Option Investor
Newsletter

Daily Newsletter, Monday, 1/23/2017

Table of Contents

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

Market Wrap

The Age Of Trump

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

A cautious market hangs tough, if cautious, as President Trump gets down to business. Today the newly minted President held a meeting with some of the nations top manufacturers, reinstated the controversial Mexico City Rule, put a halt to Federal hiring, began the process to renegotiate NAFTA and officially flushed the TPP. The meeting with manufacturers was a seeming success, they all left in good spirits with the task of coming back in 30 days with a list of actionable items to help improve the ailing US manufacturing sector. The withdrawal from TPP slamming home belief in Trump's plan to improve US trade relations.

International markets were just as cautious as traders wait to see which way the geo-political wind will blow. Asian markets were mixed as Japanese shares fell under a stronger yen, falling more than -1.25%, while those in China were supported by a government pledge to "lead' the world through this new, Western, crisis. In Europe trading was less mixed and more negative with all indices closing with losses. Average declines were in the range of -0.50%, led by the German DAX.

Market Statistics

Futures trading was quiet, there was not much news to chew on aside from speculations of what President Trump might do. The indices were indicated to open flat to negative all morning and that held into the open of trading. At the open the indices began trading with small losses, made a quick dash to test break-even and then moved down to the lows of the day. The lows were hit just before noon, about -12 points for the SPX, then the index made a nice double bottom and then began to creep back up. The remainder of the day saw the indices trend within the early range and close near the mid-point of that range.

Economic Calendar

The Economy

There was no economic data today and there is very little this week. Tomorrow we'll get Existing Home Sales, Thursday we'll get Leading Indicators, jobless claims and New Home Sales, Friday wraps up the week with the first read on 4th quarter GDP, Durable Goods and Michigan Sentiment. Next week is another data dump as the we enter February, along with a BOJ and an FOMC meeting.

The Moody's Survey of Business Confidence fell nearly -3 points over the past two weeks, -1.6 points in the past week alone, as global business sentiment cools. Despite the fall the index remains high relative to the summer bottom and consistent with an economy in expansion. Mr. Zandi says that sentiment remains firm, the US is strongest and outlook is positive.


Earnings season is well underway, at this point a little more than 12% of the S&P 500 has reported. Of those who have reported 61% have beaten EPS estimates and 47% have beaten revenue estimates, both a little below recent averages. The blended rate for earnings growth is now 3.4%, up 0.2% from a the start of the reporting season, and will likely move higher. Based on the average we can expect it to come in near 7.5% by the end of the reporting season. Full year 2016 expectation held steady at 0.2%. This week there are another 70, 14%, S&P 500 companies scheduled to report.


Forward outlook remains robust, the forward all-index 12 month EPS projection continues to rise and hit another new high in the last week. For the 1st quarter 2017 earnings growth is expected to expand to 10.9%, down a tenth in the last week, and 2nd quarter 2017 growth is expected to expand at 10.6%, up a tenth in the last week. Full year 2017 outlook is also strong, 11.4%, and implies further expansion to growth in the 2nd half of the year.


The Dollar Index

The dollar took another hit today as Trump's protectionist agenda begins to unfold. The index is under pressure from uncertainty over Trump's agenda and how he may negatively impact the economy. The Dollar Index fell a little more than -0.50% to close below the $100.50 support target and just above the $100 level. This move brings the index down to a critical support level ahead of the FOMC meeting next week. The indicators are bearish and stochastic in particular looks weak, suggesting that support could be tested further or broken in the near term. If broken next support target is near $99 and the 150 day moving average.

I'll be honest, the chart is ominous but I am not quite ready to give up my bullish stance on the dollar, for a number of reasons. For one, Trump could swing sentiment back to the upside at any moment, that's a reality. Second, the US economy is on track for expansion this year, next week's data could be strong and support the dollar. Third, FOMC meeting is next week, any move in the dollar is suspect until then, regardless of direction. Fourth, the BOJ is also next week and could move the yen with their policy as Abenomics continues to flounder. For some reason expectations for rate hikes in the first half of the year have come down in the last week, I wouldn't be too sure about that.


The Gold Index

Gold prices continue to rise on a weaker dollar and economic uncertainty. This may continue into the near term if there is no clarity from the Oval office on economic policy. Spot price gained nearly 1% in today's action to touch a two month high but was capped at resistance. Resistance is just shy of $1,220. The metal looks like it might be forming a flag pattern, indicative of continuation, but I am leery of that ahead of next week's data dump, BOJ and FOMC meeting. Of course, the Trump Factor may have taken control of gold for the near term, uncertainty could drive it higher. A break above $1,220 would be bullish with upside target near $1,280 in the near term.

The gold miners got another lift today as higher spot prices lifts forward earnings outlook. The miners ETF GDX gained nearly 3%, moving above the 150 day moving average and setting a 2.5 month high. The indicators are bullish, momentum is to the upside, so this move may continue into the near term. The caveat is that major divergence is present in MACD while stochastic shows signs of resistance. Upside target is near the 50% retracement level, $23.80, with a possible move to $26.


The Oil Index

Oil prices fell today as signs of rising US production offset hopes and signs the OPEC cuts are taking hold. Today's news, a meeting of OPEC ministers over the weekend confirmed the cartel is on track to meet its 1.8 million barrels per day production cut and US rig counts made their largest one week gain in nearly 4 years, the 8th month of increases. WTI fell nearly -1.0% to trade near $52.75 and the mid-point of the one month range. Price may remain volatile as higher prices are capped by rising US output and lower prices are supported by OPEC.

The Oil Index fell nearly -1.0% as well, creating a very small black candle and setting a new 1 month low. The index fell below the short term moving average with today's action and looks like it may move lower. The indicators are bearish and stochastic is showing weakness with a cross of the lower signal line. If the index does move lower next support is near 1,235. Longer term outlook remains positive for the sector, earnings growth projections have not fallen, 350% for full year 2017, so any dip is a likely buying opportunity.


In The News, Story Stocks and Earnings

McDonald's reported earnings before the bell and wowed a market expecting a miss. The world's largest fast food chain beat on both the top and bottom lines on strength in Asia. Global comps increased 2.7%, more than double expectations and led by China and Japan, while those in the US fell. US comps were hurt however due to comparison with the launch of all-day break-fast so results are still decent. Of note, profitability in China is improving and US comps will be impacted by all-day breakfast the rest of the year. Management says that the move to all-day breakfast was the right thing to do, but at the cost of lower menu mix. Shares of the stock fell more than -2% intraday to test support at $120 and the short term moving average.


Haliburton reported earnings before the bell with mixed results. The company reported a 5% increase in revenue, revenue that fell short, a wider than expected loss but a better than expected adjusted profit. The company says it has managed itself well through the downturn, has gained marketshare, been able to improve margins and is positioned for growth during the upswing. Shares of the stock fell more than -2.5% on the news, falling from resistance at the short and long term moving averages.


The VIX rose today but the candle is not bullish. The fear index made a small gap higher to open at the short term moving average, moved up to test resistance at $12.00 and then fell back below the moving average. The index appears to be trending sideways, near long term lows, and indicative of calm markets. The indicators are pointing higher at this time but the indications are weak and more consistent with a sell signal within a downtrend than a reversal or buy signal. The chance of increasing fear remains, there are plenty of things to be worried about right now, but those chances will subside as earnings season unfolds, we move past next week's data, the FOMC meeting comes and goes and President Trump gets his administration running.


The Indices

The indices fell today but price action was more sideways than not, and within recent ranges. Basically, there was no inauguration inspired break-out and the market continues to move sideways. Today's action was led by the Dow Jones Transportation Average which lost -0.94%. The index has created a medium sized black candle, near the mid-point of the near term range, falling from resistance at the previous all time high and supported by the short term moving average. The index has reached a point of equilibrium and ripe to make a move. The indicators have moved to a point of equilibrium as well, MACD momentum is very near to zero and stochastic has moved to the middle of its range, and at a point where the market could go either way. A fall from this level confirms resistance, downside target near 8,550, a move up confirms support with upside targets at the current all-time and above.


The S&P 500 made the next largest decline, -0.27%, and created a small spinning top candle. This is the 15th spinning top since the start of the year and the 31st day of trading within the near term range. The prevailing trend is up, the index is in consolidation above support and the indicators are consistent with that. Support is a long term up trend line, confirmed by the short term moving average, and faces only the resistance of current all-time highs. Today's action confirms support at 2,260, a break below this level would be bearish in the near to short term with downside target near 2,220. A move up from here is bullish and trend following with upside targets in new all-time-high-territory.


The Dow Jones Industrial Average made the third largest decline, -0.14%, and created a very small spinning top doji. This candle confirms the bottom of the 1 month trading range, at the short term moving average, but is not a strong indication of future movement. The indicators are moving lower at this time, consistent with a test of support within the prevailing up trend. Support is near 19,800, a break below this level would be bearish in the near to short term with downside target near 18,900. A bounce from this level would be bullish and trend following with upside targets in all-time-high-territory.


The NASDAQ Composite made the smallest decline today, only -0.04%. The tech heavy index created a very small doji spinning top candle, the 15th of near perfect sideways trading since the first of the year. The indicators are bullish at this time but over the past month are consistent with range bound trading within a tight and narrowing range. Support is just below today's close, near 5,500, a break below which would be bearish. A confirmation of support or move to new all time highs would be bullish and trend following.


The indices continue to wind up within tight and narrow ranges. Not surprisingly, this wind up is focused on the next FOMC meeting with volatility driven by earnings, economics and the shift in Presidential powers. The way it looks now, the indices could go either way but based on the prevailing trends, forward economic outlook, forward earnings outlook and Trumponomics I am bullish and see them breaking out to the upside. The caveat is that the break out has not happened, there is a chance of correction, so caution is still the word of the day. If a correction does unfold I'll be buying on the dip.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Barrier to Entry

by Jim Brown

Click here to email Jim Brown

Editors Note:

In the cybersecurity world, Palo Alto Networks provides a barrier but has also created a barrier to entry by other companies. Their method of protecting companies by providing a military grade firewall puts them ahead of the pack.


NEW DIRECTIONAL CALL PLAYS

PANW - Palo Alto Networks - Company Profile

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. In addition, the company provides support and maintenance services; and professional services, including application traffic management, solution design and planning, configuration, and firewall migration, as well as provides online and classroom-style education training services. Palo Alto Networks, Inc. primarily sells its products and services through its channel partners, as well as directly to medium to large enterprises, service providers, and government entities operating in various industries comprising education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. Company description from FinViz.com.

In November PANW posted earnings that beat the street but revenue, which rose 34% missed estimates by a fraction. Revenue was $398.1 million and analysts were expecting $400.1 million. PANW had guided for revenue growth of 33% to 35% so they were right in the middle of their guidance range. Earnings of 55 cents beat estimates for 53 cents. Shares were crushed because the company said the market was "lumpy" and customers were taking longer to make purchase decisions.

In Q3 they added more than 1,500 new customers to hit 35,500 globally. Subscription revenue has risen to 60% of total revenue as they move to a cloud model.

In early January, noted short seller Andrew Left of Citron Research, put out a bullish note on PANW saying they had a fantastic moat, which would be a barrier to entry for other companies trying to duplicate their type of firewall. His price target is $170. Shares rallied $14 over the next three weeks on the call. At the same time Bernstein put out a very positive note on the company saying nobody serious about protecting their web environment should be without PANW as their security solution.

Shares have rebounded to their November gap down level of $144 and have found resistance. They are not giving back their gains but there was a slight retracement on Monday in a weak market. I believe they will overcome this resistance level and move higher, market permitting.

There is a persistent rumor in the market that Microsoft and Cisco Systems are both looking for a cybersecurity company to acquire. Given Palo Alto's position in the sector, they would be a good target.

Earnings February 20th.

Because of the price of the options I am forced to turn this into a spread. If you want to go with a naked call, I would probably use the $150 strike.

Buy March $145 call, currently $6.20, initial stop loss $131.85
Sell short March $155 call, currently $2.85, initial stop loss $131.85
Net debit $3.35


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Indecisiveness Reigns

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes declined at the open and dip buyers appeared quickly but the rebound did not last. The Nasdaq 100 was the only index that closed in positive territory although all the indexes finished well off their lows. The dip buyers are still there but apparently the conviction is fading because they could not continue the rebound into the close.

The Biotech Index was the biggest loser at -40 points (-1.3%) and the Dow Transports the second biggest with -86 points (-1%).

Analysts are still warning of a post inauguration decline of 3% to 5% but the dip buyers may not be believers.



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


RHT - Red Hat Inc

Long call position was entered at the open.

SPY - S&P-500 ETF

Long call recommendations remains unopened until $223.25 or $228.25.



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

RHT - Red Hat Inc - Company Profile

Comments:

No specific news. Shares held their recent gains in a weak market.

Original Trade Description: Jan 21st

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in physical, virtual, container, and cloud environments; Red Hat Satellite, a system management offering that helps to deploy and manage Red Hat infrastructure across physical and virtual servers, and cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications, as well as integrating applications, data, and devices along with business processes automation; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to treat physical server storage as a scalable, shared, centrally-managed pool of virtual storage and to manage large, unstructured, or semi-structured data in physical, virtual, and cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Company description from FinViz.com.

On December 21st, the company reported earnings of 61 cents that beat estimates by 3 cents. However, the beat came mostly from a lower tax rate. Revenue rose 17.5% to $615.3 million compared to estimates for $618.4 million so a slight miss there. Billings rose 8.7% to $679 million but misses estimates for $713 million. Subscription revenue rose 19% to $543 million and 88% of total revenue. That is recurring and will help smooth out future earnings.

The CEO explained that two large government deals worth $20 million slipped into Q4. Also, two large customers chose to be billed rather than pay up front and that took another $27 million out of billings. If those deals were included the billings would have been up +16% instead of 8.7%. The good news is that all of those deals are now in Q4 and that will give Q4 an earnings boost.

Earnings March 22nd.

Shares have rebounded to $74 and appear poised to break over that level and move back to the $80 range. I am using the March options, which expire 4 days before the earnings and they are half price the next cycle in June.

Position 1/23/17:

Long March $75 call @ $2.35, see portfolio graphic for stop loss.


SPY - S&P-500 ETF - ETF Profile

Comments:

The SPY declined to $225.27 intraday and only 2 points away from our downside entry. Dip buyers arrived right on schedule and lifted it back into the recent range.

Original Trade Description: Jan 12th

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The SPY dipped to $225 intraday before the dip buyers rushed into the market. Initial support is $223 and I believe we have a chance to test that level before the inauguration. There are only four trading days left. If the bank earnings disappoint on Friday we could see a decline in low volume. With the three-day weekend ahead we could see traders move to the sidelines to avoid weekend event risk while the U.S. markets are closed.

We could also see a pre inauguration decline as traders worry about event risk surrounding the event.

Whatever the reason we could see the ETF test that level over the next four days. Assuming there is no disaster surrounding the inauguration, we could see a real rally begin afterwards.

This is a short-term position using March options just in case any potential dip turns into a crash. The estimated option premium should be less than $3.

With a SPY trade at $223.25

Buy MAR $227 call, estimated to be $3.00 or less, no initial stop loss.

With a SPY trade at $228.25

Buy MAR $232 call, estimated to be $3.00 or less, no initial stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile

Comments:

Big decline at the open but dip buyers prevailed. However, prior support at 19,800 has now become resistance.

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.

Position 12/12/16:

12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.

12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.


FINL - Finish Line - Company Profile

Comments:

No specific news. Shares hit a new 7-month closing low. Shares are declining but they are moving so slowly the option premium is bleeding faster than the stock price. Now that we are in the money the ratio should improve.

Original Trade Description: January 11th.

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

In late December Finish Line reported a loss of 24 cents compared to estimates for a loss of 18 cents. Revenue was $371.7 million, down -2.7% from the year ago period. Analysts were expecting $412.4 million. They guided for Q4 earnings of 68-73 cents compared to analyst expectations for 96 cents. Shares fell from $23 to $19 on the news and have continued to decline.

Finish Line does not report earnings again until March 22nd. That means every other retailer will post their disappointing quarters and with each earnings miss the weight should increase on FINL shares.

Finish Line operates mall stores and stores inside Macy's stores. Macy's already reported declining traffic and missed on same store sales. This should also impact FINL since lower Macy's traffic means lower traffic in the shoe section.

Shares are currently $17.50 and could easily break below the June lows before the next earnings reports. I am reaching out to May so there will be some earnings expectation in the premium when we exit before the earnings. We can buy time but we do not have to use it.

Position 1/12/17:

Long May $17 put @ $1.55, see portfolio graphic for stop loss.


LB - L Brands - ETF Profile

Comments:

No specific news. Minor decline. Support at $60 still holding.

Original Trade Description: January 14th

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites; and through franchises, licenses, and wholesale partners. As of January 31, 2016, the company operated 2,721 retail stores in the United States; 270 retail stores in Canada; and 14 retail stores in the United Kingdom. It also operated 221 La Senza stores in 29 countries; 125 Bath & Body Works stores in 30 countries; 19 Victoria's Secret stores in 7 Middle Eastern countries; and 373 Victoria's Secret Beauty and Accessories stores, and various small-format locations in approximately 75 countries. Company description from FinViz.com.

The holidays were not good for L Brands. The warned on January 5th that net sales rose 1% for the five week shopping period BUT same store sales fell -1% and sales for Victoria's Secret fell -4%. That was a major blow because the holiday shopping season is normally the best five weeks of the year for the lingerie business. They even tried to combat the falling sales by advertising some of their bras at only $10 and even the deep discount did not work.

L Brands is also suffering because they maintain a mall store format. With the malls dying in favor of online shopping, they are losing sales. More than 80% of L Brands sales come from mall traffic and that traffic is rapidly declining. Hermand-Waiche believes that online sales will be over 30% of the market in 2017 and that means Victoria's Secret is becoming obsolete to 30% of the market.

The company warned on the 5th that earnings would be at the low end of prior guidance or $1.85. Shares fell -6% on the earnings warning. With Macy's and Kohl's warning in the same week it was a bloodbath for retailers in the market. Of 11 stores reporting same store sales 8 saw sales decline.

Earnings are February 15th.

Shares are hugging the $60 level but ticking slightly lower every day. If we do get a market meltdown, they could be a target of sellers wanting to exit a nonperforming stock.

Position 1/17/17:

Long Feb $60 put @ $1.85, see portfolio graphic for stop loss.




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