The lack of suppressive tariff headlines allowed the market to break out of its depression.
The Nasdaq posted another outstanding gain of 68 points and closed within 15 points of a new high. The Russell 2000 added 10 points and closed within 2 points of a new high. With any kind of luck at all we should be poised for some new highs on Tuesday.
The lack of any material headlines on Chinese tariffs allowed the market to focus on the earnings upgrades and the approaching Q2 cycle. There was actually a series of comments making the rounds that the tariff dispute, rather than a trade war, would actually keep the Fed on hold and restrain the number of potential rate hiked this year. Conventional wisdom is expecting two additional hikes but there is a growing number of analysts that feel we may only get one hike. The Fed has no reason to rush the process. Inflation and wage growth remains stagnant and the Fed can use the next 6-9 months to unload some more QE treasuries instead. They are actually running behind their announced sales goals.
I believe the president held off on the Chinese tariff headlines because of the Supreme Court pick process. He did not want to step on his own nomination by crowding it out of the news with a tariff war. He is leaving for Europe tomorrow and there will be plenty of time to stir up the tariff troubles again when he gets back next weekend. This means we could actually have a week with a normal market.
With Q2 earnings kicking off on Friday with the big banks, there is plenty for investors to do over the next couple of weeks. We could actually be setting up for an old-fashioned earnings run.
The economic calendar is highlighted by the price indexes and their inflation indicators. This will go a long way towards setting expectations for the Fed.
The S&P broke through resistance at 2,742 on Friday and added another 24 points today. That brings it very close to the March closing high at 2,792. If the S&P breaks over that level, we could see some serious short covering and price chasing. The future risk is a potential double top at the January record high at 2,873. That is 100 points from today's close and about all we can expect from an earnings run ahead of the summer doldrums. August and September are the two worst months of the year and that is when the tariff battle could be heating up.
Surprise, surprise! Look who is on the top of the Dow leaders list when there are no tariff headlines. Boeing, Caterpillar and 3M. Add in a couple banks on a change in Fed expectations and suddenly we have a 300+ point Dow day.
The Dow is still the lagging index and has a long way to go before reaching real resistance at 25,400 but this was a good day. Multiple levels of resistance were broken.
The Nasdaq posted a 100 point gain on Friday and followed with a 68 point gain today. The close at 7,756 is only 25 points below its record high. Just one more good day and the short from June will have to start covering again. The big cap tech stocks were rocking with the exception of Bookings Holdings, formerly Priceline.
The Nasdaq is facing round number resistance at 7,800 if it does succeed in making the new high at 7,782.
The Russell 2000 has posted five consecutive daily gains and closed only 2 points from a new high. The Russell is racing the Nasdaq higher but it is at risk of a sell the news event on a touch of that high simply because of the string of gains with no pause.
I am positive on the markets as long as the tariff headlines to not worsen. The current headline focus is on Q2 earnings and we do not want that to change. If President Trump comes back from Europe and immediately attacks China again, we could lose our gains. However, in his recent tweets he continues to call President Xi a great man and a friend. There may be some behind the scenes negotiations in progress. If a headline suddenly appeared that a resolution had been reached, the market could explode higher.
Enter passively, exit aggressively!
Send Jim an email
NEW DIRECTIONAL CALL PLAY
SKYY - Cloud Computing ETF - ETF Profile
The First Trust Cloud Computing ETF is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before the Fund's fees and expenses, of an equity index called the ISE Cloud Computing Index. The index is a modified equal dollar weighted index designed to track the performance of companies actively involved in the cloud computing industry. To be included in the index, a security must be engaged in a business activity supporting or utilizing the cloud computing space, listed on an index-eligible global stock exchange and have a market capitalization of at least $100 million.
All securities are then classified according to the following three business segments: Pure Play Cloud Computing Companies: Companies that are direct service providers for "the cloud" (network hardware/software, storage, cloud computing services) or companies that deliver goods and services that utilize cloud computing technology. Non Pure Play Cloud Computing Companies: Companies that focus outside the cloud computing space but provide goods and services in support of the cloud computing space. Technology Conglomerate Cloud Computing Companies: Large broad-based companies that indirectly utilize or support the use of cloud computing technology.
The ETF was started in 2011 and now has $1.4 billion in assets. The ETF really took off in 2016 and has been rising steadily. There have been some hiccups recently as some major companies disappointed on earnings and when the Nasdaq corrected in February and March. The ETF has caught fire in the recent tech rebound and with the Nasdaq about to break out to a new high it should continue to do well.
With Q2 earnings over the next six weeks, picking a tech stock gives us a limited time for appreciation and there is always the risk of a disappointment in a stock in the same sector. By using the ETF we can benefit from the tech rally without having too much exposure to a single stock. The idea is to profit from appreciation while reducing volatility.
Shares appear poised to break out to a new high.
Buy October $57 call at $1.25. Limit order. No initial stop loss.
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
ANIK - Anika Therapeutics
The long call position was entered at the open on Tuesday.
Original Play Recommendations (Alpha by Symbol)
ANIK - Anika Therapeutics - Company Profile
No specific news. Shares continuing to rebound.
Original Trade Description: July 2nd.
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.
Long Aug $35 Call @ $1.45, see portfolio graphic for stop loss.
CHGG - Chegg Ing - Company Profile
Chegg acquired StudyBlue for $20.8 million in an all cash transaction. There will be no change to 2018 earnings but they will take a $1 charge in 2019 for facility consolidation. The acquisition will add a significant number of subjects to their existing offerings. The new offerings will include online flash cards. In 2016 29% of students used online flashcards. That roies to 37% in 2017 and continues to rise. Fifty percent of students claimed that was their only method of study.
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.
Long Oct $30 call @ $1.95, see portfolio graphic for stop loss.
IWM - Russell 2000 ETF - Company Profile
No specific news. Small caps are still the strongest sector and could make a new high this 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.
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
No specific news. Shares continue to rebound and closed at a 3-month high.
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?
Long October $40 call @ $2.60, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
The VXX is crashing as the market rebounds. It could make a new five month low this week.
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!
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.