Option Investor
Newsletter

Daily Newsletter, Saturday, 3/25/2017

Table of Contents

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

Market Wrap

Governing is Hard

by Jim Brown

Click here to email Jim Brown

President Trump is finding that promising is a lot easier than governing.

Weekly Statistics

Friday Statistics

The American Health Care Act is dead, at least for the time being. The president found that despite having a republican majority in the House, that majority was highly fractured and getting them to all go in the same direction was harder than herding cats. If Ryan made a change in the plan to appease one group, it angered another. The bill was pulled on Friday afternoon and the president said it would not be back until democrats decided they wanted to work on a joint plan to provide a comprehensive health care overhaul.

The kiss of death came when GOP committee chair, Rodney Frelinghuysen, notified Paul Ryan he would not be voting for the bill as it is currently written. He said "the bill as it is currently written would place significant new costs and barriers to care on my constituents in New Jersey."

When the voting time was getting close and all the straw counts showed there were not enough votes to pass, the markets tanked. The Dow was down -120 at the 3:15 lows after being up +59 points at 11:AM. When the news broke that the vote had been cancelled, the Dow rebounded to only -3 points but sell on close orders knocked it back down to a 60-point loss.

The S&P declined -20 points from its intraday high to -10 at 3:15 but rebounded into positive territory until just before the close.



In theory, the death of the health care bill should be positive for the markets. If the bill had passed the House it would have spent another month or more being debated and amended in the Senate and then another month in the conference committee resolving the differences between the House and Senate versions, then another couple weeks each in the House and Senate trying to muster enough votes to get it approved. Nearly every analyst said the plan had no chance of approval after the amendment/conference procedure. That means the two bodies would have been tied up for 3 months with the same end result.

The market wants tax reform and deregulation. The House and Senate have been compared to a one-lane road. With the massive health care bill sucking up all the oxygen in the room and blocking the road, the movement on tax and deregulation would have been forced to wait until July/August to take center stage with passage unlikely before late in the year. If the republicans spent all their political capital fighting health care for three months, the remaining capital might not have been enough to get cooperation on tax reform, which will be a monster project.

With health care out of the way and President Trump telling Ryan to move on tax reform, that gives the House four months to come up with a bipartisan bill that has a chance of passing in the Senate. In essence, tax reform just took a giant step forward and that should be market positive.

While not all democrats will agree on massive tax cuts, there are plenty that will work with the republicans to craft a bipartisan bill. It will not be easy and there will be plenty of disagreements but most will want to go home on their August recess and brag they voted to cut taxes for their constituents. They problem with massive tax cuts is that it will impact spending and this is where the democratic party in the House/Senate will fracture like the republican party did on health care.

Regardless, the market should see the potential for faster action on a tax reform package and that should be positive. Three months from now if the House is deadlocked again it will be another market hurdle.

Nothing in the economic arena or in stock news had any impact on the market on Friday. All eyes were on the potential failure of the health care bill.

The Durable Goods report for February showed a 1.7% rise in orders compared to a 2.3% rise in January. The January number was revised higher from 1.8%. Excluding the transportation sector orders rose +0.4%. Shipments rose +0.3% and backorders were flat at zero change. Compared to February 2016 orders were up 5.0% for the year.

The calendar for next week is mostly Fed speeches with 12 currently scheduled. The Richmond Fed Manufacturing Survey is the most important report for the week. This is the second and final revision on the GDP and it rarely changes much on this version.


Finish Line (FINL) reported earnings of 50 cents and analysts were expecting 70 cents. That was a 41.2% earnings decline. Revenues of $557.5 million fell -0.4% but beat estimates for $549 million. Same store sales plunged -4.5% and the company blamed it on a challenging retail landscape and poor footwear performance.

The company repurchased 250,000 shares worth $4.4 million to raise its fiscal 2017 total to $52.8 million. They have 4.8 million shares left on the authorization. They guided for the full year to earnings of $1.12-$1.23 and same store sales growth in the low single digits. Analysts were expecting $1.46 so it was a big miss on guidance. Shares fell -20% on the earnings miss.


Ironically, Jefferies chose Friday to upgrade Under Armour from hold to buy. The analyst raised his price target from $19 to $27. He said the bottom has formed and the brand has grown stronger with demand for athletic apparel still hearty. That would be different from the Finish Line guidance claiming it was a challenging market. Shares rose 4% on the upgrade but that is from a historic low on Wednesday.


Keeping with the footwear thread, Cowen upgraded Skechers (SKX) from neutral to outperform. The analyst raised his price target from $26 to $35. He believes Skechers will show international margin expansion and accelerated growth in EPS and free cash flow. Shares rallied 5% on the news.


Micron (MU) reported earnings after the close on Thursday. The company reported a 17% rise in revenue to $4.65 billion with earnings of 90 cents. Analysts were expecting 86 cents. The company is seeing a tight market in DRAM and NAND memory chips with price gains of 21% and 18% respectively. Micron guided for $5.4 billion in sales and earnings of $1.50 in the current quarter. Analysts were expecting $4.72 billion and 90 cents. Shares spiked 7.5% on the report.


Gamestop (GME) reported earnings of $2.38 that beat estimates for $2.29. Revenue of $3.05 billion missed estimates for $3.12 billion. Same store sales fell -16.3%. Guidance for the full year was $3.10-$3.40 but below analyst estimates for $3.73. The company said sales in its core category were weak due to a lack of new console hardware releases. They plan on closing 2-3% of their stores in 2017. Shares were crushed with a 14% drop.


Air Products (APD) said it was dropping a bid to acquire China's largest producer of industrial gases, Yingde Gases Group for $1.5 billion. The company said it was no longer in the best interest of shareholders. There was a competing bid by PAG, a Hong Kong private equity firm. A day ago, Yingde said its financial position could be "materially adversely impacted" following a major management change.


Twitter (TWTR) is considering whether to build a premium version of the network aimed at professionals. This would be a subscription version and the first time they have charged for the service. They currently have 319 million users. After 11 years, the company is still having trouble making a profit and they need another source of revenue. They would modify the current "Tweetdeck" tool that helps users navigate the network. Linkedin already has a tiered subscription fee that offers extra features for an extra price. You can see a sample screenshot of the proposed Tweetdeck HERE.

The enhanced features include:

It remains to be seen if Twitter will follow through on the project or if enough customers will pay for these features and how much they will pay.


Crude oil lost $1.17 for the week to close just over $48. There are conflicting commentaries on what to expect next. Some analysts are expecting crude to fall back into the $30s. I am not in that camp. Global inventory levels are not dropping materially and U.S. inventories are at record highs. However, inventories are always high this time of year. Once the refiners begin producing summer blend fuels, the inventory levels will drop for three months straight. Prices will rise.

Secondly, OPEC has to extend the production cuts. There is an OPEC compliance meeting this weekend. Early comments from that meeting claim they are watching the market and will decide in May on extending the cuts but nothing definitive yet. Saudi Arabia needs oil prices higher, a lot higher. They are planning a $2 trillion IPO of Saudi Aramco and higher prices means they can claim more reserves plus those reserves will be worth billions more to the market cap. There are rumors Saudi Arabia will demand a production cut from Iran before they will agree to an extension of the current cuts. Iran was producing 4.35 mbpd in January and claim they will produce 5.0 mbpd by December. That increase is nearly half of the announced cuts by the other OPEC members.


Rig activations are exploding. Last week there were 21 new oil rigs activated to bring the total to 652 with gas rigs declining by -2 to 155. Since the beginning of October, we have added 300 oil rigs, up from only 404 at the end of May. U.S. production has risen 215,000 bpd in just the last 8 weeks and it is accelerating.



Markets

The market charts have turned bearish over the last week but that could be related to the pending health care headlines. All week the number one topic in the news was the impending vote and the potential for failure. We will not know if the removal of that cloud over the market and the sudden shift to tax cuts and deregulation will have any positive impact until next week. In theory, the market should be excited but even with the shift in focus and immediate start on a tax overhaul, the actual voting could be months away and there will be as much or more infighting as there was on health care. That will produce multiple opportunities for new market volatility.

Secondly, the border adjustment tax will be even more critical now since the failure of the health care initiative prevented all the taxes from being stripped out of Obamacare. That was estimated to be worth $1 trillion over 10 years. The border adjustment tax (BAT) is not going to be market friendly but politicians need it to offset any tax cuts. Any company that imports items to sell in the U.S. is going to find their costs rising and consumers are not likely to rush out to buy these higher priced goods. There is talk of phasing in the BAT over several years to reduce the sticker shock for consumers. If the tax is going to be 20%, a number that has been mentioned, they could phase it in at 5% per year and that would allow a gradual rise in consumer prices.

Another problem to consider is the typical market weakness over the next several weeks. The next couple weeks are normally erratic ahead of April 15th tax day but the last two weeks of April are typically bearish. If the shift to a focus on tax cuts can invigorate the market, that might offset some of the typical April volatility. However, the market rallied since the election on the prospect of tax cuts so some believe the expectations are already priced into the current levels.

The next Fed meeting is not until early May so that is one problem we can ignore for a while. Unfortunately, the government debt ceiling suspension has ended and the government will run out of money on April 28th. That means we have another debt ceiling fight just ahead. With both houses scheduled to be on recess from April 10th through April 21st, there could be some activity on the funding in early April but normally nothing gets done until the last minute so the heated activity and floor fights will run from April 22nd through April 28th. It also means the tax cut headlines will probably not start until after the 28th.

If you waded through that time line above, the potential should be clear. The next two weeks could be erratic while the last two weeks of April could be bearish.

I believe the markets were negative last week because of the impending health care vote but also because institutions were setting up for what could be a rocky month.

The Dow has declined -573 points from the March high and tested light support from February at 20,525 on Friday. Note that the Dow chart is showing significant weakness.

The biggest impact to the Dow is Goldman with another 24-point deduction on Friday. Unfortunately, Goldman's chart is also negative and Friday's close was a three-month closing low. Goldman has farther to fall with initial risk to about $210. That would be another -127 Dow points. This is just one of the potholes in the Dow's future.



The S&P posted another lower low on Friday at 2,335 and the prior support at 2,360 is now resistance. The uptrend support from December is light but it did stop the intraday declines twice last week. Should that level break the next real target is 2,250. A breakdown below Friday's low could trigger cascade selling since the uptrend sentiment would be damaged.


The Nasdaq indexes remain the most bullish but the Composite Index still lost 74 points for the week. The support at 5,800 is holding and should continue to hold until the FAANG stocks quit making new highs. Together those five stocks represent about 33% of the Nasdaq 100 weighting. They can keep the Nasdaq moving higher on their own or drop it like a rock. If you add Microsoft to the group, the weighting rises to more than 41%.

The Nasdaq Composite needs to hold that 5,800 support level or the broader market will be in serious trouble.



The small cap indexes closed flat on Friday with the Russell posting a slight gain. However, neither chart was exciting and the S&P-600 is right on the edge of a potential breakdown. If the small caps rally from here they could reinvigorate the market but a material break below 820 on the S&P-600 could cause some knee jerk selling and lead to a significantly lower low.


Despite the normal volatility in April, the month has averaged a 1.3% gain since 1928. The high in the month is normally in the second week with a late month fade into May, which is the second worst month of the year after September according to Yardeni Research. When you average 89 years, everything tends to blur since years with big gains can offset many years with small declines and vice a versa.

This year we have a lot of external political influences and four months of post election history to influence trading over the next few weeks. With the strong post election rally and no material retracement, we are still vulnerable. With the Volatility Index trading at three-year lows, except for the last couple days, there is extreme complacency in the market.

If the market is going to rally into the tax overhaul, why was there $2.4 billion in market on close sell orders on Friday? That is not retail traders. Somebody with size was heading for the exit or possibly several large institutional funds selling. What do they know that we do not?



Random Thoughts


The market declined last week and bearish sentiment also declined. That must be the buy the dip mentality at work. We saw a -1.5% decline on Tuesday and this survey ends on Wednesday. The change in sentiment was evenly split with 4.1% turning bullish and 4.1% turning neutral.

Last week results


Venezuelan's have something else to worry about now. Not only are entire neighborhoods arming up with baseball bats and 2x4s as they go on the prowl for any animal they can find to eat including cats, dogs, pigeons, rats, etc, now they have no gasoline to get to work.

Venezuela is struggling to supply gasoline to consumers and many stations are permanently out while others are open only a few hours a day after the fuel trucks make their rounds. The problem is a lack of money. The government is hoarding money to make foreign debt payments and cannot pay for imported gasoline. The Venezuelan refineries are old and broken down because of lack of maintenance. The government subsidizes gasoline prices and even with the recent price increase to 38 cents a gallon, that is just a fraction of what Venezuela has to pay at roughly $1.65 per gallon to import it. Previously because of the low cost of gasoline it was distributed for free to local stations. With inflation rampant and the government broke they are now charging the stations for the gas when it is available and many cannot afford to pay.

With consumers unable to get to work the economy is only going to get worse. Some wait for hours in gas lines only to get a few gallons then drive to another station and do it again and again until they get enough to fill their tank and get to work the next day.

Most analysts believe Venezuela will default on its debt in 2017. With their oil pledged to China to repay past loans, they cannot benefit from the slight hike in crude over the last several months.

A news crew tried to do a story on the plight of the people a couple weeks ago. They paid a lot of money to a "fixer" who would take them around and protect them from the roving mobs. After only a couple days the crew had been attacked multiple times, had all the equipment stolen and fled the country. The fixer was found murdered the next day. A person in the news crew who had been to Yemen, Iraq and Syria said the conditions were much worse and there was no rule of law and everything was controlled by local neighborhood mobs with open warfare for food and basic supplies.

The country is a failed state and very close to an outright revolution to expel Maduro from power.

People protesting the government

People in line at a government controlled market

Market on the inside with bare shelves


 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

The clock of life is wound but once,
And no man has the power
To tell just when the hands will stop
At late or early hour.

To lose one's wealth is sad indeed,
To lose one's health is more,
To lose one's soul is such a loss
That no man can restore.

The present only is our own,
So live, love, toil with a will,
Place no faith in "Tomorrow,"
For the Clock may then be still.

Robert H. Smith


 

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Index Wrap

Internal Reversal

by Jim Brown

Click here to email Jim Brown
Market internals reversed from slightly bullish to bearish last week.

The major indexes all posted losses for the week from 1% to 3% and some of the sector indexes lost nearly 5%. That is a major reversal from the prior week. The Dow lost -317 points, Nasdaq -74, NYSE -170 and the Dow Transports -216. The worries about the health care bill and its impact on future administration policies caused the market to weaken on Tuesday and that weakness continued to appear the rest of the week. Even after the bill was pulled and vote cancelled on Friday, the initial rebound was blunted by strong volumes of market on close sell orders. Institutions were heading for the exits. These sells may have been planned and initiated while the vote was still scheduled and we will not know the real market reaction on the shift to tax cuts until next week.

If you are a regular reader you know I like to look at the very broad indexes to see what the market is really telling us. The narrow composition of the Dow means it can be pushed around by gains and losses in only a couple stocks. On the Nasdaq 100 the top six components account for 41% of the weighting. That means those stocks dictate the index direction.

With the next several weeks typically volatile in normal years, we could see some real volatility in what has become an abnormal year for the markets. That means we need as much confirmation as possible as to possible market direction.

We have only had one day with a 1% decline since October. The streak without a 1% decline ended at 109 days with the Tuesday market drop. A 1% decline is not unusual. It is unusual to go 109 days without a 1% decline. When this type of scenario appears, there is normally a minor rebound from the initial drop and then that rebound eventually fails to allow the drop to continue. This does not always happen but it is a normal occurrence.

The Russell 3000, the top 3,000 stocks in the market, has seen a significant decline in the technical indicators. The MACD is in full decline and the RSI is near a five-month low. It would take a major rebound to turn these indicators positive again.

There is a caveat in the Russell 3000. This index is made up of the combination of the Russell 1000 and the Russell 2000 so two thirds of the index is small cap stocks. The small cap sector has been weak since the March 1st high with the exception of four days. That corresponds to the mid March bounce in the Russell 3000.


The NYSE Composite Index is holding right over support at 11,400 with risk to 11,100 if a real bout of market weakness appeared. The NYSE has a lot of small cap stocks but it also has some of the largest stocks like Exxon and General Electric.


The Vanguard Total Stock Market Index ETF (VTI) tracks 3,578 stocks that represent the number of "investable" stocks in the U.S. market. The VTI closed at a five-week low on Friday. The prior support at 120.60 has become resistance. The uptrend support was broken on the Tuesday decline. The RSI and MACD are in full decline. Based on this chart alone, the outlook is bearish.


To put this back in perspective to the S&P-500 I am using a smoothed version of the S&P chart and the risk is clearly visible. The index violated weak support on Friday and appears to be on the verge of a material decline.

Obviously, Friday's intraday move was headline driven so using a glass half-full view that could suggest it will rebound off that support on Monday now that the focus is shifting to tax reform. However, the index is well off the market high from March 1st and even an untrained investor could look at this chart and see a potential support break. The market exists to make fools out of as many people as possible so this could be a huge trap for those expecting the worst. I prefer to let the market pick its own direction and we can follow the trend. I suspect the next couple of days could see the S&P go directional and the path of least resistance is down.


The advance decline lines on the Dow and the S&P have rolled over and are about to make a five-week low. Without a miraculous recovery on Monday, the internals are going to trigger a technical sell signal with new lows.



I realize that reading the charts is effectively looking at market expectations. True technicians will tell you that the charts have already factored in every conceivable outcome. That may be true in normal situations. However, the decision to pull the health care bill came at 3:30 on a Friday. The expectations were for the bill to fail and with that failure incur all sorts of negative connotations about future administration policies, goals, roadblocks and timing. Now that the bill is dead, the market will have to adjust to the new reality of a focus on tax cuts and deregulation. While that may be positive overall, the actual time line is counted in months, not days or weeks. With the new target for action closer to August than April, the market may decide to take a rest during this normally volatile period.

Factor in the coming expiration of government funding on April 28th and a ten-day congressional recess in the middle of April as well as taxes coming due in two weeks and investors will have a lot to consider this week.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Insurance

by Jim Brown

Click here to email Jim Brown

Editors Note:

When you own something valuable, you buy insurance. We are overly long in the portfolio with only one short position and the VIX calls. After looking at the chart setup this weekend I think we need to buy some more insurance.


NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

SPY - S&P-500 SPDR ETF - ETF Profile

The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index.

The S&P-500 is in danger of a material drop, possibly to 2,250 or the equivalent 225 level on the SPY ETF. The chart is unsupported and we are entering into a typically volatile period of the year over the next five weeks. I am recommending we buy insurance with a put on the SPY only IF the SPY trades at a new five-week low of 232.75. That way if the market opens higher on Monday we can watch to see if that direction holds before putting money at risk.

I believe if the market goes lower next week it could be the beginning of a major decline.

With a SPY trade at 232.75

Buy May $230 put, currently $2.68, initial stop loss $238.25.



In Play Updates and Reviews

Decision Day

by Jim Brown

Click here to email Jim Brown

Editors Note:

Friday was the decision day for the healthcare vote and the markets plunged when it appeared it was not going to pass. The Dow turned negative in the afternoon when it appeared the vote was imminent and it would fail. The index fell to -120 points only to rebound to within 3 points of positive when the vote was cancelled. However, sellers continued to appear and the index lost 60 points at the close.

The Dow and S&P both mode lower lows but it was a headline reaction rather than a general market decline. The Nasdaq, biotechs and the Russell 2000 all closed positive. The performance of our positions was mixed in the volatile market. The cancellation of the healthcare bill means tax reform becomes the top priority and there will be some democratic support. This should please the market but the next two weeks are typically erratic with random volatility events.



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


ADBE - Adobe Systems

The long call position was entered at the open.



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BULLISH Play Updates

ADBE - Adobe Systems - Company Profile

Comments:

Credit Suisse upgraded from neutral to outperform. The analyst said Creative Cloud would lead a generation of better than expected cash flow over the coming years. Shares spiked to $129 at the open to fill us near the high of the day.

Original Trade Description: March 23rd.

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment's flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. Company description from FinViz.com.

Everybody knows Adobe or at least they did 20 years ago. Photoshop and Illustrator were the key pieces of software everyone needed to create content for magazines and print media. What would Sports Illustrated have done without Photoshop for their Swimsuit Edition?

Fast forward to 2017 and Adobe has so many different pieces and partners that you cannot even describe them all. With annual revenue at $7 billion and growing they are rapidly outpacing everyone's earnings expectations.

Adobe is hosting its annual Digital Marketing Summit. At that event they announced several new partnerships and the integration of multiple "cloud" entities into one platform.

This description is from a Real Money article.

Headlining these moves is the creation of a common platform, known as the Experience Cloud for all of the products that to date had been grouped within Adobe's "Marketing Cloud." Going forward, Marketing Cloud will comprise one of three parts of Experience Cloud, and feature products such as Experience Manager (used to create and manage marketing content across platforms), Target (lets marketers personalize user experiences) and Social (used to run social media marketing campaigns).

Another part of Experience Cloud, known as Advertising Cloud, lets companies run and optimize search, display and video ad campaigns. It pairs Adobe's Media Optimizer search and display ad-buying tools with recently-acquired TubeMogul's video ad-buying platform. The third part, known as Analytics Cloud, combines the popular Adobe Analytics tool for uncovering insights from customer data with Audience Manager, a platform for creating customer/audience profiles.

Advertising Cloud has gotten a lot of attention, since it more firmly makes Adobe a player in an ad tech space where Alphabet/Google (GOOGL) and Facebook (FB) loom large, and where independent players such as The Trade Desk (TTD) and The Rubicon Project (RUBI) are also present. Adobe is pitching itself as an independent alternative to Google and Facebook, which of course are also giant sellers of ad inventory, while arguing that integrations between the three parts of Experience Cloud set it apart from both independent ad tech players and marketing software rivals such as Salesforce.com (CRM) and Oracle (ORCL).

In their earnings last week, they reported a 21.6% rise in revenue to $1.68 billion and the 12th consecutive increase in revenue from the Creative Cloud graphics software. Earnings were 94 cents and analysts had been expecting 87 cents and $1.645 billion in revenue. Adobe said annualized recurring revenue rose by $265 million to $4.25 billion. That is based on continuing subscription growth.

Earnings June 15th.

Shares spiked after earnings from $122 to $130 and then faded back to $125 over the next week. They have started to rebound again because finding 20% revenue growth in the market is hard to do.

Position 3/24/17 with an ADBE trade at $127.50
Long May $130 call @ $2.61, see portfolio graphic for stop loss.


ADP - Automatic Data Processing - Company Profile

Comments:

No specific news. Shares were flat in an uncertain market.

Original Trade Description: March 17th.

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.

ADP reported earnings of 87 cents that rose 57% and beat estimates for 81 cents. Revenue of $2.99 billion rose 6.4% but missed estimates for $3.01 billion. They surprised analysts with revenue growth guidance for 2017 at 6%, down from prior forecasts of 7% to 8%. They blamed the revenue miss and lowered guidance on uncertainty over the elections and the impact of the Trump election. They also see a 1% revenue hit from the sale of their CHSA and COBRA businesses in 2016. They guided for earnings growth of 15% to 17% for the full year. They currently serve 637,000 clients in 125 nations. The number of employees serviced rose 2.3%. PEO Services employees rose 12% to 452,000. These are "co-owned" employees managed by ADP for clients.

They repurchased 4.6 million shares at a cost of $422 million. They expect to repurchase $1.2-$1.4 billion in shares in 2017.

Earnings May 3rd.

ADP holds a dominant position in the payroll processing sector. With employment expected to rise again in 2017 this could be an attractive investment for funds that are tired of chasing industrials and bank stocks in the current rally.

ADP rallied nearly $1 on Friday in a weak market and closed at $105.12 and a new high. It was also just over the $105 strike. I am recommending we reach out to the $110 strike since it appears ADP is about to move higher after three weeks of consolidation. This option price is very cheap and there will be no initial stop loss.

Position 3/20/17:

Long May $110 call @ 75 cents, see portfolio graphic for stop loss.


AZN - AstraZenaca - Company Profile

Comments:

No specific news. New 5-month high.

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.

Update 3/13/17: Good article in the WSJ about AZN helped to power the stock through resistance. Read it here.

Update 3/14/17: AZN released results of a study where the ovarian cancer drug Lynparza sharply slowed disease progression. Women with the disease lived an average of 19.1 months on the drug compared to 5.5 months for those on a placebo. Another report by the Society of Gynecologic Oncology said the number was 30.2 months. This is a new class of PARP drug that blocks enzymes involved in repairing damaged DNA and thereby helping to kill cancer cells. This is the first drug of its class to be approved by the FDA and reach the market.

Update 3/17/17: AZN received its second rejection letter from the FDA on the ZS-9 drug intended to treat high potassium levels in the blood. The letter does not require any new trials. The first rejection was due to some manufacturing issues. There are no details on the second letter but analysts believe it is still related to manufacturing controls since there is no requirement for new drugs trials or data. AZN will resubmit a new application when the issues are corrected. Shares still posted a gain even with the rejection.

Update 3/20/17: AZN released the results of a study for type 2 diabetes showing that treatment with SGLT-2 inhibitors reduced the rate of hospitalization for heart problems by 39% and death by any cause by 51%. This was a study with a population of 300,000 across six countries. This could mean that AZN could apply to sell the drug under more than one diagnosis for different types of treatment.

Position 3/3/17:

Long May $30 Call @ $1.10, see portfolio graphic for stop loss.


DIS - Walt Disney - Company Profile

Comments:

Rumors and suggestions are starting to circulate suggesting Apple could buy Disney instead of Netflix in order to acquire a content generating machine and level out the earnings/cash flow. Currently Apple has very big fluctuations in revenue because of their cyclical production nature. If they owned a company like Disney they would have steady and predictable earnings. Disney has a market cap of $177 billion and Apple has $230 billion i cash. Liberty Media Chairman John Malone suggested if Disney spun off ESPN, Apple would buy Disney. That suggests an outright Apple purchase would also resort in an ESPN spinoff.

Original Trade Description: March 13th.

The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide. The company's Media Networks segment operates cable programming services, including the ESPN, Disney channels, and Freeform networks; broadcast businesses, which include the ABC TV Network and eight owned television stations; radio businesses consisting of the ESPN Radio Network; and the Radio Disney network. It also produces and sells original live-action and animated television programming to first-run syndication and other television markets, as well as subscription video on demand services and in home entertainment formats, such as DVD, Blu-Ray, and iTunes. Its Parks and Resorts segment owns and operates the Walt Disney World Resort in Florida and the Disneyland Resort in California. This segment also operates Disney Resort & Spa in Hawaii, Disney Vacation Club, Disney Cruise Line, and Adventures by Disney; and manages Disneyland Paris, Hong Kong Disneyland Resort, and Shanghai Disney Resort, as well as licenses its intellectual property to a third party for the operations of the Tokyo Disney Resort in Japan. The company's Studio Entertainment segment produces and acquires live-action and animated motion pictures for distribution in the theatrical, home entertainment, and television markets primarily under the Walt Disney Pictures, Pixar, Marvel, Lucasfilm, and Touchstone banners. This segment also produces stage plays and musical recordings; licenses and produces live entertainment events; and provides visual and audio effects, and other post-production services. Its Consumer Products & Interactive Media segment licenses its trade names, characters, and visual and literary properties; develops and publishes games for mobile platforms; and sells its products through The Disney Store, DisneyStore.com, and MarvelStore.com, as well as directly to retailers. Company description from FinViz.com

Disney reported earnings of $1.55 on revenue of $14.78 billion. Analysts were expecting $1.49 and $15.26 billion. The comparisons to the year ago quarter were tough because of Frozen and Star Wars, The Force Awakens in that period. Star Wars was the first billion dollar film for the current fiscal year. The studio segment generated $2.52 billion in revenue. In January, after the December quarter ended, the company said it had more than $7.6 billion in global box office gross thanks to Star Wars: Rogue One, Captain America: Civil War and Finding Dory. CEO Bob Iger downplayed the concerns over ESPN saying they were very overblown because ESPN was still in demand by consumers, networks and advertisers.

Shares have recovered from the post earnings depression and are poised to continue making new highs, market permitting.

Update 3/15/17: Disney has upped its ownership to 85.7% and said it was going to buy out the rest of the investors and offered them a premium to the current value of their shares. Some investors are complaining. Euro Disney has significant debt and Disney said it would recapitalize 1.5 billion euros once it had full control. The actual park management loves the plan because it would put Disney back into control and provide it solid financial backing. This is just a temporary hiccup in the stock.

Update 3/20/17: Beauty & the Beast took in $170 million in ticket sales on its opening weekend. That was a record high for a family film. Disney has 11 other animated classics that it is planning to remake with human actors. The success of Beauty & the Beast will make theses 11 films a reality.

Mulan, Aladdin, Lion King, 101 Dalmatians, Little Mermaid, Pinocchio, Sword in the Stone, Peter Pan, Snow White and the Seven Dwarfs, Dumbo and a sequel to Marry Poppins.

Update 3/23/17: CEO Bob Iger agreed to a one-year contract extension until July 2019. He was previously going to retire in July 2018.

Earnings May 9th.

Position 3/14/17:

Long May $115 call @ $1.83, see portfolio graphic for stop loss.


FNSR - Finisar Corp - Company Profile

Comments:

No specific news. Nice gain to close at a new 2-week high.

Original Trade Description: March 20th.

Finisar Corporation provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. Its optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide the fundamental optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in communication networks, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations used in wireless networks. The company also offers wavelength selective switches, which are used to switch network traffic from one optical fiber to multiple other fibers without converting to an electronic signal. In addition, it provides optical components comprising packaged lasers, receivers, and photodetectors for data communication and telecommunication applications; and passive optical components for telecommunication applications. Finisar Corporation markets its products through its direct sales force, as well as through a network of distributors and manufacturers' representatives to the original equipment manufacturers of storage systems, networking equipment, and telecommunication equipment, as well as to their contract manufacturers. Company description from FinViz.com.

Finisar reported earnings of 59 cents that rose 136% but missed estimates for 62 cents. Revenue rose 23% to $380.6 million but also missed estimates for $389.5 million. They guided for Q1 earnings of 53 cents and revenue of $370 million. Analysts were expecting 58 cents and $393 million.

Despite the enormous improvement in sales and earnings the stock was crushed for a 25% decline from $35 to $26. The damage was worse because competitor Ciena (CIEN) had also reported a weaker quarter the day before. Panic gripped traders that optical networking was somehow slowing down. The pace of sales "growth" in China slowed slightly and that sent investors running for cover. China is building out its 100 gigabit network technology in metropolitan areas and they are consuming enormous amounts of networking equipment.

Earnings June 9th.

Good article in Barrons very positive on Finisar. Read it here.

Finisar is not a one trick pony. They are also pushing into the smartphone market and will be competing on the 3D sensor components in the next version of smartphones. They are also building out massive networks in the cloud computing datacenters that require miles of fiber and very fast connections.

After the drop, multiple analysts reiterated buys and outperforms on FNSR saying this was just a hiccup and there are far greater earnings in the future. Raymond James upgraded them from outperform to strong buy. Jefferies upgraded from hold to buy. MKM reiterated a buy rating and $41 price target. Needham reiterated a strong buy and $44 target. Stifel, Raymond James and William Blair all reiterated a buy rating.

Shares have rebounded $2 off the lows from last week and should begin to accelerate higher in the days ahead.

Position 3/21/17:

Long June $30 call @ $1.50, see portfolio graphic for stop loss.


HLF - Herbalife - Company Profile

Comments:

No specific news. Minor gain in a weak market.

Original Trade Description: March 15th.

Herbalife Ltd., a nutrition company, develops and sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products, and personal care products. It offers science-based products in four principal categories, including weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition. The company's weight management product portfolio includes meal replacement products, protein shakes, drink mixes, weight loss enhancers, and healthy snacks; targeted nutrition products comprise dietary and nutritional supplements containing herbs, vitamins, minerals, and other natural ingredients; and outer nutrition products consist of facial skin, body, and hair care products. It also provides literature, promotional, and other materials, including start-up kits, sales tools, and educational materials. The company offers its products through retail stores, sales representatives, sales officers, and independent service providers. It operates in North America, Mexico, South and Central America, Europe, the Middle East, Africa, the Asia Pacific, and China. Company description from FinViz.com.

It is well known that Bill Ackman has a $1.5 billion short on Herbalife. He has had it for a couple years. It is also well known that Carl Icahn does not like Ackman.

Ackman took a major hit in Valeant when he announced on Monday he had closed his 27.2 million share position for a loss of more than a $3 billion. Ackman is hurting because several of his recent high profile positions have gone against him and investors are pulling out their money or at least sending him hate mail suggesting he get his act together. He is also holding a massive long position in Chipotle and the stock is moving lower.

On Monday, Ackman announced he closed the Valeant position. Immediately, Carl Icahn announced he was buying 372,000 more Herbalife shares and had asked the SEC for permission to acquire up to 50% of the company. He already owns 24.6%. This is killing the short position held by Ackman. Shares are rising on the Icahn news.

While this seems like the perfect long position where Icahn is going to force Ackman to cover, there is one big problem. On March 17th a movie called "Betting on Zero" which profiles Ackman's short thesis, will open in a national release. Remember, everyone has known about this movie for a year. It played in a few single venues and the stock did not decline. When it was picked up for national release about 6 months ago, everyone thought this would be the end of the company. However, in late 2016 the company settled with the FTC for $200 million on a probe into their marketing practices. They dodged another large bullet since the probe was also based on Ackman's short thesis.

Shares collapsed in late February on a guidance miss and bottomed last Friday. They have been rebounding since Icahn made his recent announcement.

I am recommending a short term strangle. The odds are good that the stock is going to be directional after the film begins showing on the 17th. Everyone will either say OMG and dump the stock or they will say, "so what is the big deal" and buy the stock. Since Icahn has $1.5 billion invested, you know he is going to be very vocal about it and will probably publicize any further purchases if the stock declines. We do not care which way the stock moves. We just need it to move significantly.

Position 3/16/17:

Long April $57.50 call @ $1.11, no stop loss.
Long April $52.50 put @ $1.36, no stop loss.


ITW - Illinois Tool Works - Company Description

Comments:

No specific news. Minor dip with the market in the afternoon.

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.

Position 3/15/17 with an ITW trade at $135.25

Long June $140 call @ $2.25, see portfolio graphic for stop loss.


LITE - Lumentum - Company Profile

Comments:

No specific news. Shaes exploded higher to close at a new high.

Original Trade Description: March 22nd.

Lumentum Holdings Inc. manufactures and sells optical and photonic products for optical networking and commercial laser customers worldwide. It operates in two segments, Optical Communications and Commercial Lasers. The Optical Communications segment offers components, modules, and subsystems that enable the transmission and transport of video, audio, and text data over high-capacity fiber optic cables. It offers optical communication products, including optical transceivers, optical transponders, and supporting components, such as modulators and source lasers; modules or sub-systems containing optical amplifiers, reconfigurable optical add/drop multiplexers or wavelength selective switches, optical channel monitors, and supporting components; and products for 3-D sensing applications, including a light source product. This segment serves customers in telecom and datacom markets. The Commercial Lasers segment offers diode, direct-diode, diode-pumped solid-state, fiber, and gas lasers; and photonic power products, such as fiber optic-based systems for delivering and measuring electrical power. This segment serves customers in markets and applications, such as manufacturing, biotechnology, graphics and imaging, remote sensing, and precision machining such as drilling in printed circuit boards, wafer singulation, and solar cell scribing. Company description from FinViz.com.

For Q4, Lumentum posted earnings of 57 cents that beat estimates for 51 cents and the 49 cents in the year ago quarter. Revenue rose 21% to $265 million to miss analyst estimates by $700,000.

The company said it was seeing "strong growth in new product revenue, particularly the 100Gb Datacom, which was up 124% sequentially and more than 500% over the year ago quarter.

They guided for Q1 for earnings of 46-54 cents and revenue of $250 million compared to 32 cents in the year ago quarter. Analysts were expecting 47 cents and $263.8 million. That was a guide beat on earnings but miss on revenue. Shares rallied $12 over the next two weeks but they gave most of that back in late February.

Earnings May 19th.

Good article in Barrons very positive on Lumentum Read it here.

On March 16th, Goldman upgraded the stock saying there was a "wide range" of possible upside if it wins Apple as a customer. Goldman said Lumentum could benefit from the inclusion of 3D sensing in the new crop of smartphones, that could add $273 million to annual revenue starting in July. Goldman's base case was $65 million in additional revenue. Then Jefferies hiked the price target citing a possible design win in the iPhone 8 as well. Lumentum, formerly part of JDS Uniphase, developed the 3D sensing technology back in 2010 so it is a core technology.

They announced some new products on Tuesday at the OFC Conference and shares soared at the open to nearly $52. The Nasdaq selloff knocked it back down to $48. The Nasdaq rally on Wednesday saw it rebound back to $51.50. There was no holding it back. Shares should continue to rise on the new products now that the post earnings depression is over.

Shares are threatening to break out to a new high. When I started writing the play in early afternoon the option was $2.55.

Position 3/23/17:

Long May $55 call @ $3.30, see portfolio graphic for stop loss.


SLCA - U.S. Silica Holdings - Company Profile

Comments:

No specific news. Shares spiked more than $2 at the open on no news but faded with the weak market. Barron's had a bullish article on competitor HCLP and why the demand for sand is going to explode this year. That probably powered the move in SLCA.

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.


SYMC - Symantec - Company Profile

Comments:

No specific news. Minor decline in a weak market after another failure at resistance.

Original Trade Description: March 16th

Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Security and Enterprise Security. The Consumer Security segment offers Norton-branded services that provide multi-layer security and identity protection on desktop and mobile operating systems to defend against online threats to individuals, families, and small businesses. Its Norton Security products help customers protect against complex threats and address the need for identity protection, while also managing mobile and digital data, such as personal financial records, photos, music, and videos. The Enterprise Security segment provides threat protection products, information protection products, cyber security services, and Website security offerings. Its products protect customer data from threats, such as advanced protection threats, malicious spam and phishing attacks, malware, drive-by Website infections, hackers, and cyber criminals; prevent the loss of confidential data by insiders; and help customers achieve and maintain compliance with laws and regulations. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. It markets and sells its products and related services through direct sales force, e-commerce platforms, distributors, direct marketers, Internet-based resellers, system builders, Internet service providers, wireless carriers, retailers, original equipment manufacturers, and retail and online stores. Company description from FinViz.com.

You cannot even turn on your phone or PC without being subjected to dozens if not hundreds of potential attackers. Worse than stealing your ID and maybe being able to cause you grief down the road, the biggest attacks today are the ransom ware attacks. If you click on an email link or leave your PC unguarded by a security program, the hacker encrypts all your files and charges you a fee to get them back. All of your documents, pictures, bank account info, Quickbooks, etc, all disappear in a heartbeat. Even if you pay the blackmail, you still may not get them back.

Symantec is the leading cybersecurity vendor for personal computers and small business servers. Enterprise class operations will normally go with higher fee organizations like Fire Eye, Palo Alto Networks, etc. Symantec has the entire personal computer space to themselves. There are some competitors like PC Magic and McAfee but they are distant competitors. Since Intel partnered with McAfee an TPG in September, they are improving but Symantec has a big head start.

Because of the daily headlines on cyberattacks, more and more consumers are reaching out and deploying more sophisticated antivirus programs. It is not just for the closet geeks anymore. Everyone needs a real security program.

Strangely, the biggest risk is still the individual. In a recent study of 19,000 individuals by Intel Security they showed each person 10 different emails and asked them to identify the real ones and the fake ones. Only 3% identified all ten correctly. That means 18,430 would have clicked on a phishing email. Clearly, everyone needs a security program to protect us from ourselves.

Update 3/23/17: Morgan Stanley raised their price target from $33 to $37 saying Symantec's recent wave of acquisitions, including Blue Coat Systems and LifeLock, have improved Symantec's position with their rivals. In June, they bought Blue Coat for $4.65 billion to beef up their enterprise offerings. In February, they paid $2.3 billion for LifeLock to enhance their consumer security business. Morgan Stanley expects Symantec to make more acquisitions after their recent $1 billion debt offering.

Symantec should continue to emerge as the big winner in personal computer security.

Earnings May 3rd.

Position 3/17/17:

Long July $32 call @ $1.29, see portfolio graphic for stop loss.


VAR - Varian Medical systems - Company Profile

Comments:

No specific news. No movement in an uncertain market and still only a few cents away from a new 5-month high.

Original Trade Description: February 18th

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

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

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

Earnings April 26th.

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

Varian announced the sale of its advanced linear accelerators to Hungary's National Institute of Oncology.

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 to more than 14 in the afternoon but fell back to just under 13 at the close when the healthcare vote was cancelled. Even after the cancellation there was still $2.4 billion in stock to sell at the close on the NYSE.

While holding the VIX call is an insurance play for us, I hope we are never in a position to profit from it. That would mean a lot of our long positions would be under water or stopped out.

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 but a new five-year closing low.

Original Trade Description: March 7th

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

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

Update 3/14/17: German chain Aldi said it was adding $1.6 billion to its already announced $3 billion U.S. expansion. They are remodeling 1,300 existing stores and plan to have 2,000 stores by the end of 2018. Aldi is a sharp discount grocer and this is going to be a major challenge to stores like Target, Walmart and Whole foods. The chain has caused a massive disruption in Britain and was the fastest growing supermarket for the last 12 weeks. They have more than 100,000 stores in 27 European countries with sales of $68.7 billion.

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.




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