Option Investor

Daily Newsletter, Wednesday, 4/17/2019

Table of Contents

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

Market Wrap

The Slowdown Is Over

by Thomas Hughes

Click here to email Thomas Hughes


Economic data confirms activity slowed from last year but it wasn't as bad as feared and signs of a rebound are already emerging. Today's news includes data from China and the FOMC's latest Beige Book, both of which suggest economic activity is already re-accelerating. The bad news is that earnings, while better than expected, haven't been enough to spark a rally. The outlook from companies like Netflix have fallen short of consensus estimates and cast a shadow of doubt on the season's potential.

Market Statistics

New from China is that GDP grew faster than expected in the first quarter. The 6.4% reported is a tenth hotter than expected and helps assuage fear of economic slowdown. The March Industrial Production and Retail Sales figures back up the GDP read and suggest activity is accelerating in the 2nd quarter. Both Chinese Retail Sales and Industrial Production came in above expectations and the previous month's read. The risk in China now is that the PBOC will begin to rethink the need for additional stimulus since it looks like what they've already done is working.

The Beige Book was little changed from the previous month. Overall U.S. activity grew at a slight to moderate pace but there is a ray of light. While most districts reported economic growth as unchanged a few say the activity is accelerating. The caveat is that outlook did not improve so economic re-acceleration is likely to be restrained without some other catalyst for growth. Retail sales were sluggish but held steady, tourism was good, home sales are stronger, and manufacturing conditions are favorable although trade uncertainty lingers.

On the employment front, the Beige Book says employment continues to grow and wages are on the rise. Demand for high-skilled labor is highest but shortages are seen across the spectrum. Labor market tightening is adding to wage pressures as employers are forced to offer higher wages and benefits. Labor market tightening is also said to be restraining growth in some areas of the country and segments of the economy.

The Beige Book also shows that prices are rising. The word used to describe inflation is modest as tariffs, freight costs, and wages cut into margins. The bad news is that tariffs are adding to inflation, the good news is that rising freight costs and wages are a sign of economic expansion, inflation tied to them is healthy so long as it is managable.

With all that is going on in the market, it was comments from United Health CEO David Wichman that had today's indices moving. He says proposals from Democratic lawmakers like Medicare For All will surely jeopardize peoples relationships with their doctors, destabilize the nation's health care system, and limit clinicians ability to practice medicine. His comments had the entire health care sector down nearly -3.0%.

Economic Calendar

The Economy

Mortgage applications fell -3.5% over the last week but that is not important. The decline is small compared to gains in the last few weeks and not unexpected. Further, the decline in mortgage apps is due solely to a decline in refinance applications and offset by a 1% increase in applications to buy. Applications to buy are now up 7% YOY and sitting at a 9-year high. Lower interest rates and pent up demand are fueling the gains and likely to sustain this growth into the foreseeable future. The risk, of course, is in the FOMC and the data, and the two of them guide the market's view of inflation.

Wholesale Inventories rose in February from an upwardly revised January figure. Inventories rose 0.2% MOM and are up 6.9% YOY. The pace of sales also increased and this month, for the first month in several, outpaced the inventory build. Sales increased by 0.3% as activity in the broader economy begins to re-accelerate. The increase in sales can be seen in the Sales-to-Inventory Ratio. The ratio has begun to roll over and sign inventory growth is slowing. With activity re-accelerating and inventory growth slowing and/or about to decline it's logical to assume manufacturing activity will pick up to meet the demand.

Tomorrow's economic calendar is full. There is a read on Retail Sales, the Philly Fed's MBOS, Flash PMI from Markit on manufacturing and services, Business Inventories, and the Index of Leading Indicators along with the weekly jobless claims. This bundle, as a whole, is a fairly broad reflection of U.S. economic activity; if it confirms what we're already seeing in other data the second half of the year could be really good.

The Dollar Index

The Dollar Index edged lower in today's session but basically is holding steady near the middle of its trading range. Today's data was dollar positive but not enough by itself to tip the balance in favor of the bulls. U.S. economic activity has stopped slowing and may be rebounding but so has that of China, the EU, and the UK. With this situation still in place, that of U.S. data offset by global data, the DXY is likely to remain range bound in the near-term. The top and bottom of the range are $97.50 and $95.50, no change there, but it looks like the top may be retested again before the index moves lower. A move above $97.50 is not expected unless tomorrow's data is strong and data from abroad comes in weak.

The Gold Index

Gold extended its fall below $1,280 in today's action and in so doing has confirmed resistance at a level that was once market support. The metal is losing is luster in favor of equities as global data points to less slow-down than previously expected. The metal shed only a quarter percent in today's action but set a new low and below resistance. The indicators are bearish and pointing lower so lower prices are expected. My target now is $1,260 and possibly $1,240 depending on data, events, etc. The risk is that stochastic is already nearing oversold levels which sets up the possibility for a rebound should the right catalyst emerge. I'm thinking a set-back in trade talks, a weak data point, weak earnings outlook, Fed-Speak, Trump-Speak, just to name a few.

The GDX Gold Miners ETF fell a full percent in today's action. The ETF created a long red candle moving down to hit support at the bottom of its range at $21.50. The ETF is also supported by the long-term moving average which is sitting exactly at the bottom of the range. The indicators are bearish and gold is indicated lower so a move lower is expected. Support may be strong at the $21.50 level and may produce a rebound. If so I would pay attention because this ETF often leads gold with its bigger moves. A fall below $21.50 would be bearish and likely take the ETF down to $21.00, $20, and $19.00.

The Oil Index

Oil prices moved lower in today's session but are basically holding steady near the recent high. WTI has been in a small consolidation band over the past week or so and set up for its next move. With OPEC+, the Venezuelan and Iranian situations, and better than expected data supporting the market a move up is what I expect over the short to long-term. In the near-term, there may be a small correction or profit-taking event. The indicators are bullish but consistent with a peak so it would not be out of place for prices to pull back.

The energy sector is beginning to percolate. Rising oil prices are fuel for rising earnings forecasts and that is what drives stock prices higher. The XOI Oil Index fell in today's trading but remains near the freshly set high and consistent with a rising market. The index is slowing edging higher week by week and building up to what I think could be a nice rally. The candles, the moving averages, and the indicators are all set up to produce a textbook move that could easily send this index up to retest 1,600 or +28%. The only question now is if oil prices follow through on the OPEC+ Call or not.

In The News, Story Stocks and Earnings

Morgan Stanley reported before the bell and beat on the top and bottom lines. The bank says Q1 adjusted EPS is $1.33, $0.13 above consensus. The GAAP EPS include a net tax benefit not seen in all quarters so was left out for comparison reasons. The bad news is that revenue was down from the prior year in what management described as a slow start to the year. Institutional Securities, Investment Banking, and Trading revenues all fell but were offset by growth in NII, Wealth Management and Investment Management. Earnings were also helped by lower compensation expenses but that should not be expected to continue in today's labor market.

Morgan Stanley also says it feels good about guidance. The company is looking for mid-single digit loan and NII growth despite the flat yield curve and interest rate uncertainty. A healthy pipeline of deal-making is also noted as a driver of future results. Shares of the stock rose 2.6% on the news.

Facebook announced today that it was working on a new device to rival Amazon's Alexa and Apple's Siri. The tool would help users interface with the Internet and help Facebook collect more data, and expose you to more risk. Despite the risks, I am sure people will flock to it so Facebook is likely to turn out a winner. Social media is on the outs and regulators are ready to swoop so Facebook needs a strategy for change or else go the way of websites like Yahoo that are now irrelevant. Shares of the stock closed with a small loss but set a fresh 8-month intraday high before the close.

Las Vegas Sands reported after the bell and delivered a solid beat. Not a jackpot but enough to keep investors interested. Adjusted EPS of $0.91 beat by $0.04 while revenue rose 2.0% and also beat estimates. EBITDA grew 8.7% or better across all properties with revenue and EPS strength driven by the integrated resort property in Macau. Good news within the report includes updates on the progress of two other major projects and favorable outlook for the remainder of the year. Shares moved up nearly 4.0% in after-hours trading.

The Indices

The indices were mostly flat and mixed in today's session. There is one index however that move up 1.0%. The bad news is that even with that 1.0% gain the chart on the Dow Jones Transportation Average does not look good. The candle is a nice little shooting star doji right below a major resistance point; all it will take is a drop in tomorrow's action for this to turn into a Shooting Star Doji reversal. The indicators are bullish but not strongly. Momentum is weak and stochastic is showing a bearish crossover that could spell trouble. A fall from this level would confirm resistance and the possibility of a deeper correction. If so my targets for support are 10,750 and then 10,500.

The S&P 500 posted the largest decline at -0.22%. The broad market index opened with a small gain but fell throughout the day to form a medium-sized red candle. The candle forms a Dark Cloud Cover with the candle before it and may lead the index lower in the next few days. The indicators are showing bearish crossovers that confirm the presence of selling pressure. A move lower is expected over the next few days, my first target for support is near 2,875, a fall below that could lead to a much deeper decline.

The NASDAQ Composite closed with a loss of only -0.05% but it too formed a Dark Cloud Cover. This index looks like a textbook example of an overextended market at its peak and about to pull back. The candle signals reversal and that is backed up by the indicators. The indicators are both showing bearish crossovers with an index well extended from reasonable support at the short-term moving average. Even if this index is still in an uptrend and heading higher I would expect to see prices consolidate at this level. A fall from this level would be bearish and may take the Comp down to 7,790 or 7,500 in the near to short-term.

The Dow Jones Industrial Average posted the smallest loss at -0.01%. The blue-chip index is still in consolidation near the recent high and it is indicated higher. A move higher is possible but not expected in light of what I'm seeing in the other indices. A move sideways or lower is more likely; my target for support in that event is 26,000.

The market has been rallying for a long time, since the end of December, and it looks extended. It has looked extended for some time and it has thrown off at least one reversal signal that failed. I have been anticipating a pullback and possibly correction to December's lows and this may be it. If it is there will be a much better signal to sell on than what we're seeing today. When that signal comes, if it comes, I'll be ready to sell for some short-term gains. The slowdown may be over but the reacceleration has yet to begin. I am still firmly bullish for the long-term.

Until then, remember the trend!

Thomas Hughes

New Plays

Slippery Slope

by Jim Brown

Click here to email Jim Brown
Editor's Note

The uphill battle for the small caps became even tougher a they began to head down a slippery slope. Resistance on the Russell held for the last week and the index finally broke on Wednesday to lose 15 points and 1%. The internals were bad and declining despite the new high on the Nasdaq 100. Since the small caps are supposed to be the sentiment indicator for the market they are flashing a bearish sign.

The S&P futures are down -9 and the outlook for Thursday is negative as traders close positions ahead of the long weekend. No new recommendations today.


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


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Russell Cracked

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small cap index declined 1% on Wednesday to lead the losers list. Small cap stocks weakened significantly despite the Nasdaq 100 closing at a record high. There was no overriding theme other than negative breadth at 3:2 decliners over advancers and the second highest volume day in small caps since late March. When volume rises in a decline that is confirmation of a change in trend.

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

INO - Inovio
The long stock position was stopped at $3.85.

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

CY - Cypress Semiconductor - Company Profile


No specific news. New 7-month closing high.

Original Trade Description: April 5th.

Cypress Semiconductor Corporation designs, develops, manufactures, markets, and sells embedded system solutions worldwide. It operates in two segments, Microcontroller and Connectivity Division, and Memory Products Division. The Microcontroller and Connectivity Division provides microcontroller (MCU), analog, and wireless and wired connectivity solutions, including Traveo automotive MCUs; programmable system-on-chip and general-purpose MCUs; analog power management integrated circuits and energy harvesting solutions; CapSense capacitive-sensing controllers; TrueTouch touchscreens; Wi-Fi, Bluetooth, and Bluetooth low energy; and USB controllers comprising solutions for the USB-C and USB power delivery standards, as well as wireless Internet of things connectivity solutions. The Memory Products Division provides NOR and NAND flash memories, static random access memory (SRAM) products, HyperRAm, synchronous and asynchronous SRAMs, nonvolatile SRAMs, F-RAM ferroelectric memory devices, and other specialty memories and clocks. The company serves various markets, including automotive, industrial, consumer, computation, white goods, communications, handset, PC peripherals, mobile devices, networking, telecommunications, video, data communications, computation, and medical markets. Cypress Semiconductor Corporation sells its semiconductor products through distributors and manufacturing representative firms, as well as through sales force directly to original equipment manufacturers and their suppliers. The company was founded in 1982 and is headquartered in San Jose, California. Company description from FinViz.com.

Cypress makes chips for the Internet of Things or IoT. That has evolved into automotive uses as well as today's cars are connected to the internet in multiple ways. Self-driving cars obviously have more chips but many cars today function as their own WiFi hotspot for the occupants. I am sure the explosion of IoT devices we have seen over the last several years is just the tip of the iceberg for the years to come.

Shares spiked in early February after the company reported earnings of 35 cents compared to estimates for 33 cents. Revenue of $604.5 million also beat estimates for $599 million.

After several days of gains the stock rolled over with the chip sector in early March. Over the last several days shares have rallied to close at a 6-month high on Friday.

Earnings May 7th.

More than 7,800 of these calls were bought on Friday compared to an open interest of only 257. Somebody is betting a lot that the stock will go up. Because of the cheap price we may hold over earnings unless we have a decent profit to protect before they report. We will NOT hold the stock over the earnings.

Position 4/8/19:
Long CY shares @ $15.90, see portfolio graphic for stop loss.
Optional: Long May $17 call @ 40 cents, see portfolio graphic for stop loss.

INO - Inovio - Company Profile


Inovio's Phase 3 HPV immunotherapy was selected as "Best Therapeutic Vaccine" at the World Vaccine Congress. Shares still fell to stop us out for a breakeven on the long stock position. The option position is still open.

Original Trade Description: April 3rd.

Inovio Pharmaceuticals, Inc., a late-stage biotechnology company, focuses on the discovery, development, and commercialization of DNA-based immunotherapies and vaccines to prevent and treat cancers and infectious diseases. Its SynCon immunotherapy design has the ability to break the immune system's tolerance of cancerous cells, as well as is intended to facilitate cross-strain protection against known, as well as new unmatched strains of pathogens, such as influenza. The company is involved in conducting and planning clinical studies of its proprietary SynCon immunotherapies for human papillomavirus-caused pre-cancers and cancers; bladder cancer; glioblastoma multiforme; hepatitis B virus; hepatitis C virus; human immunodeficiency virus; Ebola virus; middle east respiratory syndrome; and Zika virus. Its partners and collaborators include MedImmune, Limited; The Wistar Institute; University of Pennsylvania; GeneOne Life Science Inc.; ApolloBio Corporation; Regeneron Pharmaceuticals, Inc.; Genentech, Inc.; Plumbline Life Sciences, Inc.; Drexel University; National Institute of Allergy and Infectious Diseases; United States Military HIV Research Program; U.S. Army Medical Research Institute of Infectious Diseases; National Institutes of Health; HIV Vaccines Trial Network; Defense Advanced Research Projects Agency; the Parker Institute for Cancer Immunotherapy; and Coalition for Epidemic Preparedness Innovations. Inovio Pharmaceuticals, Inc. was founded in 1979 and is headquartered in Plymouth Meeting, Pennsylvania. Company description from FinViz.com.

Inovio is developing new cancer treatments that deliver coded DNA to cells so they can create their own antibodies against the invading cancer cells. They have multiple trials in progress and the success of any one trial will catapult INO significantly higher.

The drawback is money. They ended the year with $85.5 million after burning through $69 million in 2018. In February they announced a secondary to raise another $82 million. The secondary was convertible notes at $5.38 in 2023. Since that is almost a slam dunk deal, investors trashed the stock because of the 17% dilution in 2023. I think that is very short sighted since we could see three years of stock gains before that comes to pass.

Earnings May 8th.

After crashing to $3.30 on the secondary announcement shares have started to rebound. Wednesday's close was a two-month high. They announced the early closing for enrollment on two different cancer trials. They also announced a new therapy against respiratory tract tumors in a new study. Good things are breaking out all over.

Position $4/4/19:
Closed 4/17: Long INO shares @ $3.86, exit $3.85, -.01 loss.
Optional: Long May $4 call @ 30 cents, see portfolio graphic for stop loss.

PSTG - Pure Storage - Company Profile


No specific news. Resistance holding. Still a chance for a positive breakout.

Original Trade Description: April 5th.

Pure Storage, Inc. engages in building a data platform that enables businesses to enhance performance and reduce complexity and costs worldwide. The company delivers its data platform through Purity Operating Environment, an optimized software for solid-state memory that offers enterprise-class storage and protocol services; FlashArray and FlashBlade optimized hardware products for solid-state memory to enhance the performance and density of flash, optimize its advanced software services, and reduce solution cost for customers; Pure1, a cloud-based management and support software; and FlashStack and Artificial Intelligence Ready Infrastructure converged infrastructure solutions. Its data platform is used for a range of use cases, including database applications, large-scale analytics, artificial intelligence/machine learning, private and public cloud infrastructure and webscale applications, virtual server infrastructure, and virtual desktop infrastructure; and helps customers scale their businesses through real-time and accurate analytics, increase employee productivity, improve operational efficiency, and deliver compelling user experiences to their customers and partners. The company serves enterprise and commercial organizations, cloud, global systems integrators, and service providers across various set of industry verticals, consumer web, education, energy, financial services, governments, healthcare, manufacturing, media, retail, and telecommunications through a network of distribution and channel partners. The company was formerly known as OS76, Inc. and changed its name to Pure Storage, Inc. in January 2010. Pure Storage, Inc. was founded in 2009 and is headquartered in Mountain View, California. Company description from FinViz.com.

Their memory management products are state of the art and their acquisition of Compuverde will increase those capabilities. Compuverde is a leading developer of file software solutions for enterprises and cloud providers. The combination of the two companies will allow customers to implement true hybrid architectures in on premise or cloud applications or a mix of both.

They reported earnings of 14 cents that missed estimates for 19 cents. However, the miss was due to a breakdown at a contract manufacturer and prevented them from shipping a large number of orders. Revenue still rose 24% to $422.2 million despite missing estimates for $443 because of the supplier breakdown.

Shares dipped on the initial earnings results but have rebounded to six month high. Shares have been consolidating for the last six days but appear to be ready for a breakout.

Earnings May 30th.

Position 4/11/19:
Long PSTG shares @ $23.40, see portfolio graphic for stop loss.
Optional: Long May $25 call @ 40 cents, see portfolio graphic for stop loss.

VIPS - Vipshop Holdings - Company Profile


No specific news. The long position in the shares was stopped on Monday at $7.85 for a 34-cent loss.

Original Trade Description: March 30th.

Vipshop Holdings Limited operates as an online discount retailer for various brands in the People's Republic of China. It operates in two segments, Vip.com and Internet Finance Business. The company offers women's apparel, such as casual wear, jeans, dresses, outerwear, swimsuits, lingerie, pajamas, and maternity clothes; men's apparel comprising casual and smart-casual T-shirts, polo shirts, jackets, pants, and underwear; women and men shoes for casual and formal occasions; and accessories that include belts, jewelry, watches, and glasses for women and men. It also provides handbags, which comprise purses, satchels, duffel bags, and wallets; apparel, gears and accessories, furnishings and decor, toys, and games for boys, girls, infants, and toddlers; sports apparel, sports gear, and footwear for tennis, badminton, soccer, and swimming; and consumer electronic products, including computers, mobile handsets, digital cameras, and home appliances. In addition, the company offers skin care and cosmetic products, such as cleansers, lotions, face and body creams, face masks, sunscreen, foundations, lipsticks, eye shadows, and nail polish; and home furnishings comprising bedding and bath products, home decors, dining and tabletop items, and small household appliances. Further, it provides designer apparel, footwear, and accessories; and snacks and health supplements, and occasion-based gifts. Additionally, the company offers Internet finance services, which comprise consumer and supplier financing, and wealth management services. It provides its branded products through its vipshop.com, vip.com, and lefeng.com online platforms, as well as through its cellular phone application. Additionally, the company offers warehousing, logistics, procurement, research and development, consulting, and software development and information technology support services. Vipshop Holdings Limited was founded in 2008 and is headquartered in Guangzhou, the People's Republic of China. Company description from FinViz.com.

Earnings May 22nd.

In late February, the company reported earnings of 19 cents that beat estimates for 18 cents. However, revenue of $3.80 billion missed estimates for $3.96 billion. The 8.1% rise in revenue was down from a 16.4% rise in the prior quarter. The CEO said the weak quarter was the result of the company shifting some low margin categories from the "first-party business" and into the "marketplace platform." He said the move would result in a positive improvement in earnings beginning next quarter. For the current quarter they were only targeting 1-5% revenue growth and analysts were expecting 11.6%. The CEO cautioned that revenue growth was not the metric to worry about. The company is now focused on increasing profits rather than increasing revenue at any cost.

Zacks reiterated a buy rating saying earnings estimates had risen 5.9% over the last 60 days which includes the post earnings commentary. VIPS only has a 9.7 PE compared to 29.4 for the rest of the industry.

After the Zacks comments on the 25th the stock began escalating sharply and closed at an 8-month high on Friday. The stock is now over the 50, 100 and 200 day averages.

Position 4/1/19:
Closed 4/15: Long VIPS shares @ $8.19, exit $7.85, -.34 loss.
Optional: Long August $9 call @ 75 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

GME - Gamestop - Company Description


No specific news. Analysts continue to warn that Microsoft's all digital Xbox is going to be a death blow to Gamestop.

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.

Update 4/3: Gamestop (GME) reported earnings of $1.60 that matched estimates but was down from $2.02 in the year ago quarter. Revenue declined from $3.32 billion to $3.06 billion and missed estimates for $3.28 billion. Even worse they projected a 5% to 10% decline in revenue in 2019 and losses of up to 5 cents per share in Q1. The company is struggling to adapt to changes in the video game industry.

Microsoft has announced a new Xbox game console that only uses downloaded games. That prevents users from reselling the games to Gamestop on CDs as in the past. Apple and Google also announced new video game offerings that stream games through your browser and the game does not reside on your computer or mobile device. That means no CDs and no consoles needed to play the games. That means no resale opportunities for Gamestop. This is also going to impact the resale value of existing games and consoles. In addition to their woes, Activision Blizzard announced today they were going to release a battle-royale version of Call of Duty that would be free online in the month of April.

Shares fell below $9 at the open but rebounded sharply in what should be a dead cat bounce.

Update 4/6/19: After the disappointing earnings Bank of America reiterated an underperform (sell) with a price target of $5. However, Telsey Advisory reiterated a market perform and a $10 target. The stock closed at $9.86.

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

SIG - Signet Jewelers - Company Description


No specific news. Testing 52-week lows.

Original Trade Description: April 13th.

Signet Jewelers Limited engages in the retail sale of diamond jewelry, watches, and other products. As of February 02, 2019, it operated 3,334 stores and kiosks. The company operates through three segments, North America, International, and Other. The North America segment operates stores in malls and off-mall locations primarily under the Kay Jewelers, Kay Jewelers Outlet, Jared The Galleria Of Jewelry, Jared Vault, Zales Jewelers, Zales Outlet, Piercing Pagoda, Peoples Jewellers, Gordon's Jewelers, and Mappins Jewellers regional banners; and JamesAllen.com, an online jewelry retailer Website. This segment operated 2,729 locations in the United States and 128 locations in Canada. The International segment operates stores in shopping malls and off-mall locations, principally under the H.Samuel and Ernest Jones brands. This segment operated 477 stores in the United Kingdom, the Republic of Ireland, and the Channel Islands. The Other segment is involved in the purchase and conversion of rough diamonds to polished stones, as well as provision of diamond polishing services. Signet Jewelers Limited was founded in 1950 and is based in Hamilton, Bermuda. Company description from FinViz.com.

On April 4th, Signet Jewelers reported earnings of $3.96 that beat estimates for $3.77 but that was still a decline of 7.5% from the year ago quarter. Revenue of $2.154.7 billion beat the estimates for $2.142 billion but declined 6% year over year.

Globally same store sales declined -2% with sales in North America down -5.5%. The average number of transactions declined 4%. Sales at Zales stores declined -2% and Piercing Pagoda sales declined -17.1%. Kay stores fell -1.6%, Jared -8.4% and James Allen -1.4%. international sales declined -16.6% to $195 million and same store sales fell -7.3%. Average transaction values declined -5.4% and the number of transactions declined -2.3%.

They guided for Q2 for a loss of 17-28 cents and analysts were expecting a loss of 6 cents. Same store sales are expected to decline between 0.5% and 1.5%. For the full year they guided for earnings of $2.87-$3.45 and analysts were expecting $3.53. Same store sales are expected to be down -2.5% for the year. They closed 262 stores in 2018 and plan to close another 150 in 2019.

There was NOTHING to like about these earnings. Shares have fallen $5 since April 4th and with metrics like those they could fall significantly lower. Shares closed at a new 52-week low on Friday.

Position 4/15/19:
Short SIG shares @ $23.18, see portfolio graphic for stop loss.
Optional: Long July $20 put @ $1.35, see portfolio graphic for stop loss.

VXXB - Barclays VIX Futures ETN - ETN Description


New historic low on Tuesday.

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.