After several days of alternating moves, the market gave clear directional signals today. The S&P and Nasdaq closed under critical support levels and appeared to confirm a bearish direction. However, S&P futures are up more than 2 points in the evening session. The market signals are turning more bearish every day but we still do not have a clear breakdown even though support failed today. The Dow is holding much of its gains but another day like today and it will also confirm a bearish direction.
The earnings start next week and the forecasts are good but we are heading into the weakest period of the year in August and September. I repeat, it is time to be cautious rather than reckless.
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.
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
SHLD - Sears Holdings
The short stock position on Sears was entered at the open.
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BULLISH Play Updates
ACOR - Acordia Therapeutics - Company Profile
No specific news. Excellent relative strength with only a minor decline.
Original Trade Description: June 21st.
Acorda Therapeutics, Inc., a biopharmaceutical company, identifies, develops, and commercializes therapies for neurological disorders in the United States. The company markets Ampyra (dalfampridine), an oral drug to improve walking in patients with multiple sclerosis (MS); Zanaflex capsules and tablets for the management of spasticity; and Qutenza, a dermal patch for the management of neuropathic pain associated with post-herpetic neuralgia. It also markets Ampyra as Fampyra in Europe, Asia, and the Americas. In addition, the company develops CVT-301 that has completed a Phase III clinical trial for the treatment of OFF periods in Parkinson's disease; CVT-427, which has completed a Phase I clinical trial to treat migraine; Tozadenant that is in Phase III clinical trial for reduction of OFF time in Parkinson's disease; SYN120, which is in Phase II clinical trial to treat Parkinson's disease-related dementia; and BTT1023 (timolumab) that is in Phase II clinical trial for primary sclerosing cholangitis. Further, it develops rHIgM22, which is in Phase I clinical trial for the treatment of MS; Cimaglermin alfa that has completed a Phase I clinical trial in heart failure patients; and Chondroitinase Program that is in research stage for the treatment of spinal cord injury. The company has collaborations and license agreements with Biogen International GmbH; Alkermes plc; Rush-Presbyterian St. Luke's Medical Center; Alkermes, Inc.; SK Biopharmaceuticals Co., Ltd.; Astellas Pharma Europe Ltd.; Canadian Spinal Research Organization; Cambridge Enterprise Limited and King's College London; Mayo Foundation for Education and Research; Paion AG; Medarex, Inc.; and Brigham and Women's Hospital, Inc. Company description from FinViz.com.
Acordia took a fall at the end of March when two Multiple Sclerosis patents were invalidated by a court. This is normal stuff and happens all the time to biotech companies when competitors want to introduce a generic. Shares crashed but the outlook for Acordia did not.
They fell another 5% in late April when revenue of $112 million missed estimates for $121 million. The company did reaffirm guidance for ful lyear Ampyra sales in the range of $525-$545 million.
Recently, their experimental Parkinsons drug CVT-301 was named Inbrija. In early June they presented Phase III data which met its primary endpoint of improvement in motor function compared to a placebo. Multiple secondary endpoints were also met. The company plans to file a new drug application with the FDA by the end of this quarter.
Expected earnings July 27th.
Shares have been rebounding sharply and cleared resistance from the April/May decline. They have a long way to go to recover their highs and that is a potential for profit.
Long ACOR shares @ $18.80, see portfolio graphic for stop loss.
KTOS - Kratos Defense - Company Profile
No specific news. Good relative strength in a bad market with a minor gain.
Original Trade Description: May 24th.
Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products; satellite communications; technical and training solutions; modular systems; and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial, ground, and seaborne, as well as command, control, and communications systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers; and critical infrastructure, power generation, power transport, nuclear energy, financial, IT, healthcare, education, transportation, and petro-chemical industries, as well as government and military customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.
Kratos builds drones for target practice for the U.S. military. They are also building drones for combat for air to air and air to land. They also provide communication systems for missiles, satellites and various other platforms.
China and Russia are rapidly militarizing space and Kratos is working with the U.S. military to improve satellite communication to defend against attacks. The DoD is currently spending a lot of money to prepare for war in space. Kratos owns and operates a global satellite demonitoring business with revenues rising 61% in Q1.
Kratos expects to build $30 to $40 million in unmanned target drones for the Navy in the 2017 budget. That is per batch of BQM-177 drones and there is the potential for multiple batches.
Kratos has so many new programs in operation it would be impossible to list them here and several of them are secret programs for unnamed clients.
Kratos guided for a return to profitability in Q2 and sharply rising revenue for the full year. Shares spiked 30% in the four weeks after Q1 earnings. Their next report is August 3rd. I am recommending we buy an option and hold over the report. If the earnings are as positive as they teased in the Q1 report we could see another sharp reaction. This company is in all the right places for the increase in defense depart spending.
I am not recommending a stock position given the sharp gains already.
Update 6/13/17: Kratos said it was going to unveil its newest high performance class of military unmanned aerial system technology at the Paris Air Show next week. The XQ-222 Valkyrie and UTAP-22 Mako drones provide fighter like performance and are designed to function as wingmen to manned aircraft in contested airspace. The Valkyrie can carry various weapons and intelligence systems and has a range of 3,000 miles. The Mako is designed to carry sensors and stealthily infiltrate hostile airspace to gather intelligence. Both are designed to operate with or without manned flights. The Air Force recently pitched the functions of the Valkyrie saying a F-35 with a group of fighter/bomber drones could maximize control of airspace and ground attack operations. The F-35 can select targets and pass information to specific drones while maintaining situational awareness from a stealthy and relatively safe position.
Update 6/27/17: KTOS received $16 million in radar and system contract awards from a national security systems provider. Due to the classified nature of the program, on additional information was given.
Update 6/28/17: KTOS announced the award of a $37 million initial production contract for subsonic target drones from the U.S. Navy. This is the initial annual order in a long term acquisition program so this represents a major win for KTOS. The company said the anticipated annual order for 2018 was expected to be 25% larger. The aircraft can carry electronic counter measures, active and passive radar augmentation, infrared, identification friend of foe, internal chaff and flare dispensing, threat emitter simulators, smoke and scoring devices. In addition, separate contracts for Peculiar Support Equipment, Initial Systems Spares, External Payload Systems and Flight Consumables will follow shortly.
Long August $12.50 call @ 59 cents, see portfolio graphic for stop loss.
BEARISH Play Updates
PPC - Pilgrims Pride Corp - Company Profile
No specific news. Closed at a new 3-month low.
Original Trade Description: June 26th.
Pilgrim's Pride Corporation engages in the production, processing, marketing, and distribution of fresh, frozen, and value-added chicken products to retailers, distributors, and foodservice operators in the United States, Mexico, and Puerto Rico. It offers fresh chicken products comprising pre-marinated or non-marinated refrigerated (non-frozen) whole chickens, prepackaged case-ready chicken, whole cut-up chickens, and selected chicken parts. The company also provides prepared chicken products, including portion-controlled breast fillets, tenderloins and strips, delicatessen products, salads, formed nuggets and patties, and bone-in chicken parts. The company sells its products to foodservice market, including chain restaurants, food processors, broad-line distributors, and other institutions; and retail market customers comprising grocery store chains, wholesale clubs, and other retail distributors. In addition, it exports chicken products to Mexico, the Middle East, Asia, the Commonwealth of Independent States, and other countries. Pilgrim's Pride Corporation was founded in 1946 and is headquartered in Greeley, Colorado. Company description from FinViz.com.
I have started to play PPC several times because it is definitely directional. Every time I would read the headlines and the analyst commentary and everyone is saying good things and how the stock should rise. Apparently, nobody is listening.
Florida is currently probing PPC and Tyson (TSN) on price fixing on chicken. The initial review was broadened after the initial probe suggested there might be fire behind that smoke. There are currently civil lawsuits in progress claiming prices were fixed.
PPC reported earnings of 38 cents that missed estimates for 43 cents and the year ago earnings of 46 cents. Revenue of $2.020 billion did beat estimates for $2.014 billion. Margins shrank and costs rose. Cash on hand fell from $120.3 million to $30.8 million.
Expected earnings August 2nd.
Shares just broke below the May support at $23 and the next material support is $20. If the antitrust probe is going to continue, that support may not hold.
Update 6/28/17: PPC was hit with two animal cruelty suits from Texas and Georgia following an investigation by the Humane Society.
Short PPC shares @ $22.30, see portfolio graphic for stop loss.
Alternate position: Long Aug $21 put @ .60, see portfolio graphic for stop loss.
SHLD - Sears Holdings - Company Profile
Research firm CreditSights gave Sears a 20% chance of defaulting over the next year saying the company is being propped up by loans from CEO Eddie Lampert and asset sales. The firm said ultimately the stock is going to zero. The only question is when.
Original Trade Description: July 5th.
Sears Holdings Corporation operates as an integrated retailer in the United States. It operates in two segments, Kmart and Sears Domestic. The Kmart segment operates retail stores that offer a range of products, including consumer electronics, seasonal merchandise, outdoor living, toys, lawn and garden equipment, food and consumables, and apparel; and in-store pharmacies. It provides merchandise under the Jaclyn Smith, Craftsman, and Joe Boxer labels; Sears brand products, such as Kenmore and DieHard; and Kenmore-branded products. As of January 28, 2017, this segment operated approximately 735 Kmart stores. The Sears Domestic segment operates stores that provide appliances, consumer electronics/connected solutions, tools, sporting goods, outdoor living, lawn and garden equipment, apparel, footwear, jewelry, and accessories, as well as automotive services and products, such as tires, batteries, and home fashion products. It also offers merchandise, and parts and services to commercial customers; parts and repair services for appliances, lawn and garden equipment, consumer electronics, floor care products, and heating and cooling systems; home improvement services, such as siding, windows, cabinet refacing, kitchen remodeling, roofing, carpet and upholstery cleaning, air duct cleaning, and garage door installation and repair; and protection agreements and product installation services. This segment provides merchandise under the Kenmore, DieHard, Bongo, Covington, Canyon River Blues, Simply Styled, Everlast, Metaphor, Roebuck & Co., Outdoor Life, and Structure brands, as well as under the Roadhandler, Levi's, Craftsman, and WallyHome brands. As of January 28, 2017, this segment operated 670 full-line stores and 25 specialty stores. Company description from FinViz.com.
Hardly a week goes by that some aspiring writer/researcher does not post a scathing article on the retail prospects of Sears and/or Kmart after a surprise visit to an actual location. The outlook for Sears to survive as a retailer is very dim. Sears Canada just filed bankruptcy and that should be a clue for the outlook in the U.S. as well. With a cash burn rate of as much as $2 billion a year, it is only a matter of time.
Expected earnings August 24th.
In the last week of June, the stock rose as board member Bruce Berkowitz began trying to pump up the shares by proclaiming Sears was worth $90 to $100 a share just because of their real estate. They do have a lot of real estate but they are mall anchors and the malls are dying. They have already spun off a large portion of their holdings to Seritage Growth Properties (SRG). Those were the locations without debt. They have recently done some sale leaseback transactions to raise cash but now they have to pay lease rentals and that increases their cash burn.
Most analysts do not believe the Berkowitz story and assume he is trying to rescue a drowning stock price, which is one of his largest holdings.
Shares rebounded from $6.20 to $9.20 on the Berkowitz claims. Short sellers ran for cover. Now that the stock has returned to resistance, the rebound should be over and reality will return.
I am writing this as a stock short. The options are expensive. The August $8 put is $1.30. I am not recommending it.
Short SHLD shares @ $8.60, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
Minor uptick in volatility again as major indexes broke critical support.
We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.
Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.
Original Trade Description: April 12th.
The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.
As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.
Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong market gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.
We know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.
Short the VXX @ $17.98, no stop loss because it always declines eventually.
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