The narrowing market breadth we saw over the last several weeks has finally come back to bite us in the back. The FANG stocks led the charge higher and once cracks began to form in their armour the wheels came off their rally.

First Netflix disappointed and has fallen 83 points in the last two weeks or -20%. Facebook missed on earnings and gave back 46 points or -23.5% over the last 4-weeks. Intel is down 10% over just the last two days. The superstocks, have met their kryptonite.

The Nasdaq has fallen 328 points or -4.6%in just three days. This decline should be coming to a close. The Tuesday before a Fed announcement is typically bullish. Sometimes the gains are minor but they are still gains. This could be enough to reverse the current trend.

There are plenty of economics on the schedule this week with the ADP employment and the Nonfarm payrolls along with both ISM reports. The Fed announcement will be the biggest hurdle but analysts are cautiously optimistic.


The big stock news on Tuesday will be the Apple earnings after the bell. Apple shares have been declining from their new high of $194.82 four days ago. Investors are afraid they will tank like Netflix or Facebook. It all depends on the guidance.


Akamai and Shopify will be the next most closely watched reports. By the end of the week more than 400 of the S&P-500 companies will have reported and the lure of 22% earnings growth will begin to fade.


The S&P has suffered a couple of significant declines but still has strong support at 2792/2800. Those are the key levels to watch and they should hold if this is a garden-variety bout of profit taking.


The Dow was still an index laggard and has fallen back below 25,400 once again. Support for the Dow is 25,000. The Dow has been stuck in a very wide range since the initial February rebound. There is a slight bullish bias but it is not exciting.


The Nasdaq did not have a chance on Monday. The big caps were down hard and the Nasdaq lost -107 points. Initial support is 7.600 and that was almost tested today with a dip to 7,604. This is not strong support with that farther below at 7,425. This is what drove the market lower because the few big cap tech leaders were selling off hard.



The Russell 2000 is no longer immune to tariff headlines. The plunging Nasdaq has poisoned the small cap index. The techs, chips and biotechs are major components of the Russell.


I expect a Tuesday rebound and depending on the strength and on the outcome of the Fed decision, the market could roll over again on Thursday or we could take another run at resistance. I would be very surprised to see a break out to new highs and would consider that attempt to be an amazing put opportunity.

I wrote last week that I wanted to buy some index puts last week but thought maybe I was too early and put it off until this week. Now the big move could already be over and the opportunity was lost.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email



NEW DIRECTIONAL CALL PLAY

BAC - Bank of America - Company Profile

Bank of America is one of the world’s leading financial institutions, serving individual consumers, small and middle-market businesses and large corporations with a full range of banking, investing, asset management and other financial and risk management products and services. The company provides unmatched convenience in the United States, serving approximately 67 million consumer and small business clients with approximately 4,400 retail financial centers, approximately 16,100 ATMs, and award-winning digital banking with approximately 36 million active users, including 25 million mobile users. Bank of America is a global leader in wealth management, corporate and investment banking and trading across a broad range of asset classes, serving corporations, governments, institutions and individuals around the world. Bank of America offers industry-leading support to approximately 3 million small business owners through a suite of innovative, easy-to-use online products and services. The company serves clients through operations across the United States, its territories and more than 35 countries. Company description from Bank of America.

Booming economy, rising rates. That is really all you need to know about this recommendation. The 4% GDP should lift yields on the 10-year treasury to about 3.25% from the current 2.95%. With the Fed on a hike cycle and expected to hike again in Saptember and December, we would see real rates climb significantly over the next several months. Bank of America is positioned to benefit from this rise in rates.

Last week they increased their quarterly dividend by 25% to 15 cents per share. While that is not setting the world on fire, it is an added inducement for investors. The bank also announced it was buying back entire traunches of preferred shares.

After months of non performance the banking sector is rebounding on the high GDP and the prospects for the future. The higher interest rates allow them to earn more money and attract more deposits. It is a win-win scenario.

Shares are about to break out to a new five month high. BAC shares have been slow movers in 2018 but that may be about to change. The sector has shifted into rally mode and this could continue into 2019 as long as the expectations are not diminished for future Fed rate hikes.

Just because the options are cheap, don't back up the truck and open a large position. Until we have a "breakout" it is just a resistance test. If a breakout does occur it could generate an "all clear" signal for investors.

Buy October $32 call, currently 90 cents. No initial stop loss.





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


IWM - Russell 2000 ETF
The long position was stopped at $167.55.

MRCY - Mercury Systems
The long position was stopped at $39.65.


Original Play Recommendations (Alpha by Symbol)


AMBA - Ambarella - Company Profile

Comments:

No specific news. Shares are chopping around in the $38-$40 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.

Position 7/17/18:
Long Nov $35 put @ $2.50, see portfolio graphic for stop loss.

We will exit in September or earlier.


ANIK - Anika Therapeutics - Company Profile

Comments:

ANIK reported earnings of 68 cents on revenue of $30.5 million. Analysts were expecting $33 cents on revenue of $27.9 million. Shares spiked on the news and I am recommending we close the position.

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 July 25th.

Position 7/3/18:
Long Aug $35 Call @ $1.45, see portfolio graphic for stop loss.



CHGG - Chegg Ing - Company Profile

Comments:

I clearly did not have the stop loss tight enough. Shares tumbled from $29.50 to $25.50 over the last two days and did not trigger our stop loss at $25.25. Fortunately, they reported earnings after the close and shares rallied back to $27.50 in afterhours. They reported earnings of 12 cents that beat estimates for 8 cents. Revenue of $74.2 million rose 32% and beat estimates for $70.2 million. We may get lucky and have the post earnings rebound continue. I would not bet on it. However, rather than speculate tonight on an exit I would rather wait and see what happens the rest of this week.

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 rose to 37% in 2017 and continues to rise. Fifty percent of students claimed that was their only method of study.

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:

We exited at the right time on this position. The Russell has completely broken down and the tech sector is imploding. That weighs on the Russell as well as the weakness in the biotechs and chips.

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:
Closed 7/24: Long Sept $168 call @ $3.66, exit $3.66, breakeven.
Closed 7/24: Short Sept $155 put @ $2.38, exit $.81, +$1.57 gain
Net gain $1.57.



MRCY - Mercury Systems - Company Profile

Comments:

No specific news. I tightened the stop loss last week and we exited for a minor gain.

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:
Closed 7/24: Long October $40 call @ $2.60, exit $2.90, +.30 gain



SKYY - Cloud Computing ETF - ETF Profile

Comments:

No specific news. Nearly a new high on Wednesday then crashed with the Nasdaq the last two days.

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.

Position 7/10/18:
Long October $57 call at $1.25, see portfolio graphic for stop loss.


VXX - Volatility Index Futures - ETF Description

Comments:

The VXX posted a minor rebound from the five-month lows as the tech sector craters the market.

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.

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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.