Option Investor

Daily Newsletter, Saturday, 1/28/2017

Table of Contents

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

Market Wrap

Dog Catches Car

by Jim Brown

Click here to email Jim Brown

Dogs of all types have fun chasing cars but disaster can strike when they catch one.

Weekly Statistics

Friday Statistics

After six-weeks of chasing Dow 20,000, traders finally captured the prize. Just like the dog that catches a car, now they do not know what to do. I had several dogs when I was a child and two of them eventually caught cars and it was fatal each time. Let's hope the late week dormancy after investors caught 20,000 does not prove fatal as well. Volume very light on Friday with only 5.7 billion shares. The Dow traded in a very narrow roughly 31 point range after 10:AM and the S&P was locked in a four point range. What we have is a standoff. The buyers and sellers are both waiting for the other to make the first move.

The economic news was disappointing but not enough to tank the market. The GDP for Q4 came in at 1.87% growth compared to 3.5% in Q3 and forecasts for 2.4%. That 1.87% rate was just under the 1.91% average growth rate for the entire year when you add in Q1 at 0.83%, Q2 1.41% and Q3 3.5%.

Consumption contributed 1.7%, fixed investments 0.67%, inventories 1.0%, government 0.21%. Net exports subtracted -1.7%. The full year GDP was down from the 2.6% in 2015 and was the slowest growth since 2011.

The difference between Q3 and Q4 came from sales, which rose 3.0% in Q3 but only 0.9% in Q4. That emphasizes how weak the holiday shopping season really was.

It should be noted that 2017 is the 8th year in the current economic expansion and that is the second longest in the nation's history. The internet bubble of the 1990s was the longest at 10-years. The current expansion should continue for at least another year since inflation is low, global growth is rising, interest rates are low, S&P earnings are increasing and odds are good there will be some form of tax cuts that will act as additional stimulus.

Consumer sentiment rose slightly from 98.1 to 98.5 but that was the highest level since January 2004, eclipsing the 11-year high of 98.1 in January 2015. The present conditions component declined slightly from 111.9 to 111.3. The expectations component rose slightly from 89.5 to 90.3. Business expectations rose from 50% favorable to 63%. That was up from only 33% favorable in October. More than 80% of consumers said this was a good time to make major purchases.

The durable goods orders for December registered a -0.4% decline but that was far better than the -4.6% drop in November. Unfortunately, analysts were expecting a 2.6% increase. A sharp drop in defense orders was the reason for the weakness. Excluding transportation orders the headline would have been +0.5% growth and the six consecutive month without a decline. Excluding defense orders that rises to 3.8% and what would have been a good month. By themselves defense orders declined -33.4% and that skewed the entire number series. Offsetting that was a 42.2% rise in aircraft orders. Overall order growth has been very volatile over the last year.

Moody's Chart

The economic calendar for next week is headlined by the FOMC rate decision and the payroll reports. Getting lost in the noise is the ISM Manufacturing and ISM Services, which are also important.

The Fed is not expected to change rates but they will probably point to March as a potential hike. They have indicated the potential for three hikes in 2017 and as long as the market is stable they would probably rather get started sooner rather than later.

The job market is expected to have improved slightly to add 167,500 jobs compared to the 154,500 average between the ADP and Nonfarm reports in December. I am always cautious about the January report. There are a lot of temporary workers laid off in January. The seasonal adjustments are supposed to take that into account but sometimes reality rears its ugly head.

This is also the report where they do the benchmark adjustments for the prior year. That means the numbers we have been reporting can change significantly now that they actually have some data rather than just guesswork.

The ISM Manufacturing Index is expected to decline slightly. It appears analysts are unsure of the direction of activity because of the recent volatility in the regional reports.

On Monday night, the Bank of Japan meets to determine monetary policy. At the November meeting, the BOJ said it would buy an unlimited amount of Japanese government bonds (JGBs) at a fixed price with terms between 1-5 years. This was an effort to slow the rise in interest rates. Japanese rates were rising sharply on expectations for President Trump's administration to lift both growth and inflation. Now analysts are waiting to see if the bank will back off that "unlimited" authorization.

There were not many earnings on Friday but there were some market movers. General Dynamics (GD) reported a 9% increase in earnings to $2.62 compared to estimates for $2.54 per share. Revenue of $8.233 billion missed estimates for $8.258 billion. As of year-end, the company had a backlog of $59.8 billion. Shares spiked $8 on the news. Later in the day, Trump took aim at GD and Huntington Ingalls (HII) saying he was going to cut the costs of the F35 and the new submarines proposed by the Navy.

American Airlines (AAL) reported adjusted earnings of 92 cents that matched analyst estimates. Revenue of $9.79 billion narrowly beat estimates for $9.75 billion. Shares fell -5% after the company guided for higher costs in Q1 with sharp increases in fuel prices and labor costs. They predicted nonfuel costs to rise 10% to 12% compared to analyst estimates for 9%. Despite the rising costs, American authorized another $2 billion stock buyback program.

Colgate (CL) reported earnings of 75 cents that matched estimates. Revenue of $3.721 billion declined -4.5% and missed estimates for $3.844 billion. The company had increased prices 2.5% but the strong dollar removed 1.5% of sales and unit volume overseas declined by 5.5%. Shares fell 5.2% on the news.

Honeywell (HON) reported adjusted earnings of $1.74 and revenue of $9.99 billion. The company saw a -13.4% decline in Q4 because of weakness in its aerospace business. Analysts were expecting $1.74 and $10.15 billion. For the current quarter, they guided for a 1% to 2% decline in revenue because of divestitures and acquisitions. They forecast earnings growth of 1% to 3%. They did not give dollar amounts. Analysts are expecting $1.62 and $9.44 billion. Shares were volatile after the report but ended the day with a minor gain.

GoDaddy (GDDY) preannounced expected Q4 revenue of $486 million. Their prior guidance was $483-$487 million. The analyst estimate was $485 million. Shares were fractionally positive.

Gentex (GNTX) warned that 2017 revenue would be in the range of $1.78-$1.85 billion. Analysts were expecting $1.83 billion. Shares dropped about 10% at the open but recovered to close down only 2%.

AbbVie (ABBV) guided for full year earnings of $5.44 to $5.54 per share. Analysts were expecting $5.48. Shares declined -2%.

Air Products (APD) warned that earnings would be in the range of $1.30 to $1.40 and analysts were expecting $1.55. Full year guidance was $6.00 to $6.25 and consensus was $6.38. Shares fell -5% on the news.

Chevron (CVX) reported earnings of 22 cents compared to estimates for 64 cents. Earnings were not as bad as the headline suggests. There was a charge of $872 million in the quarter and removing that puts the adjusted number closer to 68 cents. Revenue of $31.497 billion missed estimates for $32.605 billion. Daily production remained almost unchanged at 2.669 million Boepd. Chevron has a lot of new production coming online over the next two years where they already spent the development money and now they are just getting everything connected and in operation. This will provide a significant boost to future earnings. The company reaffirmed its $1.08 dividend per quarter. Shares fell $2.76 on the news.

There was a flurry of tech earnings on Thursday after the bell and shares reacted on Friday. Some moved in a direction you might not have expected.

Intel warned Q1 earnings would be in the range of 51-61 cents on revenue of $14.3 to $15.3 billion. Analysts were expecting 62 cents on revenue of $14.52 billion. For the full year, Intel expects $2.66-$2.94 and $59.4 billion. Forecasts were $2.83 and $61.13 billion. You would have expected Intel shares to decline but they gained 1% for the day. Intel is facing resistance at $38.25.

Alphabet (GOOGL) reported earnings of $9.36 compared to estimates for $9.64. Revenue of $26.06 billion beat estimates for $25.26 billion. Shares fell $12 on the news.

Juniper (JNPR) reported earnings of 66 cents compared to estimates for 63 cents. Revenue of $1.39 billion beat estimates for $1.36 billion. Unfortunately, they warned Q1 earnings would be in the range of 38-44 cents and analysts were expecting 46 cents. Shares fell -4% but that was after a $2 bounce from the lows.

Microsoft (MSFT) was a big post earnings gainer. Everything appears to be going well for the company since CEO Satya Nadella took control. Their Azure cloud product is said to be in second place behind Amazon and gaining speed. Microsoft posted earnings of 84 cents that beat estimates for 79 cents. Revenue of $26.1 billion also beat estimates. The company raised guidance. Shares hit a new high and were instrumental in keeping the Dow and Nasdaq from a bigger decline. On a side note, Citigroup upgraded the company from sell to neutral. Sell? Really?

Other post earnings results include:

BDX +$4.19
VMW +$2.94
PYPL -$1.23
SBUX -$2.34
LRCX +$3.91
WYNN +$7.50

Caterpillar (CAT) warned earnings would be around $2.90 on revenue of $36-$39 billion. Analysts were expecting $3.03 on revenue of $37.87 billion. Shares gained almost 2%.

The earnings calendar for next week has a few high profile companies. Apple on Monday, MasterCard and UPS on Tuesday, Facebook on Wednesday and Amazon, Amgen, Chipotle on Thursday. There are four Dow components reporting including AAPL, XOM, MRK and Visa. After this week there will only be six Dow components left to report. Those are DIS, KO, HD, CSCO, WMT and NKE.

More than 34% of the S&P 500 companies have reported earnings. More than 65% have beaten earnings estimates but only 52% have beaten on revenue. The blended earnings growth rate for Q4 is up to 4.2% compared to the forecast of 3.1% as of December 31st. Revenue growth is now 4.7% which is slightly less than the 4.9% expectation at the end of the quarter. According to FactSet, 17 companies have issued negative guidance and 16 have issued positive guidance. Next week 103 S&P companies will report earnings. Earnings are expected to continue to increase for the rest of the year. For Q1 earnings growth is expected to be 12.8%, Q2 10.3% and for all of 2017 11.6% growth.

The party is nearly over for Sears (SHLD). Shares were down -22% for the week and the outlook is not good. They confirmed late Friday they had laid off a significant number of full time workers across all 800 of their stores. They are not laying off temporary help. They are cutting full time workers that have been there for a long time. These are the high dollar salaried positions with benefits. They laid off assistant managers, department managers, backroom managers and pricing managers. Message boards for Sears workers claim the stores only have a skeleton crew left and too few workers to actually operate the stores.

Merchandise is not even being unpacked. They have removed the shelves in many stores and they are just setting pallets of merchandise in the isles. These are pictures of a Kmart store taken by an employee and given to Business Insider.

Sears reported a -12% decline in same store sales over the holiday shopping season. Moody's and Fitch Ratings both downgraded Sears to a lower level of junk last week saying the $1.8 billion cash burn for 2017 is likely to force a default event. Most analysts believe bankruptcy is inevitable.

Crude prices continue to hover in the $52-$54 range thanks to a constant stream of headlines from OPEC about how successful the production cuts have been. Now that January is nearly over, we will begin to get the actual production data and be able to judge those headlines for ourselves. Most analysts believe oil prices will move lower before they move higher.

The active rig count is exploding. After adding 35 rigs the prior week, the U.S. added another 18 last week. Production of 8.96 million bpd is nearing the 9 million mark but still down from the 9.61 mbpd on June 5th of 2015. With this accelerated rig activation and oil prices holding over $50 we could see a new production high by the end of 2017. Producers are ramping up completions of previously drilled but uncompleted wells. The IEA said as of September there were 4,117 unfracked wells. This is the low hanging fruit for producers as they attempt to ramp up production. When prices were low, producers would drill the wells to secure the acreage but then remove the rig and not spend the additional money to complete them and turn on the production. Since the hard part is already done, they can put them on production fairly quickly. The frackers are going to be very busy over the coming months.




Happy New Year! Saturday kicks off the 15-day Spring Festival in China that follows the Lunar New Year. From the low volume on Friday, you would have thought it was New Years Eve in the USA.

I really think we are suffering from that dog/car analogy I mentioned earlier. Investors have been focused on the Dow 20,000 level for the last six weeks and now that it has been broken, nobody knows what to do. There is no higher target. People are talking about 23,000 but that is too far away to energize traders today. If we did get a corporate tax cut to 15%, we could get there in a hurry on earnings growth alone, but nobody really expects that to happen in the near future or to actually be 15%. We are probably a couple months away from the appearance of an actual tax-restructuring package and a couple more months at least before all the smoke clears from the political war that will develop. In reality, nothing is likely to actually happen to the rates until 2018. The prospect of a tax cut is the main driver of the market today and investors may be coming to the realization that it is a long way off.

The sellers have no conviction. Buyers are not chasing prices but they are buying the dips. The fact we have not seen any "material" dip is bullish but just like thunderstorms in the summer, we know there will be one eventually.

The very low intraday ranges on the Dow and S&P have pushed the Volatility Index to 30-month lows. Actually, it is less than a point from 24-year lows. We know from experience that volatility will not stay at this level and once it reverses, it can move very rapidly. When the VIX is high, it is time to buy. When the VIX is low, it is time to go. The weekly chart is to show the prior low and it does not show the rebounds as clearly since they are all squeezed together. Over the last ten years, there have been a lot of volatility events. The daily chart shows the events about every 2-3 months. It has been three-months since we had one.

If there is a target after Dow 20K, it is S&P 2,300. When the index neared that level on Wednesday there was a dead stop. The high for the day was 2,299.55. Thursday's high was 2,300.99 and Friday's high was 2,299.02. There is strong resistance at that level and that may be the next threshold to watch. The S&P has short-term risk back to 2,260 and longer-term risk to 2,230.

On the Dow, the winners offset the sinners and the index closed only fractionally lower on Friday. Gains from CAT, JNJ and MSFT offset the losses in GS and CVX. With only four Dow components reporting earnings this week, we are not likely to see the single stock volatility except for Apple on Wednesday. They report after the close on Tuesday so the reaction will be on Wednesday. The other three stocks, XOM, V, MRK are not normally market movers.

The Dow has short-term risk back to 19,750 which is just a little more than a 300-point decline. Unless market sentiment changes significantly, I do not see that level breaking but anything is always possible.

The Nasdaq big caps have caught fire and the Nasdaq 100 is in rocket mode. The next measurable resistance is well above at 5,500 but I seriously doubt we will get there without a couple pauses to consolidate and take profits. The index is up nearly 10% since the election. Most years do not gain 10%. You can see from the recent spike it is totally unsupported but that does not mean it cannot go higher.

The Nasdaq Composite is not as overheated as the Nasdaq 100. The index broke over uptrend resistance on Wednesday and is using that as support. The biotech index actually posted a decent gain on Friday and that helped push the composite index higher.

With the majority of the Nasdaq big caps already reported, we are facing a couple weeks of post earnings depression in those stocks. Apple, Facebook and Amazon are the last three majors to report this week and then we could see a period of restructuring where traders leave the stocks that have reported and look for something else that is making a move.

Support on the composite index is still 5,530.

The Russell 2000 is the straggler. It has failed to break through or even test the prior resistance highs at 1,390 and fell back on Friday below prior short-term resistance at 1,375. The Russell benefitted from the two-day short squeeze but there was no follow through. If the Russell drifts back below 1,350 we could see it lead the big cap indexes lower.

It is hard to pick a direction for next week. The complete lack of sellers and the quick buying on the dips is keeping them shallow. This would suggest we are still in a bullish mode. Technically, we are still overextended but nobody seems to care. We need to remain in trend following mode. We follow the trend until it ends. We will know that it ended when the dips begin to make lower lows. I would definitely maintain your stops as the earnings cycle plays out. Once the cycle starts to fade, the market typically fades with it as the post earnings depression takes hold.

Random Thoughts

I am shocked that the bullish sentiment declined after the Dow broke through 20K on Wednesday and the top four indexes all set new highs. That should have caused a flood of bullish sentiment. However, as I mentioned earlier, once a target is hit, there is nothing left to aim at and traders lose interest. Note that they did not shift to bearish but to neutral.

Last week results

News broke this weekend that North Korea had restarted a nuclear reactor that produces plutonium that can be used for weapons. The reactor had been dormant since 2015 as the spent fuel rods were removed for reprocessing to produce that plutonium. Washington's 38 North Korea monitoring project said the country had enough uranium and plutonium to produce about 20 bombs at the end of 2016. They are expected to test a new ICBM any day now that NK claims could reach the USA. This will be a new problem for President Trump. He has said these NK events will not happen on his watch. It will be interesting to see what he does about it. Secretary of Defense Mattis is scheduled to visit Japan and South Korea next week so shared concerns about NK will be the topic of conversation.

The Dow broke 20,000. Check. However, it took 28 days for the index to move from 19,900 to 20,000. That is the longest amount of time for the last 100 points in any of the prior 1,000 point moves since 10,000. It only took the Dow 64 days to move from 19,000 to 20,000. That is the second fastest 1,000 point gain in Dow history.

There was significant resistance to that big round number at 20K and it may not be gone. The short squeeze on Tue/Wed simply overcame the existing sellers but it may not have erased the overall resistance to this new level. Next week will be interesting.


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"A correction takes place to determine which investments are the tennis balls and which are the eggs. You want to own the things that bounce, as in tennis balls, and not the eggs."

William Berger


Index Wrap

Momentum Slowing

by Jim Brown

Click here to email Jim Brown
The Dow 20,000 target was hit and investors are not showing as much interest in chasing prices higher.

The market is not declining but the momentum indicators are fading. That is only natural after a big run lasting over two months and a big round number target. That does not mean we are about to enter into a correction but there are signs the bullish sentiment is slowing.

The number of stocks setting new highs are starting to slow despite a positive advance/decline line. Again, I am not predicting a crash, I am just pointing out that the internals are fading.

With the major indexes setting new highs you would expect the number of stocks trading over their 200 day averages to be rising. That is not the case. The percentage of S&P stocks over their 200-day has stagnated at 68%. They have been at that level since late November and not rising. In other words, the breadth of the market is not improving.

The percentage of stocks over the shorter 50-day average has also plateaued and actually starting to decline. This should be a leading indicator for the longer-term 200-day average. The 50-day is more reactive and has declined from 82% to 69% since the first week of January despite the new market highs.

I think everyone will agree the Nasdaq big caps have been outperformers with the index continuing to make new highs. It would probably be a surprise to see that only 58% of the Nasdaq 100 stocks are above their short term 50-day average. This has declined from 72% in early January. This means fewer stocks are leading the charge and that means higher risk to future gains.

Along the same line of study, the bullish percent index has stagnated at 73% for the last month. This is a lower high from the April and August levels and suggests we could see some weakness as those stocks with less than stellar earnings began to lose supporters. There is nothing wrong with the BP index at this level but the lack of gains with the market making new highs is the troubling part of the picture.

You hear it all the time that the small caps lead the market. The advance/decline line on the S&P-600 Small Cap Index is weakening. When compared to the A/D line on the Dow there is a marked difference. This is a clear example of a few big cap stocks leading the market while the small caps are fading. Longer term, this cannot continue. Eventually the few big cap leaders will become so overextended they can no longer continue the climb and the weight of the much larger number of small caps stocks will pull the market lower.

I know all these charts suggest I am bearish. I am not outright bearish but the charts are suggesting the momentum is fading. We have come a long way without a material bout of profit taking and a 3% to 5% decline would be a wonderful opportunity for the market to recharge for a move to higher levels.

As I said in the market commentary this weekend, we need to follow the trend until it ends. Normally, there is weakness after the earnings cycle is over and just before the February options expiration. The last three months have been far from normal so there is no guarantee we will see that weakness in February. Just be prepared if it suddenly appears.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Down and Down it Goes

by Jim Brown

Click here to email Jim Brown

Editors Note:

The retail sector is caught in a whirlpool of negative comps and dying malls. Nobody seems to be immune from the decline.


No New Bullish Plays


GIII - G-III Apparel Group - Company Profile

G-III Apparel Group, Ltd. designs, manufactures, and markets men's and women's apparel. It operates through two segments: Wholesale Operations and Retail Operations. The company's products include outerwear, dresses, sportswear, swimwear, women's suits, and women's performance wear; and women's handbags, footwear, small leather goods, cold weather accessories, and luggage. It markets swimwear, resort wear, and related accessories under the Vilebrequin brand; footwear, apparel, and accessories under Bass and G.H. Bass brands; and apparel products under Andrew Marc, Marc New York, Jessica Howard, Eliza J and Black Rivet, Weejuns, and other private retail labels. G-III Apparel Group, Ltd. also licenses its products under the Calvin Klein, ck Calvin Klein, Karl Lagerfeld, Guess, Guess?, Kenneth Cole NY, Reaction Kenneth Cole, Cole Haan, Levi's, Vince Camuto, Tommy Hilfiger, Jessica Simpson, Ivanka Trump, Jones New York, Ellen Tracy, Kensie, Dockers, Wilsons, G-III Sports by Carl Banks, and G-III for Her brands, as well as have licenses with the National Football League, Major League Baseball, National Basketball Association, National Hockey League, Touch by Alyssa Milano, Hands High, Collegiate Licensing Company, Major League Soccer, and Starter. The company offers its products to department, specialty, and mass merchant retail stores in the United States, Canada, Europe, and the Far East; and distributes products through its retail stores, as well as through G.H. Bass, Wilsons Leather, Vilebrequin, and Andrew Marc Websites. As of January 31, 2016, it operated 199 Wilsons Leather stores, 163 G.H. Bass stores, and 5 Calvin Klein performance stores. Company description from FinViz.com.

The holiday shopping season was not kind to any retailer except for Amazon. Most retailers are reporting negative comps and warning about slowing traffic. GIII was no exception. GIII warned Q4 saw a significant decline in sales that would cut 20 cents off earnings. They guided for the full year 2016 that ended January 31st, for revenue of $2.41 billion and earnings of $1.21-$1.31 compared to their prior guidance of $2.43 billion and earnings of $1.41 to $1.51. For 2017, they guided to earnings of $1.41-$1.51 compared to $2.44 in fiscal 2016.

The company said they were expecting positive comps in Q4 but now expect low double-digit negative comps. That is a heck of a swing. They blamed warmer weather and significantly lower traffic in the stores.

Earnings March 2nd.

Shares broke below support and closed at a three-year low on Friday. Given the trends in the retail sector, they could continue significantly lower with their guidance warning.

Buy March $25 put, currently $1.65, initial stop loss $27.85.

In Play Updates and Reviews

No Sellers

by Jim Brown

Click here to email Jim Brown

Editors Note:

Investors passed up another selling opportunity with the indexes weak but in a very narrow range. There were also no buyers. There was almost no activity at all. Volume was only 5.7 billion shares.

The S&P broke below short-term support at 2,295 and then fought that level as resistance the rest of the day. The Dow was almost dormant with an unbelievable 31 point range after 10:AM. This was holiday trading with no holiday.

The biotech index gained 41 points and helped keep the Nasdaq positive with a 5 point gain and another record close.

The excitement definitely faded after the early week rally but nobody is selling.

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

VIX - Volatility Index

The long call position was entered at the open.

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

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BULLISH Play Updates

PANW - Palo Alto Networks - Company Profile


No specific news. Minor consolidation of the recent gains. Big rebound off the opening dip.

Original Trade Description: Jan 23rd

Palo Alto Networks, Inc. provides security platform solutions to enterprises, service providers, and government entities worldwide. Its platform includes Next-Generation Firewall that delivers application, user, and content visibility and control, as well as protection against network-based cyber threats; Advanced Endpoint Protection, which prevents cyber attacks that exploit software vulnerabilities on various fixed and virtual endpoints and servers; and Threat Intelligence Cloud, which offers central intelligence capabilities, security for software as a service applications, and automated delivery of preventative measures against cyber attacks. The company provides firewall appliances; Panorama, a security management solution for the control of appliances deployed on an end-customer's network as a virtual or a physical appliance; and Virtual System Upgrades, which are available as an extensions to the virtual system capacity that ships with the physical appliances. It also offers subscription services covering the areas of threat prevention, uniform resource filtering, malware and persistent threat, laptop and mobile device, and firewall protection services, as well as cyber attack, threat intelligence, and content control services. In addition, the company provides support and maintenance services; and professional services, including application traffic management, solution design and planning, configuration, and firewall migration, as well as provides online and classroom-style education training services. Palo Alto Networks, Inc. primarily sells its products and services through its channel partners, as well as directly to medium to large enterprises, service providers, and government entities operating in various industries comprising education, energy, financial services, government entities, healthcare, Internet and media, manufacturing, public sector, and telecommunications. Company description from FinViz.com.

In November, PANW posted earnings that beat the street but revenue, which rose 34% missed estimates by a fraction. Revenue was $398.1 million and analysts were expecting $400.1 million. PANW had guided for revenue growth of 33% to 35% so they were right in the middle of their guidance range. Earnings of 55 cents beat estimates for 53 cents. Shares were crushed because the company said the market was "lumpy" and customers were taking longer to make purchase decisions.

In Q3 they added more than 1,500 new customers to hit 35,500 globally. Subscription revenue has risen to 60% of total revenue as they move to a cloud model.

In early January, noted short seller Andrew Left of Citron Research, put out a bullish note on PANW saying they had a fantastic moat, which would be a barrier to entry for other companies trying to duplicate their type of firewall. His price target is $170. Shares rallied $14 over the next three weeks on the call. At the same time Bernstein put out a very positive note on the company saying nobody serious about protecting their web environment should be without PANW as their security solution.

Shares have rebounded to their November gap down level of $144 and have found resistance. They are not giving back their gains but there was a slight retracement on Monday in a weak market. I believe they will overcome this resistance level and move higher, market permitting.

There is a persistent rumor in the market that Microsoft and Cisco Systems are both looking for a cybersecurity company to acquire. Given Palo Alto's position in the sector, they would be a good target.

Earnings February 20th.

Because of the price of the options I am forced to turn this into a spread. If you want to go with a naked call, I would probably use the $150 strike.

Position 1/24/17:

Long March $145 call @ $6.00, see portfolio graphic for stop loss.
Short March $155 call @ $3.15, see portfolio graphic for stop loss.
Net debit $2.85

RHT - Red Hat Inc - Company Profile


No specific news. Shares rebounded slightly to resume the uptrend.

Original Trade Description: Jan 21st

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in physical, virtual, container, and cloud environments; Red Hat Satellite, a system management offering that helps to deploy and manage Red Hat infrastructure across physical and virtual servers, and cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications, as well as integrating applications, data, and devices along with business processes automation; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to treat physical server storage as a scalable, shared, centrally-managed pool of virtual storage and to manage large, unstructured, or semi-structured data in physical, virtual, and cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Company description from FinViz.com.

On December 21st, the company reported earnings of 61 cents that beat estimates by 3 cents. However, the beat came mostly from a lower tax rate. Revenue rose 17.5% to $615.3 million compared to estimates for $618.4 million so a slight miss there. Billings rose 8.7% to $679 million but misses estimates for $713 million. Subscription revenue rose 19% to $543 million and 88% of total revenue. That is recurring and will help smooth out future earnings.

The CEO explained that two large government deals worth $20 million slipped into Q4. Also, two large customers chose to be billed rather than pay up front and that took another $27 million out of billings. If those deals were included the billings would have been up +16% instead of 8.7%. The good news is that all of those deals are now in Q4 and that will give Q4 an earnings boost.

Earnings March 22nd.

Shares have rebounded to $74 and appear poised to break over that level and move back to the $80 range. I am using the March options, which expire 4 days before the earnings and they are half price the next cycle in June.

Position 1/23/17:

Long March $75 call @ $2.35, see portfolio graphic for stop loss.

SLCA - U.S. Silica - Company Profile


No specific news. Only a minor decline from the new 52-week high on Thursday.

Original Trade Description: Jan 25th

U.S. Silica Holdings, Inc. produces and sells commercial silica in the United States. The company operates through two segments, Oil & Gas Proppants, and Industrial & Specialty Products. It offers whole grain commercial silica products to be used as fracturing sand in connection with oil and natural gas recovery; and resin coated proppants, as well as sells its whole grain silica products in various size distributions, grain shapes, and chemical purity levels for manufacturing glass products. The company also provides ground commercial silica products for use in plastics, rubber, polishes, cleansers, paints, glazes, textile fiberglass, and precision castings; and fine ground silica for use in premium paints, specialty coatings, sealants, silicone rubber, and epoxies. In addition, it offers other industrial mineral products, such as aplite, a mineral used to produce container glass and insulation fiberglass; and adsorbent made from a mixture of silica and magnesium for preparative and analytical chromatography applications. The company serves oil and gas recovery markets; and industrial end markets with customers involved in the production of glass, building products, foundry products, chemicals, and fillers and extenders. As of December 31, 2015, it had approximately 400 million tons of proven and probable recoverable mineral reserves. Company description from FinViz.com.

In the gold rush in the 1800's it was not the miners that got rich but it was the companies that sold them the picks, shovels and wheelbarrows. In the energy sector every shale well has to be fractured and that required mountains of sand. We are not talking regular beach sand. The primary frac sand is mined in Wisconsin and other northern states. There are various grades of sand depending on the geology of the well and what the drillers are trying to accomplish.

In 2014 it took an average of 4.2 million pounds of frac sand per well. However, in 2015 and 2016 there was a significant increase in fracking intensity that began to use much larger quantities per well. In late 2015 the amount of sand rose from 9% of the fracking fluid to 20%. In early 2016 Simmons & Co reported two wells in the Permian that used 60 million pounds of sand each while two in the Haynesville Basin used 35 million pounds each.

Houston based oilfield logistics company Twin Eagle reproted receiving "historic shipments" of frac sand at its facility outside the Eagle Ford. They reported receiving one 130-car train of sand a week. One car carries 100 tons so that is 13,000 tons per week. That is 26 million pounds of sand per week. If wells are now using 20 to 25 million pounds per well that is one train per well.

Last week the active rig count rose by 29 oil wells to 551 active oil wells. Each rig drills a minimum of two wells per month. If each well used 25 million pounds that would be more than 1,100 trains of sand per month.

There are rumors making the rounds that because of the increased intensity of sand in fracking there could be a sand shortage as the number of active rigs increase and producers began to rapidly complete the 3,000 or so wells that have been drilled over the last 18 months but never completed because of low oil prices. There is going to be a surge in the demand for sand.

U.S. Silica is one of the major sand suppliers with multiple facilities. They have used the downturn in the drilling industry to buy multiple competitors in order to bulk up for the future demand.

Earnings Feb 2nd.

SLCA has earnings on Feb 2nd but almost every company trading today has earnings over the next three weeks so that is just something we have to deal with. I am recommending we buy a longer-term option to get past any potential volatility around earnings. Their guidance should be good.

Position 1/26/17:

Long June $65 call @ $4.10, no stop loss until after earnings.

SPY - S&P-500 ETF - ETF Profile


Only a fractional decline on the SPY with the S&P down -2 points. Everything but the Nasdaq was weak on Friday.

Original Trade Description: Jan 12th

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The SPY dipped to $225 intraday before the dip buyers rushed into the market. Initial support is $223 and I believe we have a chance to test that level before the inauguration. There are only four trading days left. If the bank earnings disappoint on Friday we could see a decline in low volume. With the three-day weekend ahead we could see traders move to the sidelines to avoid weekend event risk while the U.S. markets are closed.

We could also see a pre inauguration decline as traders worry about event risk surrounding the event.

Whatever the reason we could see the ETF test that level over the next four days. Assuming there is no disaster surrounding the inauguration, we could see a real rally begin afterwards.

This is a short-term position using March options just in case any potential dip turns into a crash. The estimated option premium should be less than $3.

Position 1/25/17 with a SPY trade at $228.25

Long MAR $232 call @ $1.69, no initial stop loss.

$VIX - Volatility Index - Index Description


Another multiyear low on the VIX despite the decline in the markets. Investors just do not think the market is going lower.

Original Trade Description: Jan 26th

The VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option's expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.

The VIX closed at 10.63 and very close to record lows. You have to go back to June of 2014 for a lower recent close at 10.28. Before that, you have to travel back in time to Feb-2007 for a close at 10.05. The next lowest close was 9.48 in Dec-1993.

The point here is that volatility is near record lows only reached four times in the last 23 years. That qualifies for an abnormal event. I believe it is time we bought some VIX calls. The odds of the VIX remaining this low for the next two months are about as close to zero as you can get.

There is a very old saying in the market. "When the VIX is high, it is time to buy. When the VIX is low, it is time to go." You cannot get much lower than this.

The VIX is telling us that everyone expects the market to continue moving higher. Nobody is worried that some unexpected headline or event is going to trigger a significant market decline. When nobody expects an event is when we should be the most concerned.

Position 1/27/17:

Long March $12 call @ $2.60, no stop loss because the VIX cannot go much lower from here.

BEARISH Play Updates (Alpha by Symbol)

DIA Dow ETF - ETF Profile


The Dow posted a minor 7-point loss. The Nasdaq was the only positive index, helped by the biotech sector. The key point here is that there is no selling. Investors are not excited about buying a market top but investors already long are reluctant to take profits.

Original Trade Description: December 7th

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.

Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.

Now 13 years later, we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.

However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.

I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.

Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.

Position 12/12/16:

12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.

12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.

FINL - Finish Line - Company Profile


Despite the positive news from yesterday on the JackRabbit sale, the stock was down again.

Original Trade Description: January 11th.

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc.; Macy's Puerto Rico, Inc.; and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids' athletic shoes, as well as an assortment of accessories of Nike, Skechers, Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's department stores in 37 states in the United States, the District of Columbia, and Puerto Rico. Its JackRabbit division retails lifestyle products, such as running shoes, apparel, and accessories of Brooks, Asics, Nike, Saucony, New Balance, and other brands. It also operates the e-commerce sites jackrabbit.com and boulderrunningcompany.com. The company operated 72 JackRabbit stores in 17 states in the United States and the District of Columbia. Company description from FinViz.com.

In late December Finish Line reported a loss of 24 cents compared to estimates for a loss of 18 cents. Revenue was $371.7 million, down -2.7% from the year ago period. Analysts were expecting $412.4 million. They guided for Q4 earnings of 68-73 cents compared to analyst expectations for 96 cents. Shares fell from $23 to $19 on the news and have continued to decline.

Finish Line does not report earnings again until March 22nd. That means every other retailer will post their disappointing quarters and with each earnings miss the weight should increase on FINL shares.

Finish Line operates mall stores and stores inside Macy's stores. Macy's already reported declining traffic and missed on same store sales. This should also impact FINL since lower Macy's traffic means lower traffic in the shoe section.

Shares are currently $17.50 and could easily break below the June lows before the next earnings reports. I am reaching out to May so there will be some earnings expectation in the premium when we exit before the earnings. We can buy time but we do not have to use it.

Update 1/26/17: Finish Line said it was selling its unprofitable JackRabbit running shoe business to CriticalPoint Capital. The company said it expected to realize a cash tax benefit of $30 million from the sale. Shares declined -28 cents.

Position 1/12/17:

Long May $17 put @ $1.55, see portfolio graphic for stop loss.

LB - L Brands - ETF Profile


No specific news. Big decline of -$2.25 that was probably related to some other retail event. Either that or a major investor decided they could no longer take the pain and hit the exit button.

Original Trade Description: January 14th

L Brands, Inc. operates as a specialty retailer of women's intimate and other apparel, beauty and personal care products, and accessories. The company operates in three segments: Victoria's Secret, Bath & Body Works, and Victoria's Secret and Bath & Body Works International. Its products include loungewear, bras, panties, swimwear, athletic attire, fragrances, shower gels and lotions, aromatherapy, soaps and sanitizers, home fragrances, handbags, jewelry, and personal care accessories. The company offers its products under the Victoria's Secret, Pink, Bath & Body Works, La Senza, Henri Bendel, C.O. Bigelow, White Barn Candle Company, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, and the United Kingdom, which are primarily mall-based; through its Websites; and through franchises, licenses, and wholesale partners. As of January 31, 2016, the company operated 2,721 retail stores in the United States; 270 retail stores in Canada; and 14 retail stores in the United Kingdom. It also operated 221 La Senza stores in 29 countries; 125 Bath & Body Works stores in 30 countries; 19 Victoria's Secret stores in 7 Middle Eastern countries; and 373 Victoria's Secret Beauty and Accessories stores, and various small-format locations in approximately 75 countries. Company description from FinViz.com.

The holidays were not good for L Brands. The warned on January 5th that net sales rose 1% for the five week shopping period BUT same store sales fell -1% and sales for Victoria's Secret fell -4%. That was a major blow because the holiday shopping season is normally the best five weeks of the year for the lingerie business. They even tried to combat the falling sales by advertising some of their bras at only $10 and even the deep discount did not work.

L Brands is also suffering because they maintain a mall store format. With the malls dying in favor of online shopping, they are losing sales. More than 80% of L Brands sales come from mall traffic and that traffic is rapidly declining. Hermand-Waiche believes that online sales will be over 30% of the market in 2017 and that means Victoria's Secret is becoming obsolete to 30% of the market.

The company warned on the 5th that earnings would be at the low end of prior guidance or $1.85. Shares fell -6% on the earnings warning. With Macy's and Kohl's warning in the same week it was a bloodbath for retailers in the market. Of 11 stores reporting same store sales 8 saw sales decline.

Earnings are February 15th.

Shares are hugging the $60 level but ticking slightly lower every day. If we do get a market meltdown, they could be a target of sellers wanting to exit a nonperforming stock.

Position 1/17/17:

Long Feb $60 put @ $1.85, see portfolio graphic for stop loss.

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