Option Investor

Daily Newsletter, Wednesday, 5/24/2017

Table of Contents

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

Market Wrap

Drifting Higher

by Keene Little

Click here to email Keene Little
There might not be a lot of volume behind this week's rally but the buying has been enough to keep the bears away, allowing the market to drift higher. The question for the rest of the week is whether or not the indexes will be able to drift up through resistance.

Today's Market Stats

Last week the market tanked (on Wednesday) because of the political turmoil surrounding President Trump. This week the indexes have nearly retraced all of last week's loss and yet nothing has changed surrounding Trump as more investigations are launched in an effort to smear/clear his name. The VIX is back down below 10 and the big question is why was it so scary last week but nothing to worry about this week? To answer that question would require us to figure out a logical stock market, which of course is an oxymoron.

There's been a big liquidity push into the market in the past week and it could be argued that some big players, including central banks, have been behind the effort to recover the market and keep investors investing. The one missing component this week has been volume and a strong rally (in points) without the volume behind it makes is a little more suspect.

This being the week before the Memorial Day holiday weekend it's typical for us to see lower trading volume. It has in fact made it easier to push the market higher. With the indexes up against resistance we'll now see whether or not the sellers stay away at least before the weekend.

There wasn't much in the way of economic reports to move the market this morning. Mortgage applications were up +4.4%, reversing the previous week's -4.1%. This is a volatile weekly number and gets very little attention. Yesterday's report of new home sales in April showed a lower than expected number (569K vs. 605K expected and down from 642K in March). This morning's report of existing home sales was similarly lower but not by as much. Expectations were 5.65M, a slight drop from 5.70M in March, but the actual number was 5.57M, down -2.3%.

Total housing inventory increased 7.2% in April to 1.93M existing homes (a 4.2-month supply at current sales rate), but it's still down -9% from a year ago. As further evidence of a shrinking home ownership rate, despite a population increase, this was the 23rd consecutive year-over-year decline in the housing inventory. However, with the Millennial generation now hitting the age where they become more interested in home ownership, we could soon see a renewed demand for housing.

The existing home sales were down in every major region except the Midwest but the median sales price for single-family homes rose 6.1% to $246,100. As opposed to the new-home prices, which have steadily declined since early 2013, the median price for used homes has risen each month for over 5 years (this was the 62nd consecutive year-over-year gain). The time on the market for used homes fell to a new low of 29 days vs. 39 days a year ago. So all in all, the housing market is looking healthy, although it's becoming more of an affordability issue. There is a lack of affordable housing, especially for the lower- and mid-market range.

Lumber futures prices have been rising steadily since October 2015, doubling from $200 to a high just over $400 in April. The futures have pulled back slightly from April but price remains in a strong uptrend with no signs of weakening. As Tom McClellan has noted, lumber futures prices tend to lead new home sales by about a year and therefore it's looking like new home sales should continue to increase this year and that might reflect stronger buying interest from the Millennials, even as the Baby Boomers look to downsize.

The bigger problem for new home construction is labor. Many of the trade industries are begging for people and I know that in my hometown of Spokane, WA there are apprenticeship programs (remember those?) and trade association education programs that are trying to entice people into the home construction industry. There is a strong need for new people and that's negatively affecting how many homes can be built right now. It would appear we might now need fewer college-educated kids, with their $50K student loans to pay off, and more trade-educated kids who can earn decent money without monstrous loans holding them back.

The FOMC minutes were released at 14:00 and they caused a little volatility before finishing near the highs of the day. With the low trading volume it's not hard to move the indexes around but apparently shorts were spooked and some buyers jumped in. There was nothing new in the minutes so it was likely just some relief buying following the release of the minutes.

The FOMC minutes reflected agreement on a system to start reducing their balance sheet, which consists mostly of government bonds. They've been holding their balance sheet steady by rolling over expiring Treasuries but are now in agreement to start letting some of the Treasuries expire without replacement. They will be setting caps on how much will be allowed to roll off each month without reinvesting the proceeds. The initial caps will be set low and any proceeds over and above the caps will be reinvested.

The schedule of release of their bonds will be pre-announced in an effort to keep the market informed and reduce surprises and that's likely what the stock market liked. The reaction in the bond market was favorable -- bond prices rallied slightly, which dropped yields back down from their afternoon highs.

The Fed is a little concerned about the slowing inflation and economic indicators in Q1 but they think it's "transitory" and believe their forecast will have to be adjusted as inflation and the economy tick back up. The problem of course is that the Fed has a perfect record of never getting their forecast correct. If they think inflation and the economy are both going to tick higher my bet is that it's going to do the opposite. There are plenty of reasons to expect the long-term deflationary cycle to continue but I won't get into those tonight.

As mentioned earlier, last week's decline has largely been retraced but now we're at the point where we were last week, facing the same resistance levels. The question for the rest of the week is whether or not there will be enough volume (the pressure behind the buying) will be enough to shove the indexes up through resistance.

I was tempted to title tonight's report "I Ain't Afraid of No Bears" based on the quick reversal back down in the VIX from last week's spike up.

Volatility index, VIX, Weekly chart

Just as we had a "too far, too fast" spike to the upside last week, we now have a "too far, too fast" spike back down. The collapse of fear about a lasting downturn, which has driven the VIX back below 10, is worrisome. The VIX closed at 10.02 after hitting a low at 9.88 today and is again not far from the bottom of its large descending wedge from 2015, currently near 9.67. The low on May 9th was 9.56. A low VIX is not a reason to sell your stocks but it is a reason to be more cautious than usual. A retest of the highs for the stock market is being accompanied by a test of the lows for the VIX, and with continued bullish divergence. What, me worry?

In last Wednesday's wrap I kicked off the review of the major indexes with a look at the Nasdaq because it had a very nice setup for a reversal following Tuesday's high and it looked like Wednesday's strong decline was the kickoff to a larger decline. That has now of course been negated with the retracement of the decline. But I had shown an alternate wave count that suggested a pullback from Tuesday's high could lead to one more new high to complete a 5-wave move up from March 27th. Guess what we now have?

Nasdaq Composite index, COMPQ, Weekly chart

Not much has changed on the weekly chart and that means the Naz is still up against resistance at a price projection at 6167.53, which is where the extended 5th wave of the rally from February 2016 is equal to the 1st through 3rd waves. The more bullish interpretations says we need to see the Naz stair-step higher over the next several months and potential up towards 7000 but that would only become more evident after seeing a choppy pullback/consolidation instead of an impulsive decline.

The risk here is that the rally from February 2016 is completing and it will be followed by at least a larger pullback correction, one that could see the bottom of its up-channel from 2011 tested, which is currently near its March 2000 high at 5132.

Nasdaq Composite index, COMPQ, Daily chart

As a reminder, the rally from February 2016 is the 5th wave of the rally from 2011 (to complete an A-B-C rally from 2009). This 5th wave is a 5-wave move and its 5th wave is the leg up from March 27th, shown on the daily chart below. The smaller 5th wave equals the 1st wave near 6164, which was achieved with today's high at 6166.

That gives us longer- and short-term projections at 6164 and 6167, putting today's high in the middle. There is of course last week's high at 6170 that might also be resistance. But if the Nasdaq gets above 6170 and stays above that level then we could see a rally to the 6200-6210 area to test the trend line along the highs from April 2016 - March 1, 2017. This trend line and the 6167 projection stopped last week's rally. So far the test of last week's high is showing a significant bearish divergence. And with the VIX now back below 10, what, me worry? I ain't afraid of no bears (or double tops).

Key Levels for COMPQ:
- bullish above 6210
- bearish below 5996

Nasdaq Composite index, COMPQ, 60-min chart

Dialing in closer, the 60-min chart shows the 5th wave of the rally from March 27th, which is the leg up from last Thursday. This means we're into the 5th of the 5th of the 5th wave and there's every reason to believe we're headed shortly for at least a much larger pullback.

Using the arithmetic price scale, vs. the log scale price used on the daily chart above, the trend line along the highs from April 2016 - March 1, 2017 sits a little lower and was tested with today's high at 6166. There's additional upside potential but this is another setup for a reversal and this time with a double top. The leg up from last Thursday is building a slight rounding top (there's no good uptrend line for the rally) as it hits resistance. Nah, I'm still not worried (wink).

S&P 500, SPX, Daily chart

SPX needs buyers to continue from here otherwise it's going to look especially bearish. Following the March 1st high last week's slightly higher high was with bearish divergence and the selloff left a double top. Now we have a test of last Tuesday's high at 2405.77 with today's high at 2405.58 with an even more significant bearish divergence. Bulls need a break above 2410 (and hold above) in order to negate the bearish divergence and a triple-top setup. I think the selling could get nasty if it starts back down from here.

Key Levels for SPX:
- bullish above 2410
- bearish below 2352

Dow Industrials, INDU, Daily chart

The wave count is not at all clear on the Dow since it either finished with a truncated 5th wave or has a funky looking 4th wave and a truncated 5th wave. For now I'm using trend lines for guidance and today's rally brought the Dow up to its downtrend line from March 1 - April 26th. This downtrend line stopped the rallies on May 9 and 16 and therefore is a trend line traders are watching.

In addition to this trendline resistance (until proven otherwise), the broken uptrend line from November is currently near today's closing price at 21012. Once again, the bulls really need to keep up their buying here. Otherwise we'll have more tests of previous highs with bearish divergence.

Key Levels for DOW:
- bullish above 21,047
- bearish below 20,553

Russell-2000, RUT, Daily chart

The RUT's price pattern since last December has been nothing but corrective 3-wave moves and as such it makes it nearly impossible to discern what its next move is likely to be. Using trend lines and channels is usually effective in identifying potential turns and at the moment the RUT is up against its downtrend line from April 26th, currently near today's closing price at 1382.

Better seen on a 15- or 30-min chart is a rising wedge for the leg up from last week and the RUT broke down from it with today's pullback from the morning high. The afternoon bounce took it back up to the bottom of the wedge, leaving a potential back-test and now waiting to see if we'll get the bearish kiss goodbye with a selloff on Thursday.

Key Levels for RUT:
- bullish above 1401
- bearish below 1351

10-year Yield, TNX, Daily chart

The bond market reacted positively to the FOMC minutes and reversed the buying up until the afternoon release. This of course dropped yields, which closed below yesterday's close and could now be ready for another leg down toward the 2.00% objective out of its double-top pattern between last December and March. The bottom of the trading range (the valley between the double top), near 2.3, was tested with this afternoon's high at 2.297. A continuation lower tomorrow/Friday would more strongly suggest the decline in yields will continue.

KBW Bank index, BKX, Daily chart

The banks could also be ready for the next leg down. Yesterday's high at 91.75 was a back-test of strong resistance at its broken 20- and 50-dma's, at 91.72 and 91.60, resp. It was also a back-test of its broken uptrend line from June 2016, currently near 91.50, which it had broken below last week. There's a lot of resistance here and it's a reason the bulls need to keep up the buying and bust through it. Otherwise a decline on Thursday would leave a bearish kiss goodbye at resistance and a reason to sell. The downside objective for the H&S top, near 75.30, still beckons. That alone would be a 17% loss from here.

Transportation Index, TRAN, Daily chart

Another H&S top, another back-test. The TRAN bounced off its 200-dma last week and has now made it back up to its broken 20- and 50-dma's, at 9046 and 9065, resp., with today's high near 9045. They'll be near 9040 and 9060 on Thursday but at the moment the TRAN has also made it back up to a downtrend line from April 25th, near 9025, closing slightly below it today at 9022. Again, the bulls need to keep up the buying pressure otherwise a selloff from here would leave a bearish kiss goodbye at resistance. The downside potential is to 7900 (from the H&S pattern), which would be a decline of about -12% from here.

U.S. Dollar contract, DX, Daily chart

The US$ has been in decline since topping in January and the decline has been steepening since the bounce to a lower high in early March. On May 16th the dollar dropped below the bottom of a potential bullish descending wedge, which was a bearish move (leaving behind a failed bullish pattern).

It's looking like we should see a drop down to at least the bottom of a parallel down-channel, currently near 96. I'm expecting the dollar to eventually break down below the bottom of the channel but it should provide at least a bounce/consolidation before dropping lower.

Gold continuous contract, GC, Daily chart

The short-term pattern for gold is not clear enough to suggest a higher-probability move over the next week. With it struggling to get back above its broken uptrend line from December-March, currently just above today's close at 1258.60, it's looking vulnerable to another leg down from here. But I could easily argue we'll see a pop up to its downtrend line form 2011, near 1282, before heading back down. It would obviously be more bullish if it can break its longer-term downtrend line.

Oil continuous contract, CL, Weekly chart

Since June 2016 oil has essentially traded in a choppy sideways trading range and it's nowhere near breaking down or up yet. The weekly chart below gives a better sense for where it is than a daily chart. Today's high at 51.88 is a test of the long-term uptrend line from 1998-2008. There's a little more upside potential to its downtrend line from May 2015 - January 2017, currently near 53.30, which is the line that stopped rallies in February and April.

Much above 53.30 for oil would have me looking for a run up to the top of a parallel up-channel for its choppy rally following June 2016 high, which could also have it testing price-level S/R near 58.50. The overall choppy pattern continues to suggest we're going to get another leg down for oil, potentially below its February 2016 low at 26, and that could start from the 52-53 area or possibly higher.

Economic reports

There will be no market-moving economic reports on Thursday and then on Friday we'll get Durable Goods Orders and the 2nd estimate of GDP. With the Fed on data-dependent mode, thinking the economy is improving from Q1, these numbers could sway the market, especially since we should have very low volume on Friday.


Many of the indexes have bounced back up to potentially strong resistance and until the market can rally some more it's looking vulnerable to another reversal back down. This might be a time where the 2nd mouse will get the cheese (the first one who shorted last week's high took the bait and paid dearly for it). Most bears will be reluctant to try shorting this market again but we have a nice setup for them to try. Only in hindsight will we know whether or not the market has a different plan.

It's possible the market will simply drift a little higher into the end of the week in front of the holiday weekend. Without a lot of points added to the board it would keep the bears away and then we'll get a truer sense of market direction next week. But beware of the possibility for a negative day on Thursday, which would kick out some potentially important sell signals.

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

Keene H. Little, CMT

New Option Plays

Ride the Defense Wave

by Jim Brown

Click here to email Jim Brown

Editors Note:

The moves in defense related stocks can be explosive given the multiple conflicts. Orbital ATK is more explosive than most since they make ammunition and precision munitions.


OA - Orbital ATK - Company Profile

Orbital ATK is a global leader in aerospace and defense technologies. The company designs, builds and delivers space, defense and aviation systems for customers around the world, both as a prime contractor and merchant supplier. Its main products include launch vehicles and related propulsion systems; missile products, subsystems and defense electronics; precision weapons, armament systems and ammunition; satellites and associated space components and services; and advanced aerospace structures. (Company supplied description.)

The company reported earnings on May 11th of $1.23 that missed estimates for $1.39. The miss was due to a surprise hike in the tax rate that analysts were not expecting. There was an event two years ago that caused a lower tax rate in the year ago quarter. Analysts factored in that repeat rate without realizing it was a one-time event. Revenue of $1.085 billion beat estimates for $1.083 billion.

Revenue in the Flight Systems Group, Defense Systems Group and Space Systems Group was up between 4.6% and 5.2%. Order backlogs at the end of the quarter were up 12% to $9.8 billion. Total backlogs including options and indefinite quantity contracts were $14.8 billion.

The company guided for 2017 earnings of $5.80-$6.20 and revenues of $4.550-$4.625 billion. Free cash flow is expected to be $250-$300 million.

Earnings August 10th.

Today Orbital received a $76 million order for 50 caliber ammunition from the U.S. Army. Orbital operates the Lake City ammunition plant for the military under an $8 billion facilities management contract. Last month they announced a $92 million order for 5.56mm and 7.62mm ammunition. Since taking over the plant they have produced more than 17 billion rounds of small caliber ammunition. They also received a $53 million contract to produce 120mm and 105mm ammunition including the new M1002 and M724A2 rounds for howitzers and tanks. To date they have produced more than 5 million rounds of large caliber ammunition.

Orbital ATK’s Defense Systems Group is an industry leader in providing innovative and affordable precision and strike weapons, advanced propulsion and hypersonics, missile components across air-, sea- and land-based systems, ammunition and related energetic products.

Shares broke over resistance at $99.75 today on the award win. With the emphasis on higher defense spending and a war fighter now in charge of the military, we can expect future orders to continue. Add in their missile systems, space launch systems, etc and Orbital is a good candidate to play this sector.

Buy Aug $105 call, currently $2.80, initial stop loss $95.50.


No New Bearish Plays

In Play Updates and Reviews

Quiet Rally

by Jim Brown

Click here to email Jim Brown

Editors Note:

The market activity was very calm but the day ended with a new high on the S&P. The market was calm in the morning ahead of the FOMC minutes but once the post minutes volatility passed there was a new surge of buying that probably triggered some short covering as the index moved over 2,400. That was clear round number resistance and the equivalent of a goal line stand for the bears.

Now that the minutes are behind us and the S&P closed at a new high, there may be some further gains this week despite the low volume. I would be thrilled to see the Dow make a new high as well. That would set the stage for a real rally next week.

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

No Changes

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

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

ATVI - Activision Blizzard - Company Profile


No specific news. Another nice gain and a new high.

Original Trade Description: May 22nd.

Activision Blizzard, Inc. develops and publishes games for video game consoles, personal computers (PC), mobile devices, and online social platforms. The company operates through three segments: Activision Publishing, Inc., Blizzard Entertainment, Inc., and King Digital Entertainment. The company develops, publishes, and sells interactive software products and entertainment content through retail channels or digital downloads; and downloadable content. It also publishes subscription-based massive multiplayer online role-playing games; and strategy and role-playing games. In addition, the company maintains a proprietary online gaming service, Battle.net that facilitates the creation of user generated content, digital distribution, and online social connectivity in its games. Further, it engages in creating original film and television content; and provides warehousing, logistics, and sales distribution services to third-party publishers of interactive entertainment software, as well as manufacturers of interactive entertainment hardware products. The company serves retailers and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, game specialty stores, and consumers through third-party distribution and licensing arrangements in the United States, Australia, Brazil, Canada, China, France, Germany, Ireland, Italy, Japan, Malta, Mexico, the Netherlands, Romania, Singapore, South Korea, Spain, Sweden, Taiwan, and the United Kingdom. Activision Blizzard, Inc. was incorporated in 1979 and is headquartered in Santa Monica, California. Company description from FinViz.com.

Activision reported Q1 earnings of 56 cents, up 17%. Sales rose 19% to $1.73 billion. Activision had originally guided for 25 cents and $1.55 billion. Analysts were expecting 22 cents and $1.1 billion so it was a major blowout. For the full year, they raised guidance to 88 cents and $6.1 billion, up from 72 cents and $6.0 billion.

Blizzards's monthly active users rose to 431 million. King Digital has 342 million active users. The new Overwatch game was the fastest Blizzard title to hit 25 million registered players and now has more than 30 million. Revenues from in game purchases rose 25% driven by World of Warcraft and Overwatch customization features.

Activision is a powerhouse with rapidly rising revenue and multiple game titles arriving in the coming months.

Earnings August 3rd.

Shares dropped sharply with the market last Wednesday and have already rebounded to close at a new high today.

Position 5/23/17:

Long August $60 calls @ $2.66, see portfolio graphic for stop loss.

CVX - Chevron - Company Profile


No specific news. Crude inventories declined but shares did not move because of the OPEC meeting on Thursday.

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.

Update 4/28/17: 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%.

Udate 5/15/17: Chevron said they had taken Train 1 of the massive Gorgon LNG plant offline for a month to do some maintenance. The plant cost $54 billion to build and has 3 trains that can produce 15.6 million tonnes of LNG per year.

Position 4/17/17:

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

FB - Facebook - Company Profile


Reuters reported that Facebook has signed content deals with Vox Media, Buzzfeed, ATTN, Group Nine Media and others to begin creating shows for its upcoming video service. They are going to develop both short and long formcontent with ad breaks included. The first scripted shows will be up to 30 min which Facebook will own. The second tier will be shorter scripted and unscripted shows with episodes lasting 5-10 minutes.

Original Trade Description: May 17th.

Facebook, Inc. provides various products to connect and share through mobile devices, personal computers, and other surfaces worldwide. Its solutions include Facebook Website and mobile application that enables people to connect, share, discover, and communicate each other on mobile devices and personal computers; Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application to communicate with people and businesses across platforms and devices; and WhatsApp Messenger, a mobile messaging application. The company also offers Oculus virtual reality technology and content platform, which allow people to enter an immersive and interactive environment to play games, consume content, and connect with others. Company description from FinViz.com.

Facebook also blew away earnings estimates and they are growing earnings at the fastest rate of any of the FAANG stocks. They have multiple revenue streams and sites like Instagram and WhatsApp that are just starting to accelerate earnings. They said Instagram had reached 50,000 advertisers. Facebook's problem is they do not have enough page views to monetize despite the 1.9 billion users. They have more advertisers than they have space.

Earnings August 2nd.

Facebook had been moving sideways since hitting the $153 high post earnings. Volatility was low and investors were just waiting for a market dip so they could get a better entry point. Share fell to uptrend support at $145 and even if they due decline further there is strong support around $140.

Update 5/18/27: Facebook was fined $122.4 million by EU regulators for giving them false information in the WhatsApp acquisition process. The EU asked how many WhatsApp users were also Facebook users and the company said it did not know and did not have way of matching the usernames. A year after the acquisition Facebook launched a service that did match users and the EU said they had the capability all the time.

The company also announced a new effort to reduce "clickbait" headlines and punish websites that continually publish fake news. I hope they are successful.

Update 5/19/17: Facebook is going to live stream 20 Major League Baseball Friday night games. The company also said it was adding an "Order Food" option to let some users order, pay and have food delivered or be available for pickup. The service works with restaurants that use Delivery.com or Slice.

Update 5/22/17: Facebook shares were weak after the BROWSER bill was introduced in the House. Websites and browsers must get explicit permission from users in order to collect and use personal data including browser history, search terms, cookies, etc. They also cannot deny you the use of their program if you decline to give them permission to use your data. While the bill has little chance of passing it was a wet blanket on Facebook today.

Position 5/18/17:

Long Aug $150 call @ $4.90, no initial stop loss.

IWM - Russell 2000 ETF - Company Profile


The Russell 2000 was negative for much of the day and only posted a minor gain at the close. I am tightening the stop loss to take us out if the market rolls over.

Original Trade Description: May 17th.

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities.

The Russell 3000 is the top 3,000 investible stocks in the U.S. The Russell 1000 is the top 1,000 stocks by market cap and the Russell 2000 is the next 2,000 stocks by market cap. The Russell 2000 is commonly called the small cap index but it has a large number of midcap stocks as well.

The Russell 2000 imploded with a 39 point, -3% decline to 1,355. There is strong support at 1,344. "IF" the market rebounds as I expect the Russell is likely to rebound strongly now that all the stop losses have been hit.

The corresponding level on the IWM is $134 with the ETF closing at $134.89 on Wednesday. This support has held since January despite six intraday penetrations that were immediately bought.

Position 5/18/17:

Long July $136 call @ $3.08. No initial stop loss.

MCD - McDonalds - Company Profile


McDonalds announced a quarterly dividend of 94 cents payable June 19th to holders on June 5th. Shares rocketed higher to close at a new high.

Original Trade Description: May 3rd.

McDonald's Corporation operates and franchises McDonald's restaurants in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, Latin America, and internationally. The company's restaurants offer various food products, soft drinks, coffee, and other beverages. As of December 31, 2016, it operated 36,899 restaurants, including 31,230 franchised restaurants comprising 21,559 franchised to conventional franchisees, 6,300 licensed to developmental licensees, and 3,371 licensed to foreign affiliates; and 5,669 company-operated restaurants. McDonald's Corporation was founded in 1940 and is based in Oak Brook, Illinois. Company description from FinViz.com.

McDonalds is surging because they have overhauled their menu, offered breakfast all day, shifted to fresh beef, mobile ordering, delivery with UberEats, kiosks AND they are selling coffee for $1 and specialty drinks for $2. That is vastly lower than Starbucks and it is helping them steal market share. People stopping by to pick up a cheap coffee tend to order a snack as well. Who can resist adding an Egg McMuffin to go with that coffee.

McDonalds reported better than expected earnings and raised guidance. They reported $1.47 compared to estimates for $1.33. Revenue of $5.68 billion beat estimates for $5.53 billion. Same store sales rose 1.7% compared to expectations for an 0.8% decline. Global sales were up 4%.

Earnings July 25th.

Goldman has had a neutral rating on them forever but upgraded the fast food giant today to a buy with $153 price target. Goldman admitted they were late but said there was still plenty of time given the improved metrics. Goldman cited McDonald's "Experience of the Future" plans for mobile ordering and kiosks and said the expanding delivery options could expand revenue.

McDonalds closed at a new high today in a weak market.

Update 5/4/17: McDonalds said it was adding Signature Crafted Recipes to its stores in Florida and would be adding 5,000 workers to handle the volume.

Update 5/15/17: McDonald's Bar-B-Que opened on May 15th, 1940. The store closed and was later reopened in 1948 with only 9 items on the menu. Hamburgers were 15 cents, cheeseburgers 19 cents and cokes/coffee were 10 cents. Today, McDonalds serves 77 million customers a day. Short history of MCD in pictures The stock celebrated today with a new high.

Update 5/18/17: McDonald's added 1,000 additional restaurants to its McDelivery program utilizing UberEATS food delivery service. They had been testing at 200 stores in Florida since January. Apparently, McDonalds customers are loving it.

Update 5/22/17: The Chicago Tribune said restaurants offering the delivery service were seeing a surge in large orders. People are ordering the 40-piece Chicken McNuggets in quantity as well as the Big Mac and Chicken McNuggets Meal Bundle. That is 2 Big Macs, a 20-piece McNugget, 3 medium fries and 3 beverages for $14.99, which were also being ordered in quantities. When you think about it, if you are having friends over, ordering multiples of those deals gives everyone a choice and plenty to eat. Having UberEats deliver it is simpler than having someone gather up everyone's orders and money and then driving to McDonalds, waiting in line and then waiting while they put together your large order. If you can get it all home without spilling french fries and soda all over your car you are very lucky. This is another reason why McDonalds sales are going to rise in the coming quarters.

Position 5/4/17:

Long July $145 call @ $1.67, see portfolio graphic for stop loss.

NFLX - Netflix - Company Profile


No specific news. Shares are struggling but this happens a lot. After a period of consolidation, they tend to sprint higher.

The highly anticipated fifth season for House of Cards is only a week away and shares typically rally on the releases. The next two weeks could see shares rise.

Original Trade Description: May 17th.

Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. The company operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. It offers members with the ability to receive streaming content through a host of Internet-connected screens, including TVs, digital video players, television set-top boxes, and mobile devices. The company also provides DVDs-by-mail membership services. It serves approximately 100 million streaming members in 190 countries. Netflix, Inc. was founded in 1997 and is headquartered in Los Gatos, California. Company description from FinViz.com.

Netflix posted blowout earnings and shares rocketed higher to hit $161 on Monday. I have been waiting for three weeks for a pullback. Analysts are projecting higher highs with the high price targets at $175. There have been continuous rumors that either Disney or Apple will try to buy them not only to acquire the platform but to keep the other company from acquiring it. Both have said they want to have a big presence in streaming. Tim Cook just said it last week. Both have the cash and Disney has billions of dollars in content it can immediately add to the platform.

Netflix is expected to add 3 million subscribers in Q2. They are testing higher prices in Australia to see what price levels will cause subscriber flight. Once they figure it out you can bet they will apply it to the rest of their 100 million customers. That is instant profit. Bumping rates by $5 gets them another $500 million a month in revenue.

They announced with earnings they were finally entering China through a partnership with the largest existing streamer in China. This is one more step to a full release in the future.

Update 5/18/17: The FCC voted 2-1 to roll back the 2015 net neutrality order from President Obama. Some say this will impact major internet users like Netflix. However, the company said last month that elimination of the order would not have any impact on their business because they were big enough and had a broad enough customer base that ISPs would not try to slow down their streaming traffic. The order prevented ISPs from charging for faster bandwidth for heavy users. Netflix is responsible for 40% of the internet traffic in peak hours.

Update 5/22/17: Netflix expects to have 102 million subscribers by the end of Q2 with 51.45 million in the U.S. and 50.49 million internationally. Three years ago the company only had 11 million international subscribers. They expect international numbers to exceed U.S. subscribers by the end of the third quarter. With international subscribers growing roughly 3 million per quarter they should reach 100 million in 2020 as acceptance continues to grow. That puts them on track for 200 million total subscribers by 2025.

Earnings July 17th.

We have to use a spread because options are still expensive.

Position 5/18/17:

Long July $160 call @ $6.45, no initial stop loss.
Short July $175 call @ $2.16, no initial stop loss.
Net debit $4.29.

VAR - Varian Medical - Company Profile


Varian announced it was going to install its first Proton Therapy System in Thailand. The first one in a country is always the hardest. The order will be booked in this quarter's earnings. Shares rallied to close right on resistance at $96.75 but a breakout is imminent.

Original Trade Description: May 20th.

Varian Medical Systems, Inc. designs, manufactures, sells, and services medical devices and software products for treating cancer and other medical conditions worldwide. It operates through two segments, Oncology Systems and Imaging Components. The Oncology Systems segment provides hardware and software products for treating cancer with radiotherapy, fixed field intensity-modulated radiation therapy, image-guided radiation therapy, volumetric modulated arc therapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Its products include linear accelerators, brachytherapy afterloaders, treatment simulation, verification equipment, and accessories; and information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. This segment serves university research and community hospitals, private and governmental institutions, healthcare agencies, physicians' offices, oncology practices, radiotherapy centers, and cancer care clinics. The Imaging Components segment offers X-ray imaging components for use in radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography, computer aided diagnostics, and industrial applications. It also provides Linatron X-ray accelerators, imaging processing software, and image detection products for security and inspection purposes. This segment serves original equipment manufacturers, independent service companies, and end-users. In addition, the company offers products and systems for delivering proton therapy; and develops technologies in the areas of digital X-ray imaging, volumetric and functional imaging, and improved X-ray sources. The company was formerly known as Varian Associates, Inc. and changed its name to Varian Medical Systems, Inc. in April 1999. Varian Medical Systems, Inc. was founded in 1948. Company description from FinViz.com.

Drugs are not the only opportunity to rid yourself of a terrible disease. Varian produces multiple products for discovering and targeting cancer. They are the sector leader in imaging and radiation therapy.

Varian reported earnings of 89 cents that beat estimates for 88 cents. Revenue of $655 million beat estimates for $643 million. They guided for ful lyear earnings of $3.56-$3.64 per share.

Earnings July 26th.

On May 6th, the company announced a "game-changing treatment platform" to combat the cancer challenge. (their words) The new Halcyon system is an entirely new device that "simplifies and enhances virtually every aspect of image-guided volumetric intensity modulated radiotherapy (IMRT). This new treatment system is designed to expand the availability of high quality cancer care globally and help save the lives of millions more cancer patients." The new system requires only 9 steps compared with the 30 treatment steps required by current generation equipment. "Halcyon is well suited to handle the majority of cancer patients, offering advanced treatments for prostate, breast, head & neck, and many other forms of cancer." Press Release

The company demonstrated the new device to packed crowds at the ESTRO 36 conference in Vienna on May 8th. Shares spiked $4 on the announcement.

ASCO is about cancer treatment and the conference begins on June 2nd for four days. While the drug community will be getting plenty of press, the Varian equipment should also be benefitting from the headlines.

The market decline knocked $2 off Varian shares and gave us a buying opportunity.

Position 5/22/17:

Long August $100 call @ $2.00, see portfolio graphic for stop loss.

$VIX - Volatility Index - Index Description


Major decline with the VIX closing at 10.02 and only 25 cents away from the 24 yr closing low.

The May 8th close at 9.77 was the lowest close since December 1993. That is a 24 year low!!

This is a July call. We have plenty of time and the odds of a market sell off over the next 2.5 months are close to 100%. The VIX cannot go much lower but it can go a lot higher.

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.

Update 5/1/17: The VIX made a new intraday low at 9.90 and closed at a 10-yr low at 10.11. The government shutdown has been avoided according to reports out of Washington and that helped to deflate the VIX. 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 this week then the entire event risk scenario comes back into play with a potential come from behind win.

Position 3/30/117
Long July $14 call @ $2.55, no stop loss.
Added 5/9/17: Long July $14 call @ $1.60, no stop loss.
Average cost now $2.07.

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.

BEARISH Play Updates (Alpha by Symbol)

TSCO - Tractor Supply - Company Profile


No specific news. Shares fell -$1.17 to a new 4-year low close.

Original Trade Description: May 15th.

Tractor Supply Company operates rural lifestyle retail stores in the United States. The company offers a selection of merchandise, including equine, livestock, pet, and small animal products necessary for their health, care, growth, and containment; hardware, truck, towing, and tool products; seasonal products, such as heating products, lawn and garden items, power equipment, gifts, and toys; work/recreational clothing and footwear; and maintenance products for agricultural and rural use. As of January 26, 2017, it operated 1,600 retail stores in 49 states. The company operates its retail stores under the Tractor Supply Company, Del's Feed & Farm Supply, and Petsense names. It also operates an e-commerce Website, TractorSupply.com. The company sells its products to recreational farmers, ranchers, and others, as well as tradesmen and small businesses. Tractor Supply Company was founded in 1938 and is headquartered in Brentwood, Tennessee. Company description from FinViz.com.

In mid April TSCO warned that sales were weak and cut its earnings outlook. Same store sales fell -2.2%. The average number of transactions declined -1.4% and the average ticket size fell -0.9%. The company blamed price deflation from competition and lower sales of seasonal merchandise. They cut estimates from 49 cents to 45-46 cents.

The company has been around since 1938. Have they not gotten a grasp of weather patterns yet?

When they reported earnings of 46 cents that matched the lowered analyst estimates. Revenue rose 6.6% to $1.56 billion.

Let make sure we have this right. In Mid April, they warned of lower sales for multiple reasons and cut earnings estimates. Two weeks later, they reported a 6.6% increase in sales rather than a decrease. Other investors picked up on the discrepancy and shares began to fall. Since Amazon does not sell tractors online, somebody else is forcing their profits lower. Maybe the sale of big ticket items like tractors is suffering from the same illness as motorcycles and motor homes. A lack of extra money in consumer pockets.

The next earnings release is July 26th.

I am going to step out to the October strikes because the July options would expire before earnings. It would be best to have some earnings expectation in the premium to keep them elevated.

We can buy all the time we want. We do not have to use it. We will exit before earnings.

Position 5/16/17:

Long Oct $55 put @ $1.95, see portfolio graphic for stop loss.

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