Another week, another rally as the bears failed to take advantage of a couple sessions with early weakness.
The overbought market continues to rise and a flurry of miscellaneous headlines from all over the world failed to seriously dent enthusiasm. The Nasdaq big caps continue to lead the market higher and the Nasdaq 100 ($NDX) is extremely overbought.
The Nasdaq 100 Relative Strength Index (RSI) reading rose again to 83.09 when 70 is considered overbought. Friday was the highest reading since January 3rd, 2000 when it hit 84.15 after 2.5 months of nearly consecutive gains. Overbought oscillators can always become even more overbought but this is flashing a huge warning sign there could be a peak ahead. In 2000, the index declined more than 500 points over the next three days but once the overbought conditions were equalized, the index went on to gain 1,400 points over the next two months before the bottom fell out in March. We need a few days of equalization so the rally can continue.
With the FAANG stocks leading the way we are always at risk of a sudden change in sentiment. Those five tech leaders tend to move in the same direction at the same time. A sudden change in sentiment could see all decline at once and it would be sharply negative for the markets.
Apple is at a new high after a $15 post earnings spike over two weeks. I know everyone is expecting big things out of the company later in the year but Apple's RSI is 89.06 when 70 is normally considered overbought. That is the most overbought since November 29th, 2004 when the RSI was 91.50 and the stock was less than $5 per share. The stock declined for two weeks after that RSI peak. There is serious risk here for some chip sector headline to knock the stuffing out of the tech giant.
The S&P ran into resistance at 2,350 and has stalled there for three days. The S&P futures are up +5 tonight so it appears that resistance could be broken at Tuesday's open. Whether it falls back after the opening spike is the $64 question.
The Dow spent two months consolidating the November gains before launching off to conquer the 20,000 level and then 20,500. The next round number target is 21,000 and we are only 376 points away. The Dow, like the other indexes needs a day or two of rest before moving higher in order to let new buyers into the market.
The small caps remain the grease under the market wheels and is keeping the big caps from surging even higher. The S&P-600 has failed to break out to a new high and is stuck below resistance at 860. If the small caps were to catch fire, we could easily surge to 21,000 on the Dow without a material dip for profit taking. Conversely, if the small caps weaken, they could damage the current bullish sentiment for the big caps.
The Q4 earnings cycle is winding down with the last two Dow components reporting along with 50 S&P 500 companies this week. After this week 92% of the S&P will have reported. Tesla and the Hewlett Packard twins will be the highlights for the week.
The economic calendar is lackluster with the FOMC minutes on Wednesday the only material hurdle. Nobody expects any bad news from the minutes but there is always that possibility.
There is nothing to keep the market from moving higher this week other than becoming even more overbought. The ideal situation would be a 3% decline over about five days to equalize pressures and let new buyers into the market. However, even if we only saw a 1.5% decline, I think that would be sufficient. The bulls are in rally mode and it may take a significant event to slow the stampede.
Send Jim an email
NEW DIRECTIONAL CALL PLAY
ZEN - Zendesk Inc - Company Profile
Zendesk, Inc., a software development company, provides software as a service customer service platform for organizations. It provides single customer service interface to organizations to manage all their one-on-one customer interactions; track and predict common questions; and provide a seamless path to answers. The company's platform also enables organizations to gather customer data and engage with customers based on the insights the data provides; and offers tools for organizations to understand their customers and track the efficiency and effectiveness of their customer service. It also provides live chat software that enables the organizations to communicate in real-time with their customers through online chat; and analytics software, which enable organizations to analyze and visualize data from a diverse set of applications. The company operates in 150 countries and territories, and provides service through customer service platform in approximately 40 languages. Company description from FinViz.com
Zendesk reported a lower than expected loss of 4 cents compared to estimates for 6 cents. Revenue of $88.6 million beat estimates for $87.3 million. For the current quarter, they guided to a loss of $6-$7 million on revenue of $92 million. Analysts were expecting -$5.4 million on revenue of $91.9 million.
ZEN is tracking well with analyst estimates and the business is rapidly growing. Revenue in Q4 rose 41% and earnings for this relatively new company are heading for positive territory.
Earnings May 10th.
The company builds software for better customer relationships. They service more than 94,000 corporations in 150 countries and 40 languages. The provide all types of customer support including help centers, chat, telephone, instant message and email. Their products connect to most common database products to enable personal support based on the customers history and current needs.
Zendesk is rapidly attacking the startup market since new companies cannot spend a lot of money on an in house support staff. They are rapidly growing with guidance for full year 2017 revenue rising 35% to $420 million compared to analyst estimates for $410 million.
They reorganized internally in 2016 and the changes caused a slight disruption in Q3 and the stock fell from $31 to $20. Shares have recovered to $28 after a $4 spike post earnings. After three days of post earnings depression, they are moving up again.
Buy July $30 call, currently $2.15, initial stop loss $25.65
CAH - Cardinal Health - Company Profile
Cardinal Health, Inc. operates as a healthcare services and products company worldwide. The company's Pharmaceutical segment distributes branded and generic pharmaceutical, over-the-counter healthcare, specialty pharmaceutical, and consumer products to retailers, hospitals, and other healthcare providers. It offers distribution, inventory management, data reporting, new product launch support, and contract pricing and chargeback administration services to pharmaceutical manufacturers; pharmacy and medication therapy management, and patient outcomes services to hospitals, other healthcare providers, and payers; consulting, patient support, and other services to pharmaceutical manufacturers and healthcare providers. This segment also operates nuclear pharmacies and cyclotron facilities that manufacture, prepare, and deliver radiopharmaceuticals, as well as operates direct-to-patient specialty pharmacies; offers logistics, marketing, and other services; and repackages generic pharmaceuticals and over-the-counter healthcare products. The company's Medical segment distributes a range of medical, surgical, and laboratory products and services to hospitals, ambulatory surgery centers, clinical laboratories, and other healthcare providers, as well as to patients in the home. This segment also develops, manufactures, and sources medical and surgical products comprising surgical drapes, and gowns and apparel; exam and surgical gloves; fluid suction and collection systems; cardiovascular and endovascular products; and wound care and orthopedic products, as well as assembles and offers sterile and non-sterile procedure kits. In addition, it offers supply chain services, including spend, distribution, and inventory management services to healthcare providers; and post-acute care management, and transition services and software to hospitals, other healthcare providers, and payers. Company description from FinViz.com
Cardinal reported earnings of $1.34 compared to estimates for $1.24. Revenue of $33.1 billion just missed estimates for $33.4 billion. Pharmaceutical revenues rose 5% to $29.7 billion. Medical segment revenues rose 8% to $3.4 billion. Pharmaceutical segment profits fell 14% to $537 million because of the loss of a major customer. They expect this to be made up in future quarters by the solid performance of Red Oak Sourcing. Medical segment profits rose 50% to $159 million thanks to a higher contribution from Cardinal Health Branded products.
They guided for full year earnings of $5.35-$5.50 and growth of about 4%.
Earnings May 9th.
Analysts believe Cardinal guided conservatively and will beat guidance because of the growth in their own branded products. Shares spiked on the earnings, faded for three days and are now surging. We are going to target resistance at $85 for an exit.
Buy Jun $82.50 calls, currently $2.95, initial stop loss $76.50, target $85 to exit.
If there is a trade you would like me to consider or you have comments on this newsletter please click the email link below.
Send Jim an email
Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline. Any items shaded in blue were previously closed.
Current Position Changes
TWLO - Twilio Inc
The long call position was reentered at the open on Tuesday.
IWM Russell 2000 ETF
The long call recommendation remains unopened until a trade at $135.00. (Revised)
NVDA - Nvidia
The long call recommendation should be entered at the open on Tuesday.
IWM - Russell 2000 ETF
The long put position expired on Friday.
Original Play Recommendations (Alpha by Symbol)
IWM - Russell 2000 ETF (LONG PUT) - ETF Profile
The January decline never appeared and the market has recovered from multiple opportunities for dips over the last five weeks. The position expired on Friday.
Original Trade Description: December 12th
The IWM ETF seeks to track the investment results of the Russell 2000 Small cap Index.
The Russell is up +232 points or 20.1% in the last 22 trading days. It is grossly over extended and many small cap Russell stocks are up 30% to 40%. I understand the bullish sentiment that believes the economy will be better in 2017 but it will not be because of President Trump. His proposals will take months to get through the House and Senate and there is likely to be some major battles. Obamacare will not go away until 2018 or longer because it takes a long time to plan and execute a change that big. Lower taxes will not happen until 2018 because it will take months for both houses to vote on an acceptable tax bill. I seriously doubt they will change rates in the middle of the year. Any change will not occur until 2018.
I could go on but you get the picture. Typically, there is a honeymoon phase after a new president is elected. This phase has run its course. There are 13 trading days left in 2016 and any new highs are likely to be made before Christmas. After Christmas, investors may begin to worry and once into January and a new tax year, the selling could be dramatic. Do you remember January 2016? The market was not nearly as overextended as it is today and the Dow fell -2,180 points in just two weeks. Entering into a new tax year allows traders to capture profits and invest that money for another year before paying taxes.
Dow - January 2016
We also have the potential for an ugly inauguration or even a terrorist attack at the event. That potential will give cautious investors another reason to take profits in January.
I am recommending a long put on the Russell ETF.
There is also another trigger factor to consider. The Dow is approaching 20,000 and that could be a massive sell the news event given the big gains. Since the Dow could hit that level this week I am recommending we initiate our long put position in advance.
I have a similar put position in the Premier Investor Newsletter because every subscriber needs to be hedged against a potential market event over the next five weeks.
Initial support is in the $130 range.
Closed 02/17/17: Long Feb $134 put @ $3.37, expired, -3.37 loss.
IWM - Russell 2000 ETF (LONG CALL)- ETF Profile
The Russell was the weakest index again last week but it did finally make a new high. If we do have a sharp decline, the average is about 3%. That would drop the IWM to about $135. I revised the entry target to $135.
Original Trade Description: Jan 3rd
The Russell ETF mimics the movements of the Russell 2000 Index with a 1:10 ratio.
The Russell 2000 has failed to break support but it was the strongest gainer in the post election rally. At one point, the Russell was up 20.1%. That suggests in a market decline it could also be the fastest decliner.
Analysts are in agreement that the markets will finish 2017 significantly higher with estimates as high as 25,000 for the Dow and 2,500 for the S&P. If the regulations currently stifling small business are removed and the tax rates changed to 15% as Trump has promised, this sector will show a major boom in earnings and could be the largest gainer in 2017.
I considered buying calls on the SPY, DIA, QQQ and IWM. I decided to use the IWM for the reasons stated above.
I am going to use a dip trigger on this position to enter the play. We already have a put position on the ISM and we will exit it at the same time this position is triggered. I am putting the trigger at $126 but there is no guarantee we will reach that level. The IWM traded at $115 just before the election.
I am using the August calls because they were only $1 more than the June strikes and we get two extra months. I do not expect to hold the position that long since the summer months are normally weak for the market. We can sell them in June with a lot of time premium left.
With an IWM trade at $135.00
Buy August $140 call, estimated premium $5, no initial stop loss.
NVDA - Nvidia - Company Profile
Nvidia's decline stopped at the 50-day average at $106. This average has been strong support for the last 15 months. I am removing the entry trigger and recommending we enter the position at the open on Tuesday.
Original Trade Description: February 13th
NVIDIA Corporation operates as a visual computing company worldwide. It operates in two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for deep learning, accelerated computing, and general purpose computing; and GRID for cloud-based streaming on gaming devices. The Tegra Processor segment provides processors that integrate a computer onto a single chip under the Tegra brand name; DRIVE automotive computers, which offer supercomputing capabilities; and tablet and portable devices for mobile gaming under the SHIELD name. The company's products are used in gaming, professional visualization, datacenter, and automotive markets. It sells its products primarily to original equipment manufacturers, original design manufacturers, system builders, motherboard manufacturers, add-in board manufacturers, and retailers/distributors.
Nvidia's Graphics Processing Units or GPUs have become more than just video chips. They have become supercomputing processors and can be packaged in large groups to parallel process monster datasets and computations that would have taken weeks with conventional chips. They are truly revolutionizing the processor industry.
The focus on Artificial Intelligence or AI, a lot of companies like Google and Amazon are turning to GPUs to handle the monster amounts of data they collect every day. Facebook already uses Nvidia M40 GPU accelerators to power its Big Sur machine learning computers. Those NVIDIA GPUs were specifically designes to train deep neural networks for enterprise data centers, and the company says they are 10-20 times faster than other network computers. Nvidia said their GPD powered machine learning computers can help train networks new things in just a few hours that would take days or weeks with less powerful systems.
The new P100 GPU is 12 times faster than the prior version and can provide more performance than "several hundred computer nodes" and up to eight P100s can be interconnected to provide previously unheard of computing power. The chips in the GPUs contain more than 15.3 billion transistors each and the largest chip ever built at 16 nanometer technology. That is twice as many as on Intel's biggest chips. The P100 delivers more than 10 teraflops of performance. One teraflop can process one trillion floating-point instructions per second and the P100 can do 10 teraflops or 10 trillion calculations per second.
The COSMOS weather forecasting application runs faster on the P100 than the 27 servers, running twin multicore processors each that were previously tasked with the project. Intel makes commodity processors for the millions of PCs and servers in the world. Nvidia is light years ahead of Intel in technology. Nvidia's data center revenue increased 63% in Q1.
Nvidia announced a new chip code-named Xavier that is specifically designed for self driving cars. The chip has (8) 64-bit ARM cores, a 512-core graphics processor based on the new Volta graphics architecture, two video processors capable of handling 8K video and a specialized computer vision accelerator. The chip has more than seven billion transistors and more than twice the new Apple A9X processor. All of that capability is on one chip.
Nvidia announced a new class of supercomputing workstations with breakthrough design features. The new Quadro products provide more than twice the performance of their prior league leading technology and offer ultra-fast memory to further enhance the speed. The new GP100 GPUs provide more than 20 TFLOPS of 16-bit floating point precision computing. In English that means they are faster than the human brain can even comprehend. One TFLOP is executing one trillion floating-point calculations in one second. This workstation can do 20 TFLOPS. The Quadro GPUs can render photorealistic images more than 18 times faster than a CPU.
Nvidia posted blowout Q4 earnings of 99 cents on $2.2 billion in revenue. Analysts were expecting 83 cents on $2.1 billion. They guided for Q1 revenue of $1.9 billion and analysts were expecting 1.88 billion. The company said margins could shrink slightly from 57% because of product mix. They have so many new products there is a range of margins depending on the products and the configurations.
Despite the record earnings for the quarter and the year and 55% revenue growth in Q4, shares are declining simply because they have risen so much over the last year. Historically buying Nvidia on a dip to the 50-day average was a winning trade. That is $104.81 today. Also there is strong support at $100.
I am recommending we target a dip to $104 and buy a June $110 call. The premium should be in the $7 range if we get the entry we want.
Earnings May 11th.
Buy June $110 call, estimated to be $8, initial stop loss $95.85.
QQQ - Nasdaq 100 ETF - ETF Profile
The Nasdaq 100 closed at a new high on Friday and the Nasdaq futures are up $12.50 on Monday. I cannot believe the big caps techs are continuing to rise but I will take the gains. I did raise the stop loss again.
Raise the stop loss to $128.85
Original Trade Description: February 6th
PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ- 100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.
The Nasdaq 100 big cap index has been leading the charge higher. The Nasdaq 100 and Nasdaq Composite may have been alternating days in the lead but the big cap index has seen the least volatility. The index bounced off uptrend resistance the prior week but it is back knocking on the door again today. The NDX was the only broad market index to post a gain on Monday and it closed only one point from a new high.
I believe the NDX is going to break through that resistance at 5,200 and that should trigger a new leg higher on short covering and price chasing by portfolio managers. They are currently holding cash back to buy the dips but the dips are very shallow. A breakout could convince them they are going to be left behind if they do not act.
I could just as easily predict a failure at resistance but every analyst prediction for a market failure in 2017 has proven wrong. I would rather invest $2.50 in a call option than try to bet against the trend.
Long May $128 Call @ $2.52, see portfolio graphic for stop loss.
QRVO - Qorvo Inc - Company Profile
No specific news. Shares continuing to rise.
Original Trade Description: February 13th.
Qorvo, Inc. provides technologies and radio frequency (RF) solutions for mobile, infrastructure, and defense and aerospace applications worldwide. It operates through Mobile Products (MP) and Infrastructure and Defense Products (IDP) segments. The MP segment offers RF front end modules that combine high-performance filters, power amplifiers (PA), low noise amplifiers and switches, PA modules, transmit modules, antenna control solutions, antenna switch modules, diversity receive modules, and envelope tracking power management devices. This segment supplies its RF solutions into mobile devices, including smartphones, notebook computers, wearables, tablets, and cellular-based applications for the Internet of things. The IDP segment provides high power gallium arsenide, gallium nitride power amplifiers, low noise amplifiers, switches, radio frequency filter solutions, CMOS system-on-a-chip solutions, fixed frequency and voltage-controlled oscillators, filters, attenuators, modulators, driver and transimpedance amplifiers, and various multichip and hybrid assemblies. This segment supplies its RF solutions to wireless network infrastructure, defense, and aerospace markets; and connectivity applications for commercial, consumer, industrial, and automotive markets. Company description from FinViz.com
Triquint Semiconductor (TQNT) and RF Micro Devices (RFMD) merged in January 2015 and Qorvo was born.
Qorvo is a major Apple supplier. They will have outstanding Q3/Q4 earnings but they guided slightly lower for Q1. They blew out Q4 earnings at $1.35 compared to estimates for $1.26. Revenue of $826 million also beat estimates for $821 million.
They guided for the current quarter for earnings of 80 cents on revenue of $630 million. They said they were forecasting a decline in earnings because two China customers Oppo and Vivo along with Samsung, had postponed the launch date of their next smartphone models. Qorvo is still supplying the chips but the revenue will be delayed a quarter until those delayed launches begin to occur.
The stock dipped for about 30 minutes on the news and then began to rise again. Shares closed at a new 52-week high on Monday.
I believe this is an opportunity to get an Apple supplier well in advance of the iPhone 8 and the earnings from the other three manufacturers as well.
I am recommending an option to get us past the next earnings report where they should guide higher. Depending on our gains at the time we may hold over the report.
Earnings May 3rd.
Long May $70 call @ $3.59, see portfolio graphic for stop loss.
TWLO - Twilio Inc - Company Profile
We reentered the TWLO position using the April $38 call at the open on Tuesday. There was no specific news last week. Shares gapped lower on Tuesday to give us a better entry point. Profits are being taken with support at $31-$32.
Original Trade Description: January 23rd.
Twilio Inc. provides cloud communications platform that enables developers to build, scale, and operate communications within software applications through the cloud as a pay-as-you-go service in the United States and internationally. It offers programmable communications cloud software that enables developers to embed voice, messaging, video, and authentication capabilities into their applications through application programming interfaces. The company also provides use case products, such as a two-factor authentication solution. Company description from FinViz.com
Twilio is a cloud communications platform. That does not tell us very much but some if its biggest customers are Uber, AirBnB, WhatsApp and Messenger. Twilio has an application that matches phone numbers and internet addresses to usernames. When you send an instant message to somebody on Facebook, the Twilio app links your Facebook account to your mobile phone number and does the same thing on the other side of the conversation to your contact.
Twilio is a communications platform for new applications that do not want to reinvent the wheel and have to not only program all those linkages but build the databases necessary to connect with everyone.
Twilio had 88% revenue growth in 2015 and is expected to post 62% for all of 2016. Obviously as each year progresses and the revenue numbers soar it is harder to continue the growth when you first started and had almost no revenue. Still, 62% is outstanding.
Given its integration into numerous major applications in addition to the ones I listed above, they are a prime acquisition target. Amazon increased its stake in Twilio in December. Facebook recently increased integration of Twilio services in Messenger so it is not going to compete with the service but could decide to acquire it. With a market cap of $2 billion, pocket change to the big boys, and a dominant place in the existing technology, they are an excellent acquisition candidate.
Shares retreated from the post IPO highs of $70 to trade at $26 three weeks ago. Shares are testing resistance at $29 ahead of earnings on Feb 7th. A William Blair analyst expects the company to beat on both earnings and revenue. The analyst said "Twilio dominates the developer community, often benefitting from a first mover advantage while providing the best quality and performance in the market, particularly for its voice product of dual channel call recording capabilities."
We are in the Q4 earnings cycle so anything we add this week is going to be challenged by an earnings report over the next several weeks. On Twilio, the options are cheap and we can afford to hold over the February 7th report and we could be well rewarded.
Long Apr $38 call @ $1.71. See portfolio graphic for stop loss.
Previously Closed 2/7/17: Long Feb $29 call @ $1.09. exit $3.60, +1.62 gain.
Prices Quoted in Newsletter
At Option Investor, we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time readers are able to get a better fill than the opening print because of market maker bias at the open.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.