Editors Note:

The Russell 2000 surged 16 points to close at a new record high. Yesterday's performance was the setup for today's gains and the Russell also hit a new intraday high at 1,620. This should be sentiment support for the broader market.

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

LL - Lumber Liquidators
The long position was stopped at 20.65.

If you are looking for a different type of trading strategy, try these newsletters:

Short term Calls and Puts on equities = Option Investor Newsletter

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

BULLISH Play Updates

ELY - Ely Callaway Golf - Company Description


No specific news. Shares still trying to move higher.

Original Trade Description: May 9th.

Callaway Golf Company, together with its subsidiaries, designs, manufactures, and sells golf clubs, golf balls, golf bags, and other golf-related accessories in the United States and internationally. The company operates through three segments: Golf Clubs; Golf Balls; and Gear, Accessories and Other. It offers drivers, fairway woods, hybrids, irons, wedges, and putters. The company also provides packaged sets, golf gloves, golf footwear, golf apparel, travel gear, lifestyle apparel and accessories, headwear, eyewear, and practice aids. In addition, it licenses its trademarks and service marks for use on golf related accessories, such as golf apparel, footwear, golf gloves, prescription eyewear, practice aids, and OGIO branded bags. The company sells its products through golf retailers, sporting goods retailers, mass merchants, Internet retailers, department stores, field representatives, and in-house sales representatives, as well as to third-party distributors in the United States and approximately 100 countries. Callaway Golf Company sells its products under the Callaway Golf, Odyssey, Strata, OGIO, and TravisMathew brand names. It also sells pre-owned golf products through its Website callawaygolfpreowned.com; and Callaway Golf and Odyssey products through its Websites callawaygolf.com, odysseygolf.com, ogio.com, and travismathew.com. Company description from FinViz.com.

Callaway reported earnings of 65 cents that beat estimates for 51 cents. Revenue rose 31% to $403 million compared to estimates for $372 million. The company raised guidance from $1.12-$1.14 billion to $1.17-$1.19 billion. Earnings guidance rose from 64-70 cents to 77-82 cents. For Callaway these were outstanding numbers and suggests the company has turned itself around and business is booming.

They reported earnings on April 27th and spiked to $18.50. Post earnings depression hit and knocked the stock back down to just under $17. After a week of gains it is back at its post earning high and about to break out to new highs.

Position 5/10/18:
Long ELY shares @ $18.35, see portfolio graphic for stop loss.
Alternate position: Long August $19 call @ 75 cents, see portfolio graphic for stop loss.

FNSR - Finisar - Company Description


No specific news. The confusion around the ZTE trade restrictions is keeping all the networkers down until it is resolved.

Original Trade Description: April 14th.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, China, Malaysia, and internationally. The company's optical subsystems primarily include transmitters, receivers, transceivers, transponders, and active optical cables, which provide the fundamental optical-electrical, or optoelectronic interface for interconnecting the electronic equipment used in networks comprising switches, routers, and servers used in wireline networks, as well as antennas and base stations used in wireless networks. It also offers wavelength selective switches that are used to switch network traffic from one optical fiber to various other fibers without converting to an electronic signal. In addition, the company provides optical components primarily consisting of packaged lasers and photodetectors; and passive optical components for use in telecommunication applications. It markets its products through direct sales force, as well as distributors, manufacturers' representatives and resellers, and system integrators; and to the manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Finisar Corporation was founded in 1987 and is headquartered in Sunnyvale, California. Company description from FinViz.com.

Finisar shares were crushed for for a 35% decline in March after the company reported earnings of 20 cent when analysts were expecting 24 cents. Revenue declined -13% to $332 million and missed estimates for $334 million. For the current quarter they guided to earnings of 12 cents and analysts were expecting 23 cents. Revenue guidance of $310 million was also below estimates for $334 million.

Shares collapsed from $20 to $14 on the news. Within a couple days multiple analysts reiterated their buy ratings. Morgan Stanley upgraded the company from hold to buy. Stifel Nicolaus, DA Davidson and Riley FBR, all reiterated buy ratings saying the company was oversold and business was too good to ignore because of product mix in one quarter.

Shares rebounded on the Morgan Stanley upgrade on April 5th and have been slowly regaining ground.

Earnings are June 7th so we have have a long time for the stock to recover before that event. If th etech sector is going to rally into earnings, Finisar should benefit.

Position 5/16/18:
Long FNSR shares @ $15.69, see portfolio graphic for stop loss.
Alternate position: Long June $17 call, currently $1.00, see portfolio graphic for stop loss.

KR - Kroger - Company Description


No specific news. Shares actually posted a minor gain despite Amazon announcing a 10% discount for Prime members at Whole Foods.

Original Trade Description: April 18th.

The Kroger Co., together with its subsidiaries, operates as a retailer in the United States. It also manufactures and processes food products for sale in its supermarkets. The company operates supermarkets, multi-department stores, jewelry stores, and convenience stores. Its combination food and drug stores offer natural food and organic sections, pharmacies, general merchandise, pet centers, fresh seafood, and organic produce; multi-department stores provide general merchandise items, such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products, toys, and fine jewelry; and price impact warehouse stores offer grocery, and health and beauty care items, as well as meat, dairy, baked goods, and fresh produce items. The company's marketplace stores comprise full-service grocery, pharmacy, health and beauty care departments, and perishable goods, as well as general merchandise, including apparel, home goods, and toys; and convenience stores comprise a limited assortment of staple food items and general merchandise, as well as sells fuel. It operates under the banner brands, such as Kroger, Ralphs, Fred Meyer, King Soopers, etc., as well as Simple Truth and Simple Truth Organic brands. As of March 8, 2018, the company operated 2,800 retail food stores under various banner names, as well as an online retail store. The Kroger Co. was founded in 1883 and is based in Cincinnati, Ohio. Company description from FinViz.com.

Expected earnings June 7th.

Back in February, Kroger agreed to sell its convenience store division to EG Group for $2.15 billion. That consisted of 762 stores and 66 franchise operations in 18 states under various brand names including Loaf and Jug, Turkey Hill, Kwik Shop, Tom Thumb and Quick Stop. They had been shopping the division since October.

By selling the convenience stores they refocused on their core business, which is 2,800 grocery stores. They have to focus because of the increasing competition from discount food stores, Amazon and Whole Foods, Walmart and Target's grocery division. Kroger has a material lead but they needed to dump the high activity convenience stores and narrow their marketing efforts.

They are going to use $1.2 billion of the proceeds for an accelerated repurchase program. This is in addition to a $1 billion buyback announced in March. The remaining cash will be used to reduce debt and fund the addition of 11,000 new employees including 2,000 managers to improve their store restocking process and improve customer service. They are using the savings from tax reform with one third going to employees, a third to shareholders and a third to customers.

Shares dipped 20% in early March after the company matched earnings estimates but lowered guidance because of the divesting of the convenience stores and a mismatch by analysts. The CEO said analysts were assuming too much based on their idea on how Kroger would spend the tax cash. That is not how Kroger planned on using it. Kroger is spending $3 billion in capex in 2018 as they accelerate their turnaround plans and increasing their online ordering capabilities. They are preparing to roll out "Scan, Bag and Go" to 400 locations as a full test in 2018.

Kroger shares did not decline below the $23 bottom they hit in early March. Over the last week there has been some new life and we could be preparing to see a recovery begin.

There are also some rumors that getting rid of the convenience stores was a prerequisite for a merger with Target. This was rumored in the press for several weeks earlier in the year. Target could use their scale to improve Target's grocery business. Kroger would use Target's same day Shipt service for grocery delivery. This is just speculation but I would not be surprised to see the rumor reappear now that the divestment has occurred.

I am not recommending a stock position. There is no positive trend yet. I suggest we buy a cheap longer-term option and then wait for a recovery to begin or a news headline to restart the merger rumors.

Update 5/5: Kroger had to recall 35,000 pounds of beef for possible contamination. This sounds like a big deal but for a company of Kroger's size it is just a minor problem. It only affected two states and the meat was shipped in March with a sell by date of April 9th. That means it had already been sold and more than likely already consumed. Shares dropped earlier in the week when Amazon announced a stronger delivery service that will allow consumers to have Amazon deliver to the trunks of their locked cars but it is only available in 37 cities.

Position 4/23/18:
Long July $25 call @ $1.15, see portfolio graphic for stop loss.

LL - Lumber Liquidators - Company Description


No specific news but shares collapsed to stop us out at $20.65.

Original Trade Description: May 5th.

Lumber Liquidators Holdings, Inc., together with its subsidiaries, operates as a multi-channel specialty retailer of hardwood flooring, and hardwood flooring enhancements and accessories. The company offers hardwood species, engineered hardwood, laminates, resilient vinyl flooring, and wood-look ceramic; renewable flooring, and bamboo and cork products; and a selection of flooring enhancements and accessories, including moldings, noise-reducing underlay, adhesives, and flooring tools under the Bellawood and Morning Star Bamboo brands. It also provides in-home delivery and installation services. The company primarily serves homeowners, or to contractors on behalf of homeowners. As of February 27, 2018, it operated approximately 390 stores in North America. The company also offers its products through its Website, catalogs, and call center. Lumber Liquidators Holdings, Inc. was founded in 1994 and is headquartered in Toano, Virginia. Company description from FinViz.com.

LL reported a Q1 loss of 7 cents that was far better than the loss of 93 cents in the year ago quarter but still misses the estimates for a loss of 3 cents. Revenue of $261.77 million also beat estimates for $260.42 million.

There was a reason for the miss. There were four Northeaster blizzards in March and that kept people out of stores for most of the month. Sales rose 5.4% and same store sales rose 2.9%. However, comp sales in the Northeast where they have the densest store population declined mid single digits because of the storms.

As a LL CEO I would be happy with the 2.9% overall comps because there was also a 4.7% increase in the size of the average sale. They are opening 20-25 stores in 2018 and have already opened 9 through May 1st. They guided to mid single digit same store sales growth and a 2%-3% increase in operating profits.

The stock was crushed on the earnings news but immediately began to rebound. I believe investors are going to see through the weather impact and recognize the improvement in the sales metrics.

Position 5/7/18:
Closed 5/16: Long LL shares @ $20.94, exit $20.65, -.29 loss.
Alternate position:
Closed 5/16: Long June $22 call @ 85 cents, exit .50, -.35 loss.

TEVA - Teva Pharmaceuticals - Company Description


News broke on Tuesday that Warren Buffett more tha doubled his position in TEVA in the first quarter. Shares posted another decent gain.

Original Trade Description: December 10th

Teva Pharmaceutical Industries Limited develops, manufactures, markets, and distributes generic medicines and a portfolio of specialty medicines worldwide. It operates through two segments, Generic Medicines and Specialty Medicines. The Generic Medicines segment offers sterile products, hormones, narcotics, high-potency drugs, and cytotoxic substances in various dosage forms, including tablets, capsules, injectables, inhalants, liquids, ointments, and creams. This segment also develops, manufactures, and sells active pharmaceutical ingredients. The Specialty Medicines segment provides branded specialty medicines for use in central nervous system and respiratory indications, as well as the women's health, oncology, and other specialty businesses. Its products in the central nervous system area comprise Copaxone for multiple sclerosis; Azilect for the treatment of Parkinson's disease; and Nuvigil for the treatment of excessive sleepiness associated with narcolepsy and certain other disorders. This segment's products in the respiratory market include ProAir, ProAir Respiclick, QVAR, Duoresp Spiromax, Qnasl, Braltus, Cinqair/Cinqaero, and Aerivio Spiromax for the treatment of asthma and chronic obstructive pulmonary disease, as well as Treanda/Bendeka, Granix, Trisenox, Lonquex, and Tevagrastim/Ratiograstim products in the oncology market. This segment also offers a portfolio of products in the women's health category, which includes ParaGard, Plan B One-Step, and OTC/Rx, as well as other products. The company has collaboration arrangements with Attenukine, Procter & Gamble Company, and Regeneron Pharmaceuticals, Inc. Teva Pharmaceutical Industries Limited was founded in 1901 and is headquartered in Petach Tikva, Israel. Company description from FinViz.com

Teva is the largest generic drug manufacturer in the world. Unfortunately, that market place is becoming very competitive and the company has to reinvent itself to return to a profitable growth profile.

Fortunately, the company is taking action. They have been selling off noncore assets to pay down debt. They just installed a new CEO, Kare Schultz, and he took immediate action. On his second day on the job, he restructured the management team and said he would present a major restructuring plan in mid December. The stock jumped to a two-month high after news broke they were considering cutting 10,000 of their 57,000 workers in an effort to save $1.5-$2.0 billion a year.

Shares fell in early November after the company cut full year guidance for the third time and said they may sell shares to reduce their debt. In early December, they pulled back on the share sale idea saying they have no plans for a secondary offering in the near future.

In December, Teva announced they were cutting 14,000 workers from their 56,000-person workforce. They expect to reduce costs by $3 billion by the end of 2019, with $1.5 billion in cost reductions in 2018. The company also suspended its dividend for ordinary shares and will eliminate bonuses for 2017. They are planning on closing a "significant number" of R&D facilities, offices and other locations around the world. They are going to consolidate offices in the US from 7 locations to only one campus. Teva incurred a lot of debt when they purchased the Allergan generic pharmaceuticals business for $40 billion last year. That was poorly timed just as generic prices were crashing. The company is also reviewing its asset base in order to sell noncore assets. Apparently, the new CEO, Kare Schultz, is determined to turn the company around sooner rather than later. Shares are bouncing back from a 17-year low in November. Shares were upgraded by Morgan Stanley, Goldman Sachs and Credit Suisse on Friday.

Teva said its BLA application for Fremanexumab as a preventive for migraine headaches had been granted a priority review designation by the FDA. There were two successful Phase III studies under the HALO program with patients with episodic migraine and chronic migraines.

In February, Teva shares exploded higher after Warren Buffet reported a new stake of 18,875,721 shares or roughly 2% of the company. Teva is now making a generic Viagra that is going to be a cash cow for the next several years and should help raise their stock price.

I believe the worst is over. Shares rebounded from the November low to test $22 and then faded again on new competition for one of their generic drugs. This week shares are rebounding again after the company announced they were closing their plant in Israel because they could not find a buyer. This will help reduce the monthly expenses and will not hurt their drug plans. The majority of the revenue from the Israeli plant came from non-core activities and production of IV bags. Last week the company said it was selling a division in Overland Park, KS to AssistRX as Teva further reduces overhead.

Earnings are May 10th.

I am recommending we buy the June $19 call rather than tie up $18 in what could be a slow moving stock.

Update 4/21: Teva and P&G have agreed to terminate their 7-year partnership on over the counter medicines outside North America. The partnership was called PGT Healthcare and marketed brands including Vicks, Pepto-Bismol, etc, and had grown into a significant presence in more than 50 countries. Each company will take back its own brands and continue marketing on their own.

Update 4/28: Teva announced results of a new study on Copaxone, a drug for relapsing forms of MS. The 7-year study showed favorable relapse rates and no new of unexpected adverse events from patients receiving treatment. The announcement was made at the close and there was no stock movement afterhours on Friday.

Update 5/5: Teva posted earnings of 94 cents that was well above estimates for 66 cents. Revenue of $5.07 billion beat estimates for $4.81 billion. The company raised revenue guidance from $18.3-$18.8 billion to $18.5-$19.0 billion. They raised earnings guidance from $2.25-$2.40 to $2.40-$2.65. Shares spiked after then earnings but then fell with the market on Thursday.

Position 4/12/18:
Long June $19 call @ $1.06, see portfolio graphic for stop loss.

YRCW - YRC Worldwide - Company Description


No specific news. No material movement.

Original Trade Description: May 9th.

YRC Worldwide Inc., through its subsidiaries, provides various transportation services primarily in North America. Its YRC Freight segment offers various services to transport industrial, commercial, and retail goods; and provides specialized services, including guaranteed expedited services, time-specific deliveries, cross-border services, coast-to-coast air delivery, product returns, temperature-sensitive shipment protection, and government material shipments. It serves manufacturing, wholesale, retail, and government customers. As of December 31, 2017, this segment had a fleet of approximately 7,600 tractors comprising 5,900 owned and 1,700 leased; and 30,900 trailers consisting of 23,800 owned and 7,100 leased. The company's Regional Transportation segment provides regional delivery services, which include next-day local area delivery and second-day services, consolidation/distribution services, protect-from-freezing and hazardous materials handling, truck loading, and other specialized offerings; guaranteed and expedited delivery services consisting of day-definite, hour-definite, and time definite capabilities; interregional delivery services; and cross-border delivery services, as well as operates hollandregional.com, newpenn.com, and reddawayregional.com, which are e-commerce Websites offering online resources to manage transportation activities. This segment had a fleet of approximately 6,500 tractors, including 4,700 owned and 1,800 leased; and 13,700 trailers comprising 10,500 owned and 3,200 leased. The company was formerly known as Yellow Roadway Corporation and changed its name to YRC Worldwide Inc. in January 2006. YRC Worldwide Inc. was founded in 1924. Company description from FinViz.com.

Earnings August 2nd.

YRCW kicked it into overdrive after reporting a loss of 44 cents that was much better than the 60 cents analysts expected. Revenue of $1.22 billion matched estimates.

While those earnings are not really a lot to get excited about the company lost 78 cents in the year ago quarter. Consensus guidance for 2018 is for EARNINGS of 78 cents after losing 33 cents in2017.

Consolidated operating ratio for Q1 was 100.4 and is allowing YRCW to charge premium rates because of the high utilization, low excess capacity. The company is charging 6% more per hundredweight year over year including fuel charges and 4.4% without surcharges.

The trucking business is very busy today with signing bonuses for experienced drivers in the $5K to $10K range and a large package of benefits. Everything in the economy moves by truck and that means YRCW is primed to benefit from the economic boom.

Shares spiked $2.00 (23%) on the earnings beat. After a week of post earnings depression shares are moving higher again. They closed at a 3-month high on Friday.

Position 5/14/18:
Long YRCW shares @ $10.89, see portfolio graphic for stop loss.
Alternate position: Long July $12 call @ 80 cents, see portfolio graphic for stop loss.

BEARISH Play Updates

VXX - Volatility Index Futures - ETF Description


Finally broke support at $40 and any further market gains could prompt a larger VXX drop.

Previously: On Feb-5th a reader emailed me saying a friend was short 1,000 shares. When the $21 spike came in afterhours, Ameritrade closed that position for a $35,000 loss. They did not have a protective stop loss.

I wrote in the prior newsletter that we were not using a profit stop in this position because it could be hard to re-short the shares after a volatility event. That is just trade management for a profitable position. In ANY SHORT POSITION, you should have a catastrophe stop loss to avoid the position turning into a major loss. Had this person had a stop loss at their entry point, they would have been closed for a breakeven and they would be sleeping a lot better tonight.

Readers should always assume the potential for the worst possible outcome of a short position. Trade smart!

Original Trade Description: September 18th.

The VXX is a short-term volatility ETF 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 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 VXX always declines. The last two times we shorted this ETF we had a $7.23 and $5.98 gain.

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 into year-end we could see a sharp decline in the VXX over 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.

The VXX is hard to short. Shortsqueeze.com says there are 19.9 million shares short out of 26.7 million shares outstanding. The shares are out there and being traded because the volume on Monday was 29.6 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.

I had held off after the 1:4 reverse split because the options were expensive and I was expecting volatility in September from the budget battle and debt ceiling hurdle. With those issues pushed out into December, the volatility is dropping like the proverbial rock. Several readers have already emailed me asking when I was going to put this position back in the portfolio.

Position 9/19/17:
Short VXX shares @ $40.95, see portfolio graphic for stop loss.
Position 9/6/18:
Short VXX shares @ $54.27, see portfolio graphic for stop loss.

Average cost = $47.61.

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