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Newsletter

Daily Newsletter, Saturday, 12/10/2016

Table of Contents

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

Market Wrap

Never Ending Rally

by Jim Brown

Click here to email Jim Brown

Despite multiple calls for its demise, the post election rally keeps going and going and going.

Weekly Statistics

Friday Statistics

The three major indexes completed a feat they have not been able to do in more than five years. The Dow, S&P and Nasdaq all posted gains for five consecutive days in the same week. They all ended at new highs with portfolio managers being forced to hold their nose and buy the overbought shares. The gains are continuing despite a likely rate hike next Wednesday. If the Fed claims it is bullish on the economy we could blow out to even higher highs.

Market sentiment is increasing rapidly and consumer sentiment is moving sharply higher on the Trump bump. For an election that created so many protests after the results the impact on sentiment has been very positive. Consumer sentiment for December rose from 93.8 to 98.0 and only 1 tenth of a point below a 12-year high. In January 2015, the reading was 98.1 and I expect that to be exceeded in the revision later this month. Sentiment was at 87.2 in October. That is better than a 10-point gain in only two months.

The present conditions component rose from 107.3 to 112.1 and the highest reading since 2005. The expectations component rose from 85.2 to 88.9 and the highest level since January 2015. The percentage of respondents expecting good economic conditions over the next year rose from 46% to 51%. Those business owners surveyed and saying business conditions were favorable rose +8 points to 43%. More than 80% of consumers said it was a good time to make a major purchase.

There are two reasons for these gains. The first is that the election is over and all the negativity in the campaign attack ads has passed. The second is the normal honeymoon period after a new president is elected. This particular honeymoon appears to be stronger and longer lasting than any I can remember in the recent past. The potential for lower taxes and reduced regulation have business owners very excited.


This boost of bullish sentiment is completely ignoring the potential for a rate hike next week. The current probability is now up over 97%. The key will be the guidance and how the Fed projects future rate hikes in 2017. I suspect they will try and maintain a dovish picture and not kill the market with a harsh outlook for multiple hikes.


There are a lot of reports next week but the normal economic releases pale in importance to the Fed statement and Yellen press conference.

Since the election, the routine economic reports have been ignored. Nobody seems to care what the economy is doing today because they expect it to do a lot better in 2017.


The Dow is well on its way to moving between 1,000 point milestones in a record amount of time. The 19,000 level was first hit on Nov-22nd and we could easily hit 20,000 as early as next week. The shortest time between 1,000 point increments was in 1999 when it took 35 calendar days, not trading days, to move from Dow 10,000 to Dow 11,000. It took 7.5 years to make it to the next level at 12,000.

Note that each increment requires a much smaller percentage move than the prior increment. To go from 1,000 to 2,000 is a 100% increase. To go from 10,000 to 11,000 was a 10% increase. The move from 19,000 to 20,000 will be a 5.26% increase. Using those percentage numbers it only makes sense that we should be reducing the time between milestones but there are those pesky bear markets to deal with. The first Dow print was 40.96 when it was introduced in 1896. To reach the first 1,000 milestone required a 2,341% rise and 76 years.


Stock news was very sparse on Friday with the market activity already starting to wind down for the holidays. The new market highs are about the only thing keeping investors in the markets. There are still some big losers on the radar because business still has potholes that have to be avoided.

A big loser on Friday was Restoration Hardware (RH) with an 18% decline. The company reported earnings after the bell on Thursday of 19 cents compared to estimates for 16 cents. Revenue of $549 million also beat estimates for $533 million. However, the guidance was a killer. They lowered Q4 revenue estimates to $562-$592 million with earnings in the 60-70 cent range. Analysts were expecting $637.62 million and $1.08 in earnings. Comp sales for Q3 also declined -6% compared to a 7% rise in the year ago quarter.

The CEO said there were multiple problems including excess inventories, too many SKUs and consumers did not like their new products. It was not an encouraging conference call.


Broadcom (AVGO) was a big winner after reporting earnings of $3.47 compared to estimates for $3.38. Revenue of $4.14 billion rose +125% and beat estimates for $4.12 billion. The company also doubled its quarterly dividend to $1.02. The company guided to revenue of $4.07 billion in the current quarter but did not guide on earnings. Analysts are expecting $3.18 on revenue of $3.96 billion, a 122% increase.


Vail Resorts (MTN) reported a loss of $1.70 compared to estimates for -$1.57. Revenue of $178.3 million missed estimates for $183.5 million. Losses in lodging and real estate sales offset rising revenue in lift ticket sales. The Q3 quarter normally produces a loss since the ski mountains are not yet open for business. They did raise 2017 guidance from $482-$518 million to $567-$597 million. Shares rallied 4% on the guidance.


Retailer Duluth Holdings (DLTH) reported earnings of a penny compared to estimates for breakeven. Revenue of $67 million missed estimates for $69 million. The company guided for the full year to revenue in the range of $360-$370 million and earnings in the 52-60 cent range. Analysts were expecting $380 million and 70 cents.

They opened three new stores in Q3 and two more in the current quarter to bring their total to 16. However, the most troubling statistic was the cash on hand of $173,000 compared to $37.87 million in the year ago quarter. That $173,000 is pocket change with a 16-store network that has salaries, rent and inventory requirements. They blamed the unusually warm Sept/Oct for the disappointing sales. Other retailers have had the same complaint. They also said it was a highly promotional environment, which others have also stated. Shares fell -33%.


InvenSense (INVN) shares spiked 27% after headlines broke claiming Japan's TDK Corp was in talks to acquire the chip company. InvenSense makes motion-sensing chips. Reportedly TDK has offered $12 per share, which was a 45% premium to Friday's opening price but only barely above the 52-week high from a year ago. The stock has been troubled with many competitors in its primary market. The company has been trying to diversify into things like drones, virtual reality, optical image stabilization, wearable devices and smart home IoT devices.


Bristol-Myers Squibb (BMY) raised its dividend +2.6% to 39 cents. It is payable February 1st to holders on January 6th. That equates to a 2.74% yield. The company also settled a multi-state probe over improperly promoted schizophrenia drug Abilify. The agreement with 42 states will result in a $19.5 million payment. The drug had been marketed for use on elderly patients with dementia without the FDA approval for that use. Shares rallied 3% from support at $55.


Stillwater Mining (SWC) spiked 18% after South African company Sibanye Gold Limited said it was acquiring the company for $2.2 billion and will assume $500 million in SWC debt. SWC is the only U.S. producer of platinum and palladium, the precious metals used to make catalytic converters and jewelry. The company has 1,400 workers in southern Montana. A U.S. subsidiary of Sibanye will pay $18 a share for SWC.


RigNet (RNET) shares rallied 16% after the company was awarded a contract with Statoil for their Mariner project in the North Sea. RigNet builds high specification networking and communications systems that operate from remote locations. The company will provide the latest VSAT communications and network technology for operating in the harsh North Sea environment. They will provide a fully managed voice and data network including video conferencing, crew welfare, asset monitoring and real time data services. No dollar value was given but it is in the millions of dollars.


Coca-Cola (KO) said CEO Muhtar Kent, was stepping down as CEO effective May 1st. Kent will be replaced by the COO, James Quincey, who has been at Coca-Cola for 20 years. Kent will remain chairman of the board. This announcement came at an odd time since Coke's biggest shareholder's son, Howard Buffett, resigned from the board on Thursday. Warren Buffett said he has known Quincey for a long time and was supportive of the move. Shares were up slightly on news that Warren would not be selling his shares.


OPEC officials and non-OPEC suppliers met in Vienna this weekend to discuss additional production cuts. They previously announced that non-OPEC producers would cut 600,000 bpd but there was no specificity. Russia said they would cut 300,000 bpd but then waffled on the commitment before the headline was even a day old.

The early headlines from the meeting claim the 11 non-OPEC producers agreed to cut 558,000 bpd for six months starting on January 1st. The eleven countries were Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan and South Sudan. Talk is cheap and there is no assurance a cut will actually occur.

Saudi oil minister Al-Falih said "the intent by all those who participated is to contribute to drawing down oil inventories that are excessive. And whether the reduction in that over-supply comes from deliberate intervention, like it is the case in Saudi Arabia, or by simply managing the decline in a way that makes them meet this agreement is left to the countries themselves." Ponder that for a minute. They can cut production OR they can just let current production erode and it may or may not actually reach any of the targets. That is hardly a strong agreement that will remove 558,000 bpd starting on January 1st. This is another "We are going to cut production, move along now, there is nothing to see here" headline.

I looked at every post meeting report I could find and there was nothing about specific cuts by each country. The only specific statements said Oman would cut by 45,000 bpd and Kazakhstan said it "would try to reduce by 20,000 bpd next year." Amrita Sen from Energy Aspects Consultants said, "While a lot of the countries are formalizing natural declines, cuts by Russia, Kazakhstan and Oman are real. Russia and Kazakhstan were between them expected to add 400,000 bpd to production next year." I think that is the bottom line. Only three countries actually claim they are cutting and the rest are just agreeing not to add any new production. Multiple Russians have said over the last week that the Russian cuts will never happen so it will be interesting to see what total production levels are in March/April after full implementation of the claimed cuts.

Crude prices rebounded to $51.50 on short covering ahead of the meeting and the hope by some traders for the participants to surprise us.


The formal agreement by OPEC the prior week did wonders for the rig count. Active rigs rose by +27 for the week ended on Friday. That was an addition of 21 oil rigs and 6 gas rigs. It will be interesting to see if the non-OPEC meeting commentary will impact rig activations in the coming weeks.


 


 

Markets

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." Sir John Templeton. The big question today is whether we are in the optimism phase or the euphoria phase.

Dow Theory also states that in any bull market there are three phases. They are called accumulation phase, public participation phase and excess or panic phase. Source

Generic Chart Example

This theory applies to all phases of a market whether it is multi years or multi months. The accumulation phase is the first stage of a bull market where patient, informed investors enter the market after a period of volatility where a bottom has formed. The bad news is priced into the market and institutions begin to build positions.

The public participation phase is where negative sentiment begins to fade and bullish sentiment grows. Good news begins to flow and the public, always in reaction mode, begins to build positions. This is typically the longest phase and as technical conditions improve, more technical and fundamental traders enter the market.

The excess phase is where the improved economic and market conditions have attracted the attention of retail investors and they begin to chase prices higher thinking the market is going to run away from them. Twenty years ago last week, Greenspan called this "irrational exuberance." The perception is that everything is pointing to a continued rally and investors believe only good things are in our future.

The first phase of a bear trend follows the excess phase. It is called distribution. This is where the informed investors sell their positions but not all at once. They "distribute" their holdings over several days or weeks to those panic buyers still expecting higher highs. The beginning of a distribution phase could look like minor profit taking or a topping in the market. The market does not go down but it begins to have trouble continuing its gains. Volume normally increases as the sellers feed shares to the panic buyers. Eventually, distribution turns into outright selling and the market rolls over.

In the Dow chart below, I have marked the phases according to the Dow Theory description. We are clearly in the excess phase where investors are chasing prices on the expectations for wonderful changes in 2017. Reality is going to be a harsh wakeup call when 2017 arrives and nothing happens for many months, if at all. It could be 2018 before many of the proposed changes actually occur.

If we see the excess phase transition into a distribution phase, we should head for the sidelines.


The Dow is up 1,868 points or 10.4% over the last 22 trading days. It is only 244 points from Dow 20,000. If we actually reach that level before the end of December, I see that as a sell the news moment. The index would be up roughly 2,100 points on optimism and euphoria. The expectations are lower taxes and reduced regulation. Since those things require approval by both houses and there is only a simple majority in each house, it could take months to get anything passed and the process could be ugly. Trump still has to get all his appointees confirmed by the Senate and this is where the battles for control will begin.

We also have to get past the inauguration without a disaster. Whenever you have a million people gathered in one location and the opposing party is trying to organize two million people to block the event, there is a tremendous potential for a disaster. Add in the obvious terrorist threat and investors could be in for a nasty surprise. This would be an added incentive to lighten up on long positions at Dow 20,000.

Fortunately, there are still 14 trading days left in 2016 and they are typically bullish. This year I would expect the high for the year to be made before Christmas. In the 22 trading days since the election, the Dow has closed at a new high 14 times.

The Dow gained nearly 600 points last week alone. Just looking at the Dow chart should give every investor nervous chills. I cannot imagine any investor wanting to buy that chart but everybody has their own ideas about investing.



The S&P gained +3% last week and is up 174 points or 8.3% since the election. The gains last week clearly qualify as panic mode. Asset managers are rotating out of bonds and into equities and fund managers are putting every penny to work trying to keep up with their peers. Charles Biderman said most funds are fully invested and have almost no cash on hand. That means any end of year or new tax year withdrawals will require selling to raise cash. Today, nobody is withdrawing money so every penny in the fund goes towards maximizing gains before year-end.

There is a disturbing historical trend where the post election honeymoon is sometimes followed by bear markets. I am not going to go back and dig up all the facts to present here but the trend exists. With the current economic expansion at 7 years and growing, there is always the potential for a recession. Greenspan said last week, his main worry for 2017 is stagflation. I do not see that potential but I am sure that risk exists.

The point to this discussion is that the S&P and the other indexes are in what Elon Musk would call insane mode. That is the mode on his cars where acceleration is insanely fast. The market gains last week were insane since they were on top of already strong gains.


The Nasdaq finally broke out to a new high but it is not nearly as over extended as the Dow and S&P. The Nasdaq big caps other than Google did not participate. Facebook gained only 77 cents, Amazon +1.33 and Netflix lost 36 cents. In order for the Nasdaq breakout to have any staying power the FANG stocks all have to contribute, not just Google.

The biotech sector remains weak and Trump's comments last week about bringing down drug prices caused a new wave of uncertainty. While that is significantly easier to say than actually do, it still causes selling in the drug stocks.




The Russell 2000 is up +232 points since the election or exactly 20%. That would be a great year under normal conditions but that occurred in only 22 trading days or roughly 1% per day. In any universe that is very over extended and due for a rest.


I do believe we will see higher highs before Christmas. However, I do not expect the kind of gains we saw last week. I believe the market could be choppy and toppy as we target that 20,000 level on the Dow.

I would refrain from being overly long and I would definitely keep my stop losses in place.

 



 

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Random Thoughts


There was almost no change in sentiment for the week. Everybody has made up their mind and those "not bullish" still make up 57% of the total. There are plenty of investors left to convert. This survey ended on Wednesday.

Last week results


Mark Zuckerberg in politics? Recently released documents in an ongoing lawsuit about the creation of the Class C non-voting shares, disclosed communications between board members and Zuckerberg. The board discussed giving the CEO a two-year leave of absence it he decided to become involved in "a government position." The "Facebook has no political bias" CEO apparently has an interest in serving in government. Since 98.1% of political donations from Facebook employees were to democratic candidates, we can guess which way Facebook is leaning.

The board member comments on the Class C share suit were concerned about Zuckerberg converting the majority of shares owned by the public into class C shares with no voting rights. That would allow Zuckerberg to basically abandon the company for years to go into government and have minimal input to Facebook but still retain total control. According to board members Erskin Bowles and Mark Andreessen they "rediscuss that problem on every call."


If you currently have a functioning Galaxy Note 7 phone by Samsung, it is about to become a paperweight. The phones have been under mandatory recall but apparently, some users liked them so much they refuse to give them back. Next week, Samsung will force a software update that will remove the ability to make calls and the ability to charge the battery. The phone will become totally useless and with a discharged battery, and no further danger to Samsung. In Canada, Samsung has already implemented those changes as well as disabling Bluetooth and Wi-Fi functions. Strangely, you can still buy a Note 7 on Ebay for about $350.


iPhones are shutting down all over the world as a result of two problems. One iPhone 6s problem is hardware and requires a battery replacement so the phones have to be exchanged. Apple has notified everyone impacted on how to get the exchange. The China Consumers Association disagrees with Apple saying it affects more than just the 6S and they have requested Apple step up their exchange program to cover other models.

The second problem is related to a recent update to iOS. The iOS 10.1.1 updates reduces battery life by increasing the phone's internal temperature. Some users claim the charge dwindles from 30% to 1% in only a few seconds and then shuts down. When it is rebooted after being recharged, it shows only 30% but runs for a couple hours before shutting down again. Users are resorting to carrying an extra battery to make it through the day.

JP Morgan cited information from Orbital Insight saying mall traffic is slowing. Orbital takes satellite pictures of mall parking lots and compares them to the same period in prior years. They claim mall traffic is down -4.1% from year ago levels and this could hurt Apple more than anyone else because they get a lot of their sales from big box stores like Best Buy and mall stores. JP Morgan expects iPhone sales to decline -11% compared to consensus estimates for a 7% rise.

The Wall Street Journal said Apple's high tech jack-less AirPod earbuds may not be available in the near future. Apple originally said they would be for sale in October at $159 a pair but then withdrew them saying they needed more time to provide a quality user experience.

According to the WSJ article, the problem is technical. Bluetooth technology cannot stream to two devices at the same time. Other devices like Bragi Dash and Samsung Gear IconX solve that by transmitting to one earbud and then that bud retransmits to the other earbud. However, results are spotty because people's heads tend to get in the way. Because we are all different, the transmission from bud to bud performs differently for each person and dropouts occur. Do not expect AirPods in the near future.

Apple shares were actually one of the better tech performers last week with more than a $5 rebound off Monday's $108.25 low.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Being a male is a matter of birth. Being a man is a matter of age. But being a gentleman is a matter of choice."

Vin Diesel


 


Index Wrap

Stretching Our Luck

by Jim Brown

Click here to email Jim Brown
Everybody loved a bull market. Sentiment improves and even lackluster stocks find a bid. Unfortunately, a never-ending bull market is a fairy tale. However, there are multiple kinds of bull markets. Some markets develop a bullish trend and can maintain that trend for many months. The key is that they do not go vertical and do not go weeks without profit taking. A prime example would be the bull market from July 2011 to July 2015. The S&P rallied from 1,075 to 2,135 or a whopping 1,060 points.

The rally was sustainable because there were regular bouts of minor profit taking and the rate of climb was not unreasonable. The S&P rose 5-7 points a day for 5-7 days and then rested for 3-5 days. This allowed existing investors to capture profits and offered new investors an opportunity to buy the dozen or more dips.

S&P Rally 2011-2015

In 2015/2016 that four year rally paused. We went sideways with declines of several hundred points more than once. Investors who had grown accustomed to the nice calm cycles over the prior four years were chewed up in the sideways volatility that followed.

Another kind of bull market is the one we are experiencing now. This is a special event market. Everyone waited with baited breath for the Brexit vote and the volatility appeared but lasted only two days. The rally was sharp but lasted only slightly more than two weeks.

The U.S. political campaign began to heat up in July and volatility dried up for four months. The markets began to factor in the worst outcome and the S&P declined to 4-month lows. Trump won and with the exception of four days in late November, the market has been vertical. This is not sustainable. If you compare the post election bounce below to the five years represented in the chart above you will not see an equivalent move of 175 points in five weeks. Markets that move that far, that fast tend to correct with equal speed.

However, if you look at the chart below there was another 150-point surge in 2016 after the Brexit vote. That surge took months to digest and consolidate. Markets do not behave well after periods of bullish excess.


In the current market, there are no indications of a pending collapse. That in itself is almost scary. The biggest declines are the ones that nobody expects. The MACD and RSI are at their highs and still accelerating. Markets can decline before the indicators flash a warning so we cannot depend on those at this point.


In this market, we need to look for external events that could cause traders to take profits. We already know that nearly every long position at this point has trailing stops. Every trader/investor that is currently long is amazed at his good luck and they are afraid to take profits because the market could go higher. Markets do tend to have these streaks from time to time and nobody wants to exit only to see the S&P rally another 100 points. While that is not impossible, it is highly improbable.

So what are the events that could end the rally? The Fed announcement next week could be hawkish and predict 4-6 rate hiked in 2017. That is also highly unlikely and the market has already discounted that potential. The market expects a December hike and then probably a hike in March with a relatively dovish Fed willing to let the economy run "hot" as Yellen said in a recent speech. So, the Fed announcement is not likely to be a problem.

Dow 20,000 is another potential hurdle. It is almost a given that the Dow will reach that level before Christmas. Very large round numbers at the end of a long rally tend to be electrically charged. I can remember many times over the last 25-30 years when a round number became a "sell the news" event. I cannot imagine a bigger, rounder number than 20,000 and it would come after a very overextended rally. I would say the risk of a selling event is high.

Offsetting that is the race to year-end by thousands of fund managers. They are in a very tough competition to beat their peers for total return and it is a hotly contested race. Many, probably the vast majority, were late to the party and now they are throwing every penny they have at the market in hopes of securing their bonuses and keeping their jobs. That could power window dressing right up to the end of December.

The perfect storm would be some "pre-selling" before the Dow actually got to 20,000 and the market could chop around in the 17,000-19,000 range until Christmas. A late December surge of window dressing after the holiday could push the Dow to 20K by the end of December and all hell would break loose on January 2nd as everyone tries to unload those positions at the same time.

January can be brutal. It does not always happen but when markets have been strongly bullish in Q4, January tends to see selling. Investors can take profits and not have to pay taxes for another year.

Given the post election rally, the move into a new tax year could be dangerous. Remember January 2016? The Dow gave back 1,850 points in just over two weeks.


Lastly, there will be a presidential inauguration on January 20th. More than one million people will attend the swearing in and a million more could line the parade route. There is an effort underway to get two million people from the opposing party to show up and protest. This could get really ugly.

There is always the potential for a terrorist attack. Whenever you get a million people in one place in this day and age, there is extreme risk. Traders with profits from the current rally will definitely want to take those gains off the table before the event.

The point to this commentary this week is to encourage investors to be aware of the coming events and also be aware that the current rally is not going to continue forever. The post election honeymoon period is coming to a close. Count on it.

There is an old saying in the markets. When the VIX is high it is time to buy. When the VIX is low it is time to go. The VIX closed under 12 on Friday and at historically low levels. While a volatility event may not happen for days or even weeks, we know without a doubt it will happen. Be prepared.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Slow and Steady

by Jim Brown

Click here to email Jim Brown

Editors Note:

In this overextended market, finding a stock with a steady gain is a plus. Sometimes slow and steady really does win the race. There are so many stocks today that have rocketed off into the stratosphere and they are not investible. Others that have not participated in the rally are equally avoided because there is no spark.



NEW DIRECTIONAL CALL PLAYS

ESNT - Essent Group Ltd - Company Profile

Essent Group Ltd., through its subsidiaries, provides private mortgage insurance and reinsurance for mortgages secured by residential properties located in the United States. The company also provides information technology maintenance and development services; customer support-related services; and contract underwriting services. It serves originators of residential mortgage loans, such as regulated depository institutions, mortgage banks, credit unions, and other lenders. Company description from FinViz.com.

Essent reported earnings of 65 cents compared to estimates for 58 cents. Revenue was $121.3 million. For 2015 they saw earnings rise 65.1%. The current growth estimate for 2016 is 37.8%. While that is less than 2015 rate the relatively young company is still in a growth spurt. It is easy to show big percentages in the early years since there were little to no earnings when you started. The company began in 2008

Over the last month analyst consensus estimates have risen from 60 to 62 cents and full year estimates have risen from $2.27 to $2.34.

Shares have risen $5 over the last $3 weeks but not at the frantic pace of some other high visibility stocks. Essent is moving slowly higher a few cents a day. When the eventual profit taking appears in the broader market, Essent could be less impacted than some other stocks.

Options are cheap and we can buy well into the future for just a couple dollars.

Buy April $35 call, currently $2.05, initial stop loss $30.85.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Quadruple High

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow, S&P, Nasdaq and Russell 2000 all closed at record highs on Friday. The rally is turning into the "Never Ending Story" with every day seeing even more analysts project higher highs. That should be the kiss of death but so far the markets have been immune to the overbought flu.

However, despite the new highs, the majority of our positions declined because the market breadth is narrowing. Prior winners are starting to fade and the gains are coming from a select few stocks.

Next week is typically bullish but I do not know how much higher this market can go without a decent rest.



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


DIA - Dow ETF

Long put: Open 1/2 position at the open on Monday.

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. No material movement. Waiting for a breakout over $144.

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. Shares faded slightly after the new intraday high on Thursday.

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:

No specific news. Only a minor decline from Thursday's closing high.

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.

Update 12/8/16: 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.

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. Shaes dipped again but rebounded to close at the high for the day and right at $160.

This position remains unopened until a trade at $160.25.

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)

DIA Dow ETF - ETF Profile

Comments:

Another day of big gains. Only $1.31 away from the recommended entry point. However, with the big gain on Friday and 600 point Dow gain for the week I am modifying the recommendation. When you look at the chart, it seems nearly impossible that the SPY can continue much higher.

I am changing the recommendation to enter 1/2 a position at the open on Monday and the second half with a trade at $199. The put premiums have already fallen to my expected price at $3.50.

Original Trade Description: December 7th

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.

Buy 1/2 position at the open on Monday.

With a DIA trade at $199.00 buy the second half.

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


VXX - VIX Futures ETF - Company Profile

Comments:

Minor decline. Puts are still being bought.

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.




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