Option Investor
Newsletter

Daily Newsletter, Thursday, 6/15/2017

Table of Contents

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

Market Wrap

Consolidation Continues

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The Fed gets aggressive with their balance sheet reduction plans and the market falters. A raft of economic data came in as or better than expected, reinforcing the Fed's hawkish tone and forward economic outlook, adding to volatility. Today's action saw many of the indices shed close to -1% intraday but the losses were pared as bargain hunters stepped in to scoop up cheap stocks. I wouldn't call today's bullish, but I wouldn't call it overly bearish either.

International indices were lower in today's actions with few exceptions. Asian indices were mostly lower with losses in the range of -1.0%, the Shang Hai managed to eek out a gain of 0.06%. In Europe safe haven Switzerland was able to post gains, 0.04%, after its central bank held rates steady but most indices fell. Losses were greater than -1.0% intraday but late day bargain hunting reduced them by the close. The DAX was a loss leader posting a decline of -0.89% at the end of day. In England the BOE held rates steady as well.

Market Statistics

Early morning futures trading showed losses for the major indices from the start. The SPX was indicated down about -0.7% in the earliest part of the session with that falling to nearly -1.00% following the release of economic data at 8:30AM. Downward pressure persisted into the opening bell but slowly diminished. The SPX opened with a loss of roughly 12 points or -0.5% and fought hard to maintain that level. Trading was choppy over the first few hours of the day resulting in an intraday low of -18 points for the SPX set just before 10:30AM. By noon intraday volatility had begun to subside and allow the indices to drift upward. The remainder of the day saw the indices drift sideways to up, slowly creeping higher until they were within spitting distance of yesterday's close.

Economic Calendar

The Economy

Lots of data today and all at least as expected if not better. Initial claims for unemployment fell slightly more than expected to 237,000, down -8,000 from last week's not revised figure. The four week moving average of claims rose by 1,000 to hit 243,000. On a not adjusted basis claims rose 10% month to month versus an expectation of +13.6% and are down -12.25% YOY, consistent with ongoing labor market health.


Continuing claims rose by 6,000 to hit 1.935 million, last week's figure was revised higher by 12,000. The four week moving average of claims rose by 9,000. Regardless the revision or increase this week continuing claims remains in downtrend and hovering just above the recently set 44 year low. This figure is consistent with labor market health and ongoing labor market tightening.

The total number of claims fell by nearly -10,000 to hit 1.785 million, a new seasonal low. The total claims figure remains in downtrend and is now down -16% from this same time last year. Jobs creation may not be robust but this figure, along with the initial and continuing claims numbers, show that hiring/job retention remain strong and consistent with healthy economic conditions.


The Philadelphia Federal Reserve Manufacturing Business Outlook Survey retreat in May but not as much as expected. The index fell to 27.6 from 38.8 showing growth but less growth than the month before. Within the report all components remain positive but have moderated from previous highs. The shipments index fell -11, new orders was unchanged and employment fell -1. Hours worked continues to expand as well but it too decreased by -1 this month. The 6 month forward outlook also fell, hitting a 2 year low, but remains positive.


The Empire State Manufacturing Survey rose a much stronger than expected 21 points to 19.8. This is a +2 year high, forward outlook also rose. Within the report new orders rose 23 to 18.1, shipments rose to 22.3 and inventories to 7.7 while employment and hours worked both rose modestly.


Import prices were unchanged in May while export prices fell -0.6%.

Industrial production was unchanged in May after substantial increases in the previous month and smaller increases in February and March. Year over year production is up 2.2%. Capacity utilization fell a tenth to 76.6% and -3.3% below its long running average.

The NAHB Index of Home Builder Sentiment fell 2 points to 67 from last month's revised 69. This is below expectations and driven by a lack of traffic. All components within the report fell, led by buyer traffic which fell below the expansionary 50 level to 49. Despite this sentiment remains positive and stable at 67 with sales of single family homes running at 73 and forward outlook for sales at 76.

The Dollar Index

The Fed raised rates as expected, delivered a slightly more hawkish than expected statement and addendum, and put the bull back into the dollar. The Dollar Index gained nearly 0.60% today and appears to be reversing the Jan/Jun down trend. With the ECB backing off from hawkish expectations and the FOMC sticking to their guns policy is back in divergence, if only mildly, weakening the euro and strengthening the dollar. The indicators support today's move with a strong buy signal that could easily carry the index up to test resistance at the short-term moving average. A break above the moving average, near $97.65, would be bullish and confirm reversal if not rally. Don't forget, reversal signals could mean a switch from down to sideways as easily as down to up.


The Gold Index

Gold prices fell in tandem with a rising dollar and firming FOMC outlook. The Fed may not be set to raise rates again this year but they are set to begin trimming the balance sheet and that is seen as dollar strong, at least for now. Spot gold fell more than -1.5% or $21 to trade below $1, 260 and is heading down to test support at $1,250 and maybe lower.

The Gold Miners ETF GDX lost about -0.65% and created a small doji candle sitting just above potential support. The ETF is now near the bottom of its rapidly narrowing trading range and set to trend along this level, or move lower. The indicators are both weak and pointing lower following bearish crossovers and consistent with a move lower within a trading range. Support may be at $22 or just below but more likely near $21. A break below this level would be bearish with downside target near $18.50.


The Oil Index

Oil prices continue to plunge. WTI fell another -0.5% in today's action and is now trading near $44.50. The latest data shows supply levels did not fall as much as expected adding to oversupply concerns. No matter what OPEC tries to do they just can't alter the fact that there is more than enough oil and production capacity to offset demand. I don't think this is going to change without increased demand or a serious disruption to supply and/or production.

The Oil Index fell nearly a full percent in a drop below the 1,120 support level. The index continues to experience volatility and is retreating to the recently set low. The indicators have begun to roll over into bearish signals consistent with this move but have not confirmed with crossovers. Support is near the current low just above 1,100, a break below this would be bearish and a continuation of the near-term down trend with target near 1,050. The near-term outlook for the oil sector is bearish and driven by falling prices. The market may move down from here but how much lower it can go is questionable since it is well within a solid zone of support. Long-term I remain bullish due to forward earnings growth outlook, waiting for the bottom I know is down there somewhere.


In The News, Story Stocks and Earnings

Wells Fargo, the once unblemished mega-bank, has fallen prey to scandal once again. The bank has been accused of making improper changes to mortgages held by those in bankruptcy. A series of lawsuits allege that while the bank was dealing with the account scandal last year mortgage staff were pushing loan modifications that lowered monthly payments while extending terms and increasing the amount paid over time. The bank responded saying it did nothing wrong and all involved parties were notified beforehand. Shares of the stock fell nearly -1% on the news but do not appear as if it is overly damaging at this time.


Kroger reported earnings this morning and did not deliver what the market wanted to hear. Quarterly results were good, revenue gains and better than expected EPS, but forward guidance was weak. Guidance has been chopped by nearly -9%, blamed in part on competition from Walmart, and sent shares diving in the premarket session. The stock opened with a loss greater than -10% and extended that to near -20% by the end of day to trade at a 2.5 year low.


The VIX rose today but still doesn't look like it is ready to spike higher. The index gained about 5% creating a small green bodied candle with long upper shadow signifying resistance. Today's high was 12.01 and just below the long-term moving average, two potential resistance areas. The indicators are mixed in the near-term but consistent with range bound trading and resistance in the long. A move above 12 would be bullish for volatility, bearish for the market, with upside targets near 14 and 16. Failing to break above resistance would be bullish and consistent with market rebound.


The Indices

Rotation from tech and into more promising sectors continues. Today's action say the indices fall to support levels, and find it. The Dow Jones Transportation Average led and was able to close with a gain. The index moved up by roughly 0.20% to create a medium sized green bodied candle rising up from support. Support is the 9,325 resistance-turned-support and previous all-time high. The indicators were bullish in confirmation of the break above resistance but stochastic is now showing weakness and bearish crossovers consistent with topping action. If the index is able to move higher it will face additional resistance at the current all-time high near 9,650. A break above there would be bullish.


The Dow Jones Industrial Average closed with a loss less than -0.10% after opening much lower. The blue chips created a small green bodied candle moving up from a long-term up trend line. The index had been struggling to break above the trend line and did so Tuesday. The indicators have confirmed the break with bullish crossovers and are both on the rise in support of higher prices. Upside target is 21,500 although caution is warranted because the move looks weak and the index a bit extended.


The S&P 500 closed with a loss near -0.20% and just behind the industrials. The broad market index gapped lower to create a small green bodied candle with long lower shadow confirming support at the long-term up trend line and short-term moving average. Price action appears bullish and trend following although the indicators do not confirm. Both MACD and stochastic have formed bearish crossovers and signals consistent with consolidation and pull-back. The index may not go below the trend line, or far below it, but I don't think the test of support is over. In fact, it may just be starting as there is still quite a bit of time until the next earnings season and very little economic data over the next week. Near-term support is 2,415 and 2,400, a break below there would be bearish with targets near 2,350.


The NASDAQ Composite brings up the rear with a loss near -0.50%. The index also opened with a gap lower, tested support and then moved higher from there to create a small green bodied candle with visible lower shadow. The candle helps confirm support at the 6,115 level but price action over the last week and the indicators lead me to think this move is not over. Both indicators are bearish and gaining strength in support of lower prices with target near 6,000.


The indices look mixed. One is going up while another is going down and two more going sideways at best. Basically, we're in a big sector rotation and tech is the loser. Market leading sectors include industrials, real estate, materials and energy which are all up more than 1% over the past 5 days while the NASDAQ and XLK Technology SPDR are down -2.5% and -3.5% in the same time. Rotation is likely to continue into the near-term. The next catalysts for movement other than political or random one-off news will be the NFP in 2 weeks and then the beginning of Q2 earnings season 2 week's after that. I am neutral for the near-term, cautious for the short and bullish for the long watching and waiting for the next great entries.

Until then, remember the trend!

Thomas Hughes


 

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New Option Plays

Nice Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets rebounded from a retest of the Fri/Mon lows but it could have been better. The small caps are not rebounding and the tech stocks are hit and miss. No need to add risk unless we have a directional market. Friday should be a pivotal day for direction.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Back from the Brink

by Jim Brown

Click here to email Jim Brown

Editors Note:

The markets crashed again at the open with the Dow down triple digits and the Nasdaq 100 making a lower low. The tech wreck had a flash back this morning as the big cap techs retested their support lows from the tech dip last week.

All the indexes rebounded but as of 3:30 none are in the green.

Friday is my 50th wedding anniversary and I have to post this early today because plane schedules are conflicting with newsletter schedules. I did not update any news and I will catch up in the weekend newsletter.



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.



Portfolio snapshot as of 3:30



Current Position Changes


ATVI - Activision
The long call position remains unopened until $142.50.

SHOP - Shopify
The long call position remains unopened until $90.75.



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

ADP - Automatic Data - Company Profile

Comments:

No specific news.

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.

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 with an ATVI trade at $57.75:

Long August $60 calls @ $2.24, see portfolio graphic for stop loss.

Previously closed 6/9/17: Long August $60 calls @ $2.66, exit $2.02, -.64 loss.


BA - Boeing - Company Profile

Comments:

Will update the news in the weekend newsletter.

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.

Update 6/7/17: Boeing said the current Arab argument with Qatar has not hurt the $21.1 billion order for 72 F-15QA multirole fighters. The State Dept said they still expect the order to be signed soon. Canada said it planned to increase its military spending by 73% over the next ten years and would involve a significant number of new planes. The spokesman said Canada would hold an open competition to buy 88 advanced fighters to replace its fleet of 77 CF-18 planes. Previously, the government had planned to buy 65 fighters. Part of the requirement is that the planes would have to operate seamlessly with planes and communication systems of Canada's allies. That gives Boeing a big edge up plus they are the incumbent having made and maintained the CF-18s.

Update 6/8/17: Boeing said it was going to send some of its aircraft completion work to China and a production plant near Shanghai. The plant will focus on painting and furnishing jets to be used in China. Boeing expects this to help sales to China of 6,800 jets over the next 20 years. The company said this would not impact any jobs in the USA.

Update 6/13/17: Multiple sources claim Ryanair is talks with Boeing over a large order for the new 737-MAX 10 that will debut at the Paris Air Show next week. Ryanair has already ordered 100 of the 737 MAX 200 planes. The MAX 200 seats 189-196 and the MAX 10 seats 230 passengers. The Ryanair CEO said the only thing preventing them from growing faster was the lack of available planes. Indonesia's Lion Air is expected to place an order for 50 of the 737 MAX 10s as early as next week. Business is good for Boeing.

Update 6/14/17: Qatar's Ministry of Defense said they signed an agreement with Boeing to buy 36 F-15QA fighter jets for $12 billion. In November the U.S. approved a sale of up to 72 fighters for $21.1 billion. This was half of that approval.

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.


BABA - Alibaba - Company Profile

Comments:

Will update the news in the weekend newsletter.

The position remains unopened until $142.50.

Original Trade Description: June 10th.

Alibaba Group Holding Limited, through its subsidiaries, operates as an online and mobile commerce company in the People's Republic of China and internationally. It operates Taobao Marketplace, an online shopping destination; Tmall, a third-party platform for brands and retailers; Juhuasuan, a sales and marketing platform for flash sales; Alibaba.com, an online wholesale marketplace; Alitrip, an online travel booking platform; 1688.com, an online wholesale marketplace; and AliExpress, a consumer marketplace. The company also provides pay-for-performance and display marketing services through its Alimama marketing technology platform; Taobao Ad Network and Exchange (TANX), a real-time bidding online marketing exchange in China; and data management platform through TANX for marketers to execute their campaigns with proprietary and tailored data. In addition, it offers cloud computing services, including elastic computing, database, storage and content delivery network, large scale computing, security, and management and application services through its Alibaba Cloud Computing platform; Web hosting and domain name registration services; payment and escrow services; and develops and operates mobile Web browsers. The company provides its solutions primarily for businesses. Company description from FinViz.com

Alibaba is the poor investor's Amazon. With shares at $135, the options are at least reasonable but not cheap. Alibaba is growing as fast or faster than Amazon and tries to copy everything Amazon does.

When the company reported earnings for the last quarter at 63 cents, they missed estimates for 68 cents. Revenue of $5.6 billion easily beat estimates for $5.2 billion. Other than the earnings miss it was a solid quarter with ecommerce up 47% and cloud computing up 102%. Digital media growth was up 234%. Mobile MAUs rose from 493 to 507 million. That is important because 90% of China's ecommerce occurs on a mobile device.

The company announced plans to buy back $6 billion in stock over a two-year period.

Earnings August 18th.

Shares dipped on the earnings miss then spiked on the guidance to $125.50, which was a new high. After a little more than two weeks of post earnings consolidation, shares returned to that $125.50 level and closed at a new high.

There was an analyst day last week and that kicked the stock up to another level with a $10 gain. The company guided for 45% to 49% revenue growth in this year and analysts were only expecting 37%. MKM partners raised the price target to $177. Pacific Crest raised their price target to $160 from $137. Needham raised their target to $155. The Benchmark Company is targeting $175.

Shares declined on Tuesday on no news. With the stock overbought after the analyst meeting we could be seeing some simple profit taking. I am going to put an entry trigger on the position. If shares continue lower I will revise the entry.

With a BABA trade at $142.50

Buy Aug $150 call, currently $3.25, initial stop loss $135.50.
Sell short Aug $160 call, currently $1.30, initial stop loss $135.50.
Net debit $1.95. Prices will rise significantly before our entry is triggered.


COST - Costco - Company Profile

Comments:

Will update the news in the weekend newsletter.

Original Trade Description: June 1st.

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.

Amazon is the largest online seller of Costco products marketed under the Kirkland brand. They have 69.5% of the online market share for Kirkland products. Costco only has 23.2% market share online. Who knew Amazon was such a big supporter of Costco?

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.

Position 6/5/17:

Long July $183 Call @ $2.60, see portfolio graphic for stop loss.


FB - Facebook - Company Profile

Comments:

Will update the news in the weekend newsletter.

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.

Update 6/14/17: Facebook has built an AI that learned how to lie to get what it wants. Can Skynet be much farther into the future? Facebook fed the AI computer the text messages from 5,808 human conversations where they negotiated for some specific outcome either an item, event or decision. Then they tried to negotiate with the computer over some items each were given. The key was for the computer to end up with a specific item. During the testing they found that the computer had learned to lie to misdirect the opponent from the item the computer actually wanted. This is scary. Extrapolate this into a much larger environment with millions of conversations to learn from and the outcome could be an entirely new level of computer consciousness.

Position 6/12/17:

Long Aug $150 call @ $4.75, see portfolio graphic for stop loss.

Previously closed 6/9/17: Long Aug $150 call @ $4.90, exit $6.80, +$1.90 gain.


LB - L Brands - Company Profile

Comments:

Will update the news in the weekend newsletter.

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.


NFLX - Netflix - Company Profile

Comments:

Will update the news in the weekend newsletter.

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.

Update 6/2/17: 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.

Update 6/6/17: Cantor Fitzgerald raised their price target from $165 to $190 saying international subscriptions are set to surge. The analyst said Netflix has 50% penetration in the US households with broadband access but only 5.7% internationally. He expects that international number to rise dramatically as advertising and acceptance grows.

Update 6/13/17: Netflix partnered with telecom giant Altice and will begin rolling out pay services in France, Portugal, Israel and the Dominican Republic in the coming months.

Earnings July 17th.

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

Position 6/12/17:

Long July $160 call @ $4.96, see portfolio graphic for stop loss.
Short July $175 call @ $1.65, see portfolio graphic for stop loss.
Net debit $3.31.

Previously closed 6/9/17:
Long July $160 call @ $6.45, exit $7.50, +1.05 gain.
Short July $175 call @ $2.16, exit $2.41, -.25 loss.
Net gain 80 cents.


RMD - ResMed Inc - Company Profile

Comments:

Will update the news in the weekend newsletter.

Original Trade Description: June 6th.

ResMed Inc. designs, develops, manufactures, and markets medical devices and cloud-based software applications that diagnose, treat, and manage respiratory disorders. Its portfolio of products include devices, such as air flow generators, ventilators, and oxygen concentrators; diagnostic products; mask systems; headgear and other accessories; dental devices; portable oxygen concentrators; and cloud-based software informatics solutions. The company also produces continuous positive airway pressure, variable positive airway pressure, and AutoSet systems for the titration and treatment of sleep disordered breathing (SDB). In addition, it offers data communications and control products, such as EasyCare, ResLink, ResControl, ResControl II, TxControl, ResScan, and ResTraxx modules that facilitate the transfer of data and other information to and from the flow generators. The company markets its products to sleep clinics, home healthcare dealers, patients, hospitals, physicians, and third-party payers through a network of distributors and direct sales force in approximately 100 countries. Company description from FinViz.com.

ResMed reported earnings of 71 cents that rose 2.8% and beat estimates by a penny. Revenue of $514.2 million rose 13.3% but missed estimates for $519 million. Revenue in the America's rose 18% compared to a 9% rise in EMEA and APAC. Gross margin was 58.3%. They ended the quarter with $827.3 million in cash. They announced a quarterly dividend of 33 cents, payable on June 15th.

Expected earnings July 27th.

ResMed's recent claim to fame is the ResMed AirMini, the world's smallest CPAP mask. Their goal is to change 20 million lies by 2020 with products that improve patient outcomes and daily lives. They manufacture and market products for chronic diseases where there is a large patient base.

They currently provide remote monitoring for more than three million patients around the world.

Shares closed at a two year high on Wednesday. Earnings are July 27th and the July options will deflate too quickly. I am recommending the October strikes but we will exit before the earnings. We can always buy time but we do not have to use it.

Position 6/8/17:

Long $75 call @ $2.90, see portfolio graphic for stop loss.


SHOP - Shopify - Company Profile

Comments:

We were stopped out on the prior position on Friday and I recommended we reload with a trade at $90.75. Shares dipped again on Wednesday but support held. I again debated lowering the entry point but decided to keep it the same so we can be sure there is a rebound in progress rather than speculate on a bottom.

RELOAD: With a SHOP trade at $90.75, Buy July $95 Call. Sell July $105 call.

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.

Update 6/5/17: The S&P/TSX index is considering whether to add SHOP to the Canadian index. That would equate to about 5.4 million shares of additional buying from index funds. The rule change that would allow SHOP to benefit is out for comment until June 9th.

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.

With a SHOP trade at $90.75:

Buy July $95 call, currently $4.00, see portfolio graphic for stop loss.
Sell July $105 call, currently $1.90, see portfolio graphic for stop loss.

Previously closed 6/9/17:
Long July $95 call @ $5.25, exit $5.00, -.25 loss.
Short July $105 call @ $2.35, exit 2.50, -.15 loss.
Net loss 40 cents.


V - Visa Inc - Company Profile

Comments:

Will update the news in the weekend newsletter.

Original Trade Description: June 10th.

Visa Inc. operates as a payments technology company worldwide. The company facilitates commerce through the transfer of value and information among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. It operates VisaNet, a processing network that enables authorization, clearing, and settlement of payment transactions; and offers fraud protection for account holders and assured payment for merchants. The company also offers gateway services for merchants to accept, process, and reconcile payments; manage fraud; and safeguard payment security online, as well as processing services for participating issuers of visa debit, prepaid, and ATM payment products. In addition, it provides digital products, including Visa Checkout that offers consumers an expedited and secure payment experience for online transactions; and Visa Direct, a push payment product platform, which facilitates payer-initiated transactions that are sent directly to the Visa account of the recipient, as well as Visa token service that replaces the card account numbers from the transaction with a token. Further the company offers corporate (travel) and purchasing card products, as well as value-added services. It provides its services under the Visa, Visa Electron, Interlink, V PAY, and PLUS brands. Company description from FinViz.com.

Visa reported earnings of 86 cents compared to estimates for 79 cents. Revenue of $4.5 billion rose 23.5% and beat estimates for $4.3 billion. They raised full year revenue guidance saying they expect to come in at the high end of the $17.49-$17.79 billion prior forecast. Analysts were expecting $17.75 billion. Shares rallied $10 since the earnings report.

Estimated earnings July 20th. Visa shares declined sharply on Friday even though they are not a tech stock. The sudden need to raise cash because of losses elsewhere may have caused investors to take profits in Visa. This should be a buying opportunity. With the Fed likely to raise rates this week the financial community should continue to post gains.

Position 6/12/17:

Long Aug $95 call @ $2.30, see portfolio graphic for stop loss.


WDC - Western Digital - Company Profile

Comments:

Will update the news in the weekend newsletter.

Original Trade Description: June 10th.

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

Western Digital is in the sweet spot for hard drives and memory. After acquiring SanDisk last year they have been integrating memory products into their product lines and business is booming. Their hard drives are the state of the art with 10 terabyte drives now the leading edge of capacity. Their SSD drives are growing by leaps and bounds with capacities surging and prices declining.

They are currently bidding on the Toshiba NAND memory business with an $18 billion bid. Toshiba is supposed to announce the winner of the bid on Thursday. If WDC wins that bid they will be unstoppable with yet another source of highly desirable memory components. They already own half of the Toshiba business so whatever happens they will still be a part of the company. There could be a protracted legal fight if WDC is not the winner but they will still benefit.

Estimated earnings July 27th.

Shares crashed from a high of $91.94 on Friday to a low of $82.14 today. The rebound from the opening low was immediate and the stock closed at $86.64. I am looking for a return to the highs and if they win the Toshiba business we could see higher highs.

Update 6/13/17: Western Digital was initiated with a buy rating and a $130 price target at Aegis Capital and saying there was additional "long term appreciation" above that level. At the same time, Japanese media said WDC would raise its bid to $18.2 billion. The bids close on Thursday. Guggenheim reiterated a buy rating and a $125 target saying WDC would be fine regardless of whether or not it buys Toshiba.

Position 6/13/17:

Long Sept $90 call @ $6.50, see portfolio graphic for stop loss.
Short Sept $100 call @ $3.09, see portfolio graphic for stop loss.
Net debit $3.41



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