Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/27/2019

Table of Contents

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

Market Wrap

Rates Fall, Stocks Follow

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Comments from Stephen Moore, Trump's pick for the Federal Reserve, sent bond rates to new lows and equity markets followed suit. Moore, who has been critical of the FOMC, say's he's no sycophant to Trump but he would call for an immediate rate cut. While not a confirmed member his comments were treated like he were. It didn't help that the Reserve Bank of New Zealand issued a warning with their policy statement last night. The RBNZ says their next policy is most likely a rate cut reinforcing the idea of a global slowdown and impending recession.

Market Statistics


Conversely, in the EU, ECB President Mario Draghi cautioned markets that slowing global growth is not necessarily an indication of recession. The caveat for us is that said signal typically leads the market by quarters if not a year or more, and there is still no sign of an actual recession, only slowing growth. The yield for the 10-year Treasury fell below 2.375 deepening the inverted yield curve.


Secretary of the Treasury Steve Mnuchin and Trade Ambassador Robert Lighthizer are on their way to China. They are going to meet with Chinese Vice Premier Liu He for the third time. The word from the White House is that trade negotiations are still progressing positively, we should get some confirmation of that this weekend (or the opposite). Liu He is also expected in Washington in early April, contingent on the success of this weeks meeting, with a possible meeting between Xi and Trump next month but don't hold your breath.

In the EU the Brexit fight is nearing its endgame. Theresa May is desperately fighting for support of her deal, the only deal available to the UK, and has offered to resign if it is accepted by Parliament. Parliament is voting on a series of issues this evening that will help them determine the course they wish to take. As an outside observer, it seems as if there are but three choices; the May Brexit Deal, a no-deal Hard-Brexit, or no Brexit at all. Ironically, if the UK does go Hard-Brexit they will have much more flexibility in dealing with us and every other nation on the planet except the EU, a fact that may sway Parliament or even the EU to change their minds.

Economic Calendar

The Economy

There is at least one sector benefiting from the interest rate scare; housing. With rates on the decline, mortgage applications are surging. Over the last week, the rate on a 30-year mortgage fell another 10 basis points to 4.45%. The number of mortgage applications surged 8.9% and is at another new high. The Mortgage Purchase Index, the Mortage Market Index, and the Refinance Index all made strong gains over the past week. The housing market may still be sluggish but it is gaining momentum, this year could be a stellar year for the builders.

The U.S. Trade Deficit fell in the last month and much more than expected. The deficit came in at -$51.1 billion versus a smaller drop to about -$57.7 billion. The decline is driven by China and an increase in the number of soybeans they are purchasing. It's a small step but a good sign that U.S./China trade negotiations are bearing fruit and that relations are normalizing. A few more data points like that or some positive on the trade deal and the market might stop worrying about a recession.

The Dollar Index

The Dollar Index tried to advance today but fear of slowing growth capped gains. The index extended its move above the short-term moving average to hit resistance at $97 and fall back to break even. The index is still trapped within its range likely to remain there in the near-term. The risk is that there are several potential catalysts including news on Brexit, the Trade Deal, or inflation that may send the dollar moving sharply in either direction. The Brexit and Trade Deal are kind of floating out there in limbo where they could pop out to scare traders at any time, news on inflation is due out on Friday and more likely to miss than beat consensus estimates.


The Gold Index

Gold prices fell about a half percent today. Today's candle shows resistance at the uptrend line and support at the short-term moving average that is likely to keep the metal range bound in the very near-term. Uncertainty over inflation, interest rates, and geopolitics has the metal moving sideways within a new range. Based on the last MACD peak which was quite extreme I am still expecting a retest of the recent low sometime soon but that doesn't mean a test of $1,340 won't come first. The indicators are consistent with range-bound trading so I don't think any big moves are brewing for gold right now.


The Gold Miners ETF GDX fell back from its peak in today's trading. The ETF is showing signs of resistance at the top of its trading range that may keep it from moving much higher. The indicators are weakly bullish but show signs of peaking which are consistent with range-bound trading. A move higher may make it to $23.50 without another catalyst, a break above that level may be bullish. It looks like there is some support at $23.00 but it isn't strong, if prices move below there a drop to the short-term moving average is likely.


The Oil Index

Oil prices fell today but the move was small, the uptrend is intact. Today's move was driven by unexpected inventory data that showed a larger than expected build in WTI storage levels. WTI storage jumped 2.8 million barrels versus an expected draw of 1.1 million. The news is bearish for oil but offset by a much larger than expected draw in distillates. U.S. production is helping to keep oil prices from shooting higher but OPEC's tightening scheme is the stronger force. Couple that with news Venezuela's primary oil terminal is without power and the odds of global supply tightening increase.


The Oil Index fell today as well as it winds up for its next big move. The index is caught between the short and long-term moving averages where it is getting squeezed. The indicators are mixed but with bullish bias and set up to fire bullish crossovers so I am optimistic the index will move higher. The outlook for energy profits is already on the rise with oil prices edging higher and likely to carry the sector higher with it. A break above the long-term EMA will be bullish and may take the index up to 1,400 or higher in the near-term. A fall from this level may be bearish but it would depend on the cause.


In The News, Story Stocks and Earnings

Boeing was able to make a small advance in today's session. The stock bounced from the long-term moving average to form a small green candle as it reestablishes support near the $375 level. Today's move is driven by news the company has a fix for its 737 MAX problem, what it doesn't have a fix for is the political fallout that is only now gaining momentum. The FAA and Boeing are both in the hot seat over the approvals process and Boeing is the only one the government can fine. The fix includes a software update, increase pilot training, and cockpit alerts for the specific problem that caused the two crashes. Safety inspections have not revealed any new issues. Analysts at Citigroup have reinstated Boeing at a buy so this may mark a turning point for the stock.


KB Homes reported after the bell yesterday with mixed results. The company says revenue fell -7% in the last year but EPS beat by a wide margin. More importantly, the company raised its forecast for revenue and profits in the second half citing improving conditions. These comments jibe with what I'm seeing in the mortgage data and may yet be underestimating the strength of pent up demand. Shares of the stock jumped more than 3.0% in today's session but triggered resistance at the $25.00 level.


The Homebuilders SPDR XHB moved up more than 1.0% on mortgage outlook and results from KBH. The ETF is moving up from a strong support level and confirmed by the indicators so higher prices are expected. The stochastic and MACD are forming a relatively strong bullish trend-following signal so we may see this ETF make an extended run to the upside. My first target for resistance is $39.50, a move above that could run as high as $46 in the near to short-term.


Lululemon reported after the bell and there are only three things to say about it. The company reported strong revenue, strong earnings, and gave strong guidance above the analyst's consensus. Results are driven by strong comps, 17%, that are above the consensus as well. Shares of the stock rose 10% on the news and likely to move higher longer-term as the company executes on its strategies.


The Indices

The indices fell fairly hard this morning but didn't hold the gains. A midday bounce from support more than halved the day's losses in most cases. The only index to close with a gain is the Dow Jones Transportation Average and it managed to move higher all day. The transports created a medium-sized green candle moving up to test resistance at the pair of moving averages and resistance was there. Today's action may be bullish and is loosely supported by the indicators, the problem is that price action is still below both moving averages and there is little impetus to buy. A move above the moving averages may be bullish, a fall from today's close would confirm resistance and a possible return to recent lows.


The day's biggest loser is the NASDAQ Composite. The tech-heavy index shed about -0.60% at the close and shows both resistance and support in a single candle. The candle is large and red but mostly shadow and sitting above support. Support is at the short-term moving average and may be strong enough to cause a bounce but the indicators don't confirm that outlook. The indicators are both pointing lower following bearish crossovers which is consistent with lower prices. A move below the short-term EMA would be bearish and could take the index down to 7,400, 7,200, or 7,200.


The S&P 500 closed with a loss of -0.39%. The broad market index closed below my uptrend line and confirm resistance at this level. The candle points to lower prices and that is supported by the indicators which are both bearish and gaining strength. The caveat is that there is still support at the short-term moving average that may keep the index from falling much further. A fall below the 30-day EMA would be bearish and may take the index down to 2,730.


The Dow Jones Industrial Average closed with the smallest decline, only -0.12%. The blue-chips fell more than that but were able to regain most of the loss by the close. The candle is a medium-sized doji showing resistance at a long-term uptrend line and support at the short-term moving average. The indicators are bearish and gaining strength so it looks like support is the more likely loser in this battle. A move below the 30-day EMA would be bearish and may take the index down to 25,100 and the long-term EMA.


The indices are still trying to decide what to do. There are signs of a possible recession, economic data is slowing, but the outlook for growth remains positive. If near-term trends in economics persist we may indeed see a recession but that still won't be for several quarters at least unless something drastic happens to curb activity. The more likely scenario, assuming trade relations don't worsen, is that global economic growth will stabilize as we go into the summer and fear of recession will fade. In the meantime there are many reasons to expect some volatility and a sell in the market, negative earnings growth in the first quarter, Brexit, Trade Negotiations are only three of them. I remain firmly bullish for the long-term and neutral for the near-term.

Until then, remember the trend!

Thomas Hughes


New Plays

Why Buy?

by Jim Brown

Click here to email Jim Brown
Editor's Note

With yields at a 15-month low and dropping investors are wondering, why buy? The yield on the 10-year fell to 2.37% and brings the potential for a real inversion that much closer. The yield on the 2-year is 2.22%. An inversion of the 2/10 is the real recession indicator but only if it holds for a month or more. A temporary inversion is just a warning sign. The equity markets are running scared and with the S&P futures down -14 tonight we could be in for a rough day on Thursday. There is always the possibility for a reversal and short squeeze but the yields would have to reverse first. There is no reason for us to try and launch a new position in an unstable environment.

 

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

Bearish Pattern Forming

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Russell came close to touching 1,500 again as it works on a new lower high pattern. For three days now the Russell has failed to recover much of the prior week's loss. There was one good day but today's intraday dip to 1,505 suggests the path of least resistance is down. While that phrase has always been over used it is still true. With the S&P futures down -14 tonight, we are setting up for another bad day on Thursday.



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

HAIN - Hain Celestial - Company Profile

Comments:

No specific news. Shares down only 9 cents in a bad market. No further insider buying yet.

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.

Update 3/15: Shares are still rising but there has not been any additional insider buying since March 7th when Glenn Welling bought 1.8 million shares and Engaged Capital also bought 1.8 million. Those two entities bought 7,949,822 shares in the week ended on Mar-8th at an average price of $20.25. That is $160 million in new purchases Engaged now owns about 15%.

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.



IMMU - Immunomedics - Company Profile

Comments:

No specific news. Minor decline in a weak market.

Original Trade Description: March 16th.

Immunomedics, Inc., a clinical-stage biopharmaceutical company, develops monoclonal antibody-based products for the targeted treatment of cancer. Its advanced antibody-drug conjugates are sacituzumab govitecan and labetuzumab govitecan, which are in advanced trials for various solid tumors and metastatic colorectal cancer, respectively. The company focuses on commercializing sacituzumab govitecan as a third-line therapy for patients with metastatic triple-negative breast cancer in the United States. The company also develops IMMU-140, a humanized antibody directed against an immune response target. Its other product candidates include products for the treatment of cancer and autoimmune diseases, including epratuzumab, an anti-CD22 antibody; veltuzumab, an anti-CD20 antibody; milatuzumab, an anti-CD74 antibody; and IMMU-114, a humanized anti-HLA-DR antibody. Immunomedics, Inc. has clinical collaboration with AstraZeneca and MedImmune, to evaluate Imfinzi, a human monoclonal antibody against PD-L1, with sacituzumab govitecan as a frontline treatment of patients with TNBC and urothelial cancer; collaboration agreement with The Bayer Group for the development of epratuzumab; clinical and preclinical collaborations with academic cancer institutions, identifying new cancer indications for sacituzumab govitecan and the biology of the Trop-2 antigen; and research collaboration with the Memorial Sloan Kettering Cancer Center to investigate Sacituzumab Govitecan and Labetuzumab Govitecan in preclinical cancer models. Immunomedics, Inc. has a partnership agreement with the Samsung BioLogics Co., Ltd. to manufacture hRS7, an Immunomedics proprietary humanized antibody. The company was founded in 1982 and is headquartered in Morris Plains, New Jersey. Company description from FinViz.com.

Immunomedics has had a rocky year but they are starting to pull out of their funk. On February 26th they reported earnings but more importantly announced a complete changing of the guard with new board members, new CFO and the exit of the CEO. Shares spiked on the news.

On March 11th they presented at the Cowen and Company 39th Annual Health Care Conference. Shares spiked again. Investors apparently liked what they heard.

They have multiple drugs in the FDA approval process and several more in the research stage. Sacituzumab govitecan has demonstrated a significant clinical benefit in multiple hard-to-treat cancer settings including breast cancer. The company is currently preparing a new Biologics License Application (BLA) in response to the recent CRL from the FDA. They recently published in the new England Journal of Medicine regarding that drug in the treatment of a variety of epithelial cancers.

The company had $497 million cash on hand and enough for an additional two years of research and operations.

Earnings May 27th.

Shares have accelerated to the upside after the earnings and investor presentation.

Position 3/18/19:
Long IMMU shares @ $18.56, see portfolio graphic for stop loss.
Optional: Long May $21 call @ 75 cents, see portfolio graphic for stop loss.



XON - Intrexon Corp - Company Profile

Comments:

No specific news. Shares down slightly in a weak market.

Original Trade Description: March 13th.

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.

Update 3/20: Subsidiary AquaBounty (AQB) priced a secondary offering of 3,345,282 shares at $2.25 per share to raise $7.5 million. This has no impact on XON.

Position 3/14//19:
Long XON shares @ $5.61, see portfolio graphic for stop loss.
Optional: Long July $6 call @ $.95, see portfolio graphic for stop loss.



BEARISH Play Updates

GME - Gamestop - Company Description

Comments:

No specific news. No material movement.

Original Trade Description: March 23rd.

GameStop Corp. operates as a multichannel video game, consumer electronics, and wireless services retailer. It operates in five segments: United States, Canada, Australia, Europe, and Technology Brands. The company sells new and pre-owned video game hardware; video game software; pre-owned and value video games; video game accessories, including controllers, gaming headsets, virtual reality products, memory cards, and other add-ons; and digital products, such as downloadable content, network points cards, prepaid digital and prepaid subscription cards, and digitally downloadable software. It also sells wireless products, services, and accessories; collectibles, such as licensed merchandise primarily related to the video game, television, and movie industries, as well as pop culture themes; gaming-related print media, and mobile and consumer electronics products; PC entertainment software in various genres comprising sports, action, strategy, adventure/role playing, and simulation; and carry strategy guides, magazines, and interactive game figures. In addition, the company operates e-commerce sites under the GameStop, EB Games, Micromania, and ThinkGeek brands; collectibles stores under the Zing Pop Culture and ThinkGeek brands; and Spring Mobile, an authorized AT&T reseller operating AT&T branded wireless retail stores. Further, it provides Game Informer magazine, a print and digital video game publication; and operates Simply Mac, an authorized Apple reseller that sells Apple products, including desktop computers, laptops, tablets and smart phones, and related accessories and other consumer electronics products, as well as training, warranty, and repair services. As of March 28, 2018, the company operated approximately 7,200 stores across 14 countries. It primarily operates its stores under the GameStop, EB Games, and Micromania brands. The company was formerly known as GSC Holdings Corp. GameStop Corp. was founded in 1994 and is headquartered in Grapevine, Texas. Company description from FinViz.com.

Gamestop is headed to the same fate as Blockbuster. Gamestop sells preowned game consoles and video games. With Google announcing Stadia where all games are browser based and run on any device and computing power is not important, this is a major hurdle for Gamestop.

Microsoft announced a similar fate with plans on moving the Xbox to the cloud, called Project XCloud, and there will be no game consoles or game CDs.

With these two giants eliminating the hardware and software that is resold by Gamestop, this company is in a world of trouble. They do sell other products but consumers come into their stores for the games. With 7,200 stores they have a lot of overhead and their biggest revenue items are disappearing.

Granted, this will not happen overnight. These game conversions to the cloud will take months to take hold and many months to become the majority of market share. However, investors will see the future, with Blockbuster a prime example, and Gamestop shares are going to bleed value in the months ahead.

Earnings April 2nd. Normally we would not take a position in front of earnings but there will be analyst questions about the path of progress. The answers may be hard for investors to handle. I am recommending we own a put and hold it over the earnings report.

Position 3/25/19:
Long May $10 put @ 65 cents. see portfolio graphic for stop loss.



VXXB - Barclays VIX Futures ETN - ETN Description

Comments:

Only a minor gain despite the bad market.

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.