Option Investor
Newsletter

Daily Newsletter, Monday, 2/27/2017

Table of Contents

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

Market Wrap

Quietly Waiting

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The broad market quietly set new all time highs, waiting for the State of the Union Address scheduled for Tuesday. Today's action was light, volume was low and direction was mostly sideways. Just like last week, when the indices were down at near term support levels buyers stepped in to drive prices back up.

Today's action received some support from President Trump. He spoke to the National Governor's Association about his budget plan to be released in a few weeks. He says it is a safety and security plan, and one focused on infrastructure and defense spending.

International markets were also in wait-and-see mode. Asian indices fell hardest, shedding about a half percent on average. The Nikkei led with a drop of -0.90%, others in the region fared a little better. European indices were more mixed, opening with small gains and then falling back to hover near break-even the remainder of the day.

Market Statistics

Futures trading indicated a flat to slightly negative open for most of the morning. Action was choppy throughout the pre-open session with some upward movement going into the opening bell. The open was negative, the S&P 500 posting an initial loss of just over -2 points, and downward pressure persisted the first 15 minutes of trading. By 9:45AM intraday bottom had been hit and was not touched again. That being said, action was muted all day. Once bottom had been hit the indices drift upward to break-even and, in some cases, into new all-time high territory. The next few hours saw the market drift sideways, bobbing over and under break-even levels until late afternoon. Late day trading saw the indices move up to the highs of the day, where they held until the close of trading.

Economic Calendar

The Economy

Today's economic calendar includes the Durable Goods report and Pending Homes Sales. Durable Goods was reported before the bell and was as expected, up 1.8%. Stripping out transportation durable orders is down -0.2%, ex-defense is up 1.5%. On a year over year basis headline durables orders are down -0.8%. Transportation equipment was the strongest segment, up 6%.

Pending Homes sales came in at -2.8%, well below the expected +1.0% predicted by economists and a 12 month low. The reason for the decline are historic low levels of inventory and rising prices, prices rising due to supply/demand imbalance. On a year over year basis pending sales are up 0.4%. Sales are expected to remain sluggish with upward pressure to prices so long as inventory remains low. What I think we can expect to see now, and there is some evidence of it, is renewed activity among the home-builders.

Moody's Survey Of Business Confidence fell -0.6% to 33.1. The index is hovering just below a multi-month high and indicative of stabilizing sentiment. Mr. Zandi says that global businesses remain upbeat and performing at the high end of expectations. The North America is strongest, South America weakest with Europe and Asia both cautious.


Just over 92% of the S&P 500 has reported earnings this cycle, of those 66% have beaten EPS estimates and 52% have beaten revenue estimates. The averages are on the low side of trend, suggesting that companies are having a harder time beating estimates. This could be because 1) companies are doing worse than low-ball estimates expect or 2) estimates this season are a little more aggressive than they have been. Based on the evidence I think it is a combination of the two, those doing poorly are doing worse than expected and those doing well are not quite doing as much better-than-expected as trends suggest. To date, the blended rate is only 4.9%, trends suggested it would go as high as 7% or 8% by end of season but that does not look likely now.


Looking forward expanding growth is still in the forecast. Full year 2016 growth is hovering at 0.4% and will likely remain there. Looking out to 2017 full year growth is expected in the range of 10% and that goes up for 2018 to 11.8%. First quarter 2017 is projected at 9.3%, down -0.3% from last week, while 2nd quarter expectation is holding steady 9.0%.


The Dollar Index

The Dollar Index held steady in today's session as the market awaits a busy couple of weeks. To stat with there is the State of the Union Address tomorrow night, any talk of tax plans, spending, job creation etc could easily support the dollar. After that this week is fairly heavy with data, next week even more so, and then after that the FOMC meeting. In terms of rate hike, expectation is on the rise. The March meeting is now showing a 33% chance of at least a quarter point hike with May at 54% and June over 70%.

This week, in terms of data, the most important piece may be the Fed's Beige Book scheduled for Wednesday afternoon. Today the index posted a small gain after testing support at the $100.50 level. Support is confirmed by price action, the short term moving average and the indicators although it may be tested again. A break below support is bearish near term with downside target near $99.50 and then $98.65. A bounce would be trend following with upside target near $103.00.


The Gold Index

Gold prices held fairly steady in today's session, first up about a half percent and then down about a quarter percent. Today's action is in response to the dollar and supported by economic/political uncertainty stemming from the Trump administration. That being said I see the dollar moving higher and gold moving lower.

The gold miners did not rise, or even hold steady, in today's session. The Gold Miner's ETF GDX fell nearly -4.5%, diverging from gold prices and perhaps foreshadowing a fall in the underlying metal. Today's action breaks support at $23.50 with downside target near $21.50. The risk now is that gold won't fall, if so the sell-off in the miners could be overblown and may snap-back with quickness.


The Oil Index

Oil prices closed with small gains after an early surge of 1%. The move up was driven by hopes of supply/demand rebalance and rising prices but was quashed by reports of stockpile builds out of the Cushing supply hub. Oil prices remain range bound in the near term and winding up for what could be a big move. The only question now is if production will continue to outpace demand.

The Oil Index gained nearly a full percent in today's session, rising up from Friday's test of support. Support is the 1,200 level, the top of last years nearly 8 month trading range, and confirmed by the indicators. A drop below this level would be bearish with a near term target near 1,175 or 1,150. Longer term outlook is bullish, earnings growth is expected, so I am bullish on the sector. A move up from 1,200 would be trend following, a break above 1,250 would be bullish with upside targets near 1,300 in the near term.


In The News, Story Stocks and Earnings

Tenet Health Care reported earnings after the closing bell and did not meet expectations. The hospital operator posted growth across all segments but earnings were impaired due to restructuring and legal expenses. Shares of the stock fell more than -10% on the news.


Priceline reported after the closing bell and blew past estimates. EPS of $14.20 beat estimates by more than a dollar and sent shares soaring in after hours trading, revenue was also well above estimates. Next quarter guidance was weak, in the range of $8.50 compared to consensus of $10.72, but did not hinder trading. Shares of the stock gained more than 3.5% after the release.


The VIX rose modestly today, gaining a little less than 6%. The candle is a small one, nothing alarming, but it is the 8th close above the short term moving average. Today's action is still below resistance at 12.50 but that may be tested or broken. The indicators are consistent with range bound trading but also bullish suggesting a test of resistance could come. A break above 12.50 would be bearish for the market in the near term. Until then the index remains very low and indicative of relative market calm.


The Indices

Today's action was much like Friday, only a little less active. The early part of the session saw the indices retreat to near term support, mid-day that support was turned into a base and late day that base led to new all time highs (in some cases). Leading the charge, but not setting a new all time high, was the Dow Jones Transportation Average with a gain of 0.56%. The transports created a medium sized white bodied candle extending a bounce from support and the short term moving average. Today's action is trend following but nit quite confirmed by the indicators. Both MACD and stochastic are in process of rolling into trend following signals but have yet to complete the move, MACD looking set to do so tomorrow provide action is to the upside. A continuation of this move has an upside target at the current all time high with the possibility of new all time highs. Support is near 9,250, a break below there is bearish in the near term.


The NASDAQ Composite made the next strongest move today, 0.28%, extending a bounce from near term support. The index did not set a new all time high but is only a few points from doing so. The indicators remain consistent with a peak within an uptrend and divergent in the longer term, suggesting more consolidation or correction is possible. Near term support is near 5,750 and the short term moving average should the index pull back more than it has, a move higher is trend following with upside targets near 6,000.


The S&P 500 made the third largest gain today, 0.10%, and set a new all time closing and intraday high. Today's candle is a small white bodied candle with visible lower shadow testing near term support near 2,36. The move extends the current leg of the rally and breaks the index out of the near term trading range set last week. The indicators are bullish but also consistent with a peak or slowing trend so caution is due. Upside target remains 2,400 in the near term with 2,500 in the short. A break below the bottom of last weeks range would be bearish near term with downside target near 2,325.


The Dow Jones Industrial Average posted the smallest gain today, only 0.08%, but was able to set new all-time and intraday closing highs. The index created a small white bodied spinning top and may be cresting a peak. The indicators are both bullish and consistent with a slowing trend or peak within a bull market but do not guarantee correction or pull back. Near term support is near 20,650, a break below here would be bearish with first target for additional support near 20,500. Until then the trends are up in the near, short and long term with upside target of 21,000 in the near term.


If last week can be considered a "dip" that was bought, today can too. The indices moved lower at the open in a half-hearted attempt at selling only to meet near term support, move higher and set a new all time high. The trend is definitely up and while not a stampede, there is a steady flow of money into the market. Until we get a reason for this to stop I expect we'll keep seeing new highs.

Looking forward there are some hurdles to get over but I think they are merely bricks in the "wall of worry". The first is the State of the Union Address;Trump could do a lot to sway investor sentiment, it just depends on what he chooses to talk about. After that it will be the data as always, until the FOMC meeting, and that is on track for growth. Tomorrow look out for the 2nd estimate of 4th quarter GDP, it is expected to be revised higher, as well as auto sales, Chicago PMI and consumer confidence. I remain bullish but cautious.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Obamacare Uncertainty

by Jim Brown

Click here to email Jim Brown

Editors Note:

The lack of answers surrounding the repeal/replace strategy on Obamacare is causing higher profits for Paycom. The company provides Human Capital Management (HCM) for corporations that tracks the employee life cycle.


NEW DIRECTIONAL CALL PLAYS

PAYC - Paycom - Company Profile

Paycom Software, Inc. provides cloud-based human capital management (HCM) software solution that is delivered as software-as-a-service for small to mid-sized companies in the United States. It provides functionality and data analytics that businesses need to manage the employment life cycle from recruitment to retirement. The company's HCM solution offers a suite of applications in the areas of talent acquisition, including applicant tracking, candidate tracker, background checks, on-boarding, E-Verify, and tax credit service applications; and time and labor management, such as time and attendance, scheduling/schedule exchange, time-off requests, labor allocation, labor management reports/push reporting, and geofencing/geotracking applications. Its HCM solution also provides payroll applications comprising payroll and tax management, Paycom Pay, expense management, garnishment management, and GL Concierge applications; and talent management applications that include employee self-service, compensation budgeting, performance management, executive dashboard, and Paycom learning applications. In addition, the company's HCM solution offers HR management applications, which comprise document and task management, government and compliance, benefits administration/benefits to carrier, COBRA administration, personnel action forms, surveys, and affordable care act applications. Company description from FinViz.com.

Paycom targets companies in the 50-2000 employee range in order to provide HR and payroll processing. Companies do not have the time or the manpower to keep up with the impact of Obamacare on employees and the company. As the new administration moves away from Obamacare and into some other form of health service, there will be significant uncertainty along the way as old rules change and new rules are implemented. Paycom provides their Affordable Care Act (ACA) dashboard application that tracks everything Obamacare related. This is giving Paycom a boost. The company guided for a 28% increase in revenue in 2017.

Q4 earnings of 15 cents easily beat estimates for 9 cents and nearly double the year ago quarter. Revenue of $87.8 million also beat estimates for $86 million. Recurring revenues rose 35.7%. Adjusted gross margin was 82.4%. During the quarter they repurchases 634,506 shares.

For Q1 they guided for revenues of $114.5 to $116.5 million. Analysts were expecting $114 million. For the full year, the company guided for $422 to $424 million in revenue compared to estimates for $417 million.

Shares spiked to $52 after the Feb-9th earnings and have moved up steadily to $55 and a new high. There is nothing to keep the shares from moving higher given the raised guidance and strong performance. The Obamacare uncertainty will continue to be a tailwind for the company.

Buy May $57.50 call, currently $3.10, initial stop loss $50.50


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

One More Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow stretched its string of daily gains to 12 and needs only one more day to make it the longest streak ever. The streak of record closes appears to be running out of fuel. Friday's positive close came in the last 30 seconds and Monday's close was also in doubt until the last minute of trading. Friday's 11-point gain was only barely exceeded with a 15-point gain today. The overbought conditions are holding the index back as well as worries over President Trumps speech to the nation on Tuesday evening. One analyst said globally there were "trillions of dollars" riding on the speech. If the optimistic expectations are dashed, the global markets could fall significantly led by the U.S. markets.

The Nasdaq indexes have closed positive the last two days but have not yet returned to the highs from last Tuesday.

The market was very "heavy" today but managed to remain slightly positive. Let's hope this positive trend continues after the speech.



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


HRS - Harriss Corp

The long call position was entered at the open.

SFLY - Shutterfly

The long call position was stopped at $45.85.



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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

ADP - Automatic Data Processing - Company Description

Comments:

No specific news. Minor decline after three days of strong gains.

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. Another minor gain in a weak market.

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.


HRS - Harris Corporation - Company Profile

Comments:

No specific news. New historic high.

Original Trade Description: February 25th

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.

Position 2/27/17:

Long May $115 call @ $2.22, no initial stop loss.


MLNX - Mellanox - Company Profile

Comments:

Mellanox announced a new world speed record over their ConnectX-5 100Gb/s Ethernet Network Interface card. HP servers equipped with those card transmitted 128 million packets of data per second between servers.

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.


QCOM - Qualcomm - Company Profile

Comments:

No specific news. Minor decline after a week if testing resistance at $57.

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.

Update 2/24/17: 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.

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 gapped down at the open to stop us out.

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

Closed 2/27/17: Long June $47.50 call @ $3.00, exit $2.10, -.90.


VAR - Varian Medical systems - Company Profile

Comments:

No specific news. Minor decline after a new 4-month high on Friday.

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:

Actually, a decent gain today to close over $12 and the market closed positive. Apparently, investors are loading up on puts ahead of the president's speech.

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. Minor decline but holding over support at $90.

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 dip buyers are still there but they appear to be losing conviction. I am going to leave this open until after the president's speech to Congress Tuesday evening, just in case there is a sell the news event. If that does not occur, I will reevaluate 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. Decent bounce in the morning but faded in the afternoon.

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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