Option Investor
Newsletter

Daily Newsletter, Monday, 3/6/2017

Table of Contents

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

Market Wrap

Another Dip Bought

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Global markets were cautious in today's trade with the ECB, NFP and FOMC at hand, but the dip was bought. There was little to move the market today, the economic and earnings calendar's were both light on events, and there is quite a bit of market moving data due out later this week so volume was light and action directionless. The dominant thing in everyone's mind is the FOMC meeting, they are expected to raise rates by at least 25 basis points, but not enough to overshadow the NFP on Friday. Expectations aren't wild, only 210,000, so anything in the range of 175,000 to 250,000 should be Goldilocks.

Indices in Asia were more mixed than down. Chinese markets were up on optimistic talk coming out of the annual meeting of China's parliament. Japanese market were down however as a stronger dollar hurt the yen and North Korea fires more missiles at them. This time 4 ballistic missiles were fired with at least 3 of them landing within Japan's economic zone of operations. Europe moved lower as well, first down about a half percent but paring those losses by the close.

Market Statistics

Futures trading indicated a negative open all morning. The trade was relatively steady for most of the morning, down about -5 points for the SPX, but fell off a bit going into the open. At the open there was a mild rush of selling, not too strong, that pushed the index down about -13 points but that was the bottom of the day. The market had begun to move higher by 11:30AM, after the SPX closed the gap formed last Wednesday and confirming near term support. Between 11:30 and 1PM the indices halved their losses at least and then entered a tight trading range that persisted into the close.

Economic Calendar

The Economy

Only one economic release today, Factory Orders for January. New orders for manufactured goods rose by 1.2%, better than expected but down a tenth from last month and the 6th month of increases. Last month was not revised. Within the report shipments continues to rise while unfilled orders fell. Inventories rose by a tenth after falling -0.3% last month. Durable goods order rose by 2%, led by transportation equipment.

Moody's Survey of Business Confidence gained 0.5% to hit 33.6 and is just off the short term high. Mr. Zandi's summary is little changed. He says that global business remains optimistic, stable and strong. The global economy is growing at the high end of its potential, view of current conditions has improved from the fall and forward outlook is positive.


Earnings season is just about over for this cycle. To date, 98% of the S&P 500 has reported earnings with 65% beating earnings estimates and 53% beating revenue estimates. The blended rate is 4.9%, not bad considering the long earnings recession we were just in but not as good as I had expected. Forward outlook remains positive although the estimates are creeping lower.


First quarter 2017 is now expected to see earnings growth of 9.0%, down -0.3%, with second quarter growth down to only 8.5%. Full year 2017 outlook fell to 9.7%, still robust, with that growing to 11.9% in 2018. Estimates for next year are on the rise, rising a tenth from last week. Energy is still expected to lead in 2017 with full year growth of 315%.


The Dollar Index

The Dollar Index fell in early trading to test support at the short term moving average. Today's action is most likely backing-and-filling as forward outlook is quite bullish for the dollar. The FOMC is expected to raise rates next week, the CME's Fedwatch tool rising above 80% today, with the prospects of 3 hikes this year growing day by day. The risks this week are the data, which may be too weak or too strong, and the ECB meeting on Thursday. A hawkish sounding ECB or Mario Draghi could boost the euro and take the wind out of the dollar's sails. Support is the short term moving average, upside targets are near $103.75.


The Gold Index

Gold prices held steady today, spot gold closing with almost no movement, but downside pressure remains. The FOMC is a near certainty to raise rates, if the data is good they might be expected to raise rates a little quicker than they are now. If so support for gold could dry up. First target is $1,200 but a break below here could send it down to $1,150 in the near to short term.

The gold miners continue to lose ground. The Gold Miners ETF GDX fell more than -2.5% today to test support at $21.50. The ETF appears to be heading lower, the indicators are both consistent with a strengthening sell-off and lower prices, but a break below support is required. There may be a bounce from here this week while we wait on the data and then the FOMC next week but longer term outlook remains bearish. Resistance may be as high as $23.50, a break below support could go as low as $18.50.


The Oil Index

Oil prices lost ground today as rising US production and storage continue to offset OPEC production cuts. Today's action was supported to by talk of further OPEC cuts but negative all the same. WTI fell a little more than -0.25% to trade just above $53, near the mid-point of the near-term trading range. There is still no clear indication of supply/demand rebalancing so I expect this range to hold in the near to short term.

The Oil Index gained 0.34% today, contrary to the broad market's decline, in a move confirming support at the 1,200 level. The index appears to be building a base at this level, supported by forward earnings outlook, and is only awaiting the right catalyst to send it higher. The indicators are both confirming support at this level and set up for a fairly strong bullish entry signal in-line with the prevailing long-term trend. MACD has turned bullish and stochastic is set up for a strong bullish signal so all that's left is for a move to the upside. Near term resistance is the short term moving average, just above today's close, with additional targets near 1,235 and 1,250. A break above these could lead to a long term upward movement with upside targets near 1,350 and 1,500.


In The News, Story Stocks and Earnings

Shares of Tyson Foods, maker of all manner of poultry products, got slammed today on reports one of its suppliers had a case of the bird flu. This is the first case of bird flu in a year and is in process of being contained. If not it could affect other companies, Cal-Maine is one that springs immediately to mind. Cal-Maine is one of the largest supplier of shell eggs in the country and could get a boost if the hen population gets sick and eggs get scare. Shares of Tyson fell more than -2.5% on the news, finding support near the bottom of the three month trading range. Shares of Cal-Maine gained 1% and look like they may be heading back to the top of a 6 month range.


Shares of GoPro got slammed today as well following a downgrade by Goldman Sachs. The investment banker says the camera makers market is saturated and the entry into the drone business was not very promising. The rating was dropped to a sell from neutral with a price target of $6. The stock fell nearly -8% on the news and is now trading at a new all-time low, just above $8.


The VIX gained a little more than 2.5% in today's session but created a black bodied candle. Today's action made a small gap up at the open, opening at the short term moving average, and then falling throughout the day. The index appears to be falling back to the long-term lows and the indicators are in agreement. Both MACD and stochastic are indicating a peak and falling off, consistent with a retreat to support. Support is near $10.50 and historic low levels, levels consistent with ongoing market rally.


The Indices

The indices tried to sell-off again and again it was a halfhearted attempt. The early declines did not last long, buyers stepped in on the dip, and drive them back almost to break-even by the close. If not for a round of selling in the last 15 minutes today's losses would be even less. The Dow Jones Transportation Average led with a decline of -0.75%. The transports created a small bodied black candle with long lower shadow, hammer doji-like, confirming near term support at the short term moving average. The indicators are both bearish, consistent with a test of support, but very weak so the test may not be very deep. A break below the short term moving average is bearish in the near term with downside target near 9,250 and would be a possible entry for long term bullish positions.


The NASDAQ Composite made the second largest decline but only half that of the transports, -0.37%. The tech heavy index created a small white bodied spinning top candle testing near term support at the bottom of the gap opened last Wednesday. The indicators are consistent with a pull-back or consolidation so support could be tested again. A break below 5,820 would be bearish in the near-term with downside target near 5,750 and a long term up-trend line. A move higher from here may find resistance at the all-time high, a break above that is bullish with new all-time high targets near 6,000.


The S&P 500 made the third largest decline, -0.33%, closing with a loss of -7.81. Today's action created a small doji hammer testing support at the bottom of the gap opened last Wednesday. This is a good thing as it allows those who've missed out on the last week's rally to get in without having to chase prices, and for a calm consolidation while profits are taken and new positions are opened. The indicators are consistent with a top, both rolling over from recent peaks, so support may be tested again. A break below support would be bearish near-term with downside target near 2,350 and the bottom of last week's trading range. A move up from support may find resistance at the all-time high, a break above there would be bullish with upside target near 2,450.


The Dow Jones Industrial Average made the smallest decline today, -0.24%. The blue chips created a small spinning top doji, testing for support, but did not close the gap formed last Wednesday. The indicators are rolling over, consistent with a peak, so the gap could be closed tomorrow or Wednesday if nothing spurs the bulls into buying. A break below 20,850 would be bearish near-term with downside target near 20,500, a bounce from these levels would be bullish with upside target at the all-time high with chances for new all-time highs.


Today's action was not bad at all. There was some selling but no one lost their nerve over the weekend, there was no mad rush to get out of the market and near-term support levels held. Tomorrow could be more of the same, there are only two data points and neither one a market move in my opinion; consumer credit and the trade balance. The earnings calendar is also light, we've entered the doldrums of the cycle so there's a few weeks before things get going, so probably nothing market moving there either. As for the rest of the week; Trump could Tweet, we might get a look at the new health care plan and there is some key labor data due but the big mover will be the NFP on Friday. Until then, near-term ranges could hold, after that we'll have to see. Longer term I remain bullish. If there is a deeper pullback or correction, caused by the NFP or the FOMC, it will likely be a buying opportunity. If there isn't a deeper pull-back or correction hold on tight because more new highs are on the way.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Testing Conviction

by Jim Brown

Click here to email Jim Brown

Editors Note:

This company is unappreciated by the average investor because its customers are large corporations. ITW sells tools to corporations instead of individuals so the name is not well known. We are only going to enter this position if traders confirm their bullish convictions.


NEW DIRECTIONAL CALL PLAYS

ITW - Illinois Tool Works - Company Description

Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The Automotive OEM segment produces components and fasteners for automotive-related applications. The Test & Measurement and Electronics segment provides equipment, consumables, and related software for testing and measuring of materials and structures. This segment also offers equipment and consumables used in the production of electronic subassemblies and microelectronics. The Food Equipment segment provides commercial food equipment and related services. The Polymers & Fluids segment produces adhesives, sealants, lubrication and cutting fluids, and fluids and polymers for auto aftermarket maintenance and appearance. The Welding segment produces arc welding equipment, consumables, and accessories for various industrial and commercial applications. The Construction Products segment produces engineered fastening systems and solutions. The Specialty Products segment provides beverage packaging equipment and consumables, product coding and marking equipment and consumables, and appliance components and fasteners. Company description from FinViz.com.

ITW reported earnings of $1.39 compared to estimates for $1.37. Revenue of $3.4 billion matched estimates. Earnings were impacted by a 2% hit from the strong dollar.

The company reaffirmed their 2017 guidance for organic revenue growth of up to 3.5% and revenue from $13.8 to $14.1 billion. Operating margin is expected to rise 100 basis points to 23.5%. Free cash flow is expected to be $2 billion and $1 billion will be used in 2017 for stock buybacks. Q1 earnings guidance was $1.39 to $1.49. They ended the quarter with $2.472 billion in cash.

Earnings April 26th.

The commentary was positive and stock spiked sharply after earnings. Over the next four weeks, traders took profits and shares traded sideways. On the February 13th they declared a quarterly dividend of 65 cents payable April 11th to holders on March 31st. Shares ticked higher and began to make new highs.

I believe the economy is accelerating. The Philly Fed Manufacturing Survey was the highest since 1984 after three months of rapid growth. The new president is doing everything he can to spur growth in the USA and this is going to be contagious throughout America. Tool demand is going to rise.

Shares spiked to a new high after the president's speech and have held those gains.

Earnings are late April and I am reaching out to June for the option (no May strikes) and because of the market weakness I am putting an entry trigger on the position. We want to make sure the stock and market are moving higher before we enter the play.

With an ITW trade at $135.25

Buy June $140 call, currently $2.25, initial stop loss $132.65


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Losing Traction

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets rebounded from the early morning dip but there was a definite lack of conviction. The Dow posted the second lower high, lower low and the spinning top doji candlesticks indicate a lack of conviction by both buyers and sellers. The market fluctuated intraday but failed to make a significant move.

The S&P was weaker than the Dow but only marginally. The indexes all rebounded from the opening dip but failed to return to positive territory.

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 75% 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


RMD - Resmed

The long call position was entered at the open.

HRS - Harris Corp

The long call position was stopped at $109.35.



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 closing 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:

No specific news. Only a minor decline from the four-month high on Friday.

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.

Update 3/3/17: 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.

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. New intraday high but minor decline in the afternoon.

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. Dropped with the market at the open but recovered most of the loss in the afternoon. 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 shares dipped at the open to $109.32 to stop us out by 3 cents. I probably had the stop loss too tight but after a week of no gains, I was afraid of a support break or a market roll over. I considered reentering the position but I am going to pass today. If the stock recovers and moves over resistance, I will reinstate it.

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:

Closed 3/6/17: Long May $115 call @ $2.22, exit $1.20, -1.02 loss.


PAYC - Paycom - Company Profile

Comments:

No specific news. Minimal gain but still a new high in a down market.

Original Trade Description: February 27th

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

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

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

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

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

Position 2/28/17:

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


RMD - Resmed - Company Profile

Comments:

No specific news. Shares dropped sharply with the market at the open but rebounded to recover most of the losses.

Original Trade Description: March 4th

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.

Position 3/6/17:

Long June $75 call @ $2.50, see portfolio graphic for stop loss.


VAR - Varian Medical systems - Company Profile

Comments:

No specific news. Minor decline from the 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:

The VIX spiked at the open but immediately began to decline when the rebound began in equities. 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.



BEARISH Play Updates (Alpha by Symbol)

YELP - Yelp Inc - Company Profile

Comments:

Yelp filed a SEC notice that it had completed the Nowait acquisition. Shares rose only 15 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.




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