Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/29/2017

Table of Contents

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

Market Wrap

Dead Cat Bounce or New Rally

by Keene Little

Click here to email Keene Little
The big question on most everyone's mind is whether the bounce off Monday's low is of the dead cat variety or something more bullish. The jury is still out deliberating while the indexes have pressed up against some potentially strong lines of resistance. The jury should decide in the next day or two.

Today's Market Stats

Depending on the index we look at we see either most or nearly the entire March 21st decline retraced with this week's bounce. Many bears speculate it was mostly short covering and are itching to short the bounce. The bulls see steady buying off Monday's low and while trading volume hasn't been strong in the rally the market internals have supported the idea that the rally has more room to run. What happens over the next couple of days will help traders decide whether to look for dips to buy or bounces to short.

Today's trading was a little more lackluster than Monday and Tuesday, especially for the blue chips, and once again it can be argued either way. The bears see the short-covering rally already running out of steam while the bulls see today as more of a breather in preparation for another move higher.

The tech indexes had a better day, up about +0.4%, and the RUT was also a little stronger than the blue chips, up +0.3%. But the banks and semis spent the day in the red and bulls would much prefer those two indexes supporting the rally. There was more buying in Treasuries and that's another negative pressure on stocks. As I'll review with the charts, it's looking like we should be close to at least a pullback to correct this week's rally and potentially something a little more bearish.

The only economic reports of merit this morning were two housing related numbers -- the MBA Mortgage Index, which improved slightly from -2.7% the week prior to last week's -0.8%, and the Pending Home Sales, which improved greatly from -2.8% in January to +5.5% for February (double what had been expected). As discussed below, a big jump in consumer confidence translated to higher confidence in buying a home.

There was a big jump in consumer confidence, as reported yesterday, which jumped to 125.6 in March, up from 116.1 in February. That's the highest reading since 128.6 in 2000 and very likely reflects the confidence in the stock market after the big post-election rally. The reading was before last week's failure to get a health care reform bill passed and the stock market decline.

The high consumer confidence reading coincides with bullish enthusiasm for the stock market. There was an article in Bloomberg this morning, Bullish Americans, that showed the chart below to point out how bullish Americans have become about the stock market -- 47.4% of Americans expect the market to be higher in the next 12 months. This is the highest reading since January 2000, just before the March 2000 high.

From a contrarian perspective, the highest consumer confidence and bullish stock market sentiment since 2000 are not something the bulls should be rejoicing about. It's more likely to mean that anyone who wants to be invested in the stock market is likely already in, including fully invested mutual fund managers, and that could leave a dearth of buyers to help power the market higher.

What we don't know is how much more buying will come from corporate buybacks, which have been a huge driver behind the stock market's rally over the past several years. Extremely low interest rates have made it cheap to borrow funds for buybacks. Additionally, companies have preferred to use earnings to pay for buybacks and higher dividends. Over the longer term this is troubling since it's an inefficient use of capital resources. It's a form of financial engineering instead of investing in the future of the companies and that could exacerbate a future downturn.

The funding of corporate buybacks has resulted in a massive amount of borrowing and corporate debt levels that are now very high. If interest rates continue to climb (although I have my doubts about that) and earnings slow down with the expected slowdown in the economy (GDP has been ratcheted down significantly in the first 3 months of this year) those companies which borrowed heavily are going to find themselves in a bit of a pickle. All of this could be coming to a head at the same time consumer and investor sentiment are at/near all-time highs.

Countering the bullish investor enthusiasm is the latest Investors Intelligence reading, which was after last week's selloff. The selloff was stronger than what we had seen for more than 4 months and it scared a lot of investors. After this week's recovery we'll see if that gets reversed but today's report showed a sharp drop in bulls vs. a steady reading for bears. Bulls dropped from 56.7% to 49.5% while bears rose only slightly from 17.3% to 18.1%. The resulting spread declined by 6.4% and as Tom McClellan noted to his subscribers, a one-week drop of more than 6% oftentimes marks a bottom for the stock market's pullback.

SPX struggled to add points today but managed to finish in the green with a +0.1% gain. It remains a good proxy for the market and I'll start off the chart review with a weekly chart of SPX.


S&P 500, SPX, Weekly chart

When the price pattern becomes more difficult to read I find that trend lines and channels often do a good job guiding traders. Along with moving averages and Fibonacci levels they provide reasons to watch for possible support and resistance. Back in mid-February SPX had climbed above its trend line along the highs from April-August 2016 and stayed above the line until it dropped back below the line last week.

With the rally to yesterday's and today's high (a test of yesterday's high) SPX is now back-testing this trend line and is potentially setting up a bearish kiss goodbye if it falls back down. But if the bulls can keep up the buying pressure for the next couple of weeks we could see a rally to the 2450 area before meeting the next lines of resistance.


S&P 500, SPX, Daily chart

I've drawn in a down-channel for the pullback from March 1st that uses a trend line along the two lows of the pullback and attaching a parallel line to the high in between the two lows (a typical channel construction) and yesterday's and today's rally also tested the top of this down-channel, currently near 2361.

As mentioned above, additional resistance is at the trend line along the highs from April-August 2016. Only slightly higher, now near 2365, is the broken 20-dma and for all these reasons I think it's going to be tough to power higher. But if SPX does make it above 2366 (and holds above) then we'd have a bullish heads up that we'll see a stronger rally.

Key Levels for SPX:
- bullish above 2390
- bearish below 2322


S&P 500, SPX, 60-min chart

The 60-min chart shows price struggling at the top of its down shown on the daily chart above. At the same location, at 2361.58, is the 50% retracement of the pullback from March 1st. If the rally does continue on Thursday watch to see how it does at the downtrend line from March 1-15, near 2379.


Dow Industrials, INDU, Daily chart

The Dow was the weak sister today as it was the only major index to trade in the red all day. Yesterday it was able to get back above its broken uptrend line from October 2011 - November 2012, but today closed back on the trend line, near 20660. Monday's low was a bullish test of the 50-dma, now near 20495, and if the buyers can keep up the pressure we could see a test of its broken 20-dma, nearing 20820. But if the sellers return and drive the Dow back below its 50-dma we could see a decline to price-level S/R at 20K.

Key Levels for DOW:
- bullish above 21,000
- bearish below 20,412


Nasdaq Composite Index, COMPQ, Daily chart

The techs have been the stronger indexes in this week's rally and NDX is very close to achieving a new high above its March 21st high. The Nasdaq is only a smidge behind NDX but it could struggle to make it higher. When viewing the daily chart with the log price scale it puts the trend line along the highs from April-August 2016 near 5901, which is what the Naz bumped into today.

The chart below is using the arithmetic price scale, which lowers the April-August trend line but it also lowers the broken uptrend line from November-December, which is also now near 5901. So regardless of the price scale there is a trend line that's currently blocking the bull's path.

There's a possible megaphone pattern for the price action since March 1st, the top of which is currently near 5937, and this is typically a topping pattern. A marginal new high with another lower high for the oscillators would be a very bearish sign. But a rally above 5937 would open the door to 6000-6025 (where the broken uptrend line will be by April 7th when using the log price scale, which is a potentially important turn date).

Key Levels for COMPQ:
- bullish above 5950
- bearish below 5750


Russell-2000, RUT, Daily chart

After flirting with the bears last week and again on Monday, with the break below price-level support near 1347, the bounce off Monday's low has now run into possible trouble with its 20- and 50-dmas, currently near 1370 and 1376, respectively. Today's close near 1372 places it between the two averages. Only slightly higher is its downtrend line from March 1-17, currently near 1378. A rally above 1380 would therefore provide us with a bullish heads up but until that happens it's a setup for a reversal back down, especially with a short-term overbought market.

Key Levels for RUT:
- bullish above 1394
- bearish below 1335


Since the end of 2016 we saw a significant increase in the net long positions by the commercial traders in 10-year Treasury futures. The Commitment of Traders (COT) has shown a significantly large spread between commercial traders and non-commercials (the rest of us, including fund managers) where the non-commercials had steadily increased their net short positions as they continued to bet on the continuation of the selloff in the bond market.

With the Fed raising rates and threatening to continue raising them it would seem a natural bet for bond yields to head higher (with selling in the bond market). This helps explain the large net short position by the speculators. But when too many believe in something it's often wise to take the opposite trade. This is why it's important to look for extremes in the COT positions and at least shy away from trades where the speculators have piled into.

The spread between commercials and non-commercials has reduced somewhat since the beginning of March as the 10-year yield (TNX) double topped against its December high. But the spread is still wide enough to suggest yields have further to fall (further rally in bond prices) before the COT readings become more neutral.

10-year Yield, TNX, Weekly chart

The 10-year yield has stalled since mid-December and the March 10th high was a test of the December high with significant bearish divergence. It seems everyone was already in the pool and there were no more sellers to drive bond prices lower. It's possible we'll see TNX chop sideways while the overbought condition (oversold on bond prices) works its way off. But I think it's more likely we'll see at least a larger pullback, if not the resumption of the decline in yields this year.


KBW Bank index, BKX, Daily chart

Along with the "unexpected" rally in Treasury bonds following the Fed's rate announcements (as happened in 2005 when the Fed started raising rates) the decline in bank stocks following the Fed's announcements has surprised many. The common belief is that banks' earnings will improve with higher rates (it increases their profit spread between loan rates and deposit rates). The rate increase might have already been priced in when BKX peaked on March 1st but that calls into question the belief that the Fed will continue raising rates.

The weekly chart of BKX shows the March 1st high achieved a Fib projection at 99.96 (just shy of it with a high at 99.77) for the rally from June 2016 where it equals 261.8% of the first leg of its rally off the February 2016 low. It was a small throw-over above the top of a parallel up-channel for the rally from 2009 but the week closed at the top of the channel. Now the question is whether or not the rally from February 2016 is complete. The correct answer to that question will help determine whether or not we should be looking for a higher rally this year or to short the current bounce.

The bullish wave count calls the pullback from March 1st the 4th wave correction in the rally from February 2016. That interpretation calls for another leg up to above 100 -- I show a projection to about 103 where the 5th wave of the rally would equal the 1st wave. The bounce off the bottom of its up-channel for the rally from June 2016, as well as the trend line along the highs from April 2010 - July 2015, both near Monday's low at 88.10, is reason enough to feel bullish about BKX here.

Countering the bullish interpretation is the idea that we should be looking for just a 3-wave move up from February 2016 and that the March 1st high was the completion of the move. That makes the current bounce, which could get larger, something that should be shorted. In order to prove the bears correct they'll need to see BKX break below Monday's low (which is true for all the indexes).


Transportation Index, TRAN, Daily chart

As a reflection of our economy, which has been downgraded significantly since the end of last year (along with corporate earnings expectations), the TRAN is a good index to watch. Shipping goods and materials, or not, tells us when the economy is running on all 8 cylinders or if some cylinders are starting to misfire.

As with so many indexes, the TRAN topped on March 1st following a small rising wedge off the January 3rd low. That wedge was quickly retraced by last week and in the process the TRAN broke its uptrend line from June-October 2016, near 9010 at the time. This week it made it back up to the trend line, currently near 9095, for what could be a back-test that will be followed by a bearish kiss goodbye. A drop below Monday's low at 8798 would confirm the bearish setup. A little higher, if the buyers keep up the pressure, is the declining 20-dma, now nearing 9150. In order to turn this more bullish we need to see the TRAN back above 9310.


U.S. Dollar contract, DX, Daily chart

Predictably, the US$ bounced off its uptrend line from May-August 2016 when it was tagged Monday morning. We have a 3-wave move down from the January 3rd high and that could be the completion of the pullback that we'll see for the dollar. I think the dollar has lower to go before setting up a bigger rally but we could first see a higher bounce before turning back down.

The declining 20- and 50-dma's have come together at 100.62 and they could be upside targets for the current bounce. But like the stock market, a drop below Monday's low at 98.67 would be a break of its uptrend line from May 2016 and likely stronger selling. But the first downside target would be 97.65 for two equal legs down from January and then more bearish below that level.


Gold continuous contract, GC, Daily chart

Monday's spike low in the stock market was matched with a spike high in gold, which was a back-test of its broken 200-dma at 1262.50 (gold stopped just shy of it at 1261). The 200-dma is now near 1262, which matches its downtrend line from August 2016, and therefore gold would be at least short-term bullish above 1263. The next upside target would be its downtrend line from 2011-2016, near 1290.

But at the moment we have a double top at the 200-dma with bearish divergence, suggesting a turn back down. The first support level would be the 20- and 50-dma's, currently near 1230 and 1228, respectively.


Oil continuous contract, CL, Daily chart

With last week's and Monday's lows oil nearly tagged its uptrend line from April-August 2016, now near Monday's low at 47.08, and got a good bounce. Today was a strong day for oil, up +2.4%. I'm surprised oil's rally didn't help the stock market more. Oil has now made it up to slightly above its broken 20-dma, currently at 49.29.

A rally above the 20-dma would target price-level S/R near 51, which was broken sharply on March 8th. Above that level would be more bullish but it would then have to contend with its declining 50-dma, currently at 51.64. Oil might bounce a little higher but I believe it will be followed by a continuation lower.


Economic reports

Other than Thursday's usual unemployment claims data we'll get the 3rd estimate for GDP, which is not expected to change. The Atlanta Fed's GDP Now numbers suggest half the government's 2% estimate. Friday we'll receive the personal spending and income reports (no changes expected from January) and the PCE prices (watched carefully by the Fed), which is expected to show some softening in the increase in prices. We'll also receive the Chicago PMI and Michigan Sentiment, neither or which are expected to changed much from February.


Conclusion

The bounce off Monday's low looks strong, albeit on lower volume than the decline, but it's not clear yet whether it's more short covering than real buying and the start of something more bullish. The price pattern could be argued either way. As reviewed in the charts, most look ready for a pullback but the bullish interpretation of the pattern for the banks suggests it could be a pullback worth buying. I don't see enough corroborating evidence yet for that but it's a warning to bears.

Regardless of what this week's bounce might mean for the next couple of weeks, the short-term setup looks good for at least a pullback to correct this week's rally. If the pullback turns into a sharp impulsive decline, especially if it gets the indexes below Monday's lows, we'll likely see stronger selling. But if we get a choppy pullback pattern I'd look at it as a buying opportunity.

Over the next couple of days, assuming we'll get a pullback, we'll have better clues about what this week's rally means. If the rally does continue into next week we'll likely see new highs, even if only minor ones, and I'd look to April 7th as a potentially important turn date. Look for the techs to provide continued leadership to the upside if the bulls are back in the driver's seat. Look for the RUT to lead us lower if Monday's lows are broken.

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

Keene H. Little, CMT


New Option Plays

Parts Shortage

by Jim Brown

Click here to email Jim Brown

Editors Note:

Computer, smartphone and network manufacturers say there is a shortage of these parts. Hewlett Packard started the conversation saying there was a shortage of memory for computers and servers and the rise in prices would impact earnings in 2017.



NEW DIRECTIONAL CALL PLAYS

WDC - Western Digital - Company Profile

Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models, as well as for use in storage of data for years; and enterprise solid state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides InfiniFlash System, a system solution that offers petabyte scalable capacity with performance metrics; higher value data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop PCs, notebook PCs, gaming consoles, set top boxes, security surveillance systems, and other computing devices. In addition, it offers embedded NAND-flash storage products, including custom embedded solutions; and iNAND embedded flash products, such as multi-chip package solutions that combine NAND and mobile dynamic random-access memory in an integrated package for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as in automotive and connected home applications, and NAND-flash wafers. Further, it provides HDDs embedded into WD- and HGST-branded external storage products; and NAND-flash products, which include cards, universal serial bus flash drives, and wireless drives. Company description from FinViz.com.

Hewlett Packard started the conversation saying there was a shortage of memory for computers and servers and the rise in prices would impact earnings in 2017. Micron (MU) confirmed it when they reported earnings on the 24th saying memory prices had risen an average of 20% because of a shortage and would add to profits for 2017.

Western Digital bought SanDisk last year and they were a primary manufacturer of memory of all types. This means not only will WDC have increased profits from the rising memory prices but their actual cost will be lower on other products like disk drives and solid state drives because they are now manufacturing their own memory.

They reported earnings in January of $2.30 compared to estimates for $2.13. Revenue rose 48% to $4.9 billion and beat estimates for $4.76 billion. Shares spiked to $81.25 on the news.

Earnings April 26th.

After two months of post earnings depression, shares closed back at $81.39 and a new high on Wednesday. I believe a breakout is imminent. Earnings are four-weeks away and we could see a pre-earnings ramp on strong expectations.

Buy May $85 call, currently $3.25, initial stop loss $76.85.


NEW DIRECTIONAL PUT PLAYS

$VIX - Volatility Index - Index Description

Comments:

The VIX declined again to just over $11 and we may not get an opportunity to make a better entry for a longer-term position. I am recommending we buy a July $14 call while the VIX is at its lows. It is almost inconceivable that we will not see a significant volatility event between now and July.

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 11.42 and very close to three year lows. If the S&P futures hold at the +5 overnight, it will decline even further at the open.

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.

The fighting has already started on the debt ceiling/funding bill that will be debated when Congress comes back from recess on April 21st. The 28th is when the government runs out of money.

Buy July $14 call, currently $2.65, no stop loss.



In Play Updates and Reviews

No Follow Through

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow lost ground and the S&P barely closed positive as the short covering from Tuesday failed to generate follow through. The S&P barely edged over resistance at 2,360 and remains in its clutches. The Dow gapped lower at the open and failed to trade over that gap open and remains 142 points below resistance at 20,800.

The Nasdaq Composite gained again to 5,898 and only 6 points below a new high. The Nasdaq 100 gained 23 points and did close at a new high. This is a tale of two markets with the big cap indexes lagging while the tech stocks surge ahead. The Russell 2000 also managed to gain a minor 4 points but that was the third consecutive day of gains.

The gains in the portfolio were as mixed as the market with only 4 of our 11 longs actually gaining ground. If today was a fish I would throw it back.



Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


TGT - Target
The long put position was closed at the open.



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

ADBE - Adobe Systems - Company Profile

Comments:

No specific news. Shares posted a nice gain and closed at a new high.

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. A revenue miss by Paychex may have weighed on ADP. The stock dipped to within 3 cents of our stop loss. The option has declined to only 15 cents so I removed the stop loss. It is a May call so we have plenty of time for it to recover. We gain almost nothing by exiting now.

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:

AZN said the FDA had accepted their NDA for Lynparza for ovarian cancer. The drug was also granted priority review status with a PDUFA date of Q3-2017. Shares declined 4 cents.

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:

No specific news. Shares gave back half of Tuesday's gains.

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.

Update 3/24/17: 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 in 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.

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. Shares fell -3% after Tuesday's new 3-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. Nice $1 gain to a new 4-week closing high.

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.


LITE - Lumentum - Company Profile

Comments:

No specific news. Shares posted a new high at the open but fell back in the afternoon. May be some temporary resistance at $55.

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 but oil rallied $1.25 and that lifted the energy sector.

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. The stock rebounded back to resistance. Maybe this time we can get a breakout.

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:

The company confirmed earnings for April 26th. No movement but 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 declined again to just over $11 and we may not get an opportunity to make a better entry for a longer-term position. I am recommending we buy a July $14 call while the VIX is at its lows. It is almost inconceivable that we will not see a significant volatility event between now and July.

I am leaving the April position open but I lowered the exit target to 14. At this point we just want to recover some of the premium rather than hold it in hopes of a profit. With Congress going on nearly a two week recess starting on the 10th, we will have a much less chance of a politically stimulated event. However, when they get back on the 21st, they only have 7 days to get a funding bill passed and raise the debt ceiling. The political sparing has already started.

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.

Buy July $14 call, currently $2.65, no stop loss.



BEARISH Play Updates (Alpha by Symbol)

AN - Autonation - Company Profile

Comments:

No specific news. It was another positive day for AN because there is a lot of auto headlines in the news. None of them are on Antonation. Shares stopped at short-term resistance with longer-term resistance at $44.

Original Trade Description: March 27th.

AutoNation, Inc., through its subsidiaries, operates as an automotive retailer in the United States. The company operates in three segments: Domestic, Import, and Premium Luxury. It offers a range of automotive products and services, including new and used vehicles; and parts and services, such as automotive repair and maintenance services, and wholesale parts and collision services. The company also provides automotive finance and insurance products comprising vehicle services and other protection products, and arrangement of finance for vehicle purchases through third-party finance sources. As of December 31, 2016, it owned and operated 371 new vehicle franchises from 260 stores located primarily in metropolitan markets in the Sunbelt region of the United States. Company description from FinViz.com.

Autonation reported earnings of 95 cents that missed estimates by a penny. Revenue of $5.48 billion also missed estimates for $5.6 billion.

The company said demand for cars was falling while truck/SUV demand remained strong but under pressure. Gross profit margins on new vehicles fell from 5.6% to 5.2%. Used vehicle profits fell from 7.3% to 6.3%. The slowing demand for cars meant discounting was rising, which reduced another $100 per car from gains in the quarter. They see that pressure continuing in 2017.

Earnings May 5th.

Despite the positive economy, consumers are defaulting on the most car loans since the great recession. When interest rates were really low, banks and finance companies were giving auto loans to anyone with a pulse in order to write the higher interest loans. Now that the cars are 2-3 years old and people are tired of those cars, they are no longer making the payments. This puts more repossessed cars into the wholesale market and depresses prices.

Since more people are defaulting the credit criteria for a car loan has risen dramatically. Banks realized the error of their ways and they are making it harder to get approved. That reduces the number of people that can qualify for a loan and the number of people that can buy a car.

Auto prices have been on a permanent path higher but suddenly, very few people are willing to pay the outlandish prices for a car they will be underwater on the loan for the next five years.

This is causing strain on retailer profits. Shares of car dealers are in decline. Karmax (KMX) is widely expected to miss estimates when they report earnings on April 6th. By utilizing a put position on Autonation we can benefit from any disappointment by Karmax. Even if the dealers are not an apples and apples comparison, Autonation will be painted by the same broad brush that punishes Karmax.

Position 3/28/17:

Long May $41 put @ $1.40, see portfolio graphic for stop loss.


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

Comments:

The market was mixed and the S&P is struggling with resistance at 2,360. Tomorrow could be a reversal.

Original Trade Description: March 25th.

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.

Position 3/27/17:

Long May $230 put @ $3.49, see portfolio graphic for stop loss.


TGT - Target Corp - Company Profile

Comments:

No specific news. Shares exploded higher but we exited at the open and actually got out with a minor gain.

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:

Closed 3/29/17: Long May $52.50 put @ $1.38, exit $1.60, +.22 gain.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now