Option Investor

Daily Newsletter, Tuesday, 1/23/2018

Table of Contents

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

Market Wrap

The Dow is not Bulletproof

by Jim Brown

Click here to email Jim Brown

The earnings from PG & JNJ today proved the Dow is not bulletproof.

Market Statistics

JNJ and PG both beat on earnings and revenue but both declined sharply to erase about 65 Dow points. Their declines awakened investors to the potential for post earnings declines and prior point leaders BA, CVX and CAT also declined ahead of their earnings reports.

The market is priced to perfection on earnings expectations and some of the tax ramifications are disturbing those expectations. Multiple companies took charges related to the new tax law.

Travelers beat expectations and was rewarded with a nearly 7 point gain that added about 48 Dow points. The A/D line was slightly positive on the Dow but the top 5 gainers added about 95 Dow points while the top 5 losers erased 100 Dow points.

Johnson & Johnson (JNJ) reported earnings of $1.74 that beat estimates for $1.72. Revenue of $20.20 billion rose 11.5% and beat estimates for $20.08 billion. JNJ also took a $13.6 billion charge related to tax reform that caused a GAAP earnings loss of -$3.99 compared to earnings of $1.38 in the year ago quarter. The company guided for 2018 earnings of $8.00-$8.20, above estimates for $7.88, and revenue of $80.6-$81.4 billion compared to estimates for $80.7 billion. Their pharmaceutical revenue rose 15.5% to $9.7 billion. The CEO said the company was happy about the tax reform because it would allow them to invest at a higher rate in new drugs and products. Shares fell -6.31.

JNJ was also suffering because an appeals court upheld a ruling that invalidated a crucial patent on Remicade, a blockbuster arthritis drug. The drug had sales of $4.8 billion in 2016 but slowed in 2017 as Pfizer's generic named Inflectra entered the market.

Procter & Gamble (PG) reported earnings of $1.19 that beat estimates for $1.14. Revenue of $17.40 billion barely beat estimates for $17.39 billion. The company took a charge of $628 million that was a net of repatriation taxes of $3.8 billion and a deferred tax benefit of $3.2 billion. The maintained their guidance for 3% revenue growth but raised guidance to 5%-7% earnings growth. Full year earnings are expected to decline 30%-32% because of the sale of their beauty brands portfolio in October 2016. Analysts are expecting $4.17 for full year earnings. Shares fell $3 on the news.

Travelers (TRV) reported earnings of $2.28 that rose 39% and beat estimates for $1.64. Revenue rose 3.6% to $7.5 billion and beat estimates for $7.1 billion. Net premiums written rose 6% to $6.4 billion. The company announced a quarterly dividend of 72 cents payable March 30th to holders on March 9th. They repurchased $351 million in stock for the quarter and have $4.6 billion left in their existing authorizations. They did suffer losses from the California fires but it did not impact the results thanks to a $126 million benefit from a reinsurance dispute settled in Q3. Shares exploded higher with a $7 gain.

Dow component Verizon (VZ) reported earnings of 86 cents that missed estimates for 88 cents. Revenue of $33.96 billion beat estimates for $33.15 billion. The company said it expected as much as $4 billion in additional cash flow benefits from the tax reform. They expect to spend $17-$17.8 billion in 2018 on capex compared to the $17.2 billion they spent in 2017. The company added 1.2 million customers in the quarter including 647,000 phone users. Shares spiked on the report but faded to a loss by the close.

After the bell, Texas Instruments (TXN) reported adjusted earnings of $1.09 that matched analyst estimates. Revenue of $3.75 billion narrowly beat estimates for $3.74 billion. For the full year, the company posted earnings of $3.68 billion or $3.61 per share on revenue of $14.96 billion. They guided for the current quarter for revenue of $3.49-$3.79 million compared to estimates for $3.64 billion. Do you think they picked the exact center of the estimates on purpose? Shares had been on a monster run with a $25 gain since early December but they fell sharply in afterhours on the weak numbers.

United (UAL) reported earnings of $1.40 that rose 46% and beat estimates for $1.34. Revenues of $9.44 billion narrowly beat estimates for $9.43 billion. Revpar rose only 0.2% but cargo revenue surged by 21.6%. Shares fell $4 after the company outlined aggressive growth plans while investors fear an increase in capacity will lower margins. Management said they plan to increase passenger carrying capacity by 4%-6% per year through 2020. Also, fuel prices are rising, up 20% from this period in 2016. United guided for 2018 earnings of $6.50-$8.50 and analysts were expecting $6.96.

Shares of Canadian national Railway (CNI) reported earnings of 94 cents that missed estimates for 98 cents. Revenue of $2.57 billion missed estimates for $2.61 billion. Shares declined $2 in afterhours.

Cree Inc reported a loss of 1 cent that missed estimates for earnings of 2 cents. Revenue of $367.9 million beat estimates for $249.9 million. They guided for the current quarter for a loss of 3 cents to earnings of 3 cents with revenue of $335-$355 million. Analysts were expecting $341.5 million. Shares declined about $1 in afterhours.

Capital One (COF) reported earnings of $1.66 that missed estimates for $1.85. Revenue of $7.01 billion missed estimates for $7.12 billion. Provision for credit losses rose 10% to $1.92 billion. The bank said a rising number of consumers are falling behind on their credit card payments. The bank also took a charge of $1.77 billion related to tax reform. Loans outstanding rose 1% to $254.5 billion. Shares fell about $2 in afterhours.

Disney (DIS) said it was going to give 125,000 employees a $1,000 bonus due to the tax reform. They are also committing $50 million to a new employee education program which will be available to 88,000 employees. The program will contribute to higher education or vocational training and it does not have to be related to their current job responsibilities at Disney.

Boeing, AT&T, Wells Fargo, Comcast, Bank of America and Walmart are some of the other companies that have already announced bonuses for employees. Trickle down is working this time.

Earnings for Wednesday include Dow components GE and UTX. Regardless of what GE reports they are not going to move the Dow because they are only a $16 stock. UTX could be a mover because the rally stalled two weeks ago and shares have been stuck at the $135 level. Investors may be concerned earnings could disappoint but not concerned enough to sell.

Other companies of interest would be Stanley Black & Decker, Progressive and United Rentals. The Dow has serious risk on Thursday with both Caterpillar and 3M reporting before the bell. Should both disappoint, it could be a big drop because CAT has been an outstanding performer since September. Shares have also stalled at $170 for the last week. We exited CAT in the Ultimate Investor newsletter this morning with a huge gain.

TD Ameritrade (AMTD) said trading activity is off the charts. New accounts for people 35 and younger rose 72% in Q4. Average daily trades in Q4 were 726,000 and that has jumped to more than 975,000 daily in 2018. That is a 34% increase. The CEO said trades in blockchain and marijuana related companies were nearly 10% of the total in 2018.

The Richmond Fed Manufacturing Survey for January fell from 20 to 14. The 20 in December was a historic high so a decline was expected. The biggest component decline was employment from 20 to 10. New orders remained flat at 16 and backorders bounced back into positive territory at 5.

The calendar for the rest of the week includes new and existing home sales and the Kansas manufacturing survey. We get the first look at the Q4 GDP on Friday with expectations at 3.0% growth.

The nearly final Atlanta Fed real time GDPNow has risen to 3.4% with the last update coming after the new home sales on Thursday. If the BEA GDP is 3% or higher it will be the first time since 2005 that we have seen three consecutive quarters of 3% growth.

Hurray! The government shutdown is over. Boo! The next one is just over two weeks away. As the smoke cleared from the weekend event, it appears the democrats took the most damage. Senators are already claiming they will not cave in on the next round of funding and will hold out regardless of the time involved.

Oil prices continue to hold just under $65 despite a surprise build of 4.755 million barrels in the API inventory report after the bell. Analysts had expected a 1.6 million barrel decline. Distillate inventories fell -1.28 million barrels and gasoline saw an increase of 4.117 million barrels.

Part of the weaker than expected inventory gains in January is the requirement by regulators that the Keystone pipeline run at only 80% of capacity after a 5,000-barrel leak in November. The current flow rate is 524,000 bpd and that is helping reduce inventories at Cushing. Storage in Canada hit a record high at 31.824 million barrels in December. Transcanada, operator of the pipeline, said they had already received firm 20-year commitments for 500,000 bpd on the Keystone XL pipeline. That is about 60% of the 834,000 bpd line. The pipeline is not yet complete.

Prices could be poised for a decline. Last week the CFTC reported the largest number ever of 666,000 net long futures contracts on WTI. This is a monster bullish position held by large speculators going into what is normally a weak period for crude prices. The current month contract rolled over on Monday and prices barely moved. The next expiration is February 20th. Speculators are counting all the production outages around the world and the rate of decline in global inventories. If Russia and others begin to talk about ending or reducing the OPEC production cuts at the end of June, prices could implode as these speculators race to exit their longs.


The Nasdaq powered to a new record high close thanks to the Netflix earnings and lifted the S&P and Russell 2000 to a new high as well. The Dow failed to close at a new high because of the earnings drag but a -4 point decline is not even a rounding error.

The S&P is only 11 points away from Goldman's 2018 target price of 2,850 and 16 points away from the median target price of 2,855 from 18 analysts. The index is now 236 points or 9.1% above its 100-day average and that is the widest spread on my charts dating back to the 1970s.

We know why the market is so bullish. It is the earnings expectations. However, as I pointed out last weekend the monster charges being taken as a result of the tax reform have killed the earnings growth estimates. There is no "reason" for the market to decline in the coming days but the market never needs a reason. The blame is always placed on the event after it happens by the market commentators.

The market can continue higher as long as investors continue chasing prices. As I reported earlier about TD Ameritrade trade volume spiking 34%, retail investors are going all in as though this rally will continue until year-end. We all know that is not the case. Eventually, the trend will end and the race to the exits could be epic.

I am not predicting that this week because I think investors will remain involved until after the big caps techs report and that is next week. The first full week of February could see the post earnings depression appear and I believe February could be a rocky month. When a dip finally arrives, it will be bought and we should see higher highs in March/April before what could be a rough patch over the summer doldrums. This is just my opinion and not a guarantee.

The S&P has minor support back at 2,600 and then 2,750 followed by 2,675.

The Dow is now 2,574 points above its 100-day average. To say that is overbought would be an understatement. The Dow has considerable earnings risk over the next 7 trading days. Initial support is not far below at 25,950 but the next stair step is 24,700 and that is a long drop. If the Dow continues to rise, it will only increase the overbought conditions and the severity of the decline when it comes.

The Nasdaq big caps are packing on the points and making new daily highs. The Nasdaq chart is showing an acceleration of the gains in what could be seen as an euphoric rush that typically precedes market tops. I am not predicting an imminent decline but one look at the chart should strike fear into anyone fully invested.

The Nasdaq is now 716 points or 10.6% over its 100-day average and very overextended compared to historical norms.

The Russell was somewhat encouraging with a record close just slightly above uptrend resistance. We cannot claim it as a breakout but the new high on a day when the Dow was negative is a positive sign. However, it was led by the gains in the Nasdaq rather than a broad based surge in small cap stocks.

The trend is your friend until it ends. Unfortunately, sometimes the end arrives with very little warning. The market is positive on earnings expectations. I get that. However, that does not mean we should just keep pressing our bets until the market sevens out. Craps players should understand that scenario. When a shooter is on a hot streak, winners keep raising their bets as if they expect the run to continue for hours. The shooter eventually throws a seven and the dealers scrape all the money off the table and everyone leaves depressed.

We can continue to profit from the market gains. Just keep your stop losses in place and let the market take you out when the trend ends.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Euphoria Rising

by Jim Brown

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Editor's Note

The Nasdaq is accelerating higher ahead of next week's big cap tech earnings. However, the Dow stumbled today on disappointing earnings from VX, PG and JNJ. Will the Nasdaq stumble when those earnings are released? With earnings intensity increasing along with the number of earnings disappointments, I believe the market is at risk. There is no reason to add new plays at market highs just because it is a newsletter day.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Minor Resistance Break

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell 2000 posted a minor gain but it managed to push through uptrend resistance. The 5 point gain on the Russell was encouraging, especially since the Dow closed slightly negative. This could suggest the small caps are going to regain their leadership position. However, the Nasdaq posted another big win with 52 points so the tech sector is the current leader.

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

HIBB - Hibbett Sports
The long position was entered 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

BB - Blackberry Ltd - Company Profile


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


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.

HIBB - Hibbett Sports - Company Profile


No specific news. Minor decline after a big gain.

Original Trade Description: January 22nd.

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.

Position 1/13:
Long HIBB shares @ $26.25, see portfolio graphic for stop loss.
Alternate position: Long March $30 call @ $1.40, see portfolio graphic for stop loss.

IMMU - Immunomedics Inc - Company Profile


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


No specific news. Support is holding.

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


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.

Position 1/22:
Long TTMI shares @ $17.48, see portfolio graphic for stop loss.

Alternate position: Long March $20 call @ 34 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


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

Original Trade Description: September 18th.

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

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

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

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

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

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

Position 9/19/17:

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

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