Option Investor

Daily Newsletter, Wednesday, 4/12/2017

Table of Contents

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

Market Wrap

Market Indexes Struggling To Hold Support

by Keene Little

Click here to email Keene Little
The market hasn't moved much in the past month and it can be argued that the choppy consolidation is bullish. But the indexes are showing signs of cracking as important support levels might be giving way.

Today's Market Stats

For the past week we've seen the major indexes testing some important support levels and the choppy sideways consolidation can be viewed as a bullish continuation pattern. But today some of those support levels were broken and there is the potential it will lead to stronger selling. But so far we have only relatively small moves and the bulls could easily recover with another rally on Thursday/Friday.

It was another quiet day for economic reports and the market reacted more to a selloff in the overnight futures after a failed rally attempt. The morning dip was again bought but not as strongly as we saw on Tuesday (and multiple days before that) and the bounce attempt was given back this afternoon. The resulting price action leaves the market looking more bearish than bullish for at least the short term but the bulls can't be discounted yet.

This morning's economic reports that fall into the "inflation" numbers were the export and import prices, both of which rose +0.2% in March. This was down from +0.3% and +0.4% in February so there was some cooling in inflation, which could keep the Fed feeling like they have a little more wiggle room as far as feeling the need to continue rate increases.

The Fed has also been looking at the unemployment picture and the low unemployment number from last week (4.5%) is considered "full employment" and that has had many thinking the Fed has the green light to continue raising rates (higher inflation with full employment would leave them defending themselves if they don't raise rates).

But even as Janet Yellen acknowledged in recent comments (in a Q&A session at the University of Michigan on Monday), the decline in the labor participation rate is a "kind of hidden unemployment." She went on further, saying "We recognize that the unemployment rate itself might be a misleading indicator of the extent of slack in the labor market." It sounds like she's trying to give the Fed some wiggle room.

Another problem with the unemployment rate, which is not something the Fed talks about, is how the number could be wildly off the mark. As reported by Shadow Stats, the "birth-death" model that the Bureau of Labor Statistics (BLS), which relates to the number of new businesses started and failed, could be "creating" as many as 200K jobs per month. That would leave the actual number of new jobs dismally small.

The problem with the BLS model is that the actual number of businesses starting up has been falling dramatically for the past year. Some of the blame for this is the excessive number of new regulations from the Obama years but much of the blame is purely economics. So the unemployment picture is probably not nearly as rosy as we've been told.

But the Fed continues to communicate a desire to raise rates and/or trim their bloated balance sheet, which could cause higher Treasury rates if there aren't buyers to replace the Fed's demand for Treasuries (lower demand, lower prices, higher yields).

Compounding the problem for the Fed is that they're starting to worry about the stock market's euphoric response to Trump's election. There's been so much hope built into the stock market that that there's a high level of risk if the Trump team doesn't come through. And we're starting to see the air coming out of the hot-air balloon that rose following Trump's election.

All the hopes and dreams for a significant bump in the economy with a decrease in banking and business regulations and business taxes are now starting to crash on the rocks of reality known as Washington politics. Even with a Republican-controlled Congress it's becoming more apparent that Trump has an up-Hill battle on his hands. The stock market rally has been built on the premise that our economy is like a coiled spring, ready for significant growth once Trump enacts his changes.

There was an interesting article written yesterday by an analyst (Patrick Watson) writing for John Mauldin, titled Monumental Gridlock Meets Blind Euphoria, in which he discussed the problem with the euphoric response by the stock market and the reality that's now settling in. In the article he presented a chart done by Gavekal Research that I thought was interesting, shown below.

Coiled for Growth?

You can get more details from the article itself but summarizing, there are four options based on whether the economy is poised for growth and whether or not the Fed will tighten monetary policy aggressively. Considering the difficulty that the government will be able to do anything substantial in the coming year(s) and that the economy is sputtering along (low growth expectations), the higher probability is that the economy is not going to spring higher.

The case Watson made in the article is that the economy is the opposite of a coiled spring for growth. Add in the problem with a Fed that desperately wants (needs) to raise rates and/or trim their balance sheet, the most likely scenario is the 3rd one.

The 3rd scenario above says the Fed will make a mistake (I know, that's hard to believe since it's never happened before, cough) and tighten too quickly when the economy is not ready for it. The deflationary cycle that the Fed will help start means investors should buy the US$, bonds and stable growth stocks. Sell cyclicals, emerging markets and scarcity assets. If you read many of today's investment letters they're saying the complete opposite so the 3rd scenario above is a minority opinion. Oftentimes it's the minority opinion (betting against the masses) that works out the best. Food for thought anyway.

Before getting into stock market index charts I thought it would be good to review what's happening in the VIX, which has been climbing since hitting a low at 10.9 on April 5th. This low coincided with a high for the market on the same day before crashing lower that afternoon (supposedly triggered by the fact that Congress was not going to be able to get the new healthcare plan passed).

Since April 5th we've seen the market struggle to hold on but it has only chopped slightly lower; e.g., SPX hit a high of 2378 on April 5th and a low of 2337 on Tuesday before bouncing back up strongly. That's a measly -1.7% decline for SPX. In the meantime VIX has shot higher, climbing from 10.90 to today's high at 16.16, for a 48% increase. What's prompting the big move in the VIX and is it a strong warning for the stock market bulls?

Yes and no is the answer to the above question. The VIX increase could be related more to the trading in VIX futures but it's still a warning about what the commercial traders are betting on, or perhaps more importantly, what the non-commercial traders (speculators) are betting on.

The two charts below show the VIX and the VIX futures contracts and they tell a story.

Volatility index, VIX, Weekly chart

Tuesday's climb in the VIX broke a downtrend line from the November 4th high through the March 27th high (which coincided with the March 27th low for the stock market). Today it climbed higher and reached one of the "transition" levels at 16 (but did not close over 16). Over the years this level has marked a transition from complacency to creeping fear in the market.

Above 16 would be a warning sign that fear, which is a stronger emotion than greed, is starting to affect trader sentiment. The next level of resistance for the VIX, if it keeps climbing, is a downtrend line from January 2016 (the other peaks were June 27th and November 4th), currently near 19. Note the continuing bullish divergence on the VIX since March 2016.

VIX futures contracts, Weekly chart

Now we look at the VIX futures contracts to see which way the speculators are leaning. As we know, the speculators are typically wrong at major turns and right now they are massively short the VIX as compared to times past. There's a huge open interest in VIX futures but mostly long the VIX and in the meantime the speculators are in one of their largest short positions. Care to guess which way the VIX is likely to go?

A rising VIX, such as we're seeing, is going to cause massive pain for the speculators and as they cover it's going to drive the VIX higher. I think we're seeing that start to play out now and it's likely to continue. How that will translate to a move in the stock market is a big question but a rising VIX is generally not a good sign for the stock market.

The VIX futures and a climbing VIX doesn't mean the market will head immediately lower, especially since the price pattern supports the idea for another run higher, but as long as the professional traders continue to take the opposite side of the speculators in the VIX futures market I'd be very careful about the long side of the stock market.

So what does all this mean for the stock market? Are there any price patterns that tell us to get short the market and hang on for the ride? No, not yet and in fact I could argue for another rally to new highs once the current pullback completes. But that's not clear enough yet to suggest we should be buying the current dip. Unfortunately we'll need to wait for more price action before we'll have a better idea how the market could do over the next couple of months.

S&P 500, SPX, Weekly chart

Other than a couple of opposing large weekly candles since March 1st, all we have are small-range weeks as the bulls and bears fight for control. The only thing the bears have going for them at the moment is the drop back below the trend line along the highs from April-August 2016 (purple line). SPX had jumped above this trend line in February and has been dancing around it after dropping back below the line on March 21st.

Since dropping below the April-August 2016 trend line it has not been able to close back above it and that keeps it looking more bearish than bullish. But a choppy sideways/down consolidation can be argued to be a bullish continuation pattern and a bullish wave count (green) for the rally from February 2016 argues for another leg up once the pullback completes. I see nothing yet to negate that expectation and I'm watching for evidence in the pullback for possible completion (not yet) and a reason (or not) to get long for another (and likely final) rally.

S&P 500, SPX, Daily chart

Today was the first day since November 8th that SPX closed below its 50-dma. SPX broke it intraday on March 27th but then reversed sharply back up and closed above the 50-dma. It has tested it repeatedly since then and many have been calling for buying the dip to the 50-dma since it's generally a good buying opportunity in an established uptrend. Obviously if SPX is unable to recover back above its 50-dma, near 2352, it's going to set off some sell alarms.

In addition to the 50-dma there's an uptrend line from November 4 - March 27 near the same 2354 level. The 20-dma, which has been holding down rally attempts, is declining and is currently near 2357. Because of the choppy price pattern for the pullback from March 1st I have to consider several possible price paths from here (all the dashed lines on the chart) and right now all it means is that trades should be short-term oriented since there is a high risk for more reversals of reversals.

Key Levels for SPX:
- bullish above 2379
- bearish below 2322

S&P 500, SPX, 60-min chart

The bearish short-term patterns calls for an acceleration of the selling and a fast drop to the bottom of a parallel down-channel for the pullback from March 1st, currently near 2304. There's a price projection at 2300 for two equal legs down from March 1st and that coincides with price-level S/R near 2300.

A bullish possibility, other than rallying immediately from here, is for the completion of a small descending wedge for the decline from April 5th, which calls for just one more leg down to about 2327 to set up the next strong rally (bold green). For now, a rally above 2358 would be potentially bullish and a drop below 2322 would negate the bullish wave count and point lower.

Dow Industrials, INDU, Daily chart

The DOW has also broken its uptrend line from November 4 - March 27 (on Tuesday) and today it closed below its 50-dma, near 20644 (it will be near 20650 on Thursday. Also like SPX, MACD appears ready to roll over from at/below the zero line, which would create a sell signal. A drop below its March 27th low at 20412 would point to a possible move down to price-level S/R at 20K.

A rally above its April 5th high at 20888 could lead to a strong rally to the trend line along the highs from May 2011 - March 2015, which will be near 21330 by the end of the month (it will first need to get through 21K to exceed two equal legs up for a bounce off the March 27th low).

Key Levels for DOW:
- bullish above 20,888
- bearish below 20,412

Nasdaq Composite index, COMPQ, Daily chart

The Nasdaq tested its 50-dma on Tuesday and got a strong bounce back up to resistance at its 20-dma. Today it dropped back down to its 50-dma near 5830 but did not close below it. There's still a chance for the bulls to recover but they can't waste any time. The more the Nasdaq beats on support the weaker it will become. If the techs join the blue chips below their 50-dmas it's going to scare more than a few investors out of their positions.

Key Levels for COMPQ:
- bullish above 5937
- bearish below 5769

Russell-2000, RUT, Daily chart

The RUT has been the weakest index relative to its 50-dma and since dropping below it on April 3rd it has only been able to back-test it on Monday and Tuesday. Today's -1.3% decline left a strong rejection from the 50-dma, which leaves it on a sell signal. But like the Nasdaq, the bulls have a chance to save this if support at its uptrend from November 4 - March 27 holds, as it did on April 5th and 6th. At 1359, it closed on the uptrend line today so the bulls can't waste any time. Stronger support is price-level S/R near 1347.

It's possible the RUT has created a shallow H&S topping pattern since the left shoulder was formed back in December. The neckline is currently near 1332 and the downside projection from the pattern is to about 1250. That's just a pattern to consider but it provides downside risk assessment for now.

Key Levels for RUT:
- bullish above 1390
- bearish below 1347

10-year Yield, TNX, Daily chart

There's been buying bonds since March 10th and that has driven yields back down from the December-March double top (with bearish divergence). TNX is now slightly below the valley between the double top (the January 12th low at 2.309) with yesterday's and today's close below 2.3. This confirms the double top and suggests lower yields are coming.

But at the moment TNX has again found support at its broken downtrend line from June 2007 - December 2013, just as it did three times before in January and February. Multiple back-tests, as it's doing, generally don't work out well for the back-test to hold as support weakens and this is the 4th back-test.

The downtrend line is currently near 2.285 (today's low was 2.280) and as long as it holds we could see another bounce. The pattern since last December could be argued to be a bullish continuation pattern, which is why a break of support near 2.28 would suggest the 3rd scenario that Gavekal Research showed on their chart (first chart shown in tonight's wrap) would start to look stronger, especially if the dollar is also rallying with the bond market.

Transportation Index, TRAN, Daily chart

Along with today's losses for the SOX (-1.70%) and BKX (-1.1%), both of which were in sync with their relative weakness today, the TRAN was also a leader to the downside (-1.8%). All of them point to a slowing economy and that's not a good sign for the stock market (back to the Gavekal Research chart). The TRAN's decline follows several days of pushing up underneath its broken uptrend line from June-October 2016, which leaves a bearish kiss goodbye. This puts it on a sell signal that can only be negated with a rally above Tuesday's high at 9218.

As with the RUT and a few other indexes, there is a possible H&S topping pattern playing out, with the neckline from December through the March 27th low. The neckline is currently near 8730 so there's plenty of room for the bulls to pull something together. The downside objective for the pattern will be near 7925.

U.S. Dollar contract, DX, Daily chart

With Monday's strong rally in the US$ it closed above both its 20- and 50-dmas but Tuesday's selling and today's stronger selling has it back down below both MAs, now near and 100.65, resp. This leaves a failed breakout attempt and points to lower prices for the dollar. While I believe the longer-term picture for the dollar is bullish I think it first needs to complete a consolidation pattern off its March 2015 high. A drop down to the $90 area by later this year continues to look like a good possibility. But a rally above its March 2nd high at 102.27 would be more immediately bullish.

Gold Commitment of Traders chart, 2015-April 2017

On Monday I showed a couple of Commitment of Traders (COT) charts to highlight how much of a divergence we currently have between commercial and non-commercial traders in the S&P 500 futures contracts and the oil futures contracts. Both show large net-long positions by non-commercial traders (speculators) and large net-short positions by the commercial traders (professional). This simply highlights the risks in betting on the long side for both.

The same is true for gold, as can be seen with the COT chart below. Gold has been rallying since last December and today it made another new high for its leg up from December. But commercial traders have been building a larger net short position as the rally has progressed. The current spread between speculators, who are in a large net-long position, and commercial traders argue for a top soon in gold.

Gold continuous contract, GC, Daily chart

While the COT report argues caution by gold bugs, I do see at least a little more upside potential. If the rally from December is to achieve two equal legs up we're looking for a rally to 1335.10, shown on the chart. But it met its minimum objective today at 1281.39, with today's high at 1289, which is where the 2nd leg of its rally is 62% of the 1st leg.

Based on its price pattern I see a good chance for gold to reach its downtrend line from September 2011 - August 2016, near its January 2015 high at 1308. It would be more bullish above 1308 but maybe only to 1335. A drop back below its 200-dma, near 1261, would be a bearish heads up and then below its March 30th low at 1241.10 would mean the top of the bounce is in place.

Silver continuous contract, SI, Weekly chart

It could be instructive to watch silver here and see if a continuation of the rally in gold will be supported by silver. It's best to see them in sync when trading one or the other. Silver has now made it up to its downtrend line from April 2011 - July 2016, near 18.58, and now we should soon find out whether or not it will be strong resistance. At the same level is a short-term price projection for the 3-wave move up from December. It's also a test of its March 1st high at 18.51.

Oil continuous contract, CL, Daily chart

Oil pulled back today and while it could make it a little higher, to its shallow downtrend line from January-February, near 54.70, I see enough evidence now to suggest at least a deeper pullback, if not the start of the next leg down. The overall pattern of the bounce off the August 2016 low leads me to believe the bounce will lead to new lows (below the August low at 39.19). But a rally above the February 23rd high at 54.94 could lead to a shot up to 60 before the bounce pattern will be complete.

Economic reports

Thursday morning we'll get some more inflation numbers with the PPI reports. Along with the usual Thursday unemployment numbers we'll also get the preliminary Michigan Sentiment numbers, which are not expected to change much. A lower-than-expected number could upset the market if it's believed the drop in sentiment comes from a loss of hope in what the government will be able to achieve. Friday we'll get the important retail sales numbers, which will shed more light on what the retailers can expect. We'll also get the CPI data.


The pullback pattern from the highs on March 1st has been a choppy affair and as such it can easily be argued that we're getting a bull flag pattern. I've mentioned the potential for a choppy sideways/down pullback correction for most of April and that remains a possibility. It would chew up traders on both sides and is a big reason why I'm suggesting very cautious trading right now and make trades short-term oriented (take profits when offered). The reversals of reversals have left many traders holding the bag (with decaying options positions).

The short-term picture looks more bearish than bullish since some important support levels were broken today after repeated testing of support. That could kick in more selling as stops get hit. But the bulls could still pull another rabbit out of their hat if they hit the market with more buying immediately on Thursday.

The bulls need a rally above Monday's highs (SPX 2366) in order to negate the current sell signal but a rally above Tuesday afternoon's highs (SPX 2354) would be a bullish heads up. The bears just need to keep the bulls away from the buy buttons.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

New Option Plays

Weekend Event Risk

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes turned decidedly bearish and the approaching three-day weekend has significant event risk. Futures are down again on Wednesday evening. Any bearish play we could add would receive a bad fill on another gap down open. Launching a bullish call play in a declining market would be foolish.

Saturday is the biggest holiday of the year in North Korea and they typically celebrate by launching missiles or setting off bombs. They are expected to do a nuclear test on Saturday unless China's president has called on the hotline threatening them if they follow through with a test. The U.S. has a carrier strike force moving into position and expectations are for a U.S. reaction to any violation of the UN sanctions. This 3-day weekend probably has more event risk than any in recent memory.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Bearish Signals Everywhere

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes all turned bearish after closes below critical support. The Dow closed below 20,600, S&P below 2,350, Nasdaq below 5,850 and the Russell 2000 lost -18 points or -1.2% to close at a four day low.

The big cap indexes were already weak and the continued declines were further confirmation of trouble ahead. Once the bank earnings are out of the way on Thursday morning, there is a three-day weekend of geopolitical risk and investors may use the afternoon to clear positions. This is also the last trading day before April 15th and the tax bill has come due.

The sharp decline in the Russell and S&P-600 erased five days of gains and killed the big cap rotation idea. The Dow and S&P definitely turned bearish and Friday could be rocky.

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

CRUS - Cirrus Logic
The long call position was reopened at $63.24.

AN - Autonation
The long put position was closed at the open.

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

ADBE - Adobe Systems - Company Profile


No specific news. Stifel initiated coverage with a buy rating and $150 price target. Minor decline in a weak market.

Original Trade Description: March 23rd.

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment's flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company's Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. Company description from FinViz.com.

Everybody knows Adobe or at least they did 20 years ago. Photoshop and Illustrator were the key pieces of software everyone needed to create content for magazines and print media. What would Sports Illustrated have done without Photoshop for their Swimsuit Edition?

Fast forward to 2017 and Adobe has so many different pieces and partners that you cannot even describe them all. With annual revenue at $7 billion and growing they are rapidly outpacing everyone's earnings expectations.

Adobe is hosting its annual Digital Marketing Summit. At that event they announced several new partnerships and the integration of multiple "cloud" entities into one platform.

This description is from a Real Money article.

Headlining these moves is the creation of a common platform, known as the Experience Cloud for all of the products that to date had been grouped within Adobe's "Marketing Cloud." Going forward, Marketing Cloud will comprise one of three parts of Experience Cloud, and feature products such as Experience Manager (used to create and manage marketing content across platforms), Target (lets marketers personalize user experiences) and Social (used to run social media marketing campaigns).

Another part of Experience Cloud, known as Advertising Cloud, lets companies run and optimize search, display and video ad campaigns. It pairs Adobe's Media Optimizer search and display ad-buying tools with recently-acquired TubeMogul's video ad-buying platform. The third part, known as Analytics Cloud, combines the popular Adobe Analytics tool for uncovering insights from customer data with Audience Manager, a platform for creating customer/audience profiles.

Advertising Cloud has gotten a lot of attention, since it more firmly makes Adobe a player in an ad tech space where Alphabet/Google (GOOGL) and Facebook (FB) loom large, and where independent players such as The Trade Desk (TTD) and The Rubicon Project (RUBI) are also present. Adobe is pitching itself as an independent alternative to Google and Facebook, which of course are also giant sellers of ad inventory, while arguing that integrations between the three parts of Experience Cloud set it apart from both independent ad tech players and marketing software rivals such as Salesforce.com (CRM) and Oracle (ORCL).

In their earnings last week, they reported a 21.6% rise in revenue to $1.68 billion and the 12th consecutive increase in revenue from the Creative Cloud graphics software. Earnings were 94 cents and analysts had been expecting 87 cents and $1.645 billion in revenue. Adobe said annualized recurring revenue rose by $265 million to $4.25 billion. That is based on continuing subscription growth.

Earnings June 15th.

Shares spiked after earnings from $122 to $130 and then faded back to $125 over the next week. They have started to rebound again because finding 20% revenue growth in the market is hard to do.

Position 3/24/17 with an ADBE trade at $127.50
Long May $130 call @ $2.61, see portfolio graphic for stop loss.

ADP - Automatic Data Processing - Company Profile


No specific news.

The option has declined to only 10 cents so I removed the stop loss. It is a May call so we have plenty of time for it to recover. We gain nothing by exiting now.

Original Trade Description: March 17th.

Automatic Data Processing, Inc., together with its subsidiaries, provides business process outsourcing services worldwide. The company operates through two segments, Employer Services and Professional Employer Organization (PEO) Services. The Employer Services segment offers a range of business outsourcing and technology-enabled human capital management (HCM) solutions, including payroll services, benefits administration services, talent management, human resources management solutions, time and attendance management solutions, insurance services, retirement services, and tax and compliance solutions. This segment's integrated HCM solutions include RUN Powered by ADP, ADP Workforce Now, ADP Vantage HCM, and ADP GlobalView, which assist employers of all sizes in all stages of the employment cycle from recruitment to retirement; and ADP SmartCompliance and ADP Health Compliance. The PEO Services segment provides a human resources (HR) outsourcing solution through a co-employment model to small and mid-sized businesses. This segment offers ADP TotalSource that provides various HR management services and employee benefits functions, such as HR administration, employee benefits, and employer liability management into a single-source solution. Company description from FinViz.com.

ADP reported earnings of 87 cents that rose 57% and beat estimates for 81 cents. Revenue of $2.99 billion rose 6.4% but missed estimates for $3.01 billion. They surprised analysts with revenue growth guidance for 2017 at 6%, down from prior forecasts of 7% to 8%. They blamed the revenue miss and lowered guidance on uncertainty over the elections and the impact of the Trump election. They also see a 1% revenue hit from the sale of their CHSA and COBRA businesses in 2016. They guided for earnings growth of 15% to 17% for the full year. They currently serve 637,000 clients in 125 nations. The number of employees serviced rose 2.3%. PEO Services employees rose 12% to 452,000. These are "co-owned" employees managed by ADP for clients.

They repurchased 4.6 million shares at a cost of $422 million. They expect to repurchase $1.2-$1.4 billion in shares in 2017.

Earnings May 3rd.

ADP holds a dominant position in the payroll processing sector. With employment expected to rise again in 2017 this could be an attractive investment for funds that are tired of chasing industrials and bank stocks in the current rally.

ADP rallied nearly $1 on Friday in a weak market and closed at $105.12 and a new high. It was also just over the $105 strike. I am recommending we reach out to the $110 strike since it appears ADP is about to move higher after three weeks of consolidation. This option price is very cheap and there will be no initial stop loss.

Position 3/20/17:

Long May $110 call @ 75 cents, see portfolio graphic for stop loss.

CRUS - Cirrus Logic - Company Profile


After the close today, Pacific Crest said Cirrus, Broadcom, Qorvo and Skyworks would be exempt from Apple's in-sourcing of its own chips. The chips these companies make are highly sophisticated and protected intellectual property. This should help the stock on Thursday.

Original Trade Description: April 6th.

Cirrus Logic, Inc., a fabless semiconductor company, develops, manufactures, and markets analog and mixed-signal integrated circuits (ICs) for a range of consumer and industrial markets. It offers portable audio products, including analog and mixed-signal audio converters, and digital signal processing products for mobile applications; codecs-chips that integrate analog-to-digital converters and digital-to-analog converters into a single IC; smart codecs, a codec with digital signal processer; amplifiers; and micro-electromechanical systems microphones, as well as standalone digital signal processors. The company offers its products for mobile devices, including smartphones, tablets, digital headsets, wearables, smart accessories, and portable media players. Its products are also used in laptops, audio/video receivers, home theater systems, set-up boxes, portable speakers, digital camcorders, musical instruments, and professional audio products applications; and serve the automotive market, which include satellite radio systems, telematics, and multi-speaker car-audio systems. In addition, the company's products are used in industrial and energy-related applications, including digital utility meters, power supplies, energy control, energy measurement, and energy exploration applications. It markets and sells its products through direct sales force, external sales representatives, and distributors in the United States and internationally. Company description from FinViz.com.

Cirrus is a major component contributor to Apple, Samsung and other smartphone manufacturers. They also supply chips to dozens of other types of products.

In 2014 Apple provided for 80% of Cirrus annual revenue. In 2016 that declined to 65% and continues to shrink. Samsung made up 15% of 2016 revenue.

The strong sales of the iPhone 7 and the expected blowout sales for the iPhone 8 and Samsung 8 this year should produce millions in additional revenue. Sales rose 28% in 2016 and analysts expect 31% revenue growth in 2017. Earnings are expected to rise 82% for 2017

With the iPhone 8 expected to post blowout sales numbers, that means component demand over the next 9 months will also be strong. Suppliers normally begin shipping components in the last week of June but this year there are indications they have been requested a month earlier so that Apple can have more phones on hand when sales begin.

Earnings May 3rd.

With earnings in early May, this will only be a three-week position. We will exit before earnings. On the chart, the spike on February 1st was earnings of $1.87 compared to estimates for $1.63. The immediate decline the next day was on guidance for revenue of $300-$340 million and analysts had been expecting $331.9 million. That dip has been forgotten given all the hype over the iPhone 8 and Samsung 8. A move over that level should trigger additional short covering.

Update 4/11/17: We were stopped out on the knee jerk move in Apple suppliers after Dialog Semi was cut when news broke Apple was going to make some of their own chips for their phones. This was simply a reaction to a headline. Even if Apple did decide to make their own chips it would take until 2019 for it to have any impact and Cirrus Logic would not be affected because of the type of chips they supply. We reloaded the position at the open on 4/12.

Position 4/11/17:

Long May $65 call @ $2.93, see portfolio graphic for stop loss.

Previously Closed 4/11/17: Long May $65 call @ $3.30, exit $2.65, -.65 loss.

DIS - Walt Disney - Company Profile


Beauty and the Beast will surpass $1 billion in total box office sales this weekend. Of the 29 movies to ever break $1 billion, Disney has 14 of them.

Original Trade Description: March 13th.

The Walt Disney Company, together with its subsidiaries, operates as an entertainment company worldwide. The company's Media Networks segment operates cable programming services, including the ESPN, Disney channels, and Freeform networks; broadcast businesses, which include the ABC TV Network and eight owned television stations; radio businesses consisting of the ESPN Radio Network; and the Radio Disney network. It also produces and sells original live-action and animated television programming to first-run syndication and other television markets, as well as subscription video on demand services and in home entertainment formats, such as DVD, Blu-Ray, and iTunes. Its Parks and Resorts segment owns and operates the Walt Disney World Resort in Florida and the Disneyland Resort in California. This segment also operates Disney Resort & Spa in Hawaii, Disney Vacation Club, Disney Cruise Line, and Adventures by Disney; and manages Disneyland Paris, Hong Kong Disneyland Resort, and Shanghai Disney Resort, as well as licenses its intellectual property to a third party for the operations of the Tokyo Disney Resort in Japan. The company's Studio Entertainment segment produces and acquires live-action and animated motion pictures for distribution in the theatrical, home entertainment, and television markets primarily under the Walt Disney Pictures, Pixar, Marvel, Lucasfilm, and Touchstone banners. This segment also produces stage plays and musical recordings; licenses and produces live entertainment events; and provides visual and audio effects, and other post-production services. Its Consumer Products & Interactive Media segment licenses its trade names, characters, and visual and literary properties; develops and publishes games for mobile platforms; and sells its products through The Disney Store, DisneyStore.com, and MarvelStore.com, as well as directly to retailers. Company description from FinViz.com

Disney reported earnings of $1.55 on revenue of $14.78 billion. Analysts were expecting $1.49 and $15.26 billion. The comparisons to the year ago quarter were tough because of Frozen and Star Wars, The Force Awakens in that period. Star Wars was the first billion dollar film for the current fiscal year. The studio segment generated $2.52 billion in revenue. In January, after the December quarter ended, the company said it had more than $7.6 billion in global box office gross thanks to Star Wars: Rogue One, Captain America: Civil War and Finding Dory. CEO Bob Iger downplayed the concerns over ESPN saying they were very overblown because ESPN was still in demand by consumers, networks and advertisers.

Shares have recovered from the post earnings depression and are poised to continue making new highs, market permitting.

Update 3/15/17: Disney has upped its ownership to 85.7% and said it was going to buy out the rest of the investors and offered them a premium to the current value of their shares. Some investors are complaining. Euro Disney has significant debt and Disney said it would recapitalize 1.5 billion euros once it had full control. The actual park management loves the plan because it would put Disney back into control and provide it solid financial backing. This is just a temporary hiccup in the stock.

Update 3/20/17: Beauty & the Beast took in $170 million in ticket sales on its opening weekend. That was a record high for a family film. Disney has 11 other animated classics that it is planning to remake with human actors. The success of Beauty & the Beast will make theses 11 films a reality.

Mulan, Aladdin, Lion King, 101 Dalmatians, Little Mermaid, Pinocchio, Sword in the Stone, Peter Pan, Snow White and the Seven Dwarfs, Dumbo and a sequel to Marry Poppins.

Update 3/23/17: CEO Bob Iger agreed to a one-year contract extension until July 2019. He was previously going to retire in July 2018.

Update 3/24/17: Rumors and suggestions are starting to circulate suggesting Apple could buy Disney instead of Netflix in order to acquire a content generating machine and level out the earnings/cash flow. Currently Apple has very big fluctuations in revenue because of their cyclical production nature. If they owned a company like Disney they would have steady and predictable earnings. Disney has a market cap of $177 billion and Apple has $230 billion in cash. Liberty Media Chairman John Malone suggested if Disney spun off ESPN, Apple would buy Disney. That suggests an outright Apple purchase would also resort in an ESPN spinoff.

Update 3/30/17: Disney is relaunching Club Penguin, a game with hundreds of millions of users into Club Penguin Island. The original game had to be shutdown when browser technology began to limit what developers wanted to do inside the game. Now they are restarting in an app for Android and IOS. The basic game will be free but there is a $4.99 per month subscription fee it you want the advanced features. If only 100 million of the prior users signed up for the advanced package that would be $500 million a month in additional revenue. What kid cannot get dad to pay $4.99 per month for hours of peace and quiet?

Update 4/11/17: Goldman Sachs put Disney on their conviction buy list with a $138 price target. The company cited their best upcoming calendar of movies ever. In FY 2018 they have 4 Marvel films, 2 Star Wars films and 3 animated films. Goldman expects record profits from the studio in 2017 and 2018. The analyst said Disney was seeing accelerating profit growth at ESPN and record profits from the theme parks. Avatar Land, Toy Story Land and Star Wars Land all making debuts over the next couple years, the parks are going to be flooding the company with cash.

Earnings May 9th.

Position 3/14/17:

Long May $115 call @ $1.83, see portfolio graphic for stop loss.

FIVE - Five Below - Company Profile


Five will open the first nine stores in California next week with stores at Aliso Viejo, Anaheim, Compton, Hawthorne, Montebello, Fontana, Rancho Cucamonga, South Gate and Redlands.

Original Trade Description: April 10th.

Five Below, Inc. operates as a specialty value retailer in the United States. It offers accessories, including novelty socks, sunglasses, jewelry, scarves, gloves, hair accessories, athletic tops and bottoms, and T-shirts, as well as beauty products comprising nail polish, lip gloss, fragrance, and branded cosmetics; and items used to complete and personalize living space, including glitter lamps, posters, frames, fleece blankets, pillows, candles, incense, and related items, as well as provides storage options for the customer's room and locker. The company also provides sport balls; team sports merchandise and fitness accessories, such as hand weights, jump ropes, and gym balls; games, including name brand board games, puzzles, toys, and plush items; and pool, beach and outdoor toys, games, and accessories. In addition, it offers accessories, such as cases, chargers, headphones, and other related items for PCs, cell phones, and tablet computers; books, video games, and DVDs; craft activity kits; arts and crafts supplies that consist of crayons, markers, and stickers; and trend-right items for school comprising backpacks, fashion notebooks and journals, novelty pens and pencils, and everyday name brand items. Further, the company provides party goods, gag gifts, decorations, and greeting cards, as well as every day and special occasion merchandise products; assortment of classic and novelty candy bars, movie-size box candy, and gum and snack food; chilled drinks through coolers; and seasonally-specific items used to celebrate and decorate for events, such as Christmas, Easter, Halloween, and St. Patrick's Day. It primarily serves teen and pre-teen customers. As of January 28, 2017, it operated approximately 522 stores in 31 states. Company description from FinViz.com.

Five Below is an expensive Dollar Store. Everything in Five Below is $5 or less. That gives they a wider range of products and still keeps them somewhat Amazon proof because buying it online requires shipping.

Five Below is a bargain hunter impulse store. Customers rarely walk in with a specific product in mind but looking for a bargain instead. This is a kid magnet because they stock a lot of stuff that appeals to adolescents.

They reported earnings of 90 cents that beat estimates for 89 cents. Revenue was $388.1 million and that narrowly beat estimates for $387 million.

They guided for Q1 for earnings of 12-14 cents and analysts were expecting 13 cents. For the full year, they guided for $1.55-$1.61 per share and analysts expected $1.58. Revenue guidance was $1.21 to $1.23 billion.

They currently operate about 550 stores and plan to open 100 in 2017. They expect to increase that to 2,000 stores over time. They were primarily in Texas Florida and the North East but they have begun to expand into California and the feedback has been outstanding. Nothing costs under $5 in California so their stores are hot locations.

Earnings June 21st.

Shares closed at a 7-month high on Monday and just over resistance at $44.50. If the current rally holds the next resistance test would be $52.

Position 4/11/17:

Long May $45 call @ $1.90, see portfolio graphic for stop loss.

HLF - Herbalife - Company Profile


No specific news. Only a minor decline in a weak market.

Original Trade Description: March 15th.

Herbalife Ltd., a nutrition company, develops and sells weight management, healthy meals and snacks, sports and fitness, energy and targeted nutritional products, and personal care products. It offers science-based products in four principal categories, including weight management; targeted nutrition; energy, sports, and fitness; and outer nutrition. The company's weight management product portfolio includes meal replacement products, protein shakes, drink mixes, weight loss enhancers, and healthy snacks; targeted nutrition products comprise dietary and nutritional supplements containing herbs, vitamins, minerals, and other natural ingredients; and outer nutrition products consist of facial skin, body, and hair care products. It also provides literature, promotional, and other materials, including start-up kits, sales tools, and educational materials. The company offers its products through retail stores, sales representatives, sales officers, and independent service providers. It operates in North America, Mexico, South and Central America, Europe, the Middle East, Africa, the Asia Pacific, and China. Company description from FinViz.com.

It is well known that Bill Ackman has a $1.5 billion short on Herbalife. He has had it for a couple years. It is also well known that Carl Icahn does not like Ackman.

Ackman took a major hit in Valeant when he announced on Monday he had closed his 27.2 million share position for a loss of more than a $3 billion. Ackman is hurting because several of his recent high profile positions have gone against him and investors are pulling out their money or at least sending him hate mail suggesting he get his act together. He is also holding a massive long position in Chipotle and the stock is moving lower.

On Monday, Ackman announced he closed the Valeant position. Immediately, Carl Icahn announced he was buying 372,000 more Herbalife shares and had asked the SEC for permission to acquire up to 50% of the company. He already owns 24.6%. This is killing the short position held by Ackman. Shares are rising on the Icahn news.

While this seems like the perfect long position where Icahn is going to force Ackman to cover, there is one big problem. On March 17th a movie called "Betting on Zero" which profiles Ackman's short thesis, will open in a national release. Remember, everyone has known about this movie for a year. It played in a few single venues and the stock did not decline. When it was picked up for national release about 6 months ago, everyone thought this would be the end of the company. However, in late 2016 the company settled with the FTC for $200 million on a probe into their marketing practices. They dodged another large bullet since the probe was also based on Ackman's short thesis.

Shares collapsed in late February on a guidance miss and bottomed last Friday. They have been rebounding since Icahn made his recent announcement.

I am recommending a short term strangle. The odds are good that the stock is going to be directional after the film begins showing on the 17th. Everyone will either say OMG and dump the stock or they will say, "so what is the big deal" and buy the stock. Since Icahn has $1.5 billion invested, you know he is going to be very vocal about it and will probably publicize any further purchases if the stock declines. We do not care which way the stock moves. We just need it to move significantly.

Position 3/16/17:

Long April $57.50 call @ $1.11, no stop loss.
Long April $52.50 put @ $1.36, no stop loss.

JACK - Jack in the Box - Company Profile


No specific news. Shares gafe back the dollar gain and lost another dollar in a weak market. Resistance at $102.25 is holding.

Original Trade Description: March 30th.

Jack in the Box Inc. operates and franchises Jack in the Box quick-service restaurants and Qdoba Mexican Eats fast-casual restaurants primarily in the United States. As of October 02, 2016, it operated and franchised approximately 2,255 Jack in the Box restaurants in 21 states and Guam; and approximately 699 Qdoba Mexican Eats restaurants in 47 states, the District of Columbia, and Canada. The company was founded in 1951 and is based in San Diego, California. Company description from FinViz.com.

JACK reported earnings of $1.18 but that missed estimates for $1.24. Revenue of $487.9 million rose 3.6% but missed estimates for $500.1 million. The earnings include a $2 million restructuring charge for facility closing costs and employee severance pay. Same store sales rose 3.1% for the quarter. This compared to the retail tracking group NPD SalesTrack which showed similar chains averaged 1.6% for the quarter. The average check also rose 4.9%.

JACK guided for Q1 same store sales to be flat to down -2% at Jack in the Box stores and down 1% to 3% at Qdoba stores. For the full year they guided for sames store sales growth of 2% at Jack stores and flat at Qdoba stores. They guided for earnings of $4.25-$4.45 and well below estimates for $4.71. Shares were crushed for a 10% loss.

Earnings May 24th.

However, in case you did not know there is a restaurant recession in progress. All the restaurant chains reported negative sales comps citing excessive competition and strong discounting. At JACK operating earnings rose 27% for the quarter and very few of the other chains were even close.

Like everyone else they blamed the delayed tax refunds for a sharp slowdown in sales in February. They also suffered from the record rainfall and flooding in California where the chain has a large presence.

They plan to open 20 to 25 new Jack in the Box stores in 2017 and 50-60 new Qdoba stores.

There is nothing wrong with this company that justified a 10% drop in the stock. Now that shares are rebounding, it should attract a lot of buyers expecting a return to the pre earnings levels.

Position 3/31/17:

Long June $110 calls @ $1.85. See portfolio graphic for stop loss.

SLCA - U.S. Silica Holdings - Company Profile


No specific news. Minor decline with drop in oil prices.

Original Trade Description: March 9th

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. Company description from FinViz.com.

Silica sells sand to drillers. The drilling activity has increased 50% since the low in May. The active rig count declined to 404 on May 27th and has rebounded to 756 as of last week. Many of these reactivated rigs are completing previously drilled wells that were never fracked and put in production. The IEA said there were more than 5,000 of these wells at the end of December. It only takes a few days to reopen a well and prepare it for fracturing and then move to the next. The sand demand to fracture these wells is off the charts.

Since the drilling boom in 2014 the amount of sand used in fracturing a well has risen about 400% because of two years of additional data and refinement of the process. A current well with a two-mile lateral requires as much sand as a 100 rail car train, called a unit train.

Sand providers claim they have drillers trying to lock in sand prices for a year in advance but there is not enough sand available to fill the demand. Prices are expected to rise 40% in the first half of 2017. Multiple analysts predict a sand shortage in 2018 with another 50% or more rise in prices.

U.S. Silica was crushed in late February when they missed on earnings. They spent a lot of money in the quarter acquiring additional sand reserves and merging in acquisitions from earlier in the year. They spent 2016 acquiring other sand companies and operations around the country so they would be ready when the drilling boom returned.

They were crushed again this week when oil prices fell 7% in just two days to the lows for the year.

Oil prices are down on record inventory levels. Inventories rose by 8.2 million barrels to 528.4 million barrels on Wednesday. However, this ALWAYS happens in Feb/Mar. Refiners go offline for spring maintenance in this slow demand period. For two months, inventories build until they restart at the end of March and begin consuming huge amounts of oil to make summer blend gasoline. The price of crude always declines in this period.

If I could, I would buy a longer dated call and hold on to this position until fall. However, this newsletter is not a buy and hold strategy. I am going to recommend the June calls and we will exit before the May earnings.

Earnings May 24th.

The decline over the last two days knocked the stock back to the 200-day and support from November.

Update 4/4/17: SLCA rallied $1.24 on news they acquired a division of National Coatings that supplies roofing products with high thermal resistance and emittance. They reduce energy consumption and increase the durability of the roof. SLCA already supplies more than 260 products to industry with frack sand only one of those products.

Position 3/10/17:

Long June $50 call @ $3.20, see portfolio graphic for stop loss.

SYMC - Symantec - Company Profile


No specific news. Support was tested again.

Original Trade Description: March 16th

Symantec Corporation, together with its subsidiaries, provides cybersecurity solutions worldwide. It operates through two segments, Consumer Security and Enterprise Security. The Consumer Security segment offers Norton-branded services that provide multi-layer security and identity protection on desktop and mobile operating systems to defend against online threats to individuals, families, and small businesses. Its Norton Security products help customers protect against complex threats and address the need for identity protection, while also managing mobile and digital data, such as personal financial records, photos, music, and videos. The Enterprise Security segment provides threat protection products, information protection products, cyber security services, and Website security offerings. Its products protect customer data from threats, such as advanced protection threats, malicious spam and phishing attacks, malware, drive-by Website infections, hackers, and cyber criminals; prevent the loss of confidential data by insiders; and help customers achieve and maintain compliance with laws and regulations. This segment delivers its solutions through various methods, such as software, appliance, software-as-a-service, and managed services. The company serves individuals, households, and small businesses; small, medium, and large enterprises; and government and public sector customers. It markets and sells its products and related services through direct sales force, e-commerce platforms, distributors, direct marketers, Internet-based resellers, system builders, Internet service providers, wireless carriers, retailers, original equipment manufacturers, and retail and online stores. Company description from FinViz.com.

You cannot even turn on your phone or PC without being subjected to dozens if not hundreds of potential attackers. Worse than stealing your ID and maybe being able to cause you grief down the road, the biggest attacks today are the ransom ware attacks. If you click on an email link or leave your PC unguarded by a security program, the hacker encrypts all your files and charges you a fee to get them back. All of your documents, pictures, bank account info, Quickbooks, etc, all disappear in a heartbeat. Even if you pay the blackmail, you still may not get them back.

Symantec is the leading cybersecurity vendor for personal computers and small business servers. Enterprise class operations will normally go with higher fee organizations like Fire Eye, Palo Alto Networks, etc. Symantec has the entire personal computer space to themselves. There are some competitors like PC Magic and McAfee but they are distant competitors. Since Intel partnered with McAfee an TPG in September, they are improving but Symantec has a big head start.

Because of the daily headlines on cyberattacks, more and more consumers are reaching out and deploying more sophisticated antivirus programs. It is not just for the closet geeks anymore. Everyone needs a real security program.

Strangely, the biggest risk is still the individual. In a recent study of 19,000 individuals by Intel Security they showed each person 10 different emails and asked them to identify the real ones and the fake ones. Only 3% identified all ten correctly. That means 18,430 would have clicked on a phishing email. Clearly, everyone needs a security program to protect us from ourselves.

Update 3/23/17: Morgan Stanley raised their price target from $33 to $37 saying Symantec's recent wave of acquisitions, including Blue Coat Systems and LifeLock, have improved Symantec's position with their rivals. In June, they bought Blue Coat for $4.65 billion to beef up their enterprise offerings. In February, they paid $2.3 billion for LifeLock to enhance their consumer security business. Morgan Stanley expects Symantec to make more acquisitions after their recent $1 billion debt offering.

Symantec should continue to emerge as the big winner in personal computer security.

Earnings May 3rd.

Position 3/17/17:

Long July $32 call @ $1.29, see portfolio graphic for stop loss.

$VIX - Volatility Index - Index Description


The VIX spiked again to just over 16 on geopolitical worries and comments about delayed tax reform. I added an exit target of $18.

With Congress on a two-week recess, we will have a much less chance of a politically stimulated event. However, when they get back on the 24th, they only have 5 days to get a funding bill passed and raise the debt ceiling. The political sparing has already started.

While holding the VIX call is an insurance play for us, I hope we are never in a position to profit from it. That would mean a lot of our long positions would be under water or stopped out.

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 3/30/117
Long July $14 call @ $2.55, no stop loss.

Previously Closed 2/1/17: Long March $12 call @ $2.60, exit $2.50, -.10 loss.
Previously Closed 2/22/17: Long March $12 call @ $1.75 adj, exit $1.65, -.10 loss.
Previously Closed 4/10/17: Long Apr $13 call @ $2.30, exit $1.80, -.55 loss.

WDC - Western Digital - Company Profile


WDC may have a trump card in the sale of the Toshiba memory business. WDC has invested more than $13 billion into a partnership with Toshiba in developing the NAND memory business. The company said the sale to a third party would be a serious violation of their joint venture agreement. WDC is bidding with Silver Lake Partners but currently has the lowest bid out of the four remaining bidders. Broadcom is the highest at $23 billion. Two Chinese companies are still in the bidding but would probably be declined because of national security concerns. That leaves Broadcom and WDC and WDC is already a part owner.

Original Trade Description: March 29th.

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.

Hewlett Packard started the conversation saying there was a shortage of memory for computers and servers and the rise in prices would impact earnings in 2017. Micron (MU) confirmed it when they reported earnings on the 24th saying memory prices had risen an average of 20% because of a shortage and would add to profits for 2017.

Western Digital bought SanDisk last year and they were a primary manufacturer of memory of all types. This means not only will WDC have increased profits from the rising memory prices but their actual cost will be lower on other products like disk drives and solid state drives because they are now manufacturing their own memory.

They reported earnings in January of $2.30 compared to estimates for $2.13. Revenue rose 48% to $4.9 billion and beat estimates for $4.76 billion. Shares spiked to $81.25 on the news.

Update 3/30/17: Shares spiked on news that Toshiba would sell its flash memory business and that Western Digital could be a major bidder. With a shortage of memory in the market, this would help WDC fill that void and make them a major player in the future.

Update 4/4/17: WDC said it has increased the capacity of its Surveillance-Class hard drives to 10TB. According to IHS Markit, the growing number of high resolution monitoring cameras is causing a sharp uptick in the amount of storage required to archive the video footage. Some surveillance cameras are now HD and even 4K and that requires a lot of storage for a 24x7x365 bank of networked cameras. The new 10TB drive is optimized for 24x7 video from up to 64 HD cameras at once in security environments. 4K video surveillance cameras are estimated to be 2% of the current market today but expected to be 29% by 2020.

Update 4/6/17: WDC announced a new pocket sized SSD drive for portable data so developers and content creators can take their data with them wherever they travel. These are the fastest portable drives with speeds of up to 515 Mbps and come in 256gb, 512gb and 1TB capacities starting at $99. This is an amazing accomplishment and these will be hot products.

WDC also named Phil Bullinger as head of its data center business. Bullinger was formerly a general manager of Dell EMC storage business and before that he was in charge of Oracle's SAN/NAS storage business. Update 4/11/17: JP Morgan upgraded WDC from neutral to overweight and raised the price target from $80 to $116. The analyst said NAND memory prices are going higher and that was great for WDC. He also said the PC market was stabilizing and driving disk demand higher.

Earnings April 26th.

After two months of post earnings depression, shares closed back at $81.39 and a new high on Wednesday. I believe a breakout is imminent. Earnings are four-weeks away and we could see a pre-earnings ramp on strong expectations.

Position 3/30/17:

Long May $85 call @ $3.25, see portfolio graphic for stop loss.

Z - Zillow Group - Company Profile


No Specific news. Only a minor decline of 4 cents.

Original Trade Description: April 8th.

Zillow Group, Inc. operates real estate and home-related information marketplaces on mobile and the Web in the United States. The company offers a portfolio of brands and products to enable people find information about homes and connect with local professionals. Its brands focus on various stages of the home lifecycle, including renting, buying, selling, and financing. The company's portfolio of consumer brands comprises real estate and rental marketplaces, such as Zillow, Trulia, StreetEasy, HotPads, and Naked Apartments. It also owns and operates various brands comprising Mortech, dotloop, Bridge Interactive, and Retsly, as well as provides advertising services to real estate agents, and rental and mortgage professionals. Company description from FinViz.com.

Zillow reported earnings of 14 cents. This compares to a loss of 1 cent in the year ago quarter. Revenue of $227.6 million rose 34%. The guided for Q1 for revenue of $232-$237 million. Shares declined after the report because the guidance was slightly less than analysts expected.

In Mid March, shares declined again after a story appeared on Inman.com suggesting that Zillow's marketing programs may have violated RESPA rules. The Real Estate Settlement Procedures Act was put in place in 2010 to protect potential homeowners from predatory lenders. Basically, if a lender or real estate agent pays somebody a kickback for a referral, it is illegal after 2010.

Zillow allows mortgage brokers to advertise on the websites. No problem there. Zillow also offers referral services. If you want a mortgage loan you can go to the Zillow site and enter some information like your loan amount and zip code where you are buying the home. Zillow then matches your request with lenders that pay to advertise on the site and you are given a list of referrals. The inman.com article suggested this was a recommendation for pay, which is illegal. However, Zillow contends it is just generic advertising that matches lenders and borrowers by zip code. The key point is that Zillow gets paid for the advertising whether a lender makes a loan or not. They get paid for the click rather than a loan. Several analysts have noted that Google does the same thing if you type in mortgage loan calculator. They show lenders on that page and Google gets paid for that impression even if no loan is ever made.

Shares declined to $33 on that story and have held there for three weeks. On Friday, Zillow closed at a post dip high. With this the active selling season, the expectations for their May earnings should be high and should lift the stock.

Earnings May 9th.

Position 4/10/17:

Long May $35 call @ $1.45, see portfolio graphic for stop loss.

BEARISH Play Updates (Alpha by Symbol)

AN - Autonation - Company Profile


I recommended on Tuesday we close the position. Of course that meant the stock would fall today once we were out of the position. Shares fell 75 cents.

Original Trade Description: March 27th.

AutoNation, Inc., through its subsidiaries, operates as an automotive retailer in the United States. The company operates in three segments: Domestic, Import, and Premium Luxury. It offers a range of automotive products and services, including new and used vehicles; and parts and services, such as automotive repair and maintenance services, and wholesale parts and collision services. The company also provides automotive finance and insurance products comprising vehicle services and other protection products, and arrangement of finance for vehicle purchases through third-party finance sources. As of December 31, 2016, it owned and operated 371 new vehicle franchises from 260 stores located primarily in metropolitan markets in the Sunbelt region of the United States. Company description from FinViz.com.

Autonation reported earnings of 95 cents that missed estimates by a penny. Revenue of $5.48 billion also missed estimates for $5.6 billion.

The company said demand for cars was falling while truck/SUV demand remained strong but under pressure. Gross profit margins on new vehicles fell from 5.6% to 5.2%. Used vehicle profits fell from 7.3% to 6.3%. The slowing demand for cars meant discounting was rising, which reduced another $100 per car from gains in the quarter. They see that pressure continuing in 2017.

Earnings May 5th.

Despite the positive economy, consumers are defaulting on the most car loans since the great recession. When interest rates were really low, banks and finance companies were giving auto loans to anyone with a pulse in order to write the higher interest loans. Now that the cars are 2-3 years old and people are tired of those cars, they are no longer making the payments. This puts more repossessed cars into the wholesale market and depresses prices.

Since more people are defaulting the credit criteria for a car loan has risen dramatically. Banks realized the error of their ways and they are making it harder to get approved. That reduces the number of people that can qualify for a loan and the number of people that can buy a car.

Auto prices have been on a permanent path higher but suddenly, very few people are willing to pay the outlandish prices for a car they will be underwater on the loan for the next five years.

This is causing strain on retailer profits. Shares of car dealers are in decline. Karmax (KMX) is widely expected to miss estimates when they report earnings on April 6th. By utilizing a put position on Autonation we can benefit from any disappointment by Karmax. Even if the dealers are not an apples and apples comparison, Autonation will be painted by the same broad brush that punishes Karmax.

Update 4/3/17: Competitor Carmax (KMX) was hit by a story in Barron's saying shares could fall 20% as charge offs increase for risky loans. KMX shares fell -4.3% and AN shares fell -3.2%. Carmax reports earnings on Thursday.

Position 3/28/17:

Closed 4/12/17: Long May $41 put @ $1.40, exit $1.77, +.37 gain.

LB - L Brands Inc - Company Profile


Only a minor decline in a weak market. Dead stop on downtrend resistance.

Original Trade Description: April 5th.

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, and other brand names. L Brands, Inc. sells its merchandise through company-owned specialty retail stores in the United States, Canada, the United Kingdom, and Greater China, which are primarily mall-based; through its Websites comprising VictoriasSecret.com, BathandBodyWorks.com, HenriBendel.com, and LaSenza.com; and through franchises, licenses, and wholesale partners. As of January 28, 2017, the company operated 2,755 retail stores in the United States; 270 retail stores in Canada; 18 retail stores in the United Kingdom; and 31 retail stores in the Greater China area. It also operated 203 La Senza stores in 24 countries; 159 Bath & Body Works stores in 30 countries; 23 Victoria's Secret stores in 12 countries; 391 Victoria's Secret Beauty and Accessories stores in 70 countries; and 5 PINK stores in 3 countries. Company description from FinViz.com.

On Tuesday, Citigroup downgraded LB from buy to neutral saying the retailer is operating in too many failing and underperforming malls. The analyst said their entire year would come down to how they perform in the second half of 2017 after an ugly shopping season in 2016.

The company beat on Q4 with earnings of $2.18 compared to estimates for $1.90. Revenue of $4.5 billion matched estimates. Same store sales fell -3% at Victoria Secret. However, they guided for 2017 earnings of $2.05-$3.35 and analysts were expecting $3.61. They reported mid to high teens percentage same store sales declines in February. They also said the exit from swimwear will cost them another 6% in sales in April.

I do not need to say much about this recommendation. Sales and profits are falling, mall traffic is shrinking and the earnings for Q1 are likely to be horrible.

Earnings May 24th.

There are no June options so we either have to go with May, which expires the week before earnings or reach out to August where there will still be some earnings anticipation in the put when we exit before earnings. Using the August strike costs more but the premium erosion over the next several weeks will be a lot less.

Update 4/6/17: Before the open LB said same store sales in March fell -10%. However, they had an excuse. They blamed 2% to 3% of that drop on the later than normal Easter that would have normally produced some late March sales. They also said sales were lowered by the exit from the swimwear and apparel business had a negative 7% impact. Apparently investors bought the excuses and a monster short squeeze was born.

Victoria Secret sales declined -13%, compared to analyst estimates for a 10.8% decline. Bath and Body Works sales were flat and analysts expected a 2% decline.

Nearly every analyst said the $4.75 (11%) gain was a short squeeze. Fred's (FRED) reported better than expected earnings on Wednesday after the close and that helped lift the retail sector in general. The retail ETF (XRT) spiked 2%.

The volume on the August $45 put today was 5,624 and well over the open interest of 3,618. I am going to change the option strike to the August $45 and put an entry trigger on it of $47, just under the afternoon lows.

Position 4/7/17 with a LB trade at $47

Long Aug $45 put @ $3.31, see portfolio graphic for stop loss.

SPY - S&P-500 SPDR ETF - ETF Profile


Approaching critical support. A breakdown here could be serious.

Original Trade Description: March 25th.

The SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol. SPDR is an acronym for the Standard & Poor's Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index.

The S&P-500 is in danger of a material drop, possibly to 2,250 or the equivalent 225 level on the SPY ETF. The chart is unsupported and we are entering into a typically volatile period of the year over the next five weeks. I am recommending we buy insurance with a put on the SPY only IF the SPY trades at a new five-week low of 232.75. That way if the market opens higher on Monday we can watch to see if that direction holds before putting money at risk.

I believe if the market goes lower next week it could be the beginning of a major decline.

Position 3/27/17:

Long May $230 put @ $3.49, see portfolio graphic for stop loss.

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