Option Investor
Newsletter

Daily Newsletter, Thursday, 7/6/2017

Table of Contents

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

Market Wrap

Tech Driven Selling, Again

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Rotation persists as earnings season draws near. Today's round was led by Tesla as fears of bubble drive investors out of the stock. Adding to today's malaise was yesterday's FOMC minutes which revealed an FOMC as divided on interest rates as they've ever been. Earnings season begins next Friday with releases from Wells Fargo, Citigroup and JPMorgan, expect rotation to continue until then. Action today was light if bearish and did little to alter the near-term picture.

Asian indices were mostly flat if tilted to the downside following yesterday's FOMC minutes. Losses were led by the Nikkei's -0.47%. European indices were more firmly lower, closing with losses in the range of -0.5% as the G20 meeting gets underway. Speeches and comments from Trump concerning Russia and North Korea added to traders unease.

Market Statistics

Futures were down all morning but losses were limited to roughly -0.30%. The mornings economic data did little to inspire bullishness and left the indices drifting lower into the open. The SPX opened with a loss of -8 points and quickly extended that to -20 or -0.75%. Bottom was hit just after 10AM causing a fairly sharp bounce. The bounce cut losses in half, rising to meet resistance just below the opening level. Resistance drove the index back to the morning low just after 3PM where it languished for only a few minutes before extending the day's losses to -23 points.

Economic Calendar

The Economy

The Challenger Gray & Christmas report on planned lay off's fell -6% from the previous month to hit a 2017 low. The number of planned or announced lay off's totaled 31,105, -19% from this same time last year. On a year to date basis lay offs are running -28% below last year's level and are down -20% from the first quarter to the second. The hiring component shows the number of planned hirings at 40,095, down -48% from last month but up 190% YOY. This month's addition of jobs brings the YTD total to +487% over last year.


The ADP report on job creation says there were 158,000 new jobs created in June. This is below expectation and down from the previous month. Job creation was led by medium sized businesses and 100% services related. There was an increase in manufacturing jobs but it was offset by declines in natural resources and construction.


Initial claims for unemployment rose 4,000 to hit 248,000, last week's figure was not revised. The four week moving average of claims gained 750. On a not adjusted basis claims rose 4.5% versus an expectation of 3.8% and are down -6.3% YOY. Claims have been drifting higher over the past few weeks, in line with seasonal expectations, but remain consistent with long term labor market trends.


Continuing claims rose by 11,000 to reach 1.956 million, last week's figure was revised lower by -3,000. The four week moving average rose 6,750 to hit 1.944 million. Both of these figures have also been drifting higher in recent week's but not alarmingly so. Both remain consistent with ongoing labor market health and tightening conditions.

The total number of Americans receiving unemployment benefits gained 15,944 to hit 1.844 million. This is in line with seasonal expectations and consistent with long term trends, down – 9.9% from this time last year. We can expect to see the total number of claims continue to rise in the near term, topping out over the next couple weeks, and then resume its downward trajectory into the end of the summer and back to school/holiday shopping seasons.


The ISM Services Index came in at 57.4, above expectations and up 0.5% from the previous month. All components showed growth this month although the employment index declined. The employment index fell -2 points to 55.8 but remains strong relative to trend.


The Dollar Index

The Dollar Index fell on today's less than robust jobs creation numbers and FOMC uncertainty. The index shed a half percent to drop below the $96 level and looks like it could go lower. The indicators are both bearish and pointing lower, suggestive of lower prices, with a near term target of $95.50 and possibly move down to $95 and $94 short to long term. If the FOMC outlook for rate hikes remains weak or weakens while that of other central banks firms the dollar index is likely to continue moving lower.


The Gold Index

Gold prices held steady in today's trade despite mixed FOMC outlook and a weakening dollar. Spot prices hovered between $1,220 and $1,225 with little sign of breaking to one side or the other. Gold is not sitting on a support target waiting on tomorrow's NFP. A break below support could take it to $1,200 in the near term with a chance of breaking through to move lower. A bounce would confirm support but face resistance at $1,235.

The Gold Miners ETF GDX fell a little more than-0.5% and appears to be confirming resistance. Today's move lower begins at the $21.75 support/resistance line and is confirmed by the indicators. Both MACD and stochastic are ticking lower following bearish crossovers and consistent with lower prices. The caveat is that indications are a bit weak and remain consistent with range bound trading. Firm support should be in the range of $21, a break below that would be bearish with a target near $20.


The Oil Index

Oil prices tried to rally today but were not able to hold the gains. Surprisingly law drawdowns of crude and gasoline sparked a move of more than 3% but profit takers were ready to step in. WTI closed with a gain of only 0.33% as longer-term supply/demand reality capped gains. Support is now $45, a break back below there could easily send oil prices back to test the recent low.

The Oil Index fell a full percent and looks like it will continue to fall in the near-term. Today's candle is long, red and extends a fall from resistance begun yesterday. Resistance is the short-term moving average and previous support at the 1,120 level. The indicators are generally in line with the move but have not yet confirmed. Downside target is the current low near 1,080 and then 1,050 should that break down. The 1,050 level is the bottom of last year's long-term trading range and a likely target for support.


In The News, Story Stocks and Earnings

Tesla was the dog of the market today, falling another -5.5% as bubble fearing investors flee the market. The stock is now trading near $308.00 and entering bear market territory. Now down a little more than -20% from the peak set just a few week's ago Tesla is in danger of further downside. Although Tesla share prices are inflated with a glamour premium the move is likely overblown. This week's news was not overly encouraging but it wasn't bad enough to warrant a -20% decline, the stock has bounced back from profit taking in the past.


The financial sector has been strong in recent weeks but was not immune to today's selling. The Financial Sector SPDR XLF fell -0.75% creating a small red candle falling from resistance. Resistance is the current 9 year high just above $25.00. The indicators are weakly bullish suggesting resistance may be tested further but do not give strong indication a breakthrough is on the way. If the ETF is able to break through, perhaps on better than expected earnings, upside target is $26.50.


The VIX gained a little more than 13% today and looks like it will move higher into the near-term. Today's price action created a long green candle, the 2nd out of 5, and the completion of a Rising Three Methods continuation pattern. The indicators confirm the move as well, both creating bullish crossovers with today's action. Upside target is near $15. Despite the bullish outlook price action looks more methodical than driven on rising fear, for what that's worth.


The Indices

The NASDAQ Composite led the indices lower with a loss of -0.99%. The tech heavy index opened with a loss and then extended it but only created a small bodied red candle. Today's action tested support at the 6 week low and may continue to do so into the near-term. Both indicators confirm a move a lower with the possibility of moving down to firmer support at the long-term up trend line, just below today's close.


The S&P 500 made the 2nd largest decline in today's action creating a medium sized red bodied candle. Today's action confirms resistance at the short-term moving average with the caveat of support being just below today's close. The indicators are both confirming a move lower so support is likely to be tested further. Support is near 2,400, a break below that would be bearish for the near-term.


The Dow Jones Transportation Average comes in third today with a loss of -0.73%. The transports created a small red bodied candle falling from the just set all-time high. The index is cresting a peak within an up trend that may result in a correction of some form. The indicators are both consistent with a move up and touch to resistance although both are also divergent and suggestive of correction. A pull back from this level could go as low as the 9,500 level, about -1%, or below that to the short-term moving average, about -3%, in the near-term.


The Dow Jones Industrial Average brings up the rear in terms of losses. The blue chips shed -0.72% creating a small-to-medium sized candle moving down from resistance. Resistance is the bottom of the long-term up trend line and the current all-time high, support is however just below today's close at the short-term moving average and bottom of near-term range. The indicators are mixed, stochastic is pointing lower following a bullish crossover while MACD is making a weak bearish peak, but both suggestive of consolidation/test of support within an uptrend. A break below the moving average would be bearish in the near-term with downside target near 21,000. A bounce from here and break to new highs would be bullish with upside target near 21,600 and 22,000.


The market is still in rotation as we approach 2nd quarter earnings season. Considering the market has not sold off more than it has I'd say it was hopeful if not optimistic about results. We may see the indices pull back a little more before the season really gets underway but so long as forward outlook remains positive bull market conditions should continue. The question now is how good will earnings growth be this time around? The expectation is 6.6% with a chance of running as high as 10% and for double digit growth to continue for the next 6 quarters at least. With this in mind I have to be bullish for the long-term although I remain cautious for near-term trades. If there is a pull back I'll be ready, if not I'll still be ready.

I almost forgot, tomorrow is the NFP and a potentially market moving event. The ADP was a bit weak but never really gives clear indication of what the NFP will be. Other indications show that labor markets are firm and businesses are hiring so I expect the number will be at least positive. Consensus is 185,000, I'm going to guess 150,000 with a chance for positive surprise.

Until then, remember the trend!

Thomas Hughes


 

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New Option Plays

Bears Came Out to Play

by Jim Brown

Click here to email Jim Brown

Editors Note:

The bears were out in force today with negative confirmation on multiple indexes. With the S&P and Nasdaq posting six-week lows and confirming bearish breakdowns, there is no reason to rush into any new positions. We need this holiday week volatility to end so we can get back to business as usual next week.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Confirmation

by Jim Brown

Click here to email Jim Brown

Editors Note:

The Nasdaq and the S&P both closed under major support to confirm a bearish direction. The Nasdaq closed under 6,100 and a six-week low. The S&P closed well under 2,420 at 2,409 and also a six week low. With both indexes closing under support, this should cement the market direction BUT the S&P futures are up more than 2 points this evening. There is never any guarantee of direction until it actually happens.

The Dow lost -158 points but only a 4-day low. The four-week low is 21,287. The Dow is still bearish but the chart has yet to confirm.



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


NKE - Nike Inc
The long put position was entered at the open.



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Credit spreads and naked puts = OptionWriter

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Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor



BULLISH Play Updates

AAPL - Apple Inc - Company Profile

Comments:

Qualcomm is seeking to ban imports of some iPhones in their long running patent dispute with Apple. The news was announced after the bell and shares of Apple declined about 10 cents. This will not impact any current phones or the iPhone 8 because the case will not even begin to be heard until spring of 2018 or later. The two companies will eventually settle out of court. This is just legal sparring.

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.

Update 7/5/17: Nomura said iPhone 7 demand was weak but it was ok because of the pent up demand for the iPhone 8, expected out in a couple months. The analyst said the model 8 would provide sufficient upside in both volume and price to more than compensate for the current weak sales in the model 7.

Position 6/29/17:

Long August $150 call @ $3.00, see portfolio graphic for stop loss.


BABA - Alibaba - Company Profile

Comments:

No specific news. Shares gave back -$2.87 after nearly a $4 gain on Wednesday.

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.

Update 7/5/17: Alibaba announced the Alexa clone called Genie X1, which will be available to the first 1,000 people for a one-month trial. The cost will be $73 during this live test and it only speaks mandarin.

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. Shares down in a weak Nasdaq 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.

Update 7/5/17: Payment processor, Vantiv, offered $10 billion to buy London based Worldpay. That immediately boosted Paypal and Square on thoughts there may be other combinations in the future. Paypal has a market cap of $66 billion and Square $5 billion so Paypal is not likely a potential target but they could benefit from acquiring a smaller player.

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. New 52-week closing high.

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.



BEARISH Play Updates (Alpha by Symbol)

No Current Puts

NKE - Nike Inc - Company Profile

Comments:

Nike's plan to sell shoes on Instagram was discussed by several analysts as another positive for the stock but it will take a couple of quarters to see any gains.

Original Trade Description: July 5th.

NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers products in nine categories, including running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment under the NIKE brand name for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites (direct to consumer operations), as well as independent distributors and licensees. Company description from FinViz.com.

Nike reported earnings last week of 60 cents that beat estimates for 50 cents. Revenue of $8.7 billion narrowly beat estimates for $8.6 billion. The earnings spike was due mostly to a lower tax rate.

The stock spiked $5 on short covering after they announced they were turning to Amazon to help them sell shoes and apparel. Some analysts believe this will lead to further discounting because Amazon is a cutthroat market. We have already seen a weak market for high dollar Nike models with sales at 50% off. Moving to Amazon will cause additional discounting in those high dollar models. They also believe it will lead to lower orders from distributors and cause them even more grief in the U.S. where sales were flat. The U.S. is Nike's biggest market where they face less competition from brands like Adidas, which is rapidly accelerating.

Futures orders were reportedly down -10% indicating weak orders from distributors. As Nike shifts more from wholesale sales to the direct to retail market, they are going to face an entirely different set of problems. They announced they were laying off 1,400 employees as part of their consumer direct offense strategy.

Expected earnings Sept 28th.

The earnings are over and the post earnings depression phase should be starting. With everyone else starting their earnings next week, traders will be leaving Nike to find a stock with positive momentum.

Position 7/6/17:

Long Aug $57.50 put @ $1.51, see portfolio graphic for stop loss.




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