Option Investor
Newsletter

Daily Newsletter, Monday, 1/22/2018

Table of Contents

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

Market Wrap

Government Shuts Down, Market Rallies

by Keene Little

Click here to email Keene Little
The Senate was unable to pass a budget over the weekend, which has resulted in a government shutdown. The stock market reacted with a gap up this morning and buyers then added to the rally, finishing the day on a high note. Perhaps the market is telling us we're all better off with the government shut down.

Today's Market Stats

Tom and I (Keene) have swapped Market Wraps this week so he'll be back with you on Wednesday.

The government shutdown is temporary and everyone knows it. The only ones trying to create theatrics around this are the senators themselves and their incessant sound bites. Between that and the filibusters it's amazing any of the senators have any time to work. The market ignored all of the fanfare and worries and simply kept doing what it's been doing -- rallying to the moon. The parabolic rally continues today with the Dow up another 143 points and it was the weaker index today. Hold on tight for this ride up and for what assuredly be just as quick back down.

Other than the noise surrounding the government shutdown it was a very quiet news day. There were no major economic reports and therefore there was little for the market to chew on or to knock it off track. The northbound train remains on track and the only question on the minds of many traders is what could derail this rally. At the moment there's not much out there that's scaring investors and the only thing we appear to vulnerable to is the unknown, the Black Swan, the Minsky Moment, the final snow flake that creates the avalanche. Since those events are unpredictable we have to remain aware of the potential for a surprise bear attack but the path of least resistance is clearly to the upside and that's the way traders should be looking. Just keep the exit door propped open with your foot so that you can be one of the first ones out when someone yells "SELL!"

Since there's very little news to discuss I'm going to jump right into the review of the charts, starting with the Nasdaq since it's close to what could be strong resistance.


Nasdaq Composite index, COMPQ, Weekly chart

There was a little short-covering spurt into the close today and that had the indexes closing at the day's highs. It looked like some bears still can't believe the market's not going to at least pull back some and they are forced to cover into the close. That little spurt higher for the Nasdaq got it close to trendline resistance near 7420 (the day's high and close was 7408). On its weekly chart you can see how it has pressed up near its trend line along the highs since April 2010, which fits well as the top of a parallel up-channel since then. Through 2014-2015 the top of the channel was resistance and now it's back up to try again to bust through.

At the same level is the trend line along the highs from September 2016 - June 2017 so the trendline cross near 7420 has been a good upside target and we'll soon find out if it's also going to be tough resistance. But if the buyers keep coming, like the Ice Walkers from the North, the next level of resistance is the top of a parallel up-channel for the rally from February 2016, which could mean the Naz is heading for 8000.

The weekly oscillators are now more overbought than they've been since 2000 but we know they can get more overbought and so far there's no bearish divergence. There was a bearish divergence on RSI (not MACD) at the March 2000 high. Trendline resistance here could cause price to pause but I don't see anything yet that says the bears are cleared in hot (cleared to shoot).


Nasdaq Composite index, COMPQ, Daily chart

The daily chart shows a little closer view of the trendline resistance mentioned above. Ideally, from a pattern perspective, we'll see a little larger pullback correction and then another push higher and then each new high will have to be evaluated for its potential importance. Right now I don't expect to see anything more than a pullback correction.

Key Levels for COMPQ:
- bullish above 7290
- bearish below 7003


Nasdaq Composite index, COMPQ, 60-min chart

The 60-min chart does not show the trend line along the highs from April 2010 - July 2015 but it does show the one from December. On the 60-min chart the line looks closer to 7430 so we have a 7420-7430 target zone for Tuesday to watch. A break of the uptrend line from December 29th, currently near 7345, would tell us a larger pullback/consolidation is in progress. In the meantime we can watch to see if it will continue to chop its way higher inside the rising wedge (some bearish divergence is starting to show up).


S&P 500, SPX, Daily chart

SPX is in a similar position as the Naz as it approaches the top of its narrow up-channel from December 29th and its broken uptrend line from November 2016 - April 2017 (gray line). The two lines cross on Tuesday near 2840-2850. As with the Nasdaq, the price pattern would look best with a pullback correction (potentially into the end of the month) and then another leg higher. That would relieve some of the daily overbought condition and set up a new high with bearish divergence (if the subsequent high is going to be an important one).

Key Levels for SPX:
- bullish above 2775
- bearish below 2736


Dow Industrials, INDU, Daily chart

The Dow's squished chart shows clearly the increasing steepness of the uptrend lines since last August, with the steepest one being from December 29th and currently near 26000. Stay bullish above that line since the rally could continue to steepen as it seeks to escape the earth's gravity pull. Once the uptrend line from December 29th is broken it will be our clue to look for at least a choppy consolidation although we could see a sharp retracement before starting the next rally leg.

Key Levels for DOW:
- to the moon Alice!
- bearish below 24,700


Russell-2000, RUT, Daily chart

The RUT is also nearing potentially strong resistance at 1610 (today's closing high was 1605). A trend line across the highs from October 2017 - January 2018 crosses a price projection at 1610, which is where the move up from November 15th has two equal legs up. That in turn could be the completion of an a-b-c move for the 3rd wave of a large rising wedge pattern from August. This pattern calls for a large choppy pullback into the end of the month/early February and then another rally into the end of February.

Key Levels for RUT:
- bullish above 1610
- bearish below 1535


20+ Year Treasury ETF, TLT, Weekly chart

The Treasury market has reached an inflection point when viewed with TLT, the 20+ year Treasury bond ETF. TLT has worked its way down/over to its uptrend line from February 2011 - December 2013, which held the pullback into the December 2016 and March 2017 lows. A break of the uptrend line (for more than a week) would obviously be bearish and that would likely spike yields even higher. A spike in yields would make it a lot more difficult to service the huge amount of debt that individuals, corporations and governments have accumulated.


U.S. Dollar contract, DX, Daily chart

The US$ has been consolidating for the past week near the bottom of its large expanding triangle pattern that it's been in since 2015, which is the trend line along the lows since February 2015 and currently near 89.80. A sustained drop below that level would be a bearish move for the dollar but at the moment I think we'll see the dollar bottom and then start to head back up.


Gold continuous contract, GC, Weekly chart

Gold's next direction can be determined by a flip of the coin, although you'll then have a 50% chance of being wrong. That's about the best I can do with its chart right now. I'm not seeing enough evidence in its bounce to suggest a continuation of its rally and it's going to be somewhat dependent on what the dollar does. Gold looks bullish with its bounce off the 200-week MA and broken downtrend line from 2011-2016 in December but I remain unconvinced it will be able to make it much further.


Oil continuous contract, CL, Weekly chart

Oil's daily chart looks short-term bullish with the choppy consolidation over the past week, especially since it's consolidating on top of the broken trend line along the highs from June 2016 - January 2017, currently near 62.60. As long as oil holds above this price it will remain bullish but a drop below the uptrend line from August, currently near 60.65, would be confirmation a top is likely in place.


Economic reports

There were no important economic reports today and there won't be any tomorrow. The rest of the week remains relatively light with existing home sales on Wednesday, new home sales on Thursday and then GDP and durable goods orders on Friday.


Conclusion

The party for the bulls doesn't show any sign of aging yet as more money pours into the market, much of which is going into ETFs and that drives up all stocks, which in turn keeps the advance-decline line looking strong. The uptrend has turned into a parabolic rise and that's always dangerous but it can go much higher and much longer than anyone thinks possible. It's clearly not a time for bears to be even thinking about trying the short side -- death by a 1000 paper cuts or death by getting stabbed in the heart, take your pick.

A lot of money is chasing this market higher and my fear is that it's a lot of retail money, the ones who get the most hurt when the market turns. But if you're long you're doing very well and I'm sure it's tempting to leverage up and get more out of the rally. That would be like borrowing money to invest in crypto currencies and not recommended. If you're on the sidelines wondering how to get in and enjoy the ride, take it slow, leg in with small positions/known risk (such as an option play), and watch it carefully. I still worry about waking up to find we put in a v-top reversal with a big gap down and sharp selloff.

But unlike bottoms, v-top reversals are not common in the stock market. There were sharp reversals off the March 2000 and July 2007 highs but both were tested months later (September 2000 and October 2007), something you don't often see with v-bottom reversals. That's not to say it will happen again that way but it will be a reason not to get immediately bearish on the next big spike down. After a big bounce correction it would be time to get more aggressive on the short side. So if you're a bear itching to get short, you'll likely have plenty of time to think about that after we see an important high get put in place. For now the bulls rule and the bears drool and I don't see that changing anytime soon.

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

Retail Breakout

by Jim Brown

Click here to email Jim Brown
Editor's Note

Retailers of every shape and size are moving steadily higher. This one has a long way to go. Hibbett Sports suffered in late 2017 but that weakness is evaporating.



NEW BULLISH Plays

HIBB - Hibbett Sports - Company Profile

Hibbett Sports, Inc., together with its subsidiaries, operates athletic specialty stores in small and mid-sized markets primarily in the South, Southwest, Mid-Atlantic, and the Midwest regions of the United States. Its stores offer a range of merchandise, including athletic footwear, team sports equipment, athletic and fashion apparel, and related accessories. The company also sells merchandise directly to educational institutions and youth associations. As of January 28, 2017, it operated 1,059 Hibbett Sports stores and 19 Sports Additions athletic shoe stores. Hibbett Sports, Inc. was founded in 1945 and is based in Birmingham, Alabama. Company description from FinViz.com.

Earnings expected on Feb 16th.

Hibbett had a tough 2017 with shares crashing back to $10 on various problems including those created by Nike and Under Armour. The shoe and sports apparel business was very weak but that has turned around and even Nike is posting strong gains. Retailers in every sector are surging.

Last week Bank of America upgraded HIBB from underperform (sell) to a buy and hiked the price target from $14 to $30. The analyst said a successful launch of its ecommerce business and very easy comps for the next 12 months made Hibbett a buy.

The ecommerce launch at the beginning of last quarter added 5% to same store sales and helped eliminate a lot of aged inventory. They expect ecommerce to be accretive to 2018 earnings. The analyst also said it was providing sales from areas where Hibbett does not have stores and therefore was not cannibalizing sales at existing locations.

BAC said Hibbett had reallocated footwear space and styles for faster sales of Nike and Adidas products.

Hibbett has a healthy balance sheet, low PE, active buyback program and high short interest.

Buy HIBB shares, currently $26.10, initial stop loss $24.45.
Alternate position: Buy March $30 call, currently $1.40, initial stop loss $24.45.



NEW BEARISH Plays

No New Bearish Plays


Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps more than $1.00 at the market open.



In Play Updates and Reviews

Dead Stop

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes all closed at new highs but the Russell came to a dead stop at uptrend resistance. This would be a prime opportunity for the Russell to take the lead and break out to a new leg higher. With no further hurdles in the market's path until February 8th, the earnings should power the market higher. I know writing those words could be the kiss of death because they are logical and there is no logic in the stock 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


TTMI - TTM Technologies
The long position was entered at the open.

OHI - Omega Healthcare
The short position was stopped at $26.85.



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

Comments:

No specific news. We have a $13 put so we are not in danger of a big loss.

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

Comments:

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.



IMMU - Immunomedics Inc - Company Profile

Comments:

No specific news. Shares broke out of the consolidation pattern.

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

Comments:

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.



TTMI - TTM Technologies - Company Profile

Comments:

No specific news. Shares failed at resistance but we should get another try.

Original Trade Description: January 20th.

TTM Technologies, Inc., together with its subsidiaries, manufactures printed circuit boards (PCBs) worldwide. It provides a range of PCBs and electro-mechanical solutions, including conventional PCBs, high density interconnect PCBs, flexible PCBs, rigid-flex PCBs, custom assemblies and system integration products, and IC substrates. It also produces test specialized circuits that are used in radio-frequency or microwave emission and collection applications; printed circuits with heavy copper cores, and embedded and press-fit coins; PCBs with electrically passive heat sinks; and PCBs with electrically active thermal cores. In addition, the company offers various services, including design for manufacturability, PCB layout design, simulation and testing, and quick turnaround services. The company's customers include original equipment manufacturers and electronic manufacturing services companies that primarily serve the networking/communications, cellular phone, computing, aerospace and defense, and medical/industrial/instrumentation end markets of the electronics industry; and the U.S. government. TTM Technologies, Inc. was founded in 1978 and is headquartered in Costa Mesa, California. Company description from FinViz.com.

TTMI is an underappreciated chip stock. Earnings are rising and they are growing by acquisition. For Q3 they reported earnings of 32 cents on revenue of $667 million. For Q4 they guided for earnings of 49-55 cents on revenue of $700-$750 million. This was the fourth consecutuve quarter of organic growth, revenues and earnings that exceeded guidance.

On December 3rd they announced a deal to acquire radar components maker Anaren for $775 million in case from Veritas Capital. Anaren produces microwave components for wireless, space and defense electronics providers and counts Raytheon Co Lockheed Martin Corp, and Northrop Grumman Corp as customers. TTMI said the deal would immediately reduce costs and be accretive to earnings.

Earnings expected on Feb 7th.

Shares are about to break out to a six month high over $17.50 ahead of earnings. The short-term trend over the last month has been steadily higher. They have long-term resistance at $19.50 and a break over that level would be a new high and cause significant buying.

I do not usually recommend stocks just before earnings. I am suggesting we play the stock position and exit before the Feb 7th event. I am recommending we hold the very inexpensive option over the earnings in hopes of a real breakout to new highs. The stock closed at $17.59 so the $17.50 strike is expensive and risky. The next strike is $20, well OTM but the price is only 35 cents. It is a cheap bet on a positive earnings breakout.

Buy TTMI shares, currently $17.59, initial stop loss $16.50.
I am trying to avoid any government shutdown dip.

Alternate position: Buy March $20 call, currently 35 cents. No initial stop loss.




BEARISH Play Updates

OHI - Omega Healthcare Investors - Company Profile

Comments:

No specific news. Shares rebounded above short term resistance to stop us out.

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.

Update 1/17: 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.

Position 1/12/18L
Closed 1/22: Long March $26 put @ 85 cents, exit .60, -.25 loss.



VXX - Volatility Index Futures - ETF Description

Comments:

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

Original Trade Description: September 18th.

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

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

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

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

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

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

Position 9/19/17:

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





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