Option Investor
Newsletter

Daily Newsletter, Tuesday, 2/28/2017

Table of Contents

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

Market Wrap

Highest Volume since Dec-16th

by Jim Brown

Click here to email Jim Brown

The markets were relatively well behaved despite the highest volume day in 2017.

Market Statistics

Stocks sold off on worries over the president's speech tonight. The selling was not heavy and more of a lack of buyers and a minor bit of profit taking. However, volume was very heavy at 7.9 billion shares. Declining volume was 5.5 billion to 2.2 billion shares of advancing volume. Declining stocks were 5:2 over advancers right in line with the volume.

Investors are afraid the president will either say too much about the wrong topics or not enough about the right topics and there could be a sell the news drop on Wednesday if that was the case. With the market so overbought, everything is prices to perfection with an average of about 500 stocks making new highs every day. That means there is a significant risk of major profit taking if investors do not hear what they want.

The president is not a polished public speaker so it will be harder for him to impress investors with economic optimism is already at maximum.

On the positive side, the market could have sold off a lot more today and did not even with the heavy volume. That means the dip buyers are alive and well and will probably buy any volatility dip on Wednesday.

The Dow did break its string of record closes with a minor decline today. The Dow tied the prior record at twelve days and one more day would have been the longest ever.

Note the somewhat rounding top on the Dow chart below. The gains over the last week have been minimal so there is some concern being shown despite the record string. Now that the string has broken, there is a stronger possibility of further weakness.


It was a busy day economically. The GDP revision for Q4 was unrevised at 1.9% and the same as the initial reading. The analyst consensus was for a rise to 2.2% and Moody's expected 2.3%. This compares to a 3.5% growth rate in Q3. Consumer spending contributed 2.05% of that headline reading.


The Richmond Fed Manufacturing Survey for January rose from 12.0 to 17.0 and the highest level since last March. New orders were especially strong with a rise from 15.0 to 24.0 and the highest level in seven years. Backorders rose slightly from 4.0 to 8.0. Expectations for future shipments rose from 50 to 53 and expectations for new orders rose from 44 to 53. Manufacturers are definitely turning bullish.

The separate services survey was flat with January at 15. The expected demand component rose from 38 to 51 and a 12-month high. Expected retail demand rose from 51 to 69. Overall, the service sector improved, only the headline number remained flat.



The Texas Service Sector Outlook Survey for February declined from 16.2 to 14.1. Optimism appeared to decline slightly. The expected selling prices component fell from 12.5 to 5.2 and capital expenditure plans fell from 10.9 to 9.8. With the energy sector rebounding, the Texas service economy should be improving because of the thousands of people going back to work. The report was ignored.

The U.S. Trade Deficit for January expanded from $65.0 billion to $69.2 billion. Exports fell -0.3% to $126.2 billion with imports rising 2.3% to $195.4 billion. This report was also ignored.

The big report for Wednesday is the ISM Manufacturing Index. This is a national number compared to the various regional surveys by the Fed. The Beige Book is also important because it covers all the Fed regions.


Starting the morning off was an earnings miss from Target (TGT). The company reported earnings of $1.45 compared to estimates for $1.50. Earnings declined -4.6% over the year ago period. Revenue of $20.69 billion fell -4.3% and missed estimates for $20.746 billion. Same store sales fell -4.3%.

Target guided for full year earnings of $3.80-$4.20, down from $5.01 in 2016 and $69.5 billion in revenues. Analysts were expecting $5.35 and $70.51 billion. For Q1 they guided for earnings of 80 cents to $1.00. Same store sales are expected to decline in the low to mid single digits for 2017.

Target said to fight the sales decline they would lower prices, add brands and invest more in some of its stores and e-commerce channels. Shares fell -12% for the biggest single day decline ever.


Valeant Pharmaceutical (VRX) reported adjusted earnings of $1.26 that beat estimates for $1.20. Revenue declined from $2.7 billion to $2.4 billion but beat estimates for $2.3 billion. The CEO said they reduced debt by $519 million in Q4 and agreed to divest a "number" of assets. They guided for 2017 for revenue of $8.9 to $9.1 billion. They are targeting $5 billion in debt repayment in 2017. Investors were not impressed and shares fell -14%.


Autozone (AZO) reported earnings of $8.08 that missed estimates for $8.20. Revenue of $2.29 billion rose 1.4% but missed estimates for $2.35 billion. Same store sales were flat for the quarter. They opened 33 stores in the U.S. and four internationally in the quarter. They currently operate 5,872 stores. Inventory rose 8.7% to $665,000 per store. They repurchased $198 million in stock in the quarter with $585 million left on the authorization. Shares declined only slightly on the news.


Perigo (PRGO) shares crashed 12% on news it was going to sell its royalty stream on the MS drug Tysabri. The royalty stream is being sold to RPI Finance Trust for $2.85 billion with $2.2 billion in cash and up to $650 million in payments based on future net sales. The company also preannounced 2016 earnings with a range of $7.10 to $7.25. They guided for 2017 earnings of $6.30 to $6.65. They also announced the CFO had resigned effective immediately. The CFO quit to join another pharmacy company. Immediate resignations are never positive for company shares.


Tenet Healthcare (THC) shares fell -15% after they reported adjusted earnings of 6 cents compared to estimates for 20 cents. Revenue of $4.86 billion missed estimates for $4.97 billion. For the current quarter, they expect a loss of 45-60 cents per share. They guided for revenue of $4.75-$4.95 billion and analysts were looking for $4.95 billion. Shares fell -15%.


After the close Palo Alto Networks (PANW) fell -18% after a huge earnings miss. The company reported adjusted earnings of 63 cents that beat by a penny. Record revenue of $422.6 million missed estimates for $429.6 million. That was the slowest revenue growth in four years. They announced a new $500 million share repurchase to bring outstanding authorizations to $1 billion. They guided for Q1 of 54-56 cents on revenue of $406-$416 million. Authorizations are worthless unless they actually spend the money and PANW had not spent any on its prior authorization.


Salesforce.com (CRM) reported earnings of 28 cents compared to estimates for 25 cents. Revenue of $2.29 billion barely edged over estimates for $2.28 billion. They guided for 2017 for revenue of $10.15 to $10.20 billion, up from $10.10 to $10.15 billion. For Q1 they guided for $2.34-$2.35 billion, a 22% increase and earnings of 25-26 cents. Analysts were expecting 30 cents and $2.37 billion. The light guidance caused the stock to decline in afterhours.


Earnings highlights for Wednesday include Broadcom, Best Buy and Mylan followed by Costco and Sears on Thursday.


Shares of Signet Jewelers (SIG) fell 13% after a report of widespread sexual harassment at the Sterling Jewelers subsidiary. According to a report Sterling paid female workers less than males, promoted them less frequently, and male executives engaged in rampant sexual harassment for years demanding sexual favors for raises and advancement. A private arbitration committee ruled that 69,000 current and former female employees can sue for discrimination and back wages. This will go to trial in the fall and could be a major hit for Signet.


Apple shares shrugged off the weak Nasdaq and remained fractionally positive after UBS boosted the price target from $138 to $151 and Guggenheim raised their price target to $180. Both analysts said the iPhone 8 and its new features could be a blockbuster for Apple that could lead to several years of new sales growth.

There was additional confirmation that the iPhone 8 will have a curved OLED screen and much larger memory capacity. It may also have wireless charging and a USB port. Another report said Apple had more than 1,000 engineers working on augmented reality for the iPhone. This is going to be a good year for Apple if only half the claims and events come true.


Amazon Web Services suffered a major outage in its Simple Storage System or S3 and thousands of websites were knocked offline or rendered ineffective. The S3 system is where corporations and websites store large volumes of files for later retrieval. For instance a publisher could store the digital texts of thousands of books that may not be reviewed or even recalled for months but need to be online. That archival storage does not need to reside on a more expensive cloud server used for every day operations. The files are there if they are needed. Ironically one of the systems knocked offline was Amazon owned Audible.com. All those stored audio books were not available for download for several hours. Some of Apple's systems were offline as well as some Facebook systems. Amazon is the biggest cloud provider and when they have a hiccup it affects thousands of companies.


Another factor has slowly risen to impact market sentiment. The chance for a March rate hike has risen sharply from 17.7% a week ago to 62% at today's close. The comments from the FOMC minutes and from various Fed speakers has tilted the outcome significantly. Suddenly, sooner rather than later, has come back to bite investors.

As of February 17th.

As of today's close.

Oil prices declined to $53.18 intraday on headlines suggesting additional OPEC production cuts. Those headlines faded in the afternoon when the actual production numbers quoted showed a minor decrease from 29.96 mbpd in January to 29.87 mbpd in February. WTI rebounded to close at $54.01. After the bell, the API inventory report showed a gain of 2.5 million barrels to lift U.S. inventories to a new record high.



Markets

The markets weakened on worries over the president's speech. The market is worried the president will either say too much about the wrong topics or not enough about the right topics and there is a very good chance there would be a sell on the news event. Tonight should be interesting.

Given the sharp rise in volume the market actually held up rather well. That suggests it could take a major blunder in the speech to reall knock the market lower. Minor issues could be overlooked and lead to a monster blowout at the open. Obviously everything is speculation and we will not know which way the market is going until 10:AM on Wednesday.

I am very worried about a gap down open that clears all the stop losses and then rebounds sharply. I would recommend everyone reevaluate their own risk profile and make a rational decision about how they want to handle opening volatility on Wednesday.

I am skimping on market analysis tonight because market direction tomorrow is totally dependent on the speech.

The S&P declined slightly despite the high volume and remains above initial support at 2,350 and stronger support at 2,300. The S&P did set a record today. The average intraday range for the last 50 trading days is the lowest in history.


The Dow traded in a very narrow 60-point range despite the high volume. No Dow components gained or lost $1. The Dow is showing a potential rounding top but we still have a pattern of higher lows. That suggests a benign speech could propel the index higher.

The new target is 21,000 and we closed 188 points away from that level.



The Nasdaq has a pattern of lower highs since the record high last Tuesday. The techs stocks were the most overbought so it makes sense they were big losers ahead of the speech. The 5,800 level is decent short term support and the level to watch on Wednesday.



The Russell 2000 gained 1% on Monday and gave back -1.5% today to close at a two-week low. Small cap investors were racing to the sidelines to avoid a possible disaster on Wednesday. If the speech is successful, we could see this decline completely erased tomorrow. The small caps have been volatile from day to day but relatively flat since the 21% post election rebound.


I am not going to speculate on the speech any further than I have over the last several days. The market is at extreme risk but a successful performance could avoid a sell the news event and potentially propel the Dow to 21,000 this week.

There are so many political factors in play, the technicals do not seem to matter. Remember the cartoon from the weekend newsletter. Buy the dip.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Beware of Volatility

by Jim Brown

Click here to email Jim Brown

Editors Note:

Wednesday could be one of those days where volatility becomes a curse. The market is worried the president will either say too much about the wrong topics or not enough about the right topics and there is a very good chance there would be a sell the news drop on Wednesday if that was the case. There is a strong possibility for a volatility event in either direction at the open on Wednesday. I am not adding any new plays until we see what happens.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Broken String

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow's string of consecutive record closes was broken after hitting 12 on Monday. The index only needed one more day to make it the longest string ever. The worry over the president's speech weighed on the markets all day and all the major indexes closed lower but off the lows of the day with the exception of the Russell. The small cap index lost -1.5% or -21 points. That is a very bad sign.

The market is worried the president will either say too much about the wrong topics or not enough about the right topics and there is a very good chance there would be a sell on the news event. However, with the exception of the Russell the selling was muted but the volume was high. Tonight should be interesting.

I am very worried about a gap down open that clears all the stop losses and then rebounds sharply. I considered removing all the stops but there is always the possibility a sharp decline continues declining. I would recommend everyone reevaluate their own risk profile and make a rational decision about how they want to handle opening volatility on Wednesday.



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


PAYC - Paycom

The long call position was entered at the open.



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BULLISH Play Updates

ADP - Automatic Data Processing - Company Description

Comments:

No specific news. Very minor decline.

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. Harris said they received a 2-year grant to develop beyond-visual-line-of-sight operations for drone aircraft.

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:

No specific news. We came very close to being stopped out with the morning market drop. I lowered the stop slightly to give it some room for Wednesday morning volatility.

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.

Update 2/27/17: 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.

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.


PAYC - Paycom - Company Profile

Comments:

No specific news. Minor decline with the market.

Original Trade Description: February 27th

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.

Position 2/28/17:

Long May $57.50 call @ $2.69, see portfolio graphic for stop loss.


QCOM - Qualcomm - Company Profile

Comments:

No specific news. Holding over support at $56.

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.


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:

Volatility is building ahead of the speech. Apparently, investors are loading up on puts just in case there is a sell the news event.

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 at 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:

A few more sellers appeared but it is far from a sell off. The dip buyers may be fading. We will know after the speech.

I am going to leave this open until after the president's speech to Congress this 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. Monday's opening rebound is fading.

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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