, and Tevagrastim/Ratiograstim products in the oncology market. This segment also offers a portfolio of products in the women's health category, which includes ParaGard, Plan B One-Step, and OTC/Rx, as well as other products. The company has collaboration arrangements with Attenukine, Procter & Gamble Company, and Regeneron Pharmaceuticals, Inc. Teva Pharmaceutical Industries Limited was founded in 1901 and is headquartered in Petach Tikva, Israel. Company description from FinViz.com

Expected earnings Feb 1st.

Teva is the largest generic drug manufacturer in the world. Unfortunately, that market place is becoming very competitive and the company has to reinvent itself to return to a profitable growth profile.

Fortunately, the company is taking action. They have been selling off noncore assets to pay down debt. They just installed a new CEO, Kare Schultz, and he took immediate action. On his second day on the job, he restructured the management team and said he would present a major restructuring plan in mid December. In early December the stock jumped to a two-month high after news broke they were considering cutting 10,000 of their 57,000 workers in an effort to save $1.5-$2.0 billion a year.

Teva announced in mid December they were cutting 14,000 workers from their 56,000-person workforce. They expect to reduce costs by $3 billion by the end of 2019, with $1.5 billion in cost reductions in 2018. The company also suspended its dividend for ordinary shares and will eliminate bonuses for 2017. They are planning on closing a "significant number" of R&D facilities, offices and other locations around the world. They are going to consolidate offices in the US from 7 locations to only one campus. Teva incurred a lot of debt when they purchased the Allergan generic pharmaceuticals business for $40 billion last year. That was poorly timed just as generic prices were crashing. The company is also reviewing its asset base in order to sell noncore assets. Apparently, the new CEO, Kare Schultz, is determined to turn the company around sooner rather than later. Shares are bouncing back from a 17-year low in November. Shares were upgraded by Morgan Stanley, Goldman Sachs and Credit Suisse after the restructuring news.

Shares fell in early November after the company cut full year guidance for the third time and said they may sell shares to reduce their debt. In early December, they pulled back on the share sale idea saying they have no plans for a secondary offering in the near future.

I believe the worst is over. The reaction to the news over the last four months has been horrendous. Shares had fallen from $32 to $10. Since the new CEO took control, they have rebounded back to $19.

The rebound from the restructuring news lifted Teva back to $19 and just below current resistance. Thursday closed at a 5 month high but Friday saw a slight fade. I expect Teva shares to break through the current resistance and begin to recapture some of their losses.

Update 1/8: Teva announced an agreement with Alder BioPharma in the field of anti-CGRP based therapy. This validated Teva's EU patent #1957106 B1 in relation to anti-calcitonin gene-related peptide (CGRP) antibodies and methods of use. Alder will receive an non-exclusive license to Teva's CGP portfolio and will manufacture and commercialize Eptinezumab globally. Alder will cancel its patent litigation and make a one-time payment of $25 million to Teva. A second $25 million payment will be made on approval of a BLA for that drug. Once the drug is marketed Alder will pay $75 million when sales reach $1 billion and $75 million when sales reach $2 billion annually. They will also pay royalty payments of 5% to 7% to Teva. This was a win for Teva.

Position 1/8/17:
Long TEVA shares @ $19.31, see portfolio graphic for stop loss.
Alternate position: Long March $20 call @ $1.32, see portfolio graphic for stop loss.

YRCW - YRC Worldwide - Company Profile


No specific news.

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

AOBC - American Outdoor Brands - Company Profile


No specific news.

Original Trade Description: December 30th.

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.

Earnings March 8th.

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.

Update 1/4/18: Firearms background checks fell -8.4% in 2017, the first year over year decline in 15 years. Checks rose from 8.45 million in 2002 to 27.54 million in 2016. AOBC has to deal with this sharp decline in volume.

Position 1/4/18:
Short AOBC shares @ $12.14, see portfolio graphic for stop loss.
Alternate position: Long March $10 put at 35 cents.
No stop loss and we will hold over earnings.

VXX - Volatility Index Futures - ETF Description


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

Original Trade Description: September 18th.

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

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

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

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

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

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

Position 9/19/17:

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

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

subscribe now