Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/15/2017

Table of Contents

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

Market Wrap

Bulls Tacking On New Highs

by Keene Little

Click here to email Keene Little
It's been slow steady progress for the bulls as they make the rally 11 days in a row and new all-time highs 5 days in a row. There seems to be little in the way of higher prices, except for perhaps the level of complacency creeping into the market. But clearly the bulls rule for now.

Today's Market Stats

While the past 11 trading days haven't seen big rallies they've been enough to consistently tack on more points and keep the bulls fully in control. Resistance levels have been swept aside as sellers remain absent. The bears are in shock and the bulls are gleeful. When that sentiment will reverse is anyone's guess but for now we no indications that a top is nearby.

As I'll show in the review of the charts, the current rally looks like it could continue into a possible blow-off top. But at the very least, price action keeps the market bullish and it's a dangerous time to be thinking about shorting it. The rally could have finished today or it will finish in the next day or the next week or month but for now we're seeing a steady rise higher with only small corrections, and that's a bullish pattern. There's a lot of hope in the air and that will always goose the market higher.

But just because the market is looking bullish now, and could continue to look bullish for weeks to come, it's not a time to be complacent about the upside. If you have high confidence in this rally and practically no worries about the downside then you'd be part of the bullish crowd and from a contrarian perspective it's not a time to throw caution to the wind and join the bullish party.

Investors Intelligence (II) has a proprietary measure of bullishness vs. bearishness of 100 financial newsletter writers and the recent readings should make us concerned about the life of this rally. The sentiment reading is now the most bullish it's been for the past 10 years. From a contrarian perspective that means it's time for caution.

The II reported last week that optimistic newsletter writers climbed to 62.7%, the highest it's been since 2004. That means even into the 2007 market peak we didn't have this many optimistic newsletter writers. The reading tends to peak ahead of a market top while it bottoms at market bottoms. For a gauge, above 55% is a time to be cautious since it typically signifies a market top is forming. According to II, when the reading gets above 60%, where it is now, "it is time to start taking defensive measures."

Assuming the II reading will still be above 55% after this week it will have been 3 months above 55% and so far it's been above 60% for the past 4 weeks. So it's clearly not a market timing tool but it does give us another reason to be cautious instead of giddy about this rally.

There are more than a few sentiment indicators and they all suggest the same thing -- there's a great amount of hope right now that the Trump administration will make a big difference in our economy and to the bottom line of many corporations. The danger is that so much of this rally has been built on hope rather than results and we still don't know how much success Trump's team will have implementing these changes.

If the immigration Executive Order is any gauge, the changes will be tough to make. A rally built on hope is a dangerous rally because sentiment could turn on a dime and the big air pocket below us could be filled quickly. At this point I'd say enjoy the ride if you're long but keep your eyes and ears open and trail your stops up behind you. You want to be one of the first ones out the door when the market turns.

Another challenge for the market, although you wouldn't know it with the rally we're seeing, is how consumers are tapped out. They're not the ones joining this rally. Americans are filing bankruptcy at the fastest rate in years and rates for December and January increased, which makes it the first time we've seen a month-to-month increase in bankruptcy rates in 7 years.

More companies are also starting to declare bankruptcy and rising interest rates are not helping. In an era with abnormally low interest rates, and all the borrowing that went along with that (isn't that what the Fed was trying to prompt?), we have over-indebted consumers and companies, as well as the Federal government, but at least they can print their way out of it, for a while. Destruction of debt will create a headwind for the Fed since it will add to the deflationary pressures, which we see in the continued decline in the velocity of money.

A consequence of the level of debt for consumers, with the decline in their income/cost ratio, is that they're not the ones participating in the current rally. Corporate buybacks (they continue to borrow heavily and use profits to fund their buybacks instead of investing in capital growth projects) support the market. Add in the hopes and dreams of success with the expected (hoped for) Trump changes and we have reasons for the rally but leaving out the consumer is not a good recipe for longer-term success.

I'll start tonight's chart review with a longer view of the SPX monthly chart to show the pattern since the 2000 high and then work my way in with closer views.


S&P 500, SPX, Monthly chart

There are a couple of things to point out on the SPX monthly chart below. First is the "simple" way to stay with the trend -- long when the 21-month MA (blue) is above the 8-month MA (red) and short (or out) when the MAs reverse. Other than getting shaken out prematurely with the decline in the January/February 2016 lows, and then back in in August 2016, it's been an easy way to ride the trend. This method will keep you in or out of the bulk of the move and help you avoid losses in major downturns while keeping you in the uptrend for as long as possible.

The second thing to point out is the broken uptrend line from 1990-2002 (bold green), which was back-tested in 2015 and is now currently near 2425. It will be near 2500 by the end of May. That gives us an upside target, in time and price, if the bulls can keep this going for another couple of months. It might also be accompanied by another test of the downtrend line for the lower RSI peaks since 1996.

The rally from January/February 2016 can be counted as the 5th wave of the rally from 2009 and if that's correct then we'll be due at least a large pullback correction of that move in the next year or two. If we're in the next secular bull market off the 2009 low we could get a pull back to support near 1550 before heading higher. But if we're still in the secular bear, which I believe we are, the next leg down in this megaphone pattern will be a doozy, one that will make the 2007-2009 decline look like just a small correction.


S&P 500, SPX, Weekly chart

Since the 2009 low there's been a 23-week cycle that has done a good job identifying market turns, mostly highs. The next one due is the week of February 19th, which is next week. Interestingly, at the same time this cycle is calling for a turn we can see SPX has made it up to the top of a parallel up-channel (arithmetic price scale) for the rally from 2009.

SPX made it above the top of the up-channel in 2014, remained above the channel for the most part into 2015 and then dropped back into and down to the bottom of the channel with the decline from May 2015 into the January/February 2016 lows. Now it's back up challenging the top of the channel when the next 23-week cycle date is arriving. It can of course continue to press higher but this chart says be very careful about those expectations.


S&P 500, SPX, Weekly chart

In my "normal" weekly chart of SPX you can see this week's break above the trend line along the highs from April-August 2016, currently near 1332. This break is bullish because it's a breakout from a rising wedge pattern and that's to be respected by the bears. Never challenge a breakout, especially if a pullback finds support at the top of the wedge and continues higher from there. What we can't know yet, and must be watchful for, is whether the breakout will be a 1-week break that leads to drop back into the wedge (leaving a fakeout breakout with a throw-over finish) or if it will continue higher next week. A drop back inside the pattern, with a drop below 1332, would create a sell signal. But at the moment this has to potential to run much higher.


S&P 500, SPX, Daily chart

The daily chart below shows the breakout yesterday above the top of its rising wedge (broke out on Monday if looking at the top of the wedge as the trend line along the highs from August-December 2016) and how it simply added to the breakout today. This is what looks bullish and it remains bullish as long as it doesn't drop back into the wedge with a decline below 2332.

Key Levels for SPX:
- bullish above 2333
- bearish below 2285


S&P 500, SPX, 60-min chart

There is a dangerous sign on the 60-min chart and that is the parabolic move for this rally. Whenever you can draw 4 steepening uptrend lines, as I've done for the rally from December 30th, it's a sign of exuberance that typically does not end well. A break of the 4th uptrend line, near today's close at 2349, would be a warning signal and a break of the 3rd uptrend line, currently near 2340, would be a good indication that a high is in place.

Keep in mind that parabolic rallies tend to retrace to their starting point (the December 30th low at 2253) and that a rising wedge retraces more quickly than it took to build it (back down to the start of the shorter-term rising wedge at the November low near 2084 and then the larger rising wedge that started from the February 2016 low at 1810).


Volatility index, VIX, Daily chart

Speaking of wedges, the VIX has been building a descending wedge since its peak in November and is showing bullish divergence since the end of November. It's hard to trust movements in VIX during OPEX week but there was a big jump today (up +11.5%), which could indicate there are some non-believers in this week's rally. Does someone know something? Is big money getting ready for a big reversal? It's too hard to tell but it does add one more item in the "worry" column, especially with a rally that's going parabolic.


Dow Industrials, INDU, Daily chart

The Dow has also broken above its trend line along the highs from April-December 2016, currently near 20,500. As long as the Dow stays above that level it remains bullish, especially if a back-test of that level holds as support. Below 20,500 would leave a failed breakout attempt.

Key Levels for DOW:
- bullish above 20,500
- bearish below 20,015


Nasdaq-100, NDX, Daily chart

With today's rally NDX has also bullishly broken above its trend line along the highs from April-August 2016, currently near 5280. I've drawn steepening uptrend lines for its rally since November as it too is going parabolic. It could run a lot higher but the higher it goes the more vulnerable it becomes.

Key Levels for NDX:
- bullish above 5285
- bearish below 5168


I'll first show the RUT chart and then some comparisons to other charts to point out how the RUT can still be used as a sentiment indicator.

Russell-2000, RUT, Daily chart

The RUT has finally joined the bullish party by making new highs this week. Last Friday it broke out of the bull flag pattern off its December 9th high and now it looks like it might finally be able to make it up to the trend line along the highs from 2007-2015, currently near 1412. This is a longer-term trend line and marks what could be the top of a large megaphone pattern that I've shown on its weekly chart in the past. We could easily see a throw-over above the line so I wouldn't use it as a hard resistance level. But over the next couple of weeks it's going to be very important to see how price behaves around this trend line.

Key Levels for RUT:
- bullish above 1415
- bearish below 1349


At the beginning of the report I discussed sentiment and another measure of sentiment is to see what the RUT is doing. When small-cap stocks rise faster than large stocks, it's a sign that investors are willing to take on more risk in the market. It often leads to higher stock prices across the board. But when small caps lag behind large-cap stocks, it shows that investors may be getting worried and a correction/decline could soon follow.

One way to measure the strength of the RUT is with a relative strength (RS) chart, which is shown below. Since the December highs for the indexes the RUT has underperformed SPX. Off last Wednesday's low the RUT has joined in the rally and while this week it has finally been able to join in with new highs, it remains weak relative to SPX.

Relative Strength of RUT vs. SPX, Daily chart

Notice the RS of the RUT off the November low -- the RUT was outperforming SPX and that's exactly what you want to see in a rally. But since the December high the RUT has been underperforming SPX, including today, and that's a warning sign that the market's participants are not feeling as bullish as the broader indexes would have us believe. It's a warning sign but not a show stopper.


SPX vs. Relative Strength of TRAN vs. UTY and XLY vs. XLP, Daily chart

There are a number of ways to check on the underlying strength (or weakness) of the market and I noticed a parallel between the RS of the Transports (TRAN) vs. Utilities (UTY) and Consumer Discretionary (XLY) vs. Consumer Staples (XLP), which is shown on the chart below.

The first comparison, TRAN vs. UTY, shows us whether or not the market is feeling bullish about the economy, and investing in the transportation stocks, or if they're feeling more defensive and investing in dividend-paying utility stocks.

The second comparison shows us whether consumers are feeling flush and optimistic and spending more on discretionary items (flat screen TVs, recreation, etc.) or if they're pulling in their horns and spending on what they have to (toothpaste, toilet paper, etc.). The consumer is once again saddled with enormous debt, as are corporations and our governments and it will likely show up in less spending.

The TRAN is underperforming UTY since December and Consumer Discretionary is underperforming Consumer Staples, both of which tell us the market is turning defensive (not that you'd know it by price action in the big indexes.

I found it interesting that the two RS charts track each other closely, as can be seen on the bottom chart below. And they both have been in decline since December while SPX has continued to make new highs. For now it's just another warning sign but one worth noting.

There are other signs that the rally is occurring on the backs of fewer and fewer stocks, which is typically seen as a market forms a top, not in the middle of a larger rally. As an example, the advance-decline line and new 52-week highs are both putting in lower highs as the broader averages make new highs. The rally looks good on the surface but underneath the hood we see some problems developing.


10-year Yield, TNX, Weekly chart

The short-term pattern for Treasury yields is not clear enough to make a higher-odds prediction for the next move but I think yields will either head lower from here or after one more new high. There's a possible sideways triangle forming since the December 15th highs and the triangle would look complete with one more pullback before heading higher.

As shown on the TNX weekly chart below, there's an upside projection at 2.687% if there's a little more upside left. A drop below the January 17th low at 2.313 would be a heads up signal that a top is already in place. The flip side says a rally above the December 15th high at 2.621 would suggest the higher target could be achieved sooner rather than later.


KBW Bank index, BKX, Weekly chart

Like the RUT, the banking index finally broke out of its consolidation off the December 8th high. Today's high for BKX met a price projection at 97.07, with a high at 97.25, where the 5th wave of the rally from 2009 equals the 1st wave. But there are higher projections, including one at 102.19 where the 5th wave of the rally from June 2016 would equal the 1st wave. Coinciding with the 97.07 projection is a projection at 97.21 where the 5th wave of the rally from June 2016 is 62% of the 1st wave. As long as BKX stays above the top of an expanding triangle for its consolidation pattern from December, near 94.80, it will stay bullish. But at this point there are enough pieces in place to call a top at any time.


Transportation Index, TRAN, Daily chart

Today's rally created a new high for the TRAN as well, which is obviously bullish even if it is underperforming the broader averages. It has now met a price projection near 9534, with today's high at 9566, where the 2nd leg of the rally from June 2016 is 162% of the 1st leg. The bulls need to keep this rally going in order to prevent a triple top against its December and January highs, especially seeing the bearish divergence at the new price highs.


U.S. Dollar contract, DX, Daily chart

The US$ got the bounce I expected to see off its February 2nd low and while the bounce could make it further I think it has accomplished what it needed to and is now ready for a continuation lower. Today's rally made it back up to the top of a parallel up-channel from May 2016, which it dropped back inside of in January, and in doing so it climbed above its 50-dma at 101.33. But it was unable to hold the day's rally and dropped back down into negative territory for the day and closed below its 50-dma. The shooting star candlestick looks like a reversal candle and a down day for the dollar on Thursday would confirm it.


Gold continuous contract, GC, Daily chart

If the dollar starts back down it could help give gold a lift higher and for the moment I'm showing the potential for gold to bounce up to 1273.20 where it would achieve two equal legs up from December 15th. It has met the minimum expectation, at 1237, where the 2nd leg up is 62% of the 1st leg up so it's possible it will head lower from here. A drop below the uptrend line from December, near the 20-dma at 1219, would signal a top for the bounce could already be in place and below 1180 would confirm that. But first we'll see if gold can at least challenge its broken 200-dma near 1265.


Silver continuous contract, SI, Daily chart

Looking to silver for some guidance, it too has a little more upside potential to 18.32, where it would achieve two equal legs up from December 20th. But currently it's fighting to get through resistance at its broken 200-dma at 17.94 and its downtrend line from July 2016, near the same level. It would be short-term bullish above Tuesday morning's high at 18.09 and more bullish above 18.32 but at the moment it's vulnerable to a reversal back down from here. Watch for gold and silver to be in synch otherwise it's difficult to trust the direction for either.


Oil continuous contract, CL, Daily chart

Since the high at 54.51 on December 12th at 54.51 oil has been consolidating sideways in a tightening range. The consolidation pattern can be viewed as a bullish ascending triangle, which portends a breakout and rally to new highs for the bounce off the August 2016 high. A projection for a new rally leg would be the top of a parallel up-channel for the rally from August 2016, which will be near 57.25 by the end of the month. It would be confirmed bullish above 55.

But if oil drops below price-level S/R near 51 it would be bearish, in which case I'd look for a test of its 200-dma, currently at 48.17, and then the bottom of its up-channel, perhaps near 46 in March. The longer-term pattern and the corrective bounce structure off the August 2016 low suggests the entire bounce pattern will be retraced.


Economic reports

There were a slew of economic reports this morning and they were mixed. CPI data confirmed Tuesday's PPI data that shows inflation on the rise. It has many wondering if the Fed will try to head inflation off at the pass or let it rise past their goal in an effort to help the government pay back its debt with inflated dollars.

Retail sales and the Empire Manufacturing index were stronger than expected and that helped the bulls this morning. But Industrial Production declined more than expected, into negative territory, so that's not a good sign for our economy.

Thursday morning we'll get the unemployment claims data, housing starts and permits and Philly Fed index, none of which are likely to be market moving.


Conclusion

We have a plethora of signals that tell us the stock market's rally should not be trusted. We have multiple signs of deteriorating market internals while bullish sentiment runs high. We have multiple signs that show us the rally is occurring on the backs of fewer and fewer stocks and that important sectors are weakening relative to SPX. The rise in VIX is telling us smart money could be preparing for a reversal. With a very low VIX and the contraction in price volatility it's a dangerous time to be complacent about the upside.

The S&P 500 hasn't had a 1% intraday move since December 14th, which is the longest it's been this quiet in the history of record keeping. Quiet periods like this are always followed with a much bigger move (volatility) and from here that begs the question about which direction the big move will be. Will we see an acceleration higher or will it turn down sharply?

The most important indicator to follow is price, which means all of the cautions mentioned above are meaningless as long as prices keep heading higher. Price is king. But what we have are reasons to keep your eyes and ears open for the possibility of a nasty surprise. The rally is extended (overbought on multiple time frames), overloved and running on fumes (fewer participating stocks) and while none of that is a rally killer they are reasons to be cautious from here.

Don't get complacent and then get walloped some morning with a big gap down. It's a time for caution (peel off profits on long positions you're most worried about) and if you're a bear itching to get into the game, I suspect your time is coming very soon but not yet. There are no indications of a top yet and no reason to step in front of all the rising knives.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT


New Option Plays

Winners to Sinners

by Jim Brown

Click here to email Jim Brown

Editors Note:

These two stocks were former winners but earnings confessions revealed they were temporary sinners. Both of these stocks were punished but the damage is only temporary. When the market finally corrects, these will be bought as bargains.


NEW DIRECTIONAL CALL PLAYS

QCOM - Qualcomm - Company Profile

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.

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

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.

We played a put on QCOM a couple weeks ago and once the stock hit $53 it quit going down. It stayed at that level for more than two weeks and then began rebounding. Analysts are saying it will be years before there is any outcome on the Apple suit and the CEO said at the Goldman tech conference this week, that Apple has a very weak position and he expects it to be settled out of court.

Shares closed at a three-week high on Wednesday. Options are cheap and the stock is already beaten up. If the market begins to correct, this should be seen as a fallen angel.

Earnings April 26th.

Futures are down tonight so I am going to put an entry trigger on this recommendation.

With a QCOM trade at $56.75

Buy June $60.00 call, currently $1.50, no initial stop loss.


SFLY - Shutterfly - Company Profile

Shutterfly, Inc. engages in manufacturing and retailing personalized products and services in the United States. The company operates through Consumer and Enterprise segments. It offers a range of personalized photo-based products and services that enable consumers to upload, edit, enhance, organize, find, share, create, print, and preserve their memories. The company also provides photo-based products, such as photo books; cards and stationery; photo gifts; home decor; photo prints comprising wallet 4x6, 5x7, 8x10, square, and large format sizes, including posters and collages; and photo-based merchandise items consisting of mugs, iPhone cases, desktop plaques, candles, pillows, canvas prints, and blankets. In addition, it operates an online cards and stationery boutique that sells announcements, invitations, and personal stationery for every occasion; and cloud services under the Tiny Prints name. Further, it offers personalized save the dates, wedding invitations, thank you cards, and bridal invitations under the Wedding Paper Divas brand; and ThisLife, a service that gathers and organizes photos and videos. Additionally, the company provides MyPublisher, which allows customers to create custom photo books, share memories, and tell their stories using their own photos; BorrowLenses, an online marketplace for photographic and video equipment rentals; and Groovebook, a mobile photo book application subscription service that sends customers a keepsake book of their mobile photos each month. It also engages in the advertising and sponsorship activities; and printing and shipping of direct marketing and other variable data print products and formats, as well as operates Share sites, a share platform. Company description from FinViz.com.

Shutterfly reported earnings of $2.63 compared to estimates for $2.84. Revenue of $ 561.2 million also missed estimates for $584.4 million. They guided for Q1 for a loss of 95 cents to $1 per share. Analysts were expecting a loss of 84 cents. Revenue guidance was $185-$190 million and analysts expected $199.4 million. Shares were crushed for a $10 loss.

Shutterfly announced a major restructuring with layoffs of 260 workers or 13% of the total. They are halting development of multiple websites and businesses and will concentrate on just their core market. They tried to expand too aggressively in to other things and customers just wanted to make their picture books. They had a picture sharing site, a site to rent/borrow cameras, a Wedding Paper Divas site, Tiny Prints site, MyPublisher.com site, Trippix for trip pictures, FAvPix.com for favorite pictures, etc. They are shutting all of these down and will simply concentrate on the core concept that produces 85% of the revenue. They currently have about 11 million customers and could double that over the next five years.

Earnings May 3rd.

The shares were beaten severely on the earnings but now rebounding on the restructuring story.

With a SFLY trade at $46.15

Buy June $47.50 call, currently $2.45, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Going to Need Oxygen Soon

by Jim Brown

Click here to email Jim Brown

Editors Note:

If the rally continues much higher, we are going to need an oxygen mask because the air is getting thin. The markets took off again after there were no foot in mouth mistakes by Yellen on her second day of testimony. The gains are accelerating as more shorts are being forced to cover. Anyone thinking we were going to top out last week and adding shorts, is seriously regretting it. Analysts are starting to talk about Dow 21,000 and it is only 389 points away.

The VIX actually rose more than 11% today in a bullish market. There must be massive put buying in progress to protect these recent gains.

The Nasdaq 100 ($NDX) now has a RSI reading of 81.94 when 70 is considered overbought. That is the highest reading since July 3rd, 2014 when it hit 82.60 and the Nasdaq declined the next four days. Overbought oscillators can always become even more overbought but this is flashing a huge warning sign there could be a peak ahead.



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


No Changes



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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

ADP - Automatic Data Processing - Company Description

Comments:

No specific news. Minor gain to new 3-week high.

Original Trade Description: February 11th

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.

Position 2/13/17:

Long May $100 call @ $2.18, see portfolio graphic for stop loss.


BMY - Bristol Myers - Company Profile

Comments:

A new Barron's article said Pfizer was not likely in the bidding for BMY. A couple of analysts said Pfizer already has a strong cancer research department and they did not need to spend $100 billion for different cancer therapies. They theorized Pfizer would want somebody with a wider pipeline and several other therapies to be included. That leaves Novartis and Gilead and Roche as potential bidders.

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.

Update 2/14/17: News from Barron's (actually strong rumors) suggest Novartis (NVS), Pfizer (PFE), Gilead Sciences (GILD) and Roche are actively involved in what could be a potential bidding war for BMY.

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:

Elliott Management disclosed they bought 7.1 million shares worth $392 million and call options on another 2.8 million shares worth $154 million. That is a very big bet on Dell's resurgence.

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. Shares drifted back slightly after a couple weeks of gains.

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.

Update 2/14/17: The Cyber Threat Alliance (CTA) announced that FTNT, PANW, SYMC, CHKP, INTC and CSCO are the founding members and they appointed Michael Daniel as the first president. The CTA members are all contributing to an automated threat intelligence sharing platform to exchange actionable threat data. The CTA was incorporated as a not-for-profit organization in January.

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


$VIX - Volatility Index - Index Description

Comments:

This is a very strange market. The major indexes are streaking higher but the VIX gained 11% today. Clearly, there is massive put buying at these levels and with the low volatility.

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.
Averaged down with a $1.11 entry on 2/15.
Average cost now $1.75.

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


VMW - VMWare - Company Profile

Comments:

No specific news. The CEO was interviewed by Bloomberg and he was positively gushing about the prospects for Q3/Q4 because of the partnership with Amazon Wed Services. Also, the new software-defined networking (SDN) product saw a 50% increase in sales in Q4 and they are expecting $1 billion in new revenue from SND in 2017.

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:

The XBI posted another 1.6% gain to reach resistance at $69. The close was only 11 cents over resistance but it was enough for a new 14-month high.

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)

QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

The QQQ could not get any more vertical. This ramp in the large cap tech stocks is bordering on crazy. Would you buy this chart at the current level?

Original Trade Description: February 13th

PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ- 100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq 100 big cap index has been leading the market higher since early December. The QQQ ETF is up 11% since the close on December 2nd. While the Dow and S&P were moving sideways over January the Nasdaq 100 was piling on the gains. Those gains have gone vertical since the beginning of February.

The Nasdaq 100 is in very overbought territory with the RSI at a whopping 78.47 at today's close. A reading of 70 is considered to be overbought. The last two times the NDX had a RSI reading over 70 there was a decline in the index.

Nobody can predict when an index will decline but we can read the indicators and they are telling us to be careful with new longs at this point.

Janet Yellen will be testifying before the House and Senate over the next two days. All she has to do is phrase one sentence the wrong way and we could see a serious decline.

This is going to be a short-term position because the dip buyers are still alive and well. If we did get a 3% decline, it would be bought. We have not had one since before the election.

I am going to jump right in rather than use an entry trigger. The options are cheap and the most we can lose is $1.29.

Position 2/14/17:

Long March $127 put @ $1.29, see portfolio graphic for stop loss.




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