Option Investor
Newsletter

Daily Newsletter, Thursday, 1/25/2018

Table of Contents

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

Market Wrap

Peak Earnings, New All Time Highs

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The indices moved set new all time highs on strong earnings from big names. Caterpillar was the star of the show delivering blow out earnings and positive forward outlook. Along with the earnings are economic reports pointing to continued expansion. President Trump's visit to Davos is also helping to support the market. He's made some positive comments on the economy, growth, the dollar and trade that have helped to reassure the market.

International markets were largely down in the overnight session. Asian indices shed -0.25% to -1.00% as the dollar fell and currencies throughout the region gained strength. Adding to angst were a basket of mixed earnings reports. Exporters were hit the hardest as they have the most exposure to currency exchange.

European markets were focused on earnings, but also on the ECB, and finished their day in negative territory as well. The DAX led with a loss near -0.90% on ECB uncertainty. The bank held their rates unchanged and made no alterations to outlook or statement as had been expected. Mr. Draghi did little to indicate a change in policy was at hand but traders remain convinced there is. Data from the region has been positive and trending higher although target inflation rates have not been reached.

Market Statistics

Futures were flattish in the earliest portion of the pre-opening session. The trade began to gain strength throughout the morning as data and earnings were released eventually hitting a peak on news from Caterpillar. The Dow jumped more than 100 points on the news and opened with a small gain. The blue chip and broad market indices both set new all time highs in today's action but closed off of their highs. Price action was light in most cases, daily ranges were small and volumes were low. Advancers and decliners were evenly matched while those making new highs outpaced those making new lows by 5:1.

Economic Calendar

The Economy

Initial jobless claims rose by a smaller than expected 17,000 from last week's downwardly revised figure to hit 233,000. The four week moving average of claims fell -3,500 to hit 240,000. On a not adjusted basis claims fell -25.9% versus an expected -31.4% and are down -7.65% from last year. Looking to the chart it is easy to see there has been volatility in the data, it is also easy to see that the overall trend remains down. Recent volatility is due to the storms last fall as well as seasonal shifts in labor forces. Regardless, claims remain at/near long term 45 year lows and consistent with labor market health.


Continuing claims fell -28,000 from an upwardly revised figure to hit 1.937 million. The four week moving average of claims fell -3,500 to hit 1.920 million, the previous week's average was revised up by 2,500. This figure has also shown some volatility over the past few months as well as a flattening that may indicate the down trend is over.

The total number of American's receiving unemployment benefits jumped 116,813 to 2.453 million. My first reaction to this was "whoa, that's a big number" and it is. It is consistent with season and long term trends but well above expected. This spike, along with the flattening continuing claims, is a potential red flag that labor market tightening is coming to an end. If so we could begin to see a pick up in the pace of wage inflation as employers work harder to find, attract and retain employees.


New Homes Sales fell as expected but well above what analysts had predicted. The December read shows a -9.3% decline in sales from the previous month but the year over year and full year figures are still positive. December 2017 is 14.1% above December 2016 and full year 2017 is up 8.3% over the full year 2016. Decembers sales are hurt by the persistent problem of low inventory/high prices and by the bad weather seen across the nation.


The Index Of Leading Indicators points to continued strong expansion in the US. The headline index gained 0.6% with positive revisions to the previous two months. Along with this the Coincident Index rose 0.3% while the Lagging Index rose 0.7%. All three indices have been positive for more than a year and, according to economists at the Conference Board, "The passing of the tax plan is likely to provide even more tailwind to the current expansion. . . The gains among the leading indicators have been widespread, with most of the strength concentrated in new orders in manufacturing, consumers' outlook on the economy, improving stock markets and financial conditions."


The Dollar Index

The dollar went on a wild ride today; it first shot higher on Mnuchin's comments and the ECB and then later fell on comments from President Trump. The president refuted Mnuchin's comments, specifically the media's coverage of the comments, saying that the administration does not want a weaker dollar and that the dollar is going to strengthen along with the US economy. He also said, and this is my interpretation, theat he didn't want people to be talking about the dollar so it could float freely on the open market. The Dollar Index fell to test support at $89 and looks like it is confirming. Today's candle is a large hammer doji at support that may lead to a reversal within the long term trading range.


The Gold Index

Gold went on a wild rise as well. After the ECB meeting and press conference and before the Trump comments it moved up to test 2016 highs. After the Trump comments spot prices fell to break even and below, giving up a half percent by settlement time. The metal is indicating resistance at the previous high and top of a long term trading range although more evidence is needed. If resistance is confirmed a move lower should be expected. If the dollar does indeed strengthen as Trump says it will gold prices are likely to fall. Tomorrow's 4th quarter GDP read could spark such a move, or perhaps the FOMC next week, but global economies are improving as well. Tightening from the ECB, BOE, BOJ and others is likely to undermine dollar strength and keep it and gold within their current ranges.

The Gold Miners ETF GDX tried to extend yesterday's gains but the move was cut short by Trump's comments. The ETF fell hard on the news creating a large red candle and confirming resistance in the upper half of a long term trading range. The indicators are both bearish, showing wicked divergence and pointing lower in confirmation of lower prices. Today's action was halted at $24 and a potential support level, a break below there would be bearish within the range with a target near $23.50 and then $23.00.


The Oil Index

Oil prices fell to close the day with a loss near -0.50%. Prices had been up in the early session, setting a 4 year high, but fell later in the day following Trump's comments from Davos. This move is due to today's reversal in the dollar more than anything else as US storage data and OPEC's production cap continue to support the market.

The Oil Index fell about -0.40% on the fall in oil prices and may have hit a peak. The index has been trending strongly higher on the rise in oil prices but with those in question for the longer term a correction is due. The indicators are both consistent with possible or imminent correction showing significant divergence from freshly set long term highs. A fall fro this level could go to 1,400 or 1,375 in the near term.


In The News, Story Stocks and Earnings

Caterpillar reported in the early morning and blew past estimates. The company says improving global economics have led to strong sales, increased back logs and improved forward outlook for business. Both revenue and earnings came in above expectations, earnings more than doubling from the year ago period, driving shares up more than 3.5% in the pre-market session. The gains were short lived however as concern growth was already discounted and fears over a probe into its Swiss operations weighed on shares. By end of day the stock had formed an alarming red bodied candle with long lower shadow that may be confirming a top. Both indicators are currently bearish and moving lower suggesting lower prices to come. Support may be at the moving average, a break below there would be bearish.


Kroger is reported to be in talks with Alibaba. The goal is to form some kind of alliance with which to battle the new Amazon/Whole Food's conglomerate. Neither company commented on the report but analysts agree it is likely in response to the recently opened flagship AmazonGo store. Shares of the stock jumped in the pre market and are now trading at a 7 month high.


After hours action was hot with dozens of big name reports hitting the market. Starbuck's reported net revenue up 6% on strong global comp increases but did not meet analyst expectations. Earnings of $0.65 beat by $0.08 but were not enough to buoy share prices. Global comp sales rose by 2% driven by strong increases in China. China net revenue grew by 30% on a 6% increase in same store sales. Forward guidance is unchanged, shares of the stock fell -2.5%.


Intel also reported after the bell. The difference is that it beat on the top and bottom lines driving shares to new highs. The company reported a 4.3% gain in net revenue driving a $0.21 (25%) beat on the EPS end. Gains were driven by strong demand that is expected to persist into the new year resulting in increased guidance and a hike to the dividend. Considering the number of IoT connected devices is expected to more than triple to over 50 billion in the next decade I'd say strong demand should continue for some time.


The Indices

The indices had another day of indecision but most were able to hold their ground. The Dow Jones Transportation Average unsurprisingly led with losses near -1.60%. The transports are in near term correction and heading down to test support at the short term moving average. The indicators are both moving lower following bearish crossovers and consistent with such a move. A break below the moving average would be bearish and could take the index down to 10,500 or lower. A confirmation of support at or near the moving average would be bullish and trend following.


The NASDAQ Composite is the 2nd of two indices to close with losses although losses for the tech heavy index were far less than for the transports. The index closed with a loss of only -0.05% but created a small red candle. Today's candle is to the side of the previous two and at all time highs so looks like a consolidation at this point. The indicators remain bullish and consistent with consolidation within an uptrend so no change to outlook at this time.


The S&P 500 made the smallest gain, 0.06%, but created a red bodied candle in the process. The broad market index opened at what would have been an all time closing high but fell during the day. The candle is to the side of the previous two and consistent with near term consolidation within the current up trend. Both indicators are showing near term weakness consistent with such a move but neither show signs of reversal just yet. If the index were to move down support may be found at 2,800 or just below at the short term moving average.


The Dow Jones Industrial Average posted the largest gains and looks the most bullish of the indices. The blue chips closed with an advance of 0.53% creating a small green bodied candle and setting new all time intraday and closing highs. The index is drifting higher in lie with the prevailing trend and supported by the indicators. Both MACD and stochastic are bullish although there are some signs of weakness. A move up from here would be trend following and bullish, a move lower may find support at 26,000 in the near term.


The indices continue to hold their ground at or near all time highs. These highs are supported by long term trends, current earnings and forward outlook although there are some near term hurdles holding them back. The hurdles, mostly sentiment driven, may lead to market correction but there is no firm sign of that yet.

Tomorrow's GDP release is going to be important, especially ahead of next week's Fed meeting. Analysts are expecting growth in the range of 3%, any deviation from that will impact growth and interest rate outlook if not stock prices. A beat, especially a solid beat, will be further indication Trump's pro-growth policy and business friendly stance will spur earnings growth into the next several years. I remain bullish for the long term but cautious for the near, waiting on data. If a correction does develop I expect it will lead to another great entry point for bullish positions.

Until then, remember the trend!

Thomas Hughes


New Plays

Still Waiting

by Jim Brown

Click here to email Jim Brown
Editor's Note

With decliners outpacing advancers in the small cap indexes, any gains could be minimal. We are seeing our positions picked off one by one as the decliners continue to be in the majority in the small cap space. I do not want to just keep adding positions hoping tomorrow will be different. The S&P, Nasdaq and Russell all struggled today with a total loss of -0.13 points if you add all three together. Yes, the Dow was up again. The top five Dow stocks contributed 140 Dow points and that accounted for the closing gain. The futures are up +4 as I type this so Friday could be a different day. However, they were down -4 last night and they reversed into a gain by the open. There is no reason to add new plays with increased volatility at market highs just because it is a newsletter day.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Not What It Appears

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow, S&P and Russell posted gains but it was a fight. The Dow surged thanks to five stocks alone adding over 140 points. (BA, MMM, GS, JNJ, UTX) The Russell 2000 was positive with a 2 point gain. However, the decliners were significantly more than the advancers. The Russell has been struggling the last several days with decliners in the lead. We are getting picked off one stock at a time as the small caps fade. The index is being held up by the financials and biotechs while the rest of the stocks decline. Futures are up at +4 tonight but I do not trust them for a small cap rebound.





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 stopped at $24.45.

JCP - JC Penny
The long stock position was stopped at $3.75.



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. Shares broke below support. I am recommending we close the stock position and maintain the long put/call. We have a $13 put so we are not in danger of a further 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.



HIBB - Hibbett Sports - Company Profile

Comments:

The retail sector has been weak for the last three days and we were stopped out at $24.45. It looks like I picked at least a short-term top in the sector.

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:
Closed 1/25: Long HIBB shares @ $26.25, exit $24.45, -1.80 loss
Alternate position:
Closed 1/25: Long March $30 call @ $1.40, exit .76, -.64 loss.



IMMU - Immunomedics Inc - Company Profile

Comments:

No specific news. Only a minor decline.

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. The weak retail sector knocked us out of the stock position on JCP with a minor 22 cent loss. The option position will move to the Lottery Play section.

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:
Closed 1/25: Long JCP shares @ $3.97, exit $3.75, -.22 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 down four days in a row and missed the stop loss by 8 cents.

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

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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