Option Investor

Daily Newsletter, Saturday, 4/29/2017

Table of Contents

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

Market Wrap

Uneasy Calm

by Jim Brown

Click here to email Jim Brown

After the short squeezes on Monday/Tuesday, the markets traded sideways on moderate volume but very calmly.

Weekly Statistics

Friday Statistics

Despite the calm, there were a lot of shares traded. Volume averaged more than 7 billion shares a day for the entire week. Despite the small declines in the big cap indexes, there were 4,360 decliners to 2,625 advancers.

While the market appeared calm on the surface, I have a perfect analogy. Picture a flock of ducks moving slowly up stream. They may look calm on the surface but they are probably paddling like crazy underneath. That is what happened to the markets the last three days. The indexes barely moved but the volume was heavier than normal, about 1 billion shares a day over the average for the last five weeks. That is a lot of volume for markets not making material changes.

Granted, it is earnings season and that does create more volume. Earnings have been strong this quarter but the last two days down volume has been significantly stronger than up volume.

The most significant event on Friday was the -1.2% decline in the Russell 2000 and the S&P-600 small cap indexes. They have been bullish for the last 7-8 days and suddenly reversed significantly while the big cap indexes barely declined. That could be a sign of a sentiment shift in the market or just some profit taking ahead of weekend event risk. We will not know until Tue/Wed next week. The Russell had gained 5.6% in only 8 trading days so it was due for some profit taking.

On the economic front, the GDP report for Q1 was depressing. The GDP declined from 3.52% in Q3 to 2.08% in Q4 to 0.69% in Q1. Analysts were working themselves into a sweat trying to come up with a reason to blame. It was the weather, excessive inventory adjustments, late tax refunds or maybe it was Russia hacking the Bureau of Economic Analysis servers. Everybody had a different excuse.

Without going off on a political rant here, let's just agree that the slow growth has been a product of the economic environment over the last several years. Moody's said, "The economy is expanding at the same pace as it has throughout the last eight years." There is also the problem with Q1 numbers in general. For the last 30 years, the Q1 GDP has consistently underperformed the surrounding quarters. The BEA has written about it over the last several years and they are trying to find a way to tweak the numbers for Q1 so they "better represent" the actual conditions. I have written about this in the past. When bean counters do not like the answers their models produce, they always want to change the models until they get a number they like.

The better way is to have an accurate model for the entire year and average the results on a trailing four-quarter basis. That way the peak quarters as we had in Q3, average out the trough quarters as we had in Q1. That takes the critical focus off the quarter-to-quarter changes. It is a big economy. The models are never going to be exactly right so live with it.

Over the last six years, the Q1 average has been 0.87% growth. That compares to the average of all quarters over the last six years of 2.0% growth or 2.36% growth if you leave the Q1 numbers out of the calculation. Yes, there is a problem with Q1 but it may be just the way it is. Consumers are shopped out after Q4, businesses are planning for the rest of the year and the winter weather does retard activity. Note in the chart below that the two negative bars over the last six years have been for Q1.

A major factor in the drop was a drop in consumer spending from 2.4% to 0.23% in Q1. That is the lowest level in years. We knew it was coming because of the wasteland that is the retail sector. Over the prior four quarters, spending averaged a 2.1% contribution to GDP with Q1-2016 the lowest contributor at 1.11%.

Inventories subtracted -0.93%. Exports only added +0.07% and government subtracted -0.3%.

The forecast for Q2 GDP is roughly 3%. I do not think there has been a dramatic change in the actual economy over the last three months. The optimism is there and hiring has picked up slightly but did the economy surge 2.3% over Q1?

We have known for many weeks that the Q1 number was going to be bad. The Atlanta Fed real time GDPNow number declined to a forecast of only 0.2% growth as of Thursday after the Census Bureau lowered the estimate for inventory growth.

The final Consumer Sentiment for April declined 1 point from the initial reading to 97 and just slightly over the March number at 96.9. The present conditions component declined from 113.2 to 112.7 and the expectations component rose from 86.5 to 87.0. Sentiment and confidence have begun to fade from the post election highs but only slightly. The percentage of consumers expecting a strong economy over the next four years declined 4% to 49%.

This is going to be an active week for economic reports. This is a payroll week as well as ISM reports and factory orders. Right in the middle of the week is the Fed meeting and rate hike decision.

The House punted on the government funding battle and postponed it until next Friday so we have another whole week of wondering if there will be a government shutdown.

If that is not enough to worry about, we have the French runoff election next Sunday. Marine Le Pen is rapidly closing the gap between her and Emmanuel Macron. She gained 2% in the last two days and 6% over the last week. She is still well behind at 41% compared to Macron's 59% but the race is tightening. After the election last Sunday, she was only given a 35% chance. If she pulls within 2-3 points by the weekend, Europe will be freaking out again with the possibility of a Trump style come from behind win.

It has been a good earnings cycle so far. According to Thompson Reuters of the 288 S&P companies that have reported 76.7% have beaten analyst estimates for earnings and 64.8% have beaten on revenue. The averages over the last four quarters are 71% and 53% respectively. Q1 earnings are now expected to grow by 13.6% and well over the estimates on March 31st for 9%. Excluding energy, the earnings growth shrinks to 9.3% but still great. This will be the first quarter of double digit earnings growth since Q3-2011. Revenue growth for the quarter is expected to rise 7.1%.

The earnings forecast for Q2 is 9.3% growth, Q3 9.3% and Q4 13.5%. Q1 of 2018 is expected to grow by 11.6%. If all these forecasts were to play out as expected this could be a very strong growth period for the market. If a tax reform package is passed that lowers corporate taxes and allows for repatriation at a reasonable rate, those earnings numbers could rocket higher.

The earnings estimates have surged over the last three weeks as seen in the FactSet chart below. The estimates were still hovering at 9% in mid April and then spiked over the last two weeks. This is due to the large number of companies beating estimates. This should be bullish for the market because 13% earnings were not priced into equities.

For Q2, 38 companies have issued negative guidance and 24 have issued positive guidance.

Next week there are 127 S&P companies reporting and two Dow components, AAPL and MRK. The most watched companies for the week will be Apple for obvious reasons, Facebook, Tesla and Activision. There are a lot of companies reporting but the number of high profile companies have declined.

Chevron (CVX) reported better than expected earnings on Friday of $1.41 per share. Analysts were expecting 86 cents. However, the Chevron number included $600 million gain from an asset sale. Revenue of $33.4 billion missed estimates for $34.9 billion. Operating costs declined -14% and capex for 2017 is down about 30%. Net production increased 3% and they guided for a 4-9% growth for the full year. Shares gained $1.23 to add 8.4 points to the Dow.

ExxonMobil (XOM) reported earnings of 95 cents that beat estimates for 88 cents. Revenue of $63.3 billion missed estimates for $66.4 billion. The better earnings came from the upstream division with a profit of $2.3 billion. The refining division generated $1.1 billion in profits and the chemical business created $1.2 billion. Production was 4.2 million boepd, a decline of 4% due to more downtime for maintenance and smaller entitlements because of higher prices. Some leases and production contracts have production sharing. Exxon gets the majority of the production when prices are low as an incentive to drill and produce but when prices rise the other parties get an increased share. This reduces the production credited to Exxon even though the actual rate of production did not change. Shares rose a minimal 39 cents to add 2.67 points to the Dow.

GM reported earnings of $1.70 that rose 34.9% and easily beat estimates for $1.45. Revenue of $41.2 billion rose 10.6% and beat estimates for $40.25 billion. The company guided for full year earnings of $6.00 to $6.50 compared to the $6.12 it earned in 2016. Free cash flow is expected to be $6 billion and GM will return $7 billion to shareholders in buybacks and dividends. Shares managed to remain fractionally positive.

Cruise line Royal Caribbean (RCL) reported earnings of 99 cents compared to estimates for 92 cents. Revenue of $2.01 billion narrowly missed estimates for $2.02 billion. The company guided for the current quarter to earnings of $1.60-$1.65 and analysts were expecting $1.40. For the full year, RCL is guiding for $7.00 to $7.20. Shares spiked $6 on the news.

Uranium miner Cameco (CCJ) is having a rough decade. Shares were trading at $43 in 2011 when Japan's Fukushima disaster occurred. A 15-meter high tsunami disabled the power supply and cooling at the three Fukushima Daiichi reactors causing a meltdown. As a precaution, nearly all of Japan's 50+ reactors were shut down until they could be inspected and then recertified to withstand higher earthquake intensity. Currently 42 reactors are operable and able to restart with 24 in the actual process of getting restart approvals.

The loss of 10% of the world's 449 reactors for the last six years caused a major problem for Cameco. Uranium that had been contracted to refuel the Japanese reactors over that six-year period created a glut in the market and uranium prices crashed sending Cameco on a roller coaster of declines with the low at $7.50 in October 2016. Uranium prices hit a 13-year low in October.

I am telling this story because the outlook for Cameco is still outstanding, long-term and a reader recently asked me my opinion about the stock. When those 42 reactors eventually restart, they will join the 60+ currently under construction worldwide and uranium demand is going to rocket higher again. The long-term problem is that there is not enough uranium to fuel the growing fleet once those reactors are all operational. Multiple analysts have been predicting a production shortfall for several years but the long-term business of restarting or building a new reactor is measured in years, not months. Back in 2011 more than 15% of the uranium used in reactors came from Russian bombs. In a program started in 1993 called megatons to megawatts, Russia shipped excess uranium from deactivated weapons to the U.S. to be converted into fuel for nuclear reactors. The 20-year program terminated in 2013. The U.S. bought the highly enriched uranium from Russia in order to take it out of circulation and the byproduct of the deal was to provide fuel for reactors. Without that program supplying 15% of the fuel needed, the uranium shortfall will be even greater. Cameco is a stock I have recommended many times over the years but the restart timeframe always caused problems. The restart is always coming soon but it has never arrived. If you have a long-term investment horizon, I would not hesitate to put some Cameco shares in your portfolio.

Cameco reported a loss of 5 cents (Canadian) for Q1, compared to earnings of 20 cents in the year ago quarter. Revenue fell -4% to $393 million. Another challenge Cameco has is that uranium is ordered years in advance and Cameco stores it until time for delivery. They cannot claim the revenue until the delivery takes place. That makes their quarter-to-quarter revenue very volatile depending on how many reactors took delivery that quarter. Hurting them in Q1 was the final cancellation of the contract by Tokyo Electric Power, the operator of the Fukushima plants that will not be restarting.

Colgate Palmolive (CL) reported earnings of 67 cents that beat estimates by a penny. Revenue of $3.76 billion missed estimates for $3.8 billion. A 2.5% price increase was offset by a 2% loss in global volume and a 0.5% hit from global currency issues. North American sales accounted for 20% of total sales, Latin America 25%, Europe 15%, Asia Pacific 19%, Africa/Asia 6% and Hill's Pet Nutrition 15%. Shares fell $1 on the news.

The real news was not the earnings on Friday but the tech titans that reported after the bell on Thursday. Microsoft posted a fractional gain to a new high after reporting earnings of 73 cents compared to estimates for 70 cents. Revenue of $22.1 billion missed estimates for $23.6 billion. Shares rose because of positive comments the company made about their growing cloud business.

Intel reported earnings of 66 cents that beat estimates by a penny. Revenue of $14.80 billion rose 7% and missed estimates for $14.81 billion but it was a minor miss. They guided for Q2 revenue of $14.4 billion and full year revenue of $60 billion, with Q2 earnings of 68 cents and full year of $2.85. These were just slightly over analyst estimates. Shares declined on the slowing of Intel's high margin datacenter business. With AMD, Nvidia and now Qualcomm seeing increasing sales in that area, Intel is fighting to maintain its market share.

Alphabet (GOOGL) reported earnings of $7.73 that beat estimates for $7.38. Revenue of $24.75 billion beat estimates for $24.22 billion. That is an awful lot of ad clicks to produce that kind of revenue. Paid clicks rose 44% during the quarter with clicks on Google sites rising 53%. Revenues in the "other" segment, which includes cloud, rose 49% to $3.1 billion. This was Google's 29th quarter of 20+% revenue growth.

Analysts were quick to raise their price targets.

Monness Crespi Hardt from $900 to $1,050
Oppenheimer from $1,000 to $1,050
Pivotal Research from $950 to $990
Stifel Nicolas from $1,050 to $1,075
Nomura from $925 to $985
Credit Suisse from $1,100 to $1,150
Cantor Fitzgerald from $1,040 to $1,070
BMO Capital from $900 to $970
Cowen from $1,050 to $1,075
Barclay's $1,065
Deutsche Bank $1,250

Amazon (AMZN) reported earnings of $1.48 and revenue of $35.7 billion. Analysts were expecting $1.08 and $35.3 billion. Operating cash flow rose 53% to $17.6 billion and free cash flow rose to $10.2 billion and this was just for the quarter. Amazon Web Services had revenue of $3.6 billion which rose 43% and generated $890 million in earnings. For Q2 the company guided for revenue of $35.35 to $37.75 billion and that includes a massive $720 million hit from currency issues. Operating income guidance was $425 million to $1.1 billion. Amazon is still spending on new projects and building out its supply chain infrastructure. Jeff Bezos believes in the mantra, "If you build it they will come." They emphasized an opportunity in India and that country has four times as many consumers than the USA. If they are successful there it will catapult them into an even higher revenue bracket.

Starbucks (SBUX) broke my heart again after they reported earnings of 45 cents on revenue of $5.29 billion. Analysts were looking for 45 cents and $5.42 billion. Every time I buy Starbucks on a promising chart, there is some unexpected hiccup that costs me money. Despite jam packed stores, same store sales rose only 3% compared to expectations for 3.6%. They are suffering from multiple problems. Their mobile ordering application proved so successful that stores were swamped during peak periods and customers became frustrated and did not visit as often. Starbucks is increasing staff and procedures and they are confident they can handle the problem. Having too much business is a good thing once you learn how to handle it. Secondly, chains like Dunkin Donuts and McDonalds are eating into their market share. McDonalds is offering $1 coffee and $2 specialty drinks and no waiting. I still have confidence in Starbucks for the long-term but these post earnings disappointments are getting to be a habit.

Western Digital (WDC) reported earnings of $2.39 that beat estimates for $2.16. Revenue of $4.65 billion beat estimates for $4.59 billion. The drive maker guided for revenue of $4.8 billion in Q2 and earnings in the $2.55-$2.66 range. Analysts were expecting $4.6 billion and $2.14. They generated $1 billion in free cash flow and ended the quarter with $5.8 billion in cash. They are kicking Seagate's butt in the drive market and since they bought SanDisk last year they now have another business line and they are announcing new products every couple of weeks.

Just last week they announced a new 12 TB Ultrastar enterprise hard drive, filled with helium, which is the largest enterprise drive on the market for random activity. Helium is 1/7th the density of air, which allows the read/write heads to "fly" closer to the recording surface, allows for thinner disks and the addition of two extra platters. They have shipped more than 15 million of these in the smaller sizes. This is a must own stock for long-term investors but look for a dip.

Oil prices continued to fall to nearly $48 on worries U.S. shale production was rebounding too quickly. Crude inventories did decline -3.6 million barrels but those draw downs have been slow to appear. U.S. production rose to 9.27 million bpd, up +200,000 bpd over the last eight weeks. The peak in June 2015 was 9.61 mbpd. The low point in July 2016 was 8.428 mbpd. Over the last ten months, production has risen 840,000 bpd and that was using a much smaller number of rigs. We have more than doubled the number of active rigs since the historic low of 404 last May. If the current pace of production increases holds, an average increase of 18,000 bpd per week, we could add another 720,000 bpd by the end of 2017. Since we now have double the active rigs that pace could actually increase.

This is a challenge for OPEC and their decision to extend the production cuts for another six months. If they do that, and prices rise, U.S. producers will put even more rigs to work.

The U.S. imported 8.91 mbpd last week, 1.1 mbpd more than the prior week and the most in months. Traders are worried about U.S. production but they should also be worried about the pace of imports. Refiners import oil because it is cheap and it is a heavier oil needed to make products other than gasoline, including diesel, heating oil, etc.

Green is a high, yellow a low.

Producers activated 9 additional oil rigs and 4 gas rigs last week. However, offshore rigs declined by 3 to 17 and a three-month low.


The markets exploded higher on Mon/Tue and then went dormant. The S&P has been fighting a battle with resistance at 2,388 since Tuesday afternoon with moves above and below but returning to that level at the close. On Friday that changed and the index dipped slightly on the afternoon event risk selling.

The 2,388 level has become our directional indicator. If the market moves lower from here that becomes the level all future moves are measured against. If it moves back over 2,388 the shorts will have to cover and we could see an extended move. For traders the play would be to remain short under 2,388 and go long over 2,400. That 2,400 level is also going to be tough to cross. I would remain neutral between those levels.

The Dow has an equally difficult hurdle at the 21,000 level. The index spiked to that level by 10:AM on Tuesday and then failed to extend the gains despite some intraday penetration on Wednesday. That is rock solid resistance and it will probably take a decent catalyst to power the Dow higher from here. There are only two Dow components reporting next week and Apple after the bell on Tuesday could be a market mover. Let's hope the direction is up. Until Apple reports, there may be some hesitancy for investors to get long the market.

The Nasdaq indexes are on a mission. They are making new highs every day even though the other indexes have stalled. The Nasdaq Composite is up +237 points (4.1%) since the close on April 13th. This move is very over extended and now that most of the big cap techs have reported, we could see a lack of enthusiasm. Apple, Facebook and Tesla are the market movers reporting this week. The Composite Index is closing in on uptrend resistance at roughly 6,100 and that would be another 60 points higher. If we were to reach that level, I would definitely be a seller on a short-term trade.

The Nasdaq 100 managed to post a gain on Friday thanks to GOOGL, AMZN, PCLN and TSLA. With Apple and Facebook reporting this week there is a strong possibility we could see another upside move but after that, the majority of the big cap tech earnings will be over. The index is extended and could be setting up for the sell in May cycle. Long-term uptrend resistance from November 2014 is about 5,635.

The biotech sector surged on Friday to cap a strong week after Regeneron (REGN) reported the FDA accepted their new license application for the drug Kevzara targeting rheumatoid arthritis. Shares spiked $22 on Friday to lift the sector. The spike in biotechs should have supported the Nasdaq and the Russell but both were negative. Obviously, those losses would have been worse without the biotech support.

I mentioned earlier about the weakness in the Russell and the small caps. The S&P-600 fell back below strong resistance at 860 after a nice two-week gain. This could be a critical event for Monday. If the small cap indexes continue to decline, we could be in for a broader dip.

This is a Fed meeting week. Typically, there is a market bump on Tuesday ahead of the Fed decision. Whether that trend will be enough to lift the indexes back over resistance is unknown, especially with Apple reporting after the bell on Tuesday. The first day of May is typically bullish so that is also working in our favor.

The weekend event risk probably will not become a factor until Thursday and that depends on the headlines out of Washington on the budget crisis and French election headlines. Since the Fed decision is Wednesday, the Nonfarm Payroll report on Friday will be of lesser importance. Analysts will still bloviate about the jobs gain, regardless of what it is, but the market is not likely to react to the number.

We are approaching the "sell in May and go away cycle." Using the MACD indicator to time the exit from stocks it would appear we are still days or even weeks ahead of that signal. More on this in the Random Thoughts.

We are at the point in the market where we need to be cautious about being over extended. Once the earnings excitement fades, we could see some decent profit taking.

Random Thoughts

Wow! Bullish sentiment spiked a whopping 12.3% from 25.7% to 38.0%. That is a monster jump and a two-month high. The new market highs on Tuesday must have converted a lot of the fence sitters because bearish and neutral categories also fell sharply. This is actually worrisome since the herd is normally wrong. When the herd is most bullish, we should be getting ready for a decline.

Last week results

"When the VIX is high it is time to buy. When the VIX is low it is time to go."

The VIX made a new 10-year intraday low at 10.22 on Tuesday. While it can go lower, it very rarely accomplishes that feat. Even though it closed at 10.82 on Friday, the index is holding at three-year lows. When the market is at new highs and the VIX at new lows, we should be worried. The index can stay in the 11-12 range for some time but the longer it is low the more likely a sell off will appear.

Stock Trader's Almanac Six Month Switching Strategy

Back in 1986 the Stock Trader's Almanac discovered the position switching strategy that corresponds with the "Sell in May and go away" strategy that has been around for decades. They found that investing only in the best six months of the year and sitting out the worst six months of the year produced astonishing returns.

Since 1950, if you had invested $10,000 in the Dow over the worst six months of the year you would have a cumulative loss of $6,710 over the 66-year period. If you invested $10,000 in the Dow in 1950 and never touched it you would have a gain of $860,000 today. However, if you used the best six months switching strategy with a MACD entry point, you would have generated $2,496,586 in profits. Obviously, that is a significant difference and the strategy is really easy.

Basically, the best six month period is November-April and the worst six months are May-October. Since millions of events impact the market the Almanac publishers figured out that using a MACD buy/sell signal could significantly improve results rather than just using a strict calendar formula.

Currently the MACD is in a bullish position thanks to the market spike last week. When the MACD rolls over in May it would be a sell signal for long positions. They recommend moving to cash or bonds or some neutral position. The advantage is that you are out of the market over the summer months and free to vacation without worrying about the market gyrations. When we get close to November, you begin looking for a positive signal on the MACD to time the entry back into the market for the next six months.

A lot of investors follow this strategy so it is sort of a self-fulfilling strategy.

Read the full details HERE


Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Experience is the hardest kind of teacher, it gives you the test first and the lesson afterward." And "Experience is the name everyone gives to their mistakes."



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Index Wrap

Stall Speed

by Jim Brown

Click here to email Jim Brown
The markets rocketed higher on Mon/Tue but stalled at key resistance across all indexes.

The short squeeze was powerful. The two-day ramp blew through prior resistance that had held for weeks and powered the indexes to new high resistance. In the case of the Nasdaq it was new highs.

The indexes all stopped right at resistance with the exception of the Nasdaq and the Russell 2000. The small cap index closed at a new high on Wed/Thr before collapsing on Friday.

Back on March 1st, the indexes all surged to new highs that lasted only one day. The decline began immediately and a new rebound came two weeks later that stalled just short of the single day high and created the current resistance level.

On the NYSE Composite Index the resistance level from mid March is 11,625. The index tried for three days last week to break that level and failed.

The Russell 3000 index ($RUA) also failed to break through new high resistance from March 1st with attempts on each of the last four days. In each case, the index did not close far below and remains within striking distance.

The Vanguard Total Stock Market Index (VTI) also came to a dead stop at 123 and the March resistance high.

The S&P-1500 Composite Index failed at 556 and the resistance from March.

The point I am trying to get across is that this was not just the 30 stocks in the Dow or the 100 stocks in the Nasdaq 100. The indexes above cover nearly every investible stock in the market and each index has over 1,000 components.

The resistance failure was market wide. Buyers either lost their conviction OR fund managers are sell stock in small amounts to retail buyers who suddenly turned bullish last week. This is called distribution and it happens at market highs. Portfolio managers decide to lighten up on their holdings in a way that does not crash the market. The small lot selling is consistent and persistent as long as prices do not decline significantly. Should that happen and managers feel the market is rolling over they will hit the sell button and begin dumping shares.

We cannot know if it is distribution until several days have passed but the indications strongly suggest that managers are selling stock at the highs.

This could be because of the calendar as we head into the "sell in May" cycle or it could be because of the outlook. With the new administration not likely to get anything signed into law until before the August recess at best and by the end of 2017 at worst, there is nothing to keep managers incentivized into holding their long positions.

There is a very good chance we could see this pattern turn into a double top formation. The market has not sold off materially since October and there are plenty of profits to be protected.

The VIX is at a 3-yr low after a 10-year intraday low on Tuesday.

On the positive side, the energy sector has been negative for months and the calendar works in our favor on energy. The refiners are ramping up production and were at 94% last week. We should begin to see some material declines in crude inventories that sill support prices. If the energy sector turns positive, it could help to support the broader market.

Lastly the percentage of S&P stocks over their 200-day average fell to 75.8% on Friday and very close to breaking below the 75% range despite the new highs in the market. The big gains last week were due to a few megacap tech stocks while the broader market was starting to fade.

This could be a pivotal week for the markets. The first two weeks of earnings are over and more than half the S&P have already reported earnings. The earnings excitement that draws traders into the market to bet on earnings, has begun to fade. After Apple and Facebook next week, the interest level is going to drop even more.

Add in the budget battle in Washington, the FOMC meeting on Wednesday and the French election event risk and there could be some challenges to the market moving higher.

At this point, we need a catalyst to cause another spike higher. Other than Apple's earnings, I do not know what that might be.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Healthcare Done Right

by Jim Brown

Click here to email Jim Brown

Editors Note:

Not all healthcare providers are complaining about the Obamacare system. Centene is actually profiting from the ACA.


CNC - Centene Corp - Company Profile

Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. It operates through two segments, Managed Care and Specialty Services. The Managed Care segment offers Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs, including Medicaid, the State children's health insurance program, long-term care, foster care, and dual-eligible individual, as well as aged, blind, or disabled programs. Its health plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, laboratory and X-ray services, home health and durable medical equipment, behavioral health and substance abuse, 24-hour nurse advice line, transportation assistance, vision care, dental care, immunizations, prescriptions and limited over-the-counter drugs, specialty pharmacy, therapies, social work services, and care coordination. The Specialty Services segment provides pharmacy benefits management services; health, triage, wellness, and disease management services; vision services; dental services; correctional healthcare services; in-home health services; and integrated long-term care services, as well as care management software that automate the clinical, administrative, and technical components of care management programs. This segment offers its services and products to state programs, healthcare organizations, employer groups, and other commercial organizations. The company provides its services through primary and specialty care physicians, hospitals, and ancillary providers. Company description from FinViz.com.

Centene reported earnings of $1.12 compared to estimates for $1.05. Revenue jumped 69% to $11.72 billion to beat estimates for $11.42 billion. The big spike in revenue came from the $6.3 billion acquisition of Health Net last year.

The insurer said it had 12.15 million members on March 31st, an increase of 605,000. They raised guidance for the full year from $4.40-$4.85 to $4.50-$4.90. The health benefits ratio or HBR, the amount it spends on claims compared to the premiums received declined from 88.7% to 87.6%. The lower HBR is due to a greater mix of commercial businesses and the growth of its Obamacare businesses.

Earnings July 25th.

Shares had resistance at $73, which was broken last week. The next resistance is the 52-week high at $75.50 and the stock closed at $74.41 on Friday. There was a sell the news drop on Wednesday after the earnings but shares have already recovered $3 of that decline.

If the stock moves to a new 52-week high is should continue on to make a new high over $80.

Buy June $77.50 call, currently $1.65, initial stop loss $71.25.


No New Bearish Plays

In Play Updates and Reviews

Minor Profit Taking

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes closed at three-day lows ahead of the weekend but there was no heavy selling. Volume was 7 billion shares again making this the first week in a long time when all five days were 7 billion or higher. Since the major indexes did not move over the last three days, I am still concerned this could be distribution.

Distribution is when funds dole out their shares in an orderly systematic process in order not to spook the market. They are counting on the new high sentiment to convince retail buyers the market is still going higher. If there was a rush to exit they would just push the sell button and the prices would tank.

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. The event risk returns for next weekend with the French election runoff and the rescheduled government funding battle on Friday.

For technical traders this is the perfect week to exit the market with the indexes at new highs and the major stocks reporting good earnings. This creates the positive sentiment they can sell into before the sell in May cycle begins.

If this is distribution we could see a sharp decline next week. If it is simply consolidation, it could take a couple weeks to run its course.

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 stopped at $64.35.

HCN - Welltower Inc
The long call position was stopped at $71.45.

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BULLISH Play Updates

ADBE - Adobe Systems - Company Profile


No specific news. Shares posted a minor gain to close at a 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 new closing 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. However, Apple's fight with Qualcomm is heating up and the entire chip sector fell sharply today. The drop in CRUS stopped us out with an 18-cent loss. It was a May option and I had the stop tight to take us out on any weakness.

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:

Closed 4/28/17: Long May $65 call @ $2.93, exit $2.75, -.18 loss.

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

CVX - Chevron - Company Profile


Chevron reported earnings of $1.41 compared to estimates for 86 cents. The Chevron number did have a $600 million gain from the sale of an upstream asset so it is not really apples to apples comparison. Revenue of $33.4 billion missed estimates for $34.9 billion. Operating costs declined 14% and capex spending will be down more than 30%. Oil production rose 3% and full year growth is expected to be 4-9%.

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


No specific news. A Forbes article said 2018 is likely to be the first year of year-round blockbusters and many of them are Disney films.

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

Update 4/26/17: 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.

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. Minor decline from the 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 but shares broke through support at $71.50 to stop us out at $71.45 for a minor loss of 56 cents. HCN had a bad week.

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.

Update 4/27/17: After the bell the company announced a quarterly dividend of 87 cents payable May 22nd to holders on May 9th.

Position 4/25/17:

Closed 4/28/17: Long June $72.50 call @ $1.41, exit .85, -.56 loss.

LB - L Brands - Company Profile


No specific news. Nice gain in a weak market as shares move towards the next resistance at $53.50.

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 fell hard despite no news. The sector was also down.

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, see portfolio graphic for stop loss.

SAIC - Science Applications Intl - Company Profile


No specific news. Shares were down with the defense sector today. The loss amount was about average with the losses on other stocks in the sector.

Original Trade Description: April 26th.

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.

Position 4/27/17:

Long August $80 call @ $1.90, see portfolio graphic for stop loss.

SYMC - Symantec - Company Profile


No specific news. Shares posted a minor gain but it was a new closing high.

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.

Update 4/26/17: 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!!!

Update 4/27/17: Symantec, Google and Mozilla have reached an agreement on the life cycle of Symantec trust certificates. There is a push on in the browser community to shorten the duration of security certificates because of the proliferation of bogus websites. If the certificates expire faster, then the websites have to be revalidated more often and the bogus sites will slowly be weeded out.

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 at 3-year lows. We avoided a government shutdown but only for a week as lawmakers punted the decision to next Friday. After the close North Korea test fired another ballistic missile, which also blew up. The White House is warning it may take military action to force North Korea to halt its nuclear advance. Marine Le Pen is rapidly gaining on Macron in the French election runoff for next Sunday. She gained 6 points in two days to 41% in the recent polls compared to Macron's 59%. If she can gain another 6% early next week then the entire event risk scenario comes back into play with a potential come from behind win. I know if I close this position all of those events will occur and the VIX will be 20 next weekend.

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.

WFM - Whole Foods Market - Company Profile


No specific news. Shares fell 50 cents on profit taking ahead of the weekend event risk.

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.

Update 4/27/17: Private investment firm, Neuberger Berman, urged Whole Foods to explore a sale. The company has a 2.4% stake in Whole foods. Jana Partners has a 9% stake and is demanding action now.

Position 4/20/17:

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

Z - Zillow Group - Company Profile


Zillow announced it had partnered with REcolorado, a MLS firm serving more than 20,000 agents in the Denver/Colorado Springs area.

Zillow reports earnings after the close on Thursday. We will exit before the event.

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.

Update 4/27/17: Zillow surged to a new 9-month high after announcing new partnerships with four new MLS firms. Sandicor represents San Diego County, ABoR represents the Austin Noard of Realtors, NOMAR represents the New Orleans Metropolitan Association of Realtors and the Greater Baton Rouge Association of Realtors. All together, those MLS firms have more than 23,000 member realtors.

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


The S&P rolled over slightly just under resistance but the government funding deadline was moved to next Friday. This level on the S&P would be the perfect level for a market decline to begin.

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.

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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