Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/8/2017

Table of Contents

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

Market Wrap

Bulls Trying To Hold On

by Keene Little

Click here to email Keene Little
Other than the techs making minor new highs each day (only NDX today), the rest of the indexes are struggling just to hold onto recent gains. The bulls haven't done anything wrong yet but there are plenty of signs that they're weakening. This year's rally is looking like it's on wobbly legs.

Today's Market Stats

The stock market's rally this year has been largely due to overnight rallies in the futures market. That has given us gap-up starts to the day and then a quick bout of short covering that has typically finished in less than 30 minutes. Generally speaking, there's been very little, if any, follow-through to the gap-induced rallies. The sideways consolidations and/or selling of rallies has it looking like an effort to distribute stock to the retail crowd, with the help of continued corporate buybacks.

What looks like an effort to distribute stock from smart money managers to the retail crowd, which includes most mutual fund managers, has been a slow and steady effort that hasn't prevented the indexes from working their way higher (except for the RUT). Corporations continue to sell record levels of corporate bonds, which they're using to help fund their corporate buybacks. The retail crowd has backed away from buying stock this year after their initial excitement following the November elections so it's been a struggle to keep the rally going.

This morning reversed what we've seen in the past week by starting with a gap down and quick selling. Once the selling completed in the first 10-15 minutes we saw the indexes bounce right back up. But the jam back up into a mid-morning high (a minor new high for NDX but not the others) was then followed by another choppy consolidation. It's as if someone doesn't want the market to sell off yet but doesn't have quite enough buying power (or desire) to push the market much higher. It was a mixed day with the indexes floundering around the flat line for most of the day.

Other than the gap moves and maybe an early-morning move like this morning's jam back up there's been very little for traders to do this month as we watch the indexes work their way higher (except for the RUT, which remains trapped in a 2-month sideways choppy mess). The bulls have been able to hang on and participate in the incremental moves to the upside while the bears continue to be bewildered about how the market can continue to hold on a push slowly higher while momentum dies on the vine.

The stock market is showing many signs of tiring and I think the slow choppy move higher is an ending pattern for the rally and that soon the bulls will be stopped out as the bears enter their short trades. The result will likely be a strong decline in the coming weeks and as I'll get into with the charts, we could be days, if not hours, away from a significant high. At least we have the setup for a significant high but as always, we wait to see if the market agrees with my assessment or not.

Other than the crude inventories report this morning, there were no significant economic reports to sway the market. As I'll discuss later, with the oil chart, the large buildup in crude inventories (+13.8M barrels, which follows +6.5M in the prior week) combined with a relatively high price for oil, is not a good combination for bulls. And when the price of oil drops sharply it's usually not a good time to be long equities either (it's that slowing-economy thing).

In addition to what I see as topping patterns for the stock market indexes, there are some fundamental reasons to be concerned about the stock market. Overvaluation is one and while there are several methods used to value stocks there is one generally accepted way of using earnings, which is the cyclically adjusted price-to-earnings (CAPE) ratio.

CAPE is similar to the P/E ratio except that it uses the past 10 years' worth of earnings instead of just the previous year. This helps smooth out big fluctuations year-to-year. At the moment the CAPE for the S&P 500 stocks is 28.4, which is 70% higher than its historical average of 16-17. To put this into perspective, it's now higher than at any time since the dot-com bubble in 2000.

Another valuation method is the price-to-sale (P/S) ratio, which is similar to P/E in that it uses just the previous year's sales and the current price. For the S&P 500 this ratio is currently 2.02, which is 40% above its historical average of 1.44. Again, this ratio is at its highest level since 2000. Both the CAPE and P/S are above where they stood in 2007 (the housing bubble).

We know that the stock market has been out of whack with what's going on with the economy (Main Street and Wall Street have been disconnected for a long time). Since 2009 the S&P 500 is up nearly +240%, making it one of the strongest bull markets in history. But at the same time the U.S. economy has grown only +2% per year, about +15% since 2009. If the S&P 500 grew by the same +15% we'd be looking at 767 instead of 2300. That's not chump change.

Fundamental measurements of the stock market have never been good for timing the market and the above information is only to give some perspective how overvalued it is. The more overvalued the market becomes the more bubble-like it becomes and that makes it more vulnerable to a downside disconnect. Assuming the market is ready for a reversal, which I believe it is, what we can't know is whether we'll get just a healthy (-10%) pullback before heading higher or if instead we are at a similar point as we were in 2000 and 2007. I believe it's the latter but obviously my crystal ball is no better than anyone else's. I just think it's not a good time to ride a correction down thinking "it always comes back."

On top of what I see as a vulnerable time for the stock market we have extreme bullish sentiment as measured by Investors Intelligence. The latest report shows bulls at 62% and bears at 16%. That's a very wide spread and 62% bulls is the highest it's been since 2005. Again, this can't be used as a timing signal but it simply shows more vulnerability. Other than corporate buybacks the market is simply going to run out of buyers when pretty much everyone is already in the pool.

OK, with all of that as "background," let's see what the charts are telling us, starting off with the NDX weekly chart since this has been the stronger index.


Nasdaq-100, NDX, Weekly chart

At the January 26-27 highs NDX ran into the trend line along the highs from April-September 2016, which fits as the top of a rising wedge for the rally from February 2016. The wave count has us in the 5th wave of the rally, which is the leg up from November 4th. Following a quick pullback from the January 27th high NDX has again pushed up to the top of its rising wedge and until we see a clean breakout from this wedge I think it's important to watch for a possible top.


Nasdaq-100, NDX, Daily chart

The NDX daily chart shows the price action around the top of its rising wedge (the trend line along the highs from April-September 2016) and how it stopped yesterday's and today's rally (it closed on the line today). All it needs now is a gap-up over resistance to bring in the buyers. I say that tongue-in-cheek but it is the way this market deals with resistance.

A trend line along the highs from November 10 - January 27, at 5230-5250 depending on how long it takes to reach it, is the next upside target zone if it breaks above 5210 and holds above 5200. Otherwise, with an extended rally leg since December 30th and now showing bearish divergence against the January 27th high, I think it's a risky bet on the long side. A break of the uptrend line form December 30th, currently near 5174, confirmed with a drop below this morning's low at 5169, would be the first sign of a top being in place.

Key Levels for NDX:
- bullish above 5210
- bearish below 5086


Nasdaq-100, NDX, 60-min chart

There are two price projections for the 5th wave of the leg up from December 30th, with both coinciding closely at roughly 5205-5207. If we see a quick pop up to that level Thursday morning and then a drop below this morning's low near 5169 it would provide all the proof I'd need to see to declare a top in place. The bearish divergence vs. the January 27th high helps confirm we're into the final 5th wave. But if it rallies above 5207 and then uses the April-September trend line, currently near 5202, for support it will keep the pattern at least short-term bullish.


Powershares QQQ Trust, QQQ, Daily chart

The QQQ is of course the ETF that can be used as a trading vehicle for NDX and it's good to look at for volume. On its daily chart below I also have the Bollinger Band and you can see how it's been pushing up the top of the envelope since December. But while QQQ has been pushing higher it's been doing so on declining volume since November's rally started.

Declining volume is another indication that the rally is running out of buyers and in a rally that is pushing up against resistance it's reason enough to at least pull your stops up tighter. Note the bearish divergence on the Money Flow Index (MFI) at today's high vs. the highs at the end of January. This bearish divergence fits with what we see on the NDX charts above.


Semiconductor index, SOX, Daily chart

Helping the techs has been the semiconductor stocks and as long as they remain strong it's actually a good sign about the economy (semiconductors are so many different products that they're a good reflection of production). But the SOX is in an ending pattern and showing bearish divergence since the end of November. The wave pattern calls the rally from January 6th the final 5th of the 5th wave in the rally from February, which means the rally could reverse at any time.

The SOX has been following the trend line along the highs since last March and is approaching a trend line along the highs from July 2014 - June 2015, currently about 14 points higher near 986. I'm not sure if it will make it much higher, if at all but at the moment there's no reversal signal, just a warning sign that it could top out here.


S&P 500, SPX, Daily chart

Since the January 31st low I've been thinking SPX has a good shot at reaching the 2320 area where it would hit its trend line along the highs from August-December 2016 by the end of this week. There are some cycle studies that point to February 8-10 as a turn window. As an example, a 50-day cycle off the February 2016 low has today as a turn date, +/- 1-2 days. An important number on the Gann Square of 9 chart is 2321 since it aligns with the date March 6, which is the date of the 2009 low. There's also a full moon and lunar eclipse (and a comet flyby) this Friday night/Saturday morning.

So we have a lot coming together this week for what could be a very important high and frankly I thought we'd see SPX do better than it's done this week. Has it simply run out of steam? As Scotty would say to Captain Kirk, "I'm giving you all I got!" The choppy consolidation off last Friday's high could lead to one more leg up but like NDX, if it drops below this morning's low at 2285 I think the fat lady would be singing the blues for the bulls. That would not be confirmed until we see a drop below the January 31st low at 2267.

Key Levels for SPX:
- more bullish above 2325
- bearish below 2267


Dow Industrials, INDU, Daily chart

On January 31st the Dow broke its uptrend line from November 4 - January 19 and on February 3rd and again on Tuesday it back-tested the broken uptrend line. Today's decline leaves a bearish kiss goodbye following the back-test, which leaves it vulnerable to further selling. But we've seen the Dow in particular nuzzle up underneath broken uptrend lines before finally letting go. That remains a possibility but would become less likely if it closes below this morning's low at 20015.

Note also that with Tuesday's high the Dow came very close to the top of an expanding triangle off its December 13th high. This is a bearish topping pattern and can be viewed as the left half of a possible diamond top pattern.

Key Levels for DOW:
- bullish above 20,200
- bearish below 19,785


Russell-2000, RUT, Daily chart

The RUT has been banished to the desert for 40 days and now maybe it's finally ready to make a move. Since its December 9th high today is the 40th trading day inside a choppy sideways/down consolidation. Too bad we don't have any clues as to which way it's going to break. I've been viewing the pattern as a bull flag pattern but this has gone on so long that I can also now view it as a rolling top pattern.

We'll just have to wait for a breakout or breakdown from this pattern, with a rally above 1385 or a decline below 1333, before we'll know which way this is going to go. One caution is to watch carefully for a head-fake break that's then followed by a reversal back inside the pattern. That would be a good signal for a sustained reversal (e.g., if it does a quick drop below the bottom of the pattern but then reverses and closes back inside the pattern it would be a bullish buy signal).

Key Levels for RUT:
- bullish above 1385
- bearish below 1333


10-year Yield, TNX, Weekly chart

There was more buying in the Treasury market today, which didn't help the stock market as money could be rotating out of stocks and back into bonds. This is dropping the yields and TNX is back down to its broken downtrend line from 2007-2013, which it had broken above on December 1st. I thought the bounce off the line on January 18th would lead to a rally up to 2.687% where it would achieve a Fib projection for an a-b-c bounce correction off the January 2015 low. While that projection is still in play, it's starting to look like it's vulnerable to the downside from here.

A drop below its January 17th low at 2.313 would be bearish since it would leave behind a failed breakout above its longer-term downtrend line. We might get just a larger pullback to its 200-week MA, near 2.24, before heading back up but that can only be guessed right here. We'll have to see where it goes in the coming week to see whether or not support is going to hold. If the stock market is setting up a reversal to the downside I think TNX will be leading to the downside (as money pours into the relative safety of bonds).


High Yield Corporate bonds ETF, HYG, Weekly chart

While on the subject of bonds, the high yield corporate bond fund, HYG, is showing some vulnerability here as well. The decline off the October 2016 high found support at the 50-week MA and the November 14th low has been followed by a bounce back up to the October 2016 high at 87.56 (with a high at 87.69 on January 27th). HYG could continue up to at least its 200-week MA, currently at 89, but the daily chart says it could be trouble here.

The bounce off the November 14th low fits as an a-b-c bounce correction and achieved two equal legs up at 87.66 (only 3 cents higher on January 27th). The daily chart looks like a rolling top is developing since the end of December and you can see the bearish divergence on the weekly chart. If it drops back below price-level S/R near 86.30 it would be a good sell signal. As a measure of desired risk, a sell signal for junk bonds would be a warning sign for the stock market.


Transportation Index, TRAN, Daily chart

The transports look like they're in trouble as well. At its January 26th high the TRAN tested its December 9th high but then rolled back over, leaving a double top with significant bearish divergence. Each attempt, in December and again in January, it got above its November 2014 high at 9310 but was unable to hold above, which left two head-fake breaks.

The TRAN is currently trying to hold onto its 20- and 50-dma's, near 9238 and 9190, resp. Today's close near 9246 is marginally above both MAs and if it can get back above 9310 and hold above it for more than a day it could have a fighting chance to make a new high. But at the moment it's not something I'd bet on happening.


U.S. Dollar contract, DX, Daily chart

Last week I had mentioned I thought the US$ was ready for a bounce correction before continuing lower. The bounce started after a quick new low on February 2nd but has more upside potential before heading back down. However, it hasn't been able to bust through its declining 20-dma, currently near 100.40, and it's possible the dollar will drop further before setting up a bigger bounce correction.


Gold continuous contract, GC, Daily chart

With the dollar in decline it has given a boost to gold and while it's currently struggling to get past its October 2016 low at 1243.20 it's looking like it has at least a little more upside potential. Two equal legs up from December 15th points to 1273 but it has already met its minimum projections at 1237, where the 2nd leg of an a-b-c bounce is 62% of the 1st leg up. So it's possible gold will roll back over at any time but for now, between the projection near 1273 and its 200-dma at 1266 we'll see if gold can make it at least a little higher before rolling back over. Above 1274 would be more bullish for gold.


Oil Commitment of Traders (COT) chart, July 2010 - February 2017, chart courtesy tradingster.com

Before getting to oil's chart I wanted to provide a little background that supports the bearish picture I see on its chart. Starting with the COT (Commitment of Traders) report, it's at an extreme not seen since June 2014. As shown on the COT chart below, commercial futures traders are now more net short than in June 2014 while speculators are more net long since then. This wide of a split between the two almost always resolves in favor of the commercials. Speculators are betting huge that the oil rally will continue but it's wise to bet against them now.

The last time there was a wide split between commercials and speculators, in June 2014, it was followed by oil's price getting cut by two thirds, from more than $100 to less than $30. It's anyone's guess whether or not something similar will happen again but that's the risk for anyone betting on the long side of oil (or any number of ETFs associated with oil).

At the same time that speculators are strongly net long and commercials net short, the oil supply is building. The oil rig count has nearly doubled from the low near 300 in the spring of 2016 to the current count of 583. This will only exacerbate an already building inventory (last week's inventory build was +13.8M barrels and +6.5M the week before). An inventory build is only going to add to the price pressure on oil.

If the price of oil does start to drop how long do you think it will take for the latest OPEC agreement to fall apart? If they start cheating on production to make up for lower prices it will further exacerbate the inventory overhang.

U.S. inventories of gasoline have also been rising for the past four weeks, rising nearly 21M barrels in January. The normal build in January in the past 10 years has been 12M barrels. This is an indication of an increase in production (nearly half of a barrel of crude goes to producing gasoline) or a decline in demand, or both. In either case it's not bullish for price.

As discussed earlier, these fundamental issues are not good timing signals for trading oil but they are a strong warning sign that the price of oil will likely not climb much higher, if at all, and could drop precipitously like they did after the June 2014 high.


Oil continuous contract, CL, Daily chart

The price pattern for oil argues the February 2nd high was the completion of a small rising wedge pattern for the leg up from January 10th. The small rising wedge fits as the 5th wave of the rally from November 14th, which in turn completes an A-B-C bounce pattern off the August 2016 low, which in turn completes a more complex bounce pattern off the February 2016 low.

This bearish bounce pattern suggests the next decline could drop oil below at least the August low at 39.19 and likely below the February 2016 low at 26.05.

Short term, yesterday's decline dropped the price of oil out the bottom of the small rising wedge, the bottom of which is currently near 53.40. If the bounce off Tuesday's after-hours low at 51.22 manages to make it back up to the bottom of the rising wedge, near 53.40, we'll see if does a back-test and then drops back down. A drop below Tuesday's low at 51.22 would give us stronger confirmation that a high is in place.


Economic reports

There are no significant economic reports on Thursday and then on Friday we'll only get export/import prices before the bell and the preliminary Michigan Sentiment report at 10:00. The market is on its own to respond to overseas news and what happens in the overnight sessions.


Conclusion

I spilled a lot of electronic ink above to explain why I believe the fundamentals and technical picture suggests bulls are probably going to be done in the next couple of days, if not already done. But in reality there's just one thing to know as we go forward. If you're holding stock you should be selling and if you like to play the short side you should also be selling (or buying puts and inverse ETFs). Why? Because the Patriots won the Super Bowl.

As Sam Stovall, the Chief Investment Strategist at CFRA, noted, since 1967 the winner of the Super Bowl has predicted with 80% accuracy what the stock market, as measured by the Dow, will do that year. When the AFC wins, as the Patriots did, the stock market has finished the year in negative territory. An 80% success rate is nothing to sneeze at, even if it makes no sense at all. To many of you my EW counts make no sense either (wink).

In all seriousness, I think the AFC win this year will add to the accuracy of this predictor since I believe the market is setting up for a major top, similar to the one in 2000 and 2007. Obviously we'll know in hindsight but that's the risk I currently see for anyone willing to hold onto long positions with the belief that the market "always comes back." It will come back but a severe decline into 2018-2020 could take the next 20 years to recover. Why not get into cash and be ready for a generational buying opportunity later? In the meantime trade the short side and put some more cash into your account.

As far as timing for a high, I had mentioned some cyclical studies point to a February 8-10 turn window, which we're now in. Many times important turn dates occur around full and new moons and this Friday night will be a full moon.

SPX MPTS daily chart

At the same time as the snow moon (the name given to the full moon in February) there will also be a lunar eclipse of it Friday night. And then we'll have the New Year comet reach its closest point to earth in its flyby Saturday morning.

And lastly, Friday/Saturday marks a 1-year anniversary of the rally off the February 2016 low, which presents the "opportunity" to make this last bull run exactly one year old.

So there you have it -- we have fundamental, technical and astrological reasons for a significant market high this week, ideally on Friday but +/- 2 days is well within the turn window. Be careful out there.

Good luck and I'll be back with you next Wednesday to see how this unfolds in the coming week.

Keene H. Little, CMT


New Option Plays

Virtual Amazon

by Jim Brown

Click here to email Jim Brown

Editors Note:

Everything revolves around Amazon whether it is merchandise or cloud. Amazon continues to be the largest online retailer and the largest cloud provider. Now they have announced VMWare on AWS and shares of VMW are rising even though the specialized product will not be released until this summer.



NEW DIRECTIONAL CALL PLAYS

VMW - VMWare - Company Profile

VMware, Inc. provides virtualization and cloud infrastructure solutions in the United States and internationally. Its virtualization infrastructure solutions include a suite of products and services designed to deliver a software-defined data center (SDDC), run on industry-standard desktop computers, servers, and mobile devices; and support a range of operating system and application environments, as well as networking and storage infrastructures. The company offers VMware vSphere, a SDDC platform, which enables users to deploy hypervisor, a layer of software that resides between the operating system and system hardware to enable compute virtualization; storage and availability products that provide data storage and protection options; network and security products; and management and automation products to manage and automate overarching IT processes involved in provisioning IT services and resources to users from initial infrastructure deployment to retirement. It also provides SDDC suites, such as VMware vCloud Suite, vSphere with Operations Management, and VMware vRealize suite for building and managing cloud infrastructure for use with the VMware vSphere platform. In addition, the company offers hybrid cloud computing solutions, including VMware vCloud Air Network Service Providers and VMware vCloud Air; and end-user computing solutions, which enables IT organizations to deliver secure access to applications, data, and devices to end users. Company description from FinViz.com.

In late January VMWare reported earnings of $1.11 that beat estimates for $1.08.Revenues of $2.03 billion also beat estimates for $1.99 billion. Overall revenues rose 8.8%, service revenues 9.8% and license revenues 7.5%. The exited the quarter with $8 billion in cash with free cash flow at $2.23 billion for the full year. They announced a new $1.2 billion share repurchase program.

For Q1 they guided for revenues of $1.625 billion to $1.725 billion and earnings of 93 to 96 cents. Dell Technologies owns 80% of VMW and the future earnings dates will be aligned with Dell's for transparency.

The company announced a joint venture with Amazon Web Services to provide VMWare on AWS beginning this summer. The VMW CEO said partnering with Amazon will allow VMWare customers to maintain their leadership while moving from a private cloud to the public cloud. Companies are increasingly closing or reducing existing data centers and moving operations to the cloud so someone else can be responsible for physical security, heating, cooling, electrical demand, server upgrades, etc. VMW is the number one maker of virtualization software and has shifted focus to combining customers public and private clouds into a hybrid cloud. VMWare has smaller partnerships with Google and Microsoft but they are also competitors in many cases.

At least five analysts hiked their price targets on VMW after the earnings and Amazon announcement.

Earnings April 27th.

Buy April $92.50 call, currently $2.20, initial stop loss $85.65.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Confusion Reigns

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow traded in a very narrow 53-point range and closed negative while the Nasdaq made a new high. The Russell 2000 closed negative for the third consecutive day. Despite the new high on the Nasdaq, the markets are still struggling. There is no wave of sellers and there are still plenty of dip buyers but the market remains heavy.

The Nasdaq cannot continue making new highs every day. Eventually the big cap tech stocks will have to rest and we will need the Dow and S&P to take the lead if the rally is going to continue.



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


SLCA - U.S. Silica

The long call position was closed at the open.

WDC - Western Digital

The long call position was stopped at $77.65.

DIA - Dow ETF

The long put position has been dropped.



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

BMY - Bristol Myers - Company Profile

Comments:

No specific news. Was mentioned in a Barron's article as a possible acquisition candidate by Gilead. The company is stockpiling cash and has close to $30 billion. BMY has a market cap of $87 billion so it would be a big bite.

Original Trade Description: February 6th

Bristol-Myers Squibb Company discovers, develops, licenses, manufactures, markets, and distributes biopharmaceutical products worldwide. It offers chemically-synthesized drug or small molecule, and biologic in various therapeutic areas, including virology comprising human immunodeficiency virus infection (HIV); oncology; immunoscience; cardiovascular; and neuroscience. Its products include Baraclude for the treatment of chronic hepatitis B virus infection; Daklinza and Sunvepra for the treatment of hepatitis C virus infection; Reyataz and Sustiva for the treatment of HIV; Empliciti, a humanized monoclonal antibody for the treatment of multiple myeloma; Erbitux, an IgG1 monoclonal antibody that blocks the epidermal growth factor receptor; Opdivo, a fully human monoclonal antibody for non-small cell lung and renal cell cancer, and melanoma; Sprycel, a tyrosine kinase inhibitor for the treatment of adults with Philadelphia chromosome-positive chronic myeloid leukemia; Yervoy, a monoclonal antibody for metastatic melanoma; Abilify, an antipsychotic agent for adults with schizophrenia, bipolar mania disorder, and depressive disorder; Orencia to treat rheumatoid arthritis; and Eliquis, an oral factor Xa inhibitor targeted at stroke prevention in atrial fibrillation. Its products pipeline includes Beclabuvir, a non-nucleoside NS5B inhibitor for the treatment of HCV; BMS-663068, an investigational compound that is being studied in HIV-1; and Prostvac, a Phase III prostate-specific antigen to treat asymptomatic or minimally symptomatic metastatic castration-resistant prostate cancer. The company has clinical trial collaborations with Calithera Biosciences, Inc. and Janssen Biotech, Inc.; and a research collaboration with GeneCentric Diagnostics, Inc. Company description from FinViz.com.

BMY reported earnings of 63 cents that missed estimates for 67 cents. They guided for 2017 for earnings of $2.70-$2.90 and analysts were expecting $2.97. The shares were crushed with a $9 drop over five days. Complicating the earnings was news that sales of two drugs were slowing because of competition. However, what was not said was that BMY has dozens of other drugs currently being sold and dozens more in the pipeline. BMY has one of the richest pipelines in the business.

Fund manager Dodge & Cox did an extensive analysis of BMY and said the recent problems have just been a temporary setback and the strong pipeline of drugs plus their immuno-oncology business makes them particularly attractive and they initiated a large position. They said BMY has capitalized on its recent problems to become a focused biopharmaceutical company that is positioned to grow.

Several other analysts have recently called the BMY dip a buying opportunity. We are going to take them at their word.

Earnings April 27th.

Shares are starting to rebound from the $46 low and they have plenty of ground to cover. The biotech sector is actually positive over the last week as through investors believe the danger from Trump and drug prices may have passed or at least moved into a new stage.

Position 2/7/17:

Long March $52.50 call @ $1.11, no initial stop loss.


DVMT - Dell Technologies - Company Profile

Comments:

No specific news. Flat for the day.

Original Trade Description: February 4th

Dell Technologies Inc. provides a range of technology solutions worldwide. It offers client computing devices, including desktop personal computers, notebooks, and tablets; rack, blade, tower, and hyperscale servers for enterprise customers; value tower servers for small organizations, networks, and remote offices; networking solutions; and storage solutions, including storage area networks, network-attached and direct-attached storage, and backup systems. It also sells peripherals, including monitors, printers, projectors, and other client and enterprise peripherals, as well as third-party software products. In addition, the company offers support and extended warranty, enterprise installation, and configuration services; and infrastructure and security managed, cloud computing and infrastructure consulting, and security consulting and threat intelligence services. Further, it provides application services, such as application development, maintenance, migration, management, and consulting, as well as package implementation, testing and quality assurance functions, business intelligence and data warehouse solutions; business process services comprising back office administration, call center management, and other technical and administration services; and system and information management, and security software services. Additionally, the company offers financial services, including originating, collecting, and servicing customer receivables primarily related to the purchase of its products. It serves corporate businesses; educational institutions, government, healthcare, and law enforcement agencies; small and medium-sized businesses; and consumers directly, as well as through retailers, third-party solution providers, system integrators, and third-party resellers. The company was formerly known as Denali Holding Inc. and changed its name to Dell Technologies Inc. in August 2016. Dell Technologies Inc. was founded in 1984 and is headquartered in Round Rock, Texas. Company description from FinViz.com.

The company came public without a lot of fanfare back in August and moved sideways for two months. Since the election, the stock has been unstoppable. There was a spike last week when Michael Dell was seen in one of the presidents CEO meetings and identified as the CEO of Dell Technologies. I do not think the average investor has picked up on the fact that Dell is public again.

You may recall that Dell recently bought EMC and VMWare and they are leveraging that technology internationally. Dell has been on a mission to divest as many non-core entities as possible. On October 31st, they sold the Dell Software Group for $2.4 billion. In November, they sold the Dell Services group for $3 billion. In September, they announced a deal to sell the EMC Enterprise Content division for $1.6 billion.

In Q3, they reported revenue of $16.8 billion. Not bad for a company many investors have forgotten about.

The original Dell Company created thousands of millionaires as the stock doubled and tripled, split and repeat multiple times. I know the chart is ridiculous with a $10 gain over the last month but it has very low volatility and the option is cheap. I have put off recommending it several times thinking I would wait for a dip, only it never dips.

Earnings March 9th.

Position 2/6/17:

Long March $65 call @ $1.75, see portfolio graphic for stop loss.


PANW - Palo Alto Networks - Company Profile

Comments:

PANW announced a wide range of new next-generation firewall devices with new hardware and virtual appliances. Shares up $1.75.

Original Trade Description: Jan 23rd

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 28th.

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.

Position 1/24/17:

Long March $145 call @ $6.00, see portfolio graphic for stop loss.
Short March $155 call @ $3.15, see portfolio graphic for stop loss.
Net debit $2.85


RHT - Red Hat Inc - Company Profile

Comments:

No specific news. Only a minor decline in a mixed 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.


SLCA - U.S. Silica - Company Profile

Comments:

No specific news. We were killed on the SLCA exit this morning. The sharp decline in oil prices overnight caused SLCA shares to gap down to a two-month low at the open. The call premium imploded on the big decline.

Original Trade Description: Jan 25th

U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants, and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. As of December 31, 2015, it had approximately 400 million tons of proven and probable recoverable mineral reserves. Company description from FinViz.com.

In the gold rush in the 1800's it was not the miners that got rich but it was the companies that sold them the picks, shovels and wheelbarrows. In the energy sector every shale well has to be fractured and that required mountains of sand. We are not talking regular beach sand. The primary frac sand is mined in Wisconsin and other northern states. There are various grades of sand depending on the geology of the well and what the drillers are trying to accomplish.

In 2014 it took an average of 4.2 million pounds of frac sand per well. However, in 2015 and 2016 there was a significant increase in fracking intensity that began to use much larger quantities per well. In late 2015 the amount of sand rose from 9% of the fracking fluid to 20%. In early 2016 Simmons & Co reported two wells in the Permian that used 60 million pounds of sand each while two in the Haynesville Basin used 35 million pounds each.

Houston based oilfield logistics company Twin Eagle reproted receiving "historic shipments" of frac sand at its facility outside the Eagle Ford. They reported receiving one 130-car train of sand a week. One car carries 100 tons so that is 13,000 tons per week. That is 26 million pounds of sand per week. If wells are now using 20 to 25 million pounds per well that is one train per well.

Last week the active rig count rose by 29 oil wells to 551 active oil wells. Each rig drills a minimum of two wells per month. If each well used 25 million pounds that would be more than 1,100 trains of sand per month.

There are rumors making the rounds that because of the increased intensity of sand in fracking there could be a sand shortage as the number of active rigs increase and producers began to rapidly complete the 3,000 or so wells that have been drilled over the last 18 months but never completed because of low oil prices. There is going to be a surge in the demand for sand.

U.S. Silica is one of the major sand suppliers with multiple facilities. They have used the downturn in the drilling industry to buy multiple competitors in order to bulk up for the future demand.

Update 1/31/17: Halliburton selected U.S. Silica as its preferred provider of containerized sand for last mile logistics to drilling locations. They signed a long-term contract with SandBox, a U.S. Silica subsidiary. Shares rebounded to within a few cents of a new high.

Earnings Feb 2nd.

SLCA has earnings on Feb 2nd but almost every company trading today has earnings over the next three weeks so that is just something we have to deal with. I am recommending we buy a longer-term option to get past any potential volatility around earnings. Their guidance should be good.

Position 1/26/17:

Closed 2/8/16: Long June $65 call @ $4.10, exit 1.75, -2.35 loss


SPY - S&P-500 ETF - ETF Profile

Comments:

The S&P is holding just below major resistance at 2,300 and could be poised to break out. However, that is still major resistance.

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.

Position 1/25/17 with a SPY trade at $228.25

Long MAR $232 call @ $1.69, no initial stop loss.


$VIX - Volatility Index - Index Description

Comments:

The VIX actually closed higher despite the gains in Nasdaq/S&P.

Original Trade Description: Jan 26th

The VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option's expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.

The VIX closed at 10.63 and very close to record lows. You have to go back to June of 2014 for a lower recent close at 10.28. Before that, you have to travel back in time to Feb-2007 for a close at 10.05. The next lowest close was 9.48 in Dec-1993.

The point here is that volatility is near record lows only reached four times in the last 23 years. That qualifies for an abnormal event. I believe it is time we bought some VIX calls. The odds of the VIX remaining this low for the next two months are about as close to zero as you can get.

There is a very old saying in the market. "When the VIX is high, it is time to buy. When the VIX is low, it is time to go." You cannot get much lower than this.

The VIX is telling us that everyone expects the market to continue moving higher. Nobody is worried that some unexpected headline or event is going to trigger a significant market decline. When nobody expects an event is when we should be the most concerned.

Position 2/7/17:

Long March $12 call @ $2.40, no stop loss

Previously Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.


WDC - Western Digital - Company Profile

Comments:

No specific news. Shares crashed to $76 at the open to stop us out of the position. Trading perfectly sideways with no volatility suggested there would be a big move when the trend broke and the move went against us.

Original Trade Description: Jan 31st

Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models, as well as for use in storage of data for years; and enterprise solid state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides InfiniFlash System, a system solution that offers petabyte scalable capacity with performance metrics; higher value data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop PCs, notebook PCs, gaming consoles, set top boxes, security surveillance systems, and other computing devices. In addition, it offers embedded NAND-flash storage products, including custom embedded solutions; and iNAND embedded flash products, such as multi-chip package solutions that combine NAND and mobile dynamic random-access memory in an integrated package for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as in automotive and connected home applications, and NAND-flash wafers. Further, it provides HDDs embedded into WD- and HGST-branded external storage products; and NAND-flash products, which include cards, universal serial bus flash drives, and wireless drives. Company description from FinViz.com.

WDC is kicking butt and taking no prisoners in the disk drive sector. Since the acquisition of flash/NAND memory manufacturer SanDisk, they have upgraded and expanded their product line with additional new products announced almost weekly. SanDisk was the right acquisition at the right time. Today flash memory supply is tight and prices are rising.

The company reported earnings of $2.30 compared to estimates for $2.06. Revenue of $4.89 billion also beat estimates for $4.78 billion. They shipped 44.8 million hard drives in the quarter. The guided for Q1 earnings of $2.00-$2.10, which was above analyst expectations for $1.79. Of the 21 analysts that follow the company, 18 have it as a buy or strong buy. Only 3 rate WDC as a hold. The consensus price target is just under $95 per share with the stock trading at $79.

Update 2/6/17: WDC announced a new 512 Gigabit NAND chip that will be delivering in the second half of 2017. This is another one of those technology developments that the human brain cannot even comprehend unless you are a theoretical engineer. The power, speed and capability is so far beyond "public" computing platforms it is like being in a different galaxy from us.

Earnings April 26th.

Shares traded up on Tuesday in a weak market.

Position 2/1/17:

Closed 2/8/17: Long April $85 call @ $2.65, exit $1.50, -1.15 loss.



BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile

Comments:

The Dow traded in a very narrow 53-point range and never traded positive. Since it would take a 500 point drop to rescue this position, I am dropping it as expired as of today. I wold not close just in case disaster strikes.

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:

Dropping 2/8/17: 12/12 - 1/2 position: Long Feb $195 put @ $3.40, expiring, 3.40 loss

Dropping 2/8/17: 12/13 - 1/2 position: Long Feb $195 put @ $3.15, expiring 3.15 loss.


GIII - G-III Apparel Group - Company Profile

Comments:

No specific news. GIII bounced back from a new 3-yr low on Tuesday to gain 56 cents. The entire sector rebounded today.

Original Trade Description: January 28th

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It operates through two segments: Wholesale Operations and Retail Operations. The company's products include outerwear, dresses, sportswear, swimwear, women's suits, and women's performance wear; and women's handbags, footwear, small leather goods, cold weather accessories, and luggage. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under Bass and G.H. Bass brands; and apparel products under Andrew Marc, Marc New York, Jessica Howard, Eliza J and Black Rivet, Weejuns, and other private retail labels. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, ck Calvin Klein, Karl Lagerfeld, Guess, Guess?, Kenneth Cole NY, Reaction Kenneth Cole, Cole Haan, Levi's, Vince Camuto, Tommy Hilfiger, Jessica Simpson, Ivanka Trump, Jones New York, Ellen Tracy, Kensie, Dockers, Wilsons, G-III Sports by Carl Banks, and G-III for Her brands, as well as have licenses with the National Football League, Major League Baseball, National Basketball Association, National Hockey League, Touch by Alyssa Milano, Hands High, Collegiate Licensing Company, Major League Soccer, and Starter. The company offers its products to department, specialty, and mass merchant retail stores in the United States, Canada, Europe, and the Far East; and distributes products through its retail stores, as well as through G.H. Bass, Wilsons Leather, Vilebrequin, and Andrew Marc Websites. As of January 31, 2016, it operated 199 Wilsons Leather stores, 163 G.H. Bass stores, and 5 Calvin Klein performance stores. Company description from FinViz.com.

The holiday shopping season was not kind to any retailer except for Amazon. Most retailers are reporting negative comps and warning about slowing traffic. GIII was no exception. GIII warned Q4 saw a significant decline in sales that would cut 20 cents off earnings. They guided for the full year 2016 that ended January 31st, for revenue of $2.41 billion and earnings of $1.21-$1.31 compared to their prior guidance of $2.43 billion and earnings of $1.41 to $1.51. For 2017, they guided to earnings of $1.41-$1.51 compared to $2.44 in fiscal 2016.

The company said they were expecting positive comps in Q4 but now expect low double-digit negative comps. That is a heck of a swing. They blamed warmer weather and significantly lower traffic in the stores.

Earnings March 2nd.

Shares broke below support and closed at a three-year low on Friday. Given the trends in the retail sector, they could continue significantly lower with their guidance warning.

Position 1/30/17:

Long March $25 put @ $1.60, see portfolio graphic for stop loss.


HA - Hawaiian Holdings - Company Profile

Comments:

No specific news. Support at $50 is still holding.

Original Trade Description: February 1st

Hawaiian Holdings, Inc., through its subsidiary, Hawaiian Airlines, Inc., engages in the scheduled air transportation of passengers and cargo. It offers daily services on North America routes between the state of Hawai'i and Los Angeles, Oakland, Sacramento, San Diego, San Francisco, and San Jose, California; Las Vegas, Nevada; Phoenix, Arizona; Portland, Oregon; and Seattle, Washington. The company also provides daily services on its Neighbor Island routes among the six major islands of the State of Hawai'i; daily services on its international routes between the state of Hawaii and Sydney, Australia; and Tokyo and Osaka, Japan. In addition, it offers scheduled services between the state of Hawai'i, and New York City, New York; scheduled services between the State of Hawai'i and Pago Pago, American Samoa; Papeete, Tahiti; Brisbane, Australia; Auckland, New Zealand; Sapporo, Japan; Seoul, South Korea; and Beijing, China, as well as other ad hoc charter services. Hawaiian Holdings, Inc. markets its tickets through various distribution channels, including its Website, www.hawaiianairlines.com primarily for North America and Neighbor Island route customers, as well as through travel agencies and wholesale distributors primarily for its international route customers. As of December 31, 2015, the company's fleet consisted of 18 Boeing 717-200 aircraft for the Neighbor Island routes; 8 Boeing 767-300 aircraft; and 22 Airbus A330-200 aircraft for the North America, international, and charter routes, as well as 3 ATR42 turboprop aircraft. Company description from FinViz.com.

In late January HA reported earnings of $1.28 that missed earnings for $1.30. However, revenue of $633 million did beat estimates for $627.6 million. With fuel costs rising and much of HA routes considered long hauls, their costs are going to rise. Non0fuel costs are expected to rise 3% to 6% in Q1. They are currently negotiating a new contract with pilots and that will cause a rise in labor costs. Costs were already rising in Q4 and investors tanked the stock after earnings.

Earnings April 25th.

Shares have fallen $5 since the January 24th earnings and are hugging support at $50. If that level breaks, the next material support is $45.

Position 2/2/17:

Long March $50 put @ $2.10, see portfolio graphic for stop loss.


QCOM - Qualcomm - Company Profile

Comments:

No specific news. Back to the recent lows.

Original Trade Description: January 30th

QUALCOMM Incorporated develops, designs, manufactures, and markets digital communications products and services in China, South Korea, Taiwan, the United States, and internationally. The company operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and system software based on code division multiple access (CDMA), orthogonal frequency division multiple access (OFDMA), and other technologies for use in voice and data communications, networking, application processing, multimedia, and global positioning system products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, which include various patent rights useful in the manufacture and sale of certain wireless products comprising products implementing CDMA2000, WCDMA, CDMA TDD, and/or LTE standards, as well as their derivatives. The QSI segment invests in early-stage companies in various industries, including digital media, e-commerce, healthcare, and wearable devices for supporting the design and introduction of new products and services for voice and data communications. The company also develops and offers products for implementation of small cells; mobile health products and services; software products, and content and push-to-talk enablement services to wireless operators; and development, and other services and related products to the United States government agencies and their contractors. In addition, it licenses chipset technology and products for data centers. Company description from FinViz.com.

Qualcomm it under attack from every direction. A while back China's regulator assessed a $975 million fine for improper licensing and made them lower royalties. The South Korean FTC imposed a fine of $853 million because it found the company's licensing practices to be monopolistic. The KFTC found that Qualcomm's market share had risen from 34% in 2010 to 69% in 2015 while many competitors were forced out of the market.

In early January, the US FTC attacked the company for anticompetitive practices that prevented competitors from supplying chips to handset makers. This is another billion dollar problem.

Three days later Apple sued Qualcomm for $1 billion claiming Qualcomm charged five times as much for licensing than all other cellular patent licensors combined. Apple also claimed the company withheld $1 billion in rebates because Apple had cooperated with KFTC when that investigation was active.

There is blood in the water and there will probably be other suits from companies that suffered under the Qualcomm licensing scheme as well. The odds are also good that Qualcomm will have to change their licensing scheme, which will probably result in lower fees.

With roughly $4 billion in fines and suits over the last few weeks, the investor appetite for QCOM shares has evaporated. Brokers are slashing their ratings from buy to hold or even sell.

Last week the company reported earnings of $1.19 that matched estimates but missed on revenue. They guided for $1.15-$1.25 for Q1 and analysts were expecting $1.17. Other than that the guidance was lackluster with a lot of excuses and questions deflected.

Update 1/31/17: Qualcomm said NXP Semiconductor (NXPI) shareholders had approved the acquisition by Qualcomm. The acquisition is expected to be completed by the end of 2017. QCOM will start a new subsidiary in Amsterdam that will actually buy the shares for $110 each. The funding will come from $28.6 billion in cash currently held by Qualcomm overseas. They will not be taxed on the money as long as it is reinvested overseas.

Update 2/1/17: Qualcomm said NXP Semiconductor (NXPI) shareholders had approved the acquisition by Qualcomm. The acquisition is expected to be completed by the end of 2017. QCOM will start a new subsidiary in Amsterdam that will actually buy the shares for $110 each. The funding will come from $28.6 billion in cash currently held by Qualcomm overseas. They will not be taxed on the money as long as it is reinvested overseas.

Update 2/6/17: The company extended its tender offer for NXPI shares at $110 saying more than 43 million have already been tendered. Shares are currently trading at $100

Earnings April 26th.

Shares have collapsed on the news of the suits and fines and are threatening a steeper decline. Initial support is $50.

Position 1.31.17:

Long March $52.50 put @ $1.68, see portfolio graphic for stop loss.




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