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Daily Newsletter, Saturday, 6/3/2017

Table of Contents

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

Market Wrap

Price Chasing

by Jim Brown

Click here to email Jim Brown

After nearly three months of relative dormancy, traders have awakened to see the train leaving the station.

Weekly Statistics

Friday Statistics

Sometimes when a stock or index breaks out to a new high by a couple points we say, yes a new high but there was no conviction, I would be cautious. This time there is conviction and there is no doubt we have a real breakout in progress. While there is no way to know if it will last a few days, weeks or months, what we do know is that investors are paying attention and they are chasing prices. Shorts are being covered and investors are biting the proverbial bullet to buy something even if they do not believe it will last. The market has failed to decline on a multitude of events and now all of that base building is paying off.


Some of the credit for Friday's gains should be given to Tom Lee of Fundstrat, who made a bullish call on the FANG stocks. He said hang onto those stocks and we could see another 20% to 40% gains in the second half of 2017. Not only are those companies blessed with soaring earnings, they historically rise in the second half of the year since 2009. In 2015, the FANG stocks rose 29% through May and then surged another 43% by year-end. Since 2009, they have averaged 17.7% gains from May 31st through year-end.

Lee's call is even more surprising because he is the biggest bear on Wall Street. His year-end S&P target is 2,275 and 7% below Friday's close. Year to date, Facebook is up 33%, Amazon 34%, Netflix 32% and Alphabet/Google +26%.

The four original FANG stocks have deviated from the same path over the prior four months but the last two weeks they have been in lock step. They have been responsible for lifting the Nasdaq and the S&P to new highs and we thank them for it.


The morning market started strong despite a big miss on the Nonfarm Payrolls. The headline gain for May slipped to 138,000 from 211,000 and missed estimates for 185,000. The 211,000 from April was revised lower to 174,000 and the 79,000 from March was revised lower again to only 50,000. The rise in May was still the 80th consecutive month of gains and the longest string since the 1930s.

Goods producing firms added 16,000 jobs and service industries added 122,000. Retailers suffered the biggest decline with a loss of -6,100 jobs. Personal and business services added 38,000, finance 11,000, transportation 3,600 and mining/energy 6,000.

The U3 unemployment rate fell from 4.4% to 4.3% and the broader U6 rate fell from 8.6% to 8.4%.

There were still 94.983 million people shown as not in the labor force. The labor force declined by 429,000 and the labor force participation rate declined from 62.9% to 62.7%.

Despite the decline in unemployment the number of workers being laid off declined sharply and there were fewer workers taking part time jobs because they could not find full time work. This suggests the labor market is doing just fine and the minor 0.2% gain in the average hourly wage is not showing any upward pressure from a lack of workers. That said, there are nearly six million unfilled positions in the US. Employers claim they cannot find qualified workers or they cannot find people willing to do the work.


The decline in the growth rate of employment suggests future weakness in consumer spending and that knocked the Atlanta Fed real time GDPNow forecast down from 4% to only 3.4% growth.


The "adequate" jobs numbers and comments from Fed officials helped to raise the expectations for a rate hike at the June meeting next week. There is now a 94.6% chance of a quarter-point rate hike, which is as close to a guaranteed hike as you can get. The July meeting probability is only 4.7% and September has risen slightly to 29.3%. December probabilities have risen to 49% and should increase based on the Fed statement next week.


Also on Friday was the ISM for NY. The current conditions index declined from 55.8 to 46.7 and back into contraction territory for the first time in eight months. The employment component fell from 45.1 to 40.3 and the six-month outlook from 73.2 to 70.6.

Moody's Chart

The economic calendar for next week is very short. The biggest events come on Monday with the ISM Services and Factory Orders. The rest of the week is tame with the Wholesale Trade on Friday normally ignored.


The big event that traders are probably ignoring is the snap election in the UK. Prime Minister Theresa May called the snap election ahead of the Brexit negotiations thinking she could expand her majority in Parliament. When she called the election, she thought it would be an easy victory and add to the conservative majority. Today, according to polling by YouGov, her lead in the polls has fallen from 15% to 5% with Jeremy Corbyn, leader of the Labor Party, surging in the polls. YouGov believes May is now 13 seats short of the 326 seats needed for a majority in Parliament.

The Brexit decision is still a hotly contested topic and the election could go either way. If May loses or wins by only a small amount it will put her in a much weaker position to negotiate the terms of Brexit with the EU Commission. The pound would be hit hard. Bank of America sent a note to clients on Friday warning that currency markets appeared "overly complacent" given recent polling data. Brown Brothers Harriman said the activity in the options market showed some investors were buying downside protection against a currency event.

This will probably play out like all the other critical events over the last three months and nothing will happen to the markets. Of course, once we begin to expect that to happen we are setting ourselves up for a disappointment.


Meanwhile the dollar is at 8-month lows as the U.S. economy slowed in Q4 and 24 economic data points in May came in lower than expected. Add in the firestorms surrounding the current administration in Washington and the dollar is losing its clout.


The yield on the ten-year treasury fell to 2.159% and the lowest level since the election. The rising geopolitical concerns, troubles in Washington and weakening economics are turning treasuries back into a safety trade. That is fine if you are comfortable with a 2% return but with equities in breakout mode it will be interesting to see if bonds continue higher and yields lower. Some analysts believe this is strictly the result of a lack of securities in the market. Companies with little to no credit are able to sell billions in debt because the demand is so high the risk is ignored. With the Fed holding $4.5 trillion in treasuries, that keeps a lot of paper out of the market.


There were no material earnings reports on Friday. Companies celebrating from their earnings on Thursday included Broadcom (AVGO). The company reported earnings of $3.69 compared to estimates for $3.36. Revenue of $4.19 billion beat estimates for $4.11 billion. They guided for the current quarter for revenue of $4.37 to $4.52 billion and analysts were expecting $4.23 billion.

RBC Capital said the "stable to better demand" and "impressive execution" led to the earnings beat. Broadcom said "anticipating that end markets will remain healthy, we expect current quarter revenue growth of 6% sequentially" because of a later than normal production ramp for iPhone 8 and then into double digits in the October quarter. The CEO also said a pending smartphone ramp by a "large North American customer" an implied reference to Apple, would feature a 40% increase in the dollar content of the RF and Wi-Fi/Bluetooth combo chips Broadcom is supplying compared to the last iPhone cycle. As phones become more complicated and required to communicate at faster speeds over more frequencies, the chips become more complicated in order to support those capabilities.

Also helping the stock was news that Broadcom was not bidding on the Toshiba memory assets. Analysts were afraid they were going to pay too much. They are already in the midst of acquiring Brocade (BRCD) for $4.5 billion.

Shares exploded higher with a $20 gain.


Lululemon (LULU) rocketed 11% higher after reporting earnings of 32 cents compared to estimates for 28 cents. Revenue of $513 million missed estimates for $520.3 million. The company guided for the full year for earnings of $2.28-$2.32, a 2-cent higher range, but reduced revenue expectations to $2.53-$2.58 billion. The big earnings disappointment the prior quarter appeared to be a one-time event BUT the beat this quarter was against lowered expectations.


Restoration Hardware (RH) reported earnings of 5 cents on revenue of $562 million. Expectations were for 4 cents on sales of $556 million. The company raised full year revenue guidance from $2.3-$2.4 billion to $2.4-$2.45 billion. However, they cut earnings guidance from $1.78-$2.19 to $1.67-$1.94. RH is shifting to a Costco model where members will be charged $100 a year and that gives them access to special prices when they shop and advance notice of sales. Shares fell 25% on the news.


Workday (WDAY) reported adjusted earnings of 29 cents that beat estimates for 16 cents. Revenue of $479.9 million beat estimates for $466.8 million. Subscription revenue rose 42.7% to $399.7 million. Services revenue rose 18.7% to $67.5 million. They generated $149.4 million in free cash flow and ended the quarter with $2.1 billion in cash. They raised revenue guidance for the quarter and full year. Shares rose $3 on the news to a new high.


VMWare (VMW) reported earnings of 99 cents that beat estimates for 95 cents. Revenue of $1.74 billion beat estimates for $1.71 billion. The company guided for the current quarter for revenue of $1.84-$1.89 billion and analysts were expecting $1.81 billion. Earnings guidance of $1.11-$1.14 was above analyst estimates for $1.09. Shares declined $2 despite the good news.


Medical device maker Cooper Companies (COO) reported earnings of $2.50 that beat estimates by 25 cents and rose 25% from the year ago quarter. Revenue of $522.4 million beat estimates of $522 million. They raised full year earnings guidance from $9.10-$9.30 to $9.50-$9.65. Shares spiked $18 on the news.


Earnings for Q1 have increased 15.4% with 496 S&P-500 companies reported. Over 75% have beaten expectations and above the four quarter average of 71%. More than 62% beat on revenue and above the 53% average for the last four quarters. There have been 78 earnings warnings for Q2 and 40 companies issued positive guidance.

For next week, there are still a few stragglers. Dell (DVMT) will report on Thursday and be the highlight for the week. Softbank (SFTBY) is the biggest company reporting but they are not widely followed in the US.


Western Digital (WDC) is still trying to buy the Toshiba memory unit. The CEO of WDC is traveling to Tokyo next week to meet with Toshiba president Satoshi Tsunakawa about a new offer for the memory unit. The companies have been dueling in the press over the WDC offers and claims. WDC has filed an arbitration complaint against Toshiba and since that will take up to a year to be processed, Toshiba must work out a deal with WDC or forgo receiving any money from a sale for that period. Toshiba is desperate for cash and that puts WDC back in the picture. According to their prior joint venture agreements, WDC has sole right of refusal on any sale or transfer of assets out of the joint venture. In theory, that means WDC can block any sale. In practice, it just means any attempted sale without WDC approval is going to be messy and when you are talking about a $20 billion deal, it may be hard for alternate buyers to turn loose of the money unless they know they are getting clear title.

I believe WDC has a good chance of ending up with the business. I just hope they do not pay too much. WDC claims the fair value is $16-$18 billion but Chinese company Foxconn has reportedly bid well over $20 billion. The Japanese government does not want Toshiba to sell to a Chinese company so that bid is simply noise.


BlackBerry (BBRY) is at new 52-week highs after Citron Research said the stock could double ($20) because of their shift away from a hardware company to security software and automotive software. Citron said the change in company focus could be a game changer. Citron said Blackberry could be the next Nvidia. While I applaud their reach in comparisons, there is little to no chance of that coming to pass. Citron said Blackberry has become a real takeover target. Macquarie Research wrote an investor note in late May saying BBRY shares could hit $45, by 2020. That time horizon is out of my ballpark.


Crude prices fell again despite a larger than expected decline in U.S. inventory levels. Goldman warned that they were reducing their outlook for crude prices for the rest of the year to average $52.92. Some analysts had been targeting $55-$60 later this year but that view is fading fast.

With crude production rising almost to the point of negating the 1.8 million barrel OPEC cut by the end of 2017, traders are worried about OPEC's next move. They certainly cannot just end the cuts in March as projected. That would flood the market with a surplus of oil and ruin any 2017 effort to normalize inventories. The only thing we can always count on is that traders will never be happy regardless of what OPEC says or does.


Producers activated 11 oil rigs last week despite the drop in crude prices. However, since it takes weeks to months to unstack, move and crew an out of service rig, these have more than likely been in motion for some time and just now began drilling.

U.S. production is up more than 500,000 bpd in 2017 and is expected to rise another 500,000 bpd by the end of the year. Consumers should be thrilled because summer gas prices should remain low.



Markets

It is hard not to be optimistic or at least hopeful for the markets next week. The magnitude of the breakout on the S&P leaves no doubt about whether it is a breakout or just a minor push through resistance. In theory, this rally should continue because of the sudden strength. We have been talking for weeks about "if resistance breaks" or "it was only a minor break on low volume and there was no conviction." On Friday, volume was moderate at 6.4 billion shares but there was plenty of conviction.

Advancers beat decliners 4,710 to 2,418. New 52-week highs were 1,180 and the highest in 2017. It may have been led by the FAANG stocks and Tom Lee's bullish call but once the train started to leave the station everybody raced to climb on board.

This was a Friday when weekend event risk normally keeps markets in check. There was no sign of that caution anywhere except the Russell 2000 where the index peaked at 1,415 at 11:30 and then fell -10 points in the afternoon to close at 1,405. All the rest of the major indexes closed at or near their highs.

The S&P blew through resistance at 2,420 on Thursday and continued to climb on Friday to close 19 points above that prior resistance. Last Sunday I said the next material resistance was between 2,435 and 2,445. The S&P stopped right in the middle at 2,439. Any further gains could produce a runaway market. The last time we had a sprint like this was in February when the S&P spiked 130 points in 18 trading days to end with new highs on March 1st. it took us three months of consolidation to equalize those overbought pressures. I would gladly trade another three months of sideways summer movement for a second 130-point gain. The S&P has already rebounded 88 points from the May 18th low. For a market with no prior direction, this has been a monster rally.

I read some other commentaries and most analysts are now targeting 2,450 to 2,465 with some as high as 2,475. Most are just confused and are grabbing at major numbers as resistance points. When markets breakout well into blue-sky territory there is no really accurate way to predict a top.

I do not want to try and predict a top. I would rather just keep a running commentary of support points and look to buy the dips as they appear.

There is so much money on the sidelines because of the normal summer weakness and the various bearish market calls by big name investors, that this rally could continue farther than any expect.

Obviously, I am going to be very disappointed next week if 2,440 proves to be a climax top but I will still be appreciative for the gains we made last week. Investors are always trying to get positioned for the next move higher and those who were long last week were richly rewarded.

Current support should be 2,420 and then 2,400. This is the point where short covering and price chasing become major market movers. Shorts are in disbelief and anyone in cash is racing to chase stocks they believe are going to run away from them.


Fortunately, the Dow did not spike a couple hundred points. The 62-point gain on Friday was not enough to suggest there will be a multitude of sellers on Monday morning and several days of good solid gains are exactly what the market needs. Those big spike and die gains like those that we saw on March 1st are not conducive to a long-term rally. We need several days like Friday with solid 60-point gains and no drama.

I am not holding my breath since we have been conditioned over the last three months for sideways movement and no volatility.

There was a broad cross section of gainers on Friday with banks and energy the weakest. Defense, tech, consumer discretionary and even a couple of drug companies combined to lift the Dow.

I do not think the Dow is far enough over that prior resistance for it to be effective as support on a decline. That means support is still in the 21,000 range and that is 200 points below Friday's close.



The Nasdaq Composite surged 59 points on Friday to extend its breakout over the long-term uptrend resistance. The 6,200 level was support from the last rebound and provided a launching pad for the Thr/Fri sprint higher. The biggest news on Friday was the lack of decliners. Note in the winners and sinners list below how few Nasdaq stocks there were with losses over $1. Only 21 stocks lost $1 or more.

I have to put in the obligatory "Nasdaq is overbought" message after the 300-point gain in the last two+ weeks but there may be room to run. The Nasdaq is powered by earnings and those earnings have been strong.

Support remains 6,200 and I have no resistance on my chart until around the 6,500 level. While I seriously doubt we will just sprint up to that level that is the next line on the chart.




The Russell 2000 blew through resistance at 1,388 and 1,400 but hit a brick wall at 1,415 and closed 10 points off the intraday high on Friday. Next Friday is when the first rebalance list is released showing the dozens of stocks being removed from the Russell indexes. This typically causes a headwind the following week as retail investors try to jump in front of the actual rebalance selling later in the month.


The market had a good week after a slow start. It was driven by the big cap tech stocks but the enthusiasm was contagious. If we could just get the banks to recover next week, they could provide some additional lift. With interest rates rising, the banks should be recovering but the falling treasury yields, weaker economics, weaker dollar and low trading volumes are taking their toll. Most of the big banks closed near their 2017 lows last week.

The trend is our friend until it ends and the rally in the big cap techs could keep the current trend alive. There will eventually be a day of reckoning but without a major negative headline, I do not see a market decline for next week. Unfortunately, it is the ones we do not see coming that hurt the worst.

The terrorist attack in London on Saturday is depressing but it should not have any material impact on the U.S. markets on Monday.



Random Thoughts


The bulls cannot make up their mind. The +9% gain from last week was followed with a -5.9% decline this week. Most went back to the undecided column. The week-to-week results of this survey continue to show the lack of conviction by quite a few traders. Currently 73% are not bullish and the market is at new highs. That should/could provide more fuel for the rally if they become converts.

Last week results


Marissa Mayer, now 42, left Google to be CEO of Yahoo (YHOO) in 2012. Since then she has made nearly a quarter of a billion dollars running a company that continues to decline. Facebook and Google stole their advertisers. Their Yahoo web pages lost market share after makeovers by an army of programmers that obviously did not have any real world experience actually using the pages. Everything became an ad and content became sparse. Yahoo was hit with two of the biggest cybersecurity breaches in history and they did not even report it for two years. More than 500 million accounts were hacked in 2014 and one billion in 2013. More than 50% of the staff left and Yahoo continued to see earnings decline.

For her efforts in running a failing business, Mayer received about $900,000 a week in compensation including stock and options. She will get $187 million in severance if shareholders approve the Verizon acquisition.

Yahoo shareholders will vote this week to approve the $4.5 billion acquisition by Verizon. The phone company will take over the actual operating company and Yahoo will become Altaba, a combination of the words alternative and Alibaba. The company will hold shares representing 15% of Alibaba worth about $35 billion. Altaba will also hold 35.5% of Yahoo Japan worth roughly $10 billion. Verizon is paying the reduced price of $4.5 billion for the operating assets and the combination of those three items equals the $50 billion in market cap for Yahoo stock today.




 

Enter passively and exit aggressively!

Jim Brown

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Index Wrap

No Complaints!

by Jim Brown

Click here to email Jim Brown
I noted last week the S&P had pushed through 2,400 and could be poised to move higher.

I doubt anyone expected a breakout of this magnitude. We are so conditioned to see a resistance test, minor decline, resistance test, repeat. The blowout on Thr/Fri was finally a real breakout that has no qualifications attached.

The charts are bullish with the exception of the Russell. The big cap indexes are clearly in an uptrend with the oscillators expanding to the upside. The worry over the prior weeks about the sell in May and go away cycle have been erased at least for the present.

I posted the Advance/Decline line chart for the S&P saying it was the most bullish chart in the market because it had clearly broken out to the upside. It is even more bullish this week. The A/D line over the last two weeks mirrors the spike in February that ended with a 130 point sprint in the S&P. Currently the index has rebounded 88 points from the May 17th lows. We could have further to run.

The Dow A/D line has also broken out and looks significantly better than last week.



If there is anything to worry about this week, it is that the market is suddenly too bullish. There is more than likely going to be some more consolidation before we move too much higher. I would love to be writing this next week with the S&P over 2,450 and that is entirely possible. Sometimes when markets base as long as we have since March 1st, the breakout can be astounding. The trader phrase is "the wider the base, the higher in space."

The range since March 1st has been roughly 2327 to 2401 or 74 points. When the index broke above that 2,401 level, the target should be 2,475 after adding the width of the range to the top level of 2,401. That would be an excellent target and entirely possible, if the big cap tech stocks continue to lead.


This is a similar chart from late 2015. I have not changed anything on this chart since it was first constructed in early 2016. The range was 324 points making the target on a breakout at 2,458. We are nearly there and it will be interesting to see how the market reacts when that level is reached.


The Bullish Percent Index for the S&P improved slightly but has a long way to go. This is a slow moving chart because of the way the P&F charts are structured.


We have a textbook breakout on the Russell 3000. The push through resistance, minor decline to test that level as support, then a springboard breakout to a new high. This chart suggests the rally has legs because it has breadth. This is 2,953 stocks and not just a few big caps leading the charge.


I also said last week "it is amazing how fast market internals and market sentiment can change." Who would have thought on May 18th we would be sitting at massive new highs in the market only 10 trading days later.

If the S&P can move over 2,450, the short covering and price chasing could turn into a feeding frenzy. Unfortunately, all it will take is one major, unexpected headline to kill this sentiment. Keep your fingers crossed.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Immune to Amazon

by Jim Brown

Click here to email Jim Brown

Editors Note:

Some retailers have a moat that Amazon cannot cross. Others are road kill on the retail highway. Costco is immune to the Amazon phenomenon.


NEW DIRECTIONAL CALL PLAYS

COST - Costco - Company Profile

Costco Wholesale Corporation, together with its subsidiaries, operates membership warehouses. It offers branded and private-label products in a range of merchandise categories. The company provides dry and packaged foods, and groceries; snack foods, candies, alcoholic and nonalcoholic beverages, and cleaning supplies; appliances, electronics, health and beauty aids, hardware, and garden and patio; meat, bakery, deli, and produces; and apparel and small appliances. It also operates gas stations, pharmacies, optical dispensing centers, food courts, and hearing-aid centers; and engages in the travel businesses. In addition, the company provides gold star individual and business membership services. As of August 28, 2016, it operated 715 warehouses, including 501 warehouses in the United States, Washington, District of Columbia, and Puerto Rico; 91 in Canada; 36 in Mexico; 28 in the United Kingdom; 25 in Japan; 12 in Korea; 12 in Taiwan; 8 in Australia; and 2 in Spain. Further, the company sells its products through online. Company description from FinViz.com.

Costco reported earnings of $1.59 compared to estimates for $1.30. Revenue of $28.22 billion rose 8% but missed estimates for $28.6 billion. Same store sales rose 5% and beat expectations for 4%. Shares spiked $2.50 on the report.

Earnings August 24th.

On May 31st, Costco reported May sales results of $9.86 billion, an increase of 7%. Same store sales rose 4.5% in the U.S. and 6.4% internationally with the company average at 4.5%.

Guggenheim said the May comps reinforce the case for 20% earnings growth in Q4. Costco customers are on track to spend more than $100 billion on their Visa branded credit cards and 70% will be at retailers that are not Costco. The company stands to make $170 million on the commissions from Visa.

People love to shop at Costco and they spend a lot of money. A weekend shopping trip to the local Costco store will expose you to roughly 30 tables of free samples as Costco employees cook up concoctions available for sale in the store. Broiled salmon, cocktail weenies, crab dip, jalapeno biscuits, barbecue, etc, are all available for tasting. Weekend shopping takes on a party atmosphere and the local stores are always full. Amazon cannot crack this code.

We played Costco before the earnings and exited with a nice gain after they announced $7 special dividend for mid May. Now that earnings are over and shares are breaking out to a new high, it is time to play them again.

Buy July $183 Call, currently $2.59, initial stop loss $175.65.

This is a pre special dividend strike that was reduced by the $7 dividend.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Major Breakout

by Jim Brown

Click here to email Jim Brown

Editors Note:

All the major indexes posted excellent gains to new highs and we are now in breakout mode. I would love to repeat the last two days at least once a week for the rest of the summer. The major average are all in record territory and closed near the highs for the day. There was no selling ahead of the weekend event risk.

A bad jobs number seemed excite traders who felt it would keep the Fed from raising rates too quickly. Even the Russell 2000 broke above resistance at 1,400.

The problem now is where to put the stop losses. We are bound to have a volatility hiccup in the near future but the dip should be bought. We do not want to put the stops too close or get knocked out in the volatility but we do not want to be too far away to give back all our gains if a major dip appears.



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


ADP - Automatic Data
The long call position was entered at the open.



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BULLISH Play Updates

AAPL - Apple Inc - Company Profile

Comments:

Lots of news about what Apple may reveal at the WWDC. There are rumors of a dark mode in iOS 11 that senses light and turns dark at night. Another is an update to Apple Pay to allow peer-to-peer payments, which would be huge. Another is a new version of Apple Music that focuses on video in order to give Apple a way to showcase its original content currently in production. The Siri voice assistant is expected to be given a complete makeover to allow it to perform much more complicated tasks. This will be in conjunction with a Siri controlled speaker to compete with the Amazon Echo and Google Home. Shares exploded higher on the new overload.

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.

Update 5/31/17: 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.

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.


ADP - Automatic Data - Company Profile

Comments:

Wow! What a gift. Before the open, the nonfarm payrolls posted a big disappointment at only 138,000 jobs. This spoils sentiment for ADP because slowing jobs means less customer growth. However, it is still growth and one month does not make a trend. Remember, on Thursday the ADP Employment report showed a blowout number of 253,000 compared to estimates for 185,000. Which report is right? Since ADP is actually getting paid for each of those 253,000 new jobs, I am betting that is an accurate number.

Also, Evercore ISI downgraded ADP to underperform with a price target of $85.

Shares gapped down to $98.50 at the open. Since the gap was in our favor this was a gift. Nothing changed with the fundamentals on ADP. Since nobody could have gotten into the position before the gap lower, we were not stopped out and the entry point for the position is the opening gap lower. Thank you Mr. Market and Evercore. Shares rebounded $2 from the opening low.

Original Trade Description: June 1st.

Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.

When ADP reported they beat on earnings with $1.29 compared to estimates for $1.23 but revenues of $3.41 billion missed estimates of $3.43 billion. The news that tanked the stock was a 7% decline in new bookings. Every other metric was fine. The company guided for full year revenue growth of 6% and earnings to rise 17-18%.

Who would not want to own a company growing revenue 6% and earnings 17% per year. Those are good solid numbers.

Apparently there were enough knee jerk sellers to crash the stock from $104 to $95. After two weeks in the doghouse shares began to rise again and they are almost back to $104.

The stock has tried to break out three times this year and each time gets just a little higher before failing. This time, I expect a breakout, market permitting.

Earnings August 2nd.

Position 6/2/17:

Long Aug $105 call @ $1.05, see portfolio graphic for stop loss.


ATVI - Activision Blizzard - Company Profile

Comments:

No specific news. Minor gain to a new closing high.

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:

Shares bounced nearly $3 after Canada said it wanted to resolve the dispute with Boeing and retain them as a valued defense contractor. After the bell, Boeing said it was delaying the third 737-Max jetliner until the end of June. It was supposed to have been delivered by the end of next week.

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.

Update 5/31/17: 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.

Update 6/1/17: Boeing shares dipped at the open after the company got into a fight with the Canadian Defense Minister. Boeing complained that Canadian firm Bombardier was selling jets to U.S. customers below cost because of subsidies from the Canadian government. The defense minister became irate and cut off contact with Boeing regarding a potential order for 18 F-18 Super Hornets to replace some of their aging CF-18 fighters. This was just a headline storm. It is not material to Boeing at this time.

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:

Shares crashed again as oil declined. I do not expect Chevron to return to $110 before the June expiration. The OPEC announcement and inventory declines have not lifted oil prices. I am dropping the position for a full loss. Since the option has no value, i would not close it. You never know when something could happen that could spike oil and equities, like an attack somewhere in the Middle East.

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:

Dropping 6/2/17: Long June $110 call @ $1.31. expiring, -$1.31 loss.


FB - Facebook - Company Profile

Comments:

No specific news. Shares exploded higher with a $2 gain to a new closing high.

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 declined slightly after the big gain on Thursday.

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.

Update 6/1/17: The company said despite a 10-14% impact from the discontinued swimsuit and swim apparel lines, same store sales for May only declined -7%. That means without that impact sales would have been up 3% or more.

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:

No specific news but shares continue to race higher.

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.

Update 5/31/17: 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.

Update 6/1/17: Telsey Advisory Group reiterated an outperform but raised their price target from $150 to $165.

Position 5/4/17:

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


NFLX - Netflix - Company Profile

Comments:

Tom Lee of Fundstrat said "stick with the FANG stocks in 2H-2017 for 20% to 40% additional gains." Netflix added $2 to a new high close.

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:

No specific news. Shares were up again to close at a new high.

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.

Update 5/31/17: 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.

Position 5/15/17:

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


SHOP - Shopify - Company Profile

Comments:

SHOP said the over allotment to the May 24th secondary was oversubscribed at 850,000 shares and they were sold at $91. Shares sprinted for a $4 gain to close at a new high.

Original Trade Description: May 31st.

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.

Position 6/1/17:

Long July $95 call @ $5.25, see portfolio graphic for stop loss.
Short July $105 call @ $2.35, see portfolio graphic for stop loss.
Net debit $2.90.


VAR - Varian Medical - Company Profile

Comments:

No specific news. Excellent 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:

The VIX closed at a new 24-year low at 9.75. That breaks the old low by 2 cents. After careful consideration, I decided to keep the position open. The VIX cannot go much lower and the higher the market spikes the more likely there will be some new volatility.

The May 8th close at 9.77 was the lowest close since December 1993.

This is a July call. We have plenty of time and the odds of a market sell off over the next 2 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.



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