Option Investor
Newsletter

Daily Newsletter, Tuesday, 2/21/2017

Table of Contents

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

Market Wrap

Highest Level Since 1992

by Jim Brown

Click here to email Jim Brown

Should we be worried when every daily headline mentions the length of a streak or the magnitude of the gains?

Market Statistics

The Nasdaq 100 ($NDX) RSI reading rose again to 84.71 when 70 is considered overbought. Monday was the highest reading since January 9th, 1992 when it hit 86.39 after a 20% gain in the Nasdaq in only 13 days consecutive days. That move was followed by a six-month decline.

We know how this movie ends but we do not know if it will be this week or next month but the bull will eventually stumble.


There was only one economic report on Tuesday. The PMI Manufacturing for February fell from 55.1 to 54.3 to slightly slower growth but still a decent number. The flash PMI for services declined -2 points to 53.9. The PMI service sector outlook has faded back to where it was just before the November election. Respondents were reporting slower growth and cautious clients. This report was ignored.

The hurdle for Wednesday will be the FOMC minutes for the February meeting. With conflicting statements from Yellen and her merry band of bankers, analysts will be paying rapt attention for clues about a March rate hike.

The next market cliff could be President Trump's address to the joint session of Congress next Tuesday evening. He will be under pressure to disclose details on a potential tax deal and he will undoubtedly mention some other topics that will not be received well by the market. There is the potential for a Trump bump after the speech but there is greater potential for a sell the news event. The market could anticipate this and see increased volatility heading into the speech.


The market opened strongly positive after earnings from Walmart and Home Depot, both Dow components. Walmart (WMT) reported earnings of $1.30 compared to estimates for $1.28. However, revenue of $130.94 billion missed estimates for $131.1 billion. The company guided for the full year to $4.20-$4.40 per share.

Same store sales rose 1.8% and beat estimates for 1.3% with Sam's Club showing a 2.4% increase. This was the best same store sales for Walmart since July 2012. E-Commerce sales rose 29% after they bought Jet.com in September.

The company took a shot at the proposed border adjustment tax saying "The border adjustment tax, for us, is a concern. Clearly anything that would potentially raise prices for our customers in the US is a concern for us."

Walmart also raised their dividend 2% to $2.04 for the year. The first installment of 51 cents will be paid on April 3rd to holders on March 10th. This is their 44th consecutive year of dividend increases.

Shares rallied 3% to resistance at $72 but closed well off their highs.


Home Depot (HD) reported earnings of $1.44 compared to estimates for $1.34. Revenue of $22.21 billion rose 5.5% and beat estimates for $21.8 billion. Same store sales were very strong at +5.8% compared to estimates for a +3.7% increase. The company guided for full year earnings of $7.17 and a 4.6% rise in revenue. The number of customers and the average ticket price both rose 2.9%. They ended the quarter with $2.538 billion in cash. They generated $9.783 billion in free cash flow in 2016 and expect $11.3 billion in 2017.

The company said it was benefitting from a strong home market with rising property values as well as increased productivity. They said the unseasonably warm weather allowed contractors to continue working on outdoor projects all through the winter.

They increased their targeted dividend payout from 50% to 55% of net earnings. They increased the current dividend by 29% to 89 cents payable on March 23rd to holders on March 9th. This is the 120th consecutive quarterly dividend. They announced a new $15 billion share repurchase program that will replace the existing program. Shares gained $2 on the news.


Expeditors Intl (EXPD) reported earnings of 61 cents compared to estimates for 59 cents. Revenue of $1.64 billion rose 3% and beat estimates for $1.62 billion. Shares finished the day slightly negative.


Advance Auto Parts (AAP) reported earnings of $1.00 that missed estimates for $1.09. That was also a -18% decline from the $1.22 in the year ago quarter. Revenue of $2.08 billion did beat estimates for $2.01 billion and $2.03 billion in the year ago quarter. The company operated 5,062 stores and services 1,250 Carquest stores as of the end of the quarter. They will open 75 to 85 stores in 2017. The CEO presented a five-year plan in November and they are just getting started in the restructuring and aggressive cost reductions. Shares were fractionally lower.


Macys (M) reported earnings of $2.02 that beat estimates for $1.97 but declined from the $2.09 reported in the year ago quarter. Given the weak holiday shopping season, I think these earnings were respectable. They guided for the full year for $2.90-$3.15 compared to the $3.11 earned in 2016. Revenue of $8.515 billion missed estimates for $8.582 billion. Same store sales declined -2.7%. For 2017, they are projecting a decline in same store sales of 2% to 3%. Shares were flat because nobody expected them to do well.


First Solar (FSLR) reported adjusted earnings of $1.24 compared to estimates for 97 cents. Revenue of $480.4 million beat estimates for $391.8 million. For the full year, they guided in a range from a loss of 80 cents to earnings of 50 cents with revenue around $2.85 billion. Analysts were expecting 41 cents in earnings and $2.53 billion in revenue. The unadjusted GAAP earnings had a pre-tax charge of $729 million related to restructuring actions. They ended the quarter with $2.0 billion in cash. The company is moving forward with the conversion from Series 5 to Series 6 panels. They said their conversion efficiency on their best products was above 16.9%.


Tronox (TROX) reported an adjusted loss of 14 cents on revenue of $548 million. For the full year, the company narrowed its loss to $59 million or 50 cents per share. Tronox is a producer of titanium ore and titanium dioxide. They also announced the acquisition of the same business from Saudi Arabian company Cristal for $1.67 billion in cash and stock. This will make Tronox the world's largest producer of titanium oxide with 11 plants in 8 countries. Shares spiked 35%.


Texas Roadhouse (TXRH) saw its shares fall $5 in afterhours after reporting earnings of 29 cents compared to estimates for 37 cents. Revenue of $484.7 million missed estimates for $496.6 million. Revenue growth rose only 7% compared to prior growth at 10%. Earnings also fell -10%. Same store sales rose 1.2%. They blamed higher employee costs that exceeded declining food costs. They opened nine new restaurants in the quarter.


The earnings headliners for Wednesday are Tesla, Hewlett Packard and Jack in the Box. I would look for JACK to raise guidance. They recently raised prices on some items by as much as 35%. As long as sales did not tank as a result of the higher prices they should be doing really well in the current quarter.

The market does not seem to be paying attention but Q1 earnings growth estimates have declined -2.7% from the beginning of the quarter. For 61% of S&P-500 companies earnings growth estimates are slightly lower than analysts originally expected. This is typical but the pace of the decline is accelerating. For Q4, growth estimates declined -2.2% and Q3 -1.9%. This is not a big deal but it is important. For instance if analysts expected S&P earnings to rise 8% in Q1 and now they are expecting 7.8% growth, it is still decent growth. They are simply becoming less excited about the future. Offsetting this is the normal better than expected results when the quarter actually reports. If analysts are expecting 8% growth at the end of the quarter, typically we will see 9% or even higher when the results are announced.


Verizon (VZ) and Yahoo (YHOO) announced they had reached an agreement on the acquisition. Verizon will pay $4.48 billion in cash, a discount of $350 million from the original price as a result of the hacking scandal. The two Yahoo data breeches affected more than 1 billion user accounts. The two companies will split any liability arising from the two events. Shares of both companies were fractionally higher.


Popeye's Louisiana Kitchen (PLKI) agreed to be acquired by Restaurant Brands International (QSR) for $1.8 billion. QSR will pay $79 for each PLKI share. That is a 19% premium to Friday's closing price. QSR was formed in 2014 when Burger King bought Tim Hortons for $11 billion. Popeye's started 45 years ago as a "Chicken on the Run" fast food restaurant in New Orleans. PLKI now has 2,600 stores in 26 countries. The acquisition is expected to close in April.



Natural gas prices fell -9% in the regular session after forecasters said winter was over. This came after a 7% decline last week. The warmer than normal winter has left gas in storage well above normal levels and we could actually see an injection into storage this week more than a month ahead of the normal pattern. Forecasters also said there was evidence of El Nino forming in the pacific and that would mean a cooler than normal summer for the North East. Reportedly temperatures in the North East over the winter were 5 to 8 degrees above average with lower than normal snowfall.


Crude prices rose 1.2% to close just over $54 and right at two-month resistance. OPEC reported that its proposed production cuts had reached 90% compliance, which would be a record high if that number were correct. Normal compliance would be 50% to 70% of announced cuts. IF, and that is a big IF, they do maintain 90% compliance and agree to continue for an additional six-months starting in July, we could see inventories begin to deplete and prices rise to as much as $65 in midsummer. While I would love to see that happen, I am not holding my breath.



Markets

There is not much to say about the markets. They are overbought and nobody seems to care. Investors are buying stocks at new highs after weeks of gains. I am excited to see the gains but there is a cloud of dread over my desk. Markets do not go straight up and the Dow has posted 8 consecutive days of gains. If you do not count the one day with a 4-cent decline on the Nasdaq 100, it is up for 13 consecutive days. We know there is a cliff in our future but for now, investors are still racing up the mountain.

The S&P surged through three-day resistance at 2,350 to close at 2,361 and a nice 14-point gain. The S&P is now higher than more than half of the blue chip analyst forecasts for the end of 2017.

Year End 2017 Forecasts:

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


The Dow posted a strong gain thanks to Home Depot, Walmart, Boeing and UnitedHealth. Only six Dow components were negative for the day. All the Dow components have now reported earnings so stimulation will have to come from some other source.

Dow 21,000 is the new target and we are only 257 points away. This could be a very fast move from one thousand-point level to another. The Dow has gained +2,855 points since the November 4th close at 17,888.



The Nasdaq Composite is only slightly less overbought than the big cap index. The Composite index gapped open to 5,850 and closed at 5,853 with a 27-point gain but that open/close is significant. The entire gain was short covering at the open and the lack of a material intraday range left us with a shooting star candle which is normally bearish. If Wednesday were a down day, the candle pattern would be an evening star also suggesting the end of the surge.

Neither of those means it is the end of the rally. They are just formations suggesting we could have seen a temporary top in the Nasdaq today.



A bullish event for today was the breakout of the small cap indexes on the S&P-600 and Russell 2000. I have said several times, if the small caps begin to make new highs, the broader market could continue significantly higher. On the S&P-600, the 7-point gain to 862 was just barely a breakout over 860 so I am not ready to start targeting 900 just yet.



I hate to be a wet blanket but we know the recent market moves are too good to last without at least a couple days of weakness to allow sidelined traders an opportunity to get back in the market.

That does not mean we are going to crash on Wednesday but we should be cautious about adding a lot of new long positions. I know the animal spirits are running wild but like the running of the bulls in Pamplona Spain, the outcome can be erratic and painful if participants are in the wrong place at the wrong time. Try not to be overly long until we get a new buying opportunity.

We have been exceptionally lucky because of a lack of negative headlines that could impact the market. This is not normal and not likely to last.

Jim Brown

Send Jim an email

 

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

 


New Option Plays

Takeover Candidate

by Jim Brown

Click here to email Jim Brown

Editors Note:

If enough people call you a candidate, does that make it true? Multiple analysts are now saying BMY is a takeover target and with Carl Icahn launching a new position for that reason, we need to follow his lead.


NEW DIRECTIONAL CALL PLAYS

BMY - Bristol Myers - Company Profile

Comments:

Late in the day news broke that Cark Icahn had taken a stake in the company saying he believed it was an acquisition target given the value in the company's pipeline of heart disease and cancer drugs. Shares rebounded 2% initially but faded into the close.

I am recommending a new position on BMY. With two activist investors in Jana Partners and Carl Icahn both active on this stock, we need to take a longer-term view and hope they are successful in motivating change.

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.

Multiple analysts have now called BMY an acquisition target. Icahn said that was one of his reasons for opening the position.

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.

I am choosing a $60 June option with earnings in April. The option is cheap enough that we can hold over that earnings report if we decide to do that in April. If by chance there is a big gap higher on Wednesday, switch to the $60 strike.

Buy June $57.50 call, currently $2.78, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Unbelievable

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq 100 continued to gain and the Dow extended its winning streak to 8 days. The unbelievable part is the overbought conditions on the Nasdaq 100.

The Nasdaq 100 ($NDX) RSI reading rose again to 84.71 when 70 is considered overbought. Monday was the highest reading since January 9th, 1992 when it hit 86.39 after a 20% gain in the Nasdaq in only 13 days consecutive days. That move was followed by a six-month decline. Overbought oscillators can always become even more overbought but this is flashing a huge warning sign there could be a peak ahead.

I am taking this opportunity to rotate out of some March positions in the VIX and QQQ and into April positions. It would be extremely unlikely that we are not going to see a volatility event and potentially dramatic market decline over the next six weeks.



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


VAR - Varian Medical

The long call position was entered at the open.

BMY - Bristol Myers

The long call position was stopped at $53.45.

VIX - Volatility Index

Roll the March $12 call position up into an April $13 call.

QQQ - Nasdaq 100 ETF

Roll the March $127 put position up into an April $128 put.



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. ADP Mobile Solutions App just passed 10 million individual employees and is growing by 300,000 per month. More than 1,000 HR transactions are being processed per second. Users can access time cards, W2s, digital payroll statements as well as other data.

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:

BMY said it appointed three new independent directors in an agreement with activitst shareholder Jana Partners. The company announced an accelerated $2 billion share repurchase program. It also said it will post charges in 2017 of $1.5 to $2.0 billion in connection to a restructuring program announced in October. Shares declined $1 in a negative sector.

Late in the day news broke that Cark Icahn had taken a stake in the company saying he believed it was an acquisition target given the value in the company's pipeline of heart disease and cancer drugs. Shares rebounded 2% initially but faded into the close.

Unfortunately the intraday dip stopped us out of the position by 4 cents.

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.

Update 2/15/17: 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.

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:

Closed 2/21/17: Long March $52.50 call @ $1.11, exit $1.87, +.78 gain.


DVMT - Dell Technologies - Company Profile

Comments:

No specific news. Decent rebound off support. Now we need a new high.

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.

Update 2/15/17: 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.

Earnings March 9th.

Position 2/6/17:

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


MLNX - Mellanox - Company Profile

Comments:

No specific news. New 7-month high. Company will present at 29th Annual Roth conference on March 13th.

Original Trade Description: February 16th

Mellanox Technologies, Ltd., a fabless semiconductor company, designs, manufactures, and sells interconnect products and solutions. The company's products are used for computing, storage, and communications applications in the high-performance computing, Web 2.0, storage, financial services, enterprise data center, and cloud markets. Its products facilitate data transmission between servers, storage systems, communications infrastructure equipment, and other embedded systems. The company offers 40/56/100Gb/s InfiniBand solutions, including switch and gateway integrated circuits (ICs), adapter cards, cables, modules, and software, as well as switch, gateway, and long-haul systems; 10/40/56Gb/s Ethernet solution for use in EDC, HPC, embedded environments, hyperscale Web 2.0, and cloud data centers; and 10/25/40/50/56/100Gb/s Ethernet NICs. It also provides adapters to server, storage, communications infrastructure, and embedded systems original equipment manufacturers (OEMs) as ICs or standard card form factors with PCI express interfaces; and switch ICs to server, storage, communications infrastructure, and embedded systems OEMs to create switching equipment. In addition, the company supports server operating systems, including Linux, Windows, AIX, HPUX, Solaris, and VxWorks. Mellanox Technologies, Ltd. markets its products under the Mellanox, BridgeX, Connect-IB, ConnectX, CoolBox, CORE-Direct, GPUDirect, InfiniBridge, InfiniHost, InfiniScale, Kotura, Mellanox Federal Systems, Mellanox ScalableHPC, Mellanox Technologies Connect. Accelerate. Outperform, MetroDX, MetroX, MLNX-OS, Open Ethernet, PhyX, SwitchX, TestX, The Generation of Open Ethernet, UFM, Virtual Protocol Interconnect, and Voltaire trademarks. Company description from FinViz.com.

On February 1st, the company reported earnings of 82 cents compared to estimates for 86 cents. Revenue of $221.7 million missed estimates for $225 million. Shares crashed to a six-week low. Revenues did increase 17% and earnings up +6.5%.

The company said growth in its 25, 50 and 100 gigabit network solution was robust and would push strong multi-year growth across multiple sectors. Margin rose a whopping 24.9% to 71.6%.

They guided slightly weak for Q1 because of normal seasonal factors and $16 million in stock based compensation for employees.

Earnings May 3rd.

Shares crashed on the earnings but immediately began to rebound and have now risen above the pre-earnings level. Thursday's close was a breakout to a seven-month high.

Position 2/17/17:

Long June $50 call @ $2.80, see portfolio graphic for stop loss.


PANW - Palo Alto Networks - Company Profile

Comments:

No specific news. Recovered all the loss from Thursday.

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


QCOM - Qualcomm - Company Profile

Comments:

Qualcomm announced a new WiFi standard 802.11ax that is designed to provide added connectivity for IoT devices. Business Insider said there will be more than 22 billion IoT devices in operation by 2021 and more than $5 trillion will be spent on IoT devices over the next five years. Current WiFi protocols are not structured for the high number of in home devices expected in the coming years. The current communication protocols get bogged down in a high use environment. The 802.11ax standard will solve that problem and put Qualcomm at the top in what could become a crowded market.

Original Trade Description: February 15th

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.

Position 2/16/17 with a QCOM trade at $56.75

Long June $60.00 call @ $1.50, no initial stop loss.


SFLY - Shutterfly - Company Profile

Comments:

No specific news. Shares faded after joining the S&P-600 at the open. Traders who bought last week hoping for a big spike were disappointed and moved on.

Original Trade Description: February 15th

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.

Update 2/16/17: At 6:37 ET last night the S&P announced SFLY would be joining the S&P-600 at the open on Feb-21st. Shares gapped higher at the open to fill us at the high for the day.

Earnings May 3rd.

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

Position 2/16/17 with a SFLY trade at $46.15

Long June $47.50 call @ $3.00, no initial stop loss.


VAR - Varian Medical systems - Company Profile

Comments:

No specific news. Only a minor decline in a weak sector.

Original Trade Description: February 18th

Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. Company description from FinViz.com.

Varian reported lower than expected earnings on January 26th and shares fell -$6 to $87. Two days later, they spun off Varex and shares fell to $77 as a result of the separation. Since that split the stock has been moving higher and the rate of climb has accelerated over the last two weeks as they signed multiple new deals around the world.

Varian guided for earnings of $2.94-$3.06 for Q2 through Q4. For Q2 earnings are expected to be 84-90 cents on a 4% to 5% increase in revenues. The split at the end of January complicates apples to apples comparisons for Q1.

Earnings April 26th.

On February 13th the company announced competitive bid wins for six Shanghai hospitals. Varian is the leading manufacturer of medical devices and software for treating cancer and will provide its state of the art advanced radiotherapy technology to those hospitals. On February 14th, Varian's Eclipse treatment planning software was named the 2017 category leader for oncology treatment planning by KLAS. KLAS is an independent research firm specializing in monitoring and reporting on healthcare vendors.

Varian is on track to return to its pre-split price of $90 if the current rally continues. Because of its decline in February, I believe it offers some protection against a potential market decline.

Position 2/21/17:

Long May $85 call @ $2.75, see portfolio graphic for stop loss.


$VIX - Volatility Index - Index Description

Comments:

The VIX moved over $12 again at the open and even with the rebound in the markets, the VIX still posted a minor gain. There is definitely a lot of put buying in progress.

The March VIX call is worth $1.50 today, 25 cents less than our cost. I am recommending we close the March position and reload with an April $13 call. I do not like to own the front month with less than 3 weeks to go. I am pretty confident we will see a volatility event between now and April expiration. I would rather take a minor hit now and be in a better position for a market decline later.

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.

Close the March position.

Buy April $13 call, currently $2.35, no initial 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. An excellent $1 gain to a new 52-week high.

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 customer's 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.

Update 2/15/17: 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.

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 biotech sector was weak again today with the BTK losing 0.5% while all the other indexes were positive.

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:

I am closing the March put and recommending we reopen it as an April position. The Nasdaq 100 is extremely overbought and there has got to be a headline in our future that is going to cause a significant decline.

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.

Close the March put position.

Buy April $128 put, currently $1.65, no initial stop loss.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now