Historically weak market periods offer no guarantee of declines.

August and September may be the two weakest months of the year and the next six weeks are the heart of that weakness. However, there is no guarantee that history will repeat. The markets have been down for the last two weeks, some indexes longer, but there is no promise that will continue.

The bearish odds are about 75% over the next six weeks but that still leaves enough room for an unexpected rebound. Short interest is high because everyone is expecting the bearish trend. That means the potential for another major short squeeze remain high as well.

We all know markets to not go up or down in a straight line. Sometimes the drops may feel like an express elevator but more often than not, it is 3 steps forward, 2 steps back, regardless of the overall direction.

Currently the direction is down. We may see another short squeeze on Tuesday but until traders can string a week of gains together and begin breaking through some resistance, it is just a temporary move in a negative trend.

The S&P has tested support at 2,420 each of the last two sessions. The rebounds from support lifted the index back to the flat line but there were no material gains. The 2400-2410 level should be the next support test. The 2,400 level would qualify for a 3.3% retracement, 2,380 4.3% and 2,330 -6.0%. The S&P has not had a 5% drop since January 2016 so we are due.


The Dow dipped -75 points at the open on Monday before rebounding to close with a gain of 29. The index is still holding well above support at 21,500 and 21,300. The Dow chart is still in an uptrend despite the red candles at the top. The individual rotation of Dow components to provide new leaders every day is still in place but the index breadth is shrinking. Now that all Dow components have reported earnings, the post earnings depression is a cloud over their gains.


The Nasdaq has declined the most over the last four weeks than any other period this year. The round number support at 6,200 was broken intraday but the 36-point rebound from the lows, allowed it to close back over that level. The next material target is 6,100. That should be decent support unless there is some major headline that crashes the market. The big cap tech stocks are all week and about half of them, especially the high dollar stocks, are showing some bearish charts that could collapse at any time.



The Russell 2000 remains the weakest index. The Russell retested the 1,350 support level for the second day and it held again. The critical level is 1,340. That must hold for the market to have any chance of retaining its upward trend.


The earnings calendar is shrinking and the number of high profile companies dwindling. There are 22 S&P companies reporting this week and that will push the total to about 495 and the Q2 cycle will be over.


The Janey Yellen speech on Friday will be the most watched event of the week. She is expected to mention tapering QE purchases and that will be the center of attention. The Fed is expected to begin tapering at the September FOMC meeting. The last time they did that there was a Taper Tantrum.


The S&P futures are up +5.50 tonight. However, they were up about that much this time on Sunday evening and the market gapped lower at the open. There is never a guarantee of direction by looking at the futures, they can reverse at any time.

The next six weeks are typically dangerous. I recommend we maintain a low profile and conserve our cash for a potential buying opportunity at the end of September. Goldman believes there is at least a 50% chance of a government shutdown on Sept 30th and the S&P fell more than 10% in 11 days the last time that happened.

There is no rush to be in the market. The next six months of the year begin on November 1st. We will want to buy any September, early October dips in preparation of that best six months.

Enter passively, exit aggressively.

Jim Brown

Send Jim an email



NEW DIRECTIONAL CALL PLAY

I considered adding more than one position this week because the portfolio is so skinny but we are headed into the worst six weeks of the year for the markets. There will be significant volatility in September and there is no reason to add extra positions ahead of that volatility.

WDC - Western Digital - Company Profile

Western Digital Corporation, together with its subsidiaries, develops, manufactures, and sells data storage devices and solutions worldwide. It offers performance hard disk drives (HDDs) that are used in enterprise servers, data analysis, and other enterprise applications; capacity HDDs and drive configurations for use in data storage systems and tiered storage models, as well as for use in storage of data for years; and enterprise solid state drives (SSDs), including NAND-flash SSDs and software solutions that are designed to enhance the performance in various enterprise workload environments. The company also provides InfiniFlash System, a system solution that offers petabyte scalable capacity with performance metrics; higher value data storage platforms and systems; datacenter software and systems; and HDDs and SSDs for desktop PCs, notebook PCs, gaming consoles, set top boxes, security surveillance systems, and other computing devices. In addition, it offers embedded NAND-flash storage products, including custom embedded solutions; and iNAND embedded flash products, such as multi-chip package solutions that combine NAND and mobile dynamic random-access memory in an integrated package for mobile phones, tablets, notebook PCs, and other portable and wearable devices, as well as in automotive and connected home applications, and NAND-flash wafers. Further, it provides HDDs embedded into WD- and HGST-branded external storage products; and NAND-flash products, which include cards, universal serial bus flash drives, and wireless drives. Company description from FinViz.com

WDC shares have been depressed over the last month because of the battle underway with Toshiba over the sale of the Toshiba chip business. WDC, through its acquisition of SanDisk has a 50% ownership in the chip business and reportedly has to approve any sale. WDC has blocked the sales by Toshiba to a consortium led by Bain Capital. WDC has filed for arbitration and that case will take well into 2018 to resolve. Toshiba has to complete the sale in late August or very early September in order to close the sale by March and avoid being delisted. They need the $19 billion to fill the hole caused by the Westinghouse bankruptcy and time is growing short.

WDC has made Toshiba 6 different offers over the last two months and even offered to match the offer made by Bain. We learned last the head of Toshiba, WDC, members of the Ministry of Economy, Trade and Industry will meet in the coming days to try and resolve the impasse. Since WDC has the legal hammer with 50% ownership, the partnership agreement and the binding arbitration case already in progress, analysts believe it will be resolved in favor of WDC gaining ownership of the 50% of the business they do not currently own. Since Bain has said their group will not make payment until all the legal questions have been resolved, that means the only qualified buyer is WDC because they can keep it tied up in court for a year. Worst case, WDC could agree to join the Bain consortium with a majority stake and leave WDC in charge of the business.

It appears we are headed for a successful solution and that will remove the cloud over WDC shares.

Earnings Oct 26th.

I am recommending we play WDC for the resolution of the Toshiba sale, which has to happen over the next several weeks in order to close by March and avoid Toshiba being delisted. We have the choice of October or January options. There are no Nov/Dec strikes. I am going with October because of the cost. That should be plenty of time for a resolution.

Buy Oct $87.50 call, currently $3.10, initial stop loss $77.85.


If there is a trade you would like me to consider or you have comments on this newsletter please click the email link below.

Jim Brown

Send Jim an email



Current Portfolio


Open Positions

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


NFLX - Netflix
The long call position was stopped at $164.85.


Original Play Recommendations (Alpha by Symbol)


ABBV - AbbVie - Company Profile

Comments:

AbbVie said its all genotypic drug for Hep-C was approved in Canada. This is an 8-week treatment with a 97% cure rate. It is the only drug approved for all patients across all stages of the disease.

Original Trade Description: August 7th.

AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.

A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.

AbbVie was a spinoff from Abbott Labratories in 2012 and they are doing great. In the first quarter they reported earnings of $1.28, that rose 11.3% and beat estimates by 2 cents. Revenue of $6.5 billion rose 10.1% and that was higher than three of its biggest competitors Amgen, $2.8 billion, Biogen $5.5 billion and Celgene $3.0 billion.

Earnings are expected to continue growing with analyst estimates for 14% annual growth over the next five years. AbbVie guided for 13% to 15% in 2017. Despite the earnings growth the stock only trades at a PE of 11. AbbVie reported Q2 earnings of $1.42 compared to estimates for $1.40. Revenue of $6.94 billion narrowly beat estimates for $6.93 billion. They guided for the full year for $5.44-$5.54. Shares declined because the sales of its Hep-C drug, Viekira Pak were $225 million and well below estimates for $257 million. This is a temporary setback because they have multiple drugs in the pipeline that are expected to generate more than $1 billion in sales annually. Shares declined $3 on the earnings.

Next expected earnings Oct 27th.

Shares dipped back in May when Coherus won a court battle invalidating one of AbbVie's patents on Humira, their biggest drug. However, AbbVie said it was not a problem because there were 61 other patents on the drug and they would fight it in the courts until 2020. The first trial is not even scheduled until 2019. Amgen won FDA approval for a biosimilar but AbbVie said it would not happen until 2020 at the earliest.

The company's confidence that there would not be a biosimilar drug until 2021-2022 matched analyst estimates. This is a steep uphill battle for anyone trying to copy this drug.

The company's other drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion. Given all these cash flow giants in the pipeline, I am amazed the company only trades at a PE of 11.

The company received a favorable opinion on MAVIRET, a once daily Hep-C drug, from the European Medical Agency and the CHMP. This is an 8-week cure for Hep-C that will compete with Gilead's products.

Analysts claim AbbVie's pipeline is the strongest in the industry. The post earnings drop is a buying opportunity and shares are rebounding.

Options are very cheap.

Position 8/8/17:

Long Nov $72.50 call @ $1.90, see portfolio graphic for stop loss.



AKAM - Akamai Technologies - Company Profile

Comments:

Gartner (IT) said Akamai was in the Leaders Quadrant for the "Magic Quadrant of Web Application Firewalls." I don't know what that means but it is probably good. However, shares have been declining with the Nasdaq for the last two weeks. If the direction does not change this week we will probably be stopped out.

Original Trade Description: July 31st.

Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution that consists of an integrated suite of Web delivery, acceleration, and optimization technologies; Dynamic Site Accelerator that helps in consistent Website performance; IP Application Accelerator to enable enterprises to deliver Internet Protocol-based applications; Global Traffic Management, a fault-tolerant solution; Image Manager that automatically optimizes online images; and Cloudlets, which provides self-serviceable controls and capabilities. It also provides cloud security solutions, including Kona Site Defender, Bot Manager, Fast Domain Name System, Prolexic Routed, and Client Reputation; enterprise solutions comprising Enterprise Application Access and Akamai Cloud Connect. In addition, the company offers media delivery solutions, such as adaptive delivery solutions, download delivery solutions, media delivery acceleration solutions, media services, media analytics, and NetStorage, a cloud storage solution. Further, it provides network operator solutions, including Aura Licensed CDN suite of solutions, Aura Managed CDN solutions, and Intelligent DNS Solutions; and professional services and solutions. Company description from FinViz.com

Expected earnings Oct 24th.

Akamai beat on earnings and revenue for Q2 but analysts thought the guidance was a little light. Shares were crushed for an $8 loss. The company posted earnings of 62 cents that beat estimates for 60 cents. Revenue rose 6.4% to $608.9 million and beat estimates for $604.5 million.

The company guided for Q3 earnings of 57 to 60 cents and analysts were expecting 61 cents. Revenue guidance was $604-$616 million and expectations were $619.4 million.

Akamai is losing business from the "Big Six" including Apple, Amazon and Netflix as those companies refine their "do it in house" strategies to keep from having to pay so much to Akamai. The income from the big six fell 9% to $178.9 million. Akamai has reported on this metric for the last two years and this was the 7th quarter of decline. Akamai is still the largest content delivery service and total revenues are still rising.

Revenues in their new cyber security business rose 32% and the web performance business rose 15%. Akamai said the rapid advancement of video on demand was a strong factor in future earnings since they are the largest provider of content. Also seeing a rapid ramp was the cloud storage business. Akamai has a security hook in that growth and the redundancy of that storage.

I believe the big drop in the shares was an overreaction and their new businesses are growing so rapidly that revenue will continue to expand. They are forecasting 6% growth in Q3 and 5% to 8% growth for the year with a 64% gross margin. There is nothing wrong with their business.

If the market is going to be weak, these shares in companies that have already been punished will look like value stocks to investors looking for a safe haven after they exit the FAANG stocks.

Position 8/1/17:

Long Nov $50 call @ $2.28, see portfolio graphic for stop loss.



AMED - Amedisys - Company Profile

Comments:

No specific news. Shares are rebounding slowly.

Original Trade Description: August 7th.

Amedisys, Inc., together with its subsidiaries, provides healthcare services in the United States. It operates through three segments: Home Health, Hospice, and Personal Care. The Home Health segment offers a range of services in the homes of individuals for the recovery of patients from surgery, chronic disability, or terminal illness, as well as prevents avoidable hospital readmissions through its skilled nurses, physical and speech therapists, occupational therapists, and aides for its patients to complete their important personal tasks. The Hospice segment offers care that is designed to provide comfort and support for those who are dealing with a terminal illness, including heart disease, pulmonary disease, Alzheimer's, HIV/AIDS, and cancer. The Personal Care segment provides assistance for patients with the activities of daily living. As of March 1, 2017, the company owned and operated 420 care centers in 34 states. Amedisys, Inc. was founded in 1982. Company description from FinViz.com

On July 26th, the Centers for Medicare and Medicaid Services (CMS) said it may reduce reimbursements for home healthcare in 2018 by 0.6$. This was less than the 0.7% reduction in 2017 but shares imploded. On July 27th, the company reported earnings of 63 cents that beat estimates for 50 cents. Revenue of $378.8 million missed estimates for $380.6 million. The combination of the two events knocked $15 off the stock.

Amedisys has 385,000 home health, hospice and personal care patients in 34 states. In Q1, home health was responsible for $271 million of the total $370 million in revenue. Medicare paid 73.4% of the billing for those services. Obviously a -0.4% drop in reimbursements would be painful, it was less than the -0.7% decline in 2017. Amedisys understands this annual reimbursement process and they deal with it. The news was not worth a $15 drop in the stock price.

Next expected earnings October 25th.

I would normally go for the $50 strike price but since we are entering the normally weak Aug/Sep period, I am bumping the recommendation to the $55 strike and the 50% cheaper option. There is not a November option series so the December $55 gives us plenty of time for a decent rebound.

Position 8/8/17:

Long Dec $55 call @ $2.12, see portfolio graphic for stop loss.



NFLX - Netflix - Company Profile

Comments:

Netflix shares are slowly bleeding points after Apple said last week they were going to spend $1 billion to develop original content. Along with the decline in Netflix, the theater stocks are also sliding. Apple has the cash to outspend everyone by many multiples. Once they get the video streaming figured out they will be a serious competitor. That is not going to be in 2017 but maybe by late 2018. It should not impact Netflix now but the stock is falling and we did get stopped out at the open on Monday.

Original Trade Description: August 14th.

Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. It operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. The company offers TV shows and movies, including original series, documentaries, and feature films. It offers members with the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. As of April 28, 2017, it had approximately 100 million members in 190 countries. Company description from FinViz.com.

Everybody is suddenly bent out of shape because Disney is going to pull some of its content away from Netflix in 2019. Shares are down $12 since the news broke last week. Seriously? Netflix just broke 100 million subscribers and will have 120 million by 2019. They are creating original content as fast we possible and signing new content creators almost every week.

I understand if you are planning on holding the shares five years that you might be concerned but your concerns would be misplaced. Disney is large and they have a lot of content but are they really going to have the capability to stream content in 190 countries in 21 different languages 18 months from now? The short answer is NO.

Netflix is the Amazon of video streaming. They own this space and even Amazon Video is not able to cause them any trouble. Remember Blockbuster? Netflix shut them down.

Barron's had an article this week warning that Netflix would decline 50% by 2020. If they did an article on any other stock, it would have imploded. Netflix declined 40 cents. Apparently, very few people are worried.

Is there any doubt that Netflix will beat on earnings and subscriber numbers for Q3? Not in my mind. I am proposing we buy an October call now that the premiums have been deflated and play the ramp into earnings.

Earnings Oct 16th.

Because premiums have not deflated that much it will still have to be a spread.

Position 8/15/17:

Closed 8/21/17: Long Oct $180 call @ $7.80, exit $5.00, -2.80 loss
Closed 8/21/17: Short Oct $195 call @ $3.60, exit $2.17, +1.43 gain
Net loss $1.37.



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.

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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.