The market escaped a disaster on Tuesday night but the coming Fed rate hike and debt ceiling expiration could be a problem.
The market rallied to new highs after the president's speech only to fall back again on China's economic weakness and South China Sea threats, North Korea and Iran launching missiles and tweets about wire taps in Trump Tower. Whatever happened to normal markets where earnings and economics powered stocks and day-to-day politics were ignored?
The challenge for next week is the all but guaranteed Fed rate hike on Wednesday. The Fed speakers are suggesting three hikes in 2017. Analysts believe those will be front loaded while the optimism is high. If their post meeting statement is the least bit hawkish the market will probably respond negatively.
The expiration of the debt ceiling on March 15th is going to be another problem. There is no way the democrats and republicans are going to agree on a resolution on the debt ceiling. There is likely to be a war, if not I will be VERY surprised. We are not getting those headlines yet but everybody knows they are coming.
The post speech rally is quickly eroding away and the small cap indexes both closed under critical support. The breaks were not major, just a couple of points each but the trend is definitely negative.
The Dow remains the most overbought and has three days of lower highs and two days of lower lows. The two doji candles for Fri/Mon represent complete indecision by investors. There was no conviction by either buyers or sellers. However, for the last two days, the rebounds have been lackluster and the Dow did not make it back to 21,000 on Monday.
The S&P completely erased its post speech gains intraday on Monday with the dip to 2,367 and filled the gap from Wednesday. The S&P has local support at 2,360, which should be the first pause point of a storm appears. The 2,300 level is the next logical resting place. The S&P is not as overbought as the Dow so once a decline appears it should be the better relative performer.
The Nasdaq has erased the Wednesday gains and is closing in on support at 5,800. This should stop any minor selling imbalances because it is an easily recognizable support point. The Nasdaq was the most overbought two weeks ago but it has normalized those conditions and the 5,800 level could be a good launch point for a new leg higher.
The S&P-600 and the Russell 2000 both closed below short-term support but only by a couple points each. These are the weakest indexes and another down day could trigger some follow on selling.
The earnings cycle is winding down and this is the last week with any volume. Earnings will slow to a trickle next week. The headlines will come on Thursday from Sears, Staples and Ulta Beauty.
The next material economic report is the ADP Employment on Wednesday followed by the Nonfarm Payroll report on Friday. Both are officially expected to show declines. However, even at the expected levels that is enough to guarantee a rate hike. Yellen said if employment and the economy remained solid through next Wednesday it would be enough for a hike. She could have just said "If the nonfarm numbers are 175,000 or higher we will raise rates."
The futures started off negative on Monday evening with a drop to -3 but returned to positive territory several hours later. As I finish up this commentary, they are negative and declining again. This could reverse by morning but the key point is that the intraday rebound was weak and there is no buyers in the overnight session.
I expect a dip over the next week that is not immediately bought but I still believe it is a buying opportunity. There may be some potholes in the rally road but the destination is still a higher high in the months ahead. The problems that could kill it would be a lengthy delay in the tax cut proposal or a significant dilution that makes it weaker. Geopolitical events are starting to heat up and those could also provide a market detour.
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NEW DIRECTIONAL CALL PLAY
TRIP - Trip Advisor - Company Profile
TripAdvisor, Inc. operates as an online travel company. The company operates through two segments, Hotel and Non-Hotel. Its travel platform aggregates reviews and opinions of members about destinations, accommodations, activities and attractions, and restaurants, which enables users to research and plan their travel experiences, as well as book hotels, flights, cruises, vacation rentals, activities and attractions, and restaurant reservations. The company operates TripAdvisor-branded Websites, including tripadvisor.com in the United States; and localized versions of the Website in 48 markets and 28 languages. It also manages and operates 23 other media brands that provide travel planning resources across the travel sector, such as airfarewatchdog.com, bookingbuddy.com, citymaps.com, cruisecritic.com, familyvacationcritic.com, flipkey.com, gateguru.com, holidaylettings.co.uk, holidaywatchdog.com, housetrip.com, independenttraveler.com, jetsetter.com, thefork.com, niumba.com, onetime.com, oyster.com, seatguru.com, smartertravel.com, tingo.com, travelpod.com, tripbod.com, vacationhomerentals.com, and viator.com. The company's Websites feature 465 million reviews and opinions on 7 million places comprising 1,060,000 hotels and accommodations; 835,000 vacation rentals; 4.3 million restaurants; and 760,000 activities and attractions worldwide. Company description from FinViz.com
TRIP re;orted Q4 earnings of 16 cents that missed estimates for 30 cents. Revenue of $316 million missed estimates for $325 million. Shares fell from $52 to $40 over the three weeks since the earnings report.
TRIP missed earnings for two main reasons. They have been investing "significant" amounts of money into new processes and marketing that will pay off in the future. Secondly, they just implemented an "Instant Booking" platform that was different enough that customers became confused and they lost a lot of revenue in Q4.
However, sales on the platform improved in December and spiked higher in January as the company refined its processes and made it easier to understand. They spent money marketing the benefits of the platform and apparently business is improving significantly in Q1.
TRIP has had earnings challenged for the last three quarters as they invest heavily in developing for the future.
Earnings May 17th.
Shares appear to have bottomed at $41 having spent the last five days at that level. While we cannot be certain this is the bottom, the option is cheap enough to induce me to take the risk. Once the stock begins to bounce, it should attract some more buyers looking for a bargain. With the market starting to turn choppy, any actual decline will make stocks like this look appetizing since they have already been crushed.
Buy June $45 call, currently $2.15, initial stop loss $39.65
ATVI - Activision Blizzard - Company Profile
Activision Blizzard, Inc. develops and publishes online, personal computer (PC), video game console, handheld, mobile, and tablet games. The company operates through two segments, Activision Publishing, Inc. and Blizzard Entertainment, Inc. The company develops, publishes, and sells interactive software products and content through retail channels or digital downloads; and downloadable content to a range of gamers. It also publishes subscription-based massively multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. The company serves retailers and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, game specialty stores, and consumers through third-party distribution, licensing arrangements, and direct digital purchases in the United States, Canada, Canada, the United Kingdom, France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea, China, and internationally. Company description from FinViz.com
Activision reported Q4 earnings of 92 cents that beat estimates for 73 cents. Revenue of $2.45 billion beat estimates for $2.35 billion.
The new Overwatch game was the fastest Blizzard title to hit 25 million registered players. Monthly active users (MAU) rose 5 million at Activision to reach 51 million. Bllizzard's MAU fell 1 million to 41 million but set a record for Q4. Kind Digital users fell from 394 million to 355 million. Since King Digital is phone games the numbers tend to be volatile. Users spent 43 billion hours playing ATVI's suite of games in Q4 compared to the 45 billion hours peopls spent watching Netflix.
Shares spiked despite weak guidance. They guided for Q1 for $1.05 billion and earnings of 18 cents. The street was looking for $1.2 billion and 31 cents. For the ful lyear they guided for $6.3 billion and $1.85 in earnings. That missed street estimates for $6.68 billion and $2.03. Fortunately, ATVI normally guides low and then crushes the estimates when they report.
Earnings May 11th.
Shares spiked from $39 to $47 on the earnings. Post earnings depression appeared for four weeks and shares sank back to $45. Over the last several days the uptrend has resumed and Monday was a new high close at $47.81.
Buy May $50 call, currently $1.39, initial stop loss $43.85.
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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
NTCT - NetScout
The long call position was entered at the open on Tuesday.
SWKS - Skyworks Solutions
The long call position was entered at the open on Tuesday.
IWM Russell 2000 ETF
The long call recommendation remains unopened until a trade at $135.00.
Original Play Recommendations (Alpha by Symbol)
CAH - Cardinal Health - Company Profile
Navidea Biopharm closed on the sale of cancer diagnostic aid Lymphoseek for $83 million to Cardinal Health. Shares were down slightly in a weak market.
Original Trade Description: February 20th
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.
Long Jun $82.50 calls @ $2.85, see portfolio graphic for stop loss, target $85 to exit.
IWM - Russell 2000 ETF (LONG CALL)- ETF Profile
The Russell and S&P-600 remain the weakest indexes. The Russell closed under key support on Monday but not far enough to escape its clutches. It looks more likely every day that we will get a dip to our target entry point at $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.
NTCT - Net Scout - Company Profile
No specific news. Shares declined slowly to support at $36.50 and attempted to rebound on Monday.
Original Trade Description: February 27th
NetScout Systems, Inc. provides real-time operational intelligence and performance analytics for service assurance, and cyber security solutions in the United States, Europe, Asia, and internationally. The company offers nGeniusONE management software that enables customers to predict, preempt, and resolve network and service delivery problems, as well as facilitate the optimization and capacity planning of their network infrastructures; and specialized platforms and analytic modules that enable its customers to analyze and troubleshoot traffic in radio access and Wi-Fi networks, as well as gain timely insight into services, applications, and systems. It also provides Intelligent Data Sources under the Infinistream brand name that provide real-time collection and analysis of data from the network; network monitoring fabric switching solutions that deliver targeted network traffic access to an increasing number of monitoring systems; and a suite of test access points that enable non-disruptive access to network traffic with multiple link type and speed options. In addition, the company offers portable network analysis and troubleshooting tools, which help customers identify key issues that impact network and application performance. Further, it provides security solutions that enable service providers and enterprises to protect their networks against DDoS attacks; and threat detection solutions that enable enterprises to identify and investigate advanced threat campaigns that present tangible risks to the integrity of their networks. Company description from FinViz.com
Jeff Ubben at ValueAct added NetScout as a new position with 1,645,000 shares. Ken Fisher of Fisher Asset Management owned 3.6% at the end of Q4.
The company specializes in network assurance and network performance management.
They reported earnings of 60 cents compared to estimates for 55 cents. Revenue of $311.4 million also beat the street's estimate for $310 million. They guided for full year earnings in the range of $1.87-$1.90 on revenue of $1.2 billion.
Earnings May 2nd.
Shares exploded out of the earnings report and moved to a new 52-week high at $38. They paused there for the last week but closed at a new high by a few cents on Monday. I believe a breakout is about to appear.
Long June $40 call @ $2.45, see portfolio graphic for stop loss.
QQQ - Nasdaq 100 ETF - ETF Profile
The Nasdaq dipped on Tuesday but thankfully failed to hit our stop loss. The post speech rally hit a new high and today's decline was minimal. I am raising the stop loss again because we are pressing out luck on this rally.
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
Qorvo had a choppy week despite announcing that multiple "leading smartphone manufacturers" had selected the company's newest RF Fusion Mobile Wi-Fi products for inclusions into the new generations of phones.
There is nothing wrong with Qorvo fundamentally or technically. The stock was very volatile over the last two weeks but it is holding over support at $65.50.
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.
SWKS - Skyworks Solutions - Company Profile
Canaccord boosted the price target on SWKS from $96 to $105 on Monday citing a rosy outlook in a presentation by the company at the Mobile World Congress. Barclay's boosted their target from $85 to $100 citing recent meetings with the company and the optimistic outlook for the rest of 2017.
Original Trade Description: February 27th.
Skyworks Solutions, Inc., together with its subsidiaries, designs, develops, manufactures, and markets proprietary semiconductor products, including intellectual property worldwide. Its product portfolio includes amplifiers, attenuators, circulators/isolators, DC/DC converters, demodulators, detectors, diodes, directional couplers, diversity receive modules, filters, front-end modules, hybrids, LED drivers, low noise amplifiers, mixers, modulators, optocouplers/optoisolators, phase shifters, phase locked loops, power dividers/combiners, receivers, switches, synthesizers, technical ceramics, voltage controlled oscillators/synthesizers, and voltage regulators. The company provides its products for automotive, broadband, cellular infrastructure, connected home, industrial, medical, military, smartphone, tablet, and wearable applications. Company description from FinViz.com
Skyworks is major supplier for Apple and will benefit greatly from the sales of the updated iPhone 7 models expected to be announced in March and the iPhone 8 expected to be announced in September. This is going to be a very strong year for Apple and its suppliers.
For Q4, the company reported earnings of $1.61 compared to estimates for $1.58. Revenue of $914.3 million beat estimates for $902.7 million. The company said the soaring demand for IoT products fueled the growth and was expected to continue for the rest of the decade. Gartner Group said there were 6 billion internet devices today and that would expand to more than 20 billion by 2020. Every device needs a communications chip.
Skyworks also announced a new $500 million share buyback program. The prior program had $95 million remaining and was replaced with the new program.
Skyworks is expecting revenue growth or 8% to $840 million in the current quarter with earnings of $1.40. Analysts were expecting $818 million and $1.24.
Earnings April 20th.
Long May $100 call @ 3.89, see portfolio graphic for stop loss.
ZEN - Zendesk Inc - Company Profile
No specific news. That is probably why shares faded and nearly stopped us out on Monday. The news flow just stopped. Hopefully the market will rebound from the Monday dip.
Original Trade Description: Feebruary 20th.
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.
Long July $30 call @ $2.05, see portfolio graphic for stop loss.
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.