Option Investor
Newsletter

Daily Newsletter, Saturday, 3/4/2017

Table of Contents

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

Market Wrap

Another Friday Save

by Jim Brown

Click here to email Jim Brown

The Dow did not return to positive on Friday until a couple minutes after the close as the final trades were settled.

Weekly Statistics

Friday Statistics

The major indexes battled back from an early morning decline and the Dow was actually up 15 points at its high at 3:35 before fading into negative territory in the last 30 minutes. After closing with a 3-point loss, it slowly regained positive territory after the bell as the final trades were settled. Volume was 6.6 billion shares and the lightest day of the week but it was a Friday.

The Dow only gained 0.8% (+183) for the week despite the 303-point gain on Wednesday. Both small cap indexes actually lost ground for the week despite the big gains on Wednesday. This was definitely a large cap rally and I cannot decide if Friday was bullish or bearish. More on that later.

The only material economic report on Friday was the ISM Nonmanufacturing Index. The headline number rose slightly from 56.5 to 57.6 for February. That is the highest reading since October 2015. The sector has now shown a positive gain for 86 consecutive months. New orders rose from 58.6 to 61.2 and backorders from 48.0 to 52.0. Employment edged up slightly from 54.7 to 55.2. Respondents were very upbeat with one saying the improvement in business starting in December has been "dramatic."

It may take a few months for all the optimism to translate into real business development but that optimism definitely exists.


The economic calendar for next week is headlined by the job reports from ADP and the Bureau of Labor Statistics. I believe the numbers will be strong. One reason for my optimism is the collapse in weekly jobless claims. Last week there were only 223,000 claims and a new cyclical low and the lowest level in 41 years. The four-week moving average is 234,000 and also a new low for this economic cycle. There were some comments that the low claims were artificial because of the President's Day holiday skewing the numbers. However, claims have been falling for months (green line) and there were 5.5 million unfilled job openings in the January JOLTS report. There are plenty of available jobs. Secondarily, spring weather arrived early this year and people are already busy looking for spring/summer employment.

Moody's Chart

The ADP estimate is for a gain of 180,000 jobs compared to the 246,000 in January. The Nonfarm estimate is for 175,000 compared to the 227,000 jobs January. I will be very surprised if the actual numbers are not over 200,000 on both BUT, I am not an economist. I just read the various reports and form an opinion. We will see who is closest this week.


The big challenge for the market is the following week. The debt-ceiling deadline on Wednesday is the same day as the Fed meeting decision. The Fed is widely expected to hike rates. The CME Fedwatch tool tracking a March rate hike spiked from an 18% chance two weeks ago to an 80% chance at Friday's close. On Friday, Janet Yellen said as clear as possible that assuming the jobs report is not abnormally low the Fed will hike rates in March. The market did not even blink. That tells us that a hike is already priced in and the market believes it is due to improving economic conditions and optimism about the future.

The Fed is still targeting three hikes for 2017 and the targets for additional hikes are now May at 8%, June at 42%, July 50%, September 68%, November 71% and December 86%. Obviously all those numbers will change significantly after the March meeting and statement. More than likely the Fed will hike in June and December, economy permitting.


Last November, congress and the Obama administration avoided a debt crisis by postponing the debt-ceiling crisis until March 15th, 2017. Currently the spending limit has been "suspended" but that ends on the 15th. After that date, the government can use "extraordinary measures" to avoid defaulting and that can extend the crisis until late June or early July. However, that means halting spending on some programs, putting off payments for non-critical purposes, postponing projects and borrowing money from other accounts to keep operations going. If we go past the 15th without a new debt ceiling resolution, you can bet that every day will see more headlines about some program or department that has no funding. This would kill the current optimistic environment.

I believe we can expect the volume of debt ceiling headlines to increase daily starting next week. You may remember back in August 2011 when the S&P dropped 250 points in about two weeks when there was a fight over the debt ceiling and S&P cut the rating on U.S. debt. While I do not expect this kind of response this time around, this will be the first major congressional test for the new president. Given the current hostility between the democrats and republicans, the headlines are going to be ugly if there is not a quick resolution to the issue.


Costco (COST) was a big loser on Friday after they reported earnings of $1.24 compared to estimates for $1.36. Revenue of $29.13 billion rose 6% but missed estimates for $28.85 billion. Same store sales rose 3% but missed estimates for 3.6%.

The company announced it was raising membership fees by $5 to $60 effective June 1st with executive memberships rising by $10 to $120. Costco has about 35 million members with roughly half of them executive members. The 2% maximum reward associated with executive memberships will rise from $750 to $1000 a year. The minor increase in fees is not likely to cause material subscriber flight. Costco members are very loyal. The membership increase will produce another $260 million in annual revenue for Costco with no additional costs.

Unfortunately, the earnings miss caused an $8 drop in the stock price but it was up $36 since the election so this was minor profit taking. The stock closed at $170 and $167 should be decent support. I would look to be a buyer in that range. There is much stronger support at $162 so buy early and avoid the rush.


Autodesk (ADSK) reported a loss of 28 cents that beat estimates for a loss of 33 cents. Revenue of $478.8 million beat estimates for $474.1 million. The company is losing money because they are converting from a software sales model to a subscription model and that always causes a short fall in the first 12-24 months of the process but results in larger profits in the future. New subscriptions rose 26% to 1.09 million, up 227,000 from the same period in 2015.

The company guided for the current quarter for a loss of 21-27 cents on revenue of $460-$480 million. Analysts were expecting $503 million and a 13-cent loss. Shares declined $2 on the news. This stock has an $80-$82 buy point.


Big Lots (BIG) reported adjusted earnings of $2.26 compared to estimates for $2.22. Revenue of $1.58 billion just missed the estimate for $1.59 billion. Same store sales of 0.3% missed estimates for 1.1% but was offset by a smaller number of stores.

BIG guided for earnings of 95 cents to $1.05 for Q1 and analysts were expecting $1.01. For the year, they expect $3.95-$4.10 and analysts expected $4.45. They guided for same store sales in Q1 of 0% to 2% compared to estimates for 0.4%. Shares gained 4% on the news.


Snap Inc (SNAP) had a very strong IPO but the real market has not yet appeared. Shares were priced at $17 and rocketed to $29.44 on its second day of trading before fading back to $27. However, there is one key fact. You cannot short the stock until after the settlement date or 3 days after the IPO. The instant those shares are settled and available to borrow, the price could decline sharply.

Four analysts have already issued ratings on SnapChat. Pivotal Research initiated coverage with a sell rating and $10 price target. Nomura initiated with a reduce, same as sell, and a price target of $16. Aegis Capital initiated with a hold and $22 price target. Susquehanna initiated at neutral and price target of $22. You can bet there will be additional ratings next week as everybody jumps in on the overly hyped stock. There are close to a dozen reasons why analysts are negative. I will not list them all but the general idea is that Snap is another Twitter with a minimally growing user base that leans towards the teenager category and they are not going to draw a lot of advertisers.

Snap added 21 million users in Q2, 10 million in Q3 and only 5 million in Q4. The excitement on the messaging app is already fading.

Jim Cramer must have gotten some IPO shares because he says it is going to $100 soon. That is a clear sell signal.

If you need another reason, NBCUniversal, parent of CNBC, bought $500 million in the IPO and agreed to hold them at least a year. Why does NBC think SnapChat is worth $28 billion, the current value of the IPO? If you subtract the shares held by NBC there are only 150 million shares in the market and the volume for Thursday was 217 million and 148 million on Friday.


Deutsche Bank (DB) announced Friday afternoon they were considering a secondary offering for $8.5 billion in order to pay off some if its fines and problems. In December, DB agreed to pay the Dept of Justice $7.2 billion related to issuance of residential mortgage-backed securities or RMBS ahead of the financial crisis. The bank is also expected to raise $1.8 billion in a sale of other assets. Shares fell -4% on the news.


Bill Ackman is throwing in the towel on Chipotle (CMG). After the bell on Friday, Ackman's Pershing Square Capital Management filed a prospectus with the SEC to sell 2.88 million shares of Chipotle or 10% of the company. The prospectus said Pershing does not have immediate plans to sell the stake but reserves the right to do so at any time. Ackman disclosed his stake in September and said he was working with management to streamline the cost structure and boost shareholder value. Apparently, those efforts have hit a brick wall because the shares are the same price today as when Ackman announced the stake. Ackman has had some challenges lately with various investments and cash is probably tight. Since CMG shares are not responding to his efforts this would be an easy way to raise a lot of cash. That stake was worth $1.2 billion at Friday's close.


Walmart (WMT) said it paid $51 million to acquire outdoor retailer Moosejaw. They retail outdoor clothes and equipment online. This was the third acquisition in the last five months as it tries to broaden its brands and web presence to compete with Amazon. Moosejaw sells brands like North Face and Patagonia that Walmart does not sell. Acquiring Moosejaw gives Walmart an immediate entry into that space for next winter. Walmart recently acquired Jet.com for $4 billion and ShoeBuy for $70 million. Walmart now offers free two-day shipping for online purchases of more than $35. Their e-commerce sales rose 20.6% in Q4.


Important earnings for next week are concentrated on Thursday with Sears, Staples and Ultra Cosmetics. This is the last active week of the Q4 earnings cycle.


With 98% of the S&P companies reported the blended earnings growth for Q4 is 4.9% and revenue growth was also 4.9%. More than 65% of companied beat on earnings and 53% beat on revenue. The average percentage of companies beating earnings estimates is 71% so this cycle was slightly weaker.

As of Friday, 74 S&P companies have issued negative guidance and 30 have issued positive guidance. The forward PE is now 17.9 compared to the 14.4 10-year average.

Crude prices fell to $52.57 on Thursday after Russian production numbers for February showed 11.11 mbpd and only 100,000 bpd below the October levels. Russia had pledged to cut 300,000 bpd and claimed to cut 118,000 bpd in January even though actual production for the month was higher than December.

OPEC continued to claim compliance with the promised cuts was 94%, which would be a record high for any promised cut, ever. However, only three OPEC countries have actually complied and those three including Saudi Arabia, Kuwait and the UAE, actually cut more than promised to make up for the noncompliant members.

The non-OPEC producers including Russia committed to cut by 558,000 bpd but the OPEC compliance committee said compliance in January was roughly 48% and that rose to just over 60% in February.


Active oil rigs rose by 7 to 609 but active gas rigs declined -5 to 146. The surge in active rigs appears to be slowing since prices are no longer rising on the promise of OPEC production cuts. U.S. production rose to 9.032 mbpd and the highest level since March 18th. U.S. inventories rose to a new record high at 520.2 million barrels.


 


 

Markets

I was talking with a reader by email this weekend about the never-ending rally. I promised him that when I went bullish in the newsletter that would be a capitulation event and the rally would end. For the last several weeks, I have been expecting the nonexistent dip we could buy. That dip continues to be elusive and the day I change that outlook to go all in, that would be the day a correction appears. We just need to remain wary that a dip will eventually appear. I believe it will be a buying opportunity so whether we continue to rise or dip first, the outcome should be the same long term.

On Wednesday, the S&P gained 32 points or 1.37% on 8.22 billion shares and the highest volume since December 16th. That leap was powered by a whopping $8.0 billion in inflows into the S&P-500 ETF (SPY) according to Bank of America. That was the largest cash inflow since December 19th, 2014.

Bank of America's Savita Subramanian raised her price target on the S&P from 2,300 to 2,450 saying there is increasing likelihood the bull market is entering a terminal phase. "We are entering a typical end-of-bull-market rally where fundamentals take a back seat to sentiment and technicals." She said the fair value for the S&P today would be 2,230 and well under the 2,383 close on Friday. She pointed out that historically, the last two years of a bull market in stocks returned a minimum of 30%. The current bull market is approaching its 8th anniversary on March 9th and is currently the second longest ever. When the S&P reaches 2,467 it will become the third largest bull market gain ever.

Wells Capital Management's chief investment strategist, Jim Paulsen, said the S&P is likely to rise to 2,600 then fall back to 2,200 before closing the year at 2,350.

Morgan Stanley's Andy Chase is rated as the number one market strategist by Barron's. He believes the market will gain 50% over the next two years, which would put the S&P at 3,600. I want some of whatever he is smoking.

The S&P has now gone 96 days without a 1% decline. On Saturday, the S&P celebrated its 60th anniversary. It was launched 60 years ago on March 4th, 1957. Today there is more than $2.4 trillion indexed to the S&P and no other index even comes close. Standard & Poors combined the Industrials, Transportation, Utility and Financial indexes in 1957 to create the S&P-500.

Only a third of the analysts listed below expect the S&P to move higher from here.

Year End 2017 Forecasts:

2,275 Fundstrat, Tom Lee
2,280 Wells Fargo, Scott Wren
2,300 Credit Suisse, Andrew Garthwaite
2,300 Goldman Sachs, David Kostin
2,300 Morgan Stanley, Adam Parker
2,300 UBS, Julian Emanual
2,325 Jefferies, Sean Darby
2,325 Citigroup, Tobias Levkovich
2,335 CFRA, Sam Stoval
2,340 Canaccord, Tony Dwyer
2,350 BMO, Brian Belski
2,350 Deutsche Bank, David Bianco
2,350 BNY Mellon, Leo Grohowski
2,350 Wells Capital Management, Jim Paulsen
2,400 JPMorgan, Dubravko Lakos-Bujas
2,400 Barclays, Jonathan Glionna
2,400 Societe Generale, Roland Kaloyan
2,424 Piper Jaffray, Craig Johnson
2,450 Bank of America, Savita Subramanian
2,450 Oppenheimer, John Stoltzfus
2,500 RBC Capital Markets, Jonathan Golub
2,600 Deutsche Bank, Binky Chadha

The S&P spent most of the day in negative territory on Friday and only managed to gain 1 point. Given the 32-point gain on Wednesday and the 14-point loss on Thursday, I am having trouble deciding if the minor gain on Friday was a positive or a negative for the outlook. The index is holding over half of its Wednesday gains but it was not able to rebound from the Thursday decline.

My first impulse is that the weak Friday showing is a sign of things to come. However, the dip buyers are alive and well but do not normally jump right in on a Friday because of the weekend event risk. The answer to my dilemma requires another day of trading. Monday could be a significant day for market direction. If the S&P begins to move up again it would be a good sign. If there is an early dip that is bought that lifts the index back to a decent gain before the close, that would also be a good sign. Any decline that is not bought would produce a negative outlook for the week.

Initial support is now 2,375 followed by 2,360. The support at 2,360 should be decent because we traded at that level for six days prior to the speech. Minor dips were immediately bought.


The Dow remains significantly overbought and the very minor gain at the close was probably financial engineering by some large trader. That minor gain only took a 50-cent addition to any stock to lift the index from negative to positive ahead of the weekend.

The Dow will be under pressure as those four weeks of gains are digested. The 20,750 level is initial support and then there is a lot of air before we begin to see support again in the 19,800-20,100 range.

Only two stocks had moves over $1 on Friday and most were just trading around the flat line most of the day. With earnings over and the president's speech now distant history, the optimism that lifted the Dow to this level could begin to fade ahead of a rate hike and the debt ceiling battle.



The Nasdaq Composite is more tightly clustered at the top than the Dow or S&P. There is not as much separation on the chart between the last three days and the prior five days. This suggests some of the overbought conditions are bleeding off the index and the 5,800 level should remain decent support. The uptrend support is also converging if the index can remain over 5,800 for another week or two.



The small cap indexes remain the weakest link. The S&P-600 did not actually breakout to a new high even though it closed a few pennies over the prior high. The support at 846 is now critical. A breakdown there targets 820 and a break below 820 would be ugly. The critical level on the Russell 2000 is 1,388.



We constantly try to find excuses for why a market goes up or down. Unfortunately, the market does not need an excuse. It can rise unexpectedly at any point and the biggest declines are always the ones nobody expects. Sentiment as measured by Investors Intelligence is at a 30 year high at 63.1% and the highest level since 1987. A reading above 55 is normally considered a sell signal. The term irrational exuberance is being used almost daily to describe the current market rally.

Obviously, markets can remain bullish far longer than analysts expect and then turn on a dime once everyone converts to the bullish mindset. We cannot predict where this market will go other than to caution that an eventual correction will find a lot of unbelievers buying the dip over and over and giving back a lot of their bullish gains.

Enjoy the rally but refrain from being overly long. There will eventually be a dip that is not bought. Until then, buy the dip. I know that sounds like a contradiction of terms but we are better off adding risk on dips than at new highs. When the real dip appears, we will lose less than those chasing prices higher.



Random Thoughts


This was a very interesting week for sentiment. The survey ends on Wednesday and that was the day of the market blowout over 21,000 and 2,400 on the S&P. Instead of seeing sentiment explode higher, we saw the opposite. The bullish sentiment declined slightly but bearish sentiment rose 3.3%. That restores my faith in crowd sourcing to some extent that retail traders believe the market may be overbought and are exercising at least a little caution.

Last week results


More than 45,000 voters in France have signed a petition urging Barack Obama to run for president. They are putting up posters all over France that translate to "Yes, we can." Supporters hope to have one million signatures by March 15th. While Obama is wildly popular in France, he is not French and cannot be elected. The supporters are doing this as a joke and a way to signal they want change in the government.



On another Obama topic, it was announced last week that Penguin Random House has signed a joint book deal with the president and Michelle Obama for $65 million. Each will pen a separate book about their time as president and first lady. Bill Clinton received $15 million and George Bush received $10 million. Who says politics does not pay.


In the commentary above I listed Bank of America's S&P target as 2,450 from analyst Savita Subramanian. Michael Hartnett, chief investment strategist for BofA, has called the Trump rally the "Icarus Trade." Icarus was the son of labyrinth-designer Daedalus, who constructed a pair of feathered wings held together by wax for his son. In the fable, Icarus flew too close to the sun and the wax melted sending him crashing back to earth.

In this modern day fable, Hartnett has pegged S&P 2,500 as the peak for the Icarus market. Hartnett believes the market will continue to rise in the first half of 2017 to that 2,500 level before crashing back to earth in the second half as the reality of getting policy changes approved by congress comes back to haunt investors.

Hartnett also believes not only the Fed but also central banks around the world will begin to scale back on stimulus. The bond market has not yet priced in this eventuality and once that pricing begins, it will be negative for the equity markets.

The Fed has only hiked rates twice in the last ten years. On March 15th, they will hike rates for the second time in three months. If the market suddenly begins to expect a hike every quarter, we could see a change in sentiment. That would mean the Fed funds rate could rise to 2% by 2018. Remember, the Fed is continuing to reinvest the funds when a treasury matures. Once they halt that reinvestment and begin to let the balance sheet decline that will be another hurdle for the markets. Basically, the Fed is maintaining the QE levels from prior years by keeping their balance sheet at $4.5 trillion. Once they begin to let that run off, interest rates could take another turn higher.

The "sell in May and go away" trade could be significant in 2017.



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"A government which robs Peter to pay Paul can always depend on the support of Paul."

George Bernard Shaw


 

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

subscribe now

 


Index Wrap

Extreme Sentiment

by Jim Brown

Click here to email Jim Brown
Bullish sentiment as measured by Investors Intelligence is at 30-year highs.

Investors Intelligence surveys investment professionals and newsletter editors rather than the retail traders surveyed by the American Association of Individual Investors or AAII.

The II sentiment for last week rose to 63.1% and a 30-year high with 55 normally considered a strong sell signal. I have written over the last several weeks about the overbought markets and this is one more confirmation signal that sentiment is at extremes.

Technical indications in the equity market are also showing extreme complacency. The Volatility Index at 10.96 remains only 48 cents above the multiyear low at 10.58 that was set on January 28th. The prior multiyear low was 10.32 in July of 2014. Before that low, you have to go back to February 2007 at 10.18 for a lower low. This represents a market where the vast majority of traders are in full bullish mode.


The sentiment indicators for the S&P are also at multiyear levels. The Bullish Percent Index for the S&P shows that 79.2% of the S&P stocks have a buy signal on a Point and Figure chart. This is the highest level since July 2014.


The percentage of S&P stocks over their 200-day average has risen to 81.6% and just below the multiyear high of 82.4%. That means 408 of the S&P 500 stocks are above their long-term average.


Because of the flat market in January and the six days of minimal gains before President Trump's speech, the percentage of stocks over their 50-day average has failed to keep pace and topped out at 76%. The averages caught up with the stock when the stocks quit rising. This is still an overbought level.


The cumulative advance/decline line on the S&P has begun to weaken. It is near its recent highs and this may only be noise but we should keep watch. Note the MACD is rolling over and about to turn into a sell signal.


The Nasdaq advance/decline line has peaked and the MACD has already suggested a sell signal. The Nasdaq was very overbought two weeks ago and those pressures are now easing.


The small cap advance/decline line peaked back in early December and has remained choppy as the excesses from the 21% post election gain in the Russell are consolidated. The MACD is negative and a move in the A/D below 2,250 would be a strong sell signal.


The McClellan Oscillator for the NYSE has already shifted into sell mode as the small caps on the NYSE failed to keep pace with the Dow 30 big caps. This is a skybox view of the market and is useful for confirmation rather than an actual trade trigger. The move under 20 is confirmation of a sell signal.


The S&P weakness on Friday is a concern but it is not yet a sign of a pending decline. The index did not lose any ground ahead of the weekend and there were buyers on the dip. A move below Friday's low of 2,375 would be a warning but there is decent support at 2,360. A drop below 2,350 should retest 2,300 and a normal 3% decline.


The Dow remains the most overbought index now that the Nasdaq has consolidated some of its gains. The Dow has the most to lose after its 12 consecutive days of record closes and then the 300-point short squeeze on Wednesday. We could easily see a 500-point decline but that would not even dent the long-term uptrend. It would take a drop back to 20,000 to seriously damage the bullish sentiment.


Remember, we average about three declines of 3% or more per year. We have not had one since last fall and there is a lot of uncaptured profits at risk. With the Fed expected to hike rates on the 15th and the return of the debt ceiling crisis, there is significant market risk over the next two weeks. We should begin to see debt ceiling headlines every day starting this week. The talking heads on TV will be looking for something to use as a headline and the debt ceiling is always bad news. This will be a major challenge for the new president and the country will be watching to see how he handle it even though it will be up to congress to actually do something about it.

Remember, in August 2011 the S&P fell 250 points in about two weeks on a debt ceiling fight. Do you think the opposing parties in congress are more agreeable this time around? I seriously doubt it. This could get ugly.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Breathing Easier

by Jim Brown

Click here to email Jim Brown

Editors Note:

Millions of people have sleep apnea and going to bed at night is a constant worry. Resmed is combating that problem with more than two million cloud-connected devices to monitor a person's sleep.


NEW DIRECTIONAL CALL PLAYS

RMD - Resmed - Company Profile

ResMed Inc. designs, develops, manufactures, and markets medical devices and cloud-based software applications that diagnose, treat, and manage respiratory disorders. Its portfolio of products include devices, such as air flow generators, ventilators, and oxygen concentrators; diagnostic products; mask systems; headgear and other accessories; dental devices; portable oxygen concentrators; and cloud-based software informatics solutions. The company also produces continuous positive airway pressure, variable positive airway pressure, and AutoSet systems for the titration and treatment of sleep disordered breathing (SDB). In addition, it offers data communications and control products, such as EasyCare, ResLink, ResControl, ResControl II, TxControl, ResScan, and ResTraxx modules that facilitate the transfer of data and other information to and from the flow generators. The company markets its products to sleep clinics, home healthcare dealers, patients, hospitals, physicians, and third-party payers through a network of distributors and direct sales force in approximately 100 countries. Company description from FinViz.com.

The company reported earnings of 73 cents and best expectations for 70 cents. Revenue of $530.4 million that rose 17% and beat estimates for $515.6 million. They are expected to post double-digit earnings growth in 2017 because of new product announcements.

The new AirFit N20 and F20 full-face masks are outfitted with an "infinity seal" which offers a significant advance in fit and comfort. They just received approval for the AirMini, a CPAP for travelers.

The company now has more than two million cloud-connected devices but only a 20% penetration of their core market. They are expanding their line to market to COPD patients where they have less than 1% market share. With hospital care extremely expensive, patients are finding it significantly cheaper to stay at home with the proper breathing equipment that is constantly monitored.

With the American consumer becoming increasingly obese, the number of people with sleep apnea is growing daily. This is a booming market for Resmed because everyone wants to wake up the next morning and not stroke out as a result of sleep apnea.

Earnings April 24th.

Shares made a new high on Wednesday and then faded into Friday where the low was made early in the morning and shares closed at their high for the day. This hiccup in the recent upward trend gives us a less risky entry point.

Buy July $75 call, currently $3.10, initial stop loss $70.65.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Undecided

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets traded negative most of the day and closed only barely positive. On the plus side they did not give back any of their gains. On the negative side, they could not add to those gains. Basically investors fought to a draw. Volume was average at 6.6 billion shares. That was the lowest for the week but it was a Friday.

Next week will be key with two events the following week that can cause problems.

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. The chance of a March rate hike has more than doubled over the last week to 70% and that is almost a guarantee it will happen. That is sure to cause some political tweets and could upset 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


AZN - AstraZenaca

The long call position was entered at the open.

VMW - VMWare

The long call position was stopped at $89.05.

QCOM - Qualcomm

The long call position was closed at the open.



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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

ADP - Automatic Data Processing - Company Description

Comments:

No specific news. Minor gain but holding at the recent high.

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.


AZN - AstraZenaca - Company Profile

Comments:

AZN entered into a deal with Sanofi to market MEDI8897 for the prevention of resipiratory synctial virus (RSV) in newborns and infants. AZN will get 120 million euros up front and 495 million upon the achievement of sales related milestones. All costs will be shared equally.

Shares pushed through resistance to close at a three month high.

Original Trade Description: March 2nd

AstraZeneca PLC engages in the discovery, development, and commercialization of prescription medicines for the treatment of respiratory, inflammation, autoimmune, cardiovascular, metabolic, oncology, infection, neuroscience, and gastrointestinal diseases worldwide. Its marketed products comprise Accolate, Bricanyl Respules, Bricanyl Turbuhaler, Daliresp, Duaklir Genuair, Eklira Genuair/Tudorza/Bretaris, Oxis Turbuhaler, Pulmicort Turbuhaler/Pulmicort Flexhaler, Pulmicort Respules, Rhinocort, Symbicort pMDI, and Symbicort Turbuhaler for respiratory, inflammation, and autoimmunity diseases; Atacand1/Atacand HCT/Atacand Plus, Brilinta/Brilique, Crestor2, Plendil, Seloken/Toprol-XL, Tenormin3, and Zestril4 for cardiovascular disease; and Bydureon, Byetta, Farxiga/Forxiga, Kombiglyze XR, Komboglyze, Onglyza, Symlin, Xigduo, and Xigduo XR for metabolic disease. The company's marketed products also include Arimidex, Faslodex, Iressa, Lynparza, Nolvadex, Tagrisso, and Zoladex, as well as Casodex, Cosudex for oncology disease; Fluenz/FluMist, Fluenz Tetra/FluMist Quadrivalent1, Merrem/Meronem2, Synagis3, and Zinforo4 for infection disease; Diprivan, EMLA, Movantik/Moventig, Naropin, Seroquel IR, Seroquel XR, Vimovo1, Xylocaine, and Zomig for neuroscience disease; and Losec/Prilosec and Nexium for gastrointestinal disease. It serves primary care and specialty care physicians through distributors and local representative offices. The company's pipeline includes 146 projects, of which 125 are in the clinical phase of development. It has collaboration agreements with Celgene Corporation; Immunocore Limited; Heptares Ltd.; Foundation Medicine, Inc., French National Institute of Health and Medical Research (Inserm); and FibroGen and Astellas, as well as a research agreement with Eli Lilly. Company description from FinViz.com.

In their recent earnings AZN reported $1.21 compared to estimates for $1.14. Revenue of $5.585 billion was in line with estimates.

Shares fell after the CEO warned that generic sales of Crestor were crushing sales of the original drug. Sales of Crestor were down 53% in the quarter. The company said because of the Crestor decline there would be low to mid single-digit declines in revenue in 2017 and low to mid-teens percentage decline in core EPS.

However, the company has a lot of drugs coming to market and several are "life changing" for cancer, respiratory and metabolic diseases. He said AZN was at an inflection point for the anticipated return to long-term growth built on a solid pipeline.

Earnings May 4th.

AZN just received approval from the FDA on a type-2 diabetes drug called Qtern, a once daily tablet for a disease that affects 29 million Americans. They also said Lynparza, a breast cancer treatment, proved to be more effective than chemotherapy in treating metastic breast cancer.

Investors are buying AZN for the pipeline and ignoring the decline in Crestor. They have had years for that decline to appear and now it is old news.

AZN is a slow mover and the options are cheap. If the market rolls over we will not have much at risk. If the market rebounds we should be in the money in a couple days.

Position 3/3/17:

Long May $30 Call @ $1.10, see portfolio graphic for stop loss.


AZPN - Aspen Technology - Company Profile

Comments:

No specific news. No material decline in a mixed market.

Original Trade Description: March 1st

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.

Position 3/2/17:

Long Apr $60 call @ $1.60, see portfolio graphic for stop loss.


BMY - Bristol Myers - Company Profile

Comments:

No specific news. Minor gain but still a gain. Approaching resistance at $60.

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:

Harris announced a quarterly dividend of 53 cents payable March 24th to shareholders of record March 14th. The announcement was late in the day and there was no material spike in the stock. Shares are trapped in a narrow consolidaiton range after the February rally.

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.


PAYC - Paycom - Company Profile

Comments:

No specific news. Excellent $1.30 gain to 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:

I recommended we close this position at the open. We exited for a very minor 10 cent loss.

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.

Update 3/1/17: Commentary from Fool.com: Over the last couple of years Qualcomm launched custom Snapdragon chips for connected cars, drones, wearables, and other Internet of Things (IoT) gadgets. It acquired IoT and automotive chipmaker CSR for $2.4 billion in 2015 to gain a foothold in both markets, then offered $47 billion to take over NXP in late 2016. If the NXP deal closes, it will boost Qualcomm's "serviceable addressable markets" by about 40% to $138 billion in 2020, be "significantly" accretive to non-GAAP earnings, and generate $500 million in annualized run-rate cost synergies two years after the deal closes.

Update 3/2/17: Apple filed another suit against Qualcomm in the UK. This is the fourth suit in four different countries. Apple is claiming Qualcomm is charging royalties for technologies not covered by their long-term agreement. Apple is trying to create such a large and diverse problem for Qualcomm that the company will be forced to settle. Apple pays billions in license fees to Qualcomm so this is negative for the company and positive for Apple. Obviously, Apple can afford to fight the fight until they win and every suit weighs on Qualcomm's profitability.

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

Closed 3/3/17: Long June $60.00 call @ $1.50, exit $1.40, -.10 loss.


VAR - Varian Medical systems - Company Profile

Comments:

No specific news. New 4-month high in a mixed market.

Original Trade Description: February 18th

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

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

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

Earnings April 26th.

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

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

Position 2/21/17:

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


$VIX - Volatility Index - Index Description

Comments:

The VIX imploded as the market turned positive Friday afternoon. At 10.96 it is nearing the recent lows. We know there is going to be a mini correction in our future eventually.

I think we need to hold this position as insurance against a larger decline that stops out other positions. If we ever do get a material drop, we will be glad we are holding the VIX calls.

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. Shares dropped to hit our lowered stop loss at $89.05 and take us out of the position. The low for the day was $89.01 before the rebound added 69 cents.

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:

Closed 3/3/17: Long April $92.50 call @ $2.25, exit $1.20, -1.05 loss.



BEARISH Play Updates (Alpha by Symbol)

YELP - Yelp Inc - Company Profile

Comments:

Yelp announced today a new feature that will help customers find businesses with gender-neutral restrooms. Shares fell 63 cents.

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.




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

subscribe now