Option Investor
Newsletter

Daily Newsletter, Saturday, 7/1/2017

Table of Contents

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

Market Wrap

Storm Clouds Forming

by Jim Brown

Click here to email Jim Brown

It may be a sunny holiday this weekend but thunderstorm clouds are forming over the markets.

Weekly Statistics

Friday Statistics

Last week definitely did not turn out as I and other analysts expected. The end of quarter window dressing turned into a strip job instead as portfolio managers took profits in prior high flyers. The charts for the major indexes have turned bearish. Janet Yellen's comments earlier in the week that stocks were "rich" compared to normal valuations may have been the spark that triggered some selling. This is not quite the equivalent of the "irrational exuberance" comment from Greenspan that tanked the market but whenever a Fed head talks about an overvalued market, there is a reaction. You may remember her prior comments about small caps being overvalued.

In her congressional testimony in July 2014, she said valuations on small cap tech companies appear "substantially stretched" and the Russell 2000 fell 30 points in two days with the biotech index falling -114 points. The biotech index bottomed at 2,650 after her remarks and it is 3,859 today. The Russell 2000 was 1,130 and it is 1,415 today. Despite her comments rocking the market in 2014, they recovered to move significantly higher.

The bigger problem is that the Fed head thinks it is necessary to talk down the stock market. That thinking can bleed over into market sentiment and depress the investment outlook. Yellen will get another chance to take a shot at the market on Tuesday July 12th when she gives congressional testimony on the U.S. economy.

Whether it was Yellen taking a shot at valuations or the voices of multiple high profile analysts and investors over the last couple weeks, the damage was done. The Nasdaq has tested support at 6,100 three times and it closed at a five-week low on Friday.


The economic reports on Friday were neutral for the market with the exception of the PCE Deflator. That is the Fed's preferred indicator of inflation. The PCE declined -0.1% in May from a +0.2% rise in April. If you total the last four months you get zero inflation because each minor rise was erased by a similar decline. The Fed wants to see 2% inflation in order to support their rate hike commentary. With inflation either flat or fading that means the Fed "should" not move as fast on their rate hikes.

Food prices rose +0.1% in June but energy goods and services declined 3.0%. Durable goods prices declined -0.2%, non-durable goods -0.8% and gasoline and petroleum prices -5.9%. Housing rose +0.3% and healthcare +0.1%.

On a trailing 12-month basis, the PCE is up 1.4% and the core PCE is also up 1.4%. Those numbers compare to the peak in February at 2.1% and 1.8% respectively. The Fed will continue to say the low inflation is related to transitory issues. Previously they referenced the Phillips Curve and the relationship between high employment and low inflation. Strangely, with inflation fading, the Fed said it was considering raising its inflation target above 2% even though they have not been able to reach that target since the financial crisis.

Personal income rose 0.4% in May and the biggest gain in three months. However, the gain came from intangibles for most people because income from wages and salaries only rose +0.1%. The rest was attributed to "asset growth" and rental income. Exactly how many blue-collar workers are receiving stock appreciation, dividends and rental income?

Personal spending rose only 0.1% for May after a 0.2% hike in April and a whopping +0.6% spike in March. Spending rose 1.3% on durable goods like TVs, 0.2% on nondurable goods, 0.7% on apparel and 1.2% on gasoline. Spending declined -0.8% on motor vehicles and parts, household furnishings -0.1% and recreational goods and vehicles -0.1%. The slowing in spending does not match the rise in personal income. Since Americans always spend more than they make, these numbers are questionable.

The consumer sentiment for June declined from 97.1 to 95.1 and the lowest level since November. The biggest hit came from a drop in expectations from 87.7 to 83.9 and the lowest level since October. The present conditions rose from 111.7 to 112.5. Only 32% of business respondents expect economic conditions to improve over the rest of 2017. That is down from 40% in May.


The calendar for next week is busy despite the holiday. The FOMC minutes will be released on Wednesday afternoon and as always analysts will be looking for clues about future Fed moves. This is the week for the jobs numbers and the ADP Employment has been pushed out a day until Thursday. The expectations are for a gain of 178,000 jobs compared to 253,000 in May. The ADP report has been surprising to the upside recently.

The Nonfarm Payrolls are Friday and expected to show a gain of 180,000 jobs compared to the 138,000 in May. The nonfarm report has been surprising to the downside recently. I tend to believe the ADP numbers because they are taken from real time employer additions to the ADP processing system rather than phone interviews with random people in the nonfarm report.

The auto sales data on Monday could be another piece of the puzzle for economic direction. There is a constant rumor of peaking auto sales and another decline could boost recession worries.

Yellen's testimony to congress on the following Tuesday will be important because it is really a testimony on the state of the economy followed by a couple hours of questions.

The Q2 earnings cycle begins the following week and this week is severely lacking of any reports. The only material earnings are YUM China, Herman Miller and PriceSmart on Wednesday after the close.



ATTENTION: In order to let our staff enjoy the holiday weekend, there will be no Option Investor or Premier Investor newsletter on Monday July 3rd. The market is only open a half day and volume should only be a trickle. We will resume normal publication on Wednesday July 5th. Thank you in advance for your understanding.


The final Q1 GDP report on Thursday rose unexpectedly to 1.42% growth from 1.15% in the earlier revision. The next official GDP will be on July 28th and the first reading for Q2. The Atlanta Fed real time GDPNow forecast for Q2 is now predicting 2.7% growth, down from 4.3% in the first forecast for Q2. I am expecting it to level out around 2.5% over the next month. In Q2-2016 we saw 1.4% growth followed by 3.5% in Q3. If we can avoid breaking under 2% for Q2 that would give us a higher base for Q3 this year.



Mario Draghi said deflation was dead and inflation rising and the ECB could now adjust its policies. Interest rates were immediately adjusted by investors. The ten-year was trading at 2.12% on Tuesday and the rate spiked to 2.3% in the selloff. The dollar crashed to a nine-month low on those same comments and the strength in the European economies.



Last weekend I said I doubted if Nike (NKE) earnings would be enough to move the Dow because they would have to post a 10% gain to really contribute. Well, they reported earnings and a deal with Amazon and shares rallied 11% or $5.83 to add 40 points to the Dow.

The company reported earnings of 60 cents compared to estimates for 50 cents. Revenue of $8.7 billion also beat estimates for $8.6 billion. Much of their earnings beat was due to an unexpectedly low tax rate but nobody seemed to care. However, sales in Western Europe rose 12% to $1.56 billion and sales in China rose 16% to $1.09 billion.

As expected, they announced a pilot program with Amazon to sell a "limited" assortment of shoes and apparel on Amazon. Nike already has a robust online webstore and they have avoided selling on Amazon to avoid competition with their distributors. They also said they had deals in place with Alibaba and European e-commerce site Zalando.


Micron Technology (MU) reported earnings of $1.62 compared to estimates for $1.51. Revenue rose 92% to $5.57 billion. CEO Sanjay Mehrotra said, "Our results reflect solid execution of our cost-reduction plans and ongoing favorable industry supply-and-demand dynamics." They guided for the current quarter for earnings $1.80 on revenue of $5.9 billion at the midpoint. Analysts were expecting $1.57 and $5.62 billion. The company ended the quarter with $4.9 billion in cash.

Micron said DRAM prices rose 14% during the quarter. That is after similar gains in the prior two quarters as well. Memory is in tight supply and prices are rising sharply. Hewlett Packard warned that margins would shrink because of rising memory prices.

After a post earnings spike in afterhours on Thursday the stock fell 5% on Friday. With revenue up 92% and a beat on earnings and guidance you would have expected a blowout gain. However, Micron shares were up 200% since May 2016 so there was a lot of expectation already built in. This is definitely a buy the dip story.


American Outdoor Brands (AOBC), formerly Smith & Wesson, reported earnings of 57 cents compared to estimates for 38 cents. Revenue of $229.2 million beat estimates for $209.5 million. They guided for the current quarter for earnings of 7-12 cents and revenue of $140-$150 million. They guided for the full year for $1.16-$1.36 compared to the $2.25 earned in 2016. Shares were hammered for a 7.5% decline.

The problem for AOBC and Ruger (RGR) and Vista Outdoor (VSTA) is Trump. The current president is very pro gun while President Obama was very antigun. He tried to ban guns and ammo in various ways dozens of times in his 8 years as president. He was the best salesman the firearms sector could have wanted. President Trump is no danger to firearms owners so there is no rush to buy additional guns. Firearms owners have relaxed after 8 years of stress. Federal Premium, a maker of handgun, shotgun and rifle ammo, has been laying off workers since January. They have cut 186 workers in the Minnesota plant to reduce the workforce to 1,246. They said inventory levels have been high since the election and they are waiting on levels to be reduced before resuming full production.

Vista reported a 5% decline in ammo sales this quarter and 11.5% in the prior quarter. As an example, 9mm pistol ammo by various manufacturers can now be bought anywhere online for $160 per case of 20 boxes, compared to $240-$260 a year ago if you could find it. That is a perfect example of supply and demand.


Hain Celestial (HAIN) said activist hedge fund Engaged Capital had accumulated a 9.9% stake and is pushing the company to sell itself. The fund has nominated 7 candidates for the 8 person board. Engaged just won a similar battle with Rent a Center (RCII). Since Hain is still run by its founder, this would be a tough fight. They have already announced a 20% cut in stock keeping units (SKUs) and unveiled the biggest cost savings program of any U.S. food company. Shares spiked 8.5% on the news.


Have you gotten any sweet heart deals lately? If not then your name is probably not Warren Buffett. Back in 2011 when Bank of America stock was trading at just over $5, Buffett bought $5 billion in preferred stock and warrants that allowed him to convert that to common stock if BAC did well in the future. The price of the warrants is $7.14. When BAC announced the dividend increase on Thursday that triggered the option for Buffett to exercise the warrants. He will trade his $5 billion in preferred shares and warrants for 700 million common shares at $7.14 each. Shares are trading for just over $24 today. That gives Buffett an instant paper profit of $12 billion and he will begin collecting $336 million a year in dividends. Buffett will become the banks largest shareholder with a 7% stake.

Buffett also owns 17% of American Express, 9.6% of Wells Fargo, 9.4% of Coke, 26% of Kraft Heinz, 9.3% of United Airlines, 7.5% of Delta and large stakes in 86 other U.S. corporations. It is good to be Buffett.

Bank of America (BAC) said it would raise its quarterly dividend by 60% to 12 cents beginning in Q3 and repurchase $12 billion in stock over the next 12 months. Since BAC has 9.95 billion outstanding shares, the combination of dividend increase and share repurchases will return almost $17 billion to shareholders over the next four quarters.


Tesla's CEO Elon Musk is at it again. He teased on Friday that Tesla would have big news on Sunday. Musk was being heckled by people on Twitter to confirm a production date on the Model 3. Production is supposed to start in July. Musk tweeted back, "News on Sunday" without saying what the news would be. In theory, Tesla is supposed to begin deliveries in July and quickly ramp up production to 5,000 units a month in 2017 and 10,000 a week in 2018. Tesla has more than 400,000 deposits on preorders for the car. About all we know about the Model 3 is that it will start about $35,000 and travel at least 215 miles on a charge. There will be very few options other than battery size. The Model 3 online configurator has not yet been released. Tesla is also expected to give delivery numbers for the Model S and X next week. Total production is expected to be more than 50,000 units for the first six months and put them on track for well over 100,000 units in 2017. They produced about 76,000 cars in 2016. Musk has said the gigafactory is targeting enough batteries for 500,000 vehicles in 2018.

The next six months will be huge for Tesla because the solar shingles will begin delivering in late July and there is a huge backlog for those as well. The battery wall business will also kick into high gear as the gigafactory shifts into high production of those battery units.

Tesla shares have doubled in price since December.


E*Trade (ETFC) may be for sale. The board has given an ultimatum to its CEO. Clearly define the company's future by the end of 2018 or face a possible sale. The board wants the CEO, Karl Roessner, to revitalize E*Trade's core brokerage business and trigger a revival that has eluded the six prior CEOs that failed in the same task. E*Trade is 35 years old and just embarked on a new advertising campaign to appeal to new and old investors alike. E*Trade charged $6.95 commission per trade and Charles Schwab and Fidelity charge $4.95. Interactive Broker's charges $5 or less per 1000 shares. ($0.005 per share with a $1 minimum) E*Trade is restructuring their trading platform for about the 10th time over the last 20 years in an effort to remove the clutter and speed up the process. Time will tell if that will be enough to save Roessner's job. Some analysts think the letter from the board was an actual advertisement to anyone who might be interested in acquiring the company.


Crude prices spiked more than $3 last week in a most unlikely set of circumstances. Crude inventories rose 100,000 barrels in the EIA report on Wednesday and gasoline and distillate inventories barely declined. The lack of demand is very annoying for energy investors. Refinery utilization dropped from 94.0% to 92.5% for the week ahead of the July 4th driving weekend. U.S. production declined 100,000 bpd to 9.25 million bpd. There was an easy answer to this unlikely series of events. Tropical storm Cindy cut production in the Gulf and put all the facilities on storm watch and reduced run rates. Add that to field maintenance in Alaska and you have your production decline.

Since most energy traders do not really understand the mechanics behind the process, they saw the drop in production and thought that was a sign to go long. On Friday, Baker Hughes said active oil rigs actually declined by 2 for the week and ended the record 23 week streak of gains. That caused another spurt of knee jerk buying and crude was up $1.40 on Friday.

Nothing has materially changed over the last week except for the decline in rigs. However, we are entering a holiday period and producers tend not to add rigs ahead of a holiday because workers are gone for the holiday. While the streak ended, the 2 rig decline is not material and a new streak should begin over the next two weeks.





 

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Markets

The markets have had a good year already. The Dow has risen 8.0%, Nasdaq 14.1% and S&P-500 8.2%. The Russell 2000 is up 4.3% but it was up 21% right after the election, so the sideways motion in 2017 has been just holding those gains. Typically, when the year starts strong, especially for tech stocks, it finishes strong. That does not mean there will not be a summer correction first. August and September are the two worst months of the year for the markets.

The equity markets have suddenly caught a bad case of the volatility virus. After four weeks of relatively calm market gains to close at a new high on June 19th, the indexes have found themselves in a stormy sea. Triple digit advances and declines have cleared stop losses in both directions and volume has been very high. Thursday's volume was over 7.86 billion shares and well over the 5.0 billion expected. Friday saw 6.5 billion and this was a holiday Friday before a long weekend. This was amazing volume in what should have been a dull market.

The big cap tech stocks have lost their momentum and have fallen out of favor with investors. Whether this is related to the Yellen comments or not, is unknown. It may be just the end of the run for the FAANG stocks or just a much needed bout of profit taking. Either way it has had a dramatic impact on the markets. The Nasdaq was down -100 points again on Thursday.



The Nasdaq Composite tacked on another triple digit decline over four days of -216 points from high to low. These are getting to be really annoying. The index closed at a five-week low although there have been multiple intraday dips below our closing level. The support at 6,100 has now become critical and next week could determine our market direction for July. The Nasdaq chart is bearish and a close below 6,100 would be a very bearish signal.


The S&P is right on the edge of disaster if support at 2,420 fails. The intraday dip on Thursday cleared the sell stops but the weak rebound managed to close over support on Friday. That is a critical level. The rally remains intact as long as we rebound from here. A break below 2,420 could move significantly lower.


The Dow traded above and below initial support at 21,400 multiple times last week only to close at 21,439 on Friday. That initial support has failed. The Dow is struggling to regain its highs and there are only a few negative components. There is still hope for a recovery.

If the Dow continues lower the critical levels are 21,125 followed by 20,900. The initial level was the breakout from the prior high on June 1st. The second level was support for most of May.



The Russell outperformed for the week. Support at 1,400 held and the index almost made a new high on Wednesday. This gives me a little hope that the market may not decline further next week. The Russell is being held up by the financials, which are 17% of the index weighting. Now that the dividend and buyback news is past tense, it will be interesting to see if that sector can maintain any forward momentum.


In theory, the end of quarter portfolio restructuring is over and next week will see inflows of new cash. Unfortunately, theory and historical trends did not work too well last week. We could blast off on Monday and return to test the highs but I am not counting on it. Sentiment has been damaged, money lost and investors will be more cautious before jumping back into damaged stocks. We need to see how the market performs on Monday and Wednesday before making any new assumptions.

One factor I have not discussed is the failure of the healthcare vote in the Senate. While they may come back from the holiday and pass something before the August recess, I am not holding my breath. Even if that occurs, the potential for getting a bill through the conference committee that can pass both the House and Senate is nearly impossible. Without healthcare reform, there is no tax reform and that is what is weighing on the market.


Random Thoughts


Everyone is jumping back on the fence with both bullish and bearish investors moving to neutral. Just over 70% of investors still do not believe the market is going higher. On a contrarian basis that is good because those unbelievers will be chasing prices if we do move to new highs.



Bank of America said clients were net sellers of individual stocks for the third consecutive week. Institutional clients were also net sellers over the last two weeks. Hedge funds were net buyers over the last two weeks. Clients bought mid caps for the third consecutive week and sold both large and small caps. Pension funds were net buyers of US equities for the fourth consecutive week.

The bank said cumulative flows were heavily weighted into cyclical and defensive sectors and bond proxy sectors. Funds continued to flow into ETFs with $247 billion inflows year to date.

The bank said the flows into defensive sectors suggested the market would be lower for longer. Michael Hartnett penned a piece called "Bubble, bubble, oil and trouble" warning of structural deflation with the Fed tightening into declining inflation. He warned the Fed could be forced to ease again in 2018. Source -- Source

Chart is for the prior week:


Calling all scrabble players. The market is in need of a new acronym for the big cap tech stocks. First it was FANG for Facebook, Amazon, Netflix and Google. Then FAANG appeared with the addition of Apple. Recently FAAMG has been making the rounds with Microsoft replacing Netflix. Several traders have been referencing FANG MAN with Netflix, Nvidia and Microsoft. I am issuing a challenge to our scrabble playing readers. See if you can come up with a one-word acronym for as many of the following stocks as possible. The first 5 would be required but the rest are optional. You can use an A or G for Alphabet. If I missed a fast moving tech big cap stock you can use it as well.

Required: Facebook, Apple, Amazon, Alphabet, Microsoft.

Optional: Netflix, Nvidia, Adobe, Tesla, Priceline

Send me your answers and you could get credit for a new buzzword in the market.


The Iranian city of Ahvaz with a population of 1.1 million tied the hottest reliably recorded temperature on Earth at 129.2 degrees on Thursday. That has been recorded twice before, once in Mitribah Kuwait on July 21st, 2016 and Death Valley California on June 30th, 2013. It is hard to have a reliable recording of temperatures that hot because most thermometers do not go that high. In Ahvaz the humidity was 70% making the heat index over 140 degrees. There was a higher temperature recorded in Death Valley on July 1st, 1913 but most historians believe the measurement was technically inaccurate.




 

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

 

"Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws."

Plato



Index Wrap

Disappointing Week

by Jim Brown

Click here to email Jim Brown
The last week of the quarter did not follow the historic trend and the outlook is borderline bearish.

Last week I discussed what happens when your outlook does correspond with the charts. The historical trend did not appear and the charts turned out to be right. This week there is a new decision. The historical trend is for new retirement money to hit the market on the first three days of the quarter. While fund managers do not have to put it to work instantly, most of them do. I would not expect it on Monday but Wednesday and Thursday have a chance for a positive bias for that reason.

However, the charts have all turned negative and all the indicators have triggered sell signals. Since August and September are normally the worst two months of the year for the markets, we could be setting up for an early decline.

The legislative agenda in Washington is falling apart and tax reform is not likely to happen until 2018. That means holding gains in a declining market in hopes of a lower tax rate is no longer an option. Investors will see those gains shrinking and they will be heading for the exits if the markets continue to decline.

The S&P broke support at 2,420 by 15 points intraday on Thursday. That is damaging because it clears out many sell stops and makes that support weaker even though there was a rebound to close back above that level. If we move lower next week, the 2,400 level is not likely to hold and we could be looking at a test of 2,350.


The Nasdaq Composite closed at a five-week low and the indicators are dramatically negative. The Nasdaq is in danger of moving below critical support at 6,100 and it could be a long drop. There is round number support at 6,000 and the low from May but sentiment may be too badly damaged to honor that level. There is very strong support at 5,800 and that would be the target on any material decline.


The Dow is the least bearish but the MACD has triggered a sell signal. The Dow remains above decent support around 21,125 and it would take a major change in sentiment for the Dow to retest strong support back in the 20,500 range. The Dow benefits from being only a 30 stock index. The rebound in oil and financial stocks plus a random daily winner can keep the index afloat. That winner on Friday was Nike, which added 40 Dow points. Unfortunately, if the Nasdaq falls into crash mode, the Dow will follow.


I have shown this chart many times with the relationship between the Semiconductor Index and the Nasdaq. The SOX normally leads the Nasdaq when the big moves are made. The semi stocks collapsed last week with Nvidia and Micron falling sharply and leading the sector lower. This is not a good sign for the Nasdaq.


The FANG stocks are in decline and Netflix is leading the charge. The joint movement from late May has fallen apart and investors are bailing. Bank of America said investors have been net sellers of techs for the last three weeks.


The market is not yet in decline mode. The cumulative advance/decline line on the S&P has flattened but it has not rolled over. This suggests there are still buyers in the market but they are not buying the prior winners. They are buying defensive stocks and looking at the broader market rather than the narrow list of 20 stocks that led the market higher. The lack of a decline here is our hope for a bullish rebound next week.


The market surprised everyone last week with very heavy volume and dumping of prior winners. That could be a symptom of sector rotation and that would be positive. Monday is likely to see very light volume as traders take a four day holiday weekend. New retirement funds should hit on Wednesday/Thursday so look for the real market direction to appear by next weekend.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Holiday Event Risk

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market is only open a half day on Monday and volume should be half of normal. Direction will be a coin toss. The charts have turned bearish but Monday starts a new month and quarter and there could be new retirement funds coming into the market. However, it is not likely to happen on Monday. Most funds will be closed on Monday with only a skeleton crew manning the phones and computers. Wednesday will be the day the market picks a direction. I am not recommending any new positions for Monday. There is no reason to add new plays ahead of the weekend/holiday event risk. .


ATTENTION: In order to let our staff enjoy the holiday weekend, there will be no Option Investor or Premier Investor newsletter on Monday July 3rd. The market is only open a half day and volume should only be a trickle. We will resume normal publication on Wednesday July 5th. Thank you in advance for your understanding.




NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Excitement Fading

by Jim Brown

Click here to email Jim Brown

Editors Note:

It is that time of night when the partygoers begin to wind down and the crowd starts thinning. The excitement is fading from the Nasdaq and Friday was a two-week closing low. The end of quarter window dressing turned out to be undressing instead. The prior winners are declining and the Nasdaq chart has taken on an ominous outlook.

The Dow was up 140 points intraday and gave back 77 points to close with a gain of 63. While 63 is decent, it is still a bearish signal that the sellers were still in the market even on a holiday weekend Friday.

Next week is going to be critical to market direction. If there is not a lasting rebound on Wed/Thr, we could be in for a long boring summer.



Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


No Changes



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BULLISH Play Updates

AAPL - Apple Inc - Company Profile

Comments:

No specific news. Shares continue to honor critical support at $142.

Original Trade Description: June 28th.

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

This play is not going to take a lot of explanation. Shares rallied to $156 in May and then stalled at that level as various rumors continued to circulate over a potential delay in shipping the iPhone 8. Analysts routinely debated the various pros and cons of the Apple outlook. Shares fell to $144 and they have been trading at $145 for the last three weeks. On Tuesday's decline the stop lost $2, which was immediately recovered on Wednesday.

Apple is expected to report earnings on August 1st. The stocks always ramps up into earnings. Since Apple is expected to announce multiple iPhone models in September, a shipment delay on the big iPhone 8 will not be a disaster. We will be out of the position before the August earnings so that will not impact us either way.

The plan is to capture the ramp into the earnings and then exit. Having Apple dormant at $145 for the last three weeks shows there is plenty of support under that level and a rebound could start at any time. Fortunately, because of the dormancy, the options premiums have shrunk.

Apple is a sleeping giant. When it awakes, there could be plenty of price chasing.

Buy August $150 call, currently $3.05, initial stop loss $141.85.


BABA - Alibaba - Company Profile

Comments:

No specific news but Alibaba managed to close positive in a diving tech market.

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.

Update 6/20/17: Alibaba is hosting a forum for 3,000 entrepreneurs in Detroit to explain how easy it is for them to begin selling products on Alibaba's websites. CEO Jack Ma said in another interview he expects to employ 1 million workers in the USA.

Update 6/27/17: JP Morgan initiated coverage with an overweight rating and $190 price target. Barclays said it valued Alibaba in a sum of the parts method at $200 but their price target for the parent is $175 with an overweight rating.

Update 6/29/17: Mott Capital said Alibaba could be worth $210 on a fundamental basis. A "source" in China said Alibaba will launch a device similar to Amazon's Echo but Chinese speaking, next week. That should give the stock a decent pop.

Position 6/19/17 with a BABA trade at $139.50

Long Aug $145 call @ $5.95, see portfolio graphic for stop loss.
Short Aug $155 call @ $2.92, see portfolio graphic for stop loss.
Net debit $3.03.


PYPL - PayPal - Company Profile

Comments:

No specific news. Minor gain in a weak tech market.

Original Trade Description: June 21st.

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. Company description from FinViz.com.

PayPal started out as a payment system for Ebay. Since then they have moved into dozens of areas including credit cards, peer to peer payments. Instead of being locked into one business model, they are rapidly expanding to multiple business models. Recently they partnered with MasterCard and Visa to have their digital payments processed on their systems. The company is expanding the scope of its Venmo payment platform, which handled $6.8 billion in Q1, up 114%. This peer to peer app will now allow you to pay for goods at any merchant that accepts the app, just like Apple pay.

In Q1 PayPal revenue rose 17% to $2.975 million and earnings rose 5%. Total accounts rose 23% to 203 million. As a comparison, Mastercard's revenue was less at $2.7 billion. That is a shocker to most people.

With their Q1 earnings, PayPal committed to buy back $5 billion in stock.

Expected earnings July 26th.

Shares dipped with the Nasdaq tech crash but are recovering. Their recent high was $55 and shares closed at $53.50 today. Options are inexpensive.

Position 6/22/17:

Long August $55 call @ $1.58, see portfolio graphic for stop loss.


RH - RH Inc - Company Profile

Comments:

No specific news. Excellent relative strength. Only a fractional decline.

Original Trade Description: June 26th.

RH, together with its subsidiaries, operates as a retailer in the home furnishings market. The company offers products in various categories, including furniture, lighting, textiles, bathware, decor, outdoor and garden, tableware, and child and teen furnishings. It provides its products through its retail galleries and Source Books, as well as online through rh.com, rhmodern.com, restorationhardware.com, rhbabyandchild.com, rhteen.com, and waterworks.com Websites. As of January 28, 2017, the company operated 85 retail galleries, including 50 legacy galleries, 6 larger format design galleries, 8 next generation design galleries, 1 RH modern gallery, and 5 RH baby and child galleries in the United States and Canada; 15 Waterworks showrooms in the United States and the United Kingdom; and 28 outlet stores. The company was formerly known as Restoration Hardware Holdings, Inc. and changed its name to RH in January 2017. Company description from FinViz.com

RH reported earnings of 5 cents that beat estimates for 4 cents. Revenue of $562.1 million beat estimates for $560.4 million. However, they guided for Q2 earnings of 38-43 cents and analysts were expecting 53-75 cents. That is not a misprint.

The company said it was ditching its prior merchandising model and switching to a membership model in order to make the company Amazon proof and enhance the customer experience. They are moving away from the highly promotional retail experience with constant sales and discounts and moving to a membership model where the focus will be on the customer experience. "Members" will pay $100 a year for the ability to shop in a high quality store where they will find only high quality merchandise.

The Costco CEO once told Jeff Bezos at an event that once people buy a membership they no longer price shop. Bezos went on to create Amazon Prime where customers pay $99 a year for a membership and the rest is history. RH is trying to duplicate that experience.

Shares crashed 26% to $42 on the guidance but the rebound has been amazing. Apparently, investors like the concept and the idea of a "Costco" model but in high quality products.

Earnings August 31st.

Shares closed at a 52-week high on Monday as shorts are being forced to cover. There are a lot of shorts! The surge over the May highs should be a trigger for an entirely new round of short covering.

Options are expensive because of the rapid gain since they changed the retail model. I am using September to retain that earnings expectation premium. We can buy time but we do not have to use it.

Position 6/27/17:

Long Sep $65 call @ $5.20, see portfolio graphic for stop loss.
Short Sep $75 call @ $1.26, see portfolio graphic for stop loss.
Net debit $3.94.



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