Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/1/2017

Table of Contents

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

Market Wrap

Trump Rally Continues

by Keene Little

Click here to email Keene Little
Following President Trump's speech to Congress the stock market rallied strong. The Dow reached 21000 and notched another quick milestone as buyers gobble up the idea that Trump's policies will ignite the economy. Lack of specificity by Trump has not dissuaded buyers from continuing their bullish campaign.

Today's Market Stats

Before Trump's speech there were of course guesses about how the market would react. The common belief was that the market would not react well if Trump did not provide much in the way of details about his tax and spending policies. Well, we know what happens when the majority believes something and even though Trump's speech was long on promises and short on details, the market reacted with a strong rally today. But will it stick?

Trading volume was strong today so the rally was more than just short covering. There were practically no pullbacks during the day as each little pause brought in more buyers. The advance-decline line and advancing stocks minus declining stocks remained strong all day. New 52-week highs spiked up to a level not seen since January 25th and December 8th before that. The bulls have nothing to complain about with today's performance. Well, actually there are continuing signs of lack of momentum to the upside and with an overbought market that's always a concern.

March has come in like a lion and now we have to wonder if it will go out like a lamb (at least shorn of its wool, if not slaughtered for consumption). The good news for bulls is that statistically speaking, March has been the best month of the year in the past 10 years with an average gain of +2.7% (SPX gave us half that already today with its +1.4% gain) and positive 7 out of 10. April has been stronger in reliability -- up 9 out of the past 10 years.

But is this March going to be one that goes against statistics? January has a record of being the worst month of the year, down an average of -1.7% and positive only 4 out of the past 10 years. February is in the middle with a +0.39% average performance and up 6 out of the past 10 years. This January and February have hardly been weak and that paradoxically could set us up with a weak March.

But the data shows March can be even stronger when there's strength leading into it. Statistically speaking, a strong January-February still leads to a positive March but not quite as much. But March gets a strong boost if the market was positive November through February, which we've had.

The bulls clearly have a tail wind here and while I see the potential for a high this week, one that could lead to a larger pullback than we've seen since the end of January, it will be important to see what kind of pullback/consolidation we get. The pattern of the pullback will then provide clues about whether or not we should expect a continuation of the rally later this month.

If there's a strong tail wind behind the bulls why should we even consider the possibility that the bears might get their turn? In three words -- the Fed, debt and politics (not to mention more than a few technical indicators).

First, Yellen will be speaking on Friday and what she says could provide additional clues about what the FOMC will decide at their next meeting on March 14-15. Many are now thinking the Fed will be forced to raise rates again in March since inflation data requires them to start getting proactive. This could throw some cold water on the bulls.

Second, March 15th is also the technical deadline for the U.S. government to raise its debt ceiling. Congress is not playing well with each other right now and trying to reach an agreement could be a challenge. The market might not react well to all that, especially if the Fed has just raised rates and discussions of the amount of debt could prompt more hand wringing.

Third, European concerns could be reignited following the Dutch elections on March 15, especially if the Dutch show a continuation of an antiestablishment sentiment displayed by the Brits (Brexit) and Americans (Trump election). Following the Dutch vote will be the French vote and the worries about the EU unraveling could start to snowball.

All of the concerns mentioned above could certainly make March "different this time." That's of course all speculative but there are reasons to be cautious about the bullish expectations for March just because it has typically been so. In the meantime, the price pattern should provide early warning signs when things might change. I'll start tonight's chart review with a top-down look at the Dow.


Dow Industrials, INDU, Weekly chart

This morning's rally for the Dow popped it above the top of a parallel up-channel for its rally from February 2016, which is a bullish accomplishment if it can hold above the line, currently near 20960 (near this morning's open). A close below 20960 would be the first sign of trouble for the rally but until then the bulls have done nothing yet to indicate they're done buying.

Today's high was a small poke above a trend line along the highs from May 2011 - March 2015, currently near 21140, but obviously the rally could simply continue heading higher. On a weekly closing basis we'll have to see if the bulls can get the Dow above this potentially strong resistance in an overbought market.


Dow Industrials, INDU, Daily chart

The Dow's daily chart shows how this morning it gapped up to open at the top of its parallel up-channel for the rally from February. It then ran higher and poked above the trend line that runs along the highs from May 20111 - March 2015, near 21140, and as mentioned above, this line could end up being very strong resistance. Late in the day it pulled back below the trend line.

While it's possible today's flare-up will be followed by the start of a decline, the short-term pattern supports the need for just a small pullback correction, maybe Thursday morning, and then a final (?) small rally to complete the leg up from January 31st. So we could end up with a throw-over finish above the line but then a reversal back down into next week. The continued bearish divergence against the December high should be worrisome to bulls.

Key Levels for DOW:
- bullish above 21,155
- bearish below 20,734


Dow Industrials, INDU, 60-min chart

The Dow's 60-min chart shows an expectation for a small pullback correction into tomorrow and then one more leg up to complete he wave count for the rally from January 31st. The current projection is to about 21230. The first sign of trouble for the bulls would be a drop below Monday afternoon's high at 20851. Actually, we'd have a bearish heads up if the Dow drops back below 21K.


S&P 500, SPX, Daily chart

SPX continues to rally with increasing steepness in its uptrend lines, a sign that the rally is going parabolic. Or at least we know that steep trend lines tend not to last as long and when they break it's usually followed by a steep correction. Where this rally will end is anyone's guess but like the Dow, I think we're looking at just a small pullback and then one more minor new high to complete the rally.

I show a new key level to the upside at 2416, which is based on a projection off the short-term wave pattern (actually it's slightly lower, around 2413) and the Gann Square of Nine chart. I don't show the chart but it's interesting that 2416 is square to 666, the March 2009 low. Below that is 2406, which is aligned with the October 2002 low, October 2007 high, October 2011 low and October 2012 high.

Key Levels for SPX:
- bullish above 2300
- bearish below 2200


S&P 500, SPX, 60-min chart

The SPX pattern is very similar to the Dow's (the same with the tech indexes) and ideally we'll see a little more pullback/consolidation Thursday morning and then a final push higher. The top of a parallel up-channel for the rally will be near 2413 by Friday afternoon. From a Gann chart perspective we have 2406 and 2416 as potentially important numbers. From a pattern perspective it looks like we could make a high in between those two numbers. At least it's something to watch for since eventually even this rally is going to complete.


Nasdaq Composite, COMPQ, Daily chart

On February 15th the Nasdaq climbed above its trend line along the highs from April-August 2016, which was obviously bullish, and then used the line for support when it pulled back into last Friday's low and again on Tuesday. The back-test and bullish kiss goodbye led to today's rally and now I'm watching a trend line along the highs from November 22 - February 21, currently near 5925 (today's high was 5911).

There's also a price projection at 5940.60, which is where the 5th wave of the rally from November would equal the 1st wave. For now that gives us an upside target zone for the completion of the rally at about 5925-5941. The Nasdaq stays bullish as long as it doesn't drop below last Friday's low at 5800, a break of which would confirm the top is likely in place. This is true for the other indexes as well.

Key Levels for NDX:
- more bullish above 5941
- bearish below 5800


Russell-2000, RUT, Daily chart

The RUT finally reached its trend line along the highs from 2007-2014-2015, near 1414, with today's high at 1414.82. Slightly higher is a price projection near 1422 for the completion of a 5-wave move up from January 30th, which means it would be more bullish above 1422. At the moment we have a 1414-1422 target zone and the RUT has achieved the minimum expectation. While the short-term pattern, like the others, would look better with a small correction to today's rally and then a final push higher, the risk on the long side is now elevated with the RUT up against potentially strong resistance and showing significant bearish divergence since December.

Key Levels for RUT:
- bullish above 1422
- bearish below 1386


10-year Yield, TNX, Weekly chart

TNX has been chopping sideways since its high on December 15th and it formed a sideways triangle for the consolidation. This is a bullish consolidation pattern but it also points to just one more leg up to complete its rally from July 2016. Last Friday's low was a slight throw-under below the bottom of the triangle, typical for the completion of a triangle, and now this week's rally, especially today's, is a good signal that the next leg up for its rally has begun (although it hasn't yet broken out of its triangle pattern, the top of which is currently near 2.5%).

An upside target zone for TNX is 2.606-2.687, with the lower end being the projection for the 5th wave of the rally from July 2016 where it would equal the 1st wave. The upper projection is where the c-wave of an expanded flat correction off the January 2015 low would equal 162% of the a-wave. In between is a downtrend line from 1988-2007, currently near 2.64. TNX stays bullish (bond prices bearish) as long as it stays above last Friday's low (like stocks) at 2.314.


KBW Bank index, BKX, Weekly chart

The banks got a big boost today (BKX was up +3.6% at its high before finishing with a +3.2% gain) and like the other indexes it looks like BKX should pull back a little and then head a little higher before running into a potentially important high. BKX had stalled last week near a price projection just above 97 but then blasted through it today. The next upside target is 102.19, which is where the 5th wave of the rally from June 2016 would equal the 1st wave.

A shorter-term pattern for its rally suggests BKX could top out 100-101, which means we have a 100-102 target zone for BKX. After this week's high, which is when I think BKX could complete its rally, we'll have to determine from the next pullback/decline whether or not we should expect another leg up in May-June or if instead we'll get a more serious decline.


Transportation Index, TRAN, Daily chart

The TRAN has been working hard to rally since its January 3rd low but has only managed to make a small rising wedge with its minor new highs. This is an ending pattern, typically seen at market tops. A drop back below its November 2014 high at 9310 would be a bearish heads up and below its February 2nd low at 9047 would tell us a top is in place.


SPX vs. Relative Strength of TRAN/UTY, XLY/XLP, RUT and BKX, Daily charts

The 3 charts below show SPX at the top, clearly making new highs since December. But what's disconcerting, as can be seen in the middle chart, is the lack of participation in some key sectors. The two bottom charts show Relative Strength (RS) and the middle chart shows the transports have been underperforming the defensive utility sector since the December high. And if the consumer was doing well we'd see XLY (consumer discretionary) outperforming XLP (consumer staples) but since the December high we've seen just the opposite.

The bottom chart shows the significant underperformance of the RUT vs. SPX, which is not supporting the "animal spirits" that we typically see in a bull market. The positive thing for the market is the fact that the banks are showing at least equal strength at this point, although again, it's best if the banks are out in front. I don't show the RS for the semiconductors but since February 8th the SOX has been underperforming SPX. I like to see BKX and SOX in synch and leading the market in order to feel better about the direction. Right now we have mixed and weak signals that do not support this rally.


U.S. Dollar contract, DX, Daily chart

The US$ spiked up last night but then pulled back sharply this morning. The early-morning high was another test of the top of a previously broken up-channel for the rally from May 2016, which was last tested on February 15th. I see the potential for the dollar to make it up to 103 for a larger bounce pattern off the February 2nd low but at the moment I think there's a good chance the dollar will drop from here instead of rally.


Gold continuous contract, GC, Daily chart

Gold consolidated today after this morning's low tested support at its 20-dma, near 1237. That and the uptrend line from December, currently near 1235, should act as support if there are higher prices to come for the current bounce. But following Monday's high, which back-tested its broken 200-dma, currently near 1264, it's looking like we could see gold head back down from here. A drop below 1235 would tell us the high is likely in place. But for the short term there is upside potential to a price projection at 1273.20 (for two equal legs up from December), which would also result in a test of a downtrend line from August 2016.


Oil continuous contract, CL, Daily chart

Oil's high on February 23rd was essentially a test of its January 3rd high and is showing a significant bearish divergence. It could be consolidating sideways as MACD "resets" near zero and a break above 55 would likely lead to a rally to the 58-59 area. But the choppy move up from January 10th looks like an ending pattern and I think the higher-odds scenario points to a breakdown. A drop below the February 8th low at 51.22 is needed to confirm a high is in place.


Economic reports

Today was a busy day for economic reports but they were all ignored. There were no real surprises and the market had already been on a tear to the upside. The rest of the week will be fairly quiet.


Conclusion

The VIX issued a warning signal today by not agreeing completely with the stock market's rally. It gapped down this morning but then by this afternoon it rose sharply and retraced most of this morning's decline. Someone does not believe the rally will last and when we've seen this before it has often been a good warning sign for bulls not to get complacent. Stops should be pulled up tight, such as no lower than last Friday's or yesterday's lows.

Price is king and the new highs must be respected, especially by bears who stare in disbelief that the rally continues as it has. We have lots of warning signs and technical indicators that tell us not to trust this rally, especially since it's been built on hope and not much in the way of concrete accomplishments by the Trump administration (when it comes to tax and spend policies). This makes the rally especially dangerous and reason enough to pay close attention to those little signals that warn us things are not as rosy as they appear when looking at just price.

The wave pattern for the rally looks nearly complete and ideally needs just a small pullback/consolidation into Thursday morning and then one more push higher. If we get the push higher I'd then pull stops up real tight on long positions and if you're itching to get short, look for a rollover from a new high and use the high for your stop. It might take a stab or two to make it work (never try more than 3 times since that's the market telling you you're too early). If we get a new high, use a break of the pullback low from today's high as a stop level for getting into a short position (with a stop on the play at the high).

Bears should be close to having a turn at the feeding trough but at the moment it's too early and it's important to let price tell you when to try, and not by trying to anticipate when and where that high will occur. I have my guesses, noted on the charts in my commentary, but don't we all (wink).

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

Keene H. Little, CMT


New Option Plays

Tough Decision

by Jim Brown

Click here to email Jim Brown

Editors Note:

Picking a new stock after the biggest rally in four months is not an easy task. With the Dow up more than 300 points, S&P over 32 and Nasdaq over 78 points, every stock worth owning has gapped higher and inflated the option premiums. The stocks that did not gap higher today we do not want to own for obvious reasons. If they are not moving higher in today's market they are probably not going to be winners as this short squeeze bleeds off. I went with AZPN because of its steady trend and lack of material volatility. It has risen steadily even when the Nasdaq was weak in late February. Options are cheap so we have little risk if the market rolls over.



NEW DIRECTIONAL CALL PLAYS

AZPN - Aspen Technology - Company Profile

Aspen Technology, Inc., together with its subsidiaries, provides software and services to the process industries in the United States, Europe, and internationally. It operates through two segments, Subscription and Software, and Services. The company licenses integrated process optimization software solutions and associated support services designed to manage and optimize plant and process design, operational performance, and supply chain planning. Its software suites include aspenONE Engineering, and aspenONE Manufacturing and Supply Chain, which are integrated applications that allow end users to design process manufacturing environments, forecast and simulate potential actions, monitor operational performance, and manage planning and scheduling activities, as well as collaborate across these functions and activities. The company also provides software maintenance and support, professional, and training services. Its customers consist of companies, which are engaged in process industries, such as energy, chemicals, engineering, and construction, as well as consumer packaged goods, power, metals and mining, pulp and paper, pharmaceuticals, and biofuels. Aspen Technology, Inc. was founded in 1981 and is headquartered in Bedford, Massachusetts. Company description from FinViz.com.

Aspen reported Q4 earnings of 52 cents on revenue of $119.9 million. Estimates were for 43 cents and $117.6 million. Annualized revenue rose 4.5% to $450 million at the end of the quarter. Operating margins were 50.8%. The company repurchased 1.3 million shares in the quarter for $70 million. They ended the quarter with $140 million in cash and generated $27 million in free cash flow.

Earnings April 27th.

They are a small but growing company that provides software for manufactures to optimize plant operations. They acquired a new product in the quarter called Mtell, which offers machine learning based technology.

Shares have doubled over the last 12 months and they closed at a new high on Wednesday.

Buy Apr $60 call, currently $1.60, initial stop loss $57.50.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Doubter Dilemma

by Jim Brown

Click here to email Jim Brown

Editors Note:

Presidential doubters were caught off guard when the speech came off much better than expected. Apparently, there were a lot of investors expecting the worst and were heavily short ahead of the speech. They were crushed in the opening short squeeze and it never let up. The market did not peak until about 2:30 and the decline into the close was minor. This was a very expensive lesson for a lot of traders.

However, the Russell 2000 only made a new high by 3 points and that index peaked at noon. The small caps saw the same opening squeeze but there was no material follow on buying.

If the market was overbought earlier in the week, it is really overbought today. The real question tonight is whether the short squeeze will stick. There is no specific reason why the market should not continue rising, just not in a straight line. The problems ahead are the FOMC meeting on the 15th, which is the same day the debt ceiling hike expires. Either or both could present problems for the market.



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


MLNX - Mellanox Tech

The long call position was stopped at $47.50.



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. New historic high thanks to the market squeeze.

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. Jana Partners bought 3,872,261 shares in Q4.

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. Rebounded back to resistance. We need another positive move to punch through that level.

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. I lowered the stop loss 25 cents last night and we were still stopped out by 5 cents before the rebound began.

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. Excellent rebound and a new high.

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. Not a big jump but still a decent rebound.

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. New 4-month high.

Original Trade Description: February 18th

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

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

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

Earnings April 26th.

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

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

Position 2/21/17:

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


$VIX - Volatility Index - Index Description

Comments:

I considered closing the position this morning but the initial drop in the VIX was erased and the rebound ended with only a 38-cent decline. Apparently, there is even more put buying at this level. I am going to leave it open because today's short squeeze put the market into even more overbought territory.

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. Support held and now we need the rebound to continue.

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:

We saw a major short squeeze in the market after the tone and delivery of the speech caught quite a few doubters very short. The speech has changed the tone around the president and the market is likely to continue higher.

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. The real key is whether the rebound will stick.

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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