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Newsletter

Daily Newsletter, Wednesday, 1/17/2018

Table of Contents

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

Market Wrap

A Dip To Refresh

by Keene Little

Click here to email Keene Little
Tuesday's gap up and then strong reversal back down turned into another one-day selloff that the dipsters couldn't resist. Starting with another gap up this morning, the buyers did some follow-through buying and drove the indexes back up near yesterday's highs or made new highs, like the Dow. The Teflon bulls continue to shed bear attacks like water off a duck's back.

Today's Market Stats

Not to be dissuaded from their belief in the bulls, the dipsters piled in today to pick up some perceived bargains after the selloff on Tuesday. Another 1-day selloff led to a resumption of the rally in the land of micro pullbacks. The dipsters have had a winning strategy for a long time and as long as it keeps working, like off yesterday's low, they'll keep doing it.

There wasn't much in the way of news to prompt either the selling or the buying and there wasn't much attention paid to this morning's economic reports either. This is a market that's now driven primarily by momentum and until that momentum peters out there's no reason for the bears to fight it. Sit back and relax and enjoy the ride. Well, don't relax too much because there are some indications that the rally's end of life could be close, at least for something more than a 1-day pullback.

Last Thursday and Friday, when the market rallied strong, the VIX also rallied. I said to myself, "Self, that's not normal." When the market gapped up big Tuesday morning the VIX also gapped up. Once again Self wondered if this was a strong warning sign. It was of course a caution flag on the race track that told the drivers to slow down and be cautious. Some big players were selling/hedging the rally and that continued today. The market was up big but the VIX again finished in the green. A strong market rally with a rising VIX is a time for concern, not exuberant bullishness.

Another area of concern is in fact the level of exuberant bullishness. The latest Investors Intelligence report shows bulls at 66.7%, up from 64.4%, which equals the high reading on November 17th. The market held up through the Thanksgiving holiday and peaked on November 28th, which led to a decent pullback into early December. The bullish reading is also the highest since April 1986 so we're clearly talking nosebleed territory here.

The Investors Intelligence report show bears now at 12.7%, which is the lowest reading since April 1986 as well. That has created an abnormally high spread of nearly 52 points between the bulls and bears and that qualifies as a boat-tipping spread.

The Fear & Greed index is high, finishing at 75 today and down from near 80 last Friday. It's not as high as we've seen in the recent past but as can be seen on the chart below, when the F&G index gets to 80 or above it's time to be careful. The vertical lines show the market often only pulled back slightly, if at all, but some of the larger corrections occurred after this index showed excessive bullishness. This in combination with a very high bullish reading in the Investors Intelligence report is a clear warning sign. We'll of course only know in hindsight whether or not it will matter this time.

CNN Fear & Greed index vs. S&P 500

Moving to a review of the charts, last week I started with a top-down look at the RUT and this week I'll start with the Nasdaq since the tech indexes are also important to watch for clues for how long this rally could continue.


Nasdaq Composite index, COMPQ, Weekly chart

The Nasdaq's rally has it near the top of a parallel up-channel from 2010, currently near 7400 and about 70 points above Tuesday's high and 100 points above today's close. So there's certainly more upside potential if that's where it's headed. The lack of bearish divergence on the weekly chart suggests there could be higher prices as well.

There's a rising wedge shape for its rally from February 2016 and last week's rally had it popping above the top of the wedge, which is the trend line along the highs from April 2016 - June 2017 and it's currently near 7225. This trend line was used for support to stop Tuesday's decline and therefore the Nasdaq remains bullish above that level. From a weekly perspective the Naz doesn't break its uptrend until it drops below the bottom of its rising wedge, which is the uptrend line from June 2016 - August 2017 and currently near 6880, about 400 points lower.


Nasdaq Composite index, COMPQ, Daily chart

There are several short- and longer-term trend lines that are coming together and currently at about 7200-7280 and rallying above this zone last week was a bullish move. You can see on the daily chart how it's fighting with the trend line along the highs from March 2014 - July 2015, near 7280, and how it held above the April 2016 - June 2017 trend line yesterday and today. If the Naz drops below 7200 I'd become a little more worried about the rally but in reality the bears need to see a drop below the December 18th high before the uptrend could be declared complete.

Key Levels for COMPQ:
- bullish above 7330
- bearish below 7003


Nasdaq Composite index, COMPQ, 60-min chart

Getting in a little closer, the 60-min chart shows an idea for how this rally might finish by next week. The bold green projection is based on a wave pattern for the leg up from December 6th. A 4th wave correction off Tuesday morning's high would look better with another leg down to create a larger a-b-c pullback, maybe to 7167 for a 38% retracement of the 3rd wave (the leg up from December 29th). From there another rally would complete the 5th wave and the 7400 area would be the upside target. This is obviously speculation but something to watch for in the coming week.


S&P 500, SPX, Daily chart

With last Friday's rally SPX climbed above the trend line along the highs from July 2016 - March 2017 and then used that line for support with Tuesday's pullback. At the same level, near 2768, was its short-term uptrend line from December 29th so there was double support at that level. Once it looked like that was going to hold it was the green light for the buyers to come back in.

Today's high was 50 cents shy of Tuesday's high so we'll see if they continue to make new all-time highs. I see the potential for a sharp pullback before pressing higher but in either case, another rally up to the top of a narrow up-channel from December 29th could see SPX up near 2840 before a larger pullback/decline. For now, until I see evidence to the contrary, it's looking like we could see the rally continue into February, just not in a straight line.

Key Levels for SPX:
- stay bullish above 2768
- bearish below 2713


Dow Industrials, INDU, Weekly chart

Does the phrase "What goes up must come down" apply to the Dow? It might not if the Dow has achieved escape velocity, otherwise it might not be pretty after this rally ends. This week has added to the portion of the rally that has gone vertical and it's clearly in a parabolic climb, as evidenced by the increasing steepness of its uptrend lines. The steepest one on the weekly chart is from August and on the daily chart they've continued to get steeper from there.

The scary thing is that parabolic rallies tend to return to their starting point, which I'll argue is the February 2016 low. That's when the rally's uptrend lines started steepening. That could mean a drop down to the 16K area or maybe price-level support at 15700. A 10K (-38%) race to that level could challenge even the strongest of the buy-and-holders. I'm not making a prediction that the Dow will make it down to that level (I actually think it will drop lower in the next bear market) but it should be considered by those who want to hold through the next "correction."

Key Levels for DOW:
- bullish to the moon with the achievement of escape velocity
- bearish below 24,700 (December 29th low)


Russell-2000, RUT, Daily chart

Last Friday and again Tuesday morning the RUT poked above the top of its rising wedge for the rally from August (the trend line along the highs from October-December), currently near 1606, but was unable to close above it. Tuesday's selloff left a throw-over and the reversal back down created a sell signal, which can only be negated with a rally to a new high (above 1604). But even then it could still have trouble breaking above the top of its rising wedge.

There is a parallel up-channel for the leg up from December 14th, the top of which will be near 1609 by the end of the week, so there's slightly more upside potential the RUT is once again showing relative weakness after its dash higher last week. Bears need to respect the upside while bulls should be fully aware of the potential to simply start dropping lower from here.

Key Levels for RUT:
- stay bullish above 1568
- bearish below 1535


10-year Yield, TNX, Weekly chart

Since early November we've seen bond yields chop their way higher but the price pattern does not look bullish. Even as TNX now tests its December 2016 and March 2017 highs it's doing so with a significant bearish divergence on its weekly MACD. This is not the stuff of a new rally but instead looks like it will result in a double top. A stronger rally above 2.62% would look a little more bullish (bearish for price) and I do see upside potential to the 2.75-2.78 area but only if it can get above 2.62 and stay above that level. In the meantime the more bearish pattern for yields calls for a strong decline below 2%. Interestingly, a move down in Treasury yields (rally in prices) could coincide with a stronger selloff in the stock market (flight to safety?).


High Yield Corporate Bond ETF vs. S&P 500, Weekly chart

The chart below is the market's version of the Hawaiian alert of an inbound ballistic missile. Strange that a missile from N. Korea would supposedly take 37 minutes to hit Hawaii and the alert lasted 38 minutes. But I digress. While SPX is in the ballistic phase of its rally we see HYG unable to get through its broken 50- and 200-week MAs, currently at 87.89 and 87.75. The lack of new highs since last July while the stock market goes parabolic is a MAJOR warning sign since it shows a reluctance to take on risk in the corporate bond market (smarter investors) and that tells us the stock market rally is momentum driven and it will end badly.


Transportation Index, TRAN, Weekly chart

The transports have been in full agreement with the Dow and that has kept things bullish. But I can't help but wonder if this week's weakness portends a more challenging time for the bulls. There's an EW count and pattern that supports the idea that TRAN's rally completed with Tuesday morning's high. The selloff from there leaves a failure, so far, at the trend line along the highs from March 2016 - March 2017 (the 1st and 3rd wave highs in the rally from January 2016. The 5th wave of the rally achieved equality with the 1st wave at 11131 and therefore the pieces are in place for a top. What we don't have yet is any kind of proof from price action that a top is in place, although today's consolidation while the Dow zoom climbed higher is a warning sign and says the TRAN is ready to continue lower.


U.S. Dollar contract, DX, Weekly chart

The US$ might finally be ready to rally after declining for a year. Yesterday, in the after-hours session, the dollar made a low at 89.96, missing a price projection at 89.94 by 2 cents (the projection was based on the wave pattern for the leg down from November). It also stopped a little short of the trend line along the lows from 2015-2016, which fits as the bottom of an expanding triangle. I've been showing this triangle pattern for the past two years and I think it's still in play. It's a bearish topping pattern but I think it needs one more leg up to complete it, which means a year-long rally before the dollar bears could be correct.

If the dollar does rally back up to the top of the expanding triangle it could reach the $107 area (+19%) before setting up a stronger decline. Today's low was a test of yesterday's low and it has since shot higher, including into the after-hours session. The daily candle is a bullish engulfing pattern (outside up day) and that fits as a key reversal day. The rally should continue if so and that would leave a strong bullish divergence on the weekly chart. Until we get proof of a reversal I do see the potential for a drop down to its uptrend line from 2011-2014, near 87.50, before setting up the next rally leg.


Gold continuous contract, GC, Weekly chart

I'm not getting any warm and fuzzy feelings about gold's bullish potential here. I am feeling warm and fuzzy from the gold bears starting to crowd near me. Gold has had a corrective pattern to its bounce since its December 2016 low and it's been difficult for me to turn bullish. If it can get above 1381 resistance and hold above that level I'd feel more bullish about its prospects. But if the dollar starts to rally it could put extra downward pressure on gold.


Oil continuous contract, CL, Weekly chart

Oil's rally has stalled over the past week and the daily oscillators are starting to turn down from overbought as the price pattern puts in what looks like a small rounding top. I continue to see upside potential to the $85 area but bullish sentiment on oil is now running high and I see a big risk to the downside, especially if oil drops back below its trend line along the highs from June 2016 - January 2017, currently near 62.50. Oil stays bullish above 63.70 but short term I'm seeing evidence that suggests it's rolling back over.


Economic reports

Thursday's economic reports include the usual unemployment data as well as housing starts and permits (no changes expected) and the Philly Fed index (slight improvement is expected). Friday morning we'll get the Michigan Sentiment number, which is expected to show a small improvement. Nothing market moving.


Conclusion

The stock market's rally has been extremely strong and in fact one could argue too strong. A rally that goes parabolic tends to suck in the remaining wannabe bulls while spitting out the last holdout bears. The combination then soon leaves the market with a loss of buyers and it's that simple fact that often causes a reversal. Not some news event, although that can be a trigger, but usually just because the market exhausts its buying fuel. The rocket flames out and then returns to earth. We're waiting for the flameout.

Parabolic rallies can go a lot further than most think possible and the current melt-up has the potential to go much higher. The advance-decline line might be weakening a little but it remains fully supportive of the rally. What few bears are left in this market, it would be wise for them to stay away -- stabbing at highs to get short has been a good way to die from a thousand paper cuts as you try, stop out, try, stop out... It's what has helped fuel the rally.

Once we see an impulsive decline that breaks support levels then we'll know to start looking to short the bounces. But buying the dips has been the winning strategy and that could continue to be true for a while longer. Just don't be complacent about the upside since you are joined by the majority now. Extreme bullish sentiment in a parabolic rally is a recipe for a surprise selloff and it could be a painful one. Trade carefully and know your risks.

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

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Option Plays

Not Taking the Risk

by Jim Brown

Click here to email Jim Brown

Editors Note:

I may be crazy, wrong or just paranoid but I don't buy it. The market has lost touch with reality. It is being led higher by a couple dozen stocks and the volatility we have seen this week is not normal. Back to back days of 300-point reversals is not normal. This kind of volatility is commonly seen at market tops. I have no idea if a top is near but this is a warning signal. Boeing has added almost 400 Dow points in the last 8 days. This rocket ship is going to crash. It is only a matter of time and it will take the Dow down with it. Several other Dow stocks have also been packing on the points as though there was nothing to fear in the future. Analysts are starting to compare the Dow to Bitcoin because of its incessant rise. We know what happened to Bitcoin.

The S&P is up 5% for the year with the median S&P forecast for yearend at 2,975. Of 18 analysts surveyed, nine analysts are at 3,000 or higher, eight are at 2,850 or lower. That means the S&P is less than 50 points from the year-end targets of half the analysts in the survey. Wells Fargo said the market is in the early stages of the silly season where euphoria is rampant. Katie Stockman at BTIG warned today that momentum will slow in the coming sessions and there is likely to be a 4-5% pullback as we enter February. My personal target date is expiration week.

I do not believe we should just keep piling on new positions so the next 300 point drop can stop them all out. The futures were up sharply in the early session but have declined to flat. They could rebound again by morning but that would just mean another crazy day.

Do not forget that we could see a government shutdown at midnight on Friday. Democrats have drawn a line in the sand saying "no continuing resolution" to extend the deadline again for another 30 days. While this could still happen we should not be putting real money to work ahead of that event.

There is always another day to trade if you have money in your account.

This is going to end badly.



NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Never a Dull Moment

by Jim Brown

Click here to email Jim Brown

Editors Note:

After a -383 point plunge intraday on Tuesday the Dow rebounded 323 points today. Investors bought the dip once again and the big cap indexes all surged to new highs. The Dow was by far the most bullish with a 1.25% gain and the Russell 2000 the weakest with a .8% gain and not a new high.

I do not know how anyone trades this market if you are not a day trader. Any "investor" would be very fearful of buying these new high breakouts on individual stocks but they just keep going higher and the option premiums just keep getting more expensive.



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

ARNC - Arconic Inc - Company Profile

Comments:

No specific news.

Original Trade Description: December 27th.

Arconic creates breakthrough products that shape industries. Working in close partnership with our customers, we solve complex engineering challenges to transform the way we fly, drive, build and power. Through the ingenuity of our people and cutting-edge advanced manufacturing techniques, we deliver these products at a quality and efficiency that ensure customer success and shareholder value. Company information from Arconic.

Earnings January 22nd.

Arconic was the original Alcoa. They spun off the aluminum business then changed their name to Arconic. This company makes precision aluminum parts for aircraft and transportation equipment. Eliott management has been agitating for change and managed to get the long term CEO Klaus Kleinfeld kicked out and oversaw the five-month process to get 24-year GE veteran Charles Blankenship installed as the new CEO.

Elliott has seen their investment lag for the last year as the spinoff and CEO hunt took the wind out of Arconic's sales. Now they could be reaching the end of their struggle with a potential buyout on the horizon.

One analyst got the fire started a couple weeks ago when he suggested Honeywell was on the prowl and would eventually buy Arconic. Honeywell lost out on Rockwell Collins (COL) when United Technologies bought them for $30 billion or 14 times EBITDA.

Honeywell was under pressure by Dan Loeb to spin off its aerospace unit. Instead, they agreed to spin off the homes and global distributions unit and the transportation business leaving (by the end of 2018) the aerospace unit intact and the surviving business. Now Honeywell needs to bulk up its aerospace business of they will be the nex company acquired.

With Dan Loeb on one side urging Honeywell to build aerospace and Elliott Management on the other side urging Arconic to sell itself, this is a match made in heaven and could happen in early 2018 according to the analyst.

Shares have sprinted higher since the news story broke a couple weeks ago. They are very close to a 52-week high over $28 and a move over that level could trigger additional buying and short covering.

I am using a July option to get well past the January and April earnings. We will not hold it that long but the uncertainty surrounding those events should keep the premium up if we have a market drop in January.

Update 1/8/17: Arconic said it was freezing the pension plans at current levels for 7,900 employees and would make contributions to 401K plans instead. This will save them $140 million.

Position 12/28/17:

Long July $30 call @ $1.50, see portfolio graphic for stop loss.


CGNX - Cognex - Company Profile

Comments:

No specific news.

Original Trade Description: December 9th.

Cognex Corporation provides machine vision products that capture and analyze visual information in order to automate tasks primarily in manufacturing processes worldwide. The company offers machine vision products, which are used to automate the manufacturing and tracking of discrete items, such as mobile phones, aspirin bottles, and automobile tires by locating, identifying, inspecting, and measuring them during the manufacturing or distribution process. Its products include VisionPro, a software suite that provides various vision tools for programming; displacement sensors with vision software for use in 3D application; In-Sight vision systems that perform various vision tasks, including part location, identification, measurement, assembly verification, and robotic guidance; In-Sight vision sensors; ID products, which are used for reading codes that are applied on discrete items during the manufacturing process, as well as have applications in logistics automation for package sorting and distribution; DataMan barcode readers; barcode verifiers; vision-enabled mobile terminals for industrial barcode reading applications; and barcode scanning software development kits. The company sells its products through direct sales force, as well as through a network of distributors and integrators. Cognex Corporation was founded in 1981 and is headquartered in Natick, Massachusetts. Company description from FinViz.com.

Cognex is a tech stock where growth is booming. Every manufacturer is looking to automate as many tasks as possible and Cognex provides them the opportunity with robotic vision equipment that can inspect and track items much faster than humans.

For Q3 they reported earnings of $1.14 that beat earnings for $1.05. Revenue of $259.7 million beat estimates for $256.8 million. They guided for the current quarter for revenue of $170-$180 million and analysts were expecting $155 million. That was a major guidance beat.

Expected earnings Feb 15th.

They announced a 2:1 split that was effective on December 4th. Shares immediately sank $7 on post split depression and Nasdaq rotation but have rebounded the past two days. The 50% decrease in the stock price also reduced the option premiums by 50% and made them cheap enough to buy.

Position 12/11/17:

Long Feb $67.50 call @ $3.20, see portfolio graphic for stop loss.


FLIR - FLIR Systems - Company Profile

Comments:

No specific news.

Original Trade Description: January 10th.

FLIR Systems, Inc. develops, designs, manufactures, and markets thermal imaging systems, visible-light imaging systems, locater systems, measurement and diagnostic systems, and threat-detection solutions worldwide. The company operates in six segments: Surveillance, Instruments, Security, OEM and Emerging Markets, Maritime, and Detection. The Surveillance segment provides enhanced imaging and recognition solutions for various military, law enforcement, public safety, and other government customers for the protection of borders, troops, and public welfare. This segment also develops hand-held and weapon-mounted thermal imaging systems for use by consumers. The Instruments segment offer devices that image, measure, and assess thermal energy, gases, electricity, and other environmental elements for industrial, commercial, and scientific applications. The Security segment develops and manufactures cameras and video recording systems for use in commercial, critical infrastructure, and home monitoring applications. The OEM and Emerging Markets segment provides thermal and visible-spectrum imaging camera cores and components that are utilized by third parties to create thermal, industrial, and other types of imaging systems. The segment also develops and manufactures intelligent traffic systems; imaging solutions for the smartphone and mobile devices market; and thermal imaging solutions for commercial-use unmanned aerial systems. The Maritime segment develops and manufactures electronics and imaging instruments for the recreational and commercial maritime market under the FLIR and Raymarine brands. The Detection segment offers sensors, instruments, and integrated platform solutions for the detection, identification, and suppression of chemical, biological, radiological, nuclear, and explosives threats for military force protection, homeland security, first responders, and commercial applications. The company was founded in 1978 and is headquartered in Wilsonville, Oregon. Company description from FinViz.com.

The short description is that FLIR makes night vision equipment for the military. They are the primary provider of these high tech night vision systems and they are very expensive. With the military budget being greatly expanded in 2018 and probably 2019, FLIR is going to be getting a lot more contracts for new equipment and for replacement equipment and parts.

For Q3, FLIR reported earnings of 52 cents that beat estimates for 48 cents. Revenue of $464.7 million rose 14.7% and easily beat estimates for $446 million. The surveillance segment revenues rose 7.6%, instruments rose 10.5% and OEM and emerging markets revenues rose 39.1%. Detection systems revenues rose 18.9%. The security segment sa revenues rise 16.5%. The marine segment was the slacker with only a 4.2% increase. Order backlogs rose 10.1% to $709 million.

The company guided for full year earnings of $1.83-$1.88 up from $1.81-$1.91 with revenue of $1.78-$1.83 billion.

Earnings February 14th.

Shares rallied last week to close at a new high at $48.25 and just over two-month resistance at $47.90. They spiked again on Monday when they announced a high-resolution camera kit for self-driving cars. If this breakout continues, it should produce some short covering given the long period of consolidation after the spike from Q3 earnings in October.

I am recommending an inexpensive February ATM option with earnings on the 13th. I intend to hold this position over earnings unless we have profits to protect by that date.

This is also a longer-term position in the LEAPS newsletter.

Position 1/11/118:
Long Feb $50 call @ $1.55, see portfolio graphic for stop loss.


PLAY - Dave & Busters - Company Profile

Comments:

No specific news.

Original Trade Description: January 13th.

Dave & Buster's Entertainment, Inc. owns and operates venues that combine dining and entertainment in North America for adults and families. It offers food and beverage items combined with an assortment of entertainment attractions, including skill and sports-oriented redemption games, video games, interactive simulators, and other traditional games. The company operates its venues under the names Dave & Buster's and Dave & Buster's Grand Sports Caf. As of June 17, 2014, it had 69 company-owned locations in the United States and Canada. The company was founded in 1982 and is based in Dallas, Texas. Company description from FinViz.com.

On Monday January 8th, Dave & Busters revised earnings guidance for fiscal 2017 from $110-$112 million to $108-$110 million. That $2 million adjustment caused the stock to drop from $56 to $44. They also lowered revenue slightly from $1.148-$1.155 billion to $1.138-$1.142 billion. Same store sales was reduced to -1.0%-0.7%, down from +0.75%.

They had previously warned in the Q3 conference call that Q4 started slow. They expected it to pick up in December, which is normally a busy month but revenue never caught up with the slow start in October. Quarter to date through Jan 6th, same store sales were down -5.1% with the end of year bad weather causing people to stay home. They also suffered from the lack of interest in the NFL games in Q4.

They were positive on their new format stores. They expect to open 14-15 new stores in 2018 and the same class of store in 2016 returned 54% one-year cash on cash returns in 2017. This was an improvement on the returns on their 2014-2015 class of stores. With each generation they are improving the returns.

Expected earnings March 6th.

The sharp decline last week was very overdone for the minimal decline in earnings expectations. Shares are already rebounding and with two months before earnings they have plenty of time for a decent rebound. For Q3 they reported earnings of 29 cents that beat estimates for 23 cents and shares were on an upward trajectory until Monday's guidance warning.

With so many stocks in blowout mode and not currently buyable, investors are going to be looking for less risky buying opportunities and PLAY could be the perfect answer.

Position 1/16/18:
Long April $50 call @ $3.40, see portfolio graphic for stop loss.


RHT - Red Hat - Company Profile

Comments:

No specific news. Nice $2 rebound.

Original Trade Description: January 11th.

Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in hybrid cloud environments; Red Hat Satellite, a system management offering that helps to deploy, scale, and manage in hybrid cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications; integrating applications, data, and devices; and automating business processes in hybrid cloud environments; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to manage large, unstructured, or semi-structured data in hybrid cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Red Hat, Inc. has a collaboration with Wipro Limited to set up a cloud application factory that offers developers and IT teams a methodology for application modernization across public, private, and hybrid clouds. The company was formerly known as Red Hat Software, Inc. and changed its name to Red Hat, Inc. in June 1999. Red Hat, Inc. was founded in 1993 and is headquartered in Raleigh, North Carolina. Company description from FinViz.com.

Linux has always been immune to most of the attacks on the internet but Red Hat has taken that to a new level. There are multiple versions of free Linux versions but free means little support and questionable fixes. Red Hat has taken their Linux product and built it into multiple enterprise versions for individual applications and cloud use on virtual machines with an entire suite of applications.

In the Q3 earnings the company reported 73 cents that beat estimates for 70 cents. Revenue of $748 million beat estimates for $734.4 million. They guided for Q4 for revenue of $758-$763 million and that beat estimates for $754.7 million. They guided for $2.88 for full year earnings and revenue of $2.91 billion. Deferred revenues rose 23% to $2.11 billion and subscription revenue from infrastructure offerings rose 15% to $495 million.

The good news on all fronts was not enough and shares dropped $9 intraday after the report. $120 appeared as support and shares have been rising steadily.

Deutsche Bank reiterated a buy with a $150 target saying the new Amazon Linux product was no threat and they were only targeting a fraction of the market for test systems before eventually going live on the Amazon cloud. The analyst said the Amazon Linux competes with Ubuntu/CentOS and not Red Hat. Finally an analyst that actually understands what he is analyzing.

Expected earnings March 20th.

I am picking a March option even though it expires a week before earnings. Those after earnings are far too expensive. I am expecting some serious profit taking in the market after the majority of Q4 earnings are over, probably around the February expiration. That should take us out of this position before well before RHT earnings.

Options are still expensive so I am turning this into an optional spread to reduce the net debit.

Position 1/12/18:
Long Mar $130 call @ $3.40, see portfolio graphic for stop loss.
Optional: Short Mar $140 call @ 90 cents, see portfolio graphic for stop loss.
Net debit $2.50, maximum gain $7.40.


SYNA - Synaptics - Company Profile

Comments:

No specific news. Earnings date changed from the 6th to the 7th of February.

Original Trade Description: January 8th.

Synaptics Incorporated develops, markets, and sells intuitive human interface solutions for electronic devices and products worldwide. The company offers its human interface products solutions for mobile product applications, including smartphones, tablets, and touchscreen applications, as well as mobile, handheld, wireless, and entertainment devices; notebook applications; and other personal computer (PC) product applications, such as keyboards, mice, and desktop product applications. Its products include ClearPad, which enables users to interact directly with the display on smartphones and tablets; ClearView products that provide advanced image processing and low power technology for entry-level smartphones; TouchView products, which integrate touch and display technologies to deliver performance and simplified design; and Natural ID, a fingerprint ID product that is used in smartphones, tablets, notebook PCs, PC peripherals, and other applications. The company??s products also comprise TouchPad, a touch-sensitive pad that senses the position and movement of one or more fingers on its surface; SecurePad that integrates fingerprint sensor directly into the TouchPad area; ClickPad that offers a clickable mechanical design to the TouchPad solution; and ForcePad, a thinner version of its ClickPad. In addition, its other product solutions include dual pointing solutions, which offer TouchPad with a pointing stick in a single notebook computer enabling users to select their interface of choice; TouchStyk, a self-contained pointing stick module; and TouchButtons, which provides capacitive buttons and scrolling controls, as well as display interface products. The company sells its products through direct sales, outside sales representatives, distributors, and resellers. It serves smartphone, tablet, and PC original equipment manufacturers, as well as various consumer electronics manufacturers. Company description from FinViz.com

Expected earnings February 7th.

In August, Synaptics reported earnings of $1.18 that beat by a penny and revenue of $426.5 million that exactly matched estimates. However, they guided for the next quarter for revenue of $380-$425 million. That was a sequential decline and they blamed it on the mobile business. However, based on orders in the pipeline they expected future quarters to show significant gains. Investors were not impressed and shares fell from $56 to $33.

In early November, the company reported earnings of $1.03 that beat estimates for 97 cents. Revenue of $417.4 million beat estimates for $397.6 million. For the current quarter they guided for revenue of $410-$450 million. Shares spiked to $44 on the news then fell back to $35 again. The company said it lost market share with Apple's fingerprint sensor business because its product was not completely ready for Apple's manufacturing cycle.

The current quarter is normally seasonally strong for Synaptics. They are now shipping fingerprint sensors in volume to Huawei and Samsung. Huawei sold more than 100 million phones in the first three quarters of 2017 and has outsold Apple since the new iPhones were introduced. Samsung has adopted the Synaptics technology for their Galaxy S8 and Note 8. For the next evolution of the Note 8 the sensor will be built tight into the screen.

Synaptics is also big in touch screen technology and device driver integration or TDDI. This is their specialty. Demand is expected to grow from 100 million units in 2017 to $654 million by 2022.

In the last quarter, the company received 14% of its revenue from IoT devices. That is expected to rise to 24% in the current quarter. They recently bought Conexant and that will expand their addressable market. Conexant makes voice and audio solutions for Amazon's Alexa voice assistant.

The company just announced a partnership with Microsoft to develop voice enabled solutions for Cortana using Synaptics far-field DSP voice technology.

Synaptics has a lot on their plate and much of these efforts are just now reaching broad commercialization with the major device manufacturers. Shares are rebounding and broke over resistance at $42.50 on Monday.

Update 1/13: Keybanc upgraded SYNA to buy with a price target of $60 saying the company was more diversified than ever with strong growth potential. He noted that Vivo demonstrated an OLED phone at CES with the new Synaptics fingerprint sensor. The company claims fingerprint sensors are twice as fast as facial recognition technology and nearly impossible to fool. The analyst said the new smart home technology was an opportunity to partner with not only Amazon and Google but also with Asian operators like Alibaba. New 5-month high today with a $5 gain.

Position 1/9/17:
Long Mar $45 Call, currently $3.10, see portfolio graphic for stop loss.


TGT - Target Corp - Company Profile

Comments:

No specific news. Back to the 52-week high.

Original Trade Description: December 13th.

Target Corporation operates as a general merchandise retailer. It offers household essentials, including pharmacy, beauty, personal care, baby care, cleaning, and paper products; dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies; and apparel for women, men, boys, girls, toddlers, infants, and newborns, as well as intimate apparel, jewelry, accessories, and shoes. The company also provides home furnishings and decor, such as furniture, lighting, kitchenware, small appliances, home decor, bed and bath, home improvement, and automotive products, as well as seasonal merchandise, such as patio furniture and holiday decor; music, movies, books, computer software, sporting goods, and toys, as well as electronics, such as video game hardware and software. In addition, it offers in-store amenities, including Target Cafe, Target Photo, Target Optical, Starbucks, and other food service offerings. Target Corporation sells products through its stores; and digital channels, including Target.com. As of September 13, 2017, the company operated 1,816 stores in the United States. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota. Company description from FinViz.com.

I would not normally recommend a retailer only two weeks before Christmas but I expect Target to overcome the normal post holiday depression.

Earnings Feb 14th.

Target announced on Wednesday they were buying grocery delivery platform Shipt Inc for $550 million in cash. The company said they would be offering same day delivery across all major product categories by the end of 2019. They will be offering same day delivery for groceries, essentials, home products, electronics and other items by mid 2018.

Shipt's services cost $99 a year for unlimited deliveries. Shipt already has a network of more than 20,000 personal shoppers to fulfill orders from various retailers and deliver within hours in more than 72 markets. Shipt partners include stores like Costco, Whole Foods, Meijer, etc.

Target is going to continue letting Shipt deliver for their other customers. The more widely recognized the brand is the larger it will grow and Target will be able to benefit from their ability to scale deliveries all over the country. Plus, they will profit from the fees received for those other deliveries.

This is a great deal for Target as it ramps up competition against Amazon.

I wrote last week that shippers were noting the increase in packages from Target. They were the second largest volume in UPS trucks after Amazon. They should have a great Q4.

Update 1/2/18: Influential tech analyst Gene Munster said he believes Amazon will buy Target in 2018. Target has a market cap of $37 billion but it would require a huge premium to get a deal done, probably something in the $50 billion range. Amazon has a market cap of $573 billion. The deal makes sense in the long run because it would give Amazon 1,802 major store outlets with a huge warehousing system that Amazon could use to its advantage. The addition of Amazon specific products to the already broad range of products offered by Target, would be a major boost to Amazon sales. The stores would function as customer delivery points for Amazon packages and because of the large store footprint it would allow Amazon to expand its same day, next day delivery offering to most of the US.

While it might make sense on paper, I would not hold my breath expecting a deal to be done. That would be a big bite for Amazon and there may be a problem getting regulatory approval. President Trump already believes Amazon is a monopoly with too much power and that could keep a deal from completing.

Update 1/9/18: Target raised Q4 earnings guidance from $1.05-$1.25 to $1.30-$1.40. Same store sales are expected to rise 3.4% and well above analyst expectations for 1.25%. They guided for 2018 earnings of $5.15-$5.45 and well above estimates for $4.36.

Update 1/13/18: MKM Partners reiterated a buy rating and shares gained another $2.80 to a new 52-week high.

Position 12/14/17:

Long March $65 call @ $2.90, see portfolio graphic for stop loss.



BEARISH Play Updates (Alpha by Symbol)

DIA - Dow SPDR ETF - ETF Profile

Comments:

Simply amazing three days.

This position is dead unless we can get a 2-3 day decline ahead of the potential government shutdown. If we can get a decent drop, even just a couple days, we can sell a short put to turn it back into a spread and reduce our loss. This is a March position so we have plenty of time for disaster to strike. I believe it is worth the 40 cents to hold it just in case.

Original Trade Description: November 16th

The SPDR Dow Jones Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average. The DJIA is the oldest continuous barometer of the U.S. stock market, and the most widely quoted indicator of U.S. stock market activity.

I am going to make this as simple as possible. The Dow is still extremely overbought. It is due for a rest. The earnings cycle is over. Post earnings depression is here. The short squeeze is likely to fail. The tax plan faces an uphill battle and January could see a major market decline. It has been over 500 days since the market had a 5% decline and we average twice a year. We are due.

This is highly speculative. I am using March options because I want to have as much time as possible for this scenario to play out.

Update 12/18/17: The Dow is moving ever closer to 25,000, which could end up being a monster sell the news trigger. The Dow is up 6,900 points since the election. That is 38.5% in 13 months. There is a 100% chance there will be a correction in the future. The only unknown is when.

I am recommending we close the short put side of the spread. That captures that portion of the trade and once the Dow rolls over we do not have to deal with the rise in value in the short put. Secondly, that gives us other options to raise additional premium in the future, including selling a higher put if the index does not decline.

Position 11/17/17:

Long March $230 put @ $5.16, see portfolio graphic for stop loss.

Closed 12/19: Short March $210 put @ $1.71, exit .43, +1.28 gain.

Monte Gore, Mike Brown, Steve Spodyak, Gary Rhoads, John Tighe, Thomas McGraw




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