Option Investor

Daily Newsletter, Wednesday, 1/17/2018

Table of Contents

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

Market Wrap

A Dip To Refresh

by Keene Little

Click here to email Keene Little
Tuesday's gap up and then strong reversal back down turned into another one-day selloff that the dipsters couldn't resist. Starting with another gap up this morning, the buyers did some follow-through buying and drove the indexes back up near yesterday's highs or made new highs, like the Dow. The Teflon bulls continue to shed bear attacks like water off a duck's back.

Today's Market Stats

Not to be dissuaded from their belief in the bulls, the dipsters piled in today to pick up some perceived bargains after the selloff on Tuesday. Another 1-day selloff led to a resumption of the rally in the land of micro pullbacks. The dipsters have had a winning strategy for a long time and as long as it keeps working, like off yesterday's low, they'll keep doing it.

There wasn't much in the way of news to prompt either the selling or the buying and there wasn't much attention paid to this morning's economic reports either. This is a market that's now driven primarily by momentum and until that momentum peters out there's no reason for the bears to fight it. Sit back and relax and enjoy the ride. Well, don't relax too much because there are some indications that the rally's end of life could be close, at least for something more than a 1-day pullback.

Last Thursday and Friday, when the market rallied strong, the VIX also rallied. I said to myself, "Self, that's not normal." When the market gapped up big Tuesday morning the VIX also gapped up. Once again Self wondered if this was a strong warning sign. It was of course a caution flag on the race track that told the drivers to slow down and be cautious. Some big players were selling/hedging the rally and that continued today. The market was up big but the VIX again finished in the green. A strong market rally with a rising VIX is a time for concern, not exuberant bullishness.

Another area of concern is in fact the level of exuberant bullishness. The latest Investors Intelligence report shows bulls at 66.7%, up from 64.4%, which equals the high reading on November 17th. The market held up through the Thanksgiving holiday and peaked on November 28th, which led to a decent pullback into early December. The bullish reading is also the highest since April 1986 so we're clearly talking nosebleed territory here.

The Investors Intelligence report show bears now at 12.7%, which is the lowest reading since April 1986 as well. That has created an abnormally high spread of nearly 52 points between the bulls and bears and that qualifies as a boat-tipping spread.

The Fear & Greed index is high, finishing at 75 today and down from near 80 last Friday. It's not as high as we've seen in the recent past but as can be seen on the chart below, when the F&G index gets to 80 or above it's time to be careful. The vertical lines show the market often only pulled back slightly, if at all, but some of the larger corrections occurred after this index showed excessive bullishness. This in combination with a very high bullish reading in the Investors Intelligence report is a clear warning sign. We'll of course only know in hindsight whether or not it will matter this time.

CNN Fear & Greed index vs. S&P 500

Moving to a review of the charts, last week I started with a top-down look at the RUT and this week I'll start with the Nasdaq since the tech indexes are also important to watch for clues for how long this rally could continue.

Nasdaq Composite index, COMPQ, Weekly chart

The Nasdaq's rally has it near the top of a parallel up-channel from 2010, currently near 7400 and about 70 points above Tuesday's high and 100 points above today's close. So there's certainly more upside potential if that's where it's headed. The lack of bearish divergence on the weekly chart suggests there could be higher prices as well.

There's a rising wedge shape for its rally from February 2016 and last week's rally had it popping above the top of the wedge, which is the trend line along the highs from April 2016 - June 2017 and it's currently near 7225. This trend line was used for support to stop Tuesday's decline and therefore the Nasdaq remains bullish above that level. From a weekly perspective the Naz doesn't break its uptrend until it drops below the bottom of its rising wedge, which is the uptrend line from June 2016 - August 2017 and currently near 6880, about 400 points lower.

Nasdaq Composite index, COMPQ, Daily chart

There are several short- and longer-term trend lines that are coming together and currently at about 7200-7280 and rallying above this zone last week was a bullish move. You can see on the daily chart how it's fighting with the trend line along the highs from March 2014 - July 2015, near 7280, and how it held above the April 2016 - June 2017 trend line yesterday and today. If the Naz drops below 7200 I'd become a little more worried about the rally but in reality the bears need to see a drop below the December 18th high before the uptrend could be declared complete.

Key Levels for COMPQ:
- bullish above 7330
- bearish below 7003

Nasdaq Composite index, COMPQ, 60-min chart

Getting in a little closer, the 60-min chart shows an idea for how this rally might finish by next week. The bold green projection is based on a wave pattern for the leg up from December 6th. A 4th wave correction off Tuesday morning's high would look better with another leg down to create a larger a-b-c pullback, maybe to 7167 for a 38% retracement of the 3rd wave (the leg up from December 29th). From there another rally would complete the 5th wave and the 7400 area would be the upside target. This is obviously speculation but something to watch for in the coming week.

S&P 500, SPX, Daily chart

With last Friday's rally SPX climbed above the trend line along the highs from July 2016 - March 2017 and then used that line for support with Tuesday's pullback. At the same level, near 2768, was its short-term uptrend line from December 29th so there was double support at that level. Once it looked like that was going to hold it was the green light for the buyers to come back in.

Today's high was 50 cents shy of Tuesday's high so we'll see if they continue to make new all-time highs. I see the potential for a sharp pullback before pressing higher but in either case, another rally up to the top of a narrow up-channel from December 29th could see SPX up near 2840 before a larger pullback/decline. For now, until I see evidence to the contrary, it's looking like we could see the rally continue into February, just not in a straight line.

Key Levels for SPX:
- stay bullish above 2768
- bearish below 2713

Dow Industrials, INDU, Weekly chart

Does the phrase "What goes up must come down" apply to the Dow? It might not if the Dow has achieved escape velocity, otherwise it might not be pretty after this rally ends. This week has added to the portion of the rally that has gone vertical and it's clearly in a parabolic climb, as evidenced by the increasing steepness of its uptrend lines. The steepest one on the weekly chart is from August and on the daily chart they've continued to get steeper from there.

The scary thing is that parabolic rallies tend to return to their starting point, which I'll argue is the February 2016 low. That's when the rally's uptrend lines started steepening. That could mean a drop down to the 16K area or maybe price-level support at 15700. A 10K (-38%) race to that level could challenge even the strongest of the buy-and-holders. I'm not making a prediction that the Dow will make it down to that level (I actually think it will drop lower in the next bear market) but it should be considered by those who want to hold through the next "correction."

Key Levels for DOW:
- bullish to the moon with the achievement of escape velocity
- bearish below 24,700 (December 29th low)

Russell-2000, RUT, Daily chart

Last Friday and again Tuesday morning the RUT poked above the top of its rising wedge for the rally from August (the trend line along the highs from October-December), currently near 1606, but was unable to close above it. Tuesday's selloff left a throw-over and the reversal back down created a sell signal, which can only be negated with a rally to a new high (above 1604). But even then it could still have trouble breaking above the top of its rising wedge.

There is a parallel up-channel for the leg up from December 14th, the top of which will be near 1609 by the end of the week, so there's slightly more upside potential the RUT is once again showing relative weakness after its dash higher last week. Bears need to respect the upside while bulls should be fully aware of the potential to simply start dropping lower from here.

Key Levels for RUT:
- stay bullish above 1568
- bearish below 1535

10-year Yield, TNX, Weekly chart

Since early November we've seen bond yields chop their way higher but the price pattern does not look bullish. Even as TNX now tests its December 2016 and March 2017 highs it's doing so with a significant bearish divergence on its weekly MACD. This is not the stuff of a new rally but instead looks like it will result in a double top. A stronger rally above 2.62% would look a little more bullish (bearish for price) and I do see upside potential to the 2.75-2.78 area but only if it can get above 2.62 and stay above that level. In the meantime the more bearish pattern for yields calls for a strong decline below 2%. Interestingly, a move down in Treasury yields (rally in prices) could coincide with a stronger selloff in the stock market (flight to safety?).

High Yield Corporate Bond ETF vs. S&P 500, Weekly chart

The chart below is the market's version of the Hawaiian alert of an inbound ballistic missile. Strange that a missile from N. Korea would supposedly take 37 minutes to hit Hawaii and the alert lasted 38 minutes. But I digress. While SPX is in the ballistic phase of its rally we see HYG unable to get through its broken 50- and 200-week MAs, currently at 87.89 and 87.75. The lack of new highs since last July while the stock market goes parabolic is a MAJOR warning sign since it shows a reluctance to take on risk in the corporate bond market (smarter investors) and that tells us the stock market rally is momentum driven and it will end badly.

Transportation Index, TRAN, Weekly chart

The transports have been in full agreement with the Dow and that has kept things bullish. But I can't help but wonder if this week's weakness portends a more challenging time for the bulls. There's an EW count and pattern that supports the idea that TRAN's rally completed with Tuesday morning's high. The selloff from there leaves a failure, so far, at the trend line along the highs from March 2016 - March 2017 (the 1st and 3rd wave highs in the rally from January 2016. The 5th wave of the rally achieved equality with the 1st wave at 11131 and therefore the pieces are in place for a top. What we don't have yet is any kind of proof from price action that a top is in place, although today's consolidation while the Dow zoom climbed higher is a warning sign and says the TRAN is ready to continue lower.

U.S. Dollar contract, DX, Weekly chart

The US$ might finally be ready to rally after declining for a year. Yesterday, in the after-hours session, the dollar made a low at 89.96, missing a price projection at 89.94 by 2 cents (the projection was based on the wave pattern for the leg down from November). It also stopped a little short of the trend line along the lows from 2015-2016, which fits as the bottom of an expanding triangle. I've been showing this triangle pattern for the past two years and I think it's still in play. It's a bearish topping pattern but I think it needs one more leg up to complete it, which means a year-long rally before the dollar bears could be correct.

If the dollar does rally back up to the top of the expanding triangle it could reach the $107 area (+19%) before setting up a stronger decline. Today's low was a test of yesterday's low and it has since shot higher, including into the after-hours session. The daily candle is a bullish engulfing pattern (outside up day) and that fits as a key reversal day. The rally should continue if so and that would leave a strong bullish divergence on the weekly chart. Until we get proof of a reversal I do see the potential for a drop down to its uptrend line from 2011-2014, near 87.50, before setting up the next rally leg.

Gold continuous contract, GC, Weekly chart

I'm not getting any warm and fuzzy feelings about gold's bullish potential here. I am feeling warm and fuzzy from the gold bears starting to crowd near me. Gold has had a corrective pattern to its bounce since its December 2016 low and it's been difficult for me to turn bullish. If it can get above 1381 resistance and hold above that level I'd feel more bullish about its prospects. But if the dollar starts to rally it could put extra downward pressure on gold.

Oil continuous contract, CL, Weekly chart

Oil's rally has stalled over the past week and the daily oscillators are starting to turn down from overbought as the price pattern puts in what looks like a small rounding top. I continue to see upside potential to the $85 area but bullish sentiment on oil is now running high and I see a big risk to the downside, especially if oil drops back below its trend line along the highs from June 2016 - January 2017, currently near 62.50. Oil stays bullish above 63.70 but short term I'm seeing evidence that suggests it's rolling back over.

Economic reports

Thursday's economic reports include the usual unemployment data as well as housing starts and permits (no changes expected) and the Philly Fed index (slight improvement is expected). Friday morning we'll get the Michigan Sentiment number, which is expected to show a small improvement. Nothing market moving.


The stock market's rally has been extremely strong and in fact one could argue too strong. A rally that goes parabolic tends to suck in the remaining wannabe bulls while spitting out the last holdout bears. The combination then soon leaves the market with a loss of buyers and it's that simple fact that often causes a reversal. Not some news event, although that can be a trigger, but usually just because the market exhausts its buying fuel. The rocket flames out and then returns to earth. We're waiting for the flameout.

Parabolic rallies can go a lot further than most think possible and the current melt-up has the potential to go much higher. The advance-decline line might be weakening a little but it remains fully supportive of the rally. What few bears are left in this market, it would be wise for them to stay away -- stabbing at highs to get short has been a good way to die from a thousand paper cuts as you try, stop out, try, stop out... It's what has helped fuel the rally.

Once we see an impulsive decline that breaks support levels then we'll know to start looking to short the bounces. But buying the dips has been the winning strategy and that could continue to be true for a while longer. Just don't be complacent about the upside since you are joined by the majority now. Extreme bullish sentiment in a parabolic rally is a recipe for a surprise selloff and it could be a painful one. Trade carefully and know your risks.

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

Don't Play in Traffic

by Jim Brown

Click here to email Jim Brown
Editor's Note

The market has lost touch with reality. It is being led higher by a couple dozen stocks and the volatility we have seen this week is not normal. Back to back days of 300-point reversals is not normal. This kind of volatility is commonly seen at market tops. I have no idea if a top is near but this is a warning signal. Boeing has added almost 400 Dow points in the last 8 days. This rocket ship is going to crash. It is only a matter of time and it will take the Dow down with it. Several other Dow stocks have also been packing on the points as though there was nothing to fear in the future. Analysts are starting to compare the Dow to Bitcoin because of its incessant rise. We know what happened to Bitcoin.

The S&P is up 5% for the year with the median S&P forecast for yearend at 2,975. Of 18 analysts surveyed, nine analysts are at 3,000 or higher, eight are at 2,850 or lower. That means the S&P is less than 50 points from the year-end targets of half the analysts in the survey. Wells Fargo said the market is in the early stages of the silly season where euphoria is rampant. Katie Stockman at BTIG warned today that momentum will slow in the coming sessions and there is likely to be a 4-5% pullback as we enter February. My personal target date is expiration week.

I do not believe we should just keep piling on new positions so the next 300 point drop can stop them all out. The futures were up sharply in the early session but have declined to flat. They could rebound again by morning but that would just mean another crazy day.

Do not forget that we could see a government shutdown at midnight on Friday. Democrats have drawn a line in the sand saying "no continuing resolution" to extend the deadline again for another 30 days. While this could still happen we should not be putting real money to work ahead of that event.

There is always another day to trade if you have money in your account.

This is going to end badly.



No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews


by Jim Brown

Click here to email Jim Brown

Editors Note:

The huge reversal from Tuesday was followed by an even larger reversal today. The major indexes rebounded strongly with the Dow closing over 26,100 and a new record high with a 323 point gain. The Nasdaq and S&P also closed at highs but the Russell was the laggard and failed to return to Tuesday's high close.

The markets have lost touch with reality. Investors are buying anything with momentum on fear of missing out. (FOMO) I believe it is dangerous to enter new positions in this market.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

ALDR - Alder BioPharma
The long position was stopped at $16.25.

YRCW - YRC Worldwide
The long stock position was closed at the open.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

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

ALDR - Alder BioPharmaceuticals - Company Profile


No specific news. Shares broke below short term support to stop us out.

Original Trade Description: January 13th.

Alder BioPharmaceuticals, Inc., a clinical-stage biopharmaceutical company, discovers, develops, and commercializes therapeutic antibodies in the United States, Australia, and Ireland. The company??s lead product candidate includes ALD403, an antibody, which is in Phase II clinical trial to target calcitonin gene-related peptide for the prevention of migraine. It also develops ALD1910, a genetically engineered monoclonal antibody that is in preclinical study for the treatment of migraine; and Clazakizumab, an antibody, which has been completed Phase IIb clinical trial that inhibits the pro-inflammatory cytokine interleukin-6 for the treatment of rheumatoid and psoriatic arthritis. In addition, the company has preclinical programs in the discovery phase for various indications. Alder BioPharmaceuticals, Inc. was incorporated in 2002 and is headquartered in Bothell, Washington. Company description from FinViz.com.

Alder just reported phase III results for Eptinezumab for the treatment of migraines. The patients had an average of 16 migraine episodes per month. After treatment with Eptinezumab, migraines decreased 50% on day one and 15% of the patients reported zero incidents for the entire 12 weeks of the trial. While the endpoint of eliminating migraines for everyone was not met, everyone did receive relief while some were cured. This means the drug will be approved and could become very profitable.

In addition, Alder settled its patent dispute with Teva over the drug in an EU patent case. Under the terms of the settlement Alder will withdraw its appeal, make a one time payment of $25 million to Teva. They will make a second $25 million payment on approval of a biologics license application for the drug. Following the commercial launch of the drug they will pay an additional $75 million when sales reach $1 billion and another $75 million at the $2 billion level. They will also pay royalties to Teva of 5% to 7%. This also gives Alder access to Teva's patent portfolio and a clear path to commercialize the drug on a global basis.

The company has secured private financing of $250 million to fund the payments to Teva, the drug application process and the marketing effort to commercialize the drug.

Expected earnings Feb 6th.

Shares rallied sharply over the last two weeks and they have failed to sell off after their big gains. The stock closed 5 cents under a 6-month high on Friday.

Position 1/16/18:
Closed 1/17: Long ALDR shares @ $17.90, exit $16.25, -1.65 loss.
Alternate position: Closed 1/17: Long Feb $20 call @ 80 cents, exit .35, -.45 loss.

BB - Blackberry Ltd - Company Profile


No specific news. Shares down in a bullish market.

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.

Update 1/16: BlackBerry launched a product called BlackBerry Jarvis. This is anti hacking software for self driving cars. Manufacturers can use it to scan their product before they are released to look for weak points that could be hacked. Tata Motors said the product allowed them to cut the analysis time down from 30 days to 7 minutes.

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


I really hate to do it but I am going to begin tightening the stop loss in the days ahead. This has been a great position but nothing goes up forever.

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.

IMMU - Immunomedics Inc - Company Profile


No specific news. Up with the biotech sector.

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.

JCP - JC Penny Company - Company Profile


No specific news. Support held.

Original Trade Description: January 10th.

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.

Position 1/11/18:
Long JCP shares @ $3.97, see portfolio graphic for stop loss.
Alternate position: Long May $4 call @ 60 cents, see portfolio graphic for stop loss.

TEVA - Teva Pharmaceutical - Company Profile


No specific news.

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.

Update 1/10: 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%.

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. We closed the position for a small gain at the open.

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.

Update 1/11: We closed the expiring Jan $15 call at the open because of the evaporating premium and YRCW surged 63 cents. We were a day early on that close but hindsight is always 20:20. Position 12/11/17:

Closed 1/17: Long YRCW shares @ $14.20, exit $15.37, +$1.17 gain.
Alternate position:
Closed 1/11: Long Jan $15 call @ 71 cents, exit .55, -.16 loss.

BEARISH Play Updates

OHI - Omega Healthcare Investors - Company Profile


The company announced its 22nd consecutive quarterly increase in its dividend to 66 cents. Up one cent. The dividend is payable Feb 15th to holders on Jan 31st. Shares gained 52 cents on the news after closing at a new low on Tuesday.

Original Trade Description: January 11th

Omega Healthcare Investors, Inc. is a real estate investment firm. The firm invests in the real estate markets of United States. It invests in healthcare facilities, primarily in long-term healthcare facilities in order to create its portfolio. Omega is a real estate investment trust investing in and providing financing to the long-term care industry. As of September 30, 2017, Omega has a portfolio of investments that includes approximately 1,000 properties located in 42 states and the United Kingdom and operated by 77 different operators. Omega Healthcare Investors, Inc. was founded in 1992 and is based in Maryland, United States. Company description from Omega.

When Omega reported Q3 earnings, they also reported that two of their 77 operators (lessees) had fallen behind on their rents. The company had to record a charge of $194.7 million in non-cash impairment charges. The problem is that companies that far behind in their rent are not likely to suddenly catch up and send in a check for the past due. It typically suggests a longer term problem that could be terminal for those companies.

Funds from operations (FFO) were 79 cents and -4.8% below the year ago quarter. The company did raise their dividend to 65 cents for the 21st consecutive quarter. However, with massive delinquencies, that dividend could be in trouble. Shares plunged on the news and actually spiked the yield to 9.1% but you never want to be invested in a rising yield stock because the stock itself is declining. Investors appear to be heading elsewhere rather than risk a loss of capital.

Expected earnings Feb 7th.

Shares closed at a five-year low on Thursday. If a stock cannot rally in this market, it is definitely sick.

I am going to recommend this as an option only position. Because this is a bull market we could see a sudden rebound in OHI as a "value" play because of its decline.

Position 1/12/18L
Long March $26 put @ 85 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.

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