Option Investor
Newsletter

Daily Newsletter, Saturday, 6/17/2017

Table of Contents

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

Market Wrap

A Doji Day To Finish A Doji Week

by Keene Little

Click here to email Keene Little
Other than the Dow's continued relative strength, the rest of the market spent the week chopping sideways in a small trading range. Friday was no different as an initial morning decline was followed by a slow push back up. There are multiple reasons for each side to believe they'll be winners in the coming week.

Week's Market Stats

Friday's Market Stats

The Dow continues to shine to the upside, with new daily all-time highs and a 4-week winning streak, while the techs continue to struggle to hold onto strong gains before the June 9th selloff. The result is a fractured market, which is not a healthy sign, as money rotates from higher-risk stocks into the relative safety of the blue chips.

Not helping the market on Friday were the latest housing reports, which showed both housing starts and permits declining more than expected. Housing starts dropped to 1092K in May, a drop from 1156K (revised lower from 1172K) in April and much lower than the 1227K that had been expected. Likewise, permits dropped to 1168K from 1228K and less than the 1250K expected.

The chart below shows housing starts and permits from May 2001 through May 2017 and then the bar graph at the bottom shows housing starts over the past two years. The decline in housing starts from the highs in 2005-2006 (roughly 2100K) to the low in 2009 (roughly 500K) was a 1600K decline. The "bounce" off the 2009 low to a high of about 1300K last October was a 50% retracement of the decline and there are reasons to be concerned that the rollover from last October could continue.

While the decline so far in housing starts is hardly a significant rollover, the threat is there. A drop in the housing numbers would be another indication that the economy is slowing and more importantly that the housing market has once again become unaffordable to more people. There's plenty of data to show that while employment numbers look good (the data the Fed uses), it's the quality of that employment that is not so good. Losing a $100K job and replacing it with a $50K job keeps the employment data looking good but it's just one more person who can't afford to buy a home.

We're also seeing more evidence of a slowdown in consumer spending, which is likely a sign that people have reached their spending/credit limits. Consumer debt is now higher than it was prior to 2007 (as is corporate and government debt) and with average incomes in decline it doesn't take a math genius to figure out we have a problem. Loan default rates are on the rise, especially auto and student loans, and the amount of debt is staggering.

Banks are not prepared (again) for high default rates and investors are not taking into account (again) the rising risks in the financial industry. But I suppose we don't have to worry about the poor banks since they'll simply be bailed out of trouble (again). This time though it will be through bail-ins, not bail-outs. Instead of increasing their reserve accounts for bad debts, banks have been doing the opposite and all with the Fed's blessing. How quickly we forget.

The stock market is showing signs of fatigue but other than the cracks in the higher-beta stocks (techs and small caps) we're not seeing any evidence yet that the market is ready to turn down. There are reasons to believe we're close to a reversal, which I'll show, but sticking with the trend (up) has been the winning trade. Picking tops might be fun (in a masochistic way) but catching rising (or falling) knives is a risky endeavor. Trend following has been the key to investor success but as traders we also would like to avoid the big swings that go against our positions (whether long or short).

I'll start off the weekend review with the Dow since it's been the stronger index and where it could be headed and potentially run into trouble should help guide us in watching the broader market.


Dow Industrials, INDU, Weekly chart

The wave count shown on the Dow's weekly chart interprets the leg up from March as the 5th wave of the rally from January 2016 and as such will be the conclusion to the rally. What kind of correction/decline will follow is subject to lots of debate but for now I think it's important to recognize that we're due for at least a large pullback correction. The larger wave count for the rally from 2009 can also be interpreted as complete once this 5th wave completes, in which case the pullback/decline will be even larger (at a minimum, back to the January 2016 low near 15,500 (-28%).

While staying aware that the pattern can be considered complete at any time, which makes downside risk much greater than upside potential, there is additional upside potential to watch for. The trend line along the highs from May 2011 - December 2014 is currently near 21600 and if the melt-up in the Dow continues for another couple of months we could see it make it up to the top of is up-channel from 2016, which will be near 22,300 by the end of July.


Dow Industrials, INDU, Daily chart

The daily chart of the Dow shows the upside potential to the trend line along the highs from May 2011 - December 2014 and a price projection near the same. For the 3-wave move up from March 27th, the 2nd leg up would be 162% of the 1st leg at 21,618 and that projection crosses the trend line June 23rd, which is this coming Friday. That's another 234 points (+1.1%) and easily doable the way the Dow has been acting lately. It'll be an interesting setup if and when that level is reached. But there could be trouble sooner if the little rising wedge for the rally from May 18th has anything to say about it (shown better on the 60-min chart further below).

Key Levels for DOW:
- bullish above 21,450
- bearish below 21,159


Dow Industrials, INDU, 60-min chart

The rising wedge pattern for the rally from May 18th is shown clearly on the 60-min chart. This pattern calls the leg up from June 9th the final 5th wave to complete the short-, intermediate- and long-term wave counts and is a reason to be very cautious about the long side. While there's upside potential to the at least the 21,600 area, this chart says bulls could soon be in trouble.

Bulls will be in better shape with a rally above 21,440 to bust out of the bearish rising wedge (which has confirming bearish divergence at new highs). Keep in mind that rising (and descending) wedges tend to get retraced a lot faster than it took to build them and this one could break at any time. Keep a close eye on this pattern since we could find out early in the week how the rest of the week is likely to go.


S&P 500, SPX, Daily chart

The choppy price action since June 2nd for SPX leaves a question mark as to how it's going to resolve. The bullish interpretation is that it's a sideways consolidation and that's a bullish continuation pattern following the rally. We could see price chop sideways a little longer (maybe midweek) to complete a sideways triangle pattern and then launch into another rally leg. For now I'd use a break above the June 9th high and low, near 2446 and 2416, as the direction to trade. Be more careful about the upside though since I believe we're in an ending pattern and a swift breakdown, like we saw in the techs, is likely close at hand.

Key Levels for SPX:
- bullish above 2447
- bearish below 2415


Nasdaq-100, NDX, Daily chart

Following the breakdown in the techs on June 9th we've seen the tech indexes consolidate but nothing more bullish than that (so far). NDX did a back-test of its broken 20-dma on Tuesday/Wednesday but then gapped back down on Thursday. It tested its 50-dma Thursday morning, which has held as support, but was not able to close the week back above its uptrend line from December 2016 - April 2017, currently near 5702.

However, the trend line break is based on using the log price scale, which is my preference for trend lines. Using the arithmetic price scale, the line is near 5668 and it held as support on Friday. So it's a toss-up as to whether or not the trend line is broken. Short term, I'd use a break above Wednesday's high, near 5774, or below Thursday's low, near 5634 (which would also be below the 50-dma), for the direction of the trade (again, staying cautious about the upside since we could get just a higher bounce before turning back down).

Key Levels for NDX:
- bullish above 5775
- bearish below 5634


Russell-2000, RUT, Daily chart

Following the June 9th test of its trend line along the highs from 2007-2015, its 3rd test in 3 months, the RUT has pulled back sharply. But it's still above its 20- and 50-dma's, now near 1398 and 1390, and it wouldn't surprise me to see another test of the 2007-2015 trend line (if only because the bulls have been very stubborn about buying the dips).

The overall whippy price pattern since last December makes it very difficult to figure out where the RUT is going. But a slowly rising choppy pattern is generally an ending pattern and that's how I'm interpreting the RUT's (a shallow rising wedge off the January low). That makes the June 9th test of the 2007-2015 trend line potentially the final one.

Key Levels for RUT:
- bullish above 1437
- bearish below 1386

This past week we received some inflation reports that showed inflation is slowing, much to the consternation of the Fed. They think it's a temporary thing (either that or they're just saying it so that they can continue on their rate-increase path) but I'm surprised they don't understand the fundamental reasons why they're fighting a deflationary cycle (demographics -- aging population and a slowing population growth -- technology and slowing velocity of money, to name just a few). They have been fighting hard to increase inflation with their massive money printing scheme and while they've won a few battles they're losing the war.

I'm sure the slowdown we've seen since inflation peaked in 1981 will continue into a true deflationary period. We have been brainwashed to believe deflation is a bad thing and it is for borrowers (think government) but one of the results is it makes our companies and economy more efficient since they can't hide behind poor performance. We of course will benefit from lower prices for most things. Poor and poorly run companies and governments will be the ones who get hurt. And banks too, which is of course the real reason the Fed keeps pushing for higher inflation. The chart below is a good thing.

U.S. inflation rate, 1915-May 2017, chart courtesy tradingeconomics.com


30-year Yield, TYX, Daily chart

The bond market has also been sniffing out lower inflation one of the better indicators is the long bond, the 30-year (TYX). Investors are not going to want to own the 30-year bond if inflation is climbing. They'll want higher yields (lower prices) in order to compensate them for the risk. The bond market is one of the smarter markets (unlike the stock market, which is driven more by emotion) and right now it's telling us inflation is less of a concern than it was at the end of 2016.

TYX had found support at price-level S/R at 2.85% in April but recently broke support at the beginning of June, back-tested it this week and then dropped lower. Currently it's testing an uptrend line from July-September 2016 but I don't think that will hold. We should see rates continue lower despite what the Fed is trying to do. They might increase the shorter-term yields but that will only flatten the yield curve, which is a sign that a recession is coming. Damned if they do, damned if they don't -- that's the corner they successfully painted themselves into.


DJ US Home Builders index, DJUSHB Weekly chart

If interest rates do head back down it will at least help the home builders since it would make their houses more affordable. But at the moment the home builders stocks look like they could be in trouble. The weekly chart of the index shows a bearish setup that can only be negated with a rally above Wednesday's high at 698.

There's a little rising wedge pattern off the April low and the top of the wedge is along the top of a parallel up-channel for the 3-wave rally from February 2016. Wednesday's high was a quick throw-over above the top of the wedge and the subsequent drop back into the wedge creates the first sell signal. The second signal would be a break below the wedge, the bottom of this is currently near 665.

In addition to the wedge and the top of the parallel up-channel, as well as the bearish divergence against the March high, the reversal comes after reaching the 127% extension of the previous decline (August 2015 - February 2016), which is a common reversal Fibonacci extension. Interestingly, the home builders index has retraced a little more than 50% of its 2005-2008 decline, about the same as the recovery in the housing starts (first chart above). It's only a preliminary signal but it's looking like we might have seen the top for this index.


U.S. Dollar contract, DX, Daily chart

The US$ has been chopping sideways for about a month and it's looking like a bearish continuation pattern. I have a downside target for the dollar around 95 before setting up either a larger consolidation or a stronger rally. If the dollar gets back above its May 8th low at 98.35, which would also be above its descending 50-dma and downtrend line from April-May, I'd then start thinking more bullishly about the dollar but not yet.


Gold continuous contract, GC, Daily chart

While the dollar looks like it will continue lower it doesn't look like it will help gold, which also looks like it will continue lower. There should be solid support at its uptrend line from December-May, especially since it coincides with its 200-dma at 1242.60. That could launch another rally in it choppy move up from last December but at the moment I'm thinking we've seen the high for the bounce in gold. A little bounce off support and then a continuation lower is what I think we'll see for gold. Price action will be the only thing that tells me when to change my mind.


Oil continuous contract, CL, Daily chart

Oil is struggling to hold onto its uptrend line from August 2016 - May 2017, currently near 44.65. Thursday it broke slightly below the line and then Friday about 3 cents above the line. A break of a steep downtrend line, currently near 45.50, would be a bullish heads up that support is going to hold. A drop below Thursday's low at 44.22 would confirm support is not going to hold.


Economic reports

The coming week will be short on economic reports, one of which will be existing home sales Tuesday morning. New home sales will be reported on Friday.


Conclusion

This coming week will likely provide direction for the rest of the month. The SPX pattern, which I consider a good proxy for the broader market, has either a very bearish pattern, one which will break down hard in the coming days, or it's going to chop sideways for another couple three days and then launch higher. So a breakdown on Monday or Tuesday would be bearish for the week and the rest of the month while a sideways consolidation on Monday/Tuesday would likely be bullish into the end of the week and month.

Helping the bears, slightly, is then a short-term bearish pattern for the Dow with its rising wedge pattern off the May 18th low. This suggests maybe a little higher (less than 100 points) and then a strong move down. So again, we should find out early in the week which direction this market will likely head in the coming week and into the end of the month. In the meantime, mind the chop.

Good luck and I'll be back with you next Wednesday. See below for a good deal on an OIN subscription.

Keene H. Little, CMT


 

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Index Wrap

Another Week of Indecision

by Keene Little

Click here to email Keene Little
The Dow is about the only broader average index that has consistently pushed higher for the past 4 weeks while the others bounce around looking for direction. Even the weaker tech indexes spent the week chopping up and down, finishing with a doji.

Week's Indexes


Review of Major Stock Indexes

A review of the indexes above shows the broader averages finishing mixed with the Dow again positive (one of the few that stayed in the black for the past 4 weeks) while the techs and RUT pulled up the rear. Hurting the techs last week were the semiconductors (SOX was down -2.1%). Hurting the RUT was the weak performance in the energy sector. The commodity sector, including the metals, also did not do well for the week.

We have a fractured market right now where it's looking like money is rotating from some of the big-cap techs (FAANG) and other higher-beta stocks into the relative safety of the blue chips, especially the bluest of the blue chips, the Dow. Money managers who are required to stay invested in the stock market will often move money to the safety of the bigger and more stable big caps because it's easier to sell out of them in a down market than the other more volatile stocks.

Moving money into the Dow is a defensive play and probably a good signal to pay attention to as far as how aggressive you want to play the long side. The trend of the stock market is up and it pays to stick with the trend rather than fight it, but there are times when the signals from the market provide a warning sign and right now I'm seeing plenty of them.

It's one of those times when it's a good time to get yourself into a larger cash position while still enjoying any upside left to this market, especially since a melt-up situation could provide some outsize benefits if you're long. Bears could soon have a turn at the feeding trough but depending on the index they could be attempting to catch rising knives here.

Other than the usual tweets from the White House and more news about "off with his head" (comic Kathy Griffin's stunt done in poor taste), it was a quiet week from both a political and geopolitical perspective. We're not dealing with earnings and the week's economic reports were mixed. Without much to react to, the market was generally quiet and spent most of its time consolidating.

Depending on your perspective and which index you're looking at, the consolidation can be viewed as either bullish or bearish. I think we're at the point where the price action in the next 2-3 days will determine the direction for the rest of the week and month. I'll take a top-down look at SPX to show what I'm watching for.


A Look At the Charts


S&P 500, SPX, Monthly chart

SPX looks to be in the 5th wave of its rally from 2009, which is the leg up from January 2016. The 5th wave would equal the 1st wave at 2516, which is the projection shown on the monthly chart below. That's the upside target based on the EW pattern but it's important to remember that the form of the pattern can be considered complete at any time.

Notice too that SPX is nudging up underneath its broken uptrend line from 1990-2002, which is where the rally into the 2015 highs stopped. The bearish divergence against those 2015 highs fits with the 5th wave interpretation.

For longer-term buy-and-hold investors, or for when to get into cash, SPX is still on a buy signal (or hold signal) while the 8-month MA is above the 21-month MA. The green arrow in August 2016 would not turn to a red arrow until the 8-mma drops below the 21-mma, currently near 2177, which is something that's not likely to happen for a while. You can see from previous occurrences how this system would have kept you out of the severe downturns, with the relatively small risk of getting whipsawed, such as between February and August 2016.


S&P 500, SPX, Weekly chart

The weekly chart looks more closely at the 5th wave of the rally from 2009, which is the leg up from January 2016. It too is now a 5-wave move with the 5th wave being the leg up from March. The rally from January 2016 has created a rising wedge (and therefore 3-wave moves inside the wedge) and the downside risk is that wedges tend to get retraced much faster than the time it took to build them.

The 5th wave of the rising wedge pattern would be 62% of the 1st wave at 2506, which is close correlation with the 2516 projection on the monthly chart for the 5th wave of the rally from 2009. It will be an interesting setup to watch carefully if and when SPX makes it up to the 2500 area, especially since so many analysts are calling for that number and it could be a reason many would start taking money off the table and wait for a better buying opportunity in the fall.

Along with the bearish divergence on the monthly chart you can also see the bearish divergence against the March 1st high on the weekly chart. This again fits well with the 5th wave interpretation. We have the 5th of the 5th wave in progress and once it completes, which could be any time (not necessarily up around 2500), we'll see at least a very large pullback correction, if not something more bearish.


S&P 500, SPX, Daily chart

The leg up from March should arguably be just a 3-wave move (inside the rising wedge from January 2016) and by that interpretation might have completed at June 9th high. This suggests a stronger breakdown early in the coming week, which is one of the reasons why I said we'll likely know early in the week whether or not a top is now in place.

A variation of the corrective wave count calls for another leg up and that's why a further sideways consolidation in the next 2-3 days would be a bullish sign. A break above 2447 or below 2415, the June 9th high and low, will likely provide the direction of trade.

Key Levels for SPX:
-- bullish above 2447
-- bearish below 2415


S&P 500, SPX, 60-min chart

The 60-min chart shows the sideways triangle idea that I'm currently watching. A pop up Monday morning followed by another pullback inside the triangle would then lead to a setup to get long for the next rally leg. The bullish triangle would be negated with a decline below 2415 whereas a rally from here above 2447 could lead to the new rally leg. But watch the trend line along the highs from April 26- June 2, near 2460, for a possible high.


Bullish Percent index for SPX, Daily chart

While SPX has proceeded higher since March 1, after chopping sideways, the number of participating stocks in the index has been declining. This can be seen on the bullish percent index (how many stocks are in a bullish Point & Figure configuration). The bulls need to see the downtrend line on the BP chart, currently being tested, broken in order to show better support for the rally. At the moment this is bearish divergence.


Dow Industrials, INDU, Daily chart

The Dow's rally from its May 18th low has produced a bearish rising wedge pattern, the top of which is currently near 21420. There's further upside potential to the trend line along the highs from May 2011 - December 2014 and a price projection at 21,618. The projection is where the 2nd leg of the rally from March would be 162% of the 1st leg up.

The price projection at 21,618 crosses the 2011-2014 trend line this coming Friday, June 23rd. It could be easily accomplish in 5 days but it first needs to break through the top of its rising wedge. Above 21450 would have me looking for the 21618 target but beware of the bearish rising wedge since it could get retraced very quickly.

Key Levels for INDU:
-- bullish above 21,450
-- bearish below 21,159


Advance-Decline Line for the Dow, Daily chart

The advance-decline line remains very strong for the Dow so it's firing on all 8 cylinders. But (there's always a but) the a-d line has created a bearish rising wedge for the rally from January 2016 (similar to the one for the price pattern for SPX). This reflects slowing momentum for the rally and with RSI of the a-d line in overbought territory it's a risky time to be betting on the upside.

I drew in vertical lines where the RSI got into overbought and you can see how it coincided with at least short-term tops. The top that's coming has the potential to be much more significant


Wilshire 5000 index, W5000, Weekly chart

Reflecting a larger segment of the stock market, the weekly chart of the Wilshire 5000 shows how it also has created a rising wedge pattern for its rally from January 2016. It too is in its 5th wave, which is showing bearish divergence against the 3rd wave (the March 1st high). It can continue to press higher but that seems like a risky bet from here. Pulling stops up tighter and getting ready to short/go to cash seems like the more appropriate positioning.


Advance-Decline Line for NYSE, Daily chart

I couldn't find the advance-decline line for the W5000 but the one for the NYSE is a good one to look at. This one shows a bearish rising wedge for the rally off from November 2016. NYA, at the top of the chart, is above its uptrend line for the rally so everything's still good. But like the man who jumped from the top of a 20-story building, passing the 10th, he could be heard saying, "I'm still good."


W5000 vs. New 52-week highs and Advance-Decline Line, Daily chart

Another way to look at the strength of the market is to look at new 52-week highs and a daily running of the advance-decline line, both of which are shown below. The W5000 has been climbing to new highs this year but you can see the deterioration of the number of stocks participating. This can go on for a long time but eventually there will simply be not enough stocks to push the indexes higher.


Powershares QQQ Trust, QQQ, Daily chart

Another way to look at the NDX, which has been in trouble since its June 9th high, is the QQQ. This one provides volume data and can be instructive. The first thing I see on the QQQ chart is how it dropped quickly to the bottom of its Bollinger Band and its 50-dma, both currently near 137. Volume has spiked significantly and past instances of a volume spike in a decline has marked bottoms. The combination of the volume spike and price at support suggests we could see the techs get at least a stronger bounce.

But one thing I've noticed about the volume in previous corrections is that the volume quickly tails off as a new rally gets started. This time we have elevated volume even during the consolidation following the sharp decline. There's a fight going on between sellers and buyers and the consolidation at support, with high volume, is a change of behavior from the past. It might in fact be telling us something more bearish is about to happen. A breakdown below 137 would be bearish but until that happens look for a bounce off support.


Advance-Decline Line for NDX, Daily chart

The advance-decline line for NDX formed a parabolic rise during the rally from February 2016. This was obviously a strongly bullish sign but it does raise the risk for what happens next. Parabolic rallies never end well and while the parabolic line hasn't been broken yet (it's close to being tested while price tests its parabolic line), look out below when it breaks. Needless to say, the QQQ 137 level takes on greater importance in light of this.


Summary

We have mixed performance between the indexes, which shows us money is rotating and in this case from riskier stocks to more stable stocks, and that's a bearish warning sign. Bearish divergences in many indicators tell us to be very careful about the upside from here. At the very least we're being warned to lighten up on long positions and raise some cash for better buying opportunities in the future (how far in the future is the big unknown).

While we have plenty of warning signs we don't have any strong signals that a top is already in place or that a top will form in the coming week. Respecting the trend, the place to be is long and not short. But being aggressively long is when we're coming off lows. Being cautiously long is when we're making new highs without the support of strong technical indicators. We're in the latter period so caveat emptor.

Trade safe, have a good week and good luck with your trading.

Keene H. Little, CMT

Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville


New Option Plays

Unknown Entity

by Jim Brown

Click here to email Jim Brown

Editors Note:

Most readers will not recognize this company name but they will recognize their branded products.


NEW DIRECTIONAL CALL PLAYS

JCOM - J2 Global Inc - Company Profile

j2 Global, Inc., together with its subsidiaries, engages in the provision of Internet services worldwide. It operates through two segments, Business Cloud Services and Digital Media. The Business Cloud Services segment offers cloud services to sole proprietors, small to medium-sized businesses and enterprises, and government organizations. This segment provides online fax services under the eFax, MyFax, eFax Plus, eFax Pro, eFax Secure, eFax Corporate, and eFax Developer names; on-demand voice and unified communications services under the eVoice and Onebox names; online backup and disaster recovery solutions under the KeepItSafe, LiveDrive, LiveVault, and SugarSync names; hosted email security, email encryption, and email filtering and archival services under the FuseMail name; email marketing services under the Campaigner name; and cloud-based customer relationship management solutions under the CampaignerCRM name. The Digital Media segment operates a portfolio of Web properties, including PCMag.com, IGN.com, Speedtest.net, AskMen.com, TechBargains.com, Offers.com, and Everydayhealth.com that offer technology products, gaming and lifestyle products and services, news and commentary related products, speed testing for Internet and network connections, and online deals and discounts for consumers, as well as professional networking tools, targeted emails, and white papers for IT professionals. This segment also sells display and video advertising solutions, as well as targets advertising across the Internet; sells business-to-business leads for IT vendors; promotes deals and discounts on its Web properties for consumers; and licenses the right to use PCMag's Editors' Choice logo and other copyrighted editorial content to businesses. Company description from FinViz.com.

Very few business people would not recognize some of their brands including eFax.com, PCMag.com, TechBargains.com, etc.

The reported earnings of $1.14 that rose 12% but missed estimates by 7 cents. Revenue rose 27% to $254.7 million and also missed estimates for $258.5 million. However, they raised full year guidance to $5.60-$6.00 and $1.13-$1.17 billion. Analysts were expecting $5.59 and $1.15 billion. They also announced a dividend increase to 37.5 cents. Digital media revenues rose 81.5% to $113.1 million.

Estimates earnings August 7th.

Shares declined from $91.50 to $80.50 on the May 9th earnings and have recovered to $87.50. They are about to break out to a six week high. They have been relatively stable in the recent market weakness.

Buy Sept $90 call, currently $3.60, initial stop loss $84.50.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Tech Stocks Fading

by Jim Brown

Click here to email Jim Brown

Editors Note:

The rising Dow cannot lift the entire market by itself. The Nasdaq indexes are weakening despite the Dow. The big cap techs have yet to mount a credible rebound and the choppy trading suggests there are plenty of sellers still in the market.

If the Nasdaq Composite slips under round number support at 6,100 it could turn ugly very quickly. For the market rally to survive the big cap techs need to post a string of consecutive gains. Those gains do not have to be big but they do have to be consecutive to bolster sentiment.



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


BABA - Alibaba
The long call position remains unopened until $139.50. (REVISED)

SHOP - Shopify
The long call position remains unopened until $89.25. (REVISED)

COST - Costco
The long call position was stopped by Whole Foods news. (RELOAD)



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. Nice $1.32 gain in a mixed market. New 6-week high close.

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 July 17th (revised).

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 decline on what could be called a sell the news event for the W3 show but with the Nasdaq weak this was probably just sector weakness.

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:

The Paris air show is this coming week and Boeign will launch its 737-MAX 10 and is expected to report total orders in the hundreds. China's CALC leasing company ordered 50 planes last week but there is no description of what they ordered. That will be released next Thursday. Shares closed at a new high.

Original Trade Description: May 25th.

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

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

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

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

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

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

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

Earnings July 26th.

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

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

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

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

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:

Shares declined slightly after the Amazon/Whole Foods deal was announced but it should be temporary. Alibaba is already running retail grocery stores in China. Two-thirds of the footage is devoted to retail shoppers and the other third to filling online orders. The stores currently fill more than 15,000 orders per day each. Amazon has been late to this mode of operation.

I am lowering the entry point to $139.50

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 $139.50

Buy Aug $145 call, currently $4.55, initial stop loss $135.50.
Sell short Aug $155 call, currently $1.89, initial stop loss $135.50.
Net debit $2.65. Prices will rise before our entry is triggered.


COST - Costco - Company Profile

Comments:

Costco took a massive hit with a $13 drop on the news Amazon was buying Whole Foods. Goldman took Costco off their conviction buy list and lowered the price target from $197 to $176. Shares crashed to support at $165 at the open to stop us out.

I believe this is just a knee jerk reaction to the news. It will be a long time before Amazon completes the acquisition. Getting regulatory approval could be tough. Amazon said they expect to close before the end of 2017 but there is already a call for a Senate inquiry into the transaction. I would expect early 2018. Even after the acquisition it would probably take 6-12 months before any changes could impact Costco.

I am recommending we reload the position with a trade at $170.85 and use the July $175 strike.

With a COST trade at $170.85, buy August $175 call.

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:

Closed 6/16/17: Long July $183 Call @ $2.60, exit .26, -2.34 loss.

RELOAD: With a COST trade at $170.85, buy August $175 call.


FB - Facebook - Company Profile

Comments:

Facebook said it was using artificial intelligence (AI) to search out terrorist accounts and propaganda in its pages. The company has already deleted hundreds of thousands of accounts and it making it harder for users to reopen new accounts under different names. Fortunately, Facebook has years of history from those deleted accounts and has developed algorithms to compare new account activity against those old posts and automatically discover and delete new terrorist accounts.

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:

No specific news. LB is not moving in the right direction and I am recommending we close the position. The retail sector is in decline again after the weak retail sales numbers for May.

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:

Lots of speculation on Netflix after Apple hired two top producers to jumpstart their own original content push. Unfortunately, Netflix is the Amazon of the streaming space. They are growing faster than all the other streaming services combined. Shares have not yet begun a material rebound but support is still holding.

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:

No specific news but shares closed at another new high.

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:

SHOP has tested resistance at $87.50 on 3 of the last 4 days. I believe we are about to see a breakout over $90, market permitting. I lowered the entry point slightly.

RELOAD: With a SHOP trade at $89.25, 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 $89.25:

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:

No specific news. Shares are stuck at $94. Many analysts actually consider Visa a tech stock rather than a financial stock. They have been weak with the Nasdaq.

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:

The battle for the Toshiba memory business is heating up. WDC filed for an injunction preventing Toshiba from selling the business until the arbitration case is settled and that could take 18-24 months. This is a delaying tactic by WDC since Toshiba need the cash right now to avoid being delisted. To complicate matters Bain Capital reportedly submitted a $19 billion bid that is higher than the $18.2 billion WDC bid. Bain also has the blessings of the Japanese government and a deal would not be hit with regulatory hurdles. If somebody else wins the business, it could be short term negative for WDC shares. Because of the potential for WDC to lose this in the short term, I am recommending we close this position.

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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