The Russell crashed through the 200-day as the entire market imploded.
It would be hard to tell which index crashed first with the Nasdaq and Dow gapping down significantly at the open. The overnight futures were negative and spelling out the open before the bell rang and it was a race to the exits.
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.
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
If you are looking for a different type of trading strategy, try these newsletters:
Short term Calls and Puts on equities = Option Investor Newsletter
Credit spreads and naked puts = OptionWriter
Long term option investments = LEAPS Investor
3-6 month Option Trades = Ultimate Investor
Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.
BULLISH Play Updates
HPQ - Hewlett Packard - Company Description
The tech crash pulled HPQ lower but the 71 cent drop was bearable.
Original Trade Description: Sept 22nd.
HP Inc. provides products, technologies, software, solutions, and services to individual consumers, small- and medium-sized businesses, and large enterprises, including customers in the government, health, and education sectors worldwide. It operates through Personal Systems and Printing segments. The Personal Systems segment offers commercial personal computers (PCs), consumer PCs, workstations, thin clients, commercial tablets and mobility devices, retail point-of-sale systems, displays and other related accessories, software, support, and services for the commercial and consumer markets. The Printing segment provides consumer and commercial printer hardware, supplies, media, solutions, and services, as well as scanning devices; and laserJet and enterprise, inkjet and printing, graphics, and 3D printing solutions. The company was formerly known as Hewlett-Packard Company and changed its name to HP Inc. in October 2015. HP Inc. was founded in 1939 and is headquartered in Palo Alto, California. Company description from FinViz.com.
The replicator on the Enterprise was pure science fiction. Anything you wanted was at your fingertips. Hewlet Packard is quickly improving their replicator technology and can now "print" nearly anything you want and they can even print metal parts.
HPQ recently announced the world's most advanced 3D metal printing system. They claim the system is now 50 times more productive at a significantly lower cost. They also announced their new Metal Jet Production Service to allow manufacturers to upload their CAD designs and have the parts printed on HP equipment. This is a major breakthrough for HPQ and shares should continue higher. They have partnered with GKN and their various divisions. They produce more than 3 billion component parts per year and the company expects to print MILLIONS of HP Metal Jet parts in 2019.
Gartner Group (IT) said PC shipments reported solid growth in Q2. Gartner said PC shipments rse 1.4% in Q2 to 62.1 million units. IDC reported that PC shipments rose 2.7% to 62.3 million. The difference is that IDC included Chromebooks and Gartner includes Microsoft tablets and iPad Pro as detachables.
HPQ reported earnings of 52 cents that rose from 43 cents and beat estimates by a penny. Revenue rose 12% to $14.59 billion and beat estimates for $14.29 billion. The company guided for current quarter earnings of 52-55 cents and analysts were expecting 53 cents. Full year guidance was $2.00-$2.03 and analysts were expecting $2.00. Shares initially fell $1 on the news but recovered to close down 48 cents on Friday.
HPQ said revenue in notebooks rose 13% on a 6% increase in shipments, desktops 12% on a 7% increase in shipments. They bragged on their surge in industrial strength 3D printing with multiple major installations in China. They can print replacement parts from almost any material in color significantly faster than the competition. Their surge in the sector comes from having major funding and the ability to scale. The other printers Xone and 3D systems continue to limp along.
Shares of HPQ are at record highs but the news on the high volume metal printing could lift HPQ shares into an entirely different level. They have conquered what seemed to be impossible just a couple years ago and they are going to do it on a massive scale. The opportunities are endless.
Earnings Nov 22nd.
Update 10/3: After the close HPQ issued guidance for 2019 for earnings of $2.12-$2.22 and said they were raising the dividend by 15%. Analysts were expecting $2.15. They expect to return 50% to 75% of 2019 free cash flow to shareholders as dividends and share buybacks. They said 2018 had been a strong year for HP and 2019 was expected to be even better. They said demand was strong in the PC sector and across all their other product lines. Shares spiked in afterhours and should rise on Thursday.
Update 10/5: JP Morgan downgraded Hewlett Packard from overweight to neutral saying there is a lack of catalysts for HP in the future. Obviously, the analyst must have fallen and hit his head. HP has a large number of catalysts including the 3D metal printing business where they will print millions of parts in 2019. The analyst said chip shortages would also be a drag since Intel is behind the curve on manufacturing. He also warned that the trade battle with China could impact components and prevent full production of PCs and other products. On Wednesday, HP issued guidance that was higher than JP Morgan estimates.
Long Jan $27 call @ 85 cents, see portfolio graphic for stop loss.
IWM - Russell 2000 ETF - Company Description
The support at the 200-day broke and the rest is history. The next logical pause point is 150 or 1,500 on the Russell. Our option has declined to $1. In the Option Investor Newsletter I recommended buying the dip on the SPY, QQQ, AAPL using a lower strike. For this position I am NOT going to recommend we add to our existing position today. October normally makes new lows in the first two weeks then rebounds to close positive. "Normally" is not a guarantee.
Original Trade Description: Oct 6th.
The IWM is the Russell 2000 iShares ETF. The ETF offeres exposure to 2,000 small cap U.S. companies. The investment seeks to track the investment results of the Russell 2000 Index, which measures the performance of the small-capitalization sector of the U.S. equity market. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It may invest the remainder of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index, but which the advisor believes will help the fund track the underlying index.
The Russell 2000 and the IWM have declined to the 200-day average, which has been strong support in prior market declines. There is no guarantee the index will rebound from this level because of the current fear of rising rates. Small cap stocks are especially sensitive to rate issues.
If the index is going to rebound into the Q3 earnings cycle this is where it should bottom.
Long Dec $167 Call @ $2.38, see portfolio graphic for stop loss.
KTOS - Kratos Defense - Company Description
No specific news. Shares down in a weak market. No surprise there.
Original Trade Description: July 14th.
Kratos Defense & Security Solutions, Inc. provides mission critical products, solutions, and services in the United States. The company operates through three segments: Kratos Government Solutions, Unmanned Systems, and Public Safety & Security. The Kratos Government Solutions segment offers microwave electronic products, satellite communications, training systems, modular systems, and defense and rocket support services. The Unmanned Systems segment provides unmanned aerial systems, and unmanned ground and seaborne systems. The Public Safety & Security segment designs, engineers, deploys, operates, integrates, maintains, and operates security and surveillance solutions for homeland security, public safety, critical infrastructure, government, and commercial customers. The company serves national security related agencies, the department of defense, intelligence agencies, and classified agencies, as well as international government agencies and domestic and international commercial customers. Kratos Defense & Security Solutions, Inc. was founded in 1994 and is headquartered in San Diego, California. Company description from FinViz.com.
We have played this company before with varied success. Sometimes solid uptrends hit a wall and sometimes they continued. This time the shares have left their five months of consolidation and are a day away from making a new 9-month high.
Kratos has found a niche and its programs are starting to come to fruition. They just began delivering on a $37 million sea skimming drone contract for the Navy. The BQM-177A simulates a sea skimming missile attack to test readiness for missile defense aboard Navy ships.
They were also awarded a contract last week for a "Chemical, Biological, Radiological, High-Yield Nuclear Explosive (CBRNE) program. The project is classified and no details were given.
The point here is that Kratos is moving up in the world of defense contractors. The stock gained 10% over the last six days as realization has hit investors.
Earnings are August 9th.
The company will exhibit at the giant Farnborough International Airshow on July 16th -22nd. This will increase their visibility and the potential for new business.
The stock is $12.70 and just over the $12.50 option strike. I am going to recommend an option only long shot with a $15 call for 50 cents. We have four months if needed and our risk is very low.
Update 8/4: Kratos reported adjusted earnings of 2 cents that beat estimates for a penny. Revenue of $151.2 million that rose 5.7% sequentially and beat estimates for $147.1 million. They guided for the current quarter for earnings of 2-4 cents and revenue of $150-$160 million. However, for the full year they guided for earnings to 15-19 cents, which would be a significant improvement.
As a military contractor, earnings from quarter to quarter will always be choppy depending on program end points and government payment schedules.
Long Nov $15 call @ 55 cents, see portfolio graphic for stop loss.
BEARISH Play Updates
SNAP - Snap Inc - Company Description
Snap accelerated its cash burn by announcing an entirely new slate of scripted shows and original content. New historic low.
Original Trade Description: Sept 5th.
Snap Inc. operates as a camera company in the United States and internationally. The company offers Snapchat, a camera application that helps people to communicate through short videos and images. It also provides Camera, a tool to personalize and add context to Snaps; Friends Page that allows to creating and watching stories, chatting with groups, making voice and video calls, and communicating through a range of contextual stickers and Bitmojis; and Discover that helps to surface the most interesting stories from publishers, creators, and the community, based on a user's subscriptions and interests. In addition, the company offers Snap Map, which enables individuals to pinch on the camera screen for bringing a live map of their location, as well as showing nearby friends, popular stories, and a heatmap of recent Snaps posted to their story; Memories that allows users to choose to save the Snaps they create in a searchable personal collection, and users to create Snaps and stories from their saved Snaps and camera roll; and Spectacles, a hardware product that connects with Snapchat and capture video from a human perspective. The company was formerly known as Snapchat, Inc. and changed its name to Snap Inc. in September 2016. Snap Inc. was founded in 2010 and is headquartered in Venice, California. Company description from FinViz.com.
Snap is rapidly losing ground against Facebook and is trying to branch out into video glasses in hopes of creating a new wave of video posting to make Snap relative again. While they may have a chance long term given our selfie generation, it has yet to be proven. Meanwhile viewership and time on the website is declining. They reported a 7% decline in engagement over the last year. Advertisers are fleeing and it is going to be a tough road for Snap in the coming quarters.
They announced two styles of glasses today that capture video and look like regular sunglasses. This actually has a chance to catch on but they will not be available until November and only in Neiman Marcus and Nordstrom stores.
Earnings Nov 6th.
Shares closed at a new historic low on Wednesday. The odds are good they are going lower.
Update 9/26: Snap ad sales projections were cut by 35%. Snap's communication head announced he was leaving. Facebook said Messenger stories were now more than 200 million a day.
Long Nov $9 put @ 52 cents, see portfolio graphic for stop loss.
Previously closed 9/14: Short SNAP shares @ $10.11, exit $9.55, +.56 gain.
VXX - Volatility Index Futures - ETF Description
The market crashed and the VXX spiked 5 points. No surprise there. We have seen this movie before and the ending is always the same with the VXX eventually falling back to single digits.
The VXX will eventually be single digits but it could be months in the future.
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.
Short VXX shares @ $40.95, see portfolio graphic for stop loss.
Short VXX shares @ $54.27, see portfolio graphic for stop loss.
Average cost = $47.61.
If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.