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Daily Newsletter, Saturday, 2/25/2017

Table of Contents

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

Market Wrap

Saved at the Bell

by Jim Brown

Click here to email Jim Brown

The Dow did not turn positive on Friday until the last 30 seconds of trading but it kept the streak of gains alive.

Weekly Statistics

Friday Statistics

The dip was bought on Friday with the Dow down 73 points and the Nasdaq down -34. The other indexes returned to positive territory throughout the day but the Dow waited until the last 30 seconds of trading to turn green. Another dip bought and another record close in the books. There was $1.5 billion to buy in market on close orders on the NYSE.

For everyone who is still waiting for a market decline so that overbought conditions can be equalized, I give you the following cartoon from Hedgeye. This has been the trend since the election and apparently, it is going to continue until buyers run out of money.


The economic reports were slightly negative but the market was already rebounding then they were released. The New home sales for January rose from 536,000 to 555,000 but that was well under the consensus estimate for 570,000 and Moody's forecast for 588,000. The recent peak in sales was 622,000 back in July.

January sales rose 3.7% from December and +5.5% over January 2016. The median price of a new home rose 7.6% YoY to $318,900. The Northeast saw the biggest percentage gain at 15.8% with the Midwest second at 14.8%. The South recovered from five months of negative sales to rise 4.3% and the West posted its first sales decline since September at -4.4%.


The end of month revision for Consumer Sentiment for February rose slightly from the first reading at 95.7 to 96.3. This is still down 2.2 points from the 98.5 in January. This was the first monthly decline since October. January was a multiyear high.

The present conditions component rose from 111.3 to 111.5 and the expectations component declined from 90.3 to 86.5. That could be due to the waning honeymoon period that the new president was enjoying. Consumers are founding out that promises are easier than action in a divided government. Only 35% of respondents now expect their incomes to rise in 2017.


We have a very busy economic calendar for next week but the key event is the president's speech to a joint session of congress on Tuesday night. It is not officially a State of the Union speech but it will pass for that since there is no SOTU in inauguration years. Reports claim it will be a victory lap of sorts with the president restating all his victories and the things he has done since the election. He will also restate his promises for what he expects to get done in 2017.

The challenge here is that the president is stuck in a routine of giving campaign speeches and boasting rather than giving specifics about what lies ahead. In this particular prime time speech, he will have a full audience and they will be looking for a full meal of red meat. If there are no plan specifics and too much boasting, we could see a sell the news event on Wednesday. The market has rallied for four months on expectations without any details. If investors find that the emperor has no clothes there could be a general depression settle over the market until such time as actual details emerge.

Do not get me wrong. I believe the president has great intentions and the capability to do great things for the economy as long as he does not get bogged down in the political circus and spend too much time fighting the press. The senate is still delaying his cabinet appointments and this is the longest any president has gone without having his cabinet approved. There is a phrase that goes something like this. "When you are up to your neck in alligators, it is hard to remember that your initial objective was to drain the swamp." That means it is easy to lose sight of the initial objective and be caught up in tasks and subtasks that are only remotely related to the original goal. If the president gets caught up in fighting the minor battles, it could significantly slow the bigger goals.

I am not the only investor that understands these facts. If the speech is a letdown for whatever reason, the market could suffer.

The Richmond Fed Manufacturing Survey and the ISM Manufacturing Index are the next two reports of importance. Everything else is important but they are not market movers.


There was a flurry of earnings on Friday but JC Penny (JCP) and Foot Locker (FL) garnered the most headlines.

JC Penny reported earnings of 64 cents that beat estimates for 61 cents. Revenue of $3.96 billion was just shy of consensus estimates for $3.97 billion. They guided for full year earnings of 40-65 cents. Analysts were expecting 52 cents and that is right in the middle of the guidance. The company said it was closing 140 stores and cutting 6,000 workers in order to adjust to the world of lower mall traffic and strong online competition. They are also shutting two distribution centers. The restructuring will save Penny about $200 million a year and they will take a $225 million charge in Q2. Penny's sales are less than half what they were at the peak in 2002. They forecast same store sales of -1% to +1% for 2017.


Foot Locker reported earnings of $1.37 that beat estimates for $1.31. Revenue of $2.11 billion matched street estimates. Full year profits were $4.91 per share. Same store sales rose 5.0% and beating estimates for 4.5%. The CEO said "we are facing a challenging retail sales environment as we enter 2017. However, we believe the strategic initiatives we have in place, coupled with strong vendor relationships, will enable us to deliver another year of record performance." Marketing 101. Paint a grim picture of the problems you will have to overcome but promise to do your best. If events go against you, the warning was there. If events turn out in your favor, you did a good job under tough circumstances.

The company cited strong demand for Nike, Puma and Adidas shoes but did not mention Under Armour. Shares spiked 9% on the earnings.


Applied Optoelectronics (AAOI) reported earnings of 84 cents compared to estimates for 79 cents. Revenue of $84.9 million beat estimates for $82.7 million. Guidance for the current quarter was 80-88 cents with revenue between $87-$91 million. AAOI makes fiber optic components used by cable TV providers. Shares spiked 23% to $46 on the news. They were under $10 in June.


Intuit (INTU) shares spiked 6% after the company reported earnings of 26 cents compared to estimates for 25 cents. Revenue of $1.02 billion met estimates. They guided for current quarter revenue of $3.5 to $2.55 billion and analysts were expecting $2.45 billion. The tax season got off to a slower than normal start and the company said activity was finally starting to increase.


Berkshire Hathaway (BRK.B) reported a 15% increase in earnings for Q4. The company reported adjusted earnings of $2,665 per share compared to analyst estimates of $2,717. Warren Buffett said that "absent a recession, earnings will likely grow in 2017 thanks to the acquisition of Duracell and Precision Castparts." Berkshire shares rose 29% in 2016.

Berkshire disclosed the company had paid an average of $110.17 for 61.2 million shares of Apple and that position is up $1.6 billion since the acquisition. Buffett also said the company bought $12 billion in stocks immediately after the November election. Berkshire shares are up 18% since the election.

In Q4 Dow Chemical (DOW) converted Berkshire's $3 billion in preferred shares into more than $4 billion of common stock. Dow shares rose more than $11 in Q4 so that worked out for Berkshire.

Buffett's letter to shareholders is always insightful reading. Here it is in PDF form: Warren Buffett Letter to Shareholders


Despite the Q3 earnings cycle coming to an end there are still some good sized companies reporting next week. Priceline, Costco, Broadcom, Sears and Best Buy are the highlights.


According to Factset, 92% of S&P companies have reported Q4 earnings and 66% have beaten estimates with 52% beating on revenue. Blended earnings growth for Q4 is now 4.9%, up from estimates for 3.1% on December 31st. For Q1, 67 companies have given negative guidance and 31 have issued positive guidance. The forward PE for the S&P is now 17.7 compared to the ten-year average of 14.4.

Dow component Goldman Sachs (GS) was downgraded from hold to sell at Barenberg based on valuation. The company said all the good news was already priced into the stock. Goldman fell -3.84 and knocked more than 26 points off the Dow.

Goldman warned they did not believe the market rally would continue. They said investors are reaching "the point of maximum optimism" that will eventually lead to a pullback. They reiterated their call for the S&P to close out the year at 2,300, below its current level of 2,367. They believe the market could gain another 2% during the year but decline 4% from that level to reach their end of year target.

Goldman said investors have grown too confident that tax cuts and other initiatives would have a major impact on the economy. Goldman said once investors realize that policies do not change overnight and this is a long-term process, the market will have to adjust. David Kostin said, "Financial market reconciliation lies ahead. We are approaching the point of maximum optimism and the S&P will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tail wind to corporate earnings than originally expected." He also warned that guidance with Q4 earnings was slightly negative with full year guidance down 1%. He said there was "cognitive dissonance" in the market with expectations outpacing reality. Investors are feeling optimistic while analysts are cutting expectations based on guidance and economic data.


The king has fallen. Nvidia (NVDA) has crashed. If you believe all the hype "now is the time to sell." Seriously? The double top at $120 would have been the time to sell. Now is the time to buy. Nvidia is at the leading edge of technology today and nobody else is even close.

Short seller Citron Research said they closed their short on Nvidia after making a good call on December 28th. Citron had targeted $90 but said the quick decline to $95 as of Friday morning had exhausted the sellers.

Helping accelerate the decline was a downgrade from buy to sell by Romit Shah at Nomura. He had a call similar to the Goldman call on the market saying investors were at maximum optimism on Nvidia. He cut his price target from $100 to $90.

On January 31st, Nvidia was the second most shorted stock by hedge funds according to market cap with 7% of the shares sold short. This is what makes a market. On Friday, UBS reiterated a buy rating with a $132 price target saying datacenter sales would double.

At the opening low on Friday, Nvidia shares were down nearly $15 in two days as investors began to take profits in Nasdaq stocks. With support at $99 and a $25 decline since February 10th, the stock has gone from being very overbought to very oversold.

I am disappointed it broke through the 50-day average but things happen. That has been support for the last 15 months. I firmly believe any decline in Nvidia is a buying opportunity and this is definitely a bargain level. I have said several times in these pages I would like to see a dip to $90 as an opportunity but I am doubtful we are going there unless the market corrects.


Citron said they were transferring their profits in Nvidia into a short on Mobileye. Citron called them a one-trick pony. In the self-driving sector they are "bringing a knife to a gunfight" according to Citron. They are competing with Google, Apple, Nvidia, Uber and dozens of other companies but they are spending less on R&D and trying to rest on their early engineering advances. However, they have been bypassed in the sector. Even Tesla has dropped their technology. Insider sales have been booming and their PE is twice that of Nvidia. Citron is targeting $35 on MBLY.


Prison stocks exploded higher after the new Attorney General Jeff Sessions signaled a reversal of the Obama directive to phase out private prisons. The prior administration directed the Bureau of Prisons to withdraw or decline contracts for private prison operators at their expiration. Session issued a memo on Thursday saying the prior directive "impaired the Bureau's ability to meet future needs of the correctional system."

Prison stocks have been moving rapidly higher since President Trump won the election in anticipation of the prior directive being rescinded. Stocks had fallen about 50% after the initial directive was issued.



CBOE Holdings (CBOE) will replace Pitney Bowes (PBI) in the S&P 500 at the open on March 1st. PBI will replace CBOE in the S&P-400. CBOE is acquiring Bats Global Markets (BATS) and the combined company will have a market cap worthy of the S&P-500.

Incyte Corp (INCY) will replace Spectra Energy (SE) in the S&P-500 at the open on Tuesday. Spectra is being acquired by Enbridge (ENB).

Regency Centers (REG) will replace Endo International (ENDP) in the S&P-500. Endo will replace Regency in the S&P-400 and Nuskin (NUS) will replace Equity One (EQY) in the S&P-400 at the open on Thursday.

Dillards (DDS) will replace Intersil Corp (ISIL) in the S&P-400 at the open on Tuesday. CyrusOne (CONE) will replae Clarcor (CLC) in the S&P-400 on Wednesday at the open. Clarcor is being acquired by Parker Hannifin.

Here is one for the "What the heck" category. On the 17th, somebody bought 70,000 of the Union Pacific (UNP) January $130 calls for $2.57 each. I made a note of it but never got back to do the research. When I was reviewing my notes this weekend I discovered that somebody had bought 140,000 of those calls and sold 140,000 of the January $150 calls at 50 cents. They put on 70,000 contracts on January 30th and another 70,000 contracts on February 17th. This is important because they spent just over $29 million in premium to put on this January spread with UNP at $108. I am betting that you have to be pretty sure of a trade to invest $29 million for a spread that is roughly $25 out of the money.

Somebody knows something. After Warren Buffett bought BNSF Railway, maybe somebody else is looking to grow by acquisition. I have no clue what is going on but you do not bet $29 million just because you are feeling lucky.


Crude prices continued to tick slowly higher as we near the end of February and should start getting some production cut numbers from OPEC. They continue to brag about how successful this program is but talk is cheap.

Meanwhile energy equities continue to slide and most stocks at three-month lows. There is definitely a disconnect between crude prices and equities. This is typically a low point of the year for energy equities and we are definitely approaching a buying opportunity.



The growth in active rigs slowed last week with a net gain of only 3 rigs. Gas rigs declined -2 to offset a gain of 5 oil rigs. We may have reached a saturation point until crude prices move over that $55 resistance level. At $60, we could see another wave of activations.


 


 

Markets

The Dow has closed at a record high for 11 consecutive days. That is the longest streak since 1987. If the Dow can stretch that streak to 13 days, that will be the longest ever. Thanks to the barely positive close on Friday, the streak of daily gains is now tied with the longest in 25 years. The Dow gains have been an exercise in stock rotation. There have been different winners nearly every day and yesterday's winners can be today's losers only to revert back to leaders over the next couple days. It has been interesting to watch.

The Dow is only 179 points from Dow 21,000. At this point, it would seem inconceivable that we will not touch that level in the next several days except for the possible volatility event surrounding the president's speech on Tuesday night. That could be a major pothole in the market road or a launching pad for a new leg higher. It all depends on the tone, substance and delivery of this critical speech.

Friday's gains came on the back of Home Depot's earnings, which are still powering a move higher in HD shares plus an outsized gain in Johnson & Johnson. The number of positive stocks helped to overcome the declines in the six big losers. The energy sector and financial sector were both weak and provided an anchor for the index.

The Dow is up 2,898 points since the election and real support is nonexistent above 20,000. The actual support is coming from the dip buyers rather than a line on the chart where technicals provide guidance.



The S&P closed at a new high on Friday and is well above support at 2,300 and the rising 30-day average. The 2,350 level would probably produce a decent pause on any material decline. Friday's gap down open only succeeded in reaching 2,355.

The 2,300 level would now be a 3% decline and should be major support if there was an earthquake on Wall Street.


The Nasdaq broke its string of gains with the decline on Thursday and Friday's rebound came mostly at the close with the index in negative territory until 15 min before the bell. This would probably qualify as three consecutive down days despite the spike at the close. While there was a solid top on the index at 5,828-5,830 for the majority of the day, the intraday candles were progressively shorter as the dip buyers pressed the sellers. The final breakout in the last 15 minutes was a capitulation event on an intraday scale. Initial support is now 5,800.



The Russell 2000 struggled back from a 12-point decline to close flat with only a .10 loss. The Russell did make a lower low at 1,382 and continues to fight the prior resistance at 1,400. The small cap stocks are trying to shake off the depression but they need another injection of tax cut expectations to provide stimulus. The Russell was up 16% after the election and they have stalled at that early December resistance at 1,395 for the last three months. That is a long time to trade sideways in an otherwise bullish market. When a Russell move finally appears it could be strong regardless of direction.


You may have noticed that the bond market has decided it no longer believes in the equity rally. Treasuries are suddenly being bought in volume and the yield on the ten-year treasury closed at 2.317% on Friday and a three-month low. This is important. If treasuries are suddenly seeing large inflows of cash, it means equities have a little less firepower behind their record run. Bond investors appear to be losing confidence in the potential for big political changes. This could be a warning for equities.


This has turned into a "hold your nose and buy" market. The meltup has been gradual rather than a violent rally and that is actually the best kind. It is just hard to look at a chart that has been breaking out to new highs for several weeks and get excited about buying that chart.

Sometimes you have to "just do it" (Sorry Nike) and take the plunge. Just keep your position sizes manageable since we all know there will be a day of reckoning eventually.



Random Thoughts


The bullish sentiment rose by 5.4% to 38.5% and the highest since January 12th. Bearish sentiment remains only 1.5% below the highest level since the week before the election. The survey ends on Wednesday and that was before the late week softness.

Last week results


According to CFRA's Sam Stovall, since 1945 there have been 27 times when the S&P made positive gains in both January and February. The S&P went on to post gains for the full year in 27 of those 27 years with an average annual gain of 24%. Sam cautions with the "past performance is no guarantee of future results" warning.

February is typically the second worst month of the year for the S&P. The S&P has now seen 93 sessions without a 1% decline. The last time the S&P lost 1% in a single day was October 11th and the Cubs were in the World Series. Source




Cybersecurity is going to get a lot tougher this year. Security company FireEye said Iran and Russia were actively trying to penetrate government and military installations not only in the U.S. but also in Europe. The company said the new administration has created a lot of uncertainty that foreign adversaries are trying to unravel with their hacking.

Iran is not just intent on hacking to gain information. They were credited with destroying more than 10,000 computers in Saudi Arabia with the malware called Shamoon. If Iran were to go proactive against the U.S. there could be serious consequences. U.S. computers focus their protection on firewalls to prevent intrusions. There is little or no protection once a firewall is breached and that could lead to entire networks being taken down by Iranian malware.

FireEye said Russian hackers were very active around political institutions in Europe with a target of disrupting or influencing the coming elections. Russia is also planting false news and creating an "information operation" using social media trolls. Source


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"In my many years I have come to a conclusion that one useless man is a shame, two is a law firm and three or more is a government."

John Adams


 

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Index Wrap

Fork in the Road

by Jim Brown

Click here to email Jim Brown
The market rally is headed for a fork in the road with the president's speech on Tuesday evening.

This could be a pivotal moment for the market with the potential for a crash and burn, sell the news event or a new leg higher to even more records.

The key will be the tone, substance and delivery of the speech to the joint session of congress and the prime time TV audience. The market has been running on expectations for a major cut in corporate taxes, a significant drop in regulations, the replacement of Obamacare and a trillion dollar infrastructure spending program. So far, none of those expectations have come to pass but the deregulation portion has at least been started.

Investors will want to see Trump deliver a detailed speech in a calm presidential manner where he spells out coming attractions without a lot of hype and campaigning. That may be too much to ask of the citizen statesman. He is not a polished public speaker and viewers will be comparing his delivery to that of President Obama, who was an accomplished orator. I hope President Trump is successful because the market may not be kind to a less than stellar performance.

The Dow surged at Friday's close to turn positive only in the last 30 seconds of trading after rebounding from a 74 point drop at the open. This was the 11th consecutive record close and the longest streak since 1987. If the Dow can add two more days of gains it will be the longest streak ever.

The Dow is not as overbought as the Nasdaq 100 was last week but it is close. However, the index has benefitted from a new set of stocks leading it higher every day. There has been an interesting rotation sequence among the components.

As you can see from the chart below that 11 day string of gains is unsupported. The RSI has flattened out over the last several days but Friday's close at 81.79 is well below the 87.4 reading back on December 13th. The RSI and MACD don't tell us if the market is going up next week. They only tell us the degree of overbought and the potential for a reversal.

In this market, the technicals have not mattered. The market is trading on optimistic expectations. Unfortunately, reality has a habit of spoiling the party.

The Dow has a new target at 21,000 and closed only 179 points below that level on Friday. It is entirely conceivable that we touch that level on Tuesday and then position for a sell the news event at the close. If the performance is positive we could be headed even higher on Wednesday.


The S&P-500 closed at a new high on Friday after falling back to use 2,350 as support. The progress of the S&P has been a little more volatile than the Dow and last week's tight range suggests it could move higher next week. The RSI is hovering right at 80 and still overbought.

If we were going to see a normal 3% decline, that would only take us back to 2,300 and that level should be good support. That would be a good buying opportunity.

The S&P has gone 93 trading days without a 1% decline in a single day. If it can make it two more days, it will be the 12th longest streak since 1950. The longer the streak, the sharper the eventual decline.


The Nasdaq Composite has begun to show some cracks in the foundation. The indicators have rolled over but that simply shows the momentum has slowed thanks to a couple days of index declines. The 5,800 level was support on the dip and I would not be surprised to see it tested again.


The Nasdaq 100 ($NDX) declined enough over two days to subtract 5 points from the overbought RSI. The index is still overbought but those two declines did wonders for the animal spirits still in buy mode. They were unable to lift the index back into record territory but it was a decent rebound from the 28-point drop at Friday's open. The longer this uptrend remains intact the bigger the correction when it comes.


The small cap Russell 2000 has traded sideways since December 9th. The 16% post election rally has held but the index has been unable to add to its gains.

I looked at about 300 small cap charts this weekend and there were less than 25 that were bullish. I am surprised the Russell has held up so well with so many bearish components. If the index dips back below 1,380 I believe we could see a retest of 1,350 or lower. The MACD is about to turn negative.


The Russell 3000 chart is similar to the Dow with a stutter step at the top last week. It is encouraging to see the broadest market index duplicating the moves of the narrowest market index. This is confirmation this is a broad market rally at lease in the big caps indexes.


I have shown this chart periodically over the last year. This shows the expected move on a technical breakout from the 2015 consolidation pause and the early 2016 market crash. The range of the two-year consolidation was 324 points. That suggests a breakout or breakdown will run about 324 points. That targets 2,458 on the upside and the S&P closed at 2,367 on Friday. This chart is not time dependent so there could be pauses in the breakout and still be valid. However, when/if the 2,458 level is reached, that would be a bearish signal on a technical basis.

I built this chart after the January dip in early 2016 and I have changed nothing since then. This is a control against letting short-term market bias get in the way of longer-term market direction.


Hopefully investors will find something in the speech that gives them confidence and keeps them in the market. However, even if we do get a sell the news decline, it does not mean the rally is over. It would only mean the optimism is being reduced. Long term, there will be policy changes and they should be good for the economy and that will keep investors interested for the rest of 2017. The dips will continue to be bought, but they may be deeper than what we have seen since last October.

I do not see any potential for a bear market unless the border tax is implemented in a way that causes significant inflation or even a recession. All the rest of the proposed policies are market positive.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Defense First

by Jim Brown

Click here to email Jim Brown

Editors Note:

The defense sector has been on fire since the election on expectations for a flurry of new programs and new life for old ones. The Harris Corporation is a communications company. They handle real time military communications of all types. They are the leader in their field.


NEW DIRECTIONAL CALL PLAYS

HRS - Harris Corporation - Company Profile

Harris Corporation provides technology-based solutions that solve government and commercial customers' mission-critical challenges. The company operates in four segments: Communication Systems, Space and Intelligence Systems, Electronic Systems, and Critical Networks. It designs, develops, and manufactures radio communications products and systems, including single channel ground and airborne radio systems, 2-channel vehicular radio systems, multiband manpack and handheld radios, multi-channel manpack and airborne radios, and single-channel airborne radios, as well as wideband rifleman team, ground, and high frequency manpack radios. The company also offers secure communications systems and equipment, including Internet protocol based voice and data communications systems, as well as single-band land mobile radio terminals and multiband radios comprising a handheld radio and a full-spectrum mobile radio for vehicles. In addition, it provides earth observation, environmental, geospatial, space protection, and intelligence solutions, such as sensors and payloads, as well as ground processing and information analytics for security, defense, civil, and commercial customers; and positioning, navigation, and timing products, systems, and solutions. Further, the company offers electronic warfare, avionics, wireless technology, command, control, communications, computers and intelligence, and undersea systems solutions for aviation, defense, and maritime applications. Additionally, it provides managed services that support air traffic management, energy and maritime communications, and ground network operation and sustainment; and information technology and engineering services to government and commercial customers. The company has a collaboration with Boeing for the development of avionics technology for military aircraft. The company was founded in 1895. Company description from FinViz.com.

The reported Q4 earnings of $1.42 compared to estimates for $1.37. Revenue of $1.7 billion missed estimates for $1.76 billion. The company guided for full year earnings of $5.40 to $5.60 per share on revenue of $5.76 to $5.88 billion. Analysts were expecting $5.78 and revenue of $7.16 billion. Harris is known for low balling guidance.

Earnings and guidance were apples and oranges because of several acquisitions and asset sales. Long cycle business were growing along with operating margins. Radio and tactical orders were added to the backlogs. They are using the sale proceeds from various asset sales to pay down debt and invest in future products.

They just received new contracts from the Air Force for navigation payloads for new GPS III satellites. Their actual earnings release is hard to read despite being filled with dozens of new major contracts. All the buyers are classified so there are no names other than "middle east country" "European country" etc. Some are so classified they cannot even disclose that information.

Harris enjoys a unique niche in the defense space. Harris supports more than 100 countries. The company is organized into three business segments: Communication Systems, Space and Intelligence Systems and Electronic Systems.

Earnings are May 4th.

HRS made a new high on Tuesday and then pulled back for two days. Friday saw shares return to the Tuesday high in preparation for a breakout.

Harris has relatively wide spreads. The spread on the option we are using is $1.65x$2.30. As we move farther into the calendar the spreads will tighten. However, that precludes using a stop loss until we have built up some gains.

Buy May $115 call, currently $2.30, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

It Is Alive!

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow rebounded back from a 76-point decline at the open to end the day positive and keep its string of gains alive. The Dow has now closed at record high for 11 consecutive days. That is the longest streak since 1987. Two more days and it will be the longest ever. The Dow rebounded 66 points in just the last 30 minutes and was negative right until the close when a burst of buying in Merck, Disney, UnitedHealth and Apple rescued it from breaking that string.

The dip buyers are alive and well and I am starting to believe there will be no correction in the near future. Every minor dip is being bought and the market cannot build up any speed to the downside before it is blocked.



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


PANW - Palo Alto Networks

The long call position was stopped at $149.65.



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. Three consecutive days of great moves on no news. Definitely no complaints here.

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.

Update 2/21/17: 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.

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:

No specific news. No news yet on the size of the Icahn stake. No volatility today, just a decent move higher to a 2-month closing high.

Original Trade Description: February 21st

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.

Position 2/22/17:

Long June $57.50 call @ $2.78, no initial stop loss.


MLNX - Mellanox - Company Profile

Comments:

No specific news. New 7-month closing high.

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:

We no longer have to decide if we are going to hold over earnings. The big gap lower open on the Nasdaq caused a gap lower open on PANW and we were stopped out at the low for the day. A really nice position turned into just a minor gain of $1.65. The option prices rebounded several dollars higher just 10 min after the open. If PANW did not have earnings coming up on Tuesday, I would immediately go back into a new position. Now we have to wait until Wednesday and hope there is not a $10 post earnings spike.

There was no news. The drop was totally market related.

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:

Closed 2/24/17: Long March $145 call @ $6.00, exit $8.73, +2.73 gain.
Closed 2/24/17: Short March $155 call @ $3.15, exit $4.23, -1.08 loss.
Net $1.65 gain


QCOM - Qualcomm - Company Profile

Comments:

Qualcomm announced support for Amazon's Alexa service on Bluetooth devices including headphones, speakers, hearables and fitness accessories. Users will be able to speak the Alexa wake word and the devices will pass the requests to Amazon's Alexa service for things like weather, news, sports, markets, music, etc.

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.

Update 2/21/17: 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.

Update 2/22/17: Qualcomm announced a joint venture with GE Digital and Nokia to create LTE hotspots for individual companies with large facilities. The concept is to provide a large area like a factory, rail yard, port or mining complex with a wide area WiFi to enable "Industrial Internet of Things" (IIoT) devices.

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. The decline rate increased and we missed being stopped by 5 cents. Rather than close it today I will leave it open and ANY decline on Monday will stop us out. Any rebound gives SFLY another chance to run.

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. Continued rebound to a new 4-month high.

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:

Another spike over $12 intraday when the Nasdaq was down hard at the open but the rebound caused the VIX to fade again.

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 2/22/17:

Long Apr $13 call @ $2.30, no stop loss, profit target $17.

Previously Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.
Previously Closed 2/22/17: Long March $12 call @ $1.75 adj, exit $1.65, -.10 loss.


VMW - VMWare - Company Profile

Comments:

No specific news. Decent rebound from the market induced opening drop.

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.



BEARISH Play Updates (Alpha by Symbol)

QQQ - Nasdaq 100 ETF - ETF Profile

Comments:

There are no sellers. The big opening drop in the Nasdaq was quickly bought and the major indexes closed positive. I am going to leave this open until after the president's speech to Congress next Tuesday, just in case there is a sell the news event. If that does not occur, I will close the position. There are simply too many dip buyers.

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 Apr $128 put @ $1.59, no stop loss.

Previously Closed 2/22/17: Long March $127 put @ $1.29, exit .50, -79 cent loss.


YELP - Yelp Inc - Company Profile

Comments:

No specific news and only a minor decline after the 2% drop on Thursday.

Original Trade Description: February 22nd

Yelp Inc. operates a platform that connects people with local businesses primarily in the United States. Its platform covers various local business categories, including restaurants, shopping, beauty and fitness, arts, entertainment and events, home and local services, health, nightlife, travel and hotel, auto, and others categories. The company provides free and paid business listing services to businesses of various sizes, as well as enables businesses to deliver targeted search advertising to large local audiences through its Website and mobile app. It also provides other services, including Yelp platform, which allows consumers to transact directly on Yelp; Yelp deals that allow local business owners to create promotional discounted deals for their products and services; and gift certificates products for local business owners to sell full-price gift certificates directly to customers. The company's Yelp platform enables consumers to complete food delivery transactions, book spa and salon appointments, order flowers, make winery reservations, and others. It also serves customers in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Mexico, the Netherlands, New Zealand, Norway, the Philippines Poland, Portugal, Singapore, Spain, Sweden, Switzerland, Turkey, and the United Kingdom. Company description from FinViz.com.

Yelp reported earnings on February 9th of 27 cents that easily beat estimates for 25 cents. Revenue of $194.8 million barely beat estimates for $194.3 million. With an earnings beat you would have expected the stock to rally strongly. That was not the case.

The company guided to revenue of $195-$199 million and analysts were looking for $204.4 million. Full year guidance was $880-$900 million.

The challenge was slowing growth. In Q2 they added 7,400 accounts. In Q3 6,600 accounts and in Q4 only 2,800 accounts. Yelp says its addressable universe is more than 20 million local businesses but they only have 138,000 active advertisers. It is far too soon for growth to be slowing at that fast a pace.

They are also seeing a decline in website traffic and app usage.

The problem is competition. Amazon, Google and Facebook are breaking into the market with new offerings. Other copycat sites like Munch Ado are stealing their customers.

Yelp pulled back from its focus on national brands and is concentrating on local business advertising, which is the bulk of their business. They are aggressively cutting costs as evidenced by the earnings beat but that only works so long if the new advertiser growth is slowing and consumer usage is fading.

Piper Jaffray called the guidance lackluster and said a "confluence of factors" will cause further decline in Yelp traffic in the future.

Earnings May 11th.

Shares have been declining steadily since earnings and have now moved under support at $35.

Position 2/23/17:

Long APR $33 put @ $1.55, see portfolio graphic for stop loss.




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