Option Investor
Newsletter

Daily Newsletter, Thursday, 3/9/2017

Table of Contents

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

Market Wrap

Expecting A Strong NFP

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market continued to test support while we wait on next week's FOMC meeting. Looking to the economic calendar I see that the next four trading days, culminating with the FOMC announcement on Wednesday, are packed with data that promise to move the market. Tomorrow is of course the NFP and unemployment data, I expect to see some strong numbers across the board; strong jobs creation, declining unemployment, rising participation and increasing wages. After that Monday is a dud, nothing released that day, and then PPI Tuesday mornings, CPI Wednesday morning and the FOMC later that day.

Today's action was affected by economic data and the ECB meeting. Trading in Asia was less affected, being closed long before the ECB meeting or the release of US data, although producer level inflation in China suggests an uptick in economic activity. Official PPI jumped 7.8% in February, the fastest pace since before the global financial crisis, but was offset by weak consumer level data. Chinese indices fell on the news, about -0.5%, while equities in Japan continue to rise on weaker yen and better than expected GDP growth.

European market closed almost exactly flat after a choppy session. The trade was driven by Mario Draghi who's comments may qualify as Goldilocks. The ECB kept rates unchanged, as expected, with little to no change to the statement. The comments during the press conference however came across as mixed, he talked up the health of the global economy, the effectiveness of ECB policy and signs of recovery in the EU while maintaining the stance that rates would remain at or below current levels for quite some time. Other positives from the press conference are higher targets for 2017 inflation and GDP growth.

Market Statistics

Futures trading was flat to negative for most of the early morning. This moderated to flat as the ECB announcement was hitting the wires and turned slightly positive after the press conference and the release of today's economic data. The open was calm, the indices opened with small gains and were able to hold them for most of the day. Early action was calm, trading within tight ranges just above break-even. Around 1:30PM this all changed when some sell orders hit the market. The S&P lost about 10 points over the next 45 minutes, hitting intraday bottom at 2,355. A double bottom formed between 2:15 and 2:45 resulted in a push back toward break-even levels from below. The late day rally held into the close, leaving the indices near the highs of the day.

Economic Calendar

The Economy

First off let me comment on the ADP figures from yesterday. Wow. That was surprising but not unexpected, the labor market as a whole has been building up to a boil for a long time. Data within the report was also quite good, showing a healthy and broad increase in jobs across all sectors.

Today's data is not as surprisingly good as yesterday's but is consistent with ongoing labor-market recovery and health. First up is the Challenger, Grey & Christmas report on planned lay-offs. The number of lay-offs planned or announced in February is 36,957. This is down 19% from the previous month and is down -40% from last year. On a year-to-date basis job cuts in 2017 are down -40% from this same time last year as well. Retail leads the cutting, led in turn by JC Penny and their announced store closings. Energy has recovered from last years cuts, this months total for the sector is down -87%. The number 1 and number 2 reasons for cutting jobs are cost cutting and restructuring. On a side note, Challenger says that plans to hire or increase hiring have hit an all-time high.


Initial claims for unemployment rose by 20,000, rebounding from last week's 44 year low, to hit 243,000. Last week's figure was not revised. The four week moving average of claims rose by 2,250. On a not adjusted basis claims rose by 14.6% versus an expected 5.0% and are down -1.5% year-over-year. Despite the narrowing between in YOY data the not-adjusted claims are trending well below last years levels, as are adjusted claims, and both remain consistent with ongoing labor market health.


Continuing claims fell by -6,000 to hit 2.058 million from last week's revised figure. Last week's figure was revised lower by -2,000. Except for a little volatility over the holiday season this figure has been hovering near this level, just off the long term low, since last September and is consistent with labor market health.

The total number of American receiving unemployment benefits fell by nearly 100,000 this week to hit 2.434 million. This is in line with expectations, seasonal and long-running trends, and consistent with ongoing labor-market recovery. This week's total is the lowest level since the post-holiday peak and likely precedes a multi-month decline in claims that will end in late spring.


Import/export data was also releases at 8:30AM. Import prices rose 0.2% versus an expected 0.1%. Export prices, ex-oil, rose 0.3% and in-line with expectations.

The Dollar Index

The Dollar Index lost a little ground today despite dovish comments from Mario Draghi. The index fell -0.20% creating a small black bodied candle hanging below potential resistance levels. The ECB's actions were not unexpected, the comments were however a little confusing in that they seemed to predict economic improvement and the need for stimulus at the same time. Bottom line, the FOMC is on track to raise rates next week and this year while the ECB isn't which puts them on divergent paths once again. The dollar may churn sideways o pull-back over the next few days, so long as the data is not strong and supportive of rate-hikes, up to and until the FOMC meeting but the short to long term outlook is bullish. Resistance is near $102.50, a break above would be bullish with next resistance at the current long term high. Near term support is along the short term moving average near $101.15 with a firmer target near $101.50.


The Gold Index

Gold prices fell a little more than -0.5% to trade at a new 5 week low. The move is driven by rising expectations for a Fed interest rate hike, probability now over 90%, and could be the beginning of a much larger move. The question now is not when the next rate hike will be but how much will they raise rate this year, and how often. The data is picking up, there is a real chance for accelerated economic growth this year, so it is not impossible the FOMC will raise rates more often or in larger increments than expected. Support target for gold is $1,200, just below today's closing price, a break below this level could easily go to $1,150 in the near term with lower prices a possibility in the long term.

The gold miners remain under pressure and poised for a move lower. The Gold Miners ETF GDX fell -0.65% today, reversing yesterday's rebound and falling from support turned resistance at $21.50. The indicators remain bearish and supportive of lower prices. Stochastic is showing weakness with a cross below the lower signal line but MACD momentum is falling off so any move lower that does occur may be muted. Downside target is the long term low near $18.50.


The Oil Index

The reality of supply/demand imbalance has hit the oil market, prices are falling. WTI fell another -2.5% in today's session, extending yesterday's -5% decline, to trade near $49.25 and the lowest levels since last November. This decline may continue into the near term with a possible floor near $45. This is the price at which shale production is expected to turn-off and if so could slow production and supply enough to possibly support prices.

The Oil Index opened lower and moved lower from there to hit support levels, about face and move higher. The index closed with a gain slightly greater than 0.5% and indicative of support at this level. Price action has returned to the top of the long-term trading range that was broken when OPEC announced their deal. Now that the deal is coming to a close and we've seen it didn't really do anything the market has also returned to reality, which I think is a good thing. Long term outlook for earnings growth is still bullish, the market should be able to move higher in the short to long term once a near term bottom can be established. Today's candle has a long lower shadow, indicative of support, but not a guarantee lower prices will not be seen so I'd be cautious for now. The indicators are bearish in the near term but remain consistent with support over the longer term in the range of 1,100 to 1,170.


In The News, Story Stocks and Earnings

Zumiez reported after the bell and did not satisfy investors. The company blew away fourth quarter estimates but provided weak forward guidance. Quarterly results include an 8.7% increase in net sales, a 5.1% increase in comp sales and a 38% increase in net earnings. The downside is that forward guidance is below consensus, a net loss in the first quarter, although mitigated by plans to open 18 new stores this year. Shares of the stock were down marginally during the open session and then fell an additional -10% in after hours trading.


Ulta Beauty reported after the bell as well and the report was an echo of Zumiez. The beauty product company beat top and bottom line earnings but gave weak forward guidance mitigated by plans to open new stores in 2017. Shares of the stock fell -5% in after hours trading.


The VIX rose 3.71% today and is approaching the top of the near term range. Today's rise is not alarming in and of itself but could be the precursor to a sharper move should the market get spooked. The indicators are consistent with a trading range and move to the top of a trading range but not overly bullish. The top of the range is near 12.50, a break above this could be bullish for volatility and bearish for the market. Regardless, the VIX remains low and consistent with bull market conditions.


The Indices

Today was a day of mixed trading. The indices first seemed to want to move higher, then they succumbed to selling and dipped into negative territory only to bounce back before the close and end, for the most part, the day with small gains. One index bucked today's trend and closed with a substantial loss and that was the Dow Jones Transportation Average. The transports closed with a loss of -0.68%, at a 3 week low and below the 9,230 support target. Today's action is a little alarming for the bulls, a break down of support is not what we want to see, but is not yet indicative of deeper correction. The indicators are consistent with a test of support so this level may be tested further or broken. If broken downside target for support is 9,000 in the near term and 8,500 in the short to long.


The day's biggest gainer was the S&P 500 with an increase of 0.08%. Today's action snaps the 3 day losing streak and confirms again near term support at the bottom of last week's trading range, near 2,360. The indicators are still pointing lower so there could be further testing of support but for now it looks like it will hold. A break below support has a near term target of 2,325, near a long term up-trend line. A bounce would be trend following with initial target at the current all-time highs.


The NASDAQ Composite and Dow Jones Industrial Average both closed with gains of 0.02%, just barely above yesterday's close. The tech heavy index created a small spining top doji just above the short term moving average. This is the fourth such candle this, all within last week's trading range and above near term support levels. The indicators are pointing lower, consistent with a test of support, but not suggestive of deep correction at this time. Near term support is near 5,800, a break below here would be bearish with possible targets as low as 5,500. A bounce would be trend following and bullish with targets at and above the current all-time high.


The Dow Jones Industrial Average created a small doji candle touching down to support at the bottom of last week's trading range, the pre-Wednesday support level. Today's action closes the gap formed on last Wednesday, the last index to do so. The indicators are rolling over and pointing lower, consistent with a test of support but not indicative of deep correction at this time. Near term support is just below today's close, near 20,850, and likely to hold provided there is no shock to the system or let-down in expectations. A break below support would be bearish near-term with downside target near 20,000. A bounce from this level would be bullish with upside target at the current all-time high and above.


This week has been a bit nerve-wracking for us bulls as the indices retreat from last week's all time highs. The good news is that near term support levels are holding, for now, and that forward outlook remains positive. Tomorrow's NFP could be the trigger to start the next big market move, whichever direction it is, but if not the FOMC meeting is only a few days away and is usually a pivotal moment for the market. Speaking of the NFP, strong data should not be negative for the market since the FOMC is already expected to raise rates next week and several more time this year. This means there is a chance that good news could be good news and not a harbinger of doom, if the NFP is as strong as the ADP that would be great news for the economy. I'm still bullish, cautiously anticipating the next move but aware there is a chance for correction. If there is I'll be buying on that dip too.

Final thought. Today is the bull market's 8th birthday. In terms of cyclical bull markets that is old and it could mean the end. In terms of secular bull markets, in which we are in, 8 years is only about middle-aged so I think we can still expect to see many more years of higher prices.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Drop Opportunity

by Jim Brown

Click here to email Jim Brown

Editors Note:

The decline in crude prices is temporary and it has provided some opportunities. The WTI drop below $50 is only temporary. Prices will rebound as soon as inventories begin to decline.


NEW DIRECTIONAL CALL PLAYS

SLCA - U.S. Silica Holdings - Company Profile

U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. Company description from FinViz.com.

Silica sells sand to drillers. The drilling activity has increased 50% since the low in May. The active rig count declined to 404 on May 27th and has rebounded to 756 as of last week. Many of these reactivated rigs are completing previously drilled wells that were never fracked and put in production. The IEA said there were more than 5,000 of these wells at the end of December. It only takes a few days to reopen a well and prepare it for fracturing and then move to the next. The sand demand to fracture these wells is off the charts.

Since the drilling boom in 2014 the amount of sand used in fracturing a well has risen about 400% because of two years of additional data and refinement of the process. A current well with a two-mile lateral requires as much sand as a 100 rail car train, called a unit train.

Sand providers claim they have drillers trying to lock in sand prices for a year in advance but there is not enough sand available to fill the demand. Prices are expected to rise 40% in the first half of 2017. Multiple analysts predict a sand shortage in 2018 with another 50% or more rise in prices.

U.S. Silica was crushed in late February when they missed on earnings. They spent a lot of money in the quarter acquiring additional sand reserves and merging in acquisitions from earlier in the year. They spent 2016 acquiring other sand companies and operations around the country so they would be ready when the drilling boom returned.

They were crushed again this week when oil prices fell 7% in just two days to the lows for the year.

Oil prices are down on record inventory levels. Inventories rose by 8.2 million barrels to 528.4 million barrels on Wednesday. However, this ALWAYS happens in Feb/Mar. Refiners go offline for spring maintenance in this slow demand period. For two months, inventories build until they restart at the end of March and begin consuming huge amounts of oil to make summer blend gasoline. The price of crude always declines in this period.

If I could I would buy a longer dated call and hold on to this position until fall. However, this newsletter is not a buy and hold strategy. I am going to recommend the June calls and we will exit before the May earnings.

Earnings May 24th.

The decline over the last two days knocked the stock back to the 200-day and support from November.

Buy June $50 call, currently $3.20, initial stop loss $41.50.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Support Bounce

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow and S&P both rebounded from support late in the afternoon to return to positive territory. The Dow dipped just below the initial support at 20,800 when the market hit the lows at 2:15. The S&P dipped to 2,355 and 5 points under initial support at 2,360 but then rebounded to close positive at 2,365. While the rebound was encouraging the Dow only gained 2 points, S&P 2 points and Nasdaq 1 point. That is hardly a monumental rally but it was well off the lows.

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


ADP - Automatic Data Processing

The long call position was stopped out at $103.25.

RMD - Resmed

The long call position was stopped out at $70.65.

ITW - Illinois Tool Works

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

IWM - Russell 2000 ETF

The long call position remains unopened until a trade at $133.75.



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 for the day but the afternoon intraday drop hit our stop loss at $103.25.

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:

Closed 3/9/17: Long May $100 call @ $2.18, exit $4.90, +$2.72 gain.


AZN - AstraZenaca - Company Profile

Comments:

Causeway International bought 305,959 shares to open a new position. Liberum initiated coverage with a buy rating.

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 rebounded from the intraday drop to close positive.

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:

Jana Partners started a new position in BMY with 3.8 million shares according to SEC filings. I am removing the exit target. The market does not seem to want to decline and everything is turning positive for BMY. If it breaks over resistance at $60 there could be a big spike higher.

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, see portfolio graphic for 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


IWM - Russell 2000 ETF - ETF Profile

Comments:

Nice decline to $135 but we need another $1.25 drop to our entry point at $133.75.

Original Trade Description: March 8th

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


PAYC - Paycom - Company Profile

Comments:

No specific news. Shares declined to support in the afternoon but immediately bounced when that support was reached.

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 declined intraday to $70.39 to stop us out at $70.65.

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:

Closed 3/9/17: Long June $75 call @ $2.50, exit $1.95, -.55 loss.


VAR - Varian Medical systems - Company Profile

Comments:

No specific news. Nice gain to pull within $1.50 of a new high.

Original Trade Description: February 18th

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

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

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

Earnings April 26th.

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

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

Position 2/21/17:

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


$VIX - Volatility Index - Index Description

Comments:

The VIX spiked at the close again as traders become more concerned the rally appears to have lost traction.

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:

Target declared a quarterly dividend of 60 cents payable June 10th to holders on May 17th. This is their 199th consecutive quarterly dividend. Shares rose 18 cents on the news.

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. Major bounce at the open but did not move higher the rest of the day.

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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