Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/13/2019

Table of Contents

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

Market Wrap

Grounded!

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Boeing is facing increasing trouble as one country after another grounds the 747 Max-8. Canada, the U.S., and the EU have joined a growing global movement to control public risk. Regardless the reason for the crash the fact two jets of the same model were involved in incidents raises concern for public safety. More than one official including President Trump cited new information connecting the two crashes. Because the 737, Max-8, and Max-9 represent a lion's share of Boeing's business a hiccup in business is all but assured.


Market Statistics

There were plenty of other events for the markets to focus on but the Boeing/737 issue topped the list. Another Brexit setback hit the market last night late when the UK Parliament voted down May's amended deal. This means the UK is faced with a no-deal Brexit, a hard-Brexit, or requesting an extension for them to figure out some other option. Parliament did manage to vote against a no-deal Brexit so there is some hope, slim as it is, a smooth transition is still possible. The bad news is, based on EU President Juncker's comments there is little chance a new deal can be struck, so parliament has a job cut out for it.

This week is quadruple witching, the week in which monthly and quarterly options for equities, indices, futures, and commodities expire simultaneously. This event may play a roll in today's upward market movement, it is also a possible target date for the market to alter course so caution is the name of the game.

Economic Calendar

The Economy

We received three economic reports today and they are all for January. The first, Durable Goods, rose 0.4% and well above the expected -0.10%. The previous month was revised higher which adds some strength to the January data and helps get the first quarter off to a better than expected start. This is the third month of durable goods increases. Ex-transportation goods orders fell -0.1%, ex-defense orders rose 0.7% showing strength in private transportation investment. Shipments, however, fell -0.5% and the first time in three months as manufacturers struggle to keep up with demand.


Construction spending rose more than expected and blew away estimates. The headline spending figure rose 1.4% versus an expected 0.5% as government spending boosts the market. Spending is up only 0.3% YOY. Residential spending fell in January, down -0.3%, despite lower interest rates, rising wages and pent up demand and is down -5.7% from last year. Private spending posted a small increase, 0.20%, but is down -2.0% from last year.

The Producer Price Index was a bit weaker than expected which is both a good and bad thing. Headline PPI came in at 0.1% for the month versus an expected 0.2%. While good in terms of the FOMC and rates hikes it does confirm slowing in the economy. The 1.9% YOY rate will help keep the FOMC patient but the 2.3% core YOY rate is something that bears closer attention.


The Dollar Index

The Dollar Index extended its fall in today's session. The weak PPI data did nothing to support the dollar despite political unease in the EU. The index fell more than -0.42% on the news and created a large red candle. The candle has broken the short-term moving average, near the midpoint of the trading range, and looks like it will move down to the bottom of the range near $95.50. The indicators are consistent with a move toward the bottom of the range are not strongly bearish so support is expected near $96 or $95.50. With the FOMC meeting set for next week, I'd expect to see the index continue within the range of $9.50 to $97.50 over the next few days at least, maybe longer. A move below support or above resistance would be significant.


The Gold Index

Gold prices moved up on today's weak dollar. The spot price gained about 0.70% to form a medium-sized green candle. The candle is breaking above resistance at the $1,300 level, the short-term moving average, and an uptrend line so the move has some strength. Because the last downward move created an extreme bearish peak I expect to see the low at $1,280 retested sometime in the near to short-term, when exactly that will happen is hard to say. The next target for resistance is $1,320 but a move to $1,340 is possible with the dollar moving lower, either of those targets could produce strong enough resistance to send gold prices back to the low.


The Gold Miners ETF GDX advanced in today's session but the move wasn't strong and may not get much higher. The ETF closed with a gain near 0.65% to create a small doji candle. The doji shows resistance just below the $23.00 level and a possible peak within a consolidation range. The indicators are mixed showing signs of rising prices with a bearish bias overall. A move up, if it closes above $23.00, could retest $23.50 but higher than that is doubtful without gold setting a new high too. If resistance confirms at$23.00 a move back to $22.00 or $21.50 is likely.


The Oil Index

Oil prices rose nearly 3.0% after U.S. inventory data shows a much bigger draw than expected. WTI advanced $1.32 on news inventories fell by 3.9 million barrels in the last week. The draw isn't large but is more than expected and compounded by a 4.62 million barrel drawdown in gasoline. The weak data is due to a variety of factors including OPEC's tightening efforts and sanctions on two key exporting nations. Now that WTI is moving to new highs I expect to see it continue higher for the near to short-term. My next target for resistance is $60 where is may enter consolidation.


The Oil Index gained about 1.5% on the strength in oil prices and looks like it may move higher. The caveat is that the index is still below potentially strong resistance at the 1,300 level and then the long-term moving average. The indicators are mixed but turning weakly bullish and the move is supported by rising oil prices so a touch to 1,300 or the 150-day EMA is possible. A break above the 150-day EMA would be bullish.


In The News, Story Stocks and Earnings

JP Morgan made waves in the banking sector when it announced plans to open 90 new branches in its competitors back yards. The bank says it will open locations in and around Washington D.C., Boston, Philadelphia and key markets in North Carolina, Tennessee, Missouri, and other mid-western states. Branches are planned near large universities as well as lower to middle-income areas with plans to broaden exposure in those areas next year. Shares of the stock were flat in today's session.


Aurora Cannabis announced a deal that will help seal it's position as the top pot stock this year. The company has entered into a strategic partnership with Nelson Peltz to formulate plans for future expansion. Mr. Peltz was awarded options to buy 20 million shares of the stock, shares which gained more than 10% on today's news. Aurora is one of Canada's top-three cultivator/producers and working aggressively to dominate markets at home, in the U.S. and overseas. One example is the companies purchase of Whistler Medical Marijuana, Whistler is one of Canada's oldest brands and the only cultivator with an organic license.


The VIX fell in today's session and is now at a semi-critical level. Today's low is consistent with the recent low where support has so far been present. This level may produce a reversal in fear and an increase in overall market volatility but the indicators so far do not indicate that. The indicators are both consistent with falling prices so I would expect to see the VIX trend sideways or test support in the near-term. A move below today's low, near 13.50, would be bearish for fear and bullish for the broader market.


The Indices

The indices extended their bounces in today's session but the moves aren't convincingly bullish. Resistance is evident in most cases. Today's leader is the Dow Jones Transportation Average with a gain of 1.02%. The transports created a medium-sized green candle with a long upper shadow that points to resistance at the 10,500 level. The indicators are consistent with a bullish swing in momentum but not yet firing a bullish signal so upward movement is questionable. If the index does move up resistance is likely at 10,500, a move above that would be bullish.


The NASDAQ Composite posted the second largest advance at 0.69%. The tech-heavy index set a new high with today's action but the candle is small and the upper shadow reveals resistance is present. The indicators are consistent with upward drift but not yet showing a strong signal so I am cautious with this one. A move up may reach 7,800 but there is potential for resistance from today's close all through that target.


The S&P 500 also advanced 0.69% in today's session. The broad market index created a small green candle with long upper shadow showing resistance at my uptrend line and the 2820 level. This is potentially a very important level as it may keep the S&P 500 in bear-market conditions in the near to short-term. A fall from this level may confirm the top of a trading range with the December low as a target for support. A move up would confirm bull market intent if not an actual bull market, my target would then be 2,870 and the January 2018 all-time high.


The Dow Jones Industrial Average posted the smallest gain and formed the smallest candle in today's session. The index advanced 0.58% to form a small green candle with visible upper and lower shadows. The candle is above support targets at the short-term moving average and long-term uptrend line so looks bullish. The indicators are still mixed so caution is warranted. A move up may find resistance near 26,050, a move above that would be bullish.


The market moved up, again and again, I am skeptical, there just isn't anything to drive the market higher right now. The updraft may be caused by a lack of bad news, it may be caused by dwindling fear, it may be caused by fundamentals but it's hard to say, there is just too much clouding the market right now to be sure. With the FOMC meeting next week, the Brexit falling apart, slowing global growth, and trade uncertainty lingering in the air it's a good time to sit on the sidelines until a little more certainty arises. I am firmly bullish for the long-term but neutral for the near-term.

Until then, remember the trend!

Thomas Hughes


New Plays

Fish Farming in Indiana

by Jim Brown

Click here to email Jim Brown
Editor's Note

Biotech research companies tend to pop up in unexpected places. The FDA just approved AQB, a subsidiary of XON to farm salmon in Indiana.

 

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


NEW BULLISH Plays

XON - Intrexon Corp - Company Profile

Intrexon Corporation engage in the engineering and industrialization of biology in the United States. The company, through a suite of proprietary and complementary technologies, designs, builds, and regulates gene programs, which are DNA sequences that consist of key genetic components. It provides reproductive technologies and other genetic processes to cattle breeders and producers; biological insect control solutions; technologies for non-browning apple without the use of artificial additives; genetically engineered swine for medical and genetic research; commercial aquaculture products; and preservation and cloning technologies. The company also offers UltraVector platform that enables design and assembly of gene programs that facilitate control over the quality, function, and performance of living cells; and RheoSwitch inducible gene switch that provides quantitative dose-proportionate regulation of the amount and timing of target protein expression. In addition, it provides AttSite Recombinases, which allows stable, targeted gene integration and expression; LEAP automated platform to identify and purify cells of interest, such as antibody expressing cells and stem cells; ActoBiotics platform for targeted in situ expression of proteins and peptides from engineered microbes; and AdenoVerse technology platform for tissue specificity and target selection. The company serves the health, food, energy, and environment markets. Intrexon Corporation has collaboration and license agreements with ZIOPHARM Oncology, Inc.; Ares Trading S.A.; Oragenics, Inc.; Intrexon T1D Partners, LLC; Intrexon Energy Partners, LLC; Intrexon Energy Partners II, LLC; Genopaver, LLC; Fibrocell Science, Inc.; Persea Bio, LLC; OvaXon, LLC; S & I Ophthalmic, LLC; Harvest start-up entities; and others. The company was formerly known as Genomatix Ltd. and changed its name to Intrexon Corporation in 2005. Intrexon Corporation was founded in 1998 and is based in Germantown, Maryland. Company description from FinViz.com.

Intrexon reported a loss of 22 cents that beat estimates for 29 cents. Revenue of $43.2 million declined 44% and missed estimates for $62 million. It was not a good report.

The company's primary revenues come from collaboration and licensing along with some product and service revenues. Collaboration and licensing revenues declined 55% to $25.2 million. These revenues can be very sporadic which means some earnings reports can be ugly. However, the auditor is considering a "going concern" statement in the financials.

The company has $224 million in cash on hand and multiple streams of cash flow from these collaboration and licensing efforts. The CEO said there were multiple efforts underway to develop new revenue streams.

Last week, Bill Miller, of Miller Value Partners, a $2 billion investment fund, tweeted that current efforts underway could make the company worth many multiple of the current stock price. Shares began to rebound from the post earnings beating.

On March 8th, AquaBounty (AQB) a wholly owned subsidiary of XON, received permission from the FDA to import fish eggs from Canada and raise salmon in Indiana. I do not understand what is special about these eggs but shares of AQB spiked sharply.

I am recommending we follow Bill Miller and see if this inexpensive stock can at least return to the pre earnings levels.

Buy XON shares, currently $5.63, stop loss $4.85.
Optional: Buy July $6 call, currently $1.05, stop loss $4.85.



NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Small Caps Trailing

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small caps posted gains, but they were minimal compared to the large cap indexes. We should be grateful that the Russell closed over 1,550 but there is no excitement. I scanned my list of over 300 stocks again and there were probably less than ten that looked to be buyable. The small cap charts are terrible. That means there are plenty of companies that could see some positive buying if sentiment turns around. However, today, there are very few worth considering.



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:

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


BULLISH Play Updates

HAIN - Hain Celestial - Company Profile

Comments:

No specific news. Insider buying has caused thousands of investors to follow their lead.

Original Trade Description: March 2nd.

The Hain Celestial Group, Inc. manufactures, markets, distributes, and sells organic and natural products. The company operates in seven segments: the United States, United Kingdom, Tilda, Ella's Kitchen UK, Canada, Europe, and Cultivate. It offers infant formula; infant, toddler, and kids foods; diapers and wipes; rice and grain-based products; plant-based beverages and frozen desserts, such as soy, rice, oat, almond, and coconut; flour and baking mixes; breads, hot and cold cereals, pasta, condiments, cooking and culinary oils, granolas, and cereal bars; canned, chilled fresh, aseptic, and instant soups; yogurts; chilies; chocolates; and nut butters. The company also provides juices, hot-eating products, desserts, cookies, crackers, frozen fruits and vegetables, pre-cut fresh fruits, refrigerated and frozen plant-based meat-alternative products, tofu, seitan and tempeh products, jams, fruit spreads, jellies, honey, marmalade products, and other food products. In addition, it offers snack products, such as potato, root vegetable, and other vegetable chips, as well as straws, tortilla and whole grain chips, pita chips, and puffs; personal care products consisting of skin, hair, and oral care products, as well as deodorants, baby care items, body washes, sunscreens, and lotions; and herbal, green, black, wellness, rooibos, and chai tea. The company sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and clubs, and drug and convenience stores in approximately 80 countries worldwide. The Hain Celestial Group, Inc. was founded in 1993 and is headquartered in Lake Success, New York. Company description from FinViz.com.

In early February Hain posted earnings of 14 cents that missed estimates for 25 cents. Sales declined -5% to $584.2 million and missed estimates for $611 million. All of the guidance was terrible. Shares fell 20% on the news.

Shares began to rebound almost immediately. The company announced an investor day for February 28th and it was well received. Two analysts posted positive notes about the company the following day.

The most bullish event was a four million share purchase in the open market but the biggest shareholder, Engaged Capital. Director Glenn Welling has purchased five million shares since the analyst meeting and both entities were still buying on Thursday. I see a potential takeover play ahead or at the least and activist shareholder play. Shares are exploding higher on the active buying.

Earnings May 9th.

Position 3/11/19:
Long HAIN shares @ $21.44, see portfolio graphic for stop loss.
Optional: Long May $23 call @ $1.00, see portfolio graphic for stop loss.



MDR - McDermott International - Company Profile

Comments:

Shares down sharply on new news. Close the position.

Original Trade Description: March 2nd.

McDermott International, Inc. provides engineering, procurement, construction and installation, front-end engineering and design, and module fabrication services for upstream field developments. It operates through three segments: the Americas, Europe and Africa; the Middle East; and Asia. The company delivers fixed and floating production facilities, pipeline installations, and subsea systems from concept to commissioning for offshore and subsea oil and gas projects. Its operations include fabrication and offshore installation of fixed and floating structures; and the installation of pipelines and subsea systems, as well as provision of shallow water and deep water construction services. The company's customers include national, integrated, and other oil and gas companies. McDermott International, Inc. was founded in 1923 and is headquartered in Houston, Texas. Company description from FinViz.com.

McDermott posted a whopping $15.33 per share loss for Q4 after writing down $2.2 billion in goodwill. The adjusted loss was $1.55 and analysts were expecting earnings of 17 cents. This was a kitchen sink quarter. They knew it was going to be bad so they bundled everything they could find into the quarter to get it over with in one bad report.

On the flip side they guided for full year earnings of $1.65-$1.75 and analysts were only expecting $1.47. Revenue forecast of $9.5-$10.5 billion was also better than the $9.8 billion estimate.

They ended the year with an order backlog of $10.9 billion and have received $5.5 billion in awards YTD in 2019. They are bidding on $93.1 billion in projects. They have $1.4 billion cash on hand and $2 billion in unused credit.

They recently closed a merger with Chicago Bridge & Iron (CBI) which gave them broader expertise, additional capabilities, and a deeper order book. They expect the $475 million in cost savings synergies to be realized in 2019.

They are currently planning to sell their pipe fabrication business and storage tank business to focus more on their key sectors. They expect proceeds in excess of $1 billion. The pipe business is expected to close in Q2 and the tank business in Q3.

The strong guidance is the key to this position. Shares have rebounded sharply from the earnings disaster and should break over $10 in the next couple of weeks with the potential to move a lot higher. The risk should be minimal because all the bad news is over.

Position 3/4/19:
Long May $10 call @ 90 cents, see portfolio graphic for stop loss.

Previously Closed 3/7: Long MDR shares @ $9.16, exit $8.15, -1.01 loss.



BEARISH Play Updates

VXXB - Barclays VIX Futures ETN - ETN Description

Comments:

Almost a five-month low. The ETN is finally moving in our direction. 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.