Market uncertainty is rising and investor conviction is fading.
The closer we get to August, the less conviction we will see from investors. The negative headline flow is going to be increasing as the calendar works against the president and his tariff proposals. These fights must be resolved in early September to avoid a disaster in the midterm elections. That means the trade wars will be fought in the headlines in August. Since Aug/Sep are normally the two weakest months of the year, that is an added incentive to move to the sidelines while the trade battle rages.
Today there is the promise of a strong earnings cycle to keep investors involved but we are not seeing it lift the market. Every minor bounce is sold. This lack of an earnings rally is troubling and could be a warning signal.
In less than two weeks, more than 80% of the S&P will have reported earnings. The lure of an earnings rally will be over and investors will be left staring at the political headlines rather than earnings headlines from their favorite stocks.
Alphabet (GOOGL) reported strong earnings after the close and the stock gained $40 in afterhours. The Nasdaq futures rallied about 30 points. This could power the market higher on Tuesday but it remains to be seen if it is enough to trigger any short covering and lift us out of our consolidation pattern.
Wednesday and Thursday are the heavy days this week with Facebook after the bell on Wednesday and Amazon and Intel after the bell on Thursday. Big cap tech stocks led the rally to this point. Once those stocks report they tend to become victims of post earnings depression and that will weigh on the market next week. The end of the earnings excitement typically comes with Apple's earnings, which is August 2nd this year. There is a Fed rate decision on August 1st so those two days could be critical to market direction.
The economic highlight this week is the Q2 GDP on Friday. It is expected to be over 4% and that is going to create a lot of positive headlines. Whether it will lift the market for more than a short time remains to be seen. It could give the Fed another reason to continue raising rates.
The S&P managed to rebound from the opening dip and post a minor gain. It was far from exciting and did very little to excite the broader market. The index has been able to hold over 2,800 and that is a plus.
The Dow traded in a narrow 98-point range and closed almost right in the center. The A/D line was almost perfectly flat with only one decliner more than advancers on the Dow. The resistance at 25,400 has not been tested since early June where it failed on six consecutive days. That is going to be a significant hurdle.
The Nasdaq has come to a dead stop at uptrend resistance at 7,850. The Google earnings could be the spark needed to power through that level but it remains to be seen if it can hold the gains. We have seen some earnings disappointments in some tech reports. While, I do not expect any of the bellwethers to disappoint, we can never be sure they will not. Netflix is an example of this problem.
The Russell is also struggling with some short term, new high, resistance. With tariffs coming back into focus, the small cap stocks should be doing well but they are only holding the recent highs and not advancing.
I am recommending caution over the next couple of weeks. If earnings surprise to the upside and the market rallies into August, I will be very pleased. However, if the market rolls over around Apple's earnings date, I will not be surprised. Next week I will tighten our stops even further and probably add some puts on indexes. Be patient, market declines produce buying opportunities.
Enter passively, exit aggressively!
Send Jim an email
NEW DIRECTIONAL CALL PLAY
No new play this week.
I went through my entire list of nearly 800 tradable stocks and there was nothing worth taking a risk in this market. There were a lot of good stocks but 65% of the S&P report earnings this week or next. Nearly every one of the stocks with decent charts were about to announce earnings and that takes them out of contention.
There is a lot of uncertainty in the market. We could easily roll over as the calendar turns to August because the geopolitical events are going to heat up and the market is not going to react well.
I even considered puts on the SPY to hold through August but we might have one more week of positive gains and I would rather enter at a higher level.
Be patient, there is always another day to trade.
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
SKYY - Cloud ETF
The long call position was entered at the open on Tuesday.
Original Play Recommendations (Alpha by Symbol)
AMBA - Ambarella - Company Profile
No specific news. Shares are chopping around in the $37.50-$39 range while they decide which direction to travel.
Original Trade Description: July 16th.
Ambarella, Inc. develops semiconductor processing solutions for video that enable high-definition (HD), video capture, analysis, sharing, and display worldwide. The company's system-on-a-chip designs integrated HD video processing, image processing, computer vision functionality, audio processing, and system functions onto a single chip for delivering video and image quality, differentiated functionality, and low power consumption. Its solutions enable the creation of video content for wearable cameras, automotive cameras, and professional and consumer Internet Protocol (IP) security cameras, as well as cameras incorporated into unmanned aerial vehicles in the camera market; and manage IP video traffic, broadcast encoding and transcoding, and IP video delivery applications in the infrastructure market. The company sells its solutions to original design manufacturers and original equipment manufacturers through its direct sales force and distributors. Ambarella, Inc. was founded in 2004 and is headquartered in Santa Clara, California. Company description from FinViz.com
Ambarella used to be the sweetheart of the semiconductor industry with their camera chips capturing a wide swath of the up and coming devices. Unfortunately, you cannot rest on past accomplishments.
Shares have declined almost 40% since January. The drop began when one of their customers reported weak sales and falling demand for that company's products. When they reported Q1 earnings they beat the street but lowered guidance and that caused another move lower.
Then GoPro said they would no longer sell the Karma drone, which had 12 cameras with Ambarella chips. Since GoPro accounted for roughly 20% of Ambarella's income that was a major blow. With their Q1 earnings Ambarella said GoPro income would be non-existent for the rest of the year. They said revenues would be "insignificant" in 2018 compared to $37 million in 2017. Analysts are cutting forecasts and trashing talking Ambarella's outlook.
The company is also facing new competition from Qualcomm and that will increase if they eventually acquire NXP Semiconductor as expected.
Earnings September 4th.
Ambarella shares closed at a two-year low on Monday and very close to a major breakdown. I am recommending we play that breakdown.
Long Nov $35 put @ $2.50, see portfolio graphic for stop loss.
We will exit in September or earlier.
ANIK - Anika Therapeutics - Company Profile
No specific news. Shares flattened at $35. Earnings are July 25th. Expectations should be low. We are going to hold over.
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
No specific news. Shares holding just under new highs. Earnings July 30th.
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.
Update 7/9: 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.
Earnings August 2nd.
Long Oct $30 call @ $1.95, see portfolio graphic for stop loss.
IWM - Russell 2000 ETF - Company Profile
The bullish conviction is slowly evaporating. It is possible some strong earnings over the next couple of days could reflate it but the approaching tariff headlines and the normally weak August period are starting to be a serious headwind. I tightened the stop to just below today's lows.
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 rolled over from the 3-month high. The uneasiness in the market is causing profit taking in recent gainers.
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.
SKYY - Cloud Computing ETF - ETF Profile
No specific news. New closing high the prior Thursday. Fading slightly with the market.
Original Trade Description: July 9th.
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.
Long October $57 call at $1.25, see portfolio graphic for stop loss.
VXX - Volatility Index Futures - ETF Description
The VXX posted a minor decline and is holding at five-month lows.
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.