Option Investor

Daily Newsletter, Tuesday, 1/30/2018

Table of Contents

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

Market Wrap

Blame Game

by Jim Brown

Click here to email Jim Brown

The markets opened negative and hit their lows about 10:30 on only a minor increase in volume.

Market Statistics

In a big market selloff, you want to see capitulation by existing holders. That normally means a large advance to decline imbalance and very high volume. That tells analysts that the dip is meaningful and investors are racing to the exits. Today was not one of those days. An A/D imbalance of 8:1 or even 10:1 normally signals capitulation at either the top or bottom of a regular market cycle. Today declines were 4:1 over advancers. While that is elevated, it is far from a panic. Volume was 8.03 billion shares and only about 10% over levels seen so far in 2018. There was definitely no rush to the exits.

The two day decline of -1.75% was the worst since September 2016. That should give you an idea of how few declines we have had. Actually, there were only two declines of more than 2% in 2017 and this was the first one in 2018.

The blame game started before the market even opened as market commentators tried to assign blame for the negative market. Some blamed the spike in treasury yields to 2.72% on the ten year. Since the yield closed at 2.696% on Monday, I hardly think that was the problem.

Others blamed the end of month portfolio rebalancing by pension fund managers. In theory if you have a balanced portfolio of 60% stocks and 40% bonds, the manager is supposed to rebalance whenever those ratios become unbalanced. With the markets up roughly 8% for the year in January coupled with gains in December, the ratios could have risen to more than 70% equities and 30% bonds. Analysts have been predicting a $16-$20 billion sale of equities at month end to bring the portfolios back into balance. While that theory was making the rounds, there was no material flow into treasuries that would have offset the decline in equities. It may have had an impact and it could be spread over the last three days and the first two days of the month. This may have had some impact on the market but there was no material increase in volume.

The most likely cause of the decline was simply being extremely overbought and the announcement by Amazon, JP Morgan and Berkshire that they were forming a company to provide cheaper healthcare for their 1.1 million employees. That caused the bottom to fall out in the healthcare, pharmacy and drug stocks. The carnage was deep and wide spread. The goal is to reduce healthcare expenses by 20% or more. JP Morgan spent $1.2 billion on healthcare in 2017. If they were able to accomplish this feat, it would be a major blow to nearly every provider of drugs and services.

The group had to go public with their plans because they are starting a hunt for a CEO. The company will be separate and will be "ring fenced" from the parent companies to avoid conflicts of interest. That would also make it potential magnet for dozens if not hundreds of other major corporations also trying to cut expenses. Given Amazon's resources and the razor thin margins they produce, there is a very good chance they will exceed their cost reduction goals and that could upset the entire healthcare industry.

America has the highest drug prices in the world and every drug has to go through multiple hands before it is given to you by the druggist. Some people claim there is 20-40% in costs generated by the various middlemen including distributors, wholesalers, pharmacy benefit managers, etc. With Amazon's clout, they could go direct to the manufactures and force them to bid for the business and discount their own products.

Amazon disrupts. The fear of Amazon disrupting the very profitable drug pipeline business caused massive declines in the various stocks. UnitedHealth (UNH) lost more than $10 to cause a -74 point impact to the Dow.

When markets suddenly decline, stocks that are not a part of that reason, sell off as well. This is the "whoosh" effect. Since most investors do not know minute by minute why the market is moving, only that their charts are falling, they tend to pull the ripcord and bail from their positions to protect their profits. This morning was a whoosh market. As the various reasons being given were discounted by analysts, the market stabilized around 10:30 and traded in a narrow range the rest of the day.

To prove the points above the Volatility Index ($VIX) spiked to 15.40 at the open then faded to trade relatively sideways the rest of the day. There was no panic other than at the open. The spike over 15 was the highest level since August 17th. The VXX futures ETF rose more than $2 on Monday but only 96 cents today. Traders were more concerned about volatility on Monday than today.

The economic news this morning was positive and had no impact on the market decline. The Consumer Confidence for January came in at 125.4, up from 123.1 in December. That is still down from 18-year high of 128.6 in November but still near the high. The present conditions component declined from 156.5 to 155.3 but the expectations component rose from 100.8 to 105.5. That is directly related to the passage of the tax reform package at the end of December and the announcement by more than 100 companies that will give their employees significant bonuses as a result.

Those thinking jobs were plentiful rose from 36.3% to 37.6%. Those respondents thinking of buying a car rose from 13.0% to 13.4%. However, those planning on buying a home declined from 7.4% to 6.0% and appliance buyers from 59.3% to 49.6%. Rising interest rates were blamed on the decline in homebuyers.

The S&P CoreLogic Case Shiller home price indexes showed a 6.4% rise in prices. This was for the November period and the report was ignored as old news.

After the bell, the weekly API crude inventory report showed a build of 3.229 million barrels compared to expectations for a minor build of only 126,000 barrels. Gasoline inventories rose 2.692 million barrels and a decline of -4.1 million barrels of distillates. Prices declined -$1.57 in regular trading and another 10 cents after the bell. The EIA expects US production to top 10.0 million bpd in this week's report or next week at the latest.

The calendar for tomorrow has the FOMC meeting announcement and no rate hike is expected. Currently analysts expect an average of 3.2 rate hikes in 2018. This is Janet Yellen's last Fed meeting and Jerome Powell will take over the Chairmanship after tomorrow.

There is a 94.8% probability of no hike on Wednesday with only a 5.2% chance of a hike. The March meeting has a 72.1% probability.

The consensus estimates for the ADP Employment have risen from 173,000 to 185,000 over the last three days. The estimates for the Nonfarm Payrolls on Friday have risen from 163,000 to 180,000. Unless both reports miss the estimates by a mile there will be no impact on the market. Unemployment is near record lows and everyone expects fluctuation from month to month.

The State of the Union speech tonight could have an impact on the market depending on the content. Everyone is expecting some details on an infrastructure package that could run from $1.0-$1.7 trillion. This would boost materials stocks and is probably why Caterpillar (CAT) was positive in a very weak market today.

The government funding deadline for Feb 8th is going to be a challenge. The partisan divide is actually increasing in hostility and the odds are good we will have another government shutdown that could last longer than the one in mid January. Earnings reports will be declining by that date and the market may not be willing to ignore larger conflict.

The only calendar that means anything to investors for the rest of the week is the earnings calendar. This is big cap tech earnings week and the deck is stacked for the next two days. There are eight additional Dow components reporting over the next three days.

There were some big losers after the earnings reports today. Dow component McDonalds (MCD) fell -3% after reporting good earnings. The company reported earnings of $1.71 that easily beat estimates for $1.59. Revenue of $5.34 billion beat estimates for $5.23 billion but declined from the $6.03 billion in the year ago quarter. Same store sales rose 4.5% in the US and 5.5% globally. The company blamed the sales increase on the McPick 2 menu, beverage value items and "strong consumer response" to the Buttermilk Crispy Tenders and delivery options. The company plans to open 1,000 new stores with 75% funded by affiliates and licensees. The company is also going to spend $2.4 billion to modernize existing locations and provide digital upgrades.

Shares declined -$5 (-3%) on worried the new $1, $2, $3 value menu would reduce sales on other higher priced, higher margin items. Shares closed at a new high on Friday and I am sure they were caught up in the whoosh effect with the Dow crashing -411 points intraday. This is a buying opportunity with a drop to uptrend support.

Dow component Pfizer (PFE) reported earnings of 62 cents that beat estimates for 56 cents. Revenue of $13.7 billion beat estimates for $13.67 billion. They guided for full year revenue of $53.5-$55.5 billion compared to estimates for $53.83 billion. Earnings guidance was $2.90-$3.00 compared to estimates for $2.78. They anticipate buying back $5 billion in stock in 2018 and investing $5 billion in capital projects. They shocked investors with an expected tax rate of 17% and $15 billion in repatriation taxes over the next 8 years. The tax rate was a shock after AbbVie projected a 9% tax rate with their earnings on Friday. Investors had hoped to hear similar numbers from Pfizer. Shares fell on the earnings and the imploding Dow.

Harley-Davidson (HOG) reported earnings of 54 cents compared to estimates for 46 cents. Revenue of $1.05 billion beat estimates for $1.01 billion. These numbers were up from 27 cents and $933.0 million in the year ago quarter. That is where the good news ends. The company said it was going to incur consolidation costs of $170-$220 million and $75 million in capital costs over the next two years. The consolidation of plants would save them $65-$75 million annually after 2020.

The company said Q4 sales declined 9.6% year over year with sales down -11.1% in the USA. Industry sales were down -6.5%. Overall shipments by Harley in 2017 were the lowest in six years. The company said the customer base was getting older and younger customers were lukewarm to the brand. They lowered 2018 guidance for shipments of 231,000-236,000 motorcycles, down from actual shipments in 2017 of 241,498 and its prior 2018 forecast of 241,000-246,000. Shares fell 8% on the lowered guidance.

Polaris Industries (PII) reported earnings of $1.47 that matched estimates. Revenue of $1.43 billion beat estimates for $1.35 billion. They guided for the full year for earnings of $6.00-$6.20 per share compared to estimates for $6.03. However, revenue guidance for 3%-5% growth was well below the 9% analysts were expecting. Shares fell $18 on the news.

Aetna (AET) reported earnings of $1.25 that beat estimates for $1.18. Revenue of $14.74 billion missed estimates for $14.89 billion. CVS is in the process of acquiring Aetna for $69 billion. Shares fell $6 on the earnings.

Harris Corp (HRS) reported earnings of $1.67 that blew past estimates for $1.40. Revenue of $1.54 billion beat estimates for $1.48 billion. They guided for the full year for earnings of $6.30-$6.50, up from $5.85-$6.05. Revenue guidance of $6.08-$6.14 billion was up from $6.02-$6.14 billion. Shares soared for a $9 gain.

After the bell, Advanced Micro (AMD) reported earnings of 8 cents that beat estimates for 5 cents. Revenue of $1.48 billion beat estimates for $1.41 billion. They guided for Q1 for revenue of $1.5-$1.6 billion and analysts were expecting $1.25 billion. Unfortunately, they backtracked on the comments the Meltdown and Specter hacks would not be material to results. Now they fear the Specter hack could be costly and the efforts to fix the security flaw in their chips could be ineffective.

Nearly every computing device made by AMD, Intel and ARM Holdings over the last 20 years contains the design flaws that "could" allow hackers to steal information. Shares fell -5% initially but rebounded to flat in afterhours.

Juniper (JNPR) reported earnings of 53 cents compared to estimates for 52 cents. Revenue of $1.24 billion narrowly beat estimates for $1.23 billion. The company guided for earnings of 25 cents and revenue of $1.05 billion in Q1. That was less than the 42 cents and $1.15 billion analysts were expecting. The company said the weakness came from delays in installations by key customers and did not impact ongoing sales or market share. Shares fell $2 in afterhours.


It would be really hard to come up with a comprehensive forecast for the markets on Wednesday. The markets closed near the lows for the day and there was no rebound at the close. Typically, when the markets are going to rebound from a big dip they tend to show some signs of buying at the close. On Tuesday, there was actually some sell on close orders but they were light.

We all know the market was very overbought and was due for a rest. Declining -1.75% in two days is a decent drop but it only took us back to where we were trading last Monday. We have gone for more than a year without a material decline and two days, even at -1.75%, is not much given our recent gains.

I would love to jump in and buy the dip but as I wrote on Monday night, I would not jump in on the first drop. We could easily see an intraday rebound attempt that gets slammed again OR could just explode higher again on Wednesday. The recent pattern to triple digit losses is that they were followed by triple digit gains. Will that happen again? Nobody can tell tonight.

The futures are mildly positive at +3 while the SOTU speech is in progress. That is good so far. That means nothing has been said to tank the market at this point. A positive speech should be good for the market.

Last week Bank of America warned of a potential imminent sell off of 5.6% to 2,686. The S&P declined today to 2,820. A forecast is an opinion not a guarantee. If we were going to return to the long-term uptrend line that would be about 2,650-2,700 depending on the speed of the decline. The 100-day average is currently 2,622 and I have written about that several times recently. The 50-day average is 2,700 and far more likely to be hit but maybe not until mid February.

I still believe we have a good chance of remaining in our present range until the first full week of February when the earnings activity begins to decline.

The Dow has 8 more components announcing earnings this week. Boeing could be the most volatile on Wednesday. The stock has been the biggest supporter for the Dow and any disappointment could be ugly. I do not expect it but nobody expected the Amazon, JPM announcement either. The Dow declined -411 points at its lows.

Initial support is 26,000 followed by 24,700 and that would be a long drop.

The Nasdaq declined only 0.85% compared to the -1.4% on the Dow. I believe that is because investors were hanging on to their big cap techs in hopes of blow out earnings this week. I hope they are not disappointed. The index has initial support at 7,400 but then a sizeable drop to 6,900 if the market continues to be weak.

The Russell 2000 came to a dead stop at 1,580 and exactly uptrend support. This was encouraging. Any further decline could test 1,550. The small caps are not as overbought as the big caps but in any material market decline, they tend to get slaughtered.

I sincerely hope the market explodes out of the gate on Wednesday and the two-day decline was a onetime event. Hope is not a successful trading strategy but it is one investors rely on constantly. If the market opens higher, beware of a lower high where the bounce is sold. If you are going to buy the dip, try to wait until you see a rebound with decent volume and velocity before jumping in.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Russian Roulette

by Jim Brown

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Editor's Note

When choosing new position there should be at least a general idea of market direction. Otherwise, you are just playing Russian Roulette. The S&P has declined -1.75% in two days. That is the most since September. Is the decline over? Will the market blast off to triple digit gains again on Wednesday? Nobody knows and trying to recommend new positions ahead of the unknown is not something I want to do today. There is always another day to trade when the direction is clearer.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Bullish Event

by Jim Brown

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Editors Note:

Despite the Dow gapping down -305 at the open there was a bullish event today. The Russell 2000 declined -15 points BUT came to a dead stop at uptrend support at 1,580. This is exactly where it should have stopped and suggests the small caps may not be heading lower unless the bog cap Dow really craters. The Nasdaq declined -64 points but that -0.8% was less than the -1.4% drop on the Dow. This is probably because investors were trying to hold on to their positions until after the big cap tech earnings this week.

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

GME - Gamestop
The long position was entered at the open.

BOTZ - Global X Robotics
The long position was stopped at $26.50 at the gap down open.

IMMU - Immunomedics
The long position was stopped at $17.00 at the gap down 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

BOTZ - Global X Robotics AI - Company Profile


All good things must come to an end. The BOTZ position was stopped out at the open when the Dow gapped down -305 points to start the session.

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:

Closed 1/30: Long BOTZ shares @ $22.10, exit $26.50, +$4.40 gain.
Alternate position:
Closed 1/30: Long Mar $23 call @ 80 cents, exit $3.58, +$2.78 gain.

GME - Gamestop - Company Profile


No specific news. Excellent relative strength with only an 8 cent loss in a very ugly market.

Original Trade Description: January 29th.

GameStop Corp. operates as an omnichannel video game retailer. It sells new and pre-owned video game hardware; video game software; pre-owned and value video game products; video game accessories, such as controllers, gaming headsets, virtual reality products, memory cards, and other add-ons; and digital products, including downloadable content, network points cards, prepaid digital and subscription cards, and digitally downloadable software. The company also sells mobile and consumer electronics, including wireless products and services, and accessories, as well as new and pre-owned smart phones; personal computer (PC) entertainment software in various genres, including sports, action, strategy, adventure/role playing, and simulation; and strategy guides, magazines, and interactive game figures. In addition, it offers collectibles that include licensed merchandise related to the video game, television, and movie industries, as well as pop culture themes; and operates electronic commerce Websites under the GameStop, EB Games, Micromania, and ThinkGeek brand names. Further, the company operates kongregate.com, a browser-based game site; Game Informer magazine, a print and digital video game publication; iOS and Android mobile applications; Simply Mac, a certified Apple consumer electronic products reseller, as well as offers certified training, warranty, and repair services; and Spring Mobile, an authorized AT&T reseller operating AT&T branded wireless retail stores, as well as pre-paid wireless stores under the Cricket Wireless name that offers prepaid services, wireless devices, and accessories. As of January 28, 2017, it operated approximately 7,535 stores in the United States, Australia, Canada, and Europe. GameStop Corp. primarily offers its products through stores under the GameStop, EB Games, and Micromania names. The company was formerly known as GSC Holdings Corp. GameStop Corp. was founded in 1994 and is based in Grapevine, Texas. Company description from FinViz.com.

Expected earnings March 5th.

When Gamestop reported Q4 earnings, sames store sales rose 11.8%, hardware sales rose 39.4% and software sales rose 7.3%. The only gaming hit was an 8.1% decline in sales of preowned software. That was due to a surplus new games hitting the market in the quarter making older titles less desirable.

However, the killer was a 20% decline in revenue from AT&T for selling their mobile phones and DirecTV service. It was not that they sold dramatically fewer units but AT&T slashed their compensation to retailers. For instance if the company got $50 in Q3 for selling a phone and only got $40 in Q4 for selling the same phone, the revenue shortfall is not the fault of the seller but the manufacturer.

Gamestop is currently selling for a ridiculous PE of 5.5 with an 8.7% dividend. Game sales are doing fine and they have 7,500 stores. This looks like a buying opportunity.

Position 1/30:
Long GME shares @ $17.08, see portfolio graphic for stop loss.
Alternate position: Long April $18 call @ .84, see portfolio graphic for stop loss.

IMMU - Immunomedics Inc - Company Profile


No specific news. Shares crashed with the market at the open to stop us out.

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:

Closed 1/30: Long IMMU shares @ $14.69, exit $17.00, +$2.31 gain.
Alternate position:
Closed 1/30: Long Feb $16 call @ $1.15, exit $1.65, +$.50 gain.

TTMI - TTM Technologies - Company Profile


No specific news. Minor gain in a weak market. Our stop loss is just under Thursday's low.

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.

VIPS - Vipshop - Company Profile


No specific news. Only a 56 cent decline in a weak market. Actually good relative strength.

Original Trade Description: January 27th.

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People's Republic of China. It offers a range of branded products, including women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories consisting of belts, fashionable jewelry, watches, and glasses for women and men. The company also provides handbags, such as purses, satchels, duffel bags, and wallets; apparel, gear and accessories, furnishings and decor, toys, and games for boys, girls, infants, and toddlers of all age groups; sports apparel, and sports gear, and footwear for tennis, badminton, soccer, and swimming; and skin care and cosmetic products, including cleansers, lotions, face and body creams, face masks, sunscreen, foundations, lipsticks, eye shadows, and nail polish. In addition, it offers home furnishing products comprising bedding and bath products, home decors, and dining and tabletop items; small household appliances; designer apparel, footwear and accessories; and snacks, health supplements, and occasion-based gifts, such as chocolates, moon-cakes, and tea. Further, the company provides consumer financing, supply chain financing, and wealth management services. The company provides its branded products through its vipshop.com, vip.com, and lefeng.com Websites, as well as through its cellular phone application. Vipshop Holdings Limited was founded in 2008 and is headquartered in Guangzhou, the People's Republic of China. Company description from FinViz.com.

VIPS has about a 6% market share in e-commerce apparel in China. Currently there is a battle in progress for market share among numerous major players including Alibaba and their various websites. They all exist in come part under the Alibaba umbrella.

Tencent (TCEHY) and JD.com (HD) are two of the major online players. They just announced an $853 million stake in VIPS. Tencent bought a 7% stake for $604 million and JD.com put up another $259 million to increase their stake from 2.5% to 5.5%. FYI Tencent owns a 21% stake and Walmart owns a 10% stake in JD.com. These are major players who believe VIPS is going to grow significantly.

VIPS is the 4th largest business to consumer online retailer in China behind Alibaba's Tmall, JD.com and Suning, in that order. Over the last 12 months VIPS increased its active customers by 22% to 6.5 million. The company is expanding out of apparel and accessories and into things like pharmaceuticals. On Alibaba's Singles Day, VIPS handled more than 10 million orders. Analysts expect VIPS revenue to grow 33% in 2018 and earnings to grow 43%.

Why is the investment by JD.com and Tencent so critical? Tencent has 980 million monthly active users on WeChat and JD.com has 266.3 million active customers. They are going to make these customers available to VIPS. Remember, VIPS only has 6.5 million customers but they have the products that Tencent does not have. This means VIPS sales are going to explode.

VIPS has earnings on Feb 19th. I am recommending we buy a cheap call and hold over the earnings event because good things are likely to come out of the report.

No stock, just buy the call. The stock is rising quickly but it could reverse just as easily.

Position 1/29/18:
Long Mar $19 call @ $1.15, 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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