Option Investor
Newsletter

Daily Newsletter, Saturday, 3/11/2017

Table of Contents

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

Market Wrap

Lost Opportunity

by Jim Brown

Click here to email Jim Brown

The markets lost some ground for the week but missed a good opportunity for a real decline.

Weekly Statistics

Friday Statistics

The markets attempted to decline all week with lower highs and lower lows but every minor dip was bought and while the indexes did post a loss for the week it was minimal. Critical support held on the Dow at 20,800 and S&P 2,360 and the Friday rebound kept the weekly losses at a minimum.

With nearly everyone expecting at least a minor sell off you would think there would be no buyers. Apparently, there is also a significant lack of motivated sellers and just enough buyers to keep the losses to a minimum.


The big economic event on Friday was the Nonfarm Payrolls for February. The headline number of 235,000 easily beat upwardly revised estimates for 190,000. The January total was revised higher from 227,000 to 238,000 and the December total was revised lower by 2,000 jobs to 155,000.

The manufacturing and construction sectors were big winners thanks to the warmer weather in February. Goods producing sectors saw jobs rise 95,000 with service sectors rising 140,000. Of the 235,000 jobs, 227,000 were private jobs and 8,000 were governmental.

The construction sector added 58,000 jobs, leisure & hospitality 26,000, healthcare 27,000, manufacturers 28,000, mining/energy 9,000 and financial services 7,000. Retail was the big loser with a loss of 26,000 jobs as retailers close stores and layoff the remaining holiday workers.

Average hourly earnings rose +0.2% to 2.8% YoY. The unemployment rate declined from 4.8% to 4.7%. The broader U6 rate declined to 9.2%.

The labor force increased by 340,000 and the labor force participation rate rose one tenth to 63%.

The ADP report on Wednesday showed a gain of 298,000 compared to estimates for 190,000 and the second blowout in a row. The prior month showed a gain of 261,000 jobs.

I wrote last Sunday when estimates for both reports were 175,000 that I would be surprised if the actual numbers were not over 200,000. I guess my analysis was better than the people that get paid to study payroll reports.


The blowout jobs numbers cemented the chances for a Fed rate hike next Wednesday. At the close on Friday, the CME FedWatch Tool showed an 88.6% chance of a quarter-point rate hike. There was actually some talk of a half point hike but you can see on the chart below there is zero chance of more than a quarter point. The real risk is that economy continues to grow and the Fed accelerates their pace. Current estimates are for June and December with a potential balance sheet reduction announcement next March.


Currently the median expectations for all the FOMC participants is 1.25% for the end of 2017. That rises to 1.75% for 2018 and 2.5% for 2019. We will get a new Dot Plot after Wednesday's Fed announcement. If this has changed significantly, it would be market negative. The market wants to see a slow and steady pace and no acceleration. The Dot Plot is a significant help to the market in forecasting future rates.


The economic calendar for next week is very busy. The high points are of course the Fed announcement and the expiration of the debt ceiling. In October 2015, congress elected to avoid another contentious battle and just suspended the debt ceiling until a new president was elected. That suspension expires on March 15th. If a new deal is not reached by March 31st, the government will have to stop paying some bills and prioritize the payments on the debt to protect the country's credit rating. Treasury Secretary Steven Mnuchin has said that Treasury debt payments are a "critical commitment." The head of Office of Management and Budget, Mick Mulvaney, has questioned the urgency of raising the debt limit and has supported prioritizing debt payments over other obligations. After March 31st, the government will have to evoke "extraordinary measures" to allow the government to continue operating. That means things like contributions to federal retirement accounts will stop as well as other nonessential functions. That would allow the government to continue operating until September. However, once the debt ceiling suspension expires, it will become a daily topic on the nightly news and that could weigh on the market.

There is also a flurry of events outside the U.S. this week starting with Mario Draghi's speech on Monday. The Dutch election is on Wednesday with the far right anti-Islam populist, Geert Wilders, is in a dead heat with the current prime minister Mark Rutte. If Wilders wins, it would be another blow against liberal Europe. Wilders has pledged to close the Netherland's borders, shut down the mosques and leave the Euro and EU. Some analysts believe he has an 80% chance to win even though the actual polls are neck and neck. Pollsters believe voters for Wilders are afraid to say they are voting for him so his polls are artificially low. Wilders claims he is part of a growing worldwide movement and he speaks for the will of the people. That sounds eerily familiar to our recent election in the USA. If he wins, he would still have to build a coalition in a highly fractured parliament.

On Thursday the Swiss Central Bank, Bank of England and the Bank of Japan will all update their monetary policy so this will be a big day for the global markets.


In stock news, Sears Holdings (SHLD) reported an adjusted loss of $1.28 that was better than expectations for a loss of $2.85 per share. That still represented a loss of $607 million and they are burning cash at an alarming rate. Analysts believe they need $2 billion to make it through 2017. Revenue was $6.1 billion, down from $7.3 billion but beat estimates for $5.9 billion.

Susquehanna said Sears is struggling just to exist and the results were terrible. They do believe the chain will continue to exist through 2017 thanks to sales of real estate and brands, and then the outlook becomes increasingly worse once there are no longer any assets to sell. By selling their real estate and leasing it back, they raise immediate cash but they take on a new debt on every store. Outstanding debt and capital lease obligations rose from $2.2 billion to $4.2 billion in 2016. That means their cash burn in 2017 will actually increase significantly.

The company said it had completed the sale of Craftsman to Stanley Black & Decker (SWK) for an upfront cash payment of $525 million. That buys them another quarter of cash burn.

Shares spiked 15% on short covering, because nobody in their right mind would buy Sears for an investment. Time to get short again.


Finisar (FNSR) reported earnings of 59 cents on revenue of $380.6 million. Analysts were expecting 62 cents on revenue of $389.7 million. The company guided for earnings of 50-60 cents for Q1 on revenue of $360-$380 million. Analysts were expecting 58 cents and $393.1 million. The company said they were seeing a slowdown of demand in China in what could be the result of a weakening economy. China has been a large part of demand for networking manufacturers over the last year as they build out their 4G networks. If that demand is slowing it means other vendors will also have earnings problems.


Ulta Beauty (ULTA) exploded higher on Friday after reporting earnings of $2.24 compared to estimates for $2.13. Revenue of $1.58 billion also beat estimates for $1.54 billion. They guided for the current quarter to revenue of $1.24-$1.26 billion and analysts were expecting $1.28 billion. The weak guidance did not seem to matter to investors.


Vail Resorts (MTN) reported earnings of $3.63 and analysts were expecting $3.45. Revenue of $725.9 million also beat estimates for $709.3 million. Earnings and revenue have been growing as they continue to acquire other ski areas and then cross-market to their fan base. They recently bought Whistler Blackcomb in British Columbia. They announced last month they were acquiring Stowe Mountain in Vermont. Total lift revenue rose 25% to $358.2 million. Their results were even more surprising since the winter conditions early in the season were below average and slower to build a snow base. The more ski locations they add, the more the season pass becomes attractive for skiers that are interested in traveling to multiple locations. This means the higher end season passes will sell better. The company announced a new quarterly dividend of $1.053 per share.


Q4 earnings growth appears to have topped out at 4.9% but that is the first time we have had two consecutive quarters of growth since Q1-2015. With 99% of the S&P reported, 78 companies have issued negative guidance and 30 have issued positive guidance. More than 65% of companies beat the earnings estimates but only 53% beat on revenue. The 12-month forward PE is now 17.7 and above the 5-year average of 15.0 and the 10-year average of 13.9.

Earnings are over. There are a few stragglers but only a couple where you would recognize the symbols. Oracle and Adobe are the highlights for the week and the first couple days are devoid of anything material.


Ionis Pharmaceuticals (IONS) was cut from neutral to sell by Goldman saying the shares were overpriced and could fall by 45%. The company just got a drug approved with partner Biogen (BIIB) called Spinraza for spinal muscular atrophy. They also reported positive phase III results on Volanesorsen for familial chylomicronemia syndrome and they are applying for FDA approval. Goldman did not feel this drug would be a big winner. Ionis is planning on adding five new drug candidates to its pipeline in 2017. Shares fell -9% on the downgrade.


Snap Inc (SNAP) continued its decline after Facebook announced its third Snapchat clone called Messenger Day. It runs on Messenger and allows you to take a photo of yourself or surroundings, draw on it, add a filter or special effect, and then post it like a status update. It will be viewable by your friends for only 24 hours. Facebook already debuted Instagram Stories and WhatsApp Status, two other clones of SnapChat. Shortly after the Instagram Stories was announced more than 150 million had been posted. Since Messenger already has more than 1 billion users, adding the SnapChat like feature means those 1 billion users will not need to download another app just to accomplish the same thing. SNAP is not expected to be profitable for at least a year, if ever. The insider lockup period was changed to 150 days from the IPO date. Currently there are 660 million shares but only 150 million are available for trading. By the end of 2017 there will be 1.5 billion shares trading due to an aggressive stock-based compensation program and expiring lockups. By Friday, the short interest had already grown to 4.4% in only four days the stock has been available to short. Since it is not going into the indexes until at least six months, if at all because of the nonvoting stock, there is going to be a lot of selling interest and very little buying interest.

Options were listed on Friday and will be available for trading on Monday.


Incyte Corp (INCY) spiked 8% on Friday after a rumor broke it was nearing a deal to be acquired by Gilead Sciences (GILD). Incyte's Jakafi drug for myelofibrosis could give Gilead a starting point for cancer immunotherapy. If Gilead makes a deal for INCY then Tesaro (TSRO) could decline because it was also seen as potential acquisition target for Gilead. Shares have been declining for the last two weeks. Gilead shares have been declining for the last year because their drug sales for Hep-C are declining and investors were worried they would make a stupid acquisition.



Citigroup (C) said they were still buyers of Nvidia. They restated all the various sectors where Nvidia is either dominant or becoming dominant including AI, machine learning, automotive, IoT, gaming and multiple cloud partnerships. They just announced a joint venture with Microsoft where it will offer the HGX-1 Hyperscale GPU, which it bills as an "industry standard hyperscale GPU accelerator." The GPU is built from an open-source design Nvidia and Microsoft developed as part of the Project Olympus initiative and part of the Open Compute Project consortium. The head of Microsoft's Azure cloud platform said, "The HGX-1 AI accelerator provides extreme performance scalability to meet the demanding requirements of fast-growing machine learning workloads, and its unique design allows it to be easily adopted into existing data centers around the world."

I have said it over and over again, Nvidia is the bleeding edge of chip technology today. I believe Citi's price target is $145.


STM Micro (STM) reported a small fire in the basement of a manufacturing facility in France. This is the facility that makes the 3D motion sensors for the iPhone 8. The sensor manufacturing process is time consuming and the yields are very low. That means they can only make a limited quantity at a time. The delay from the fire could set production back weeks or even longer since the clean room above the fire has to be cleaned of smoke and recertified before production can resume. Apple engineers are on the site trying to get an idea how long the production process is going to be offline and whether Apple will have to change the anticipated delivery date of the new phones. This is the only facility that makes that sensor so Apple cannot just offload the order to somebody else. If the phone delivery date was pushed back a month because of the problem, it could disrupt earnings expectations for Apple for Q4. That would be a monumental event given the ramp in Apple shares on those expectations. Expect to hear more about this in the weeks ahead.


S&P announced another flurry of changes to the S&P indexes. These will take effect on Monday March 20th. The one stock most likely to benefit should be AMD going into the S&P-500. The stock is heavily shorted, has been a recent favorite and will require a lot of buying to bulk it up into S&P-500 portfolios. The stocks coming out of the S&P-500 could see some decent selling.

S&P-500 large cap:
In = Advanced Micro (AMD), Raymond James (RJF) and Alexandria Real Estate Equities (ARE).
Out = Frontier Communications (FTR), First Solar (FSLR), Urban Outfitters (URBN).

S&P-400 midcap:
In = Take-Two (TTWO), Masimo (MASI) and Coherent (COHR), Frontier Communications (FTR), First Solar (FSLR), Urban Outfitters (URBN).
Out = Advanced Micro (AMD), Raymond James (RJF) and Alexandria Real Estate Equities (ARE), Fossil (FOSL), Denbury Resources (DNR), Vista Outdoor (VSTO).

S&P-600 small cap:
In = Fossil (FOSL), Denbury Resources (DNR), Vista Outdoor (VSTO).
Out = Take-Two (TTWO), Masimo (MASI) and Coherent (COHR).

Crude prices crashed to the low for the year at $48.39 and the lowest level since November 30th. Prices fell -9% in three days to knock energy equities to the lowest levels since November. The problem boils down to inventories and production. Inventories rose to a new record high with the addition of 8.2 million barrels. Most of the oil producers met at CERAWeek in Houston last week and investors did not get any clues suggesting OPEC would extend their production cuts past June. Since Saudi Arabia has to increase production by 1.0 mbpd in the summer and burn the extra oil to generate electricity, it would be hard to say we are extending the cuts and then boost production by 1.0 mbpd. I am not expecting an extension.

U.S. production rose again to 9.09 mbpd and the highest level since last May as the shale fields came alive with new activity. The more than 5,000 drilled and uncompleted wells from 2016 are rapidly being completed and put into production and we could see another 500,000 bpd increase by the end of 2017.

Lastly, the net long open interest in crude futures was near record highs on the hopes the OPEC production cut would cause prices to continue to rise. When that did not happen, they have been stuck between $52-$55 for two-months, and OPEC oil ministers in Houston did not telegraph any extended cut, the fire alarm rang and everyone rushed to the exits at once.


Over the last 9 weeks, U.S. inventories have risen nearly 50 million barrels. While this may seem alarming, it is not. It is only alarming to uneducated traders. Inventories rise in Jan/Feb/Mar because refiners are taken offline for maintenance while fuel demand is low. This reduces oil demand by as much as 2.0 mbpd during that period. By the end of March, refiners are coming back online and they will begin producing summer blend fuels in high quantity. They have to let the winter blend fuels deplete and as you can see in the graphic below that is exactly what is happening. Once they move back into production, oil supplies will begin to fall and fuel inventories will begin to rise. They have to be in full production well ahead of Memorial Day and the unofficial start of the summer driving season.

Oil prices crashing in Feb/Mar is a good thing because it gives us a buying opportunity for energy equities. Oil prices typically peak around August ahead of Labor Day and the end of driving season.

Yellow is a recent low and green a recent high.



Active rigs rose by 12 last week to 768 with oil rigs up +8 to 617 and gas rigs adding 5 to 151. Even the offshore rig count rose +2 to 20. Since the low at 404 onshore rigs last May we have added 364 and almost doubled. By this May I am certain we will have double the active rig count over last year.


 


 

Markets

The markets missed a good chance for a decent bout of profit taking last week but that does not mean they will not get another chance in the coming week. The Fed statement is always a challenge. Traders worry about what they might say and then wonder what they worried about when the statement actually appears.

Do not forget the Tuesday before a Fed announcement is normally positive. Since that trend is so well known, I would not be surprised to see Monday positive as well. The Fed statement typically produces some immediate volatility but the initial direction after the release is seldom the one that sticks. The March meeting has a Yellen press conference at 2:30 so that is another opportunity for the Fed to calm markets if the statement was hawkish or to stir them up if she thinks the market did not react as expected.

Typically, Yellen is seen as the queen of the doves and even when she is trying to be hawkish, it seldom comes across as she expects.

The bigger problems will be the debt ceiling and the central bank statements from overseas. The BoE and BoJ would be the ones to watch. Since their statements come after the Fed policy statement, I would expect them to follow in the same line of thinking. They will not normally want to deviate significantly from the Fed's path.

Overall, the various indexes saw support tested on Thursday and there was a minor rebound on Friday. After six days of declines there were some oversold pressures starting to build. Friday's afternoon rebound was an equalization of those pressures as shorts took profits and covered ahead of the weekend event risk.

The S&P tested 2,360 on Thursday and closed 12 points above that level on Friday. Uptrend support has now reached that 2,360 level so it should have increased strength next week.

As of Friday, the S&P has traded for 103 sessions without a 1% market drop.


The Dow saw 20,800 tested and it held but the rebound was lackluster and the 20,902 close was not really out of trouble. At one point last week the Dow had erased the post speech gains but it recovered to end with a loss for the week of only 102 points.

The 20,800 level should remain support with uptrend support at 20,700.



The Nasdaq remains the market leader with the Nasdaq 100 spiking on Friday to close only 5 points below a new high. The big caps are rising and Google (GOOGL) set a new high close at $861 and Facebook at $138.79. Amazon missed a new high close by $4.

The Nasdaq Composite closed at a 5-day high at 5,861 but failed to really move out of the congestion range from the prior three weeks. Support at 5,800 was not tested but the Thursday drop to 5,812 came close. This level should continue to provide support unless there is a significantly negative headline. The historic high close was 5,904.




The S&P-600 small cap index declined to roughly 825.50 on each of the last two days with the 825 level strong support. Clearly, there were some buyers waiting but the rebound was lifeless and without a sudden change in sentiment, I would expect that 825 level to be tested again and probably with a little more volume.


With the multiple major events next week, this could be a volatile period for the markets. However, they like to climb a wall of worry and this week would qualify.

We saw a decent support test and a mediocre rebound that suggests we could see another support test. Our four-leaf clover for next week is the tendency for the markets to rally on the Tuesday before the Fed announcement. That could be the slight bullish bias we need to avoid an early week retest.



Random Thoughts


There was a major change in sentiment last week. Bearish sentiment jumped a whopping 10.9% and bullish sentiment fell -7.9%. You would think there had been a market crash instead of just several days of breakeven trading. That is the highest level of bearish sentiment since February 2016 at 48.7%. On a contrarian basis the S&P is typically up 5.8% six months after a high in bearish sentiment. The only question is whether or not this is the high.

Last week results


Late Friday the SEC denied a request by Cameron and Tyler Winklevoss to list a Bitcoin ETF for trading on the Bats exchange. Bitcoin's value had risen to $1,325 early Friday afternoon on hopes the SEC would approve the request. Immediately after the SEC ruling, the Bitcoin Price Index declined to $1,022. The SEC said based on Bitcoin's record of cyber security breaches and the lack of consistent treatment of the assets by governments, we believe the Bitcoin market is unregulated and not ready to be publicly traded in an ETF. They said over time, markets of significant size may develop and they could look at it again when that occurred.

There are two other applications pending from the Bitcoin Investment Trust and SolidX Partners, a blockchain services company.



Twitter claims to have 319 million monthly active users. However, researchers at USC claim as many as 48 million may be robots. They used more than 1,000 features to identify robot accounts and determined that between 9% and 15% of Twitter accounts are actually robot accounts. Twitter had previously said they thought 8.5 million accounts were machines. Not all robot accounts are bad. Robots can notify people of disasters by reading the tweet stream and analyzing the data. By screening the data stream, only the tweets that have data deemed useful to the actual user makes it through to the user or a distribution list.

However, some robots are negative. They can look for tweets and content that has a specific political perspective and then blast it out to hundreds or thousands of other news feeds to make sure the information is widely disseminated. Some emulate human behavior to manufacture fake grass roots support, promote terrorist propaganda or recruitment. If robots can now tell us what to think, can even more significant machine control be on the horizon?


Since January 4th, the high on the Volatility Index (VIX) has been 13.28. That is the longest period of low volatility since the financial crisis. This suggests total complacency and on a contrarian basis, extreme market risk. The VIX has gone through 46 sessions as of Friday without breaking 13.5. The last time this happened began in September 2006 and ran for 112 days. The VIX can remain low for a long time but the longer the period of relative calm, the worse the correction at the end.



 

Enter passively and exit aggressively!

Jim Brown

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Index Wrap

Broad Market Confirmation

by Jim Brown

Click here to email Jim Brown
Many times we have a single index or two lift the market higher because of the outperformance of several stocks in a specific sector.

Last week the biotech sector refused to decline and the big cap tech stocks began setting new highs. That would appear to be the age old story of a few stocks dragging the indexes higher but the broad market indexes were sticking right to the existing road map.

The Russell 3000 ($RUA) set a new high close at 1,422 on the prior Wednesday and then declined to support at 1,390 this Thursday. That was a minimal 2.2% decline in six days. Analysts have been calling for a 3% or greater dip but that 2.2% may be all they are going to get.

Support at 1,390 appears to be solid and Thursday's decline stopped at 1,393 rather than actually hit that support level. When stocks or indexes reverse only a few cents or points before hitting support, it means there were investors waiting and they bought the stock early rather than wait for the actual touch. Too many times active traders miss a trade because they put their entry triggers right on or below a support point. In this business if you snooze you lose and so they are buying in advance of the expected support level.

In this particular case the dip buy may have been premature. The oscillators have turned bearish and the Friday rebound was minimal. This could have been just a cleanup day for shorts after a six day decline.


However, the market missed a perfect opportunity to sell off because there are still more buyers than sellers. The buyers are simply looking for better entry points on the dip rather than buying the highs.

The Vanguard Total Stock Market Index (VTI) is showing an identical pattern to the Russell 3000, which is not surprising since a 5,000 stock index should be roughly similar to a 3,000 stock index except the VTI has a lot more small cap stocks. The R3K is the largest 3,000 stocks in the market while the VTI includes nearly all of the investable stocks on the NYSE and Nasdaq. The VTI includes a significant number of microcap stocks to reach the 4,900 total stocks. The NYSE has 2,800 stocks and the Nasdaq 3,100. The VTI is the combination of both.

The point I am trying to make is that we are seeing a broad market move rather than just a few stocks on the Dow or the Nasdaq 100 big caps.


The biotech sector was supportive of the broader market last week. The Biotech Index ($BTK) closed at a new 52-week high on Friday at 3,512 with nearly a 1% gain. That is deceptive because the index did fall sharply on Tuesday but was one of only three indexes/sectors to post a gain for the week. The biotech index gained 18 points for the week, semiconductors 18 points and the Nasdaq 100 12 points. Strangely, the financial sector lost ground despite the pending rate hike.

There are 165 biotech stocks in the Nasdaq. Biotechs represent 7% of the Russell 2000 by weighting and 3% of the S&P-500. The Russell 2000 Growth ETF (IWO) has 14% biotechs by weighting.


The sector offsetting the biotech gains and giving all the major indexes balance was the energy sector. The Oil Index lost -2.5% and the Oil Service Index lost 5% for the week.

Fortunately, the drop in oil prices is seasonal and the sector should turn around over the next couple of weeks and be supportive for the next several months.


I started this commentary explaining how the broader indexes/ETFs are all behaving identically. I think this is relevant given the volatility in the various sectors. Overall, the market is maintaining a bid and there does not appear to be any move by investors to close positions or even buy insurance with options.

The volatility index is near three years lows and averaging levels not seen since the financial crisis.

It would appear on the surface that the market has a solid base of bullish investor sentiment even though the AAII Sentiment Survey showed a sharp move towards the bearish camp last week.

We have gone through multiple periods of distribution and the market keeps moving higher. We saw several days of negativity last week and yet the indexes are still within spitting distance of their record highs. There is nothing pointing to an impending decline.

That does not mean a dip will not appear, only that there are no signs. The convergence of multiple, potentially market moving events, next week could be just a wall of worry for the bulls to climb. However, there are still pitfalls ahead. If the market decides the changes to the tax code are going to be pushed well into the future, Citigroup believes we could see a 10% to 15% correction.

Despite the concerns spelled out above, I believe investors should remain long until the trend actually changes. The minor declines from last week are just noise as was the minor rebound on Friday When you have an index at 20,800 posting gains and losses of 2-3 points a day, this is consolidation rather than preparations for a decline. That could change in a heartbeat if one of those coming events produced an unexpected surprise but until then, the trend is our friend.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

New High Bet

by Jim Brown

Click here to email Jim Brown

Editors Note:

Companies making new highs tend to keep making new highs. For some reason that does not give me a lot of confidence in buying a stock that has been up solid for two weeks but I am afraid we are going to see a Nvidia type stock sprint and I do not want to miss it.


NEW DIRECTIONAL CALL PLAYS

ATVI - Activision Blizzard - Company Profile

Activision Blizzard, Inc. develops and publishes online, personal computer (PC), video game console, handheld, mobile, and tablet games. The company operates through two segments, Activision Publishing, Inc. and Blizzard Entertainment, Inc. The company develops, publishes, and sells interactive software products and content through retail channels or digital downloads; and downloadable content to a range of gamers. It also publishes subscription-based massively multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. The company serves retailers and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, game specialty stores, and consumers through third-party distribution, licensing arrangements, and direct digital purchases in the United States, Canada, Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea, China, and internationally. Company description from FinViz.com

Activision reported Q4 earnings of 92 cents that beat estimates for 73 cents. Revenue of $2.45 billion beat estimates for $2.35 billion.

The new Overwatch game was the fastest Blizzard title to hit 25 million registered players. Monthly active users (MAU) rose 5 million at Activision to reach 51 million. Bllizzard's MAU fell 1 million to 41 million but set a record for Q4. Kind Digital users fell from 394 million to 355 million. Since King Digital is phone games the numbers tend to be volatile. Users spent 43 billion hours playing ATVI's suite of games in Q4 compared to the 45 billion hours peopls spent watching Netflix.

Shares spiked despite weak guidance. They guided for Q1 for $1.05 billion and earnings of 18 cents. The street was looking for $1.2 billion and 31 cents. For the ful lyear they guided for $6.3 billion and $1.85 in earnings. That missed street estimates for $6.68 billion and $2.03. Fortunately, ATVI normally guides low and then crushes the estimates when they report.

Earnings May 11th.

Activision has not just one or two but seven game franchises worth more than $1 billion each. It is hard to argue with success. Also, the gamers currently playing those games are always waiting for the next version or the next big game that takes technology a step further. The gaming business is one of massively recurring revenue. They not only sell new game but expansion packs to existing games, maps, tools, and other game content that helps users better enjoy the experience.

Call of Duty, Overwatch, World of Warcraft and Destiny are cash cows that generate steady streams of recurring revenue. More than 74% of ATVI's $6.6 billion in 2016 revenue was from subscriptions, in-game purchases and other digital items where the ongoing costs are next to zero. Five years ago that number was 34%.

With $2.2 billion in annual free cash flow the company can continue to develop new content and look for other acquisitions to broaden the brand.

The company is now branching out into E-sports with an Overwatch League. There are tens of thousands of gamers that will pay just to watch a pro play their favorite games. Having those pros compete with other pros is even better.

Activision is making new highs but with everything they have going for them, I believe they will keep making new highs. The options are cheap so we do not have much to lose if the stock or market suddenly takes a turn for the worst.

Buy May $50 call, currently $1.99, initial stop loss $46.45


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Not a Bullish Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

Despite the rebound from negative territory to a positive close Friday was not a bullish day. This was simple short covering because the market has refused to move materially lower over the last week. We had some negative days but the last several have been neutral. Anyone short from the beginning of the week probably exited in frustration on Friday in order to avoid weekend event risk. The S&P closed only 8 cents higher than the open. The Dow did not do much better.

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


SLCA - U.S. Silica

The long call position was entered at the open.

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

AZN - AstraZenaca - Company Profile

Comments:

No specific news. Flat for the day after an intraday rebound from the lows.

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 have spiked to a new high at $59.50 five times in the last seven days but cannot hold the gains. Somebody is sitting on that level with stock to sell. Eventually they will run out of shares.

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. We never did get a SEC report on how many shares Icahn is buying. He must not be done yet.

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. Nice rebound from Thursday's drop.

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:

Minor rebound and we are still untriggered.

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 rebounded slightly from support 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.


SLCA - U.S. Silica Holdings - Company Profile

Comments:

No specific news. Shares rebounded slightly despite a continued decline in oil prices.

Original Trade Description: March 9th

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.

Position 3/10/17:

Long June $50 call @ $3.20, see portfolio graphic for stop loss.


VAR - Varian Medical systems - Company Profile

Comments:

No specific news. Another nice gain to pull within $1.00 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 lost traction again as the jobs report was positive and the market rebounded from the intraday lows. This market will not go down. Next Wednesday is going to be the key with the Fed meeting and debt ceiling expiration.

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. Shares rose slightly after the 15% spike in Sears shares after their earnings.

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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