Option Investor
Newsletter

Daily Newsletter, Thursday, 12/8/2016

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Taking A Breather

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The bulls took a rest day today but were still able to set new intraday and closing highs for all major indices. In terms of today's news, decent labor data and the latest policy statement from the ECB. The EU central bank and Mario Draghi have had their say, the FOMC is next at bat with a dollar set up to be knocked out of the park. The ECB? They extended the duration of their asset purchase program, increasing QE, but capped it with plans to taper beginning April and ending December 2017.

International markets were mixed, driven both by euphoria over the rally in US indices (that's what I call follow through) as well as local news. In Asia markets were mixed though largely higher, led by the Nikkei's 1.45%. The move left the index near the 1 year high despite a downgrade for GDP over the next two years. Chinese indices were more flat than not, if positive, despite an improvement in, and better than expected, trade data that gives evidence there is some pick up in global demand. European indices were first flat, then down sharply, then back up on the realization that 1) QE was extended and 2) the taper means that the ECB expects the EU to exit economic distress over the next year. Mario Draghi, at the press conference and in support of this sentiment, said that inflation is expected to rise in 2017 and 2018.

Market Statistics

Futures trading was a bit choppy throughout the morning but held near break-even and within a very tight range. Economic data gave a little lift, the ECB policy release a little drag and then the Draghi press conference a little lift leaving the trade very near the 0.00% line as the opening bell was sounding. Action on the SPX was flat and choppy the first half of the day, the index bobbed up and down over the break even line until after noon. At that time there was a small surge, up to new all time highs, that was met with a bit of selling. The index fell back to just above break even, about 2:30PM, bounced and began to move sideways within the daily range, where it remained until the close of the day.

Economic Calendar

The Economy

Very little economic data today or tomorrow, quite a lot next week. Today's bit is the weekly jobless claims, initial claims falling by a slightly largely than expected 10,000 to hit 258,000. This is the 92nd week of claims below 300K. The four week moving average of claims rose by 1,000 to hit 252,000. On a not adjusted basis claims rose by a whopping 41.3% (seasonally expected) versus the expected 46.6% On a year over year basis not adjusted claims are -8.2% lower than last year, which is the salient detail of this data point. In terms of labor markets and labor trends, the data remains consistent with long term labor market improvement and trending near the long term lows.


Continuing claims fell by a fairly large amount, -79,000, to hit 2.005 million from last weeks revised figure. Last week's figure was revised upward by 3,000. The four week moving average of continuing claims fell by -9,500 to hit 2.028 million. Both the headline continuing claims and moving average have returned to long term historically low levels and are consistent with improvement within the labor market.

The total number of Americans claiming unemployment fell by -117,950, a number that at first surprised me, to hit 1.785 million. This drop is unusually large, but expected based on past seasonal trends. Based on those same trends we can expect to see the number rebound by nearly 500,000 next week. Despite the rise the total claims remains below last years figures, down -7.7% this week, and consistent with long term labor market recovery.


Tomorrow on the economic calendar, Michigan Sentiment and Wholesale Inventories. Next week: The FOMC on Wednesday along with Retail Sales and PPI. Thursday is CPI, Philly Fed, Empire Manufacturing and jobless claims. Friday is Housing Starts and Building Permits.

The Dollar Index

The dollar, it had a bit of a wild ride today too but the underlying fundamentals remain skewed in it's favor; the ECB is still loose and will be for another 13 months, the FOMC is tightening and will be over the next 13 months. The question now is how hawkish will the Fed be? Will they tighten in line with expectations or do more? Will they surprise with something else? Will they indicate when the next hike will possibly come and will that be sooner or later than expected? All questions that could send the dollar shooting up to retest recent highs if the answers favor a stronger dollar. Today's action, a quick dip down to test support at $100 and confirm, then bounce back to a 1 week high above the previous long term high and resistance level of $100.49. Next upside target is $102 with a chance of going higher.


The Oil Index

Oil prices are on shaky ground, as is the OPEC deal, the very ground that oil prices are standing on. The deal has yet to be fully ratified, another meeting takes place this weekend to hammer out more details, but nonetheless fails to reduce output to levels that will effectively rebalance the market. At the same time non-OPEC members such as Russia are also required to agree to cuts and total OPEC production reached a new all-time high, both casting a shadow of doubt on an already dubious deal. I remain skeptical. WTI hovered around $50, closing with a gain near 2% at $50.84.

The oil sector continues to move higher, I think regardless of an OPEC deal. Earnings outlook for the sector is good, great, even outrageously fantastic (full year 2017 earnings growth projection is +340%) and based on oil at or near current prices. Even if oil prices hover in the $45 range earnings growth will be huge. The Oil Index gained a little more than 0.5% in today's action to tickle one year high. The indicators are bullish and on the rise, beginning to show some strength. A break above 1265 would be bullish.


The Gold Index

Gold prices fell on a stronger dollar, after a bit of a choppy morning, to trade near $1172. The metal remains under pressure and is likely to fall back to retest recent lows given dollar outlook. Support targets are near $1150 and $1160, a break below $1150 being bearish and likely to lead to even lower prices. The only thing going for gold now is the possibility of an increase in physical demand now that prices are lower, and the onset of serious inflation and gold as a hedge.

The gold miners continue to consolidated near their recent lows. The Gold Miners ETF GDX falling about -0.25% in today's action. The ETF is consolidating within a narrow range, creating a bit of a pennant pattern within a down trend, while it winds its way over to the short term moving average. The moving average has provided resistance and sparked downward movement at least 6 times over the past 4 months and likely to do so again. The fact that the moving average is now coincident with the 50% retracement line is only another nail in the coffin. Support is near $20, a break below here could go as low as $16.50 in the near term.


In The News, Story Stocks and Earnings

Sears reported earnings in the wee hours of the morning, beating on the top and bottom lines. That being said, the bottom line was net loss for shareholders but a significantly smaller loss than last year. Another thing to take note of, revenues are shrinking due to both a reduction in the number of Kmart and Sears stores as well as a -7.4% decline in same store sales across the group. What I can say about Sears is that when I went in there a few weeks ago just about the whole place was at least 50% off, I bought a nice new jacket. Shares of the stock climbed nearly 5% on the news.


Costco reported after the closing bell yesterday, did not quite meet analyst expectations for revenue but was still able to please the market. The wholesale club reported a 3% increase in revenue and a 13.5% increase in profit. Today's action saw prices gap up, shoot higher during the session, and hit resistance to create a wicked looking pinbar. The indicators are bullish if a bit mixed and the stock is trading just below resistance of $160.


Hovnanian Enterprises reported earnings before the bell. Revenue and profit both rose from the same quarter last year, fiscal 4th, but full year earnings and revenue fell short. The fourth quarter however saw a 16% increase in revenues, driven by housing trends, that is expected to continue into next year. Shares of the stock jumped 2% in the pre-market, traded just shy of a new intraday 15 month high, and then sold off on profit taking to close with a loss. Despite the sell off the indicators bullish and showing strength, there may be a pull-back in prices from here but I would expect to see them at least retest the current high.


The Indices

The indices took a bit of a breather today but were still able to move higher and set new all time highes across the board. Starting with the SPX, which made the smallest gain, the index moved up by 0.22% to set a new all time high. Today's move is leftover momentum from yesterday's rally and a good sign for us bulls. The indicators are bullish and confirm the move to new highs, if they are divergent at this time. The divergence is not confirmed yet and even if it were, based on the extreme nature of the preceding MACD peak we can expect to see up to 4 successive peaks (three more including the current peak) before the move is fully exhausted. Upside target is near 2,300.


The Dow Jones Industrial Average made the next largest gain, 0.33%, creating a small bodied white candle. The index is drifting higher on momentum, following yesterday's push higher, and likely to keep rising. The indicators are both confirming the move and strength within an ongoing up trend. This move could continue into the near to short term before becoming exhausted with Dow 20,000 well within reach.


The NASDAQ Composite made the 2nd largest gain in today's session, just shy of 0.45%. The tech heavy index created a small bodied white candle and set a new all time high. The indicators are a bit weaker on this chart but nonetheless consistent with a trend following bounce and move higher. Divergences present are a red flag and bear watching but, for now, are unconfirmed. Next upside target is near 5,500.


The Dow Jones Transportation Average made the largest gain, just over 0.5%, and put the transports back in the lead with another new all time high. The index ability to creep higher for a 2nd day following the break-out to the first new highs in almost 2 years is a good sign. The indicators are bullish and confirm the break-out as well, although there are also unconfirmed divergences here. Upside targets are 9,500 in the near term and 10,000 and 10,500 in the short to long terms.


The continuation of the long term secular bull market that had been building on positive earnings growth outlook, unleashed by post-election relief and supported by economic trends is still underway. The indices are making new highs, the transports are participating, earnings growth is back, economic outlook is good and the only negatives are concerns that the Trump economy won't be as good as we think. That could be true but remember this; outlook was positive before Trump won the election and has only improved since, even if the Trump economy isn't as good as we think right now it will still be better than what we were expecting before. I am bullish, still cautious, but bullish with an eye on Dow 20,000. The next big catalyst will be next Wednesday when the FOMC releases their policy statement, I can't wait.

Until then, remember the trend!

Thomas Hughes


 

PUT OPTION INVESTOR
ON YOUR SHOPPING LIST


Don't forget to reward yourself with our 2016 End-of-Year Annual Subscription Sale!  You’ll save $1,147 when you renew now.

The options market isn’t waiting for you.  And you shouldn’t wait to keep Option Investor coming at the lowest prices you’ll see for at least a year! There isn’t a minute to spare. 
Order now.

Renew for as little as $495,
ONLY $1.35 per day




New Option Plays

Massive Opportunity

by Jim Brown

Click here to email Jim Brown

Editors Note:

Every once in a while an opportunity comes along that truly qualifies as a fat pitch. This is it. This rally is going to fail. Every rally fails eventually. This one has a big fat, easily seen target and once that bell has been rung, traders will leave the building.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

DIA Dow ETF - ETF Profile

The SPDR® Dow Jones® Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.

Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.

Now 13 years later we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.

However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.

I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.

Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.

With a DIA trade at $199.00

Buy Feb $195 put, expected premium $3.50, no initial stop loss.



In Play Updates and Reviews

Give and Take

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets posted a "normal" day even if it was still a new high for the major indexes. We cannot have a 300 point gain every day. Some days need to be normal. Today was one of those days with a decent gain but plenty of give and take in the individual stocks. Shares posting new highs on Wednesday faded and new companies took their place today.

The Nasdaq finally closed over 5,400 to make a new high and that leaves the Nasdaq 100 ($NDX) as the only major index not in breakout mode. Google was in the win column with a $5 gain but the rest of the FANG stocks were either losers or fractional gainers in the case of Facebook. We really need those big cap techs to catch fire in order to push the market higher.



Current Portfolio


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.


Profit Targets

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


FFIV - F5 Networks

The long call position was opened with a trade at $142.25.

UNH - UnitedHealth

The long call position remains unopened until a trade at $160.25.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates


ADP - Automatic Data Processing - Company Profile

Comments:

No specific news. New high close.

Original Trade Description: December 5th.

Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.

ADP reported a 26.5% rise in earnings to 86 cents that beat estimates by 9 cents. Revenues rose 7.5% to $2.92 billion and beat estimates for $1.91 billion. The number of employees on client payrolls rose 2.7%. They ended the quarter with $2.82 billion in cash and long-term debt of $2 billion. The announced the sale of their CHSA and COBRA business to WageWorks for $235 million. The sale will be completed in Q2 2017.

The company guided for 2017 revenue growth of 7% to 8% and 15% to 17% earnings growth. The PEO Services segment revenues are expected to rise 14% to 16%.

The company just declared a 57-cent quarterly dividend to raise the annual dividend to $2.28.

Earnings Feb 1st.

ADP holds a dominant position in the payroll processing sector. With employment expected to rise again in 2017 this could be an attractive investment for funds that are tired of chasing industrials and bank stocks in the current rally.

Shares took profits last week from a very nice climb and could be ready to try for a new high.

There is resistance at $97 but given the time of year and the overbought conditions in the rest of the market, we could see a breakout. Options are relatively cheap.

Position 12/6/16:

Long Feb $97.50 call @ $2.10, see portfolio graphic for stop loss.


FFIV - F5Networks - Company Profile

Comments:

No specific news. Suddenly a big rally back to resistance at $144 to trigger the position.

Original Trade Description: November 21st.

F5 Networks, Inc. develops, markets, and sells application delivery networking products that optimize the security, performance, and availability of network applications, servers, and storage systems. It offers Local Traffic Manager, which provides intelligent load-balancing, traffic management, and application health checking; BIG-IP DNS that automatically directs users to the closest or best-performing physical, virtual, or cloud environment; Link Controller, which monitors the health and availability of each connection in organizations with more than one Internet service provider; Advanced Firewall Manager, a network firewall; and Application Security Manager, an Web application firewall that provides comprehensive, proactive, and application-layer protection against generalized and targeted attacks. The company also provides Access Policy Manager, which provides secure, granular, and context-aware access to networks and applications; Carrier-Grade Network Address Translation, which offers a set of tools that enables service providers to migrate to IPv6 while continuing to support and interoperate with existing IPv4 devices and content; and Policy Enforcement Manager that offers traffic classification capabilities to identify the specific applications and services to service providers. In addition, it offers cloud-based and other subscription services; BIG-IP appliances; VIPRION chassis-based systems; and Traffix Signaling Delivery Controller for diameter signaling and routing. Company description from FinViz.com.

The big attack on the Internet several weeks ago was driven by malware that had been placed on IoT devices including security cameras, cable boxes, burglar alarms and dozens of other device types. These devices are typically delivered without any material malware defenses. It is up to each manufacturer to overcome this in the future with some kind of defense.

However, FFIV provides software and hardware to prevent denial of service attacks from these devices as well as the more robust attacks from computers and servers. With more and more servers in the cloud it is harder to protect them from attack like you would dedicated physical servers in a dedicated data center. This is where FFIV excels.

The company's Silverline service places a sophisticated cloud based filter around critical infrastructure that stops attacks instantly. Aided by hardware based firewalls in dedicated data centers they protect data and equipment from all outside attacks.

For Q3 they reported earnings of $2.11 compared to estimates for $1.94. revenue ot $525 million beat estimates for $520 million.

Earnings Jan 21st.

FFIV shares spiked on earnings in late October and have been moving steadily higher. They are about to break over resistance at $144 and we could see another leg higher when that happens.

Position 12/8/16 with a FFIV trade at $142.25

Long Jan $145 call @ $3.80, see portfolio graphic for stop loss.


FLOW - SPX Flow Inc - Company Profile

Comments:

No specific news. New 52-week high close.

Original Trade Description: November 30th.

SPX FLOW, Inc. provides various engineered solutions worldwide. The company engineers, designs, manufactures, and markets products and solutions used to process, blend, filter, dry, meter, and transport fluids with a focus on original equipment installation, including turn-key systems, modular systems, and components, as well as aftermarket components and support services. It operates through three segments: Food and Beverage, Power and Energy, and Industrial. The Food and Beverage segment offers mixing, drying, evaporation, and separation systems and components, as well as heat exchangers, and reciprocating and centrifugal pump technologies primarily under the Anhydro, APV, Bran+Luebbe, Gerstenberg Schroeder, LIGHTNIN, Seital, and Waukesha Cherry-Burrell brands. The Power and Energy segment provides pumps, valves, and related accessories, principally for use in oil extraction, production, and transportation at wells, as well as for pipeline applications under the APV, Bran+Luebbe, ClydeUnion Pumps, Copes-Vulcan, Dollinger Filtration, LIGHTNIN, M&J Valve, Plenty, and Vokes brands. This segment primarily serves customers in the oil and gas industry, as well as in nuclear and other conventional power industries. The Industrial segment offers air dryers, filtration equipment, mixers, pumps, hydraulic technologies, and heat exchangers under the Airpel, APV, Bolting Systems, Delair, Deltech, Hankison, Jemaco, Johnson Pump, LIGHTNIN, Power Team, and Stone brands. This segment principally serves customers in the chemical, air treatment, mining, pharmaceutical, marine, shipbuilding, infrastructure construction, and general industrial and water treatment industries. Company description from FinViz.com.

SPX Flow was spun off from SPX Corp (SPXC) in September 2013. Shares sold off from the $40+ opening to $15 over the next six months. After a quick rebound to $31 in May the stock has moved sideways for the rest of the year.

They reported earnings of 34 cents that beat estimates for 33 cents. Revenue of $466.8 million narrowly missed estimates for $467.7 million. They guided for full year earnings of $1.27-$1.47 with revenue of $2.0 billion.

The CEO said the company had made good progress in its restructuring efforts post split. Revenue was light in Q3 because of a delay in shipping some orders in the energy sector. They are looking forward to a rebound in the energy sector and manufacturing in general.

Earnings Feb 1st.

Shares closed right at 52-week resistance at $31.50 and are poised for a breakout, market permitting. The stock gained $1 today in a weak market.

Position 12/1/16:

Long March $35 call @ $1.51, see portfolio graphic for stop loss.


NVDA - Nvidia Corp - Company Profile

Comments:

No specific news. Competitor AMD saw a two step upgrade from BAML from underperform to buy and the price target raised from $5 to $12. The analyst said AMD could be an acquisition target but not by Intel or Nvidia. The analyst said AMD has nowhere to go but up since its market share for processors has fallen from 17% to 2.4%. Nividia shares spiked to a new intraday high but faded on the AMD headlines.

Original Trade Description: December 3rd.

NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors. Company description from FinViz.com.

Nvidia is taking market share from every chipmaker in the market. Their graphics cards are the hottest things going and every model sells out and are resold for higher prices in the secondary market. Their GPU products are the fastest processors available for extreme computing environments, monster applications, data mining, machine learning and artificial intelligence. One recent benchmark showed an Intel server would take over 2,000 hours to process one massive computation program. A Nvidia GPU server only took 30 hours. Amazon and other cloud providers are buying 1000s of GPU equipped servers to handle massive cloud applications.

They are also moving into a stronger position in the self driving vehicle sector with superfast visual and logic chipsets that can 1000s of inputs in a second to help the car navigate and avoid collisions.

Every time Nvidia announces a new product they are years ahead of the competition.

Earnings Feb 9th.

Shares are up +165% in 2016 alone but they are far from done. They spiked 10% after earnings in early November and held the highs for two weeks despite market volatility in tech stocks. On Thursday, Nvidia shares finally cracked when the Nasdaq fell -77 points for the second consecutive decline of more than 1%. On Friday, shares posted a gain and showed no signs of further weakness. Over the last two weeks, MKM Partners upgraded them to a $106 price target and Needham raised their target to $100. The problem is that most analysts do not understand the technological revolution underway at Nvidia.

Options are not cheap but you sometimes get what you pay for. You can spread it to reduce the cost but I am not going to recommend that today. As the stock moves higher we can spread later once the distant strikes become more valuable.

Position 12/5/16:

Long Feb $95 call @ $5.03, see portfolio graphic for stop loss.



SMG - Scotts Miracle Grow - Company Profile

Comments:

Shares were upgraded by BAML from underperform to buy and raised the price target from $80 to $105 saying the stock has more room to run. Shares spiked $4 on the upgrade.

Original Trade Description: November 12th.

The Scotts Miracle-Gro Company manufactures, markets, and sells consumer lawn and garden products worldwide.

Nine states had legalization of marijuana on the ballot in some form and eight approved the measures. California, Massachusetts, Maine and Nevada approved it for recreational use. Arkansas, Florida and North Dakota approved it for medical use, which is a first step towards eventual recreational use. Montana approved a measure for commercial growing and distribution. Arizona was the only state where a recreational use measure failed.

Scotts has already said the legalization of pot was good for their business since growers want to grow it fast and grow it indoors. Over the last two years, Scotts has acquired two hydroponic acquisitions. One of them was a marijuana nutrient and growing products maker. They are branching out into the equipment and lighting required for indoor plant cultivation with the acquisition of Gavita, a grow light and hardware producer. They recognize pot as an "emerging high-growth opportunity" under their Hawthorne Gardening Company brand. They want to invest $500 million in the marijuana industry.

Scotts recently spun off its Scotts LawnService yard fertilizer business into a partnership with TruGreen so that low margin business is gone. The partnership pays distributions back to Scotts.

In the last quarter, sales rose 7% with consumer purchases rising 10%. This compares to the full year revenue growth of 2%. This shows how fast the business is growing with the new focus. They are projecting 6% to 7% revenue growth in 2017 and adjusted earnings of $4.10-$4.30. They called those numbers conservative.

Earnings Feb 2nd.

Position 11/14/16:

Long March $90 call @ $3.90, see portfolio graphic for stop loss.


UNH - UnitedHealth - Company Profile

Comments:

No specific news. Shares missed our entry point by a penny and only declined fractionally in a choppy market.

Original Trade Description: December 7th

UnitedHealth Group Incorporated operates as a diversified health and well-being company in the United States. The company's UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, individuals, and military service members; and health care coverage, and health and well-being services to individuals aged 50 and older addressing their needs for preventive and acute health care services. It also provides services dealing with chronic disease and other specialized issues for older individuals; Medicaid plans, Children's Health Insurance Program, and health care programs; and health services, including commercial health and dental benefits. This segment serves through a network of 1 million physicians and other health care professionals, as well as approximately 6,000 hospitals and other facilities. Its OptumHealth segment offers health management services, including care delivery and management, wellness and consumer engagement, distribution, and health financial services. This segment serves individuals through programs offered by employers, payers, government entities, and directly with the care delivery systems. The company's OptumInsight segment provides software and information products, advisory consulting services, and business process outsourcing and support services to hospitals, physicians, commercial health plans, government agencies, life sciences companies, and other organizations. Its OptumRx segment offers pharmacy care services and programs, including retail pharmacy network management, home delivery and specialty pharmacy, manufacturer rebate contracting and administration, benefit plan design and consultation, claims processing, and clinical program services, such as formulary management and compliance, drug utilization review, and disease and drug therapy management. Company description from FinViz.com.

UNH will have about $184 billion in revenue in 2016 to put it at number six on the Fortune 500 list. With its broadening of scope using its various Optum programs it is maximizing profits by widening the service component of its business. Here is an excellent article on why UNH will be the most profitable. Amazon of Healthcare

I am not going to go into an in depth explanation of UNH. That article I referenced has plenty of information why UNH should be a long term holding of any investor.

Earnings January 17th.

I wanted to play UNH last week when it was at $152 but it had resistance at $153 and I decided to wait another day to see if that resistance was broken. Shares gapped up to $158 at the open the next day and ran to $162.50 over the next four days. Now that big gain has been digested and shares pulled back to $156 before adding a couple dollars on Wednesday. I believe the UNH rally will continue for the reasons listed in that article above. I am willing to take a shot here that the market rally also continues even if Wednesday's futures related spike fades in the days ahead. We have 16 trading days until 2017 and we should close the year at higher levels.

With a UNH trade at $160.25

Buy Jan $165 call, currently $2.45, initial stop loss $155.85.


WDC - Western Digital - Company Profile

Comments:

No specific news. Shares faded slightly after the big gain on Wednesday.

Original Trade Description: November 12th

Western Digital Corporation, together with its subsidiaries, engages in the development, manufacture, sale, and provision of data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content worldwide. The company's product portfolio includes hard disk drives (HDDs), solid-state drives (SSDs), direct attached storage solutions, personal cloud network attached storage solutions, and public and private cloud data center storage solutions. It provides HDDs and solid-state drives for performance enterprise and capacity enterprise markets desktop, and notebook personal computers (PCs).

Western Digital bought flash memory maker SanDisk in October 2015 and this is going to supercharge their product offerings. They have already raised guidance after a couple quarters of integration. Revenue in Q3 rose 38% to $4.7 billion.

Last week WDC announced a 50-cent quarterly dividend payable Jan 17th to holders on Dec 30th.

The consensus rating of 27 analysts is a buy with a price target of $69.64. Shares closed at $58.89 on Friday.

They reported earnings on Oct 27th and spiked to $62. Post earnings depression saw them fade back to $55 and now they are moving up again. I believe they will exceed that $62 earnings high. They traded at $115 in 2015.

Earnings Jan 25th.

Update 12/7/16: Shares spiked $5 higher after the company raised guidance at Tuesday's analyst meeting. The company said Q4 earnings would be in the range of $2.10-$2.15 compared to prior guidance of $1.85-$1.95.

Position 11/14/16:

Long Jan $62.50 call @ $2.20, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

VXX - VIX Futures ETF - Company Profile

Comments:

Fractional gain as put buying continues to support the VIX/VXX. Apparently, everyone does not believe the market gains will stick.

Original Trade Description: September 21st.

The VXX is a short-term volatility product 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 down four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

After the August split the ETF moved sideways for four weeks at $36. The volatility event on Sept 9th with the Dow falling -2.5% spiked the VXX from $33 to $42 in three days. That bounce has faded and it is almost back at $33. You are probably thinking, the $40 level would have been a good entry point and you are right in hindsight. However, with the market in danger of breaking down if the Fed had hiked rates, it was better to wait. Now there is nothing on the horizon to cause a spike other than normal market movement.

This is going to be a long-term position. I am not putting a stop loss on the position because long term the VXX always goes down. If we get another volatility spike we will buy another position at a higher level and then ride them both back down.

Position 12/6/16:

Long March $24 put @ $2.36, see portfolio graphic for stop loss.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now