Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/31/2018

Table of Contents

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

Market Wrap

Fed Outlook Firms

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market rebound from yesterday's lows on strong earnings, economic data and thumbs up for the economy from the FOMC. The committee left rates unchanged but says near-term risks are balanced, there are solid gains in labor, investment and the economy and upgraded their inflation outlook. They now see inflation rising this year and reaching their 2% target in the medium term.

The hawkish alterations to the policy statement raised the chances we'll see 4 rate hikes this year bit did not move outlook for the next hike appreciably. Trump's State of the Union was also talked about but he didn't deliver much change so it was largely shrugged off.

International markets were mixed on earnings, data and caution ahead of today's FOMC meeting. In Asia, markets were wildly mixed with the Nikkei leading losers with a loss near -0.85%, Chinese indices moving in opposite directions and gainers led by Hong Kong. European indices were equally mixed and closed near to flat for the day despite gains in the US market.

Market Statistics

Futures trading was positive all morning with gains in the range of 0.5% to 0.85% for the major indices. Future gained some strength on data and earnings although it wobbled a bit going into the open. The open saw gains in the range of 0.45% for the broad market with those extended to 0.75% within the first 15 minutes of trading. This was the early top and resulted in a retreat to break even for the SPX followed by sideways range bound trading the remainder of the morning. The FOMC release caused a little volatility which led the SPX to briefly dip into negative territory. Losses were regained before the close leaving the index with small gains.

Economic Calendar

The Economy

ADP Employment was well above expectations and point to strong gains in labor. Whether or not that spills over in the NFP remains to be seen, last month's ADP of 242,000 did not result in similarly strong numbers in the non-farm payrolls. Regardless, December's 234,000 beat consensus estimate of 167,000 and is the second month in a row of gains above 225K. Over the past 12 there have been 7 months above 200K resulting in a 12 month average above 200K. Gains were broad in terms of business size but heavily skewed in favor of service, 212K, with professional, trades and hospitality leading. There were 9,000 new construction and 12,000 new manufacturing jobs announced within the goods-producing sector.


The Employment Cost Index was released shortly after the ADP. The index shows a 0.6% rise in employment cost, in line with expectations. The gains are driven by rising wages and benefits which also show an acceleration from 2016. Wages&Salaries and Benefits increased each increased by 0.5% in the month of December bringing full year 2017 gains to 2.6%. Benefits are up 2.5% YOY but so is the costs of those benefits.


The Chicago Business Barometer fell -2.1 points to 65.7 but remains in positive territory and indicative of moderate economic expansion. This month's reading is also 28% above last January, consistent with long-term improvement in the economy. Three of the five sub-indices fell in the last but two, employment and deliveries, showed gains. New Orders fell to a 5 month lower doing the most to cause this month's decline, regardless it remains positive and indicative of increasing business. The Employment Index hit a 6 year high, breaking above 60 for the first time since 2013.

The Index of Pending Home Sales rose by 0.5% in December, the month of gains and on top of an upward revision to November. The NAR says sales are expected to moderate in 2018 as the impact of new tax laws hurts high-value markets. Despite this economists at the NAR say there is some momentum going into 2018 driven by plentiful jobs and rising wages. The problem is persistently low inventory in both new and older homes.

The Dollar Index

The Dollar Index firmed on the FOMC statement but did not gain much. The statement is a bit more hawkish but only the point of being in-line with current outlook, it did not really increase the pace of the rate hiking timeline. That being said inflation is on the rise and could easily begin to pick up momentum in to the middle part of the year. If so the FOMC could indeed be forced to increase the timeline. Until then the Dollar Index may enter a new trading range while we wait on more data here and from abroad. With the EU, the UK and Japan all showing signs (to varying degree) of accelerating growth the dollar could remain under pressure for some time to come.


The Gold Index

Gold prices wobbled in today's session, settling very near to break even and creating a medium sized doji candle. The placement of today's candle is in the middle of a range between long-term resistance and the 30 day EMA so looks more like indecision than an indication of support or resistance. The metal is under pressure from improving US economics and firming FOMC outlook but supported at the same time by recent weakness in the dollar and to some extend geopolitics. In the near term, it seems as the balance of power may shift to the dollar and if so spot prices are likely to fall. A move lower may find support at the 30 day EMA near $1320, a move higher may find resistance at the long-term high near $1360.

The Gold Miners ETF GDX created a medium sized doji in today's session. Today's candle is to the side of the previous but prices moved down to test support in today's action. Support is the pair of moving averages and based on the candle I'd say it was present. Whether it holds is yet to be seen. The indicators are both bearish and moving lower suggesting support will be tested again at least. A move below the longer term 150 day EMA would be bearish with targets at $22.50 and the bottom of a long-term range near $21. A move up may find resistance at $24, a move above there would be bullish within the range.


The Oil Index

Oil prices went on a bit of a wild ride today. Spot price for WTI was down -0.7% in the early session, bounced a bit, dipped back to the early lows on inventory data and then rebound again to close with a small gain. Today's data showed a larger than expected build in WTI and a smaller than expected draw in gasoline that provides more evidence oil markets are well supplied. Today's action suggests there is still support present near $64 but without positive news could easily crumble.

The Oil Index rebound from yesterday's low but it may be a dead-cat bounce. Today's candle is small and near the bottom of yesterday's long red candle suggesting sellers are still in control of prices. The indicators remain bearish and in support of correction within up trend so further downside may be coming. The first target for firm support at the 30 day EMA near 1385 and would equal a 5% correction from recent highs if hit. In the meantime, prices remain in an uptrend with positive and strong forward outlook. This dip may result in another buying opportunity.


In The News, Story Stocks and Earnings

Advanced Micro Devices reported before the bell and served up a 33% increase in revenue beating analysts estimates on the top and bottom lines. The company also provided guidance above consensus on strength in all areas of operation. There are some questions about the comparability of the figures due to changes in accounting practices but that didn't stop shares from gaining 5%.


Boeing also reported before the bell and also blew past estimates. The airline reported a 9.1% increase in YOY revenue driven by improved performance and operating conditions. EPS of $4.80 beat by a staggering $1.91 but that is due to tax-reform impacts. Ex-tax reform adjusted EPS is closer to $3.05, still ahead of expectations but only by a dime. The company also provided strong outlook which helped to drive shares up by more than 5% to set a new all-time high.


Poultry producers found themselves in hot water after allegations of price collusion were levied by US Foods and Sysco. The two companies, which account for the lion's share of all US restaurant and foodservice business, claim producers have been working together to artificially inflate prices. Reps at the major chicken producers deny the claims but that didn't stop shares of Tyson from falling more than -3.5% on high volume.


After hours action was filled with a number of high profile earnings reports with most beating expectations. Paypal beat top and bottom line, beating expectations, with revenue growth of 25.8%. The company says person-to-person volume is up 50%. Share moved up on the news.

Microsoft reported better than expected top and bottom line earnings with a 12% increase in YOY revenue. Gains are driven by increasing demand and strength in the cloud segment.

Facebook reported better than expected revenue and earnings on strength in advertising. The company provided mixed forward outlook as it pulls all cryptocurrency related ads in response to growing abuses. Shares of the stock fell on the news.

Qualcom beat on the top and bottom lines as did AT&T. The telecom giant reported EPS of $0.78 which beat the consensus by $0.13 and provided strong forward guidance. Shares of the stock moved higher on the news.

The Indices

The indices had a bit of a wild ride today if inside fairly narrow ranges. The Dow Jones Industrial Average posted the biggest move, close to 1% intraday and near 0.30% at the close. Today's candle is small and red with a long lower shadow indicative of support at the 26,000 level. The indicators have confirmed the move to support with bearish crossovers and suggest a further test of support is coming. A break below 26,000 would be bearish near term with a target near 25,575 and then 25,000. A confirmation of support at current levels or move higher would be trend following and bullish.


The NASDAQ Composite closed with a gain near 0.12% creating a small red bodied candle. Today's candle is within the near term consolidation range so does not appear to be overly bearish on its own. The indicators, however, confirm near-term weakness with bearish crossovers suggesting a move to test support is on the way. Support may be found at today's lows or, if those are broken, near 7,250 and the short term moving average.


The S&p 500 also closed with a gain near 0.05% creating a small red bodied candle. Today's candle is to the side of yesterday's but set a new two week low confirmed by the indicators. Both MACD and stochastic are pointing lower following bearish crossovers suggesting a test of support or correction is at hand. A move lower may find support at 2,800 or just below there at the short term moving average. A break below the MA may go as low as 2,700 or 2,600 and the long-term moving average.


The Dow Jones Transportation Average closed with barely a gain but a gain it closed with. The index created a small tombstone doji at near-term support following a brief pullback. The candle is a sign of support although the indicators remain bearish and in support of further downside. A break below the moving average would be bearish with targets near 10,500 and 10,000. A confirmation of support or move higher would be bullish and trend following with target near 11,500.


Today's action was a little wobbly but generally left the indices sitting on near-term support targets. A move below these targets would, or could, be bearish but in light of recent market gains more likely natural and healthy correction. Anything more would require a deterioration of forward outlook, an expectation for weak earnings or impending unfavorable conditions... none of which are present now. I remain firmly bullish for the long term but have turned neutral for the near term. It's time for me to sit back and wait to see how deep this correction goes, looking for my next great entry point. Based on today's after-hours earnings reports my guess is not too deep but we'll see.

Until then, remember the trend!

Thomas Hughes


New Plays

Chips Crumbling

by Jim Brown

Click here to email Jim Brown
Editor's Note

The semiconductor sector appears to have peaked and small cap chip stocks are falling to the bottom of the market bag. There is nothing wrong with Jabil as a company but the stock is crashing.



NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

JBL - Jabil Inc - Company Profile

Jabil Inc. provides electronic manufacturing services and solutions worldwide. The company operates through two segments, Electronics Manufacturing Services and Diversified Manufacturing Services. It offers electronics design, production, and product management services. The company provides electronic circuit design services, such as application-specific integrated circuit design, firmware development and rapid prototyping services; and designs plastic and metal enclosures that include the electro-mechanics, such as the printed circuit board assemblies (PCBA). It also specializes in three-dimensional mechanical design comprising the analysis of electronic, electro-mechanical, and optical assemblies, as well as offers various industrial design, advance mechanism development, and tooling management services. In addition, the company provides computer-assisted design services consisting of PCBA design, and PCBA design validation and verification services; and other consulting services, such as the generation of a bill of materials, approved vendor list, and assembly equipment configuration for various PCBA designs. Further, it offers product and process validation services that include product system, product safety, regulatory compliance, and reliability tests, as well as manufacturing test solution development services. Additionally, the company offers systems assembly, test, direct-order fulfillment, and configure-to-order services. It serves automotive and transportation, capital equipment, consumer lifestyles and wearable technologies, computing and storage, defense and aerospace, digital home, healthcare, industrial and energy, mobility, networking and telecommunications, packaging, point of sale, and printing industries. The company was formerly known as Jabil Circuit, Inc. and changed its name to Jabil Inc. in June 2017. Jabil Inc. was founded in 1966 and is headquartered in St. Petersburg, Florida. Company description from FinViz.com.

Expected earnings March 15th.

Jabil reported earnings of 80 cents that beat estimates for 78 cents. Revenue of $5.59 billion also beat estimates for $5.5 billion. They posted wide guidance for Q1 of 50-74 cents on revenue of $4.75-$5.50 billion. Analysts wre expecting $4.76 billion.

By all rights Jabil shares should be rising but the decline that started in September has accelerated with Wednesday's close a 52-week low. With the Semiconductor Index showing increased volatility in what could be a topping process, the lesser known chip companies are declining.

Sell short JBL shares, currently $25.43, initial stop loss $26.65.
Alternate position: Buy March $24 put, currently 70 cents, initial stop loss $26.65.



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



In Play Updates and Reviews

Small Caps Fading

by Jim Brown

Click here to email Jim Brown

Editors Note:

If the small cap stocks are supposed to lead the market then a decline in the Russell is not a good sign. The small cap stocks posted a 3:1 decliners over advancers ratio on Wednesday. I have a screen of more than 200 small cap stocks and there were very few that posted gains. The sector has turned negative with the MACD/RSI turning bearish and uptrend support was broken. We are down to just three plays in the daily portfolio and I am hesitant to add new ones today.





Current Portfolio


Stop Loss Updates

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


Profit Targets

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





Current Position Changes


TTMI - TTM Technologies
The long stock position was stopped at $16.50.



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BULLISH Play Updates

GME - Gamestop - Company Profile

Comments:

No specific news. Yesterday's relative strength evaporated.

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.



TTMI - TTM Technologies - Company Profile

Comments:

No specific news. Shares collapsed to trade under $16.50 and stopped us out. I would have closed the long call option but with the premium only 5 cents we are better off moving it to the Lottery Play section and watching for a rebound over the next two months.

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:
Closed 1/31: Long TTMI shares @ $17.48, exit $16.50, -.98 loss.

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



VIPS - Vipshop - Company Profile

Comments:

No specific news. Only a 19 cent decline in a mixed market.

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

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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