After weeks of negative headlines on tariffs we are do some positive news on earnings.

The markets appear to be poised to rebound from the current three-week decline. The Dow was knocked back to correction territory but the S&P and Nasdaq, although weak, never declined more than about 5% or less. The Russell 2000 retreated about 3.8% from the closing high to the closing low.

Everybody knows there will be additional tariff headlines to rock the market but it appears we have reached a point where the news is having less of an impact on the market. Whether that trend will continue depends on the severity of the future headlines. In an interview on Monday, Michael Dell said the "U.S. and China were locked into a path of mutually assured destruction" on tariffs. Hopefully somebody blinks before we actually go down that path.

I have been expecting the first two days this week to be volatile, but after July 4th I expect to see a temporary rebound into the earnings cycle. By the end of July, I expect to see another decline as headlines heat up and we near the bearish August/September period.

The economic reports on Tuesday are nothing special and they should not move the market. President Trump could tweet about his breakfast and it would cause more movement.

Thursday and Friday are payroll days and while important, they are not likely to move the market unless there is a significant difference from the estimates. Tariff headlines will rule the market for the next several weeks.


There are no earnings of consequence. This is the slowest week of the cycle and they will begin accelerating again the next week. The current forecast is 19.8% growth for Q2.


The S&P has been holding over support at 2,700 despite some significant declines. T always seems to recover at the last minute. However, resistance at 2,750 has been equally strong. The S&P is governed by about 20 stocks. Half of them could be considered industrials and the other half tech stocks. I read on Monday that 80% of the S&P gains this year were due to the top five stocks and four of them were tech stocks. We need the broader market to catch fire and not be so dependent on the ultra big caps.


The Dow battled back from a -194 point loss to close with a minor gain. However, this rebound could have set the stage for a post holiday rebound. The index has rebounded from 24,100 four times in the last six days. There was one penetration to touch 24,000 and that was instantly bought. We need to see it move above the 100-day and 50-day averages at 24,600-24,616.



The Nasdaq Composite rebounded from the touch of the 50-day at 7,440 on Monday and the touch of support at 7,425 on Thursday. Despite multiple attempts, support has held and we had an excellent rebound today to gain 57 points. The big cap tech stocks were mostly positive with the giant stocks all in the top 5 on the list. This is positive to see investors come back into the techs in a big way.



The Russell 2000 remains the strongest index with only a -3.8% decline from the high. Today was the second test of the 1,630 level and both times the dips were bought.


Headlines rule. It does not make any difference how the charts look. Depending on their severity the tariff headlines can push the market around like a butterfly in a hurricane. We just need to keep some dry powder and be ready to jump on the rally train if we see it leaving the station.

If you have not entered the IWM position, Tuesday would be the day to do it. If we are going to have a rebound it should begin after July 4th. There are no guarantees but earnings are coming fast and investors have a bearish posture. I expect to see a lot of converts late this week if there are no headlines.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL CALL PLAY

ANIK - Anika Therapeutics - Company Profile

Anika Therapeutics, Inc., together with its subsidiaries, provides orthopedic medicines for patients with degenerative orthopedic diseases and traumatic conditions in the United States and internationally. The company develops, manufactures, and commercializes therapeutic products based on its proprietary hyaluronic acid (HA) technology. Its orthobiologics products comprise ORTHOVISC, ORTHOVISC mini, MONOVISC, and CINGAL for the treatment of osteoarthritis of the knee; HYALOFAST, a biodegradable support for human bone marrow mesenchymal stem cells used for cartilage regeneration and as an adjunct for microfracture surgery; HYALONECT, a resorbable knitted fabric mesh; HYALOSS used to mix blood/bone grafts to form a paste for bone regeneration; and HYALOGLIDE, an ACP gel used in tenolysis treatment. The company's dermal products include wound care products that comprise HYALOMATRIX and HYALOFILL for the treatment of complex wounds, such as burns and ulcers, and for use in connection with the regeneration of skin; and ELEVESS, an aesthetic dermatology product. Its surgical products comprise HYALOBARRIER, a post-operative adhesion barrier for use in the abdomino-pelvic area; INCERT, a HA product used for the prevention of post-surgical spinal adhesions; MEROGEL, a woven fleece nasal packing; and MEROGEL INJECTABLE, a viscous hydrogel. The company also offers ophthalmic products, including injectable HA products that are used as viscoelastic agents in ophthalmic surgical procedures, such as cataract extraction and intraocular lens implantation; and veterinary products, which include HYVISC, an injectable HA product for the treatment of joint dysfunction in horses. Anika Therapeutics, Inc. has a strategic collaboration with the Institute for Applied Life Sciences at the University of Massachusetts Amherst to develop a therapy for rheumatoid arthritis. Company description from FinViz.com

Anika has had several problems recently. They disappointed on earnings in early May and shares fell $11 the next morning. The stock rebounded and recovered all the loss then in mid June they reported weak results from a trial on Cingal, for osteoarthritis in the knee. The drug performed as advertised but did not generate a statistically significant reduction in pain. The trial has been extended. The drug is already approved overseas for this condition. Shares fell $18 on the news.

Anika announced an accelerated share buyback program for $30 million, 6% of the outstanding shares, to be completed in June. Shares are rebounding again. After two bouts of very sharp declines, this could be a major buying opportunity. Worst case we could see shares ease a little higher on the buyback program.

Earnings August 1st.

Buy Aug $35 Call, currently $1.65, initial stop loss $28.35.




Current Portfolio


Open Positions

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.




Current Position Changes


AKAM - Akamai
The long call position was stopped at $76.85.

IWM - Russell 2000 ETF
The long call position was entered at the open on Tuesday.


Original Play Recommendations (Alpha by Symbol)


AKAM - Akamai Technologies - Company Profile

Comments:

Akamai lowered the top end of their revenue guidance before the open on Tuesday. Shares gapped lower to stop us out.

Original Trade Description: May 7th

Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution; Dynamic Site Accelerator that helps in consistent Website performance; Image Manager that automatically optimizes online images; CloudTest to conduct load testing and other analysis of Websites in a pre-production environment; mPulse that provides real-time Website performance data to provide insight about end-user experiences on a Website; and Global Traffic Management, a fault-tolerant solution. It also provides cloud security solutions, including Web Application Protector to safeguard Web assets from Web application and distributed denial of service; Kona Site Defender, a cloud computing security solution; Bot Manager Premier to identify bots; Fast DNS, which translates human-readable domain names into numerical IP addresses; Prolexic Routed to protect Web- and IP-based applications; and Client Reputation for protection against DDoS and Web application attacks. In addition, the company offers enterprise security solutions, including Enterprise Application Access that enables remote access to applications; and Enterprise Threat Protector to enable enterprise security teams to identify, block, and mitigate targeted threats. Further, it provides network operator solutions, including Aura Licensed CDN, Aura Managed CDN, and Intelligent DNS solutions, as well as professional services and solutions; media delivery solutions, such as adaptive delivery, download delivery, infinite media acceleration, media services, and media analytics solutions; and NetStorage, a cloud storage solution. The company sells its solutions through direct sales and service organization; and channel partners. Company description from FinViz.com

Akamai reported earnings of 79 cents that beat estimates for 70 cents. Revenue of $669 million rose 11% and beat estimates for $657 million. The earnings beat came from a concentrated push into cloud security along with a surge in its media delivery business. Revenue in the booming cloud security business surged 36%.

They did not provide guidance but with the cloud business booming shares should continue moving higher.

Earnings July 30th.

Shares have been consolidating for the last two months and now that earnings were positive shares are starting to move higher again. Monday's close was a 6-week high.

Update 5/14: Major gain for the week after the CEO and Founder, Tom Leighton answered an acquisition question positively. An analyst asked him if the company was for sale and he said, "We are a public company and our board, which is very professional and diligent, is always going to do the right thing for shareholders." That suggests if they are not considering any offers today, they will more than likely be receiving some in the near future. Shares exploded higher.

Update 5/21: Shares spiked $1.50 in afterhours when Akamai announced a partnership with MUFG (MUFG) to develop a blockchain payment network that could handle one million transactions per second and be operational in early 2020 or before. Akamai has the scope and the horsepower to make it happen.

Position 5/8/18:
Closed 6/26: Long August $75 call @ $4.30, exit $4.20, -.10 loss.



CHGG - Chegg Ing - Company Profile

Comments:

No specific news. Shares fell with the market but are rebounding nicely.

Original Trade Description: May 29th

Chegg, Inc. operates direct-to-student learning platform that supports students on their journey from high school to college and into their career with tools designed to help them pass their test, pass their class, and save money on required materials. The company offers Chegg Services, which include digital products and services; and required materials that comprise its print textbooks and eTextbooks. Its digital products and services include Chegg Study, which helps students master challenging concepts on their own; Chegg Writing that enables automatically generate sources in the required formats, when students need to cite their sources in written work; Chegg Tutors that allow students find human help on its learning platform through a network of live tutors; Chegg Math, an adaptive math technology and developer of the math application; Brand Partnership, which offers various ways for student-relevant brands to reach and engage high school and college students; Test Prep that provides students with an online adaptive test preparation services; and internships services. The company rents and sells print textbooks and eTextbooks; and offers supplemental materials and textbook buyback services. The company has a strategic alliance with Ingram Content Group. Company description from FinViz.com

CHGG reported earnings of 10 cents on revenue of $77 million to beat estimates of 9 cents and $74 million for the fifth consecutive earnings beat. Cash on the balance sheet reached a record high of $500 million compared to $66 million in Q2 2017. Jefferies said the cash pile offered Chegg the opportunity to expand its business outside of its own organic growth.

Shares have been rising steadily since the earnings beat in February and closed at a new high on Tuesday in a very bad market.

Earnings August 2nd.

Position 5/30/18:
Long Oct $30 call @ $1.95, see portfolio graphic for stop loss.



IWM - Russell 2000 ETF - Company Profile

Comments:

No specific news. Small caps are still the strongest index but they did fall again with the Nasdaq last week.

Original Trade Description: June 25th.

The S&P futures have recovered from -4.50 earlier in the session to +3. The Dow dipped to the 200-day and then rebounded to close just below that critical average. It could be close enough to attract some risk takers.

The S&P dipped to the strong support of the 100-day at 2,702 and rebounded to close just above the 50-day at 2,716. These averages should be decent support as long as there are no additional tariff surprises. In President Trump's speech tonight, he was careful to push hard on the topic that the tariff war would be resolved peacefully. While we may not end up with no tariffs between countries, he teased that tariffs would be reduced significantly. That appeared to ease the market tensions overnight.

I wanted to play the SPY instead of the IWM because it has fallen farther and could rebound the most. However, as long as there are tariff threats the place to be is the Russell and the drop in the IWM gave us an entry point.

Position 6/26/18:
Long Sept $168 call @ $3.66, see portfolio graphic for stop loss.
Optional: Short Sept $155 put @ $2.38, see portfolio graphic for stop loss.
Net debit $1.28.



MRCY - Mercury Systems - Company Profile

Comments:

No specific news. Shares are rebounding again.

Original Trade Description: June 4th

Mercury Systems, Inc. provides sensor and safety critical mission processing subsystems for various critical defense and intelligence programs in the United States. The company's products and solutions are deployed in approximately 300 programs with 25 defense prime contractors. Its principal programs include Aegis, Patriot, Surface Electronic Warfare Improvement Program, Gorgon Stare, Predator, F-35, Reaper, F-16 SABR, E2D Hawkeye, and Paveway. The company also designs, markets, and licenses software and middleware environments under the MultiCore Plus name to accelerate development and execution of signal and image processing applications on a range of heterogeneous and multi-computing platforms. In addition, it offers hardware products, including components, such as power amplifiers and limiters, switches, oscillators, filters, equalizers, digital and analog converters, chips, monolithic microwave integrated circuits, and memory and storage devices; embedded processing modules and boards, switch fabric boards, high speed input/output boards, digital receiver boards, multi-chip modules, integrated radio frequency and microwave multi-function assemblies, tuners, and transceivers, as well as graphics and video processing, and Ethernet and input-output boards; and integrated subsystems. The company was formerly known as Mercury Computer Systems, Inc. and changed its name to Mercury Systems, Inc. in November 2012. Company description from FinViz.com

In April Mercury reported earnings of 30 cents that missed estimates for 35 cents. Revenue of $116.3 million missed estimates for $123.3 million. Mercury said government budget issues shifted $11 million in revenue into the next quarter.

The company guided for revenue of $146.7-$151.7 million in the current quarter and significantly above Q1 levels. They raised full year guidance to $1.35-$1.38 per share on revenue of $464-$468 million.

Shares were crushed for a $16 drop or -35% on the news. They have been rebounding steadily since early May.

Bookings rose 41% to a record $150 million. They now have a record backlog of $429 million in orders. They are guiding for a 20% rise in revenue in 2018 with 23% EBITDA margins.

Earnings July 24th.

I understand the reasons for the Q1 miss. Government budget deadlines are highly unreliable. Also, they just completed the acquisition of Themis Computer, which added additional onetime costs. With the raised guidance, the drop should eventually be erased. This is a tech stock in the defense sector. How much better growth and security could you get?

Position 6/5/18:
Long October $40 call @ $2.60, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

The VXX spiked on the renewed volatility in the Dow but the $40 resistance is holding. This tariff tantrum will eventually become resolved or fall into the category of old news.

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 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 VXX always declines.

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 new rally into the Q1 earnings cycle 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. There are 34.2 million shares outstanding and ShortSqueeze.com says 44.5 million are short. The shares are out there and being traded because the volume on Monday was 46.5 million. More than 221 million traded on Feb 5th. This ETF is a favorite vehicle for the computer traders so the volume is always high. 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.

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

We are 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 today.

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

Position 2/13/18:
Short VXX shares @ $49.16, no initial stop loss.



Prices Quoted in Newsletter

At Option Investor, we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

The prices quoted in the newsletter are the end of day prices in most cases.

When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.

For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time readers are able to get a better fill than the opening print because of market maker bias at the open.

For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.

All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.