Option Investor

Daily Newsletter, Wednesday, 4/26/2017

Table of Contents

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

Market Wrap

More Hope for A Bigger Rally

by Keene Little

Click here to email Keene Little
French election results and a bolt Trump tax plan have had investors feeling bullish the stock market this week. Follow through has been lacking and we're left to wonder if tax-plane reality will be a kick in the pants.

Today's Market Stats

Other than the excitement over the French election results on Sunday (Marie Le Pen did not do as well as had been feared by the market), Tuesday's gap-up was presumably on the hopes that Trump's tax plan, which was announced today, would spark another big rally. The tax plan is supposed to decrease corporate tax rates, boost the standard deduction for personal returns (effectively reducing personal tax rates) and simplify returns. It all sounds great but of course the devil is in the details.

I saw two headlines today on MarketWatch -- one was "Trump's tax plan sets the stage for Dow 30,000" and the other was "Here's how much a Trump tax-plan letdown could whack the stock market." The first article talked about how a significant reduction in the corporate tax rate (to 15% and 10% on repatriated earnings), along with some other changes, could boost corporate earnings. That in turn would support higher stock prices and Dow 30,000 here we come. Makes me think of trying to breathe on Mt. Everest without supplemental oxygen.

The other article talked about why the tax plan could struggle to get approved. We have a hope-filled rally that's unfortunately likely headed for disappointment. A tax plan without a lot of details about how it's to be paid for could be a challenge, to put it mildly, since Congress, even a Republican one, is not likely to pass a plan that puts us further into debt by another $3T to pay for the tax breaks. Any whiff of a failure to get Trump's tax plan passed is going to disappoint a lot of investors who have been buying on the assumption the plan will get passed.

I'll add my own opinion of the tax plan -- it has a snowball's chance in Hell of passing. There are too many entrenched special interests which make a lot of money with the existing tax scheme. A big tax cut without offsetting tax gains will be very difficult for Congress to swallow. A big tax cut with offsetting tax gains would simply mean taking money from one pocket and putting it in the other and that could easily have the net effect of zero. There are too many in Congress who want to see Trump fail and the bigger the changes he calls for the more they'll push back. Bully for Trump for coming up with a bold proposal but unfortunately we have a Congress and special interests who are not interested in bold. Bold scares them.

Today started quietly and remained quiet for most of the day. The RUT continued its relative strength but ran into strong resistance (more later with its charts). The techs were relatively weak today and remained near the flat line while the blue chips tried to rally with the RUT. By the end of the day, following the announcement of the Trump tax plan, all but the RUT finished in the red. This begs the question about whether or not this week's rally was buying the rumor and this afternoon was a small sell-the-news reaction. We'll know more on that score after Thursday's trading.

This week's rally in the stock market was brought to us almost exclusively by the morning gaps on Monday and Tuesday. Those spikes to the upside might have been mostly short covering since there was little buying that followed. And with SPX essentially testing its March 1st high, at 2401 with today's high at 2398, the bulls would like to see some greater participation by all stocks instead of fewer than were seen at the March 1st high.

S&P 500 vs. new 52-week highs and Advancing-Declining stocks, Daily charts

As can be seen on the charts below, the number of stocks participating in the rally to new highs has been declining since the highs last November/December. The advancing minus declining stocks also peaked in December and there's a strong bearish divergence since mid-March. This is even with the number of small caps rallying to new highs this week.

Other than the French election and Trump's tax plan there hasn't been much to move the market this week. Other than some home sales data yesterday there was little in the way of economic reports to sway the market one way or the other. Thursday's reports, including durable goods orders and pending home sales might move the needle but probably not much. The market will now need to digest this week's gains and decide whether or not to add to them.

Trump's tax plan included a large reduction in corporate tax rates and a plan to help small businesses. The latter is one of the reasons why the RUT rallied strong off the April 13th low -- investors were climbing aboard in what was expected to be a big boost to small caps. The result might have been a rally up to strong resistance and now disappointment might start to set in.

Russell-2000, RUT, Weekly chart

Today's rally brought the RUT right up to its trend line along the highs from 2007-2014-2015, near 1426 (today's high was 1425.70). The last time this trend line was tested was on March 1st and before that on December 9th. This is the 3rd test and with the significant bearish divergence since December there is a good possibility this is setting up a 3-drives-to-a-high topping pattern at the top of a large megaphone topping pattern. There is also a small megaphone pattern up against the larger one.

For those who use DeMark Sequential counts (not shown on the chart), a daily sequential sell signal triggered this week and next week we'll get a weekly sequential sell signal. This chart alone, until the RUT can successfully break above the trend line, and stay above, should scare the bulls into getting very defensive.

Russell-2000, RUT, Daily chart

Other than the 2007-2015 trend line there doesn't appear to be much in the way of a further rally for the RUT. It has broken above its March 1st high, near 1415, and the oscillators have room to run to the upside. All the bulls need to do is rally the RUT above 1434 (that level is shown further below on the 60-min chart) and keep it above the trend line near 1426. That could be a tall order, considering how it reacted to the trend line in June 2015, December 2016 and March 2017. Play defensive until the bulls can prove this time will be different.

Key Levels for RUT:
- bullish above 1434
- bearish below 1364

Russell-2000, RUT, 60-min chart

There is one price pattern that supports a move up to about 1434, which is where the leg up from April 13th would be 162% of the March 22-31 rally (for a possible a-b-c bounce within what will become a larger corrective pattern off the March 1st high). Between the 2007-2015 trend line, near 1426, and the 1433.84 projection we have potentially stiff resistance to any further rally. By the same token, it would be more bullish above 1435.

The rally from April 13th developed steeper uptrend lines, indicating the rally was going parabolic. This afternoon's relatively small pullback broke the steeper uptrend line and that's another warning sign that the rally peaked today.

S&P 500, SPX, Weekly chart

Looking at the SPX weekly chart, there are a few different ways to interpret the wave count for the rally from January/February 2016. One thought is that we need to see a larger pullback correction from March 1st before potentially heading higher again. Counter to the possible top that the RUT is putting in (yet to be proven) is a bullish wave count that calls for higher prices for at least another month.

A rising wedge pattern for the rally suggests 3-wave/corrective moves for each of the waves and we could be into the final 5th wave. If the 4th wave correction in the rally, which is the pullback from March 1st, completed at the March 27th low (we could get another leg down to about 2300 before it completes) then I would expect a 3-wave move up to complete the 5th wave of the pattern, which is what I'm depicting in bold green.

The minimum projection for the 5th wave in this pattern is to the 2500 area. A price projection near 2507 crosses the top of the rising wedge in mid-June. There is by no means a guarantee that we'll see a rally from here to there but it's the upside potential as long as we continue to see bullish price action. The first sign of trouble for the bulls would be closure of this week's gap up (last Friday's close at 2348). Whether or not that would lead to just another pullback before starting the rally to new highs is something that will have to be figured out later.

S&P 500, SPX, Daily chart

Today SPX came within less than 3 points from its March high at 2400.98 before pulling back in the final hour. The result is a shooting star candlestick at resistance, which is a potential reversal candlestick. A down day on Thursday would confirm the reversal. But to stay with the bullish price path shown on the weekly chart above, I would expect to see higher prices in the coming days and support at the March 1st high.

There is an intermediate-term price pattern that is short-term bearish but still longer-term bullish. At the moment we have a 3-wave move down from March 1 to March 27 that's been followed by a 3-wave move back up to today's high. That could be followed by a sharp decline to 2275-2300 to complete a larger 3-wave pullback from March 1st before setting up the final 5th wave rally shown on the weekly chart. This possibility would be evaluated more carefully if and when we get a sharp move down to the 2300 area.

Key Levels for SPX:
- bullish above 2401
- bearish below 2348

Dow Industrials, INDU, Daily chart

Like SPX, the Dow is at risk of putting in a double top against its March 1st high. A rollover in the oscillators from here would show a significant bearish divergence and obviously that's not something the bulls want to see. They'd rather see a continuation of the rally and it would be more bullish above the March 1st high at 21169, in which case I'd look for a rally to the trend line along the highs from May 2011 - December 2014, which will be near 21400 by early May.

If the rally is completing here we'll see the Dow drop back down to close this week's gaps and a drop below Tuesday's gap (Monday's close) at 20763 would be the first bearish warning sign.

Key Levels for DOW:
- bullish above 21,170
- bearish below 20,760

Nasdaq-100, NDX, Daily chart

Yesterday and again today NDX tested its trend line along the highs from April 2016 - March 2017, currently near today's high at 5564. So far there's no proof this trend line will hold as resistance but that's the bearish setup, especially if the daily oscillators roll over from here.

The wave count for the rally from November also supports the idea that today's high might have been THE high. The rally started with a series of 1st and 2nd waves, a longer middle 3rd wave (December 30 - March 1) and then a series of 4th and 5th waves to finish "unwinding" the count. The final 5th wave equals the first 1st wave at 5561.79, which was achieved today. The combination of the wave count, price achievement and trend line could be too much for the bulls to handle and any turn back down from here has the potential to develop into a stronger selloff.

Key Levels for NDX:
- bullish above 5562
- bearish below 5442

10-year Yield, TNX, Daily chart

Bond investors reacted to the Trump tax plan announcement by buying bonds, which dropped yields from their 2-week high, as they worry that the tax plan will likely not pass through Congress without major changes and a big battle. The bond market, which is arguably smarter than the stock market, is saying they're not worried about an economy that could expand and drive inflation higher.

From a price pattern perspective, TNX has been able to bounce off its April 18th low and get back above the downtrend line from June 2007 - December 2013, near 2.27, as well as the bottom of the November-April trading range, near 2.31. It also climbed back above its broken 20-dma, currently at 2.306, all of which is potentially bullish. Today's little pullback to the bottom of its November-April trading range could be a back-test that will lead to higher yields (lower bond prices).

A drop back below 2.26 would likely mean a drop lower, possibly down to a price projection at 2.00 (the width of its November-April trading range). This is the way I'm currently leaning and I'll continue to believe lower yields are directly ahead unless TNX is able to climb back above its broken 50-dma, currently at 2.40.

KBW Bank index, BKX, Daily chart

The banks got a strong bounce with the rest of the market but is now hitting potentially strong resistance as well. On Tuesday BKX came close to back-testing its broken 50-dma and then sold off, leaving a shooting star candlestick at resistance. It then tried again today and successfully hit its 50-dma, at 93.56 with its high at 93.67, but then sold off again, leaving another shooting star.

A double failure is not a good sign for the bulls but they could pull a surprise here and rally BKX above its 50-dma. I would turn more bullish the banks if BKX can close above 93.60, otherwise this looks like a setup for a reversal back down. The bears would be in better shape with BKX back below its 20-dma, currently near 90.80.

Transportation Index, TRAN, Daily chart

The transportation stocks were weaker than the broader market today and the TRAN finished down -0.9%. This follows a back-test of price-level resistance at 9310, which is its November 2014 high, with yesterday's high at 9301 and today's high at 9275. In addition to price-level resistance it also back-tested its broken uptrend line from June-October 2016.

In addition to those two lines, a price projection at 9294 for two equal legs up from March 27th was also achieved. That makes three reasons why the TRAN should turn back down and today might have been the start of the move down. Conversely, the TRAN would be more bullish above 9310.

U.S. Dollar contract, DX, Daily chart

On Monday the US$ broke below its uptrend line from May-August 2016 and price-level support, both near 99.10. Today the bounce back up tagged its broken uptrend line and then sold off. It looks like a back-test followed by a bearish kiss goodbye, giving it the setup for further decline. It would be at least short-term bullish above Monday's gap close, at 99.67, or it might get a bounce/rally off the bottom of a possible descending wedge (a trend line along the lows from December), near 98.39. But with the break also below its 200-dma, at 98.94, if it stays below that level we could see a sharper decline from here.

Gold continuous contract, GC, Daily chart

Gold pulled back a little stronger this week as the stock market rallied (less fear) but at the moment it could be just for a back-test of its recovered 200-dma, currently near 1257. Another bounce back up would give gold the chance to test its downtrend line from September 2011 - July 2016, near 1300. The price projection at 1335 is where the bounce off the December low would achieve two equal legs up. But it's possible the bounce is already completed and now we'll see gold head back down. A drop below its March 30th low at 1241 would be a confirmed break of its uptrend line from December.

Silver COT report, 2007-present

Silver is looking weaker than gold and today it closed below its uptrend line from December, which could be forewarning us that gold will follow. And even though silver has pulled back sharply from its April 17th high it hasn't stopped speculators from betting it's just a dip to buy. As can be seen on the Commitment of Traders (COT) report, the non-commercial traders are net long in a big way (much more so than anything seen since 2007). In the meantime the commercial traders have a huge net short position. Care to guess who's going to win this bet?

Gold and silver don't always trade in sync but they do more than not. This is fair warning to gold and silver bugs to protect long trading positions (vs. those who own the metals for the long term and are not trading the metals). I think we'll have lower prices on both to give us a good opportunity to become long-term holders of the metals.

Oil continuous contract, CL, Daily chart

Oil's sharp decline from April 12th had it quickly breaking back below its 50- and then 20-dma's and it's now holding support at its 200-dma, at 48.92. It's also trying to hold onto its uptrend line from April-August 2016, currently near 49.53. A drop below its 200-dma would have me looking for a test of its uptrend line from August-November, near 47.60. A drop below its March 22nd low at 47 would confirm the next leg down is in progress. A rally back above price level S/R at 50.92, as well as its coincident 20- and 50-dma's, would be at least short-term bullish.

The COT report for WTI crude is not near any kind of extreme but it does show a spike up in the net long position of speculators and a spike in the opposite direction by the commercials with their large net short position. The last time they were near the current levels, at the end of October, oil experienced a sharp decline into the November 14th low.

Economic reports

Thursday will be a little busier for economic reports but unless there's a real negative surprise in the durable goods numbers I don't think the market will be paying much attention. It seems too focused on The "Donald."


As shown on tonight's SPX chart, I see upside potential for this market for at least another month as it continues to work its way higher (not in a straight line of course). But the RUT and NDX charts give me pause -- they show a strong reason why you want to have very tight stops on long positions and why you should be looking to short today's highs. Shorting this market is obviously trying to catch rising knives at the moment and it's a risky thing to do.

Waiting for confirmation of a top, starting with a sharp impulsive reversal back down, and then shorting a bounce with a stop at a new high, is a more conservative way to try shorting the market. But I know there are a lot of Type A traders out there who are itching to short the top. Any rollover from here is an opportunity to do that.

Hat tip to Carla for the info on short interest in the S&P 500, which is at a low not seen since May 2007. I haven't seen the actual numbers but obviously a very low level of short interest makes it more difficult to drive the market higher with short covering. Perhaps that's one reason why there was so little follow through to the gap-up starts on Monday and Tuesday.

Between the ultra-low VIX (below 11), which indicates complacency, and the lack of shorts we might not be far from an "exogenous" event that creates more than a little panic in the market, and without shorts to use for driving the market back up. There might be more upside left to this market but the downside risk is again dwarfing upside potential. Caveat emptor.

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

Keene H. Little, CMT

New Option Plays

Defense Contractor

by Jim Brown

Click here to email Jim Brown

Editors Note:

Defense companies and those that provide services to the military should do well in the coming years. Most of these companies spiked significantly after the election and remain too lofty to consider buying. SAIC had a setback that gives us an opportunity.


SAIC - Science Applications Intl - Company Profile

Science Applications International Corporation provides technical, engineering, and enterprise information technology (IT) services primarily in the United States. The company's offerings include engineering; technology and equipment platform integration; maintenance of ground and maritime systems; logistics; training and simulation; operation and program support services; and end-to-end services, such as design, development, integration, deployment, management and operations, sustainment, and security of its customers' IT infrastructure. It serves the U.S. military comprising Army, Air Force, Navy, Marines, and Coast Guard; the U.S. Defense Logistics Agency; the National Aeronautics and Space Administration; the U.S. Department of State; and the U.S. Department of Homeland Security. The company was formerly known as SAIC Gemini, Inc. and changed its name to Science Applications International Corporation in September 2013. Company description from FinViz.com.

Back in late March, SAIC reported earnings of 79 cents that missed estimates for 80 cents. Revenue of $1.03 billion also missed estimates for $1.09 billion. Shares were knocked for a $16 loss. They paid a dividend of 31 cents and bought back 457,000 shares for $38 million.

The company explained in detail several different items that caused them to miss estimates including the constant challenges with government contracting. The government never does anything on schedule including awarding contracts or making payments when contracts are completed.

During the quarter, they received awards of $800 million and net bookings for the full year were $5.3 billion with a book to bill ratio of 1.2 and their strongest ever. Their order backlog at the end of the quarter was $8 billion.

Earnings June 29th.

This is a good solid company that was punished for some minor execution issues and for the calendar challenges of dealing with the government. Shares cruised along in the $72 range for three weeks and begin rising this week. I am sure the market short squeeze did not hurt.

Now that the shares have started to rebound we can take a position.

I am going to reach out to the August option cycle to get past their earnings date. Open interest is thin so I would use a limit order to enter the position. Once we get closer to June the volume will increase.

Buy August $80 call, limit $2.50, initial stop loss $69.75.


No New Bearish Plays

In Play Updates and Reviews

Top Heavy

by Jim Brown

Click here to email Jim Brown

Editors Note:

The indexes are starting to look top heavy after more than a week of gains. The president's tax proposal received a lot of negative press in the mainstream media because the odds for getting it passed are practically zero. Too many sacred cows would get slaughtered if the proposal became law.

Add in the very overbought market conditions and the Dow closed with a small loss but 95 points off its intraday highs. Were it not for the full slate of magacap tech stocks reporting earnings on Thursday, the decline could have been worse. We also have the government funding battle with the deadline on Friday. Lawmakers claim they are close to a compromise but still no deal.

Next week begins May as in "Sell in May and go away." It will be interesting to see if the sellers appear given the lack of potential upside catalysts after this week's earnings.

Now that the April options have expired, the May premiums will decay faster. I am going to begin tightening stop losses on the May positions to take us out on the next dip.

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

WDC - Western Digital
The long call position was stopped at $84.65 for a breakeven.

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Credit spreads and naked puts = OptionWriter

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Long and short equity trades = Premier Investor

BULLISH Play Updates

ADBE - Adobe Systems - Company Profile


No specific news. Shares declined slightly from the new high.

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. Minor decline from the nearly new high.

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


No specific news. Minor decline from the new high.

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.

Update 4/12/17: 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.

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.

CVX - Chevron - Company Profile


After the bell, Chevron declared a quarterly dividend of $1.08 payable June 12th to holders on May 19th.

Original Trade Description: April 16th.

Chevron Corporation, through its subsidiaries, engages in integrated energy, chemicals, and petroleum operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as operates a gas-to-liquids plant. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, and fuel and lubricant additives, as well as plastics for industrial uses. It is also involved in the cash management and debt financing activities; insurance operations; real estate activities; and technology businesses. Further, the company holds interests in power plants, as well as operates geothermal plants; and engages in the transportation of refined products primarily in the coastal waters of the United States. The company was formerly known as ChevronTexaco Corporation and changed its name to Chevron Corporation in 2005. Company description from FinViz.com.

Chevron is one of the U.S. energy majors with billions of barrels of reserves. The company pays an annual dividend of $4.32 or 4.07% yield. They are totally committed to preserving and raising the dividend. This makes them a top pick by nearly every major analyst.

Chevron is coming out of a major project cycle where they spent over $25 billion a year on capex building out monster projects. Now that the projects are nearly complete and ramping up production, the company can reduce its capex significantly and still increase production as those projects come online.

Chevron has amassed a two million acre position in the Permian Basin with 9 billion barrels of reserves. The company is currently operating 11 rigs in the Permian and will be adding 9 more in the coming months. They plan on ramping up their Permian production from the current 80,000 bpd to 700,000 bpd over the next few years. Chevron's Permian acreage is said to be worth more than $43 billion. It was acquired in pieces at much lower prices by predecessor companies over the last several decades. The Permian was never a big focus for Chevron as they concentrated on megaprojects elsewhere. They are increasing spending in the Permian by $2.5 billion in 2017. They are not hedging their oil production because they believe prices will rise.

Earnings on April 28th are expected to be a miss because of the sharp decline in oil prices in March. This is expected to lower earnings and force misses for the major producers. Since this is a well-known fact, I suspect it it being priced into the stock ahead of the report.

Thursday's decline of 3% put the stock right at light support at $106. If this level fails, there is strong support at $100.

Oil prices should begin to rally any day now. Refinery utilization of back over 90% and it is time to begin pushing summer blend fuels into the distribution system. We should begin to see inventory declines every week and that should last through July. August is normally when crude prices top out. OPEC should extend the production cuts because they are right on the edge of a reduction in inventories and an extension would guarantee it.

Chevron shares should rebound with crude prices. If they were to surprise with earnings, shares should rebound quickly.

The option is cheap and we are going to hold over the earnings report.

If the market tanks at the open on Monday, please do not enter this position until the S&P is positive.

Update 4/19/17: Chevron shares crashed with the entire energy sector after a nearly $2 drop in crude prices on weak inventory numbers from the EIA. WTI only declined -1 million barrels and gasoline rose 1.5 million compared to an expected decline of -1.6 million. The EIA said gasoline demand was down -0.8% from the same period in 2016.

Update 4/22/17: Chevron lost a court case in Australia for $260 million. The case ruled on the deductibility of interest on a $2.5 billion loan made from the parent company between 2003-2008. Chevron Australia paid 9% interest on the loan from Chevron and the parent company borrowed the money at a lower rate. The court said Chevron Australia could only deduct the interest at the parent's borrowing rate. Chevron said they would appeal.

Update 4/24/17: Chevron said it was selling its assets in Bangladesh to Himalaya Energy. No price was given but Bloomberg said the fields were worth about $2 billion. Chevron is planning on selling $10 billion in non-core assets in 2017. Himalaya is owned by a consortium of Chinese state owned firms. Bangladesh has a right of refusal on any deal and they said they were not done with their evaluations yet. The three fields held in the Chevron subsidiary produce 720 million cubic feet of gas and 3,000 barrels of condensate per day.

Position 4/17/17:

Long June $110 call, currently $1.45. See portfolio graphic for stop loss.

DIS - Walt Disney - Company Profile


Disney shares rose in a weak market after they said they would be cutting more than 100 on air reporters and commentators from ESPN. These are high dollar positions and with ESPN viewership falling, they can save money and bring in some fresh talent. I saw several twitter posts praising the move because the network had become too liberal and focused too much on people like Colin Capernack and Caitlin Jenner rather than the actual sports.

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.

Update 4/25/17: Disney announced the release dates of multiple blockbuster movies that could be potential blockbusters. Lion King 2, Star Wars: Episode IX, Indiana Jones, Wreck it Ralph 2, Frozen 2 and a bunch of "untitled" movie dates that will eventually be assigned a name. The dates released were in 2018-2020. Analysts claim 2018 and beyond will be the largest slate of hit movies Disney has ever released. List Here

Earnings May 9th.

Position 3/14/17:

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

FIVE - Five Below - Company Profile


No specific news. New 7-month high.

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.

Update 4/12/17: 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.

Position 4/11/17:

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

HCN - Welltower Inc - Company Profile


No specific news. Shares declined on the tax program announcement. I am not sure what is happening here but I am raising the stop loss.

Original Trade Description: April 24th.

Welltower Inc. is an independent equity real estate investment trust. The firm engages in acquiring, planning, developing, managing, repositioning and monetizing of real estate assets. It primarily invests in the real estate markets of the United States. The firm primarily invests in senior living and health care properties. It invests across the full spectrum of health care real estate, including senior living communities, medical office buildings, inpatient and outpatient medical centers and life science facilities. The firm conducts in-house research to make its investments. It was formerly known as Health Care REIT, Inc. Welltower Inc. was founded in 1970 and is based in Toledo, Ohio with additional offices in Brentwood, Tennessee and Dallas, Texas. Company description from FinViz.com.

The REIT stocks have been in a strong uptrend over the last several months on expectations for the market to correct when/if President Trumps policies failed to be implemented. The tax reform, infrastructure spending, health care reform, etc are all fraught with months of complicated negotiating in the House and Senate. Once equity investors realize tax reform may not happen until 2018 the market is likely to crash.

Add in the geopolitical risk with Syria and North Korea and these REITs were a flight to safety play. They crashed on Monday as investors jumped into other equities or simply cashed out to cover losses in their shorts.

I believe the future remains bright for the REITs. There is likely to be some challenges for the broader market over the next several months and they will become a safe haven once again.

Earnings May 24th.

One other benefit to the REITs is that the options are cheap because they do not move fast. They move slowly without a lot of volatility. If I am wrong in my assumption we will not have much premium at risk.

Position 4/25/17:

Long June $72.50 call @ $1.41, see portfolio graphic for stop loss.

LB - L Brands - Company Profile


No specific news. Shares surged higher with a $1.41 gain to push through resistance level is $51.25.

Original Trade Description: April 17th.

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.

Two weeks ago, 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.

On April 6th, 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. 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. Investors bought the excuses and the stock did not decline.

Earnings May 24th.

Oppenheimer came out swinging on the LB buying opportunity with a $62 price target. The analyst said patient investors will be well rewarded because the low March numbers were predicted in advance and the recent sell off was overdone. Changes in inventory levels and content after a slow January, made an immediate difference in traffic and revenue.

In April, the stores are transitioning into a Mother's Day theme featuring new and seasonal products in body care, home fragrance, soaps and sanitizers.

Shares rebounded to $47.50 on the better than expected same store sales when accounting for discontinued swimwear. They have held at that level for seven days and are showing no signs of a decline. The next move appears to be higher. If we make an entry now before that move begins, we can get a lower option premium.

There are no June options.

Position 4/18/17:

Long August $50 call @ $2.70, see portfolio graphic for stop loss.

MSM - MSC Industrial Direct - Company Profile


No specific news. Shares gained only a penny but at least it was not a loss as the market rolled over.

Original Trade Description: April 22nd.

MSC Industrial Direct Co., Inc., together with its subsidiaries, markets and distributes various ranges of metalworking and maintenance, repair, and operations (MRO) products primarily in the United States, Canada, and the United Kingdom. The company's MRO products comprise cutting tools, measuring instruments, tooling components, metalworking products, fasteners, flat stock, raw materials, abrasives, machinery hand and power tools, safety and janitorial supplies, plumbing supplies, materials handling products, power transmission components, and electrical supplies. It offers approximately 1,000,000 stock-keeping units through its master catalogs; weekly, monthly, and quarterly specialty and promotional catalogs; brochures; and the Internet, such as its Websites comprising mscdirect.com and use-enco.com. The company serves primarily through its distribution network of 85 branch offices and 12 customer fulfillment centers. In addition, it distributes fasteners and other consumables for customers in manufacturing, government, the Department of Defense, transportation, and natural resources end-markets. The company was founded in 1941 and is headquartered in Melville, New York. Company description from FinViz.com.

MSC reported earnings of 93 cents compared to estimates for 90 cents. Revenue of $703.8 million beat estimates for $696.8 million. They guided for the current quarter to revenue of $734-$748 million and analysts were expecting $735 million. They declared a quarterly dividend of 45 cents. Shares fell $18 on the news.

The earnings were great and guidance was good. Why did the stock crater? Shares had vastly outperformed the market with a $35 post election gain. The earnings turned into a sell the news event as investors captured all that built up profit.

Shares bottomed at $86 last week and began to move slightly higher. Having just released earnings they to not report again until July 6th. We have plenty of time.

Just to be sure the rebound has begun I am going to put an entry trigger on the position.

Position 4/24/17:

Long June $95 call @ $1.71, no initial stop loss because of wide spreads.

SYMC - Symantec - Company Profile


Symantec said cyber criminals were upping the fees to get your data back after they infect your computer with ransomware. The average fee in 2016 was $294 and that has risen to $1,077 in 2017. DON'T click those links in emails!!!

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 10th.

Position 3/17/17:

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

$VIX - Volatility Index - Index Description


The VIX is holding just under $11 and we still have the funding battle in Washington later this week. Unless they shutdown the government we could be in trouble on this position. The market did lose its bullish bias today when the tax program was short on details.

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 fell sharply to lose -2.27 after Seagate (STX) reported earnings before the open that proved to be a big disappointment. Seagate reported earnings of $1.10 compared to estimates for $1.06. However, revenue of $2.67 missed estimates for $2.71. Seagate shares fell 17% on the news and the ugly drop dragged WDC shares lower to stop us out with the loss of 5 cents. This was a May option and I had the stop tight to prevent a loss if the market rolled over.

After they report earnings on Thursday, I am going to reload this position with a longer dated option. That assumes their earnings are positive and they don't gap to the moon.

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.

Update 4/12/17: 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.

Update 4/14/17: Rumors broke early Thursday saying Toshiba had shut down all meetings and actions relating to the sale of its memory business. Shares of Toshiba fell 9%. Later in the afternoon Toshiba said it had not take that action and the report was incorrect. Toshiba's problem is that half the assets it is trying to sell already belong to WDC. Western has a "right to approve" clause in its joint venture contract with Toshiba and they can halt any sale. Reportedly, there are only three bidders left. Those are Broadcom at $23 billion and Taiwan's Hon Hai Precision Industry at $27 billion. WDC is reportedly offering between $15-$18 billion but they have the hammer and the right to block any transaction. The Hon Hai bid would likely be rejected for national security reasons.

Update 4/20/17: Bloomberg said WDC was negotiating with the state-backed Innovation Network of Japan and Development bank of Japan as well as the government over the acquisition of Toshiba's memory business.

Update 4/25/17: The Nikkei Asian Review reported that Western Digital has offered to "bail out" Toshiba from its current financial problems. This is a new tactic that suggests the memory business may not be sold but would end up with WDC possibly having a larger equity position in the WDC/Toshiba memory partnership. I am greatly encouraged that WDC is working every angle to maintain future control of the memory unit.

Earnings April 28th.

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:

Closed 4/26/17: Long May $85 call @ $3.25, exit $3.20, -.05 loss.

WFM - Whole Foods Market - Company Profile


No specific news and shares ticked up again to avoid our stop loss.

Original Trade Description: April 19th.

Whole Foods Market, Inc. operates natural and organic foods supermarkets. Its stores offers produce, packaged goods, bulk, frozen, dairy, meat, bakery, prepared foods, coffee, tea, beer, wine, cheese, nutritional supplements, vitamins, body care, pet foods, and household goods. As of March 8, 2017, the company operated approximately 460 stores in the United States, Canada, and the United Kingdom. Whole Foods Market, Inc. was founded in 1978 and is headquartered in Austin, Texas. Company description from FinViz.com.

This is not a play based on Whole Foods fundamentals or earnings. This is a defensive play covering the next four weeks when the market could be volatile.

Shares of WFM spiked last week when news broke that Amazon had considered acquiring the chain to jumpstart its grocery business. Before that news we found out that Jana Partners had taken a huge stake and had given the firm until September to make some radical changes of they would launch a proxy fight.

A couple weeks before that Kroger (KR) was reportedly mulling over making a run at Whole Foods. Jana already had Kroger, Albertsons and Amazon on their list of possible acquirers they were suggesting to WFM management.

Normally shares spike up on a big set of news headlines like these and then roll over a few days later when nothing happens. WFM shares are continuing to rise. That suggests there may be continuing conversations that have not made it to the headlines.

Earnings are May 10th and I am recommending we buy the May $35 call because it is cheap, there is a reasonable chance of something happening in the acquisition area and if the market or stock tanks, we have very little at risk.

Update 4/20/17: Credit Suisse analyst Edward Kelly put out a note saying Kroger (KR) should write a check for WFM because they were the perfect partner and it would accelerate Kroger's market share. The analyst said accretion could be 40 cents per share before any reinvestment.

Update 4/24/17: An article in the Financial Times said Albertsons, owned by Cerberus Capital Management, had spoken with bankers about making a bid for Whole Foods. It appears everyone is circling the wounded WFM with Kroger, Amazon and Albertsons all mentioned as potential buyers. Shares were up nearly $2 intraday but faded at the close to a gain of 75 cents and a new high. We are nearing a point of excessive optimism given how far the stock has spiked. I am tightening the stop loss. Update 4/25/17: An article by Bloomberg suggested Whole Foods was not going to be acquired because of the $13 billion price tag and the impact to the debt structure of both Kroger and Albertsons if they went the cash route. The article suggested Amazon could easily digest them in a cash deal but did not speculate on that outcome. Bloomberg article

I considered closing the position but our stop loss is pretty tight so I am going to let it run. I know as soon as I close it somebody will offer $40 for the company.

Position 4/20/17:

Long May $35 call @ $1.30, see portfolio graphic for stop loss.

Z - Zillow Group - Company Profile


No specific news. Shares gained $1 to close at a new four-month high.

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.

Update 4/19/17: Bridge Interactive, a subsidiary of Zillow, announced it had added 10 new multiple listing services to its platform. This added 180,000 agents to its 400,000 existing members.

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)

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


It was not a big decline but the short squeeze lift is starting to wear off. The tax proposal today turned into a sell the news event when everyone realized it has zero chance of being passed. We are still facing the government funding deadline on Friday.

The Dow and S&P have reached levels where we should begin worrying about a potential double top in the markets. The rally this week has erased nearly all the option premium. There is no reason to close the position for 40 cents.

I am leaving this position open because we still have the government funding risk later this week and we are approaching the "sell in May "cycle.

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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