Option Investor
Newsletter

Daily Newsletter, Wednesday, 5/31/2017

Table of Contents

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

Market Wrap

Dip Buyers Continue to Rescue the Market

by Keene Little

Click here to email Keene Little
Following a quick pop up this morning the indexes spiked down as strong sell programs hit the tape. But as is usual for this market, the selling stopped after the first 30 minutes and the dipsters arrived to mop up. Buying the dip continues to work but there is growing risk it might not soon.

Today's Market Stats

The market got hit with some strong sell programs right after a small gap up started the day. But the selling stopped after the first 30 minutes and the dipsters arrived on cue to start their buying again. The indexes recovered a good portion of the morning selling and they closed with only marginal loses. Interestingly, the techs look vulnerable to a reversal back down while the RUT looks like it could start a bigger bounce, which would reverse the pattern we've seen between the two.

The morning selloff was blamed on some economic numbers but those pre-market reports saw very little reaction in the futures. It wasn't until the cash market opened that the selling hit. Was it a shot across the bow of the USS Bullship or just a quick shot of selling to clear some weak longs before resuming the rally? Answer that question correctly and you'll be able to position yourself for the next move.

One of the issues we're soon going to be dealing with is higher volatility from big trades going off in the ETFs, which now account for over $2T worth of U.S. stocks. And more than a quarter of these funds are traded by the quant hedge funds, otherwise known for their computerized algorithm trading. There's little to no concern about individual stocks and they're trading only on technical/algo signals

The computer program trading is pretty much on autopilot where a human is not even involved and the buying and selling can quickly get out of control. The programs are designed to stop trading if things get out of whack and that could then cause the problem with lack of liquidity in the market. That's when flash crashes have occurred in the past.

Because everyone is "investing" in the same ETFs, especially the big ones like SPY to essentially be invested in the S&P 500 index, we could see huge price swings if everyone starts to react the same way and panic in and out of funds en masse. Selling will quickly get out of control since fear is a stronger emotion than greed and when everyone wants out there could be times when there are virtually no buyers. The computers will have shut down trading after initially joining in the selling to clear their inventory.

Many are now investing in ETFs to avoid fees with mutual funds, who are also heavily investing in ETFs rather than individual stocks since the fund manager feels safer that way instead of being responsible for picking the wrong stocks. Hedge funds have much higher fees and haven't had stellar performance, which is driving more investors into passive investing through ETFs. This makes for a very different market than we had not many years ago. I think it makes it a much riskier market, especially when the selling begins. And that makes the question about this morning's selling even more relevant.

Before getting to my regular charts I wanted to show some comparative charts as a way to highlight the weakness under the surface of this market. At the moment we're seeing all dips bought and a constant underlying bid to the market. That has many thinking we must be in a new paradigm with a constant stream of new money coming into the market. Whether it's out-of-thin-air Fed money, overseas money, Mom and Pop money through ETFs, corporate buybacks, you name it, there seems to be an endless stream of money into the market. The cumulative advance-decline line continues to show good liquidity coming into the market. So it's not unreasonable to think this market has much higher to go.

What we can't know is what will cause the money spigot that's pouring money into the market to turn off. Usually it's an event that jolts players awake and ask the question, "Is my money safe in the stock market?" When enough people become concerned about the market we'll see a reversal but not before. A hint of investors becoming concerned start to show up in some of the market breadth numbers and comparative (relative strength) charts.

The first group of charts below shows market breadth with new 52-week highs in the middle and the number of advancing less declining stocks in the bottom chart. SPX is at the top. Notice the negative divergence between the new highs for SPX but declining highs for the number of stocks hitting their own 52-week highs and the slight deterioration of the number of advancing stocks. In other words the rally in the broader averages is happening on the backs of fewer and fewer stocks.


S&P 500 vs. New 52-week highs and Advancing-Declining stocks, Daily charts

Some of the explanation for the deterioration in the market breadth numbers above could be the fact that more investors are simply going with the passive investment approach by simply investing in ETFs, such as SPY for SPX, instead of picking individual stocks. Picking individual stocks is what mutual funds used to do but even they now do a lot of passive investing.

Buying just the SPY as an example creates buying in just the 500 stocks in the S&P 500, whether or not each stock in the S&P 500 deserves to be bought. The rest of the stocks outside the S&P 500 essentially get ignored. It's only speculation as to whether or not this is the primary cause of the deterioration in the market internals but with a strong bearish divergence on the daily and weekly charts for SPX I'd say it's still providing us fair warning.

We have a very different market than even what we had at the start of this century. All the program trading and ETF trading, many will argue, leave us extremely vulnerable to large volatile moves as all 500 stocks in the S&P 500 get bought and sold together, en masse. Panic moves, in either direction, could cause massive price swings and that would result in even fewer investors desiring to be in the stock market. This would be especially true for the baby boomer group who are now more interested in protecting their capital.

Needless to say, it's going to be interesting moving forward when the market finally starts to correct in a bigger way.

Back to the comparative charts, the relative strength (RS) of the Transports (TRAN) vs. Utilities (UTY) is shown in green and the RS of Consumer Discretionary (XLY) vs. Consumer Staples (XLP) is shown in red. SPX is again in the top chart. The bottom chart shows the RS each of BKX and RUT vs. SPX.

I like to watch the Transports as a sign of strength (or weakness) of the economy while the Utilities is more of a defensive sector (where money goes for safer dividends rather than growth). When TRAN starts to underperform UTY it's a sign of a move into more of a defensive posture, which does not support an ongoing bull market. Note that the RS of TRAN/UTY is threatening to break a support level that it has held since March 24th.

Consumer discretionary (XLY) spending will show a stronger RS vs. consumer staples (XLP) when consumers are feeling better about their financial position and the economy. When XLY starts to underperform XLP it shows consumers are becoming more cautious but still obviously buy toothpaste, toilet paper, etc. They forego big TVs and other toys. Up until the high on May 2nd the RS line has pulled back and is now threatening to break its uptrend line from March 21st. We're on the cusp with both RS lines of knowing whether or not the present bull market will be in more trouble.

S&P 500 vs. Relative Strength of Transports vs. Utilities and Consumer Discretionary vs. Consumer Staples, Daily charts

Now onto the regular charts, I'll start with the Nasdaq again since the techs have been stronger than the other indexes. When they reverse back down we'll have a stronger signal to pay attention to. Until then, with their outperformance to the upside, the bulls remain in control. However, there are some early signs that the bulls should be very careful here.


Nasdaq Composite index, COMPQ, Weekly chart

The Nasdaq has worked its way up toward a price projection at 6263 (it's still 40 points away with this morning's high at 6222), which is where an extended 5th wave in the rally from February 2016 would equal the 1st through 3rd waves (one of the common relationships when the 5th wave extends). This projection crosses the trend line along the highs from April 2016 - March 1, 2017 next week.

The 2016-2017 trend line is currently near 6240 and was last tested with last Thursday's high and remains the upside target for now (if the bulls can keep up their buying pressure). But as I'll show on the other two Nasdaq charts further below, now's a good time for bulls to play more defense rather than hope for more highs.


Nasdaq Composite index, COMPQ, Daily chart

The 2016-2017 trend line is the purple line on the daily chart below. It was tested on May 16th and again on May 25th. This morning's quick gap up to 6222 was another test and was quickly followed by a strong spike down. The bearish divergences on MACD and RSI suggest the rally will likely complete sooner rather than later. The 5th wave of the move up from November is showing bearish divergence against the 3rd wave (the March 1st high).

The 5th wave of the leg up from March 27th is also showing bearish divergence against the 3rd wave (the May 16th high), which is more easily seen on RSI. This all helps confirm the wave count and it suggests this rally is now running on fumes and might have topped with this morning's quick high. Today's hanging man doji at resistance is reason for caution as well. There's a little more upside potential but the wave count, with the 5th of the 5th wave in the rally from November completing, suggests upside potential is now dwarfed by downside risk.

Key Levels for NDX:
- bullish above 6240
- bearish below 5996


Nasdaq Composite index, COMPQ, 30-min chart

Moving in closer to look at the final little 5th wave, which is the leg up from May 18th, the rally made it up to the 127% extension of the previous decline (May 16-18), at 6217, which is a common reversal Fib to watch. This morning's high came within about 4 points of its trend line along the highs from March 21 - May 1 and then spiked down.

Notice the bottom on May 18th -- a gap down was quickly followed by a strong spike back up. The spike up completed in the first hour and then pulled back before continuing higher. This morning's gap up was followed by a spike back down and then a bounce. As below, so above? The bounce off this morning's low is currently a 3-wave move and could therefore be just an a-b-c correction to this morning's decline. Any further selling Thursday morning would turn the short-term pattern further bearish and more strongly suggest the rally from November has completed.

Another reason why the techs might be topping here is because I see the potential loss of support from the semiconductors. The SOX has now achieved a price target and is up against trendline resistance.


Semiconductor index, SOX, Weekly chart

The SOX has now made it up to a price projection zone at 1092-1106. The higher level is the 78.6% retracement of its 2000-2002 decline and the lower number is where the 5th wave of the leg up from February 2016 equals the 1st wave. This morning's high was 1101.76, about 5 points shy of the higher target.

A trend line along the highs from March-October 2016 was tagged with this morning's high and it's slightly above its broken uptrend line from June-November 2016, currently near this morning's low at 1086. The bulls need to push above this morning's high whereas the bears want to see this morning's low broken. Where the SOX goes from here will likely lead the tech indexes.


S&P 500, SPX, Daily chart

SPX pulled back to support this morning near its March 1st high at 2401 and its May 9th high near 2404. This level was resistance in May until the gap up over it last Thursday. That gap was closed with this morning's drop down to 2403.59 and with support holding it's looking like SPX will press higher. But like the Nasdaq, the bounce off this morning's quick low is just a 3-wave bounce so far and nearly accomplished two equal legs up at 2412.43 with this afternoon's high at 2412.31.

A drop back down Thursday morning would be potentially bearish, especially if the 2401-2404 support level breaks. However, as long as support holds there remains upside potential to the price projection at 2434, which is where the move up from March 27th would achieve two equal legs up (to complete an A-B-C move for the 5th wave of the rally from January/February 2016, which is a rising wedge pattern).

Key Levels for SPX:
- bullish above 2406
- bearish below 2352


Dow Industrials, INDU, Daily chart

The Dow's spike down this morning had it breaking back down below its downtrend line from March 1 - April 26 but then recovered back to the line for the close. Whew, almost lost it there. This is the trend line the Dow gapped up over last Thursday so it's important for bulls to hold the line. However, today's decline has the Dow back below its uptrend line from November 4 - April 19, now nearing this morning's high at 21051. This morning's low found support at the 20-dma, at 20937, and that's probably a more important level for the bulls to defend.

There's upside potential to 21211 where it would achieve two equal legs up from March 27th and then much higher potential if the bulls can break above that level. But with the waning momentum it's looking doubtful that the bulls can accomplish much, if anything, more to the upside.

Key Levels for DOW:
- bullish above 21,047
- bearish below 20,553


Russell-2000, RUT, Daily chart

The RUT had one of the stronger bounces off this morning's low, which is a bit of a change in character for the index that's been running weak compared to the others. With this morning's low near 1355 the RUT tested its uptrend line from March 22 - May 18 and almost made it down to its uptrend line from February-November 2016, currently near 1353.

The resulting candlestick today is a bullish hammer on support and if it rallies on Thursday we'd have at least a short-term bullish reversal candlestick pattern. The challenge for the bulls will be its broken 20- and 50-dma's, currently near 1382 and 1378, resp. Just above those is its downtrend line from April 26 - May 25, currently near 1385. That gives the bears a 1378-1385 zone of resistance to defend.

Key Levels for RUT:
- bullish above 1392
- bearish below 1347


10-year Yield, TNX, Daily chart

On May 17th TNX broke support at its uptrend line from July-September 2016, tried to recover last week but then sold off from last Wednesday's high, leaving a back-test and bearish kiss goodbye. It's now about to test price-level support at 2.19, which is the bottom of its gap up on November 14, 2016 and then back-tested twice on April 18th and May 18th.

Normally I'd say the chances of another back-tested holding is slim but with the 200-dma coming up to the same level, currently near 2.17, there's likely to be at least a bounce off 2.17-2.19 support. It would obviously be more bearish below 2.17.

The weakness in TNX (rallying in bonds) has been another warning sign for the stock market since lower yields reflects the bond market's concern about economic growth and slowing inflation. But it would obviously be a boost for the stock market if TNX can hold support and launch another rally. The oscillators are even hinting of the possibility.


KBW Bank index, BKX, Daily chart

The banks were particularly weak today, continuing their relative weakness vs. SPX since December. Today BKX dropped slightly back below its trend line along the highs from April 2010 - July 2015, currently near 88.90, but then managed to close on the line. It did the same in mid-April but then bounced to a lower high on May 4th vs. its March 1st high. It held the line on the next pullback into the May 17th low and is now again testing the line. Only slightly lower is the neckline of a possible H&S topping pattern (left shoulder in December, head on March 1st, right shoulder high on May 4th), currently near 86.80.

Between the trend line along the highs and the H&S neckline BKX has a 86.80-88.90 support zone, which should produce at least a bounce. But a drop below 86.80, and especially below its 200-dma (rising and currently at 85.67), would suggest a strong selloff to follow. The first downside target would be the H&S price projection near 75.25. Not until BKX can break its downtrend line from March 1st, currently near 91.40 (above its 20- and 50-dma's), would I start to think something bullish about the banks.


U.S. Dollar contract, DX, Daily chart

The US$ consolidated off its May 22nd low and now looks ready for another leg down, which could take the dollar down to the bottom of its parallel down-channel from January, currently near 96. I think it will work its way down to a price projection at 94.79 for the 3rd wave (or c-wave) in the decline from January, where it would equal 162% of the 1st wave down but not likely in a straight line.


Gold continuous contract, GC, Daily chart

With the dollar sinking lower it's helping gold bounce higher but gold is now approaching its downtrend line from September 2011 - July 2016, currently near 1280. This is an important trend line, which last stopped the rally into the April 17th high, so the bulls want to see gold above 1280. The bearish interpretation of the pattern says resistance will hold and we'll soon see another leg down for gold. We should get our answer soon.


Oil continuous contract, CL, Daily chart

Oil has been doing so much chopping up and down that I don't anyone has a strong clue about where oil is headed next. This morning's decline had oil dropping below its uptrend line from August-November 2016 but it then recovered with a spike back up off the midday low. It was also able to save itself from a close below its 20-dma at 48.57.

If oil rallies above last Thursday's high at 52 I think we could see a strong rally but first it would have to get through its downtrend line from February-April, near 52.40, and then its longer-term downtrend line from May 2015 - January 2017, near 53.40. But if the selling continues and oil drops below this morning's low at 47.73 it would be a break below multiple support lines and could lead to much stronger selling (down to 40 at a minimum).


Economic reports

Thursday morning is full of economic reports, the most important of which will be the ADP report, which is expected to be 180K and near what it was for April. Some additional labor numbers are not expected to change much either and as long as there are no nasty surprises it will keep the Fed on course to raise rates again in June.

In the morning we'll also get the results of construction spending and the ISM Index, neither of which is expected to have changed much from previous months. Friday morning in the pre-market session we'll get the NFP reports, which are expected to show a small decline from April.


Conclusion

The bull market rally is by no means dead yet and with a constant big under the market, along with the dip buyers, we could certainly see the market float higher for a long time. Some believe we need to see a melt-up, similar to the tail end of the rally into the 2000 high, before we should even think about looking for a top to this rally.

But from at least a short-term perspective I think we're close to, if not at, a market high. The pattern for the Nasdaq shows a wave count, price projections and trend lines that suggest it's very close to finishing the rally from November, which would mean at least a larger pullback correction. It's possible the techs put in their highs with this morning's quick pop higher but the blue chips support the idea for at least one more push higher. Even the RUT perked up a little today.

We have no confirming signals of a top and while there are plenty of warning signs, they aren't market timing signals. Stick with the bulls but only very carefully and with relatively tight stops. My concern is that we could see a big gap down to start the decline and many tight stops will be gapped over. Lightly positioned on the long side and mostly in cash is my recommendation for now.

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

Keene H. Little, CMT


New Option Plays

Takeover Candidate

by Jim Brown

Click here to email Jim Brown

Editors Note:

Online shopping is a retail space controlled by Amazon and Ebay. Shopify is trying to change that.


NEW DIRECTIONAL CALL PLAYS

SHOP - Shopify - Company Profile

Shopify Inc. provides a cloud-based multi-channel commerce platform for small and medium-sized businesses in Canada, the United States, the United Kingdom, Australia, and internationally. Its platform provides merchants with a single view of their business and customers in various sales channels, including Web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces; and enables them to manage products and inventory, process orders and payments, ship orders, build customer relationships, and leverage analytics and reporting. The company was formerly known as Jaded Pixel Technologies Inc. and changed its name to Shopify Inc. in November 2011. Company description from FinViz.com.

The company reported a Q1 loss of 4 cents compared to estimates for a loss of 11 cents. Revenue rose 75% to $127.4 million and beat estimates for $122.1 million. Merchant solution revenue rose 92% to $65.3 million and subscription revenue rose 60% to $62.1 million. They guided for Q2 to revenues of $142-$144 million and the full year for $615-$630 million. That is above their prior guidance of $580-$600 million.

Expected earnings August 1st.

The company was very positive about the future outlook. On May 18th they announced a secondary offering for $500 million at $91 per share. The stock dropped from $91 to $81 on the news but immediately recovered. Wednesday's close was a two-week high after that announcement.

SHOP has been discussed multiple times as takeover bait for Ebay or Amazon. Neither company will comment but Amazon would be the likely player. They could gobble up Shopify at $7 billion like a late night snack.

I believe shares are going to resume their upward momentum now that the secondary offering has been consumed by the market.

I wanted to buy calls that expire after earnings but there are no August strikes yet. The next strike in October is too expensive. Even the short term strikes are expensive so I am going with a July spread to reduce the risk.

Buy July $95 call, currently $5.50, initial stop loss $86.65
Sell short July $105 call, currently $2.30, initial stop loss $86.65.
Net debit $3.20.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Month End Mystery

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major averages plunged at the open with the Nasdaq dropping -40 and the Dow -79. The major indexes, even including the Russell 2000, rebounded to only minor losses at the close. I suspect this was primarily month end adjustments. The volume was huge at 8.0 billion. There were no headlines that justified the dip.

Tomorrow starts a new month and the first couple days are normally bullish. If the trend holds and the major averages can return to their highs we should be in good shape. The market was due for a dip and the morning plunge may have satisfied those urges.



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


LB - L Brands
The long call position was entered at the open.



If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

AAPL - Apple Inc - Company Profile

Comments:

Shares fell to support at $152.75 in a weak market. ZDNet said Apple has already started production on its competitor to the Amazon Echo. The device will not be announced publicly until later but there will be clues at the WWDC that starts on Monday. Reportedly, it will have surround sound and better quality than Amazon and Google. Apple will need to release some info to developers at the conference if they want any applications available when the smart device begins shipping.

Original Trade Description: May 27th.

Apple Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players to consumers, small and mid-sized businesses, and education, enterprise, and government customers worldwide. The company also sells related software, services, accessories, networking solutions, and third-party digital content and applications. It offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers. The company also provides iLife, a consumer-oriented digital lifestyle software application suite; iWork, an integrated productivity suite that helps users create, present, and publish documents, presentations, and spreadsheets; and other application software, such as Final Cut Pro, Logic Pro X, and FileMaker Pro. In addition, it offers Apple TV that connects to consumers' TV and enables them to access digital content directly for streaming high definition video, playing music and games, and viewing photos; Apple Watch, a personal electronic device; and iPod, a line of portable digital music and media players. Further, the company sells Apple-branded and third-party Mac-compatible, and iOS-compatible accessories, such as headphones, displays, storage devices, Beats products, and other connectivity and computing products and supplies. Additionally, it offers iCloud, a cloud service; AppleCare that offers support options for its customers; and Apple Pay, a mobile payment service. The company sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store, and Apple Music. It also sells its products through its retail and online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers. Company description from FinViz.com.

The eyes of the world will be focused on Apple in two weeks as it updates application developers on all the new features and software in its various products. This covers the iPhone, iPads, Macs and Watches. Apple routinely tries to keep from giving away its best secrets but it is impossible for developers to develop unless they know what they are developing. There are always leaks. This typically provides a boost to Apple shares.

Apple reports earnings on August 1st. That is getting close to the normal September announcement date for the iPhone 8. If the buzz from the developers conference is good we could see shares rise into that earnings report.

Shares have been flat for the last three weeks despite the constantly rising Nasdaq. The WWDC could be the catalyst that lifts Apple shares out of this consolidation pattern.

I am using the August strikes so the earnings expectations will keep the premium inflated. I do not plan on holding over earnings. We will exit in July or earlier depending on how the stock reacts to the WWDC news.

The August strikes are expensive so I am recommending a spread.

Position 5/30/17:

Long Aug $155 call @ $4.89, see portfolio graphic for stop loss.
Short Aug $165 call @ $1.67, see portfolio graphic for stop loss.
Net debit $3.22.


ATVI - Activision Blizzard - Company Profile

Comments:

No specific news. No movement.

Original Trade Description: May 22nd.

Activision Blizzard, Inc. develops and publishes games for video game consoles, personal computers (PC), mobile devices, and online social platforms. The company operates through three segments: Activision Publishing, Inc., Blizzard Entertainment, Inc., and King Digital Entertainment. The company develops, publishes, and sells interactive software products and entertainment content through retail channels or digital downloads; and downloadable content. It also publishes subscription-based massive multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. The company serves retailers and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, game specialty stores, and consumers through third-party distribution and licensing arrangements in the United States, Australia, Brazil, Canada, China, France, Germany, Ireland, Italy, Japan, Malta, Mexico, the Netherlands, Romania, Singapore, South Korea, Spain, Sweden, Taiwan, and the United Kingdom. Activision Blizzard, Inc. was incorporated in 1979 and is headquartered in Santa Monica, California. Company description from FinViz.com.

Activision reported Q1 earnings of 56 cents, up 17%. Sales rose 19% to $1.73 billion. Activision had originally guided for 25 cents and $1.55 billion. Analysts were expecting 22 cents and $1.1 billion so it was a major blowout. For the full year, they raised guidance to 88 cents and $6.1 billion, up from 72 cents and $6.0 billion.

Blizzards's monthly active users rose to 431 million. King Digital has 342 million active users. The new Overwatch game was the fastest Blizzard title to hit 25 million registered players and now has more than 30 million. Revenues from in game purchases rose 25% driven by World of Warcraft and Overwatch customization features.

Activision is a powerhouse with rapidly rising revenue and multiple game titles arriving in the coming months.

Earnings August 3rd.

Shares dropped sharply with the market last Wednesday and have already rebounded to close at a new high today.

Position 5/23/17:

Long August $60 calls @ $2.66, see portfolio graphic for stop loss.


BA - Boeing - Company Profile

Comments:

The Boeing Midcourse Defense anti-missile system performed flawlessly and knocked down a target ICBM fired from the Marshal Islands on Tuesday. This is the equivalent of a bullet hitting a bullet with a closing speed of more than 2,000 mph in space. That is pretty impressive. Boeing is the prime contractor with Northrop Grumman (NOC), Raytheon (RTN) and Orbital ATK (OA) the key subcontractors. Shares closed at a new high.

Original Trade Description: May 25th.

The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. It operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital. The Commercial Airplanes segment develops, produces, and markets commercial jet aircraft for various passenger and cargo requirements; and provides related support services to the commercial airline industry. This segment also offers aviation services support, aircraft modifications, spare parts, training, maintenance documents, and technical advice to commercial and government customers. The Boeing Military Aircraft segment researches, develops, produces, and modifies manned and unmanned military aircraft, and weapons systems for global strike, vertical lift, and autonomous systems, as well as mobility, surveillance, and engagement. The Network & Space Systems segment researches, develops, produces, and modifies strategic defense and intelligence systems, satellite systems, and space exploration products. The Global Services & Support segment provides integrated logistics services comprising supply chain management and engineering support; maintenance, modification, and upgrades for aircraft; and training systems and government services that include pilot and maintenance training. The Boeing Capital segment offers financing services and manages financing exposure for a portfolio of equipment under operating and finance leases, notes and other receivables, assets held for sale or re-lease, and investments. The company was founded in 1916 and is headquartered in Chicago, Illinois. Company description from FinViz.com.

Boeing dipped last week after the test flights for the 737-MAX were halted temporarily. Boeing is expecting to begin deliveries of that model later this month. The problem was a low pressure disk in the LEAP-18 engine built by CFM International. That is a joint venture between GE and France's Safran. The halt was only a day before Boeing announced they were resuming flights of the planes without the LEAP-18 engines. CFM said the problem would be fixed within "weeks" because an alternate supplier was increasing production of the specific part. That problem has already been forgotten.

Boeing has dozens of projects underway and the biggest backlog of plane orders in history. The 787 Dreamliner is already on its third revision. The first plane was the 787-8 then there was the 787-9 and now the 787-10. The 787-8 was barely profitable because of higher than expected production costs. However, the improved 787-9 and 10 are highly profitable and in high demand. The delivery mix fell to only 25% model 8s in Q1. Currently there are 672 Dreamliners on order and only 89 are for the model 8. By the time the planes are actually built that will probably decline much further. Orders being transferred from airlines to leasing companies are typically upgraded to the more desirable models because the leasing companies want the longest lasting, fully featured models so the lease rates remain higher longer. The newest version the 787-10 already has 169 orders and it costs $40 million more than the model 8 but only costs a couple million more to produce. Analysts believe Boeing's profitability will rise $1.5 billion on this order shuffle alone.

Boeing got another windfall when Trump was elected and suddenly took an interest in producing more F-18 Hornet's than F-35s. Boeing was only expected to produce 5 Hornets this year with a big order for F18 Growlers filling out the production line. The Growlers are the radar jamming planes that protect a flight of fighters. In the budget that was just passed, an additional $1.1 billion was allocated for 14 additional F-18s in this year. Trump had asked for 24 but Congress only approved 14. There will be a lot more in the budget for 2018. The F-18 is the workhorse of the Navy and many of their older planes are reaching the 6,000 flight hour maximum threshold. That means the Navy will need hundreds over the next several years to replace the aging aircraft. Boeing expects the production line to increase to 3-4 per month starting in 2020. Boeing expects another 100 planes to be ordered over the next five budget cycles and possibly more as the military scales down requests for F-35s in favor of the much cheaper F-18s. Boeing has an enhancement called Block III that basically gives the F-18 the networking capability of the F-35. They envision a stealthy F-35 entering hostile airspace and doing reconnaissance and then transmitting back threat and target information to the heavily armed F-18s to actually carry out the attacks. Over the last five years, the Navy has requested five times as many F-18s as F-35s. A F-18 costs $75 million and F-35 $121 million.

Boeing said on any given day 2 out of every three F-18 planes are out of commission waiting for repairs. Planes have been flown hard in the post 9/11 world with multiple theaters of war and planes down for a single part end up getting cannibalized for other parts to keep the remaining planes flying.

Boeing will also profit from the $110 billion arms deal with Saudi Arabia and the escalation to $350 billion over the next decade.

All of this means Boeing is going to remain highly profitable for a very long time and this is just two production lines of the dozens of products being manufactured by the company.

Earnings July 26th.

Shares made a new high on May 9th at $187 before dropping back to $182 on the market decline. That drop has been erased and shares are poised to break out to a new high and probably begin a new leg even higher.

Update 5/27/17: Tom Cruise said he was planning on filming a new Top Gun movie in 2018. Since the F-14 is no longer flown and the F-35 is not yet available for its film debut, Boeing will probably receive a major public relations bonanza with the F/A-18 Super Hornet in the title role. If it stars in the movie it would be a major advertising win because the capabilities will be shown all around the world and that could generate additional orders.

Boeing received a new $58.6 million contract to demonstrate a new generation of technology to intercept and destroy multiple missiles fired at the USA. This is a result of the accelerated missile testing currently in progress in North Korea. The technology is called the Multi-Object Kill Vehicle (MOKV). Basically, it would be one missile that would be launched at an incoming swarm of hostile missiles. As the MOKV nears the intercept point it would itself launch multiple interceptors and each would be directed to a different target by the radar and communication systems on the MOKV. Instead of firing one missile from the ground to target one incoming missile, the MOKV would be like launching a launching pad of missiles to a predetermined location and then having it attack the swarm on its own. This is not going to be cheap technology.

Boeing also said it won a $89 million contract from the Navy to incorporate the Block II Infrared Search Track System in the F/A-18 E/F aircraft.

Options are expensive so I am recommending a spread.

Position 5/26/17:

Long Aug $190 call @ $5.15, see portfolio graphic for stop loss.
Short Aug $200 call @ $1.79, see portfolio graphic for stop loss.
Net debit $3.36.


CVX - Chevron - Company Profile

Comments:

The company was upbeat at its shareholder meeting on Wednesday but that did not help the stock price after crude prices fell $1.60 in regular trading. They also announced the restart of train 1 at the Gorgon LNG facility. This was well ahead of schedule.

I am not putting a stop on this or closing the position because the option price collapsed when crude declined and there is nothing to be gained by closing the position. There are still three weeks until expiration.

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%.

Update 5/15/17: Chevron said they had taken Train 1 of the massive Gorgon LNG plant offline for a month to do some maintenance. The plant cost $54 billion to build and has 3 trains that can produce 15.6 million tonnes of LNG per year.

Update 5/27/17: BNP Paribas downgraded Chevron from hold to sell. They lowered the price target to $100 and blamed the downgrade on weaker cash flow generation. I think this analyst was smoking something illegal when he made this call. Chevron spent nearly $100 billion over the last five years in developing projects and those are starting to come on line now. Chevron's capex is dropping sharply because all the projects are completed. This will be a cash-generating machine in future quarters. Shares declined 39 cents.

Position 4/17/17:

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


FB - Facebook - Company Profile

Comments:

No specific news but shares were down at the open as big cap tech stocks took a breather.

Original Trade Description: May 17th.

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. Company description from FinViz.com.

Facebook also blew away earnings estimates and they are growing earnings at the fastest rate of any of the FAANG stocks. They have multiple revenue streams and sites like Instagram and WhatsApp that are just starting to accelerate earnings. They said Instagram had reached 50,000 advertisers. Facebook's problem is they do not have enough page views to monetize despite the 1.9 billion users. They have more advertisers than they have space.

Earnings August 2nd.

Facebook had been moving sideways since hitting the $153 high post earnings. Volatility was low and investors were just waiting for a market dip so they could get a better entry point. Share fell to uptrend support at $145 and even if they due decline further there is strong support around $140.

Update 5/18/27: Facebook was fined $122.4 million by EU regulators for giving them false information in the WhatsApp acquisition process. The EU asked how many WhatsApp users were also Facebook users and the company said it did not know and did not have way of matching the usernames. A year after the acquisition Facebook launched a service that did match users and the EU said they had the capability all the time.

The company also announced a new effort to reduce "clickbait" headlines and punish websites that continually publish fake news. I hope they are successful.

Update 5/19/17: Facebook is going to live stream 20 Major League Baseball Friday night games. The company also said it was adding an "Order Food" option to let some users order, pay and have food delivered or be available for pickup. The service works with restaurants that use Delivery.com or Slice.

Update 5/22/17: Facebook shares were weak after the BROWSER bill was introduced in the House. Websites and browsers must get explicit permission from users in order to collect and use personal data including browser history, search terms, cookies, etc. They also cannot deny you the use of their program if you decline to give them permission to use your data. While the bill has little chance of passing it was a wet blanket on Facebook today.

Update 5/24/17: Reuters reported that Facebook has signed content deals with Vox Media, Buzzfeed, ATTN, Group Nine Media and others to begin creating shows for its upcoming video service. They are going to develop both short and long form content with ad breaks included. The first scripted shows will be up to 30 min which Facebook will own. The second tier will be shorter scripted and unscripted shows with episodes lasting 5-10 minutes.

Position 5/18/17:

Long Aug $150 call @ $4.90, no initial stop loss.


LB - L Brands - Company Profile

Comments:

No specific news. Shares posted a 2% gain in a weak market.

Original Trade Description: May 30th.

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. The company was formerly known as Limited Brands, Inc. Company description from FinViz.com.

The company reported its seventh consecutive quarter of positive earnings surprises despite a minor revenue miss. Earnings of 33 cents beat estimates for 29 cents. That was well above the company's own guidance for 20-25 cents. Revenue of $2.436 billion was slightly lower than the estimate for $2.456 billion.

The bad news was a 9% decline in same store sales. The majority of that was due to the exit from swimwear and related apparel categories. This has been in progress for about two years. Those two categories created a 6% decline for the lack of swimwear and 9% decline for the related apparel. Excluding those the comp sales were in line with estimates. However, Victoria Secret lingerie sales declined -12% while PINK sales rose in the low single-digits.

They raised their 2017 guidance to earnings of $3.10-$3.40, up from $3.05-$3.35. Q2 earnings guidance was 40-45 cents. Analysts were expecting $3.19 and 45 cents.

Expected earnings Aug 16th.

Shares were down ahead of earnings to $47.50. They have rebounded to a two-week high and appear to be on the road to recovery. Resistance is $53.50.

Position 5/31/17:

Long August $52.50 call @ $2.35, see portfolio graphic for stop loss.


MCD - McDonalds - Company Profile

Comments:

McDonalds said they were expanding the mobile delivery from 1,100 stores to 3,500 by the end of June. They are planning on expanding to all 14,000 stores by the end of the year. This is a very big deal for McDonalds. Shares closed at a 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.

Update 5/15/17: McDonald's Bar-B-Que opened on May 15th, 1940. The store closed and was later reopened in 1948 with only 9 items on the menu. Hamburgers were 15 cents, cheeseburgers 19 cents and cokes/coffee were 10 cents. Today, McDonalds serves 77 million customers a day. Short history of MCD in pictures The stock celebrated today with a new high.

Update 5/18/17: McDonald's added 1,000 additional restaurants to its McDelivery program utilizing UberEATS food delivery service. They had been testing at 200 stores in Florida since January. Apparently, McDonalds customers are loving it.

Update 5/22/17: The Chicago Tribune said restaurants offering the delivery service were seeing a surge in large orders. People are ordering the 40-piece Chicken McNuggets in quantity as well as the Big Mac and Chicken McNuggets Meal Bundle. That is 2 Big Macs, a 20-piece McNugget, 3 medium fries and 3 beverages for $14.99, which were also being ordered in quantities. When you think about it, if you are having friends over, ordering multiples of those deals gives everyone a choice and plenty to eat. Having UberEats deliver it is simpler than having someone gather up everyone's orders and money and then driving to McDonalds, waiting in line and then waiting while they put together your large order. If you can get it all home without spilling french fries and soda all over your car you are very lucky. This is another reason why McDonalds sales are going to rise in the coming quarters.

Position 5/4/17:

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


NFLX - Netflix - Company Profile

Comments:

CEO Reed Hastings was on CNBC for about 15 min with interviews rapid firing questions and it was interesting to watch but he artfully dodged all the questions everyone wanted to know. Netflix is in a good position, the demise of net neutrality is not a problem and subscribers are booming. Original content is exploding. Shares shook off the weak market to lose only 15 cents.

Original Trade Description: May 17th.

Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. The company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. It offers members with the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. It serves approximately 100 million streaming members in 190 countries. Netflix, Inc. was founded in 1997 and is headquartered in Los Gatos, California. Company description from FinViz.com.

Netflix posted blowout earnings and shares rocketed higher to hit $161 on Monday. I have been waiting for three weeks for a pullback. Analysts are projecting higher highs with the high price targets at $175. There have been continuous rumors that either Disney or Apple will try to buy them not only to acquire the platform but to keep the other company from acquiring it. Both have said they want to have a big presence in streaming. Tim Cook just said it last week. Both have the cash and Disney has billions of dollars in content it can immediately add to the platform.

Netflix is expected to add 3 million subscribers in Q2. They are testing higher prices in Australia to see what price levels will cause subscriber flight. Once they figure it out you can bet they will apply it to the rest of their 100 million customers. That is instant profit. Bumping rates by $5 gets them another $500 million a month in revenue.

They announced with earnings they were finally entering China through a partnership with the largest existing streamer in China. This is one more step to a full release in the future.

Update 5/18/17: The FCC voted 2-1 to roll back the 2015 net neutrality order from President Obama. Some say this will impact major internet users like Netflix. However, the company said last month that elimination of the order would not have any impact on their business because they were big enough and had a broad enough customer base that ISPs would not try to slow down their streaming traffic. The order prevented ISPs from charging for faster bandwidth for heavy users. Netflix is responsible for 40% of the internet traffic in peak hours.

Update 5/22/17: Netflix expects to have 102 million subscribers by the end of Q2 with 51.45 million in the U.S. and 50.49 million internationally. Three years ago the company only had 11 million international subscribers. They expect international numbers to exceed U.S. subscribers by the end of the third quarter. With international subscribers growing roughly 3 million per quarter they should reach 100 million in 2020 as acceptance continues to grow. That puts them on track for 200 million total subscribers by 2025.

Update 5/27/17: Piper Jaffray reiterated an overweight rating this morning but raised the price target from $166 to $190. The analyst said Netflix probably low-balled the company's 2020 earnings expectations by as much as half. The analyst said it the international viewers grow as well over the next 10 quarters as the last 10 then expectations could be 100% too low. They believe Netflix could have 180 million international subscribers by 2020. Jaffray said the total addressable market of broadband viewers could be more than 765 million by 2020.

MKM Partners also raised their price target from $175 to $195.

Earnings July 17th.

We have to use a spread because options are still expensive.

Position 5/18/17:

Long July $160 call @ $6.45, no initial stop loss.
Short July $175 call @ $2.16, no initial stop loss.
Net debit $4.29.


OA - Orbital ATK - Company Profile

Comments:

The Boeing Midcourse Defense anti-missile system performed flawlessly and knocked down a target ICBM fired from the Marshal Islands on Tuesday. This is the equivalent of a bullet hitting a bullet with a closing speed of more than 2,000 mph in space. That is pretty impressive. Boeing is the prime contractor with Northrop Grumman (NOC), Raytheon (RTN) and Orbital ATK (OA) the key subcontractors. Shares rebounded sharply.

Original Trade Description: May 24th.

Orbital ATK is a global leader in aerospace and defense technologies. The company designs, builds and delivers space, defense and aviation systems for customers around the world, both as a prime contractor and merchant supplier. Its main products include launch vehicles and related propulsion systems; missile products, subsystems and defense electronics; precision weapons, armament systems and ammunition; satellites and associated space components and services; and advanced aerospace structures. (Company supplied description.)

The company reported earnings on May 11th of $1.23 that missed estimates for $1.39. The miss was due to a surprise hike in the tax rate that analysts were not expecting. There was an event two years ago that caused a lower tax rate in the year ago quarter. Analysts factored in that repeat rate without realizing it was a one-time event. Revenue of $1.085 billion beat estimates for $1.083 billion.

Revenue in the Flight Systems Group, Defense Systems Group and Space Systems Group was up between 4.6% and 5.2%. Order backlogs at the end of the quarter were up 12% to $9.8 billion. Total backlogs including options and indefinite quantity contracts were $14.8 billion.

The company guided for 2017 earnings of $5.80-$6.20 and revenues of $4.550-$4.625 billion. Free cash flow is expected to be $250-$300 million.

Earnings August 10th.

Today Orbital received a $76 million order for 50 caliber ammunition from the U.S. Army. Orbital operates the Lake City ammunition plant for the military under an $8 billion facilities management contract. Last month they announced a $92 million order for 5.56mm and 7.62mm ammunition. Since taking over the plant they have produced more than 17 billion rounds of small caliber ammunition. They also received a $53 million contract to produce 120mm and 105mm ammunition including the new M1002 and M724A2 rounds for howitzers and tanks. To date they have produced more than 5 million rounds of large caliber ammunition.

Orbital ATK’s Defense Systems Group is an industry leader in providing innovative and affordable precision and strike weapons, advanced propulsion and hypersonics, missile components across air-, sea- and land-based systems, ammunition and related energetic products.

Shares broke over resistance at $99.75 today on the award win. With the emphasis on higher defense spending and a war fighter now in charge of the military, we can expect future orders to continue. Add in their missile systems, space launch systems, etc and Orbital is a good candidate to play this sector.

Update 5/30/17: Orbital was awarded a $9- million contract to produce composite structures for the B-2 Sprit stealth bomber. The new parts will increase the survival ability and the life span of the B-2 bombers.

Position 5/15/17:

Long Aug $105 call @ $2.60, see portfolio graphic for stop loss.


VAR - Varian Medical - Company Profile

Comments:

No specific news. Minor gain and another new high.

Original Trade Description: May 20th.

Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. The company was formerly known as Varian Associates, Inc. and changed its name to Varian Medical Systems, Inc. in April 1999. Varian Medical Systems, Inc. was founded in 1948. Company description from FinViz.com.

Drugs are not the only opportunity to rid yourself of a terrible disease. Varian produces multiple products for discovering and targeting cancer. They are the sector leader in imaging and radiation therapy.

Varian reported earnings of 89 cents that beat estimates for 88 cents. Revenue of $655 million beat estimates for $643 million. They guided for ful lyear earnings of $3.56-$3.64 per share.

Earnings July 26th.

On May 6th, the company announced a "game-changing treatment platform" to combat the cancer challenge. (their words) The new Halcyon system is an entirely new device that "simplifies and enhances virtually every aspect of image-guided volumetric intensity modulated radiotherapy (IMRT). This new treatment system is designed to expand the availability of high quality cancer care globally and help save the lives of millions more cancer patients." The new system requires only 9 steps compared with the 30 treatment steps required by current generation equipment. "Halcyon is well suited to handle the majority of cancer patients, offering advanced treatments for prostate, breast, head & neck, and many other forms of cancer." Press Release

The company demonstrated the new device to packed crowds at the ESTRO 36 conference in Vienna on May 8th. Shares spiked $4 on the announcement.

ASCO is about cancer treatment and the conference begins on June 2nd for four days. While the drug community will be getting plenty of press, the Varian equipment should also be benefitting from the headlines.

The market decline knocked $2 off Varian shares and gave us a buying opportunity.

Update 5/24/17: Varian announced it was going to install its first Proton Therapy System in Thailand. The first one in a country is always the hardest. The order will be booked in this quarter's earnings. Shares rallied to close right on resistance at $96.75 but a breakout is imminent.

Update 5/25/17: Varian will be hosting multiple events at the ISRS meeting in Switzerland from May 28th - June 1st. They will be demonstrating their leading edge radiosurgery systems for cancer treatment.

Position 5/22/17:

Long August $100 call @ $2.00, see portfolio graphic for stop loss.


$VIX - Volatility Index - Index Description

Comments:

Only a minor bounce but the market decline was minimal.

The May 8th close at 9.77 was the lowest close since December 1993. That is a 24 year low!!

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%. 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.
Added 5/9/17: Long July $14 call @ $1.60, no stop loss.
Average cost now $2.07.

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)

No Current Puts




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

subscribe now