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Daily Newsletter, Wednesday, 3/8/2017

Table of Contents

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

Market Wrap

Slow Pullback

by Keene Little

Click here to email Keene Little
Since the March 1st high we've seen the indexes slowly pull back as dips are bought and bounces are sold. There seems little commitment by either side to move the market and we're left wondering if the pullback is going to be just a short correction to the rally or something more bearish. The jury is still out deliberating.

Today's Market Stats

Other than the weaker small cap stocks the other indexes have not given much back in the past week and the slow choppy pullback continues to keep the price pattern potentially bullish. What's not clear yet is whether or not we'll get a larger pullback before possibly heading higher again or if instead we're going to get a large (in time if not price) consolidation over the next several weeks before then turning back up.

Of course the bears could always make a surprise attack and scare up enough bulls to hit their stops and start the market tumbling lower. We have a preliminary sell signal that goes by the scary sounding name "Ohama Titanic Syndrome," which I'll discuss more later. It wouldn't be the first time that a slow pullback/consolidation suddenly lets go to the downside so these sell signals, even if it doesn't pan out, deserve our attention.

This morning started off quietly with a continuation of the sideways choppy consolidation we've seen since Monday. The afternoon turned weaker when it became more apparent that the consolidation wasn't going to lead to another bounce. The dipsters are probably getting a little frustrated that their favorite trade for the past 100 years (OK, I exaggerate but it feels that long) isn't working. It's not much but the pullback from March 1st is already a little deeper than anything we've seen since the Trump rally began on November 4th. The risk is that the hope-filled rally will start to deal with reality.

This morning's economic reports had very little effect on the market. One surprising number was the ADP report, which showed a higher than expected gain of 298K jobs vs. expectations for 180K and an improvement from 261K in January. This was the biggest monthly gain since April 2014. And the January number was revised higher from 246K. The expectation for the NFP report this Friday is 188K, down from 227K in January, but we could see an upside surprise there as well.

The strong employment number, especially if it's mirrored in Friday's NFP report, would prompt a higher expectation for a rate increase by the Fed next week, although they're pretty much 100% now for next week. Expectations of another hike in June jumped above 50% for the first time. We did see some selling in the bond market today, which drove yields higher, but the rates we see as consumers (2-year through 30-year) are not affected by the Fed. Market forces (supply/demand) are what drive their prices. What the Fed does is somewhat meaningless for most of us.

Crude inventories were reported this morning and they jumped +8.2M barrels last week, up from +1.5M barrels the previous week. This caused oil prices to take a dumperoo and oil broke support today (I'll cover more later).

Other than that, it was a quiet day but another weak one. The market is pulling back but it's doing so slowly and in a choppy fashion. This pattern supports the idea that we'll get another rally leg out of this but it's too early to tell whether or not the decline is simply building up for a bigger move to the downside or if instead it will continue to consolidate for weeks as it's done in the past before moving higher.

The RUT has been the weaker index and that could be an indication of bigger trouble for the broader market. I'll start tonight's chart review with a top-down look at the RUT to try to discern its next move.


Russell-2000, RUT, Weekly chart

Since December, when the RUT was first approaching its trend line along the highs from 2007-2014-2015, I've been watching to see if it will be resistance. It was finally tagged February 21st and again on March 1st (at 1414). Both times it left a significant bearish divergence on the daily chart as well as the weekly chart, as can be seen clearly on MACD. Price has rolled over from resistance and the oscillators have rolled over, giving the impression that this line of resistance is going to hold.

We could of course get another quick pop back up for another attempt or we could first see a deeper pullback to its uptrend line from February-November 2016, currently near price-level support (its June 2015 high) at 1296. If we get a choppy sideways/down pullback over the next several weeks we could see the uptrend line closer to 1340 by the time it's tested in April. A choppy pullback to the uptrend line would suggest another rally leg would follow. But a sharp impulsive decline to the uptrend line would suggest a bounce would be followed by a break of the uptrend line. But for now the short-term pattern is not clear enough to suggest one way or the other.


Russell-2000, RUT, Daily chart

The RUT's daily chart shows a little more clearly the price action at the trend line along the highs from 2007-2015 and the significant bearish divergence against the December high and between the February and March highs. Yesterday and today it's been struggling to hold support at its 50-dma, near 1376, and only slightly lower is an uptrend line from December 1 - January 30, near 1367.

The short-term pattern supports the idea that the RUT will find support at either of these two levels, 1376 or 1367, and start at least a bigger bounce. That bounce could lead to at least a minor new high to again test the trend line along the highs from 2007-2015, maybe by the end of the month. The choppy pattern in a shallow rising wedge since December would likely continue and see the RUT struggle to make it back up to the top of the wedge, which will be near 1425 by the end of the month. But if we get a bigger bounce and then a break of the uptrend line from December 1st it would be a stronger sign of the bear.

Key Levels for RUT:
- bullish above 1415
- bearish below 1367


Russell-2000, RUT, 60-min chart

The RUT's 60-min chart shows the struggle around 1376 (the 50-dma) and an expectation for a drop down to its uptrend line from December 1st. It could of course break the uptrend line but it's short-term oversold and I think the odds favor a bounce off support. A high bounce that's then followed by a break lower would increase the likelihood that we're at the start of a more serious decline. But until that happens we have to keep in mind the bullish potential for another choppy climb back up to the 1420 area later this month or into April.


RUT's Relative Strength vs. SPX, Daily chart

To put the RUT's weakness in perspective, the chart below compares its strength to SPX and as you can see, it has been underperforming SPX since the RS peaked on December 8th. Even more bearish, the RS of the RUT has now dropped below the bottom of a parallel down-channel that it's been in since December. Like a stock, when it drops below the bottom of a parallel down-channel it means the decline is accelerating. A deteriorating picture for the small caps is likely to infect the broader market.

S&P 500, SPX, Daily chart

From a short-term pattern perspective it's important for the bulls to defend against a break below the February 24th low at 2352.87 since it would indicate the leg up from February 24th completed. That in turn could indicate we're going to get at least a larger pullback before potentially heading back up again. A drop below 2352 would also be a break of support at its 20-dma, now near 2355, and an uptrend line from November 4 - January 31, now near 2353.

Only slightly lower is the trend line along the highs from April-August 2016, now near 2347, and a break below that level would be key for the bears. Once SPX broke above this trend line, on February 14th, it should act as support on a back-test. If the back-test doesn't hold it would mean it was a failed breakout attempt and that would be bearish.

Key Levels for SPX:
- bullish above 2401
- bearish below 2347


SPX vs New 52-week highs, Daily chart

While the pullback from last week looks relatively small and the choppy pattern supports the idea we could see another rally, the underlying strength of the market is questionable. As reflected with the RUT's underperformance, a check under the hood reveals further weakness. The chart below is just one example, which shows the deterioration of new 52-week highs into the March 1st peak.

The indexes were looking good with their new price highs but the rally was on the back of fewer stocks participating in the rally. This doesn't prevent another attempt at a new high but it does tell us the underlying strength in the market is waning. It's not a good time to chase the market higher when this occurs since a fast reversal makes upside potential dwarfed by comparison.

We could see another sideways consolidation like we saw off the December high but notice the higher high for 52-week highs in December vs. the lower high in March. This increases the chance for a more meaningful correction, if not bearish decline, than what we saw after the December high. I'm not showing the advancing stocks minus declining stocks but it's the same picture -- fewer stock participated in the advance into the March high than we saw into the December high.

While we're on the subject of new highs, Tom McClellan noted on Monday that we're nearing the dreaded "Ohama Titanic Syndrome" for the market. This is a signal that was developed back in 1965 by Bill Ohama and is generally agreed to be a preliminary sell signal for the market. It is triggered when the number of new 52-week lows for NYSE-listed stocks exceeds new highs within 7 trading days of a new market high. The NYSE made its high on March 1st and only 3 trading days later, on Monday, new lows exceeded new highs.

New lows have exceeded new highs 3 days in a row this week, which gets us closer to Ohama's refined syndrome signal, which he believes is more accurate if the market experiences 4 out of 5 trading days with new lows exceeding new highs and new highs must decline to about 1.5% of total issuance (about 30). The number of new highs on Monday and today were 42.

By Friday we'll know whether or not we have a more accurate syndrome sell signal and with many participants worried about an overvalued market and a Trump rally that could start to unwind, the sell signal could get more investors worried about the current decline if it continues.

Dow Industrials, INDU, Daily chart

On March 1st the Dow hit its trend line along the highs from May 2011 - March 2015 and then immediately sold off the next day. It then dropped back below the top of a parallel up-channel for its rally from February 2016, near 21K. The selloff from the trend line, like the RUT, and the rollover of its oscillators has it looking more bearish than bullish. But the short-term pattern for the pullback looks corrective and supports the idea that the bulls aren't quite finished yet. We could see another attempt to break above the trend line along the highs from 2011-2015.

If the sellers overpower the buyers we could see the Dow drop down to support at its 20-dma, currently near 20700, and its uptrend line from November 4 - January 31, currently near 20630. A drop below 20630 would be more bearish, especially if the decline starts to develop into a sharp impulsive move.

Key Levels for DOW:
- bullish above 21,200
- bearish below 20,630


Dow Industrials, INDU, 60-min chart

The current decline for the Dow has it approaching potential support near 20840-20850, which includes its February highs and its uptrend line from January 31 - February 8. This afternoon's low was 20835 and the uptrend line crosses 20840 at the open on Thursday. It's a good setup for at least a bounce off support to relieve the short-term oversold condition.


Nasdaq Composite, COMPQ, Daily chart

There are a few lines of support that the Nasdaq is currently testing. It makes it a bit congested on its chart, and hard to see the multiple doji stars for the past 3 trading days, but at the moment you can see the Nasdaq testing its uptrend line from December 30 - January 31, currently near 5860 (closer to 5848 when viewed with the arithmetic price scale). Today's close at 5837 was below this trend line but only by a minor amount and easily recoverable.

A more important trend line is the one along the highs from April-August 2016, which the Naz broke above on February 14th. It has used this trend line as support on multiple pullbacks since then and the line is currently near 5840, very close to today's closing price. A failure to hold this line would leave a failed breakout attempt.

Slightly lower, near 5828, is the 20-dma and then below that, near 5810, is its uptrend line from November 4 - December 30. And finally, its February 24th low at 5800 is the last support line the bears need to cross. All of this gives us a relatively tight support zone at roughly 5800-5860 for the bulls to use to launch either another rally leg or at least a larger bounce. Until the Naz drops below 5800 there remains the potential for another rally leg to a new high.

Key Levels for COMPQ:
- bullish above 5912
- bearish below 5800


10-year Yield, TNX, Weekly chart

The sideways triangle that I've been tracking on TNX since its December high counted as complete with the February 24th low, which was a slight throw-under below the bottom of the triangle (a typical way triangles complete). Yesterday TNX broke above the top of the triangle and rallied higher today. It should be into its final leg of the rally from July 2016 and the upside target zone remains 2.606-2.687, which are two price projections based on the wave pattern. In between is a downtrend line from 1988-2007, currently near 2.635 (arithmetic price scale).

Once this rally leg from July 2016 completes we should get at least a large pullback correction (for several months) before continuing higher (that's the bullish interpretation) or it will start back down and head for new lows later this year (the bearish interpretation). I favor the bearish interpretation, which is based on the longer-term pattern and the idea that the Treasury market will be the go-to place for yield, especially if the stock market heads back down. Foreign investors who want something more than a negative interest rate on their investments will also prefer U.S. Treasuries and higher demand for them will raise their prices and drive yields lower.


Transportation Index, TRAN, Daily chart

On Tuesday the TRAN dropped out of its small ending diagonal (rising wedge) off its February 2nd low. In addition to that bearish move it has now closed back below the November 2014 high at 9310. It has tried repeatedly to clear this S/R level but has been unable to do so. It also closed below its 50-dma, near 9281, and needs to recover that quickly if it wants to keep the bears away. The last break was February 2nd but was recovered the next day. Following the significant bearish divergence into the January, February and March highs, we could be seeing the start of a more significant breakdown.


U.S. Dollar contract, DX, Daily chart

Since its February 2nd low the US$ has been chopping its way back up in what looks like a small rising wedge pattern. It looks like it could use one more minor new high to complete the pattern, perhaps near 102.75 in another couple of days. Unless the dollar rallies above 103 I'm expecting it to soon start back down and head for its uptrend line from May-August 2016, currently near 98.15.


Gold continuous contract, GC, Daily chart

Gold has made a relatively quick move down from its February 27th high, which was a back-test of its broken 200-dma, followed by a bearish kiss goodbye. It then broke its 20-dma and uptrend line from December on March 2nd, followed by a quick back-test of both on Monday before dropped lower. It has now made it down to support at its 50-dma (1210.50) and price-level support near 1205, a break of which would obviously be more bearish for the shiny metal. We could see a bounce off this support zone before heading lower but so far I'm not seeing much in the way of bullish divergence to suggest support is going to hold.


As mentioned earlier, oil got hit hard after the morning inventory report. With all the oil rig platforms coming back on line and the much higher efficiency of the frackers I'm surprised the inventory report was a surprise but apparently caught more than a few traders leaning to the long side.

In fact, the COT report has been showing a huge number of speculators betting oil will continue higher (while commercials have built a larger net-short position). As can be seen in the chart below, the number of long contracts held by speculators (the blue line at the bottom) is at the highest level seen in a long time. It's a higher level than was seen in mid-2014 just before the price of oil crashed lower. The result will likely be similar here.

Speculators in Oil, updated through March 3, 2017, chart courtesy stansberryresearch.com


Oil continuous contract, CL, Daily chart

I've been expecting oil to drop lower from its choppy bounce pattern off the January 10th low and today's decline should be followed by lower prices. There is of course the potential for another leg higher in oil but with the large number of speculators betting on that outcome I think it would be wiser to bet against them (and with the commercials).


Economic reports

The few economic reports Thursday morning will not be market moving but Friday's could move the market if there are any big surprises in the employment numbers. It will all be in the interpretation of WWTFD (What Will The Fed Do).


Conclusion

Time and again we've seen the stock market go into a holding pattern following a rally and it appears so far that a similar pattern has started. Chopping sideways/down is a way to work off an overbought condition and set up the next rally and it's possible we're in the beginning of what could be another multi-week consolidation.

The decline from March 1st is already larger than anything we've seen in the rally off the November 4th low. It's not saying much but it is a change in behavior when the dipsters can't drive the market back up following a small pullback. Whether or not the current pullback turns into a full blown decline of 5% or more (the Ohama Titanic Syndrome signal is a threatening signal) we should be prepared for that possibility. At a minimum we should see a larger consolidation and worse we could see a much stronger breakdown. In either case I think it's riskier being long the market than short it.

As long as the pullback/decline continues to be a slow choppy sideways/down pattern we'll know it's likely to consolidate and work off the overbought condition before heading higher again. The consolidation would likely last through this month (oh joy).

But if the decline starts to steepen, which the RUT is threatening to do, and gains more momentum to the downside then we'll likely get a much stronger correction to the rally and potentially the start of a much more serious decline (if the bull market finished on March 1st, only days from the anniversary of the March 6, 2009 low). It's a good time for both sides to stay cautious while we wait for further price action to provide some more clues.

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

Keene H. Little, CMT


New Option Plays

Betting on a Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The small caps are leading the larger indexes lower and we could finally see a decent dip. How we play that dip is the key. I am profiling a dip buy on the Russell 2000 ETF.


NEW DIRECTIONAL CALL PLAYS

IWM - Russell 2000 ETF - ETF Profile

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities.

The IWM has declined from more than $140 on Wednesday the 1st of March, to $135.90 as of Wednesday's close. The Russell has declined for five consecutive days. There is major support in the $133.50-$134.00 range. With the large cap indexes refusing to decline materially, we should see some buyers appear when that IWM support is reached. Secondary support is about $130.50. We will use a break of that level as evidence the trade is broken and I will place the stop loss slightly below $130.

The small caps rallied 21% after the election and after today's decline that has dropped to 15%. The small caps were the most bullish because the president's policies will benefit small businesses the most. This is why I do not believe the Russell will go into full meltdown mode.

The risk to this trade is that the tax overhaul gets pushed well into the future, possibly 2018. That could happen because of the war currently underway on the new healthcare proposal. If the proposal does not get a vote within the next 30-45 days, the wheels will come off the effort and the president's agenda dies a slow death. Democrats have vowed to slow walk it and stop it if possible.

The second risk is the expiration of the debt ceiling suspension on March 15th. This is not currently being discussed in the news headlines but once it arrives it could be another congressional disaster.

I considered buying puts on the SPY/IWM, etc because of these problems. However, premiums are already high and the large cap indexes are showing strong relative strength. I believe any dip over the next several days will be shallow and brief. If the risks above materialize it should be weeks from now and hopefully after an initial rebound has formed. That will give us an opportunity to exit if the market turns negative again.

Obviously, all of this is just speculation. Nobody can accurately pick market direction in advance. We try hard but the market has a mind of its own. This is a speculative recommendation. Do not enter the position if you cannot afford to lose all or part of your premium.

With an IWM trade at $133.75

Buy May $136 calls, estimated to be $3, initial stop loss $129.50


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Dow Weakens Late in the Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow fell sharply late in the day to temporarily drag all the indexes lower. The Dow was down -86 at the lows and only rebounded slightly to close at -69. The sharp drop turned all the indexes negative but the Nasdaq recovered to post a minor gain. The selling came in the last 30 minutes on no specific news. Crude oil fell -5% to $50 and the low for the year and that pushed CVX and XOM to the bottom of the losers list.

The ADP Employment report was a blowout with 298,000 new jobs compared to estimates for 190,000. If the Nonfarm Payrolls on Friday are similar, the rate hike is a lock for next Wednesday.

The problems ahead are the FOMC meeting on the 15th, which is the same day the debt ceiling suspension expires. Either or both could present problems for the market. The chance of a March rate hike has more than tripled over the last two weeks to 91% today 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


TGT - Target

The long put position was entered at the open.

ITW - Illinois Tool Works

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



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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

ADP - Automatic Data Processing - Company Description

Comments:

No specific news. Minor decline in a weak market.

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. Another minor drop as drug prices received some more attention with democrats visiting the White House for a drug chat.

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. Shares were positive until the Dow imploded in the last 30 minutes of trading.

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. BMY will present at the Barclay's Global Health Conference on March 15th at 8:30 am.

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. Minor decline in a weak 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 again in a weak market. Support was broken and we missed being stopped out by 5 cents.

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. Nice rebound to erase Tuesday's decline.

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 close this time as the Dow imploded in the last 30 min of trading. Maybe we are going to actually see some selling.

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)

TGT - Target Corp - Company Profile

Comments:

No specific news. New five year low.

Original Trade Description: March 7th

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.

Position 3/8/17:

Long May $52.50 put @ $1.38, see portfolio graphic for stop loss.


YELP - Yelp Inc - Company Profile

Comments:

No specific news. Still chopping around in the $33-$34 range. We need a break below $33 to get the party started.

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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