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Daily Newsletter, Saturday, 5/6/2017

Table of Contents

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

Market Wrap

Risk Evaporated

by Jim Brown

Click here to email Jim Brown

Late Friday polls on the French election showed a nearly impossible to overcome lead by Macron and weekend event risk evaporated.

Weekly Statistics

Friday Statistics

With a the Fed meeting and jobs report in the rear view mirror and the pro EU candidate well ahead in France, there was suddenly no reason not to hold longs over the weekend. In the polls, Macron had 63% and Le Pen 37%. With French and German markets at their highs and expected to surge Monday on a Macron victory, big caps stocks were suddenly in demand for the last 30 minutes of trading.

Apple (AAPL) rescued the Dow from the IBM disaster and kept the index close to zero or slightly positive most of the day. IBM fell $4 after Warren Buffett said he sold 30% of his shares. Berkshire was the largest shareholder in IBM at 9% and 81 million shares. He said when the stock hit $180 in Q1 he sold about 25 million shares. His comments suggested he would have sold the rest if the price had not dropped so sharply in early March. Buffett began buying IBM in 2011 in the $160-$170 range. Over the last 6 years, he collected more than $20 per share in dividends. When asked if he made a bad decision buying IBM he said he could have made a lot more money just buying the S&P. Shares fell from the $216 high in 2013 to $117 in early 2016. You can see why he wanted to bail when shares returned to $180 and a minor profit in Q1. IBM shares subtracted 27 points from the Dow on Friday.


Buffett was also saying positive things about Apple. He said the weak iPhone sales in Q1 did not matter. "I don't own Apple because of what I think the earnings are going to be in the next three months or six months." He said he understood why sales are soft and used a car analogy. "If you knew a new car was coming out tomorrow and you had to pay roughly the same, for the year older model, you are probably going to wait." Berkshire owns 2.5% of Apple's stock. Apple just added $35 billion to their stock buyback program and raised the dividend.

Apple was also rising on a note from Citigroup giving a 40% chance they would buy Netflix. Analyst Jim Suva assigned percentages to several other companies as well saying a repatriation tax cut could give Apple a window of opportunity to make a big purchase. Suva said Disney was a 25% chance, Tesla, Activision Blizzard, Electronic Arts and Take-Two Interactive were at 10% or less. On Tuesday, CEO Tim Cook said he wants Apple to be a major player in online video. Buying Netflix would be a way to spring to the front of the pack. With Apple's cash, they could accelerate the production of original content.

There was also a new article suggesting Apple and Amazon were getting together in an Apple TV deal where the Amazon Prime Video app would run on Apple TV by Q3. Apple is also increasing funding for its own original content that will be on the Apple Music service.

With all the various headlines on Apple, the stock shot up $2.43 to add roughly 17 points to the Dow and offset IBM's drag.


The Nonfarm Payrolls for April showed a gain of 211,000 jobs after a sharp drop to 79,000 jobs in March. February showed a revised gain of 232,000 jobs. The unemployment rate fell from 4.5% to 4.4% and the lowest level since 2006. The unemployment rate fell because the percentage of population not in the labor force rose by 162,000. The participation rate slipped slightly from 63.0% to 62.9%. Average hourly earnings rose +0.3%.

Goods producing jobs rose by 21,000 and service jobs gained 190,000. Analysts were expecting a gain of 180,000 after the ADP report on Wednesday showed a gain of 177,000. Mining and energy jobs rose 10,000 as oil well workers go back to work. Manufacturing added 6,000, motor vehicles and parts added 9,000. Retail employment rose 6,000, professional and business +39,000, temporary help +6,000, leisure and hospitality (waiters and waitresses) +55,000. Government employment rose 17,000 despite a decline of 6,000 in the federal government.

The separate household survey showed a gain of 156,000 jobs but significantly less than the 472,000 in March. The broader U6 unemployment rate fell from 8.9% to 8.6% and a post crisis low. The drop was due to a 281,000 person decline in those working part time for economic reasons.

Eventually there will be a hit to job growth once Obamacare is replaced and the 30-hour mandate for healthcare is eliminated. Millions of people currently prevented from working 40 hours on their primary job are working a second job to make ends meet. Once they are able to go back to 40 hours on their primary, they will drop the second job. Employers will also lower the number of jobs. For example, employers with 40 people working 30 hours a week (1,200 hours) will move back to 30 people working 40 hours a week (1,200 hours) but that means 10 people will be laid off. There are always unintended consequences to every government intervention. Obamacare increased part time employment and reduced full time employment. "If" it is replaced, that situation will reverse.


The strong jobs number suggests the Fed is free to hike rates in June and again in September. Analysts believe there will be 2 hikes this year and 3 hikes in 2018. Some are starting to move towards 4 hikes in 2018 but that is still the minority opinion.

There is currently a 78.5% chance of a rate hike in June according to the Fed Fund Futures.


The economic calendar for next week is lackluster with the Producer and Consumer Price Indexes and Retail Sales for April, the most important reports. You can tell the Fed quiet period surrounding the meeting is over because they are out in force hitting the speaking circuit. There is nothing on the economic calendar to move the market unless there is a dramatic disappointment in a specific number.


The earnings calendar is headlined by Nvidia, Priceline, TripAdvisor and Valeant on Tuesday. The retailers close the week with Nordstrom, Kohl's, Macy's and JC Penny.


The current earnings cycle is getting better every week. Of the 412 S&P-500 companies that have reported, earnings growth has risen to 14.7%. More than 75% of companies have beaten on earnings and 63.4% have beaten on revenue. The averages over the last four quarters are 71% and 53% respectively. There have been 50 earnings warnings for Q2 and 27 guidance raises. For next week, 42 S&P companies and one Dow company (DIS) will report. The current PE for the S&P-500 is 17.7. S&P earnings for 2017 are now expected to total $131.44 and grow to $147.40 in 2018 and $161.22 in 2019. If the PE remained constant that would mean the S&P would rise to 2,853 by the end of 2019. Obviously, that is the equivalent of a thousand years in market time.

Companies expected to beat earnings are PCLN, NVDA, EOG, KSS.

Companies expected to miss estimates are VMC, DISCA, TRIP.

Friday's earnings were sparse. Cigna (CI) reported earnings of $2.77 and analysts were expecting $2.44. Revenue of $10.3 billion beat estimates for $9.94 billion. Cigna guided for 2017 to earnings of $9.25-$9.75. Anthem asked the Supreme Court to review last week's decision by an appeals court to block the $48 billion takeover bid for Cigna. The appeals court said the merger would further reduce competition in an already concentrated insurance market. Cigna has sued Anthem seeking billions in damages for not completing the deal on schedule. The original bid was in 2015 and it lingered until the courts finally blocked it. They also blocked the $34 billion acquisition of Humana by Aetna. Shares rallied $3.50 to a new 52-week high.


Ruth's Hospitality Group (RUTH) reported earnings of 35 cents that beat estimates for 33 cents. The restaurant chain posted revenue of $105.5 million that just missed estimates for $105.9 million. They opened two Ruth Chris Steak House restaurants in the quarter plus another store in a partnership. They had 70 company owned steak houses open at the end of the quarter and 81 franchised stores. Same store sales rose 0.7% and the average check rose 2.4%. The calendar shift of Easter into Q2 impacted Q1 results by 70 basis points. The shift of Valentine's Day from Sunday to Tuesday cost them 50 basis points. Apparently, fewer people want to go out for a big meal on Tuesday after work.


Restoration Hardware (RH) announced a buyback program for $700 million. The company said it completed the prior $300 million program in Q1 for 7.85 million shares. This is a material announcement since the market cap for RH is only $1.7 billion. They are proposing to buy back 40% of their shares. The catch is that there is no expiration date on the program. They could take 5 years to complete it and there is no guarantee they will ever complete it. Companies announce buyback programs all the time and then buyback only a fraction of the announced total. Shares rose $5 to $57.


Facebook (FB) said it was launching about two-dozen TV shows in June. The content will be in two forms. Some will be 5-10 min in length and others will be traditional TV format shows. Facebook said it was planning on creating an "ecosystem" of professionally produced video content to augment user-generated videos that currently run on Facebook pages. The idea is to attract viewers so they can sell more ads. Facebook is now interviewing for new positions for film producers, creative producers, film engineers and several other producer type roles. Some will be deeply involved with producing original content and some will "oversee" content generation by others, as in Facebook users, companies and aspiring writers/producers. Facebook is well behind Amazon, YouTube and others in this endeavor but they have plenty of cash and they are not afraid to spend it.


Exact Sciences Corp (EXAS) rocketed another 10% higher on Friday to gain $10 for the week. EXAS makes the new colon cancer screening test Cologuard. This is a simple do it at home and mail it in test that costs $435 per copy. It just became accepted by insurance companies in the last several quarters. Cowen & Co surveyed 50 primary care providers and based on the survey those providers expect to use it on 55% of their patients. With roughly 80 million potential patients of screening age this translates into a $5 to $6 billion a year opportunity.

In Q1 EXAS said 10,000 providers ordered initial Cologuard tests, bringing the number of prescribers to 70,000. Since its launch two years ago, the company has completed 450,000 tests. More than 100,000 were in Q1. That shows you how fast the acceptance is ramping. Revenue rose 226% over the year ago quarter. The company said it hopes to have 2% of the market by the end of the year but said it could be processing 8 million tests annually within a couple years. This is a monster market and the Cologuard is much cheaper, safer, less time consuming and far less trouble than a colonoscopy. Shares have exploded since their earnings and guidance on the 27th.


On Thursday after the close Zillow (Z) reported earnings of 11 cents compared to estimates for 5 cents. Revenue of $245.8 million also beat estimates for $236.2 million. They guided for Q1 revenue in the range of $257 to $262 million and full year revenue of $1.05 to $1.07 billion. RBC Capital raised the price target from $40 to $48. Canaccord raised from $42 to $46, Cowen from $37 to $40. Shares exploded higher on the news to close at $44. We exited our long position at the open on Thursday to avoid a potential post earnings drop. Can I have a do over on that please?


The energy sector had a bad week. Oil prices dipped to $43.76 Thursday night to cap a decline that started around $54 about three weeks ago. Inventory declines have been slow to appear with only a 900,000 barrel decline for the last week. Refiners have been slow to restart production from their spring maintenance season. These events will eventually occur. Consumers drive like crazy over the summer and gasoline consumption soars starting around Memorial Day.

Recent comments from random analysts read like the end of the world for oil prices. With current U.S. production at 9.29 million bpd, one analyst was forecasting 10 million bpd by the end of August. The prior peak in 2015 was 9.61 million bpd. If that increase were to occur it would negate half of the OPEC production cuts and that is just until the end of August. If production continued to increase at that rate the U.S. would add another 1.0 million bpd by next April and inventories would be bursting at the seams.

This has little or no chance of happening. Even if we did increase at the recent average rate of 18,000 bpd per week, that is only about 80,000 bpd per month. There is also the law of decreasing returns. Production is surging today because of all the previously drilled but uncompleted (DUC) wells now being completed. That is far easier than drilling from scratch. Once all those DUC wells are completed the pace of new production will slow significantly.

Meanwhile, oil prices tanked on no news while we wait for the summer driving season to begin and inventories to drop. I went to buy gas yesterday in Colorado and it was $2.36 a gallon. They are already hiking the prices for the summer driving season. Based on $45 oil it should be closer to $2 a gallon. I checked GasBuddy.com and it was $3.09 in NYC, $2.75 in San Francisco and $2.04 in Houston.


There was a slowdown in rig activations last week, which was probably related to the decline in oil prices. Oil at $45 is not going to support as many rigs as $55 for obvious reasons. Only 7 new rigs were added.


Markets

With the late surge on Friday afternoon and the new closing high on the S&P with the Dow slightly over 21,000 it would appear we are poised for a breakout move on Monday assuming Le Pen does not win in the French election.

For two weeks, the markets moved sideways and refused to decline. We had all kinds of potentially negative events but no real selling. Despite going nowhere, volume was high on Tue/Wed/Thr. Thursday was the highest volume since March 21st and all the indexes ended in single digit gains except the Dow, which had a single digit loss. The market action has had all the earmarks of a distribution cycle but it looks like the buyers are about to win the battle.

Volume was moderate at 6.5 billion shares on Friday with advancers 5:2 over decliners. That is the first day in the last four that advancers beat decliners. This is a really crazy market but after two weeks we may be about to pick a direction.

The S&P closed 3 points over the prior closing high from March 1st of 2,395.96 and only fractionally below round number resistance at 2,400. At this point, ANY further gains could trigger significant short covering and price chasing. Everyone not in the market will be racing to buy something before it runs away from them.


The Dow closed at 21,006 and ever so slightly over critical resistance at 21,000. Like the S&P, ANY further gains could lead to significant price chasing. Numerous Dow components closed at new highs and they are overshadowing those laggards still in a slump. If the Dow breaks out, the laggards could find buyers as well on the theory they are not overbought like many Dow stocks seem to be.

The historic closing high is 21,115 on March 1st. That will be the last line of resistance for the bears but they seem to have lost their conviction.



The Nasdaq Composite closed fractionally over resistance at 6,100 and appears ready to move higher. The prior two days of post high selling were minimal despite the sector being very overbought. Nobody wants to sell techs and the FAANG stocks continue to make new highs.

Current support is just over 6,050 and then again at 6,025. There are no sellers and like the other indexes, ANY additional move over 6,100 could cause significant price chasing.




The small cap indexes are lagging big caps again. The Russell was leading the market for the prior two weeks when big caps were stumbling. It appeared to be a rotation from big to small, which would have been bullish for market sentiment. Now that rotation has reversed again and while the market may move higher, a big cap rally has less staying power. Portfolio managers buy big caps because they are liquid and they can get some short-term gains in a positive market. They buy small caps for the long term when they feel the market is going to remain bullish for a longer period.


As of late Saturday, the polls still have Macron ahead of Le Pen 60% to 40% despite Macron's emails being hacked and posted online on Friday. France has a 44-hour blackout of electioneering before the runoff to allow voters to reflect on their choices. While a 20% margin seems unbeatable, it would only take a 10.1% swing to put Le Pen in the lead. She is very strong in the country and Macron is strong in the more liberal cities like Paris. While it would appear Macron will win and the markets are prepared to run if he does, there is no guarantee. Populism is growing in Europe and Le Pen still has a remote chance of pulling off a victory.

The U.S. markets would like to see Macron win because he represents the least amount of change. We will know Sunday evening what Monday will look like once the S&P futures open for trading.

We have had a great earnings cycle with very strong earnings but that cycle is fading. After this week, there will only be about 46 S&P stocks left to report. We will also be heading towards the Memorial Day weekend that kicks off the summer doldrums.

I recommended last week for readers to be cautious with long positions until the Dow moved over 21,000 and the S&P over 2,400. Monday could be the day that happens and the odds are good it will be a repeat of the short squeeze on Monday after the French primary election. That means if you were not long at the close on Friday, you should consider passing on new entries where the stocks gap up significantly on Monday.



Random Thoughts


The bulls held on to their lead at 38.1% and a few more bears joined the fence sitters in the neutral camp. This survey ended on Wednesday so Friday's new highs are not yet in the calculation. If we have another giant short squeeze on Monday, it will be interesting to see the sentiment shift for next week.

Last week results


Major U.S. companies are paying summer interns a fortune in salaries. For example, Facebook is paying $8,000 a month with perks including free food, housing and free weekend events. Others include Microsoft at $7,100 a month in a rotational program that focuses on software engineering. Exxon pays $6,500 a month and teaches engineering, economics and management. Salesforce.com pays $6,450 and provides job shadowing, mentoring and classes. Amazon pays $6,450 and interns are encouraged to have ideas, innovate and try new things. Apple pays $6,400 and the program is run like a series of small start-ups instead of a global company. Others include Bank of America $4,750, Bloomberg $6,400, Yelp $6,400, Yahoo $6,080, VMware $6,080, Google $6,000, Nvidia $5,770, Intuit $5,440, Juniper $5,440. All the numbers come from Glassdoor.com. Top 25 Internships


You paid how much? This quaint 80-year old 908 square foot house with hardwood floors, wood burning fireplace and exposed beam vaulted ceiling in Palo Alto California recently sold for $2,555,000 and $623,000 over list price after a bidding war developed. The house will be bulldozed. Developers wanted only the 7,500 square foot lot. That is $341 a square foot just for the land. Sky High Prices

There have been stories recently about Silicon Valley employees making $160,000 a year and just barely scraping by. Facebook engineers making up to $700,000 a year asked Zuckerberg to subsidize their housing because of the absurdly high prices. This housing mania on the West Coast is eventually going to end very badly.



I was going to use the phrase "light this candle" in a section of commentary but that paragraph did not make the final edit. For those investors who have been in the market a long time here is a flashback to the award winning Ameritrade commercial with Stewart telling Mr B "Let's light this candle." Has the market changed since then? Classic Commercial



 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"A habit cannot be tossed out the window; it must be coaxed down the stairs a step at a time."

Mark Twain


 

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Index Wrap

It's Alive

by Jim Brown

Click here to email Jim Brown
Traders were shocked to see the market showing signs of life on Friday afternoon after two weeks of dormancy.

I feel like I am watching an old Frankenstein movie where the creature moves for the first time and the doctor declares "it's alive." The Dow and S&P had done nothing since the post election short squeeze on the 25/26th. They had gone dormant despite higher than normal volume. There were multiple headline events over the last two weeks but nothing could move the indexes away from the flat line.

Friday's gains came in the last few minutes of trading after late polls showed Macron well ahead of Le Pen in the French runoff. Add in a rebound in oil prices and traders decided to go long over the weekend in hopes of a repeat post election performance with another short squeeze on Monday.

The S&P set a new closing high but remains under the 2,401 intraday high from March 1st. Despite the lackluster movement over the last two weeks, the momentum indicators have turned positive. If we do get a Monday short squeeze it could lift the markets well over prior resistance and begin a new leg higher.


The Dow closed only a minor amount over 21,000 and it is either poised for a double top formation or a breakout to a new high. The old high from March 1st is 21,115. The Dow is not as bullish as the S&P or the Nasdaq but it is refusing to relinquish any points.


Uptrend resistance on the Nasdaq is 6,100 and that is exactly where the index stopped on Friday. Any material gains should trigger additional short covering.


The Nasdaq had a headwind last week as the semiconductor sector rested and pulled the tech index slightly lower. I believe the weakness is over and Nvidia reports earnings on the 9th. That should boost the sector. Remember, where the semiconductor sector goes, the Nasdaq will follow.


Oil prices have been very detrimental to the equity market. Oil declined roughly $10 in just over two weeks and crushed the energy sector. However, falling oil prices is also a detriment to the broader market because it suggests a lack of demand or weak economics. You would think that lower oil prices would stimulate consumer spending and increase corporate profits for anyone not in the sector. That does happen long term but the immediate impact is a decline in equities.

Oil has been declining despite the falling dollar. This is very unusual. They normally move exactly the opposite of each other.



The market breadth increased significantly last week and the Russell 3000 closed only .05 points from a new high. This is the real market indicator and it is suggesting we are going higher.


The advance/decline line for the S&P also suggests we are going higher. The cumulative line is back at its highs from March. This was the most bullish chart of all the index A/D charts.


The two weeks of dormancy saw the bullish percent index slip back closer to 70%, which is still good but well off the 80% just three weeks ago.


Lastly, the dormancy also caused the percentage of S&P stocks over their 200-day average to fall to 75.6%, down from 84% three weeks ago.


There are conflicting signals in the market but assuming Macron wins the election in France, the markets are poised for another short squeeze. I doubt it will be as violent as the last one but you never know.

We are now in the "sell in May and go away" period and nobody appears to be leaving. With S&P earnings up 14.7% in Q1 and similar numbers predicted for the rest of the year, there is no real reason to head for the sidelines. There is optimism in Washington, Wall Street and Main Street so it might take a significant catalyst to cause a major sell off.

With the Volatility Index holding at 10-year lows, the complacency is rampant. Is there a Black Swan event in our future?

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Multiple Opportunities

by Jim Brown

Click here to email Jim Brown

Editors Note:

Summer vacation planning is in high gear and gasoline prices will be rising. I am profiling a play on Carnival Cruises and Anadarko Petroleum. Carnival is seeing record numbers of passengers at significantly higher prices. Anadarko was severely oversold on multiple headlines.



NEW DIRECTIONAL CALL PLAYS

CCL - Carnival Cruises - Company Profile

Carnival Corporation operates as a leisure travel and cruise company. It offers cruises under the Carnival Cruise Line, Princess Cruises, Holland America Line, and Seabourn brands in North America; and Costa, AIDA, P&O Cruises (UK), Cunard, and P&O Cruises (Australia) brands in Europe, Australia, and Asia. The company operates approximately 100 cruise ships. It also owns Holland America Princess Alaska Tours, a tour company in Alaska and the Canadian Yukon, which owns and operates hotels, lodges, glass-domed railcars, and motor coaches. In addition, the company is involved in the leasing of cruise ships. It sells its cruises primarily through travel agents and tour operators. The company was incorporated in 1972 and is headquartered in Miami, Florida. Company description from FinViz.com.

Carnival shares are at a record high after the company reported earnings of 38 cents that beat estimates for 35 cents. Revenue rose 3.8% to $3.79 billion and beating estimates. Onboard spending rose 6% as the company added more casinos and IMAX theaters to its ships. They raised full year guidance from $3.30-$3.60 to $3.50-$3.70.

The company said "At this time, cumulative advance bookings for the remainder of 2017 are well ahead of the prior year at considerably higher prices." More than 25.3 million people are expected to cruise this year compared to the 15.8 million a decade ago.

The company also raised the dividend by 14% to 40 cents payable on June 16th to holders on May 26th. They also approved a $1 billion stock buyback program.

Earnings June 27th.

Shares rallied to a new high at $63 and have held there for a week with no attempt to sell off. I believe they will move higher and the options are cheap.

Buy July $65 call, currently $1.20, initial stop loss $59.85.


APC - Anadarko Petroleum - Company Profile

Anadarko Petroleum Corporation engages in the exploration, development, production, and marketing of oil and gas properties. It operates through three segments: Oil and Gas Exploration and Production, Midstream, and Marketing. The Oil and Gas Exploration and Production segment explores for and produces oil, natural gas, and natural gas liquids (NGLs). The Midstream segment engages in gathering, processing, treating, and transporting Anadarko and third-party oil, natural-gas, and NGLs production, as well as the gathering and disposal of produced water. The Marketing segment sells oil, natural gas, and NGLs in the United States; oil and NGLs internationally; and anticipated liquefied natural gas production from Mozambique. The company's oil and natural gas properties are located in the U.S. onshore, deepwater Gulf of Mexico, and Alaska; and in Colombia, Cote d'Ivoire, Mozambique, and other countries As of December 31, 2016, it had approximately 1.7 billion barrels of oil equivalent of proved reserves. Florida. Company description from FinViz.com.

Anadarko shares were hammered over the last several weeks by multiple events. The $10 drop in crude prices was the major cause of the first dip. Prices will rebound as we enter the summer driving season that begins on Memorial Day.

The second problem was a house explosion in Firestone Colorado. When the house was built the contractors cut into an abandoned flow line that used to run through the pasture that became a housing development. The line had been abandoned and the tanks removed long ago. However, when the well was shutdown in early 2016 the valve on the abandoned line was never closed. A new valve, new line to new storage tanks elsewhere was installed after Anadarko acquired the lease and the well was restarted in February. Unknown to Anadarko, the well was actually flowing gas into both lines. The gas from the line that had been cut saturated the ground around the house and entered the basement through a sump pump. The non-odorized gas built up in the basement until the owner tried to install a new water heater and the house blew up. Two men were killed and the wife was badly burned.

Anadarko shutdown more than 3,000 wells in the area to make sure they do not have any other problems. The well was drilled in 1993 and was last inspected in 2014. The well initially belonged to Gerrity Oil. Gerrity became a subsidiary of Patina Oil and Gas. Patina had 3,550 producing wells in the Wattenberg field within a 40 mile radius. Noble Energy bought Patina in 2005. How/when the well ownership moved from Noble to Anadarko is not clear.

I am sure there will be a settlement. However, Anadarko has insurance. If Somebody other than Anadarko was responsible for shutting down the well in early 2016 then they will be liable as well. That could have been any number of oil field service providers like Baker Hughes, Schlumberger or others. There is also the contractor that cut the line while they were building the house. If they did not report it, they could be liable.

Anadarko is a $30 billion company. Any fine, judgment or settlement that comes out of this event will be expensive but on a relative basis it will probably be less than the cost of drilling a single well and will probably be shared by several companies. I do not want to be uncaring but we are talking about a business reality that is important to this investment.

Earnings August 1st.

The double whammy of the oil price drop and the high profile house explosion crushed APC shares. The headlines on the explosion are already fading. Once oil prices begin to rebound ahead of Memorial Day the energy company shares will also begin to rise. Options are cheap because of the disaster. This is a buying opportunity.

Buy Aug $55 call, currently $2.14. No initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Sentiment Change

by Jim Brown

Click here to email Jim Brown

Editors Note:

After two weeks of sideways trading on negative breadth, the S&P closed at a new high and the Dow just over 21,000. A buy program at 1:30 triggered some short covering and both of the big cap indexes closed strongly positive. The Nasdaq also participated with a close at 6,099.97, which is a new closing higher but still trapped by the long-term resistance at 6,100.

The Russell 2000 and S&P-600 small cap indexes were also up sharply. After some late day polls from France suggested Le Pen did not have a chance in Sunday's runoff, the markets eased slowly higher. The polls showed Macron with 63% and Le Pen with 37% and suddenly the weekend event risk evaporated.



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

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BULLISH Play Updates

ADBE - Adobe Systems - Company Profile

Comments:

No specific news. Still holding the recent gains.

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.

Update 5/2/17: Barclay's initiated coverage with a buy rating and $155 price target on growing traction in the cloud. They expect revenue from the Creative Cloud to rise 20% per year.

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.


CNC - Centene Corp - Company Profile

Comments:

No specific news. Pulling away from resistance.

Original Trade Description: April 28th.

Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. It operates through two segments, Managed Care and Specialty Services. The Managed Care segment offers Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State children's health insurance program, long-term care, foster care, and dual-eligible individual, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and X-ray services, home health and durable medical equipment, behavioral health and substance abuse, 24-hour nurse advice line, transportation assistance, vision care, dental care, immunizations, prescriptions and limited over-the-counter drugs, specialty pharmacy, therapies, social work services, and care coordination. The Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; vision services; dental services; correctional healthcare services; in-home health services; and integrated long-term care services, as well as care management software that automate the clinical, administrative, and technical components of care management programs. This segment offers its services and products to state programs, healthcare organizations, employer groups, and other commercial organizations. The company provides its services through primary and specialty care physicians, hospitals, and ancillary providers. Company description from FinViz.com.

Centene reported earnings of $1.12 compared to estimates for $1.05. Revenue jumped 69% to $11.72 billion to beat estimates for $11.42 billion. The big spike in revenue came from the $6.3 billion acquisition of Health Net last year.

The insurer said it had 12.15 million members on March 31st, an increase of 605,000. They raised guidance for the full year from $4.40-$4.85 to $4.50-$4.90. The health benefits ratio or HBR, the amount it spends on claims compared to the premiums received declined from 88.7% to 87.6%. The lower HBR is due to a greater mix of commercial businesses and the growth of its Obamacare businesses.

Earnings July 25th.

Shares had resistance at $73, which was broken last week. The next resistance is the 52-week high at $75.50 and the stock closed at $74.41 on Friday. There was a sell the news drop on Wednesday after the earnings but shares have already recovered $3 of that decline.

If the stock moves to a new 52-week high is should continue on to make a new high over $80.

Position 5/1/17:

Long June $77.50 call @ $1.57, see portfolio graphic for stop loss.


CVX - Chevron - Company Profile

Comments:

No specific news. Up with oil for a change.

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.

Update 4/19/17: 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.

Update 4/22/17: Chevron lost a court case in Australia for $260 million. The case ruled on the deductibility of interest on a $2.5 billion loan made from the parent company between 2003-2008. Chevron Australia paid 9% interest on the loan from Chevron and the parent company borrowed the money at a lower rate. The court said Chevron Australia could only deduct the interest at the parent's borrowing rate. Chevron said they would appeal.

Update 4/24/17: Chevron said it was selling its assets in Bangladesh to Himalaya Energy. No price was given but Bloomberg said the fields were worth about $2 billion. Chevron is planning on selling $10 billion in non-core assets in 2017. Himalaya is owned by a consortium of Chinese state owned firms. Bangladesh has a right of refusal on any deal and they said they were not done with their evaluations yet. The three fields held in the Chevron subsidiary produce 720 million cubic feet of gas and 3,000 barrels of condensate per day.

Update 4/28/17: Chevron reported earnings of $1.41 compared to estimates for 86 cents. The Chevron number did have a $600 million gain from the sale of an upstream asset so it is not really apples to apples comparison. Revenue of $33.4 billion missed estimates for $34.9 billion. Operating costs declined 14% and capex spending will be down more than 30%. Oil production rose 3% and full year growth is expected to be 4-9%.

Position 4/17/17:

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


FIVE - Five Below - Company Profile

Comments:

No specific news. Excellent gain almost back to a 3-year 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.


MCD - McDonalds - Company Profile

Comments:

No specific news. Shares made another new high.

Original Trade Description: May 3rd.

McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. McDonald's Corporation was founded in 1940 and is based in Oak Brook, Illinois. Company description from FinViz.com.

McDonalds is surging because they have overhauled their menu, offered breakfast all day, shifted to fresh beef, mobile ordering, delivery with UberEats, kiosks AND they are selling coffee for $1 and specialty drinks for $2. That is vastly lower than Starbucks and it is helping them steal market share. People stopping by to pick up a cheap coffee tend to order a snack as well. Who can resist adding an Egg McMuffin to go with that coffee.

McDonalds reported better than expected earnings and raised guidance. They reported $1.47 compared to estimates for $1.33. Revenue of $5.68 billion beat estimates for $5.53 billion. Same store sales rose 1.7% compared to expectations for an 0.8% decline. Global sales were up 4%.

Earnings July 25th.

Goldman has had a neutral rating on them forever but upgraded the fast food giant today to a buy with $153 price target. Goldman admitted they were late but said there was still plenty of time given the improved metrics. Goldman cited McDonald's "Experience of the Future" plans for mobile ordering and kiosks and said the expanding delivery options could expand revenue.

McDonalds closed at a new high today in a weak market.

Update 5/4/17: McDonalds said it was adding Signature Crafted Recipes to its stores in Florida and would be adding 5,000 workers to handle the volume.

Position 5/4/17:

Long July $145 call @ $1.67, see portfolio graphic for stop loss.


MSM - MSC Industrial Direct - Company Profile

Comments:

No specific news. Minor gain in a weak market.

Original Trade Description: April 22nd.

MSC Industrial Direct Co., Inc., together with its subsidiaries, markets and distributes various ranges of metalworking and maintenance, repair, and operations (MRO) products primarily in the United States, Canada, and the United Kingdom. The company's MRO products comprise cutting tools, measuring instruments, tooling components, metalworking products, fasteners, flat stock, raw materials, abrasives, machinery hand and power tools, safety and janitorial supplies, plumbing supplies, materials handling products, power transmission components, and electrical supplies. It offers approximately 1,000,000 stock-keeping units through its master catalogs; weekly, monthly, and quarterly specialty and promotional catalogs; brochures; and the Internet, such as its Websites comprising mscdirect.com and use-enco.com. The company serves primarily through its distribution network of 85 branch offices and 12 customer fulfillment centers. In addition, it distributes fasteners and other consumables for customers in manufacturing, government, the Department of Defense, transportation, and natural resources end-markets. The company was founded in 1941 and is headquartered in Melville, New York. Company description from FinViz.com.

MSC reported earnings of 93 cents compared to estimates for 90 cents. Revenue of $703.8 million beat estimates for $696.8 million. They guided for the current quarter to revenue of $734-$748 million and analysts were expecting $735 million. They declared a quarterly dividend of 45 cents. Shares fell $18 on the news.

The earnings were great and guidance was good. Why did the stock crater? Shares had vastly outperformed the market with a $35 post election gain. The earnings turned into a sell the news event as investors captured all that built up profit.

Shares bottomed at $86 last week and began to move slightly higher. Having just released earnings they to not report again until July 6th. We have plenty of time.

Just to be sure the rebound has begun I am going to put an entry trigger on the position.

Position 4/24/17:

Long June $95 call @ $1.71, see portfolio graphic for stop loss.


SAIC - Science Applications Intl - Company Profile

Comments:

No specific news. Minor gain in a weak market. They announced the shareholder meeting will be June 7th.

Original Trade Description: April 26th.

Science Applications International Corporation provides technical, engineering, and enterprise information technology (IT) services primarily in the United States. The company's offerings include engineering; technology and equipment platform integration; maintenance of ground and maritime systems; logistics; training and simulation; operation and program support services; and end-to-end services, such as design, development, integration, deployment, management and operations, sustainment, and security of its customers' IT infrastructure. It serves the U.S. military comprising Army, Air Force, Navy, Marines, and Coast Guard; the U.S. Defense Logistics Agency; the National Aeronautics and Space Administration; the U.S. Department of State; and the U.S. Department of Homeland Security. The company was formerly known as SAIC Gemini, Inc. and changed its name to Science Applications International Corporation in September 2013. Company description from FinViz.com.

Back in late March, SAIC reported earnings of 79 cents that missed estimates for 80 cents. Revenue of $1.03 billion also missed estimates for $1.09 billion. Shares were knocked for a $16 loss. They paid a dividend of 31 cents and bought back 457,000 shares for $38 million.

The company explained in detail several different items that caused them to miss estimates including the constant challenges with government contracting. The government never does anything on schedule including awarding contracts or making payments when contracts are completed.

During the quarter, they received awards of $800 million and net bookings for the full year were $5.3 billion with a book to bill ratio of 1.2 and their strongest ever. Their order backlog at the end of the quarter was $8 billion.

Earnings June 29th.

This is a good solid company that was punished for some minor execution issues and for the calendar challenges of dealing with the government. Shares cruised along in the $72 range for three weeks and begin rising this week. I am sure the market short squeeze did not hurt.

Now that the shares have started to rebound we can take a position.

I am going to reach out to the August option cycle to get past their earnings date. Open interest is thin so I would use a limit order to enter the position. Once we get closer to June the volume will increase.

Position 4/27/17:

Long August $80 call @ $1.90, see portfolio graphic for stop loss.


SYMC - Symantec - Company Profile

Comments:

No specific news. New closing high. Earnings are Wednesday afternoon. Close Wednesday morning at the open.

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.

Update 4/26/17: Symantec said cyber criminals were upping the fees to get your data back after they infect your computer with ransomware. The average fee in 2016 was $294 and that has risen to $1,077 in 2017. DON'T click those links in emails!!!

Update 4/27/17: Symantec, Google and Mozilla have reached an agreement on the life cycle of Symantec trust certificates. There is a push on in the browser community to shorten the duration of security certificates because of the proliferation of bogus websites. If the certificates expire faster, then the websites have to be revalidated more often and the bogus sites will slowly be weeded out.

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:

Weekend event risk caused a slight gain but still holding at 10-yr lows.

This is a July call. We have plenty of time and the odds of a market sell off over the next 2.5 months are close to 100%. I considered recommending we double up on the position with the VIX at 10-year lows. I decided I would leave that up to each individual investor. The VIX cannot go much lower but it can go a lot higher.

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.

Update 5/1/17: The VIX made a new intraday low at 9.90 and closed at a 10-yr low at 10.11. The government shutdown has been avoided according to reports out of Washington and that helped to deflate the VIX. Marine Le Pen is rapidly gaining on Macron in the French election runoff for next Sunday. She gained 6 points in two days to 41% in the recent polls compared to Macron's 59%. If she can gain another 6% early this week then the entire event risk scenario comes back into play with a potential come from behind win.

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.



BEARISH Play Updates (Alpha by Symbol)

PG - Procter & Gamble - Company Profile

Comments:

No specific news. No excitement. Holding near the lows for the week. Hopefully the next move is lower.

Original Trade Description: May 1st.

The Procter & Gamble Company provides branded consumer packaged goods to consumers in North America, Europe, the Asia Pacific, India, the Middle East, Africa, and Latin America. The company's Beauty segment offers hair care products comprising conditioners, shampoos, styling aids, and treatments; and antiperspirants and deodorants, personal cleansing, and skin care products. This segment markets its products under the Head & Shoulders, Olay, Pantene, Rejoice, Old Spice, Safeguard, and SK-II brands. Its Grooming segment provides blades and razors, pre- and post-shave products, and other shave care products, as well as appliances under the Braun, Fusion, Gillette, Mach3, Prestobarba, and Venus brands. The company's Health Care segment offers toothbrushes, toothpaste, and other oral care products; and gastrointestinal, rapid diagnostics, respiratory, vitamins/minerals/supplements, and other healthcare products under the Oral-B, Crest, Prilosec, Vicks, Metamucil, Pepto Bismol, and Align brands. Its Fabric & Home Care segment provides fabric care products, including fabric enhancers, laundry additives, and laundry detergents; and home care products comprising air care, dish care, P&G professional, and surface care products under the Tide, Ariel, Downy, Gain, Cascade, Dawn, Febreze, Mr. Clean, and Swiffer brands. The company's Baby, Feminine & Family Care segment offers baby care products, such as baby wipes, diapers, and pants; adult incontinence and feminine care products; and family care products, such as paper towels, tissues, and toilet papers. This segment markets its products under the Pampers, Always, Bounty, Charmin, Luvs, and Tampax brands. The company sells its products through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, distributors, baby stores, specialty beauty stores, e-commerce, high-frequency stores, and pharmacies. The Procter & Gamble Company was founded in 1837. Company description from FinViz.com.

P&G is never going out of business but their continual slowdown in sales it a testament to the changing retail environment. Even their age old, die hard brands, like Tide and Mr. Clean are losing market share to the dozensof new products in the same category. Tide was the old reliable that everyone used 50-70 years ago. Now it is just one of the group of brand name products for washing clothes.

P&G posted adjusted earnings of 96 cents compared to estimates for 94 cents. Revenue of $15.61 billion declined -1% and missed estimates for $15.71 billion. The strong dollar caused a 2% decline in revenue. The company guided for a 1% decline in revenue for the year compared to prior guidance of flat revenue. The affirmed earnings estimates for $3.67. This was the 13th consecutive decline in quarterly revenue.

Earnings July 26th.

Shares dropped $3 on the revenue miss and weak guidance. Investors are not excited about owning a company with declining revenue. That always squeezes profits as well.

I am recommending a September option instead of July because the July expires the week before earnings. We are not going to hold over but I would like to have those earnings expectations in the premium when we exit. Buying longer dated options does not mean you have to hold them until maturity. We can buy time but we do not have to use it.

Position 5/2/17:

Long Sept $85 put @ $2.05, see portfolio graphic for stop loss.


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

Comments:

The S&P gained 9 points to close at 2,399.09 and finally broke away from the 2,388 resistance. Friday's close was a new high. Any further gains puts it over 2,400 and we could see a strong short covering rally. Without a major negative event before expiration this position is going to expire worthless. You could close it and save the 25 cents but that is cheap insurance against an unexpected event.

The Dow and S&P have reached levels where we should begin worrying about a potential double top in the markets. The rally last week has erased nearly all the option premium. There is no reason to close the position for 25 cents.

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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