Option Investor

Daily Newsletter, Saturday, 1/26/2019

Table of Contents

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

Market Wrap

Saved by the Bell

by Jim Brown

Click here to email Jim Brown

Time on the clock expired before the Dow could slide into the loss column for the week.

Weekly Statistics

Friday Statistics

The Dow gapped up to +306 at 10:30 but faded the rest of the day as the various headlines impacted the market. The temporary shutdown at LaGuardia, the arrest of long time Trump friend Roger Stone, the hourly updates on the government shutdown and the impact of earnings all weighed on the index. The Dow finished the week with a 30-point gain but that was a plus given the sharp declines early in the week.

The Dow, Nasdaq and Russell stretched their weekly gains to five weeks, but the S&P ended its streak with a loss of 6 points for the week.

There were no economic reports on Friday. The durable goods orders for December and the new home sales were postponed by the government shutdown.

Late Friday afternoon the president, house and senate agreed on a temporary bill to reopen the government until February 15th to let 800,000 workers return to their jobs, receive their back pay and at least one more paycheck before another potential shutdown on the 16th. As part of the deal a conference committee was formed to work out a solution acceptable to all parties over the next three weeks. The bill was signed by President Trump late Friday to officially reopen the government.

One of the first reports for next week will be the Q4 GDP, with the analyst consensus at 2.9% growth. The Atlanta Fed real time GDPNow forecast is currently 2.7% growth. The tariffs on China are thought to have removed several tenths from Q4 but anything over 2.5% growth is still a respectable number.

The Q1 GDP is going to be impacted by 0.5% to 0.7% from the government shutdown.

The headline event for next week is of course the FOMC decision on Wednesday and the Powell press conference. There was some "messaging" last week about a potential slowdown in QT if the data supported it. This is another change in the posture for the Fed suggesting they got the message from the market. With Mario Draghi warning about a continued slowdown in Europe and the potential for a hard Brexit, there may have been some communication between the central bankers and Powell is being preemptive in his messaging.

This is also payroll week. I do not know if the government shutdown with 800,000 people furloughed will have any impact on the Nonfarm Payroll numbers or not because I don't know how they account for that in their surveys. The ADP number should not be impacted because that does not have any government component. It is corporate payrolls only.

There are a lot of reports because some were postponed by the shutdown and pushed into next week. There may be some I do not have on the schedule because the new dates have not yet been assigned for those previously postponed.

The earnings calendar will be far more important than the economic calendar.

For this reporting cycle 112 S&P companies have reported Q4 earnings with average growth of 14.3% and 5.6% revenue growth. More than 72% of companies have beaten on earnings and 58% have beaten on revenue. More than 125 S&P companies report next week.

The most important part of this cycle is the rapidly declining estimates for Q1. Estimates were over 8% as of December 1st and that has fallen to only 2.0% as of Friday. If the Q1 forecast falls below zero, the market is going to react negatively. Guidance will be especially critical this quarter.

Q2-2019 estimates have fallen from 10.6% back on July 1st to a forecast for 4.5% today. Q3-2019 has declined from 12.1% on October 1st to 3.4% today.

Apple is the first big cap tech stock to report on Tuesday and this will be a "hold your breath" report. The analyst community is evenly split between "all the bad news is priced in" and "they are going to miss even the revised guidance." With hardly a day going by over the last two months without an Apple supplier warning or an analyst downgrading the stock, there is a lot of bad news for sure. I am worried that when faced with weak phone sales they may guide even lower in hopes of beating Q1 estimates rather than be forced to warn again mid quarter. You know the old saying, "under promise and over deliver."

Apple has a monster impact on the tech sector because of all the suppliers. When you have one company consuming $30 billion in parts every quarter, every little cut in production causes big ripples.

Wednesday is stuffed with big names with Facebook, Boeing, McDonalds, Microsoft, PayPal, Tesla and Visa. Facebook will be the most watched to see if they are going to guide lower because of the 10,000 social media screeners they hired to police posts. How much are those costs going to impact earnings? Will there be charges for litigation both existing and expected? Has their advertising revenue taken a hit from all the privacy violations?

Compared to Apple and Facebook, Microsoft will look like an old reliable tortoise as it plods slowly along creating annual investor wealth rather than consistent quarterly gains. Microsoft has a lot of new initiatives underway and their earnings call could be exciting.

Lastly, Amazon reports on Thursday and nobody is expecting any surprises. That makes this dangerous. The biggest surprise normally comes when you are not expecting it. I think most investors will be interested in how Jeff and Mackenzie Bezos are going to split the 16% of the company that Jeff owns. Investors would love to hear that a settlement has been previously agreed and Mackenzie will get X% but Jeff retains the votes.

There are 13 Dow components reporting earnings.

Intel (INTC) was a 20-point drag on the Dow on Friday after missing on revenue estimates and posting weak guidance. Intel posted earnings of $1.28 that beat estimates for $1.22. Revenue was $18.7 billion, and analysts were expecting $19.01 billion. Overall earnings rose 18% while revenue rose 9%. The company guided for Q1 earnings of 87 cents on revenue of $16 billion. Analysts were expecting $1.01 on revenue of $17.37 billion. It was a major guidance miss. They guided for the full year for earnings of $4.60 on revenue of $71.5 billion and analysts were expecting $4.55 and $73.25 billion.

Intel's revenue growth rate in the cloud division declined from 50% to 24% YoY. That is a major challenge. Large cloud providers like Amazon, Google and Microsoft are customizing their own chips and servers and some have begun adding processors from AMD now that they have the newest technology.

JP Morgan reiterated an overweight rating saying despite current weaknesses in cloud and modems, the second half of 2019 would be an inflection point. This is when they will begin to deliver some of their newer chip architecture and could regain some market share.

Shares fell 5.5% and closed $1.25 off the lows with a loss of nearly $3. With decent resistance at $50 it is likely to be a while before it moves over that level.

Starbucks (SBUX) shares posted a decent gain on Friday after the company reported earnings of 68 cents that beat estimates by 3 cents. The big news was the 4% rise in same store sales that beat estimates for a 2.8% rise. The company said the return of holiday drinks had lifted sales. Who knew Peppermint Mochas and Gingerbread Lattes would be so popular? They said afternoon sales were the best in five quarters thanks to new drinks and food options. They now have more than 2,000 stores in China in 30 cities.

Here is the kicker. If holiday drinks spiked same store sales in Q4, what will happen in Q1 when those drinks are no longer popular and leave the menu? Are they setting up for an earnings miss?

Western Digital (WDC) reported earnings of $1.45 per share that missed estimates for $1.49. Revenue fell from $5.34 billion to $4.23 billion and missed estimates for $4.25 billion. Shares fell more than $2.50 in afterhours on Thursday. However, even though they posed weaker guidance on the conference call shares spiked $11 from the afterhours low of $37.50 to the opening high at $47.95. The company guided for current quarter revenue of $3.6-$3.8 billion and earnings of 40-60 cents. Analysts were expecting $3.88 billion and 97 cents.

The company said the weakness came from a slowdown in high end smart phone sales with lots of memory. They expect that trend to fade in 2H 2019 when another model year for dozens of even larger memory phones will debut. They also forecast a resurgence of cloud buying as cloud computing companies return to more normal buying patterns. The company is also targeting $800 million in cost reductions and those cost reductions will outpace price declines in 2H19. They also blamed the weak earnings on a major slowdown in China in a repeat of comments already heard from other tech companies.

United Rentals (URI) reported earnings on Wednesday that beat estimates. Their earnings beat and positive guidance could be a good sign for Caterpillar's earnings on Monday. United saw rental revenue rise 21% to 86% of its total revenue. Overall revenue rose 20% to $2.306 billion.

If the rental business is booming, we should expect to see equipment sales rise as well. This rental equipment is not cheap and rental prices rose 2.2% for the quarter. Caterpillar is expected to show positive gains in North America, but it will be China in focus. With the monster Belt and Road initiative in China covering 60 countries and costing between $4-$8 trillion, there is going to be a huge demand for earth moving equipment for the next 20 years. They are proposing thousands of miles of highways, railroads and electrical infrastructure to support commerce along those routes. I would not buy and hold Caterpillar today just because of this mammoth project but it will be a source of high demand for years to come.

Worries over trade, the government shutdown and the messaging from the Fed on tapering QT all weighed on the dollar on Friday. The Dollar Index fell a whopping 78 cents and that powered gold and silver higher.

Gold prices shot up nearly $23 on the drop in the dollar. Also attracting attention to gold was Venezuelan president Maduro trying to get his hands on $1.2 billion in gold held by the Bank of England. As many countries have now recognized the opposition party leader as the rightful president of Venezuela, Maduro is trying to extract some hard currency with inflation in Venezuela up 80,000% in one year. If he is heading for a remote island paradise getaway now that his socialist gig is up, he will have to get his gold elsewhere. The Bank of England denied his request to remove Venezuelan gold from their vaults.

Crude prices are back over $53, helped by the falling dollar but hurt by rising inventory levels. In the US, inventories rose by 8.0 million barrels last week. Imports rose by 660,000 bpd to the highest level in four months. With President Trump threatening to cut off imports of Venezuelan oil, refiners have been loading up on the heavy sour crude that converts better into diesel and distillates. If sanctions are incurred, they will have to acquire this from the Middle East and Saudi Arabia is pressuring other OPEC nations not to sell to the US in order to keep our overall inventories lower. WTI is priced on our inventory levels. Sanctions on Venezuela will increase our oil prices.

Active rigs rebounded from the loss of 25 the prior week with 9 rigs going back to work last week. With oil prices still relatively low, there is not likely to be any rush to put rigs to work.


The S&P had rallied for four weeks before stumbling at the 10% correction level of 2,637. After consolidating for a week, Friday was a breath of fresh air and it almost made it to a new 5-week high. There were just enough big cap losers to keep that from happening, but we should be thankful for Friday's gain.

We are heading into big cap tech earnings and there is likely to be volatility with some missing estimates. Resting nearly 30 points above support gives us some room if Apple and/or others stink up the place.

Support is back around 2,615 with some congestion just above that level. This is where we should begin to worry if downside volatility reappears.

The Dow was helped by the tariff sensitive stocks like Boeing, Caterpillar and 3M but Apple was surging ahead once again. While a 5-point gain was remarkable ahead of earnings the stock is still very oversold, and this was probably a combination of short covering and bottom fishing ahead of Tuesday's event. The odds are good we are going to see a major move in Apple, only the direction is unknown.

The Dow overcame its consolidation early in the week and closed right at resistance at 24,750. If it can move over that level the round number resistance at 25,000, which is also the 100 and 200 day averages, will be the next hurdle. There are 13 Dow components reporting earnings this week. There will be volatility.

The Nasdaq closed at a 7-week high and just over resistance at 7135-7157. The Nasdaq is approaching a very active period of congestive resistance between Friday's close and 7,500. This should not be a walk in the park but a tough uphill battle.

The flurry of big cap tech earnings next week will provide volatility in both directions. Support is now around 7,000.

The Russell recovered from the early week decline to close fractionally positive for the week and at a 5-week high. There is a little white space on the chart before there are multiple lines of converging resistance at 1,531.

This is going to be a hectic week. With 13 Dow components, 125 S&P components and most of the Nasdaq big cap tech stocks reporting earnings along with a FOMC decision there will be plenty of headlines. As usual, guidance will be critical in maintaining the rally. Companies will be required to beat on both top and bottom and raise guidance. Anything else will result in declines.

The Tuesday before a FOMC decision is normally positive. With the government shutdown over temporarily and China coming to talk at the end of the week, the political headlines should be positive. Obviously, we all know the market does not need a reason to sell off. However, recently it has been climbing the wall of worry on a regular basis. Let's hope this continues.

Enter passively and exit aggressively!

Jim Brown

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New Plays

Volatility Ahead

by Jim Brown

Click here to email Jim Brown
Editor's Note

Earnings are Thursday and volatility is guaranteed. The last several quarters have seen significant volatility after YRCW reported earnings.


New positions are only added on Wednesday and Saturday except in special circumstances.


YRCW - YRC Worldwide - Company Profile

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2017, this segment had a fleet of approximately 7,600 tractors comprising 5,900 owned and 1,700 leased; and 30,900 trailers consisting of 23,800 owned and 7,100 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, truck loading, and other specialized offerings; guaranteed and expedited delivery services consisting of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates hollandregional.com, newpenn.com, and reddawayregional.com, which are e-commerce Websites offering online resources to manage transportation activities. This segment had a fleet of approximately 6,500 tractors, including 4,700 owned and 1,800 leased; and 13,700 trailers comprising 10,500 owned and 3,200 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. YRC Worldwide Inc. was founded in 1924 and is headquartered in Overland Park, Kansas. Company description from FinViz.com.

YRCW has a problem with earnings reports. They either gap up or gap down immediately afterwards. Their performance has been so spotty on earnings there is no accurate expectation of what they will report.

The stock is cheap at $5.75. Over the last two weeks shares have risen to that level from the December market crash and have plateaued there with no further movement. For any normal stock this would appear to be staging for a post earnings breakout.

Since the options are so cheap, I am recommending a combination play where we buy a cheap option on either side of the stock price and hope for a strong move in either direction.

Earnings Thursday January 31st.

Buy Feb $6 call, currently 48 cents, no stop loss.
Buy Feb $5 put, currently 28 cents, no stop loss.


No New Bearish Plays

In Play Updates and Reviews

Five Weeks

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow, Nasdaq and Russell all posted gains for the fifth consecutive week. The S&P failed to post a gain with a six-point loss for the week. The other indexes posted only miniscule gains. The key point here is that the markets fought back from an early week bout of volatility to close flat for the week. That maintains the streak and the rally remains intact ahead of tech earnings next 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

No Changes

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

Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.

BULLISH Play Updates

AMD - Advanced Micro Devices - Company Profile


Intel crashed on its revenue miss and AMD soared to a 2-month high on expectations for rising market share.

Original Trade Description: Dec 22nd.

Advanced Micro Devices, Inc. operates as a semiconductor company worldwide. It operates in two segments, Computing and Graphics; and Enterprise, Embedded and Semi-Custom. The company's products include x86 microprocessors as an accelerated processing unit (APU), chipsets, discrete and integrated graphics processing units (GPUs), and professional GPUs; and server and embedded processors, and semi-custom System-on-Chip (SoC) products and technology for game consoles. It provides x86 microprocessors for desktop PCs under the AMD Ryzen, AMD Ryzen Pro, Threadripper, AMD A-Series, AMD E-Series, AMD FX CPU, AMD Athlon CPU and APU, AMD Sempron APU and CPU, and AMD Pro A-Series APU brands; microprocessors for notebook and 2-in-1s under the AMD Ryzen processors with Radeon Vega GPUs, AMD A-Series, AMD E-Series, AMD C-Series, AMD Z-Series, AMD FX APU, AMD Phenom, AMD Athlon CPU and APU, AMD Turion, and AMD Sempron APU and CPU brands; and microprocessors for servers under the AMD EPYC and AMD Opteron brands. It also offers chipsets under the AMD brand; discrete GPUs for desktop and notebook PCs under the AMD Radeon and AMD Embedded Radeon brand; professional graphic products under the AMD Radeon Pro and AMD FirePro brands; and customer-specific solutions based on AMD's CPU, GPU, and multi-media technologies. In addition, it provides embedded processor solutions for interactive digital signage, casino gaming, and medical imaging under the AMD Opteron, AMD Athlon, AMD Sempron, AMD Geode, AMD R-Series, G-Series, and AMD Embedded Radeon brands; consumer graphics under the AMD Radeon brand; and semi-custom SoC products. It serves original equipment and design manufacturers, datacenters, system integrators, distributors, and add-in-board manufacturers through its direct sales force, independent distributors, and sales representatives. Advanced Micro Devices, Inc. was founded in 1969 and is headquartered in Santa Clara, California. Company description from FinViz.com.

AMD was always the red-headed stepchild that Intel kept around to prevent Intel from being called a monopoly. They let them have just enough business to keep them going. After decades of picking up Intel's scraps, the company has finally come of age and has announced multiple processor families that are more technological advanced than Intel's chips and they are 12-18 months ahead of Intel's first foray into this level of manufacturing.

Cloud operators are taking notice of the faster, cooler, cheaper processors and this sector buys hardware by the truckload. AMD is stealing market share from Intel and this is likely to accelerate as these new processor families flood the market before Intel can catch up.

Earnings Jan 23rd.

Over the last two weeks of Nasdaq decline, AMD pulled back to uptrend support and could be ready to rebound sharply if the market cooperates.

Update 1/10: AMD's president and CEO, Dr Lisa Su, gave the keynote address at CES 2019 on Thursday. She announced the fastest GPU video card they have ever produced running on a 7nm process. The card has 60 compute units, 3840 stream processors, 16gb of ultra-fast HBM2 memory with a 1 TB memory bandwidth for stunning high speed graphics on 4K and 8K monitors. Shares popped at the open but faded in the afternoon.

Position 12/24:
Long April $20 Call @ $1.70, see portfolio graphic for stop loss.

BOX - Box Inc - Company Profile


No specific news. 2% rally to a 4-month high.

Original Trade Description: Jan 19th.

Box, Inc. provides cloud content management platform that enables organizations of various sizes to manage and share their enterprise content from anywhere or any device. The company's Software-as-a-Service platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 23 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, and energy industries, as well as government sector primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Box, Inc. was founded in 2005 and is headquartered in Redwood City, California. Company description from FinViz.com.

Earnings February 27th.

Box is a provider of cloud content management services to enterprise customers. Procter & Gamble and GE are two of its largest customers. Over the last several weeks there has been a persistent rumor they will be acquired. Google has been a rumored acquirer but it is more likely Microsoft or even Hewlett Packard could be interested.

Entering a position on acquisition rumors is rarely a good move. More than 90% of the time nothing happens. In this case revenue is growing in excess of 25% for 2018 and they guided for 20%+ for 2019. They also guided for their first quarterly profit in Q4 since they went public in 2015.

Their customer retention rate is close to 100% and they had more than 90,000 customers at the end of Q3. Box has enough scale that it makes sense to be acquired rather than a large company trying to replicate their product and service and spend years stealing market share. Buying Box now would be an instant add on to profits.

Shares broke over three-month resistance on Friday and the next material level is $24.

Position 1/22/19:
Long BOX Shares @ $19.74, see portfolio graphic for stop loss.
Optional: Long March $21 Call @ $1.00, see portfolio graphic for stop loss.

INFN - Infinera - Company Profile


Shares posted a 5% gain on Friday on no news.

Original Trade Description: Jan 5th.

Infinera Corporation provides optical transport networking solutions, equipment, and software and services worldwide. The company's product portfolio consists of Infinera DTN-X Family of terabit-class transport network platforms, including the XTC Series, XTS Series, and XT Series; Infinera DTN-X XTC series multi-terabit packet optical transport platforms that integrate digital OTN switching and optical WDM transmission; and Infinera DTN-X XT series for terrestrial applications and XTS series for subsea applications. It also provides Infinera XTM Series packet-optical transport platform that enables high-performance metro networks with service-aware, application-specific capabilities; and Infinera Cloud Xpress Family designed to meet the varying needs of ICPs, communication service providers, Internet exchange service providers, enterprises, and other large-scale data center operators. In addition, the company offers Infinera FlexILS open line system platform that connects various Infinera and third-party terminal equipment platforms over long-distance fiber optic cable providing switching, multiplexing, amplification, and management channels. Further, it provides software solutions, including Xceed Software Suite that address long-haul, subsea, and metro networks, as well as a range of support services for all hardware and software products. The company also serves telecommunications service providers, Internet content providers, cable providers, wholesale and enterprise carriers, research and education institutions, enterprise customers, and government entities. It markets and sells its products and related support services primarily through its direct sales force. The company was formerly known as Zepton Networks. Infinera Corporation was founded in 2000 and is headquartered in Sunnyvale, California. Company description from FinViz.com.

Earnings Feb 5th.

Infinera is a global supplier of terabyte speed network equipment. They are in nearly every country. Their products handle long haul data transmission even in undersea links.

Shares collapsed back in early November when they reported earnings. The CEO said the company had seen a pause in sales as buyers evaluated the combined company. They had just purchased Coriant. The CEO said revenue in Q4 would increase by 50% because of the acquisition but they would post a bigger loss on acquisition expenses.

For Q3 they lost 4 cents and analysts were expecting a 5-cent loss. The guidance for Q4 was a loss of 26-30 cents because of the acquisition.

Shares fell to $3.50 post earnings. Over the last week they have recovered to $4.25 and appear to be accelerating higher. Resistance is $5.

This is not a fast mover, but all the bad news is now priced into the stock.

Readers have been requesting more low dollar stock recommendations and this would fit that scenario.

Update 1/10: The Australia to Japan undersea cable completed a major upgrade of the 12,700 kilometer cable system using Infinera ICE4 devices allowing multi terabit capacity.

Position 1/7/19:
Long INFN shares @ $4.22, stop loss $3.75.

Optional: Long April $5 Call @ 31 cents, no stop loss.

NUAN - Nuance Communications - Company Profile


No specific news. Earnings date changed to February 7th.

Original Trade Description: Jan 16th.

Nuance Communications, Inc. provides voice recognition and natural language understanding solutions worldwide. It operates through five segments: Healthcare, Automotive, Enterprise, Imaging, and Other. The Healthcare segment offers clinical speech and clinical language understanding solutions, such as Dragon Medical, a dictation software that allow physicians to capture and document patient care in real-time; transcription solutions, which enable physicians to streamline clinical documentation with a transcription platforms; clinical document improvement and coding solutions; diagnostic solutions that allow radiologists to document, collaborate, and share medical images and reports; and professional and personal productivity solutions to business users and consumers. The Automotive segment provides branded and personalized virtual assistants and connected car services for automotive manufacturers and their suppliers. The Enterprise segment offers On-Premise solutions and services, an automated customer service solution that comprise automated speech recognition, voice biometrics, transcription, text-to-speech, and dialog and analytics products; and On-Demand multichannel cloud, a platform, which offers enterprises the ability to implement automatic customer service. The Imaging segment provides multi-function printer (MFP) scanning and document management solutions; MFP printing and document management solutions to capture and automate paper to digital work flows; and PDF and OCR software for capturing, creation, and management of document work flows. The Other segment offers voicemail transcription and other value-added services to mobile operators; and speech recognition solutions and predictive text technologies for handset devices. The company was formerly known as ScanSoft, Inc. and changed its name to Nuance Communications, Inc. in October 2005. Nuance Communications, Inc. was founded in 1992 and is headquartered in Burlington, Massachusetts. Company description from FinViz.com.

Multiple positive headlines over the last three weeks plus an appearance at the JP Morgan healthcare conference last week has brought new life to Nuance.

In mid November the company announced the spinoff of its automotive unit and shares tanked in an already down market. The spinoff will be completed before the end of 2019 so it is not anything that should impact price today.

Their expertise in voice recognition software is being married with a new AI background to bring this technology to a wide range of applications. Organic revenue rose 12%.

Shares have rebounded from $12.50 to $15.20 in three weeks and could easily retest their November highs near $18 on the new business applications. Fund managers are looking for beaten down small cap stocks as we move into 2019.

Earnings February 19th.

Buy NUAN shares, currently $15.20, see portfolio graphic for stop loss.

Optional: Long Apr $16 call @ 90 cents, see portfolio graphic for stop loss.

SFIX - Stitch Fix - Company Profile


No specific news. A fractional close over resistance at $23. One more positive day should do it.

Original Trade Description: Jan 23rd.

Stitch Fix, Inc. sells a range of apparel, shoes, and accessories through its Website and mobile app in the United States. It offers denim, dresses, blouses, skirts, shoes, jewelry, and handbags for men, women, and kids under the Stitch Fix brand. The company was formerly known as rack habit inc. and changed its name to Stitch Fix, Inc. in October 2011. Stitch Fix, Inc. was founded in 2011 and is headquartered in San Francisco, California. Company description from FinViz.com.

Stitch posted Q3 earnings in early December of 10 cents compared to estimates for 3 cents. Revenue rose from $295.6 million to $366.2 million and beat estimates for $358 million. They guided for Q4 for revenue of $360-$368 million. Analysts were expecting $363 million.

Shares sank because the expected growth was nearly flat. The company said it was changing its focus to quality long term customers rather than short term customers that are more costly. This is a great move but short sighted investors sold the stock.

They want to move away from customers that continually return everything in their box creating headaches for the company. They want to keep customers that actually buy some or all of the items in their box because that generates the profits. They don't want to add customers at a breakneck speed just to please analysts.

Shares rebounded from the December earnings drop and market crash to a two-month high on Friday. This week has seen a pullback, which could be an entry point.

Position 1/24/19:
Long SFIX shares @ $21.82, see portfolio graphic for stop loss.
Optional: Long March $23 call @ $1.88, see portfolio graphic for stop loss.

SNCR - Synchronoss Technologies - Company Profile


No specific news. Prior resistance is now support.

Original Trade Description: Jan 5th.

Synchronoss Technologies, Inc. provides cloud, digital, messaging, and Internet of things platforms, products, and solutions worldwide. Its products and services include cloud-based sync, backup, storage and content engagement capabilities, broadband connectivity solutions, analytics, white label messaging, and identity/access management that enable communications service providers, cable operators/multi-services operators, original equipment manufacturers with embedded connectivity, and multi-channel retailers, as well as other customers to accelerate and monetize value-add services for secure and broadband networks and connected devices. The company also provides Synchronoss Enterprise solutions, such as secure mobility management, data and analytics, and identity and access management solutions for the financial, healthcare, and life sciences markets; and Synchronoss Personal Cloud platform that delivers an operator-branded experience for subscribers to backup, restore, synchronize, and share their personal content across smartphones, tablets, computers, and other connected devices. Its products and platforms are designed to enable multiple converged communication services to manage across a range of distribution channels, such as e-commerce, m-commerce, telesales, customer stores, indirect, and other retail outlets. The company markets and sells its services through direct sales force and strategic partners. Synchronoss Technologies, Inc. was founded in 2000 and is headquartered in Bridgewater, New Jersey. Company description from FinViz.com.

At CES 2019, Synchronoss Technologies announced a partnership with TBCASoft to redefine telecom operators with a blockchain payment processing system. This will allow users to make instore payments, mobile and digital purchases directly from their phones using the Synchronoss secure-multichannel communications platform. Payments can be made vis SMS, email and rich communications services (RCS) leveraging the TBCASoft cross-carrier blockchain payment system. Synchronoss plans to leverage distributed ledger technology to remove middlemen parties typically found in other payment ecosystems.

Shares rose 20% over the last 10 days as the news surrounding CES became known in the investor marketplace. The stock is on the verge of a breakout to a seven-month high.

Earnings Feb 6th.

Position 1/14/19:
Long SNCR shares @ $6.75, see portfolio graphic for stop loss.
Long March $7.50 call @ 60 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


Excellent drop ahead of the weekend. Futures decay over the weekend should help.

The VXX will eventually be single digits but it could be months in the future.

Previously: Earlier this year, a reader emailed me saying a friend was short 1,000 shares. When the $21 spike came in afterhours, Ameritrade closed that position for a $35,000 loss. They did not have a protective stop loss.

I wrote in the prior newsletter that we were not using a profit stop in this position because it could be hard to re-short the shares after a volatility event. That is just trade management for a profitable position. In ANY SHORT POSITION, you should have a catastrophe stop loss to avoid the position turning into a major loss. Had this person had a stop loss at their entry point, they would have been closed for a breakeven and they would be sleeping a lot better tonight.

Readers should always assume the potential for the worst possible outcome of a short position. Trade smart!

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.
Position 9/6/18:
Short VXX shares @ $54.27, see portfolio graphic for stop loss.

Average cost = $47.61.

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