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Newsletter

Daily Newsletter, Wednesday, 4/19/2017

Table of Contents

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

Market Wrap

Bears Keep Blocking Bulls

by Keene Little

Click here to email Keene Little
A morning gap up saw very little follow through and the indexes gave most, if not all, of the morning rally back. The bears have been effectively blocking attempts to rally and it's looking like we'll get lower prices before potentially heading higher.

Today's Market Stats

Thanks to an overnight rally in equity futures, which appeared to be designed to get indexes up and over some resistance levels, the market gapped up this morning (except for the Dow, which was dragged down by IBM) and bulls had an opportunity to reverse the downtrend we've been in since March 1st. But the bear's defense team blocked the attempt and the lack of follow through to the morning buying brought the bear's offensive team back onto the field.

There was very little in the way of economic reports or overnight news from overseas to help move the market and once the initial buying in the morning quickly petered out we saw the continuation of downward pressure. The bounce attempts have been consistently on lower volume while selling has been on higher volume. This is consistent with a downtrend and at the moment it appears the downtrend will continue to pressure the market.

The overall pattern of the pullback from March 1st is a choppy mess and it looks more like a correction to the rally than something more bearish. That could of course change in a hurry if we start to get a sharp strong decline that starts breaking some important support levels, but at the moment I think we're looking for a buying opportunity in the not-too-distant future. We might see the pullback continue the rest of this month and into early May before setting up a buying opportunity.

For now I see more opportunity for traders on the short side, based on the price and volume pattern. But the choppy price pattern is difficult to trade because of the whipsaws and reversals of reversals. Unless you're a fast day trader or one who can hang onto a trade in the face of sharp reversals in your face, this is a tough market to trade right now.

The current market condition will change but for now it requires caution and an opportunity to practice what I like to call the double-cheek trade -- stand up, firmly grab both butt cheeks and then sit down, trapping your hands and not allowing them to "accidentally" hit the buy/sell button. We are traders who like to trade and feel like we're wasting our time (and money-making opportunities) when not trading. But as Jesse Livermore told other traders, his success (when he had it) was based more on knowing when not to trade than what he traded.

The Dow was the worst performer today, thanks to IBM's big gap down and selling. The reaction to yesterday's after-hours earnings report was quite negative and the poor Dow never had a chance to get out of the red. The other indexes were doing well in the morning but then gave up most of the gains. SPX also dropped back into the red but the techs and RUT stayed in the green all day.

We often hear about how well corporate earnings are doing, how much they beat (if they beat) estimates, etc., but in fact corporate profit margins have been in decline since 2011. The stock market has been ignoring this fact by focusing on just earnings while forgetting about expenses. Expenses like higher dividend payouts, stock buybacks, interest on massive borrowing.

For a long time margins have been shrinking, which should affect valuations based on growth potential but the stock market has been whistling past the graveyard on this issue. Unless the decline shown on the chart below can get reversed we could find the market in serious trouble, even if that day of reckoning will be months from now. Manually matching those periods with declining profit margins will show you that the stock market did not do well during those periods.

Corporate Profit Margins, 1947-March 2017

The stock market has been pulling back since the March 1st highs and it's not looking yet like the pullback is complete. The pattern supports those who are looking to buy the dip but I think that opportunity could be another week or two or three away. The price patterns can be confusing at times like this but we have some key levels to watch to help guide the way.


S&P 500, SPX, Weekly chart

The choppy pullback from the March 1st high is looking more and more like a bullish consolidation pattern. There will likely be lower prices ahead but so far it's looking more like a bull flag type of pattern than something more bearish. An uptrend line from February-November 2016, currently near price-level support at 2275, could be the downside target for the pullback.

The bottom of a bull flag for the pullback is currently near 2300 so we have a 2275-2300 support zone to watch for. There is of course the potential for another rally leg to kick into gear at any time but so far the shorter-term pattern suggests lower prices before setting up the possibility for another rally leg. If the decline starts to accelerate I'll then start to think a little more bearishly but at the moment I'm thinking a larger choppy pullback this month before setting up another rally leg.


S&P 500, SPX, Daily chart

The daily chart below shows the possible down-channel and a projection to the bottom of the channel where it meets the uptrend line from February-November 2016 near 2293 May 9th. This is of course speculation on my part but a continuation of a choppy pullback to that time/price would be a very good setup to get long for the next rally.

If the bears take control of this market and drive SPX below the bottom of its down-channel, currently near 2304, it would then start to look more bearish. Because of the choppy pattern there are a myriad possibilities for price movement and the big caution right now is that this is not a good time for traders -- there are simply too many whipsaws and lack of follow through. And bulls need to exercise caution since there are no indications yet that the next rally leg is ready to start.

Key Levels for SPX:
- bullish above 2379
- bearish below 2322


S&P 500, SPX, 60-min chart

The 60-min chart shows a short-term down-channel within the down-channel from March 1st. The bounce attempts have been 3-wave moves and on weaker volume, which shows them as corrections to the decline. The likelihood is that the decline will continue and has the potential to accelerate lower in the coming days. A drop below the bottom of both down-channels and a break of price-level S/R near 2300 would be potentially worrisome for the bullish expectations following the pullback but the more important level for the bears to break is near 2275.

There will be plenty of time to evaluate the decline, assuming we'll see more to the downside, to see if it will continue to support the longer-term expectation for another rally leg.


Dow Industrials, INDU, Daily chart

The negative reaction to IBM's after-hours earnings release yesterday (today it finished down -8.36, -4.9%) hurt the Dow today. Chevron and Exxon were also weak with the oil sector today and they helped pull the Dow lower. The net result was the Dow did not gap up with the other indexes this morning and led to the downside but still lost only -0.6%. It is the first major index to drop below its March 27th low (20,412) and further supports the idea that we're going to see a move down to at least the bottom of a down-channel for the pullback from March 1st.

The bottom of its down-channel is currently near 20160 and crosses price-level S/R near 20K on May 5th, which is close to the same day as the May 9th date mentioned for SPX. Two equal legs down from March 1st points to 20131 and based on all this I think a good downside target/support zone is 20,000-20,130. Below 20K would be more bearish.

Key Levels for DOW:
- bullish above 20,888
- bearish below 20,412


Nasdaq-100, NDX, Daily chart

Yesterday NDX ran up to resistance at its broken 20-dma and its broken uptrend line from December, both near 5399. Thanks to an overnight rally in equity futures that resistance was easily taken care of with this morning's gap up. It then promptly ran into the trend line along the highs from April-August 2016 and turned back down. Notice how this trend line (purple) acted as support for most of the time since mid-February until it was broken again on April 11th.

It's now back up for a back-test and the bearish pattern says we'll get another leg down. A drop below its 50-dma, which held as support last Thursday, currently near 5366, would be a bearish heads up and then a drop to the bottom of its megaphone pattern, near

Key Levels for NDX:
- bullish above 5443
- bearish below 5275


Russell-2000, RUT, Daily chart

The RUT was again the stronger index today and that's typically a bullish sign. But the RUT's early gains fizzled with the rest of the market and even though it finished in the green with its +0.4% gain it showed weakness following this morning's rally attempt. Like the NDX, it gapped up this morning and jumped over resistance at its broken 20-dma near 1363 and then made it back above its broken uptrend line from November 4 - March 27.

Unfortunately for the bulls there was stronger resistance waiting to pound the RUT back down. At this morning's high at 1376.69 it was only pennies above its broken 50-dma and its downtrend line from March 1st. The decline from the morning high dropped the RUT back down to its uptrend line from November, currently near 1367. Intraday it looks like a pullback to support and ready to spring higher but on the daily chart, with the shooting star at resistance, it looks like a failure to recapture the broken uptrend line. We'll know better on Thursday which support and resistance line is stronger.

Key Levels for RUT:
- bullish above 1390
- bearish below 1345


10-year Yield, TNX, Daily chart

Treasuries have kept rallying this weak and that's putting downward pressure on stocks as money rotates out of stock and into bonds. This has resulted in a continuation of the pullback in yields, which is an indication that there's less fear of an expanding economy and resulting higher inflation. Recent data does in fact show a reversal of inflation that was ticking higher in the past several months.

As can be seen on the TNX daily chart below, it has broken important support at the bottom of its trading range since the end of November as well as dropping back below its downtrend line from 2007-2013. This follows the double top in December and March and the width of the trading range suggests a downside price objective at 2.00%. This has been considered a pivotal yield level for the 10-year and what happens after that will be very important to the longer-term picture.


KBW Bank index, BKX, Daily chart

The banks have been weaker than the broader market since December and was especially weak at the March 1st high (note the bearish divergence in March relative to December). There is the possibility we have a H&S top (left shoulder in December, head in March and the right shoulder into April. The height of the head projected down from the H&S neckline points to about 76 for a downside target. It doesn't guarantee it will get there, or stop there, but it provides a sense of downside risk.

Prior to 76 there is support at the H&S neckline, near 87.25, the bottom of a down-channel from March 1st, near 83.75, its 200-dma, near 82.20 and then its July 2015 high at 80.87. In other words the bears will have a lot of work to do before they can hope to achieve the downside objective near 76. Note today's failure at the trend line along the highs from April 2010 - July 2015, which acted as support until it was broken last week. Today it was resistance on a back-test.


Transportation Index, TRAN, Daily chart

The TRAN has also formed a possible H&S top, which includes bearish divergence at its March 1st high relative to its previous highs in December and January. The downside objective out of the H&S top is down near 7925. Again, there are plenty of support levels between here and there but it shows the downside risk. The first sign of bullishness would be a rally above the April 10th high at 9218. This morning's high at 9043 was a back-test of its broken 20-dma at 9040.


U.S. Dollar contract, DX, Daily chart

The US$ is potentially inside a bullish descending wedge off its January 3rd high but it's missing the kind of bullish divergence I would expect to see to help validate the pattern. It's also possible the 3-wave pullback into the March 27th low is all the pullback correction we'll see before heading higher and a rally above the April 10th high at 101.26 would point to that possibility. But the bearish wave count calls for an acceleration of the selling from here and a drop below the bottom of the wedge, currently near 98.40, would likely be followed by strong selling.


Gold continuous contract, GC, Daily chart

The short-term pattern for gold would look best with one more minor new high to complete the leg up from March 10th. Two equal legs up from March 10th points to 1307.60, which is slightly above its downtrend line from September 2011 - July 2016. This is an important longer-term trend line, currently near 1304, and a strong break of it would be a strong bullish statement. But with a 3-wave move up from December 15th to a potentially strong line of resistance and with the dominant trend still to the downside, gold traders can look to get short near the trend line, using a stop just above 1308.

The next upside target above that level is 1335.10, which is where the rally from December 15th would achieve two equal legs up. Above 1336 would be especially bullish but for now I think buying a minor new high, if we get it, could lead to disappointment. We could have much better prices ahead for us to pick up the shiny metal for long-term holdings.


Silver continuous contract, SI, Monthly chart

I always like to see what silver is doing since it has less of a currency-like demand as does gold. It's more of an industrial metal and it's therefore more of a reflection of the economy than is gold (although gold also is an industrial metal, especially in the semiconductor industry). At any rate, I like to see gold and silver in sync to help with confidence in determining the larger trend.

The monthly chart of silver is shown below to show the dominant trend had been down since it peaked in April 2011. Just as the dominant trend for gold is down, until the downtrend line from 2011-2016 is broken, there's a parallel down-channel for the decline, the top of which is a downtrend line from April 2011 - July 2016.

Sunday's overnight high at 18.65 tested the top of silver's down-channel. Near the same level, currently at 18.14 and where silver closed today, is the 50-month MA. The bulls need to see a continuation of the rally in order to break through these two important lines of resistance. Until resistance is broken this is a place to short silver with a relatively tight stop (no higher than 19).


Oil continuous contract, CL, Weekly chart

Oil dropped sharply today and that had the energy sector suffering. Oil's decline follows a back-test of double trendline resistance and looks bearish as the weekly RSI rolls over from its own back-test of the broken uptrend line from 2015. MACD has barely been able to lift off the zero line and a rollover from here would create a MACD sell signal.

Since the low in August 2015 there is a potential inverse H&S pattern for oil, with the head at its January/February 2016 double bottom and the right shoulder at the August 2016 low. The neckline (bold blue line) is currently near 53.30 and was back-tested last week. There's a downtrend line from May 2015 that could be the neckline of a larger inverse H&S pattern and it too was back-tested with last week's high at 53.76.

The setup looks good for oil bears to take a shot at getting short black gold (and maybe soon the real gold as well) with a tight stop just above 53.80. A rally above price-level S/R near 58.50 would be a bullish move, in which case the H&S objective near 80 would be the upside target (if it can get through its 200-week MA, currently at 66.35.


Economic reports

Tomorrow's economic reports include the Philly Fed index, which is expected to drop sharply to 24 from 32.8 in March. Leading indicators is also expected to show a slowdown. The only report of consequence on Friday will be existing home sales, which are expected to show continued growth (the rally to new highs in the home builders is a good sign for the housing market, although I do see evidence of them putting in a top soon).


Conclusion

The overall pattern of the pullback from March 1st continues to suggest we're getting just a correction to the longer-term rally. A choppy move counter to the dominant trend is typically just a correction to that trend and it will be followed by a resumption of the trend. After more than six weeks of a choppy pattern it's hard to argue that it's bearish. We could see the choppy pullback continue for another week or two but unless it starts spiking to the downside and taking out some key support levels (could happen) we'll be looking to be buyers of the correction. But I don't see a setup for buyers yet.

Using SPX as a market proxy, I see the potential for a continuation lower to a support zone at 2275-2300, about another 1.6%-2.7% lower. A choppy pattern such as we've had, and could continue to have, is not a good time for traders. From an EW perspective, the pattern fits a 4th wave correction (to be followed by one more rally to complete the 5th wave) and 4th waves have a reputation for sending brokers' children to expensive colleges while causing traders to go broke. You want to avoid trading inside 4th waves.

Assuming we'll see the market work its way lower over the next couple of weeks, we'll have time to evaluate the setup to get long. In the meantime exercise patience and if you need to be in the market I'd rather be short than long expect lots of whipsaws.

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

Keene H. Little, CMT


New Option Plays

Safety Play

by Jim Brown

Click here to email Jim Brown

Editors Note:

The trend is your friend especially when there are multiple potential acquirers. This is a defensive position with WFM one of the few stocks that has shaken off the market weakness of the last two weeks.



NEW DIRECTIONAL CALL PLAYS

WFM - Whole Foods Market - Company Profile

Whole Foods Market, Inc. operates natural and organic foods supermarkets. Its stores offers produce, packaged goods, bulk, frozen, dairy, meat, bakery, prepared foods, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, pet foods, and household goods. As of March 8, 2017, the company operated approximately 460 stores in the United States, Canada, and the United Kingdom. Whole Foods Market, Inc. was founded in 1978 and is headquartered in Austin, Texas. Company description from FinViz.com.

This is not a play based on Whole Foods fundamentals or earnings. This is a defensive play covering the next four weeks when the market could be volatile.

Shares of WFM spiked last week when news broke that Amazon had considered acquiring the chain to jumpstart its grocery business. Before that news we found out that Jana Partners had taken a huge stake and had given the firm until September to make some radical changes of they would launch a proxy fight.

A couple weeks before that Kroger (KR) was reportedly mulling over making a run at Whole Foods. Jana already had Kroger, Albertsons and Amazon on their list of possible acquirers they were suggesting to WFM management.

Normally shares spike up on a big set of news headlines like these and then roll over a few days later when nothing happens. WFM shares are continuing to rise. That suggests there may be continuing conversations that have not made it to the headlines.

Earnings are May 10th and I am recommending we buy the May $35 call because it is cheap, there is a reasonable chance of something happening in the acquisition area and if the market or stock tanks, we have very little at risk.

Buy May $35 call, currently $1.27, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Dow Drop

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Dow was the anchor again today with a -119 point loss while the Nasdaq struggled to post a 13 point gain. The Dow was dragged down by IBM. Goldman Sachs and Chevron. Crude prices fell -$1.83 in the regular session to close at $50.58 and well off the nearly $54 high from last week. This tanked the entire energy sector.

The Nasdaq Composite spiked to 5,894 and a a 45 point gain before being dragged lower by the Dow to only a 13 point gain at the close. The Russell 2000 gained 5 points but that was -10 points below the intraday high.

The market decline was totally driven by the Dow, which held the S&P to a 4-point loss. We are getting awfully close to the fiscal battle next week and Friday is option expiration so expect more volatility.



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


No Changes



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. Minor loss but still honoring uptrend support.

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.

The option has declined to only 10 cents so I removed the stop loss. It is a May call so we have plenty of time for it to recover. We gain 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.


CRUS - Cirrus Logic - Company Profile

Comments:

No specific news. Now up for three days.

Original Trade Description: April 6th.

Cirrus Logic, Inc., a fabless semiconductor company, develops, manufactures, and markets analog and mixed-signal integrated circuits (ICs) for a range of consumer and industrial markets. It offers portable audio products, including analog and mixed-signal audio converters, and digital signal processing products for mobile applications; codecs-chips that integrate analog-to-digital converters and digital-to-analog converters into a single IC; smart codecs, a codec with digital signal processer; amplifiers; and micro-electromechanical systems microphones, as well as standalone digital signal processors. The company offers its products for mobile devices, including smartphones, tablets, digital headsets, wearables, smart accessories, and portable media players. Its products are also used in laptops, audio/video receivers, home theater systems, set-up boxes, portable speakers, digital camcorders, musical instruments, and professional audio products applications; and serve the automotive market, which include satellite radio systems, telematics, and multi-speaker car-audio systems. In addition, the company's products are used in industrial and energy-related applications, including digital utility meters, power supplies, energy control, energy measurement, and energy exploration applications. It markets and sells its products through direct sales force, external sales representatives, and distributors in the United States and internationally. Company description from FinViz.com.

Cirrus is a major component contributor to Apple, Samsung and other smartphone manufacturers. They also supply chips to dozens of other types of products.

In 2014 Apple provided for 80% of Cirrus annual revenue. In 2016 that declined to 65% and continues to shrink. Samsung made up 15% of 2016 revenue.

The strong sales of the iPhone 7 and the expected blowout sales for the iPhone 8 and Samsung 8 this year should produce millions in additional revenue. Sales rose 28% in 2016 and analysts expect 31% revenue growth in 2017. Earnings are expected to rise 82% for 2017

With the iPhone 8 expected to post blowout sales numbers, that means component demand over the next 9 months will also be strong. Suppliers normally begin shipping components in the last week of June but this year there are indications they have been requested a month earlier so that Apple can have more phones on hand when sales begin.

Earnings May 3rd.

With earnings in early May, this will only be a three-week position. We will exit before earnings. On the chart, the spike on February 1st was earnings of $1.87 compared to estimates for $1.63. The immediate decline the next day was on guidance for revenue of $300-$340 million and analysts had been expecting $331.9 million. That dip has been forgotten given all the hype over the iPhone 8 and Samsung 8. A move over that level should trigger additional short covering.

Update 4/11/17: We were stopped out on the knee jerk move in Apple suppliers after Dialog Semi was cut when news broke Apple was going to make some of their own chips for their phones. This was simply a reaction to a headline. Even if Apple did decide to make their own chips it would take until 2019 for it to have any impact and Cirrus Logic would not be affected because of the type of chips they supply. We reloaded the position at the open on 4/12.

Update 4/12/17: After the close today, Pacific Crest said Cirrus, Broadcom, Qorvo and Skyworks would be exempt from Apple's in-sourcing of its own chips. The chips these companies make are highly sophisticated and protected intellectual property.

Position 4/11/17:

Long May $65 call @ $2.93, see portfolio graphic for stop loss.

Previously Closed 4/11/17: Long May $65 call @ $3.30, exit $2.65, -.65 loss.


CVX - Chevron - Company Profile

Comments:

Chevron shares crashed with the entire energy sector after a nearly $2 drop in crude prices on weak inventory numbers from the EIA. WTI only declined -1 million barrels and gasoline rose 1.5 million compared to an expected decline of -1.6 million. The EIA said gasoline demand was down -0.8% from the same period in 2016.

Original Trade Description: April 16th.

Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. Further, the company holds interests in power plants, as well as operates geothermal plants; and engages in the transportation of refined products primarily in the coastal waters of the United States. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Company description from FinViz.com.

Chevron is one of the U.S. energy majors with billions of barrels of reserves. The company pays an annual dividend of $4.32 or 4.07% yield. They are totally committed to preserving and raising the dividend. This makes them a top pick by nearly every major analyst.

Chevron is coming out of a major project cycle where they spent over $25 billion a year on capex building out monster projects. Now that the projects are nearly complete and ramping up production, the company can reduce its capex significantly and still increase production as those projects come online.

Chevron has amassed a two million acre position in the Permian Basin with 9 billion barrels of reserves. The company is currently operating 11 rigs in the Permian and will be adding 9 more in the coming months. They plan on ramping up their Permian production from the current 80,000 bpd to 700,000 bpd over the next few years. Chevron's Permian acreage is said to be worth more than $43 billion. It was acquired in pieces at much lower prices by predecessor companies over the last several decades. The Permian was never a big focus for Chevron as they concentrated on megaprojects elsewhere. They are increasing spending in the Permian by $2.5 billion in 2017. They are not hedging their oil production because they believe prices will rise.

Earnings on April 28th are expected to be a miss because of the sharp decline in oil prices in March. This is expected to lower earnings and force misses for the major producers. Since this is a well-known fact, I suspect it it being priced into the stock ahead of the report.

Thursday's decline of 3% put the stock right at light support at $106. If this level fails, there is strong support at $100.

Oil prices should begin to rally any day now. Refinery utilization of back over 90% and it is time to begin pushing summer blend fuels into the distribution system. We should begin to see inventory declines every week and that should last through July. August is normally when crude prices top out. OPEC should extend the production cuts because they are right on the edge of a reduction in inventories and an extension would guarantee it.

Chevron shares should rebound with crude prices. If they were to surprise with earnings, shares should rebound quickly.

The option is cheap and we are going to hold over the earnings report.

If the market tanks at the open on Monday, please do not enter this position until the S&P is positive.

Position 4/17/17:

Long June $110 call, currently $1.45. See portfolio graphic for stop loss.


DIS - Walt Disney - Company Profile

Comments:

No specific news. Minor decline with the Dow.

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.

Update 3/30/17: Disney is relaunching Club Penguin, a game with hundreds of millions of users into Club Penguin Island. The original game had to be shutdown when browser technology began to limit what developers wanted to do inside the game. Now they are restarting in an app for Android and IOS. The basic game will be free but there is a $4.99 per month subscription fee it you want the advanced features. If only 100 million of the prior users signed up for the advanced package that would be $500 million a month in additional revenue. What kid cannot get dad to pay $4.99 per month for hours of peace and quiet?

Update 4/11/17: Goldman Sachs put Disney on their conviction buy list with a $138 price target. The company cited their best upcoming calendar of movies ever. In FY 2018 they have 4 Marvel films, 2 Star Wars films and 3 animated films. Goldman expects record profits from the studio in 2017 and 2018. The analyst said Disney was seeing accelerating profit growth at ESPN and record profits from the theme parks. Avatar Land, Toy Story Land and Star Wars Land all making debuts over the next couple years, the parks are going to be flooding the company with cash.

Earnings May 9th.

Position 3/14/17:

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


FIVE - Five Below - Company Profile

Comments:

No specific news. New 7-month high.

Original Trade Description: April 10th.

Five Below, Inc. operates as a specialty value retailer in the United States. It offers accessories, including novelty socks, sunglasses, jewelry, scarves, gloves, hair accessories, athletic tops and bottoms, and T-shirts, as well as beauty products comprising nail polish, lip gloss, fragrance, and branded cosmetics; and items used to complete and personalize living space, including glitter lamps, posters, frames, fleece blankets, pillows, candles, incense, and related items, as well as provides storage options for the customer's room and locker. The company also provides sport balls; team sports merchandise and fitness accessories, such as hand weights, jump ropes, and gym balls; games, including name brand board games, puzzles, toys, and plush items; and pool, beach and outdoor toys, games, and accessories. In addition, it offers accessories, such as cases, chargers, headphones, and other related items for PCs, cell phones, and tablet computers; books, video games, and DVDs; craft activity kits; arts and crafts supplies that consist of crayons, markers, and stickers; and trend-right items for school comprising backpacks, fashion notebooks and journals, novelty pens and pencils, and everyday name brand items. Further, the company provides party goods, gag gifts, decorations, and greeting cards, as well as every day and special occasion merchandise products; assortment of classic and novelty candy bars, movie-size box candy, and gum and snack food; chilled drinks through coolers; and seasonally-specific items used to celebrate and decorate for events, such as Christmas, Easter, Halloween, and St. Patrick's Day. It primarily serves teen and pre-teen customers. As of January 28, 2017, it operated approximately 522 stores in 31 states. Company description from FinViz.com.

Five Below is an expensive Dollar Store. Everything in Five Below is $5 or less. That gives they a wider range of products and still keeps them somewhat Amazon proof because buying it online requires shipping.

Five Below is a bargain hunter impulse store. Customers rarely walk in with a specific product in mind but looking for a bargain instead. This is a kid magnet because they stock a lot of stuff that appeals to adolescents.

They reported earnings of 90 cents that beat estimates for 89 cents. Revenue was $388.1 million and that narrowly beat estimates for $387 million.

They guided for Q1 for earnings of 12-14 cents and analysts were expecting 13 cents. For the full year, they guided for $1.55-$1.61 per share and analysts expected $1.58. Revenue guidance was $1.21 to $1.23 billion.

They currently operate about 550 stores and plan to open 100 in 2017. They expect to increase that to 2,000 stores over time. They were primarily in Texas Florida and the North East but they have begun to expand into California and the feedback has been outstanding. Nothing costs under $5 in California so their stores are hot locations.

Earnings June 21st.

Shares closed at a 7-month high on Monday and just over resistance at $44.50. If the current rally holds the next resistance test would be $52.

Update 4/12/17: Five will open the first nine stores in California next week with stores at Aliso Viejo, Anaheim, Compton, Hawthorne, Montebello, Fontana, Rancho Cucamonga, South Gate and Redlands.

Position 4/11/17:

Long May $45 call @ $1.90, see portfolio graphic for stop loss.


HLF - Herbalife - Company Profile

Comments:

No specific news. Minor decline in a weak market. The options expire on Friday so I am putting a stop loss on the position.

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.


LB - L Brands - Company Profile

Comments:

No specific news. Good resistance test today and a strong 73 cent gain in a weak market.

Original Trade Description: April 17th.

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, PINK, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, the United Kingdom, and Greater China, which are primarily mall-based; through its Websites comprising VictoriasSecret.com, BathandBodyWorks.com, HenriBendel.com, and LaSenza.com; and through franchises, licenses, and wholesale partners. As of January 28, 2017, the company operated 2,755 retail stores in the United States; 270 retail stores in Canada; 18 retail stores in the United Kingdom; and 31 retail stores in the Greater China area. It also operated 203 La Senza stores in 24 countries; 159 Bath & Body Works stores in 30 countries; 23 Victoria's Secret stores in 12 countries; 391 Victoria's Secret Beauty and Accessories stores in 70 countries; and 5 PINK stores in 3 countries. Company description from FinViz.com.

Two weeks ago, Citigroup downgraded LB from buy to neutral saying the retailer is operating in too many failing and underperforming malls. The analyst said their entire year would come down to how they perform in the second half of 2017 after an ugly shopping season in 2016.

The company beat on Q4 with earnings of $2.18 compared to estimates for $1.90. Revenue of $4.5 billion matched estimates. Same store sales fell -3% at Victoria Secret. However, they guided for 2017 earnings of $2.05-$3.35 and analysts were expecting $3.61. They reported mid to high teens percentage same store sales declines in February. They also said the exit from swimwear will cost them another 6% in sales in April.

On April 6th, LB said same store sales in March fell -10%. However, they had an excuse. They blamed 2% to 3% of that drop on the later than normal Easter that would have normally produced some late March sales. They also said sales were lowered by the exit from the swimwear and apparel business had a negative 7% impact. Victoria Secret sales declined -13%, compared to analyst estimates for a 10.8% decline. Bath and Body Works sales were flat and analysts expected a 2% decline. Investors bought the excuses and the stock did not decline.

Earnings May 24th.

Oppenheimer came out swinging on the LB buying opportunity with a $62 price target. The analyst said patient investors will be well rewarded because the low March numbers were predicted in advance and the recent sell off was overdone. Changes in inventory levels and content after a slow January, made an immediate difference in traffic and revenue.

In April, the stores are transitioning into a Mother's Day theme featuring new and seasonal products in body care, home fragrance, soaps and sanitizers.

Shares rebounded to $47.50 on the better than expected same store sales when accounting for discontinued swimwear. They have held at that level for seven days and are showing no signs of a decline. The next move appears to be higher. If we make an entry now before that move begins, we can get a lower option premium.

There are no June options.

Position 4/18/17:

Long August $50 call @ $2.70, see portfolio graphic for stop loss.


SYMC - Symantec - Company Profile

Comments:

No specific news. Moving in the right direction only very slow.

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 10th.

Position 3/17/17:

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


$VIX - Volatility Index - Index Description

Comments:

The VIX closed just under the high for the day as the Dow decline worsened at the close. Next week could be a killer with the funding battle and the debt ceiling crisis.

With Congress on a two-week recess, we will have a much less chance of a politically stimulated event. However, when they get back on the 24th, they only have 5 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 3/30/117
Long July $14 call @ $2.55, no stop loss.

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.
Previously Closed 4/10/17: Long Apr $13 call @ $2.30, exit $1.80, -.55 loss.


WDC - Western Digital - Company Profile

Comments:

No specific news. Only a very minor 7 cent decline in a weak market.

Original Trade Description: March 29th.

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.

Update 3/30/17: Shares spiked on news that Toshiba would sell its flash memory business and that Western Digital could be a major bidder. With a shortage of memory in the market, this would help WDC fill that void and make them a major player in the future.

Update 4/4/17: WDC said it has increased the capacity of its Surveillance-Class hard drives to 10TB. According to IHS Markit, the growing number of high resolution monitoring cameras is causing a sharp uptick in the amount of storage required to archive the video footage. Some surveillance cameras are now HD and even 4K and that requires a lot of storage for a 24x7x365 bank of networked cameras. The new 10TB drive is optimized for 24x7 video from up to 64 HD cameras at once in security environments. 4K video surveillance cameras are estimated to be 2% of the current market today but expected to be 29% by 2020.

Update 4/6/17: WDC announced a new pocket sized SSD drive for portable data so developers and content creators can take their data with them wherever they travel. These are the fastest portable drives with speeds of up to 515 Mbps and come in 256gb, 512gb and 1TB capacities starting at $99. This is an amazing accomplishment and these will be hot products.

WDC also named Phil Bullinger as head of its data center business. Bullinger was formerly a general manager of Dell EMC storage business and before that he was in charge of Oracle's SAN/NAS storage business. Update 4/11/17: JP Morgan upgraded WDC from neutral to overweight and raised the price target from $80 to $116. The analyst said NAND memory prices are going higher and that was great for WDC. He also said the PC market was stabilizing and driving disk demand higher.

Update 4/12/17: WDC may have a trump card in the sale of the Toshiba memory business. WDC has invested more than $13 billion into a partnership with Toshiba in developing the NAND memory business. The company said the sale to a third party would be a serious violation of their joint venture agreement. WDC is bidding with Silver Lake Partners but currently has the lowest bid out of the four remaining bidders. Broadcom is the highest at $23 billion. Two Chinese companies are still in the bidding but would probably be declined because of national security concerns. That leaves Broadcom and WDC and WDC is already a part owner.

Update 4/14/17: Rumors broke early Thursday saying Toshiba had shut down all meetings and actions relating to the sale of its memory business. Shares of Toshiba fell 9%. Later in the afternoon Toshiba said it had not take that action and the report was incorrect. Toshiba's problem is that half the assets it is trying to sell already belong to WDC. Western has a "right to approve" clause in its joint venture contract with Toshiba and they can halt any sale. Reportedly, there are only three bidders left. Those are Broadcom at $23 billion and Taiwan's Hon Hai Precision Industry at $27 billion. WDC is reportedly offering between $15-$18 billion but they have the hammer and the right to block any transaction. The Hon Hai bid would likely be rejected for national security reasons.

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.

Position 3/30/17:

Long May $85 call @ $3.25, see portfolio graphic for stop loss.


Z - Zillow Group - Company Profile

Comments:

Bridge Interactive, a subsidiary of Zillow, announced it had added 10 new multiple listing services to its platform. This added 180,000 agents to its 400,000 existing members.

Original Trade Description: April 8th.

Zillow Group, Inc. operates real estate and home-related information marketplaces on mobile and the Web in the United States. The company offers a portfolio of brands and products to enable people find information about homes and connect with local professionals. Its brands focus on various stages of the home lifecycle, including renting, buying, selling, and financing. The company's portfolio of consumer brands comprises real estate and rental marketplaces, such as Zillow, Trulia, StreetEasy, HotPads, and Naked Apartments. It also owns and operates various brands comprising Mortech, dotloop, Bridge Interactive, and Retsly, as well as provides advertising services to real estate agents, and rental and mortgage professionals. Company description from FinViz.com.

Zillow reported earnings of 14 cents. This compares to a loss of 1 cent in the year ago quarter. Revenue of $227.6 million rose 34%. The guided for Q1 for revenue of $232-$237 million. Shares declined after the report because the guidance was slightly less than analysts expected.

In Mid March, shares declined again after a story appeared on Inman.com suggesting that Zillow's marketing programs may have violated RESPA rules. The Real Estate Settlement Procedures Act was put in place in 2010 to protect potential homeowners from predatory lenders. Basically, if a lender or real estate agent pays somebody a kickback for a referral, it is illegal after 2010.

Zillow allows mortgage brokers to advertise on the websites. No problem there. Zillow also offers referral services. If you want a mortgage loan you can go to the Zillow site and enter some information like your loan amount and zip code where you are buying the home. Zillow then matches your request with lenders that pay to advertise on the site and you are given a list of referrals. The inman.com article suggested this was a recommendation for pay, which is illegal. However, Zillow contends it is just generic advertising that matches lenders and borrowers by zip code. The key point is that Zillow gets paid for the advertising whether a lender makes a loan or not. They get paid for the click rather than a loan. Several analysts have noted that Google does the same thing if you type in mortgage loan calculator. They show lenders on that page and Google gets paid for that impression even if no loan is ever made.

Shares declined to $33 on that story and have held there for three weeks. On Friday, Zillow closed at a post dip high. With this the active selling season, the expectations for their May earnings should be high and should lift the stock.

Earnings May 9th.

Position 4/10/17:

Long May $35 call @ $1.45, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

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

Comments:

The SPY closed under support at 233.50 again and this should be a warning sign as we near the fiscal battle all next week.

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.




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