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Newsletter

Daily Newsletter, Tuesday, 3/7/2017

Table of Contents

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

Market Wrap

Small Caps Breaking Down

by Jim Brown

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The large cap indexes ended the day with only minimal losses but the small cap indexes posted big losses and closed at the lows for the day.

Market Statistics

The small cap stocks, which compose two-thirds of the market, are breaking down. The Russell 2000 and the S&P-600 both posted large losses and closed well under recent support. It appears those indexes, which have been the weakest since early December, are finally giving up some gains and that could trigger selling in the big cap indexes like the S&P-500.


There were no important economic reports this morning. The CoreLogic Home Price Index for January showed prices rose 6.9% year over year and a slightly lower rate than the 7.2% in December. This is a lagging number and it was ignored.

The Trade Deficit for January increased from $44.3 billion to $48.5 billion and the largest deficit since March 2012. Analysts claim the early Lunar New Year may have pulled forward some imports and the number will return to its $44 billion average by the end of March. Otherwise, this would have a significant impact on Q1 GDP. Imports rose 2.3% in January and exports declined -0.6%. Exports totaled $124.0 billion and imports were $189.4 billion. The stronger dollar is going to continue to weigh on exports as the Fed returns rates to normal. Also, a border adjustment tax will impact the imports significantly.

Moody's Chart

Consumer Credit additions for January declined to $8.8 billion from $14.2 billion in December and $25.8 billion in November. Revolving credit fell -$3.8 billion and the first drop in a year. It was the biggest decline since 2012. Nonrevolving credit rose $12.6 billion. The drop in the headline number is just one more piece of evidence that the December/January shopping season was very bad. Based on the pattern above I would expect the tax refund checks to go to paying down debt rather than a shopping splurge. The report was ignored.

The first employment report is due out on Wednesday. The consensus expectations have risen from 175,000 to 190,000 over the last two days. The nonfarm estimates rose by a similar amount.

Yellen said if employment remained steady, the Fed was going to raise rates in March. That is the condensed version of her statement. Analysts believe any nonfarm number over 175,000 will be considered steady and guarantee a Fed rate hike. However, should we get an unexpected decline and the Fed did not raise rates that could negatively impact the market. I know that seems like the opposite of reactions to prior meetings, but it would suggest recent employment was a bubble and the Fed might have to remain on hold for several more months.

While the market appears to be overly optimistic, the economy is not as strong as you would think. The Atlanta Fed real time GDPNow for Q1 has declined from a forecast of 3.4% growth to only 1.3% over the last four weeks. The economic reports have not been as strong as they appear on the surface. The Fed will look at this forecast before they decide to raise rates. The Fed funds futures are currently predicting an 84.1% chance of a rate cut. With the GDP forecast this low, will they actually pull the trigger?




President Trump tweeted this morning that he was working on a new system to lower drug prices. The only thing that came down was the price on drug stocks. The Biotech Index ($BTK) gapped lower and ended the day with a -1.4% loss. Several high profile drug stocks fell sharply before rebounding in the afternoon. This tweet was a major reason the markets opened lower. The futures were already negative overnight but fell again on the tweet. Multiple analysts were scratching their heads on the tweet and wondering what it meant. Citigroup said "It is unclear to us what a 'new system' would entail." Evercore said, "The question really is: what does this mean?" Evercore suggested Trump might be referring to Medicare Part B where there are no pricing tiers. Trump has said multiple times he wants drug companies to enter competitive bids on drugs sold to Medicare.



It was a boring day in the earnings cycle. Dicks Sporting Goods (DKS) reported adjusted earnings of $1.32 compared to estimates for $1.29. Revenue of $2.48 billion barely edged out estimates for $2.47 billion. Same store sales were up 5%.

Dick's guided for Q1 for earnings of 48-53 cents and analysts were expecting 61 cents. They guided for same store sales of 3% to 4%. Dick's expects full year earnings of $3.65-$3.75. Shares fell 9% on the weak guidance.


Michaels (MIK) reported earnings of 96 cents compared to estimates for 95 cents. Revenue of $1.75 billion rose 4.1% but missed estimates for $1.81 billion. The sales growth came from the acquisition of 19 stores from Lamrite West. Same store sales actually declined -0.5%. Michaels predicted the same sales trend for 2017. While other retailers are closing stores, Michaels plans on opening 17 new stores this year to bring their total to 1,220. They guided for full year earnings of $2.05-$2.17 and analysts were expecting $2.04. Shares rallied 2% on the news.


Navistar (NAV) reported a loss of 76 cents and analysts were expecting a loss of 51 cents. Revenue of $1.66 billion missed estimates for $1.75 billion. The company completed a $256 million equity investment from Volkswagen last week. Some analysts believe it will lead to a complete takeover of the problem plagued Navistar. The equity investment gives Navistar access to Volkswagen technology.


H&R Block (HRB) reported a loss of 49 cents that was slightly better than the 52 cents analysts expected. Revenue fell from $475 million to $452 million but still beat estimates for $427 million. The company normally reports a Q4 loss because of tax filing seasonality. They said they gained market share in the quarter and repurchased $100 million in stock. They have repurchased $317 million in the current fiscal year. IRS reported a 10% decline in E-filing so far in 2017.


Bojangles (BOJA) reported adjusted earnings of 28 cents that beat estimates for 21 cents. Revenue of $139.4 million just missed the estimates for $140.4 million. They guided for the full year for earnings of 87-93 cents and revenue of $560-$569 million. Same store sales rose 2.4%. Company owned stores rose 1.1% and franchised stored rose 3.2%. They opened 21 stores with 9 company owned and 12 franchised to bring their total to 716. They plan to open 57-62 stores in 2017. Shares collapsed on the news.


Earnings are winding down and Thursday is the last set of headliners. Sears, Staples and Ulta Beauty are the ones to watch.


Snap Inc (SNAP) shares continued to collapse with a 10% decline. I warned on Sunday once the IPO shares were settled and available for shorting, there would be a big hit to the stock price. Helping the slide was an investor group asking index providers S&P Dow Jones and MSCI to bar SNAP from being included in the indexes because the IPO shares were non-voting. S&P Dow Jones said they would not add any company until 6-12 months after the IPO and would use that time to study Snap's structure. MSCI said SNAP does not currently qualify for inclusion but the decision would be reviewed in May. There are now 5 analyst recommendations, two holds and three sells. One of those is an underperform, which I classify as a sell. Who wants to hold an underperforming stock. Been there, done that.


GEO Group (GEO), a REIT operator of private prisons, announced a 6 million share secondary after the close. They plan to use the proceeds to repay amounts under their existing revolving loan and for general purposes. Shares fell $3 on the news. They have been an outperformer since the election.


Dish Network (DISH) will replace Linear Technology (LLTC) in the S&P-500 on Monday. LLTC is being acquired by Analog Devices (ADI).



Markets

Was 100 the round number investors were watching? Today was the 100th day since the S&P has lost more than 1% in a single session. Is that the trigger for a sell off? I seriously doubt it. That only makes it the 12th longest streak since 1950. Those types of streaks rarely have any impact on the market.

The S&P has traded within 1.5% of its high for the last 79 days. That is how little downside volatility we have had. The index could not even put a couple days together to add up to 1.5%.

The TD Ameritrade Investor Movement Index (IMX) is setting records. The sentiment index was invented in 2010 and is currently at historic highs. The index is calculated by surveying positions and cash held in investor accounts as well as the amount of trading activity by those accounts. Ameritrade has more than 6 million investor accounts so it is a broad sampling. Having the index at a historic high is another piece of data indicating the market is overbought. This could be called the irrational exuberance index.


Volume today was 6.5 billion shares and down volume was more than twice up volume despite the minor index losses. Decliners of 4,918 vastly overcame advancers at 2,096. New 52-week lows of 153 beat new highs at 146 for the first time in 2017.

As of Monday's close, the Dow was up +14.2% since the election. The S&P +10.9%, Nasdaq +12.5% and the Russell 2000 +15.8%. Those are remarkable gains for less than four months of trading and without a 1% single day decline.

The S&P has erased the post speech gains and is closing in on decent support at 2,360. A break below that level could trigger the sell off everyone has been expecting. With the futures down -5 Tuesday night and the markets down for two consecutive days, we could be setting up for a real decline.


The Dow has traded in a narrow range for the last three days with slightly lower highs and lows. The doji candles represent indecision and lack of conviction by both buyers and sellers. The Dow is the most overbought index and the least supported. There was very little movement in the individual Dow components.



The Nasdaq has also erased the Wednesday gains and is closing in on strong support at the 5,800 level. The small bodies on the last two candles represent indecision and Tuesday's candle closed near the lows.


The small cap Russell 2000 closed at the low for the day and well under support at the 1385-1388 level. The index has been the weakest link and it could be leading the large caps lower. The sharp decline in the biotech sector was a major factor in today's drop.


There are multiple things weighing on the market. We have the economic slowdown in Asia, warnings over the South China Sea, North Korea and Iran firing missiles, the impending French election and the sporadic tweet storm. Add in the uncertainty over the FOMC meeting next Wednesday and the expiration of the debt ceiling.

Last night the republicans released the draft of the new American Healthcare Act and it appears to be dead on arrival. More than 20 republican senators and representatives have said they will not vote for it and the list is growing.

The new administration cannot do tax reform, which is what the market really wants, until the healthcare reform is passed. With everyone choosing sides before the bill has even moved into the first committee, it is going to be a long hard fight and it may not happen before the August recess. That means overhauling the tax system may not happen in 2017. That is a major sentiment killer once it becomes apparent to the retail and even institutional investors.

The market has had dozens of reasons to sell off and failed to do so. Every minor dip has been bought. Now after two days of minor declines there is a growing feeling that a volatility event is imminent. We will have to wait and see if this is just a new wall of worry that can be scaled or is this the Great Wall that proves to be too high without a running start from a lower level.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Down and Out

by Jim Brown

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Editors Note:

The retail sector is a graveyard of broken dreams, ghost town malls and excess inventory. All Target's are not mall stores but the chain has a bigger problem in addition to the breakdown of the malls it is called Amazon.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

TGT - Target Corp - Company Profile

Target Corporation operates as a general merchandise retailer. It offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; music, movies, books, computer software, sporting goods, and toys, as well as electronics, such as video game hardware and software; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. The company also provides food and pet supplies comprising dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and home furnishings and decor, including furniture, lighting, kitchenware, small appliances, home decor, bed and bath, home improvement, and automotive products, as well as seasonal merchandise, such as patio furniture and holiday decor. In addition, it offers in-store amenities, including Target Cafe, Target Photo, Target Optical, Portrait Studio, Starbucks, and other food service offerings. Target Corporation sells products through its stores; and digital channels, including Target.com. Company description from FinViz.com.

Target reported earnings of $1.46 compared with $2.31 in the year ago quarter. Analysts estimates were $1.50. Full year earnings of $4.58 was also below the 2015 total of $5.25. Sales for the holiday quarter declined -4.3% to $20.7 billion and also missed estimates. The company guided for 2017 same store sales to decline in low single digits with earnings at a mid range of $4.00, also below the 2016 total. Q4 same store sales fell -1.5%. For Q1 they guided for earnings of 80 cents to $1, below the year ago $1.29 and analyst estimates for $1.31. For the same period Walmart saw same store sales rise 11.8%.

Earnings May 30th.

Shares are crashing because investors are worried Target will turn into Sears with the monster stores becoming ghost towns similar to the deserted stores operated by Sears. With guidance moving lower, analyst estimates moving lower and the biggest shopping quarter of the year behind them, it could be a long hot summer for Target's share price. Shares closed at a five-year low on Tuesday after breaking support at $56.

Buy May $52.50 put, currently $1.39, initial stop loss $58.65.



In Play Updates and Reviews

Closed Near the Lows

by Jim Brown

Click here to email Jim Brown

Editors Note:

Markets closed near their lows after two back-to-back losses. The market appears to be anticipating a sell off but it never comes. The market has had multiple opportunities to drop but each one turned into just a minor bout of weakness. The dips were bought. The dip today was minor and the buying was lackluster.

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


ITW - Illinois Tool Works

The long call position remains unopened until a trade at $135.25.



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BULLISH Play Updates

ADP - Automatic Data Processing - Company Description

Comments:

No specific news. Minor decline from Monday's new 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. Big drop at the open after the Trump tweet on drug prices but recovered almost all of the loss.

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. Another big spike at the open 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 sharply at the open after the Trump tweet on drug prices.

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.


ITW - Illinois Tool Works - Company Description

Comments:

No specific news.

This position remains unopened until a trade at $135.25.

Original Trade Description: March 6th.

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 last week 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


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 some 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 recent 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 again at the open but immediately began to decline when the rebound began in equities. Nobody believes there will ever be a sell off.

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:

No specific news. Minor gain in a weak market.

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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