Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/13/2019

Table of Contents

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

Market Wrap

Mixed Signals

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market is moving higher on growing trade optimism despite mixed signals from Washington. Last week, Larry Kudlow and other White House officials let it be known there were still wide differences regarding trade and that a meeting between Trump and Xi would not happen before March. Now, Trump says he may postpone the implementation of the March 2 tariffs provided the US and China could reach an acceptable agreement before the deadline. That message and word from China President Xi would meet with Mnuchin and Lighthizer on Friday implies a deal, at least in principle, is not that far away.


Another government shutdown may be avoided but the jury is still out on that one. The Congress has passed a bill on the President's desk for his signature but the signing has not yet happened. Trump says he wants to peruse the document for potential landmines he wants to avoid. The deal doesn't include money for the wall but it does include funding for a physical barrier along some parts of the border which is a big step for the Democrats to have made. If he vetoes the bill Trump says he will still get his funding even if he has to shift funds from other spending projects.

Market Statistics

The Presidential political cycle is already getting underway, oh joy. Today's news includes a report that Joe Biden, former Obama VP, is entertaining the idea of running for President. So far all he's done is flirt with potential donors as he mulls his decision. As of now, he is the front-runner for the Democratic nomination.

The fight against share buybacks is slowly heating up. Senator Marco Rubio recently joined the fray and said today a bill addressing the issue would be presented soon. According to him, we don't have free markets and buybacks are the reason why. His plan is to alter the tax code to disincentivize the practice in hopes businesses will pass on more of their profits to employees or in the form of dividends. He wants to treat buybacks and dividends the same way, good in theory, but if he's successful the market will lose billions of dollars of support that has been a major driver of the bull market.

Today's market set the most new highs since before the November/December stock market correction.

Economic Calendar

The Economy

Only one economic release today and it was a fairly important one; the Consumer Price Index for January. The reports show that consumer-level inflation held steady over the last month as declines in energy offset increases in food, shelter, and most other items Americans use daily. The gasoline index declined the most, about 5.5%, while food increased by 0.2%. At the core-level CPI rose 0.2% over the last month and up 2.2% YOY. This data is solid, solid enough to indicate continued US expansion, and is enough to substantially increase the chances of a rate hike this year, slim as they are.



The Dollar Index

The Dollar started today on shaky footing as trade optimism fueled an early rally in global currencies. Later in the day, however, weak EU data and solid US data helped stiffen the dollar. In the EU industrial production fell -0.9% and more than expected in a sign of continuing slowdown within their economy. In the UK CPI came in below expectations and at a 2-year low. The DXY opened with a loss equal to yesterday's gains but then moved up steadily to regain all the losses before the close. The index looks like it may be consolidating for another push higher, a push that may take it up to the $99 level in the near-term.


The Gold Index

Gold prices tried to rally on today's weak dollar but weren't able to hold the gains. The dollar's midday reversal is the cause and sent spot prices back to break even before the close of the session. The metal is still in consolidation and still above support so there is a bullish bias, the problem is that the dollar looks like it could move higher on stable US economic activity and that would put pressure on gold. Support is near $1,315, a move up may find resistance near $1,330 while a move lower may find support near $1,300.


The Gold Miners ETF GDX moved up in the early portion of the session only to fall back by the close. The ETF closed with a small loss and set a new near-term low in the process. The candle is indecisive but price action over the past two weeks shows a market that is under pressure. For now, the ETF is still above support at the $22 level so there some bullish bias, the risk is that a break of $22 could trigger a deeper decline, possibly to retest support at the short-term moving average. A move up may find resistance at $22.50.


The Oil Index

Oil prices were able to move higher despite a larger than expected build in US stockpiles. The driver of the move is word from OPEC and Saudi Arabia indicating production caps have lowered total output to under 31 million barrels per day. WTI gained nearly 2.0% on the news but the gains were capped by the US inventory data. Stockpiles of WTI and distillates increased substantially over the last week despite an expectation for tightening markets.

The OPEC production cut seems to be doing what it was intended, oil prices are creeping higher, although there is still a long way to go before they regain the losses we saw at the end of last year. Based on price action alone, it looks like WTI will test new near-term highs before it will seek out new near-term lows.


The Oil Index tried to move higher on today's oil news but the gains weren't held. The index continues to consolidate within its near-term range and does not show much sign of breaking out in either direction. The indicators are both near the middle of their ranges which indicates a quiet market, one waiting for a sign of direction. A move up will be bullish when it break 1,300, a move lower will be bearish when it breaks 1,225.


In The News, Story Stocks and Earnings

Hilton Worldwide reported better than expected revenue and earnings despite the effects of slowing global economic growth. The hotel operator says global RevPar grew 2.0%, US RevPar grew 1.1%, management fees increased by 13.9%, margins improved, adjusted EPS grew 12.9%, and occupancy held steady. The company went on to raise guidance above the consensus and sent shares moving up. The analyst at Nomura tracking the sector says they are comfortable with the guidance after seeing the Q4 results but held his price target steady. Shares moved up more than 5%.


Dish Network fell more than -7.0% in today's action after reporting better than expected revenue. The problem is a miss on EPS and a massive decline in paid subscribers. The number of paid subscribers fell 339,000 in the last quarter, 10 times the number of net-subscriber adds posted in the previous quarter. Dish has been experiencing massive customer loss for some time now and does not appear to be winning the TV/media wars.


Shares of Deere And Company were downgraded today by Bank of America Merril Lynch. The analysts say ongoing trade concerns and slowing global expansion will weigh on sales of farm equipment. Based on that outlook, Deere is expected to not raise guidance this year and not maintain a premium over rival Caterpillar. The downgrade is from buy to neutral and comes with a decreased price target, $11.25, and sent shares down more than 2.0%.


Google made headlines today announcing it would invest $13 billion in US real estate this year. The company is planning on expanding its data centers into Nebraska, Nevada, Ohio, Texas, Oklahoma, South Carolina, and Virginia and add 10's of thousands of jobs in the process. Shares of the stock gained about 0.35% on the news, the bigger story is, of course, the boost to US jobs, jobs that are fueling wage gains and consumer spending.


The Indices

The indices moved higher today but the gains were capped by profit-takers, not surprising given this week's run up and the fact OPEX is at hand. The day's leader is the Dow Jones Transportation Average with an advance of 0.49%.

The transports have extended their break above the long-term moving average and look like they could continue to rise in the near-term at least. The indicators are bullish so upward pressure is present, the problem is that momentum and stochastic are both diverging from the new high. A move higher is still expected although gains may be limited, my next target for resistance is 10,750 assuming we get a close above 10,500.


The Dow Jones Industrial Average posted the second largest gain with an advance of 0.46%. The blue-chip index moved higher in the pre-opening session to break above resistance at a long-term uptrend line and set a new near-term high. The move is bullish and may lead to higher prices still but there are some red flags that may halt gains in the coming days. Both indicators are divergent from the new high and there is a potentially strong resistance target just above today's close. A move up is expected but I wouldn't count on it going to far until price moves above 25,750.


The broad market S&P 500 moved up 0.30% to set a new near-term high. The move is bullish but the candle is weak and there is some visible upper shadow so the risk of reversal is present. The indicators are mixed, MACD is bullish and divergent while stochastic moves lower, which indicates a slowing market and the presence of resistance, a recipe for reversal if I ever heard one. If prices are able to move higher resistance may be present just above today's close near 2,780, a break above that would be bullish. If the price falls from today's closing level support may be found at 2,700 and the long-term moving average.


The NASDAQ Composite posted the smallest gain at only 0.07%. The tech-heavy index created the most bearish looking candle of all, small and red with visible upper shadow, that raises the odds tomorrow's action will see index prices fall from today's close. A move lower may find support at Tuesday's close, a move below that will probably continue down to the long-term moving average near 7,260.


The market is moving higher and that is a great thing, the sentiment is improving but we are not out of the woods yet. The trade talks are the biggest obstacle the market faces at this time, the biggest obstacle it has faced in quite some time, and there is no guarantee we'll see substantive progress regardless the cause for hope. If the talks break down, if the next round of tariffs gets implemented and the outlook for global economic activity takes another hit I fear we may see a sharp and possibly prolonged downdraft in stock prices. Until then I am bullish for the long term and incredibly cautiously bullish for the near-term.

Until then, remember the trend!

Thomas Hughes


New Plays

Setting Up for a Fall

by Jim Brown

Click here to email Jim Brown
Editor's Note

Bullish sentiment is rising ahead of a normally weak period in the market. While I would love to see the S&P retest 2,800 and continue its recent gains, the odds are shrinking that it will happen. I would love to just back up the truck and load up a bunch of momentum stocks but the last two weeks of February are the weakest part of the month. The cloud of post earnings depression settles over the market and investors are deciding what positions to sell to raise money to pay their taxes. With the weak performance on the S&P and Nasdaq today, the market could be setting up for the post expiration turmoil. There is no reason to add new plays today.

 

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


NEW BULLISH Plays

No New Bullish Plays


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Nearing Resistance Again

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell posted only a minor 4-point gain as it nears resistance at 1,550. This was actually a decent gain given the weakness in the big cap markets near the close. The Dow, S&P and Nasdaq all dove at the close as a sell program hit. The Russell was hit as well but the damage was less severe. Unfortunately, the resistance at 1,550 could be strong. It depends on what headlines we are going to be fighting.



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



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


BULLISH Play Updates

BOX - Box Inc - Company Profile

Comments:

No specific news. Closed at a new 4-month high.

Original Trade Description: Jan 19th.

Box, Inc. provides a 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.



EGHT - 8X8 Inc - Company Profile

Comments:

8x8 announced the offering of $200 million in convertible senior notes. Over the next 40 days the company will enter into agreements with option counterparties to create "capped calls." This process is an attempt to limit the impact of any future conversion of the notes on the number of shares outstanding. Shares dipped sharply at the open but recovered quickly to post a decent gain for the day.

Original Trade Description: Feb 9th.

8x8, Inc. provides enterprise cloud communications and customer engagement solutions for small and mid-size businesses, mid-market, and distributed enterprises worldwide. It offers unified communications, team collaboration, conferencing, contact center, analytics, and other services to various business customers on a software-as-a-service (SaaS) model. The company provides 8x8 Virtual Office, a self-contained and end-to-end solution that delivers high quality voice and unified communications-as-a-service; 8x8 Virtual Contact Center, a multi-channel cloud-based contact center solution; and 8x8 Virtual Office Meetings, a cloud-based video conferencing and collaboration solution that enables secure and continuous collaboration with borderless high definition (HD) video and audio communications from mobile and desktop devices. It also offers 8x8 Sameroom, an interoperability platform, which enables cross-team messaging and collaboration within a large organization and between organizations; and Script8, a communications flow and routing engine that offers a scripting environment for routing communications data for specific workflows, as well as allows end-users to create simple, personalized, and customizable communications experiences, such as communications control, external data source integration, and intelligent routing. The company integrates its services with third-party applications and platforms, including enterprise resource planning, customer relations management, human capital management, and other proprietary application suites. It markets its services to end users through direct sales organization, Website, and channel partners. As of March 31, 2018, the company serves approximately 53,800 business customers. 8x8, Inc. was founded in 1987 and is headquartered in San Jose, California. Company description from FinViz.com.

8X8 was punished severely for earnings that missed only fractionally. The company reported a loss of 6 cents on revenue of $89.9 million. Analysts were expecting a loss of 6 cents on revenue of $88.6 million. No problems there except that matching on earnings normally produces a decline in the stock.

They lowered guidance for 2019 from $334-$338 million to $334-$335 million. Still not a major decline but the stock was hammered.

Service revenue rose 20% with a 61% increase in customers billing more than $10,000 in monthly recurring charges. Average monthly service revenue per business customer rose to $5,211.

The CEO said, "we are disrupting a $50 billion addressable market that is shifting toward cloud solutions with a preference for a single technology platform."

Shares fell from $19.50 to $16.50 on the earnings. They have recovered to $18.79 and continue to move higher.

Earnings April 30th.

Position 2/11:
Long EGHT shares @ $18.88, see portfolio graphic for stop loss.
Optional: Long May $20 call @ $1.05, see portfolio graphic for stop loss.



EPZM - Epizyme - Company Profile

Comments:

No specific news. Holding at 5-month high close in a weak market.

Original Trade Description: Feb 6th.

Epizyme, Inc., a clinical stage biopharmaceutical company, discovers and develops novel epigenetic medicines for patients with cancer and other diseases in the United States. Its product candidates include tazemetostat, an inhibitor of the EZH2, which is in Phase II clinical trial for patients with relapsed or refractory non-hodgkin lymphoma (NHL); Phase II clinical trial for relapsed or refractory patients with mesothelioma; Phase I dose-escalation and expansion study for children with INI1-negative solid tumors; Phase II clinical trials for patients with relapsed or refractory diffuse large B-cell lymphoma (DLBCL); Phase Ib/II clinical trial in elderly patients with DLBCL; and Phase II clinical trial for relapsed or refractory patients with mesothelioma characterized by BAP1 loss-of-function,; and Phase Ib/II clinical trial for the treatment of patients with relapsed or refractory metastatic non-small cell lung cancer, as well as Phase II clinical trial in adult patients with ovarian cancer. The company is also developing additional programs, such as pinometostat, an intravenously administered small molecule inhibitor of DOT1L for the treatment of acute leukemias; and PRMT5 inhibitor that is in Phase I clinical trial for patients with solid tumors and NHL. Epizyme, Inc. has collaboration agreements with Celgene Corporation; Genentech Inc.; Glaxo Group Limited; Roche Molecular Systems, Inc.; Eisai Co. Ltd.; Lymphoma Study Association; and Boehringer Ingelheim. The company was founded in 2007 and is headquartered in Cambridge, Massachusetts. Company description from FinViz.com.

In early January, Epizyme said it was planning to file for approval of its leading drug candidate, Tazemetostat, later this year. This drug is a late-line treatment for follicular lymphoma with EZH2 mutations. There are approximately 25,000 cases diagnosed annually. The Phase 2 data, showed an objective response rate (ORR) of 71% and complete remission of 11%. The ORR for patients with the wild-type EZH2 mutation saw a 6% remission.

The company said the completed Phase 2 data could serve as a new drug application in Q2 for use in epitheloid sarcoma, a cancer without a drug therapy.

Obviously, it takes some time for FDA approval but once approved this could be a very large cash flow in the hundreds of millions of dollars annually.

Shares popped on the initial announcement in January then suffered a relapse on profit taking. This week EPZM has rebounded out of that dip and made a new 5-month high.

Earnings March 12th.

Position 2/7/19:
Long EPZM shares @ $11.63, see portfolio graphic for stop loss.
Optional: Long March $12.50 call @ $.55, see portfolio graphic for stop loss.



INFN - Infinera - Company Profile

Comments:

Infinera was selected to provide a long-distance telecommunication network in Mexico for GTAC on a nationwide basis. The selected Infinera because of its capability to deliver up to 200 gigabits per second and error free transmission of 80 channels of 100 gigabits per channel without regeneration over a 400 kilometer distance.

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:
Closed 2/7: Long INFN shares @ $4.22, exit $4.75, +.53 gain (12%).

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



RDUS - Radius Health - Company Profile

Comments:

No specific news.

Original Trade Description: Feb 2nd.

Radius Health, Inc., a biopharmaceutical company, develops and commercializes endocrine therapeutics in the areas of osteoporosis and oncology. The company markets TYMLOS for the treatment of postmenopausal women with osteoporosis. It is also developing abaloparatide transdermal patch, a short-wear-time patch formulation of abaloparatide that is in Phase III clinical trial to treat postmenopausal women with osteoporosis; RAD1901, a selective estrogen receptor down-regulator/degrader, which is in Phase I clinical trial for the treatment of metastatic breast cancer; and RAD140, a non-steroidal selective androgen receptor modulator that is in Phase I clinical trial to treat breast cancer. The company has collaborations and license agreements with 3M; Ipsen Pharma SAS; Eisai Co. Ltd.; Duke University; and Teijin Limited, as well as research and development agreements with Nordic Bioscience Clinical Development VII A/S. Radius Health, Inc. was founded in 2003 and is headquartered in Waltham, Massachusetts. Company description from FinViz.com.

A week ago, Radius took advantage of the JP Morgan Healthcare Conference to raise guidance for the full year 2018. Sales of their lead drug, Tymlos, surpassed the upper range of $95-$98 million. This is for osteoporosis in postmenopausal women. This is the only anabolic drug in the US market that is increasing its market share. Share rose from 20% at the beginning of 2018 to 27% at the end of the year. In December, market share of new anabolic patients was 40%.

They announced an accelerated late stage clinical pipeline for two drugs with blockbuster potential ($1 billion a year). These are elacestrant (breast cancer) and abaloparatide-patch (osteoporosis in postmenopausal women.)

For the full year 2019 they expect revenue of $155-$175 million and year-end cash of more than $100 million.

Earnings February 28th.

Since the JP Morgan conference three weeks ago, Radius has moved steadily higher. If shares can move over $20 the rally should accelerate.

Position 2/4/19:

Optional: Long March $20 call @ $.90, see portfolio graphic for stop loss.

Previously closed 2/7: Long RDUS shares @ $18.70, exit $17.95, -.75 loss.



BEARISH Play Updates

VXXB - Barclays VIX Futures ETN - ETN Description

Comments:

Only a minor decline because of the market weakness at the close. We just need to be patient.

Original Trade Description: Nov 17th.

The investment seeks return linked to the performance of the S&P 500 VIX Short-Term Futures Index TR. The ETN offers exposure to futures contracts of specified maturities on the VIX index and not direct exposure to the VIX index or its spot level. The index is designed to provide investors with exposure to one or more maturities of futures contracts on the CBOE Volatility Index. Company description from FinViz.com.

The VXXB is a short-term volatility ETN 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 ETN. 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, the prior VXX ETN had done five 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 VXXB and its predecessor the VXX always decline long term.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETN and forget it. 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 may put a trailing stop loss on it. We will take profits and then look for a bounce to get back in. We could keep this play in the portfolio on a trading basis permanently.

The VXXB will be hard to short. The shares are out there and being traded because the volume on Thursday was 22.1 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.

Position 2/1/19:
Short VXXB shares @ $35.33, see portfolio graphic for stop loss.