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Daily Newsletter, Saturday, 2/11/2017

Table of Contents

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

Market Wrap

Rally Confirmation

by Jim Brown

Click here to email Jim Brown

All but one of the broad market indexes closed at a new high on Friday after two days of breakout gains.

Weekly Statistics

Friday Statistics

It is official. We now have a breakout in progress. The Dow, S&P-100, S&P-400, S&P-500, Nasdaq Composite, Nasdaq 100, NYSE Composite, Vanguard TSMI (VTI), Russell 1000, 2000 and 3000 all closed at new highs. Yes, even the Russell 2000 by less than 1 point. The only broad market index not joining the party was the S&P-600 Small Cap Index.

Friday's continued breakout was confirmation of the new high breakout from Thursday. The major indexes actually closed near their highs and it was not a short squeeze. There was a minor gap higher at the open but the buying was steady all day.

The resistance level at 2,300 on the S&P has now been broken with a close on Friday at 2,316. Both Nasdaq indexes closed well over their respective round number resistance levels at 5,700 and 5,200. It will be hard for the bears to recover from this mauling.


The motive power supposedly came from a comment by President Trump on Thursday that a "phenomenal tax cut" would be unveiled very shortly. Former Goldman Sachs president Gary Cohn is leading the tax reform effort and confirmed it would be released within weeks. The leaked details claim a cut in the corporate rate to 20% on U.S. income and imports with no tax on exports or income earned overseas. Reportedly, U.S. companies have accumulated $2.6 trillion in banks overseas while they waited for the next repatriation holiday. None of these details are carved in stone and may or may not make it through into the final plan or through Congress. However, there is a tax cut coming and that is what juiced the market.

On the economic front, the Consumer Sentiment for February declined slightly from 98.5 to 95.7. The present conditions component declined minutely from 111.3 to 111.2 and the expectations component fell from 90.3 to 85.7 for the majority of the headline decline.

This was the first decline in the headline number in four months. We should not read too much into the decline. Consumers have gotten their credit card bills from the holidays and the higher minimum payments always weigh on sentiment in February. Sixty-four percent of respondents said their financial conditions were better than five years ago, up from 61% last month.


Import prices for January rose 0.4% after a 0.5% rise in December. However, excluding oil, prices declined -0.2%. Excluding autos prices declined -0.3%. The rise in the dollar makes imports cheaper. By comparison oil import prices rose 7.9% in December thanks to the OPEC production cut headlines.

The prices for agricultural foods, feeds and beverages fell -1.9% in January. That was the same as the drop in December. Nonagricultural prices rose 1.0%. This report was ignored.

If a border adjustment tax is imposed or a tariff arrangement with Mexico, our import prices are going to shoot up rather quickly. For instance, we import about $300 billion in goods from Mexico annually. If there were just a 5% tax on those imports, it would mean the cost of those goods would rise by $15 billion a year. There have been numbers tossed around as high as 20%.

The calendar last week was devoid of any material economic reports. That is not the case this week. There is a flurry of economics with a surge of Fedspeak interspersed. Janet Yellen will give her semi-annual testimony on the economy to the Senate on Tuesday and House on Wednesday. Those are always flash points for the market because you never know what direction the questions will take and what answer will be given. In her early days as Fed Chairwoman, she did suffer from foot in mouth disease on more than one occasion. In recent appearances, she has been more cautious.

The Philly Fed Manufacturing Survey on Thursday is the most important regional report for the month. On Wednesday, the Retail Sales for January is probably the next most important for the week.

The Fed speakers are all clustered together on Tue/Wed so the headlines will flow but it will be over quickly.


Stock news on Friday was very sparse. With the earnings cycle winding down there were very few reporters that most people would recognize.

Engineering company Fluor (FLR) reported earnings of 82 cents. That is four cents above estimates. They will take a charge of $45 million or 32 cents a share on an IRS rule that limits the deductibility of foreign currency translation losses on some foreign subsidiaries. They expect to report actual earnings on Feb-17th. Shares were up fractionally.


Interpublic Group (IPG) reported earnings of 75 cents that beat estimates by 8 cents. Revenue rose +3% to $2.26 billion and matched analyst estimates. Interpublic is an advertising agency and they said ad sales rose 3.3% in the U.S. and 7.8% in international markets. The company announced a $300 million share repurchase program and raised their dividend by 20% to 18 cents. The dividend will be paid on March 15th to holders on March 1st. Shares spiked over $25 at the open but faded quickly.


Insurer Aon Plc (AON) reported earnings of $2.56 compared to estimates for $2.49. Revenue of $3.32 billion missed estimates for $3.4 billion. Free cash flow rose 22% for the year to $2.1 billion. Shares spiked at the open but faded quickly.


CBRE Group (CBG) reported earnings of 93 cents that beat estimates for 79 cents. Revenue of $3.82 billion rose 6% but missed estimates for $3.89 billion. The company guided for full year earnings of $2.35 to $2.45. Shares rallied 8% on the news.


Stock movement was mixed for companies reporting on Thursday evening. Expedia (EXPE) reported earnings of $1.17 that missed estimates by 20 cents. Revenue of $2.1 billion rose 23% but barely beat estimates for $2.068 billion. Gross bookings rose 8% or $1.2 billion to $16.1 billion. Analysts thought guidance was conservative and shares were volatile but closed only fractionally lower.


Nvidia (NVDA) reported earnings of 99 cents compared to estimates for 83 cents. Revenue of $2.17 billion also beat estimates for $2.11 billion. It was a record quarter for Nvidia. The company guided for Q1 revenue of $1.9 billion compared to estimates for $1.88 billion. Nvidia also said margins would decline in Q1. The company returned $1 billion to shareholders in 2016. They authorized a dividend of 14 cents to be paid March 17th to holders on Feb 24th.

The CEO bragged on Nvidia's inroads to AI, machine learning, cloud computing, gaming, autonomous vehicles, early cancer detection and weather prediction. "The era of AI is upon us." I am ok with that as long as they do not change their name to SkyNet.

Shares declined on the soft guidance but the stock has seen giant gains over the last year. It is due for a rest. They are kicking Intel's butt in new technology and while $120 is the current resistance, I have no doubt they will be higher in the coming months. I would be thrilled to have another chance to buy this stock at $100. Nvidia is the new technology revolution.


Activision (ATVI) reported earnings of 92 cents compared to estimates for 73 cents. Revenue rose 49% to $2.45 billion and beat estimates for $2.36 billion. The company raised its dividend by 15% to 30 cents and will buy back $1 billion in stock over the next 12 months. They also committed to repay $500 million in debt of which $139 million has already been paid in 2017.

Guidance was soft. The company guided for Q1 revenue of $1.05 billion and earnings of 18 cents. Analysts were expecting $1.196 billion and 31 cents. For the full year, they guided for $6.3 billion and $1.85 and analysts were expecting $6.68 billion and $2.03.

The CEO said the company had record revenue and earnings for both the quarter and the year. They have 447 million monthly active users. Customers spent 43 billion hours playing and watching Activision Blizzard content. Shares exploded higher with a 19% gain.

Think about that for a minute. Over 43 billion hours in one quarter playing games. I wonder how many of those hours were played by unemployed persons. That would be an interesting statistic.


NCR Corp (NCR) reported earnings of $1.07 compared to estimates for $1.03. Revenue of $1.8 billion beat estimates for $1.74 billion. For the current quarter, they expect earnings of 43 to 48 cents and revenue of $1.45 to $1.47 billion. This was their 14th consecutive quarterly earnings beat. For the full year, they guided for $6.6 to $6.72 billion and $3.25-$3.35 for earnings. Analysts were expecting $6.55 billion and $3.27 for earnings. Shares spiked 6% on the news but faded into the close.


Twitter (TWTR) reported a loss of 3 cents that beat estimates for a loss of 11 cents. Revenue of $717.2 million missed estimates for $737.7 million. The company only reported 4% user growth to 319 million monthly active users. Daily active users rose 11% probably due to Trump's 20 million followers.

The stock is in freefall and the odds are good the prior support at $14 is not going to hold this time around.


The earnings calendar for next week has only one Dow component and that is Cisco Systems on Wednesday. There are 54 S&P companies reporting. As you can see, the names in yellow are a lot less important than in prior weeks. The next two weeks are the small cap reporting period. The big caps are mostly over and the small caps will be generating the headlines starting next week.


According to FactSet 71% of S&P companies have reported with 67% beating EPS estimates and 52% beating revenue estimates. The blended earnings growth rate rose from 4.6% last week to 5.0% as of Friday. On December 31st, the estimate was for 3.1% earnings growth. For Q1, 57 companies have issued negative guidance and 25 have issued positive guidance.

For Q1 analysts are expecting 9.9% earnings growth and 7.5% revenue growth. For Q2 the numbers are 9.1% earnings growth and 5.5% revenue growth. For all of 2017 the forecast is 10.3% earnings growth and 5.6% revenue growth.

According to FactSet the most mentioned item on the 317 conference calls was tax policy on 85 calls, deregulation on 63 calls, trade policy 58, health care 25, infrastructure/stimulus 23, defense 11, energy 10 and immigration 6. Given the recent uproar over the travel ban, I would have expected immigration to be higher.

Intel (INTC) held an analyst day on Thursday and the company is probably wishing they had cancelled it. Intel said its three main areas of investment are memory chips, autonomous vehicles and wireless 5G chips. The company also said the secular decline in personal computer usage was a headwind to growth. Credit Suisse said Intel has a "spotty" track record when investing in new areas.

Intel sees a server contraction for the foreseeable future with a 5% decline per year through 2021. The reason was the decline in company operated server farms in favor of moving to the cloud. The spokesperson said the server decline will lead to smaller operating margins.

Analysts read through the chatter on why Intel was sticking with 14 nanometer (NM) products in 2017 instead of going with their new 10 nm process. Apparently, the yield and the margins on the 10 nm process are holding back full-scale production. Estimates were for full production in Q4 and too late for the back to school and holiday shopping seasons. The slowdown in technology implementation by Intel looks like an opportunity for AMD to steal back some market share with lower priced high performance PC/Server chips.

Intel shares broke support at $36.25 and declined sharply on the analyst downgrades, post meeting.


Sears Holdings (SHLD) spiked 39% at the open after the company pulled a rabbit out of their press release hat. The stock closed at a 14-year low on Thursday at $5.53 and gapped up to $7.70 on short covering at the open. The Sears press release was large and they promised multiple things, most of which were simply restatements of prior announcements.

They announced a restructuring in order to save $1 billion annually. They are going to combine the Kmart and Sears administrative offices. They are closing 150 stores. They have initiated a plan to sell $1 billion in real estate based on recommendations by Eastdil. They are going with computer analytics to plan inventory purchases by store and reduce unwanted inventory. They also took down the rest of their unused $500 million bank credit line while their total $1.971 billion revolving credit line was cut back to $1.5 billion.

Same store sales declined more than 10.3% in the holiday shopping period but they guided for revenue of $6.1 billion compared to analyst estimates for $5.68 billion. Despite the expected revenue beat, they will still post a loss between $535 million and $635 million.

Most of the analysts were astounded by the 39% spike in the shares since much of the press release was a repeat and the rest was vague, wishful thinking ideas.


The financial sector was up on Friday after the Fed's toughest watchdog on the sector resigned. Federal Reserve Governor Daniel Tarullo, announced he will retire on April 5th. He started his term the week President Obama took office. His term was not due to expire until 2022. He was a principal driver of the new rules and regulations to govern the sector since the financial crisis. Analysts believe that his replacement will more than likely favor deregulation as proposed by President Trump. Neil Dutta head of U.S. economics at Renaissance Macro Research said, "Buy banks. The dogs are running without a leash."

The Financial select SPDR (XLF) was up sharply on the news but faded late in the day.


Crude oil had a volatile week with a decline from $54 to $51.50 on news the U.S. added more than 13 million barrels to inventories last week. Crude immediately rebounded on the expectations for tax cuts and a stronger economy that lifted the broader market. Crude closed right back at $54 where it started the week and that was despite a rising dollar that closed at a two week high.


Active rigs rose +12 to 741 with 8 new oil rigs and 4 new gas rigs. That is the highest number of active rigs since November 4th 2015. The pace of additions is beginning to slow but that is still an addition of 82 rigs over the last four weeks. Producers are clearly expecting oil prices to remain over $50.


 


 

Markets

I scanned the Dow 30 charts because I was curious how many of the companies were at new highs. I was actually surprised that 16 of the Dow components were either at or relatively close to new 52-week highs. Those at the highs were CAT, BA, IBM, GS, HD, UTX, DD, V, UNH, AXP, CSCO, MSFT, JPM, DIS, MRK and AAPL. That suggests the rally is actually more broad based that it appeared on the surface.

The S&P finally broke over the 2,300 level convincingly and held its gains. There was only a two-point fade at the close to end at 2,316. If the S&P can hold those gains and even expand on them next week, we could be off to the races. The problem is the uptrend resistance at almost exactly 2,316. This is where the tax cut and deregulation enthusiasm runs head first into the reality of resistance. The most likely path is a fall back to 2,300 as support and then a new surge to a new high. On a positive note both Nasdaq indexes have already surpassed that same uptrend resistance.


The Dow managed to close 169 points over prior resistance of 20,100. Doing this on a Friday afternoon without any material selling at the close is very positive. The Dow actually closed just slightly above uptrend resistance from April while the S&P closed just below that level. ANY further gains by either/both indexes should trigger significant short covering and price chasing by portfolio managers.



Both Nasdaq indexes have broken over uptrend resistance and well over their respective round number resistance levels at 5,700 and 5,200. The winners list below is a good balance of all types of tech instead of just the big caps or the FAANG stocks. This is a broad market rally in the Nasdaq.




The Russell 2000 is still the laggard. The index did close at a new high by less than 1 point but in reality, it was a dead stop at the 1,388 resistance level. If the small caps were to catch fire and begin making new highs like the Nasdaq, it would be a race to buy stocks. Fence sitters would be coming off the sidelines in droves to keep from being left behind. A move over 1,400 would be very bullish for the broader market.


I am very encouraged to see an actual trend that is not sideways. With the earnings cycle nearly over for the big cap indexes, there will be less to motivate buyers. If the potential for a tax cut and deregulation is powering stocks as analysts believe then the slowing earnings may not be a problem.

It is very critical that the markets hold their gains and we do not slip back as we did the prior week. That decline to 19,800 on the Dow has been erased but it caused a two-week pause in the rally. In late January, there was also a two-week pause. I want to be done with these consolidation pauses. Let the markets rise for a full week so the bulls can develop some conviction and the sellers become converts.



Random Thoughts


The markets were choppy early in the week and this survey closes on Wednesday. The bears lost a lot of voters last week but only a few have made the full conversion to bullish. The other half decided to pause on the sidelines before diving in the rally river.

Last week results


Edward Snowden may be returning to the U.S. in the near future. Multiple sources claim Russia is done milking him for everything he knows and is considering sending him to the U.S. as a gift to the Trump administration. Putin is clearly trying to befriend the new president and Trump has called Snowden a traitor and a spy. The plan is reportedly to "curry favor" with President Trump. Russia is denying this rumor but it has sprung up from several sources. By keeping Snowden that is just one more point of contention between the U.S. and Russia and one that is easily rectified at no cost or effort to Russia.

If Snowden is returned to the U.S. it will be the end of his cushy lifestyle and he will spend the rest of his life in a maximum security prison. There have been calls to have him executed for treason. Also over one million people signed a petition to President Obama to grant him a pardon. Obama released Private Bradley (Chelsea) Manning instead. Manning was convicted of turning over hundreds of thousands of classified documents to WikiLeaks.

Snowden


Venezuela's food crisis has gotten so bad people are killing pink flamingos, anteaters, monkeys and other protected animals to stave off hunger. Zulia University reported finding more than 20 flamingo remains with their breast and torso removed. Citizens are transitioning from eating the pigeons, lizards, cats, dogs, horses, donkeys and anything else they could catch or steal. The new wild animal diet is now called the "Maduro Diet" after the current dictator Nicolas Maduro, who assumed power after Hugo Chavez died.

Inflation rose 700% in 2016 and is expected to be worse in 2017. The lack of money and price controls prevents anyone from importing food. Corporations are not going to import a chicken for $3 if they have to sell it at the government mandated price of $2. Currently 2 pounds of flour costs $2 on the black market. That is very expensive in Venezuela. When the average minimum wage in Venezuela is currently $11 a month, there is no money to buy groceries even if those groceries actually existed.

The protests against the government are becoming bloodier by the week. Troops are loyal to Maduro because he can feed them. If he were overthrown, chaos would accelerate even worse than what we see today.

The country is already a failed nation and is approaching a nationwide disaster as people slowly starve to death, literally. Any outside aid is seized by the government or by angry mobs as soon as it arrives. I seriously doubt Maduro will last the year.


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit."

John Templeton


 

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Index Wrap

Fake Rally?

by Jim Brown

Click here to email Jim Brown
All the fence sitters waiting on the sidelines this weekend are wondering if the market breakout is the real deal or just another head fake that draws investors in just to crash a day or two later.

Nobody, and I mean nobody, can ever guarantee whether the market is going up or down on a short-term basis. If somebody tell you the market will go up on any specific day, ignore them.

The market will do whatever it wants and we are simply participants along for the ride. Next week could be a nice ride IF the breakout continues. Friday's close was the perfect setup with all but one of the major indexes closing at a new high and several made multiple new highs for the week.

For all intents and purposes, it definitely looks like the real deal but we can never be sure. If it were easy, everyone would be a millionaire and beach space would be at a premium.

The S&P chart is picture perfect for a breakout. The index consolidated for seven weeks, tested resistance at 2,300 on the first break and failed. The weeklong decline allowed new investors to establish positions and then another four-day resistance test followed. On the fifth day, the breakout occurred on headlines of an impending corporate tax cut plan. The continued gain on Friday was icing on the cake.

Traders should not expect another leg higher like the post election bounce. In the current market and our position on the calendar, any further gains are likely to be 2-3 days up, 2-3 days down and repeat. This is the way a normal market works.

The uptrend resistance at 2,319 is similar to that same line on the Dow and both Nasdaq charts. All three of those other indexes closed above that resistance. This suggests the S&P will do that as well.

While I would be perfectly happy to see the S&P power through that level for a couple days of additional gains, I would also be fine with a pullback to use 2,300 as support before launching a rally to new highs. I am sure everyone reading this would agree. The only thing we all want is for the S&P to make new highs.


There is only one small problem with a continued market rally.

Analysts updated their 2017 S&P forecasts in light of the post election rally. These are the highest estimates on the street today. Note that the top six have already been met and this is just February.

2,275 Fundstrat, Tom Lee
2,300 Bank of America, Savita Subramanian
2,300 Credit Suisse, Lori Calvasina
2,300 Goldman Sachs, David Kostin
2,300 Morgan Stanley, Adam Parker
2,300 UBS, Julian Emanual
2,325 Jefferies, Sean Darby
2,340 Canaccord, Tony Dwyer
2,350 BMO, Brian Belski
2,350 Deutsche Bank, David Bianco
2,400 JPMorgan, Dubravko Lakos-Bujas
2,400 Barclays, Jonathan Glionna
2,400 Societe Generale, Roland Kaloyan
2,424 Piper Jaffray, Craig Johnson
2,425 Citigroup, Tobias Levkovich
2,450 Oppenheimer, John Stoltzfus
2,500 RBC Capital Markets, Jonathan Golub

There has not been a rush to upgrade those targets. When numerous analyst targets are hit, the market tends to fade in intensity because traders are thinking, "target hit, I need to take profits."

However, I think analyst thinking was poisoned by the political headlines in Dec/Jan and they were expecting the market to fade in January and that did not happen. There were numerous analysts calling for a post inauguration decline. Oops!

Given the recent economics and the lightning speed of the new president in getting pro-business actions started, I expect analysts to begin upgrading their targets rather than the market falling back to meet them.

Tony Dwyer at Canaccord remains adamant that we are facing a 5% to 7% correction and the S&P will then rebound to 2,340 by year-end. All I can say is, "Tony I hope you are wrong."

Note on the chart above that the RSI (Relative Strength Index) is nearing 70. The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes. Readings over 70 are considered overbought territory.

We exceeded 70 for two weeks back in December but the majority of the post election rally in November was from lower levels.

The MACD has also turned barely positive. Since both of these are momentum indicators, the sideways motion over the last two months is still being felt in the indicator. If the gains continue for several more days, both indicators should accelerate significantly.

What all this means is that the market strength is improving even though we are moving towards slightly overbought levels.

This is also seen in the advance/decline line for the S&P. This is the highest level in years and suggests very strong market breadth. There were 778 new 52-week highs on Friday compared to 69 new 52-week lows. That is the most new highs since December 9th when the post election rally peaked.


The percentage of S&P stocks over their 200-day average is finally rising after five weeks of dormancy. At 75.8% that is the highest level since September. The percentage over their shorter 50-day average is also rising but more slowly since the average has been rising since November. The market stall in January let the average catch up with a lot of stocks.



On the Dow chart, the index has closed above the longer-term uptrend resistance, the MACD has turned positive and the RSI is approaching 70. Note that back in December the RSI was over 70 for an entire month but that was the result of the rally's velocity going into December.


The Nasdaq surged to a new closing high for the last four days. Friday's close was above longer-term uptrend resistance. Note the RSI is well over 70 and the highest level since November 2014. Based on the chart and the RSI, I would say the Nasdaq is overbought and at risk. However, we have seen Nasdaq rallies in the past that went weeks past normal overbought levels. There is risk for a Nasdaq pause in the coming weeks. However, the mix of stocks leading the index higher on Friday was broad based and not a specific subsector. The Nasdaq A/D line is also at a new high.



The most overbought index is the Nasdaq 100 ($NDX) big caps. The index has rallied 12.1% since the election and most of that gain (7.7%) has been since December 30th. That is a very long way to run in a very short period of time. Note the RSI at 75.75.

These are the FAANG stocks, Facebook, Amazon, Apple, Netflix and Google leading the charge higher. They had help from companies like Priceline, Amgen and Baidu. This group of big cap tech stocks led the broader market higher and should they decide to rest, the broader market is likely to rest as well.


The small cap Russell 2000 is the laggard in this market rally. The Russell made a new high by less than a point on Friday but it was a fight. The Russell stocks are still consolidating from the 30%, 40% even 50% gains post election. It was not all the small caps but quite a few and they are slowly bleeding points and making it tough for the broader index to post any gains.

If the Russell were to breakout over 1,400 next week, it would be a welcome sight and a trigger that would pull fence sitters off the sidelines.


The rally is not a fake. It has overcome declining sentiment from two weeks ago and could be on the verge of a sprint higher. This coming week will be pivotal. A rally built on political expectations is dangerous. Those expectations can be changed in a heartbeat with a headline or in this case a tweet. I want the bullish sentiment to continue to build as we move higher but I do think the Nasdaq is due for a rest. Whether the rest of the market can continue making new highs is the $64 question.

I do believe we will see higher highs in the months ahead but I also believe we will see some short-term setbacks, which are normal even in wildly bullish markets. Consider them buying opportunities.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

This News Was Not Bad

by Jim Brown

Click here to email Jim Brown

Editors Note:

This company warned that earnings would be slowing to only 16% in 2017. That is down from 20% in Q4 so the stock was knocked for a loss. The bad news is now priced into the stock and 16% growth is still very good.



NEW DIRECTIONAL CALL PLAYS

ADP - Automatic Data Processing - Company Description

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

Earnings for the last quarter rose 20% to 87 cents and analysts were expecting 81 cents. Revenues of $2.99 billion rose 6% but missed estimates for $3.02 billion.

They guided for lower than expected bookings for 2017. The CEO said the decline in expectations was driven by the uncertainty surrounding the election but now that a new administration was in place they expected their bookings pressure to ease. "Despite the recent uncertainty in the U.S. business environment, we continue to believe that change will be beneficial to us, as we are well-positioned to help our clients navigate the complexities of HCM (human capital management)."

They are now expecting 6% revenue growth in 2017 compared to prior forecasts for 7% to 8%. Worldwide new business bookings would be similar to the $1.75 billion sold in 2016 compared to prior forecasts for 4% growth. They expect earnings to rise 15% to 17% over 2016.

ADP is rapidly expanding their Total Service product where they provide comprehensive outsourcing solutions where workers are co-employed by ADP and its clients. Revenue in that division rose 16% with 12% earnings.

Earnings May 3rd.

Shares crashed on the lowered guidance but are rebounding now that the market is improving. The bottom line is that earnings are expected to rise 16% and the emphasis on jobs by the Trump administration is going to be positive for ADP. Long term investors are going to see the $2.28 dividend and the double digit earnings growth and assume the worst is already priced into the stock with the post earnings drop.

Buy May $100 call, currently $2.10, initial stop loss $94.50.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Breakout

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the major indexes have now broken out to new highs. Friday's gain across all markets was confirmation and it was not a short squeeze. There was steady buying right from the open and it was not led by any individual stocks.

I did find it very interesting that other than the SPY, only 1 stock in the call portfolio posted a gain. The total points at the close was a loss of 56 cents. The SPY gained 98 cents. Despite the strongly bullish market, most stocks that have been recent gainers took a time out on Friday. We did lose our last put position with a no news bounce of 2% on Qualcomm. As I scanned charts looking for potential plays I noticed that most of the previously weak stocks posted gains and previously strong stocks were mildly negative. That sounds suspiciously like some bargain hunting in anticipation of a continued rally. However, it may have just been shorts covering in the face of the market breakout over resistance.



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


XBI - Biotech ETF

The long call position was entered at the open.

QCOM - Qualcomm

The long put position was stopped out at $54.25.



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

BMY - Bristol Myers - Company Profile

Comments:

No specific news. Resistance has appeared at $52 and shares have not moved higher for 4 days. When this finally breaks, we could see a sharp move higher.

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. Holding at new resistance at $65.

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:

No specific news. Only a minor decline after a big gain on Thursday. Now that February options have expired the short $155 call premium should begin to decline rapidly. Assuming no material decline we should end up with roughly a $7.50 gain on the position.

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. Closed at a new 7-week high on Thursday. Only a minor decline today. I am recommending we target $80 to exit.

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.

Target $80.00 to exit the position.


SPY - S&P-500 ETF - ETF Profile

Comments:

The S&P finally pushed through 2,300 to close at 2,316 on two days of gains. If the index can hold and add to those gains again on Monday, we could be off to the races.

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 declined only 3 cents and not as much as you would have expected. Still some people buying insurance puts.

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.


VMW - VMWare - Company Profile

Comments:

No specific news. Only a minor 7 cent decline after a 52-week high on Thursday.

Original Trade Description: February 8th

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.

Position 2/9/17:

Long April $92.50 call @ $2.25, see portfolio graphic for stop loss.


XBI - Biotech ETF - ETF Profile

Comments:

No specific news. The XBI gapped open almost to the high for the day to initiate the position and then faded in the afternoon. Most stocks that were recent gainers paused on Friday.

Original Trade Description: February 9th

The SPDR S&P Biotech ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Biotechnology Select Industry Index.

This is a sector ETF that tracks 90 biotech and pharma stocks having a market cap of at least $500 million. The index is rebalanced quarterly to remove stocks that have decreased and add stocks that have exceeded the market cap requirements. As such this ETF is focused on the larger cap names and many of the small cap stocks are not represented.

The XBI has rebounded from $61, where it fell after comments from the president in January, to $67 despite new comments earlier this week. The overall optimism about the economy, faster approval of drugs and tax cuts have lifted the sector.

If the ETF can move over $70 the next material resistance is $80. I am using an inexpensive March option because the sector can be volatile. There are no April options yet.

Position 2/10/17:

Long Mar $68 call @ $2.15, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

QCOM - Qualcomm - Company Profile

Comments:

No specific news. Shares spiked 2% to $54.28 and stopped us out by 3 cents. Everything was working so well and suddenly disaster struck.

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:

Closed 2/10/17: Long March $52.50 put @ $1.68, exit .95, -.73 loss.




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