Option Investor
Newsletter

Daily Newsletter, Wednesday, 2/21/2018

Table of Contents

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

Market Wrap

Inflation Fears Dominate Market

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

Inflation fears, in the form of FOMC minutes, dominated today's market in early trading. Even though the early action was bullish, there were fear signs of accelerating inflation and rising interest rates could tank the market. The news was received with mixed reviews, sending the markets into a volatile round selling that gave market watchers whiplash.

Asian markets gained in today's session although trading was muted. Many in the region, mainland China specifically, are closed for the Lunar New Year holiday. Those that were open had an eye toward the firming dollar and today's FOMC meeting minutes. The Hong Kong Heng Seng led with a gain near 2% followed by smaller gains in other indices. European indices were not so buoyant as weaker than expected PMI in Germany and the EU weighed on share prices. The DAX led losers with a loss of -0.14%, the FTSE led gainers with an advance near 0.5%. UK shares were also supported by better than expected unemployment figures.

Market Statistics

Futures trading was negative in the early hours and pointed to a triple-digit loss for the Dow Jones Industrial Average. The trade slowly moved higher throughout the morning until hitting break even just before the opening bell. Trading was supported by a round of positive earnings releases before the open, as well as an indication of strength in the broad economy. The open was calm but basically saw the indices move straight up. The SPX gained a little more than 15 points in the first 15 minutes, making for a 30 point swing from early futures indications, and extended those gains before lunch. The market made several small peaks throughout the day but hit a strong one just before noon. From that point on the indices trend sideways until the FOMC minutes were released.

The release was described as "marginally dovish" by many of the pundits but what is, in reality, a reaffirmation of rising inflation and interest rates. The committee sees stronger growth across the nation that affirmed their gradual approach. They say that rates will maintain an upward trajectory appropriate to maintaining that growth. Inflation is still expected to hit the 2% target in the medium term and may need to sustain that level before more serious action is taken. A weaker dollar is seen helping spur inflation although wage inflation is still sluggish (2.9% YOY at last report?). Tax cuts are a net positive in the near term, the longer term remains to be seen.

The news sparked big knee-jerk moves in most markets that were quickly reversed. The dollar shot higher on the weaker sounding stance but soon found its footing on reaffirmed inflation outlook and rate-hiking timeline. This caused big swings in gold and forex markets and sent the 10-year treasury yield up to a 4 year high. The equities market was not immune. The indices shot up to set new intraday highs but soon fell back to test support at break-even levels, and then move lower to close at the lows of the day.

Economic Calendar

The Economy

Today's data started with flash PMI readings from Markit. All three indices; the composite, the manufacturing, and the services, came in above expectation and expanding from the previous month. All three came in at 55.9 for the month and beating expectations by at least a half a point. Growth in the services sector outpaced that of manufacturing, beating estimates by nearly 2 full points. Regardless the spin, the news is bullish for the economy and hawkish for the FOMC.

Existing home sales fell a surprising -3.2% versus an estimated gain. The decline is driven by increasingly low inventory that is driving up prices, as well as rising interest rates. Inventory fell once again and is now sitting at a low not seen since 1999. If there is a parallel we may see a boom in housing over the next half-decade or so. The rest of the week is light on data, nothing Friday and only jobless claims and leading indicators tomorrow.

The Dollar Index

The Dollar Index had been drifting higher in the earlier portion of the session but that all changed with the release of the FOMC minutes. After a knee-jerk move down traders realized that interest rate hikes are still on the table, coming and likely to happen at the next Fed meeting. The index then reversed its course to end the day with a small gain and testing resistance at the short-term moving average.


The Gold Index

Spot gold had a wild ride in today's action, first down then up and then down again to close at the low of the day. The metal created a small red bodied candle moving down from the short term moving average in confirmation of resistance. The indicators are both bearish and pointing lower so further downside is likely. A move lower may find support at $1,320 or $1,315, a move below there could possibly go to $1,300 or lower.


The Gold Miners ETF GDX moved up on the news but gains were capped at a previous pivot point within the long-term trading range. The indicators are a bit mixed but generally consistent with a trading range. MACD is weak and directionless while stochastic leads the market higher. Today's resistance was just below the $22.50 line and may be tested again. A move lower would be bearish but not likely to move far. Support target is at the bottom of the long-term range near $21.


The Oil Index

Oil prices wobbled a bit within a narrow range while traders wait on tomorrow's inventory data. The release was postponed a day due to the Monday holiday and is expected to show a build and/or increase in production. Either data would be bearish for the market as it supports the idea of well-supplied markets in 2018. WTI is trading below the short term 30-day moving average and looks ready to fall. Support may be found at or near $58, a break below there would be bearish.


The Oil Index shed a little more than -0.35% today, creating a small red bodied candle. The index is drifting lower after the bounce last week and may be headed down to retest its lows. The indicators are a bit mixed but are generally bearish with stochastic rolling into a bearish crossover. If the index does move lower support is likely to be found near 1,270 and the long-term moving average or just below that near 1,220 and previous support.


In The News, Story Stocks and Earnings

Not all earnings reports were good and not all good reports were taken well. With expectations so high many companies have fallen prey to overly high expectations. Texas Roadhouse grew revenue more than 12% in the quarter beating EPS estimates and yet the stock fell in early pre-market action. Shares dropped more than -4% on revenue that was only in-line with expectations and guidance that is more of the same, double-digit growth but not more than expected. Today's candle opened with a fair sized gap lower but the losses were recovered by the close as bargain hunters stepped in to support prices.


Jack in the Box reported after the bell and also fell prey to overly high expectations. The company beat top and bottom line estimates and provided a positive forward outlook. Results were impacted by a number of negative factors that make comparing results difficult. These include the impact of the new lower tax rate and a change of accounting standards. Despite this shares fell more than -3% on the news.


The VIX tried to shed more than -15% in today's action but recouped most of the losses by the close. Today's candle is small and red but has a long lower shadow confirming support at the short-term moving average. This is a potentially bearish signal for the market and may result in another surge in volatility over the next few trading days.


The Indices

The indices tried to move up but got stymied by rising interest rates. The major indices all had gains in the range of 1% before the FOMC minutes and shed them all and more by the closing bell. The Dow Jones Transportation Average is the only one to close with gains, posting an advance near 0.35%. The transports created a medium bodied green candle with long upper wick indicative of resistance. Today's move confirms resistance at the short-term moving average and may indicate a retest of recent lows in on the way. The indicators are mixed and do not give many clues to direction so I would expect to see prices move sideways within a range in the near term.


The Dow Jones Industrial Average posted the largest loss, -0.66%, and is confirming resistance at the short-term moving average. Today's action is bearish and may lead to a retest of recent lows although the indicators are not in full confirmation. Momentum is bearish but stochastic is pointing up so any move lower is likely to find support fairly quickly. Downside target is 24,000.


The S&P 500 closed with a loss near -0.55% and at the lows of the day. The index created a medium sized red candle with long upper shadow confirming resistance at the short-term moving average. The indicators are mixed and do not support a strong move lower although momentum remains to the downside. The may be support at 2,700, a break below that would be bearish with a target near the recent lows.


The NASDAQ Composite closed with the smallest loss, near -0.30%, and created a small red candle. Today's action confirms resistance above 72,60 and may lead the market lower. The indicators are bullish and pointing higher, in support of higher prices, but could easily shift on renewed selling. If the index were to move lower support may be found at the short-term moving average, a break below that would be bearish with a target near the recently set lows.


The equity market had a volatile session and may move lower in the near term. The Fed induced a bit of selling but it wasn't the run-for-the-hills type we saw a few weeks ago. This looks like it will be a calmer retreat as sector rotation and profit-taking work their way through the system. If the market does move lower, I will view it as an entry for longer-term bullish positions. Until then I am neutral/cautiously bearish with an eye toward tomorrow's data.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Market Buy

by Jim Brown

Click here to email Jim Brown

Editors Note:

In two days, the Dow has declined about 425 points. Time to buy the market?

 

New positions are only added on Wednesday and Saturday except in special circumstances.


NEW DIRECTIONAL CALL PLAYS

SPY - S&P-500 ETF - ETF Profile

The SPDR S&P 500 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500 Index.

The S&P has declined for two days and finished well off its highs on Monday. That high was $275.32 and it closed today at $270.00. There is risk to the 100-day average at $265. I would be surprised if we dipped that low but it is possible.

The S&P futures are down -13 as I type this. If we do get a big drop at the open, I am recommending we buy the dip. This is a risky position because we are trying to predict a market bottom.

I am recommending we buy the April $275 call. If the futures really drop over night and we get one of those -10 point S&P drops at the open, I would buy the $270 call. That means if the SPY opens at $265 or below, buy the $270 call otherwise buy the $275 call.

SPY opens above $265, buy April $275 call, currently $3.55
SPY opens below $265, buy April $270 call, est premium $3.75.
No initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Another Fun Day in the Market

by Jim Brown

Click here to email Jim Brown

Editors Note:

Volatility returned in a flash after the FOMC minutes were released. The Dow rallied to +302 immediately after the minutes and held the gains for about 20 minutes. Suddenly the dollar shot up and treasuries were sold hard. The yield on the ten-year rocketed higher to hit 2.943% and a four-year high. The Dow rolled over and fell -475 points to close at the low for the day.

This is not a good sign. While we always knew there could be a retest of the February lows and a retest we hoped would fall short, the spike in the yields is very troubling. As the rates move ever closer to 3% that is a bigger risk for the market.

I am not putting any stop losses on our positions. With volatility still high and triple digit intraday moves that is just an opportunity to be stopped at the lows for the day. These are April positions or longer and the volatility should not last more than two more weeks.



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


Full updates on all plays on Wednesday and Saturday. Only closed plays are updated on other days.


BULLISH Play Updates

CAT - Caterpillar - Company Profile

Comments:

No specific news. Shares declined with the Dow.

Original Trade Description: February 5th

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction, rental, quarry, aggregate, mining, waste, material handling, oil and gas, power generation, marine, rail, and industrial markets. Its Construction Industries segment offers backhoe, compact, track-type, small and medium wheel, knuckleboom, and skid steer loaders; small and medium track-type, and site prep tractors; mini, wheel, forestry, small, medium, and large track excavators; and motorgraders, pipelayers, telehandlers, cold planers, asphalt pavers, compactors, road reclaimers, and wheel and track skidders and feller bunchers. The company's Resource Industries segment provides electric rope and hydraulic shovel, landfill and soil compactor, dragline, large wheel loader, machinery component, track and rotary drill, electronics and control system, work tool, hard rock vehicle and continuous mining system, scoop and hauler, wheel tractor scraper, large track-type tractor, and wheel dozer products; longwall, highwall, and continuous miners; and mining, off-highway, and articulated trucks. Its Energy & Transportation segment offers reciprocating engine powered generator set and engine, integrated system, turbine, centrifugal gas compressor, diesel-electric locomotive and component, and other rail-related products and services. The company's Financial Products segment offers finance for Caterpillar equipment, machinery, and engines, as well as dealers; property, casualty, life, accident, and health insurance; and insurance brokerage services, as well as purchases short-term trade receivables. Its All Other operating segments provides parts distribution and digital investments services. The company was formerly known as Caterpillar Tractor Co. and changed its name to Caterpillar Inc. in 1986. The company was founded in 1925 and is headquartered in Peoria, Illinois. Company description from FinViz.com.

2/5/18: Buy the market dip tactical trade: CAT declined to the 100-day average and bounced significantly. They had good relative strength on Friday and I would expect them to rebound significantly as soon as the market turns positive.

Update 2/14: CAT reported their rolling 3-month sales rose 34% globally. There was a 23% ris ein North America. Resource segment sales rose 49%, construction sales +30%, rnergy and transportation rose 16%, power generation +8%, industrial sales +13% and oil and gas sales +27%. This company is in the sweet spot of the global economic boom. The report the rolling 3-month average to smooth out the big ticket sales spikes from month to month.

Position 2/6/18:
Long APR $160 Call @ $4.03, see portfolio graphic for stop loss.


HD - Home Depot - Company Profile

Comments:

No specific news on Wednesday. On Tuesday, Home Depot reported earnings of $1.69 that beat estimates for $1.61. Revenue of $23.88 billion rose 7.5% and beat estimates for $23.66 billion. The company took a charge of $127 million due to tax reform. They also took a charge of 17 cents a share for the onetime bonus payment to hourly associates as a result of the tax reform law. Same store sales rose 7.2% and beat estimates for 6.5%. Customer transactions increased by 2% and the average check rose by 5.5%. They guided for the full year for earnings of $9.31-$9.73 and for revenue to rise 6.5%. They will repurchase $4 billion in shares, have a tax rate of about 26% and spend about $2.5 billion in capex. They will open three new stores. Home Depot put their store expansion program on hold in 2017 to focus that money on improving existing stores and upgrading their infrastructure. Apparently, that move was successful.

Original Trade Description: February 5th

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. The company also sells its products through online. It operates through approximately 2,278 stores, including 1,977 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 119 in Mexico. The Home Depot, Inc. was founded in 1978 and is based in Atlanta, Georgia. Company description from FinViz.com.

2/5/18: Buy the market dip tactical trade: This Dow stock has been rock solid up until last week. Home Depot and Boeing have the most buy recommendations of any other Dow stock. Support at $181 should hold.

Position 2/6/18:
Long $190 Call @ $5.80, see portfolio graphic for stop loss.


INTC - Intel - Company Profile

Comments:

Israeli Economic Minister Eli Cohen said Intel was going to invest $5 billion in Israel to upgrade a chip facility from 22 nanometer to 10 nanometer. The smaller the numbers, the faster the chips. Intel received a state grant worth 5% of the total and received a lower tax rate of 5% for the next ten years. Intel expects to receive another 10% grant. Intel exported $3.6 billion in chips from Israel in 2017 and employs more than 10,000 workers, most of which are in research and development.

Original Trade Description: February 5th

Intel Corporation designs, manufactures, and sells computer, networking, and communications platforms worldwide. The company operates through Client Computing Group, Data Center Group, Internet of Things Group, Non-Volatile Memory Solutions Group, Intel Security Group, Programmable Solutions Group, and All Other segments. Its platforms are used in notebooks, 2 in 1 systems, desktops, servers, tablets, smartphones, wireless and wired connectivity products, and mobile communication components; enterprise, cloud, and communication infrastructure; and retail, transportation, industrial, video, buildings, and other market segments. The company offers microprocessors that processes system data and controls other devices in the system; chipsets, which send data between the microprocessor and input, display, and storage devices, such as keyboard, mouse, monitor, hard drive or solid-state drive, and optical disc drives; and system-on-chip and multichip packaging products that integrate its central processing units with other system components onto a single chip. It also offers NAND flash memory products primarily used in solid-state drives; security software products that secure computers, mobile devices, and networks; programmable semiconductors and related products for communications, data center, industrial, military, and automotive market segments. In addition, the company develops computer vision and machine learning-based sensing products, mapping and driving policy technology solutions for advanced driver assistance systems, and autonomous driving technologies. It serves original equipment manufacturers, original design manufacturers, cloud and communications service providers, and industrial, communications, and automotive equipment manufacturers. The company was founded in 1968 and is based in Santa Clara, California. Company description from FinViz.com.

Update 2/5/18: Buy the market dip tactical trade: Intel soared to a new high after earnings but has retraced -10% in the weak market. Their outlook is good and support at $43 should hold on any further market weakness.

Update 2/17/18: Intel has been hit with 32 class action lawsuits over the recently discovered security flaw in their chips. The security problems named Meltdown and Specter have resulted in numerous patches to operating systems. However, those patches sometimes degrade the system by as much as 25%. Intel said it has no estimate of the potential loss from the multiple suits. It could be a large number since they did not report the bugs for several months after they were initially discovered and the system degradation could be a real problem. For large companies with millions of dollars of computers, a decline in performance of 25% is a real factor.

Postion 2/6/18:
Long $47 Call @ $1.54, see portfolio graphic for stop loss.


JPM - JP Morgan - Company Profile

Comments:

Shares rallied intraday on the prospects for higher interest rates. The bank also said it was going to redevelop its current NYC location at 270 Park Ave into a 2.5 million square foot headquarters with construction to begin in 2019 and last about 5 years. The current building was built in the 1950s to house 3,500 employees and the new building will house 15,000 employees and offer class A rental space for tenants.

Original Trade Description: February 17th

JPMorgan Chase & Co. operates as a financial services company worldwide. It operates through Consumer & Community Banking, Corporate & Investment Bank, Commercial Banking, and Asset & Wealth Management segments. The Consumer & Community Banking segment offers deposit and investment products and services to consumers; lending, deposit, and cash management and payment solutions to small businesses; residential mortgages and home equity loans; and credit cards, payment services, payment processing services, auto loans and leases, and student loans. The Corporate & Investment Bank segment provides investment banking products and services, including advising on corporate strategy and structure, and capital-raising in equity and debt markets, as well as loan origination and syndication; treasury services, such as cash management and liquidity solutions; and cash securities and derivative instruments, risk management solutions, prime brokerage, and research services. It also offers securities services, including custody, fund accounting and administration, and securities lending products for asset managers, insurance companies, and public and private investment funds. The Commercial Banking segment offers financial solutions, including lending, treasury, investment banking, and asset management to corporations, municipalities, financial institutions, and nonprofit entities, as well as financing to real estate investors and owners. The Asset & Wealth Management segment provides investment and wealth management services across various asset classes, such as equities, fixed income, alternatives, and money market funds; multi-asset investment management services; retirement services; and brokerage and banking services comprising trusts, estates, loans, mortgages, and deposits. JPMorgan Chase & Co. was founded in 1799 and is headquartered in New York, New York. Company description from FinViz.com.

Banks make money by acquiring deposits and paying minimum interest rates while lending the money out at higher rates. When interest rates rise the rates on the loans match the jump in rates but the interest paid on deposits creeps up at a slower rate. For a bank like JP Morgan or Citigroup, each quarter point rise in rates is worth hundreds of millions of dollars in interest. The Fed is expected to hike rates at least 3 times in 2018 and possibly 4 times for a full 1% increase. This is a goldmine for JP Morgan.

In the past the Fed has always believed that the ideal interest rate is 2% above the core rate of inflation. With the core rate approaching 2% that means a 4% Fed funds rate, which equates to a lending rate for banks at about 6%. Since the banks are coming off a Fed rate of less than 1% and doing well at those levels, a jump to 2.25% by the end of 2018 would double their interest income.

None of this is really important for a short term option trade but investors buy stocks for the future. JPM has a fortress balance sheet and They stand to make billions from the Fed rate hike cycle. That means JPM is a buy today and we are going to jump in before they make a new high.

With Jay Powell providing testimony to the House on Feb 28th, the focus for the next week will be on what he might say about raising rates. Those expectations should cause bank stocks to rise. The next Fed meeting is March 20/21st and they are widely expected to hike at that meeting. That expectation should lift bank stocks ahead of that meeting.

Expected earnings April 13th.

I considered using the April options. However, with the potential for market volatility, it would be better to use the June strikes because they will hold their value longer. We will exit this position before earnings. We are buying time but we are not going to use it.

Position 2/20/18:
Long June $120 call @ $3.17, see portfolio graphic for stop loss.


MSFT - Microsoft - Company Profile

Comments:

No specific news.

Original Trade Description: February 5th

Microsoft Corporation develops, licenses, and supports software products, services, and devices worldwide. The company's Productivity and Business Processes segment offers Office 365 commercial products and services for businesses, including Office, Exchange, SharePoint, Skype for Business, and related Client Access Licenses (CALs); Office 365 consumer services, such as Skype, Outlook.com, and OneDrive; Dynamics business solutions, such as financial management, enterprise resource planning, customer relationship management, supply chain management, and analytics applications for small and mid-size businesses, large organizations, and divisions of enterprises; and LinkedIn online professional network. Its Intelligent Cloud segment licenses server products and cloud services, such as Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure, a cloud platform; and enterprise services, such as Premier Support and Microsoft Consulting that assist in developing, deploying, and managing Microsoft server and desktop solutions, as well as provide training and certification to developers and IT professionals on Microsoft products. The company's More Personal Computing segment comprises Windows OEM, volume, and other non-volume licensing of the Windows operating system; patent licensing, Windows Internet of Things, MSN display advertising, and Windows Phone licensing system; devices, including Microsoft Surface, phones, and PC accessories; and search advertising, including Bing and Bing Ads. This segment also provides gaming platforms, including Xbox hardware, Xbox Live, video games, and third-party video games. The company markets and distributes its products through original equipment manufacturers, distributors, and resellers, as well as through online and Microsoft retail stores. Microsoft Corporation has a strategic partnership with CNH Industrial N.V. The company was founded in 1975 and is headquartered in Redmond, Washington. Company description from FinViz.com.

2/5/18: Buy the market dip tactical trade: Microsoft has declined nearly 10% from its strong earnings and the stock normally respects the support of the 50-day average. Microsoft will sell significantly more windows software as users upgrade to get away from the Meltdown and Specter hacks in the older processors. Expect a surge in software sales for Q1.

Position 2/6/18:
Long $90 Call @ $3.05, see portfolio graphic for stop loss.


NKE - Nike Inc - Company Profile

Comments:

No specific news.

Original Trade Description: February 3rd

NIKE, Inc., together with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. It offers NIKE brand products in nine categories: running, NIKE basketball, the Jordan brand, football, men's training, women's training, action sports, sportswear, and golf. The company also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking, and outdoor activities. In addition, it sells sports apparel; and markets apparel with licensed college and professional team and league logos. Further, the company sells a line of performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, and other equipment under the NIKE brand for sports activities; various plastic products to other manufacturers; athletic and casual footwear, apparel, and accessories under the Jumpman trademark; action sports and youth lifestyle apparel and accessories under the Hurley trademark; and casual sneakers, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks. Additionally, it licenses agreements that permit unaffiliated parties to manufacture and sell apparel, digital devices, and applications and other equipment for sports activities under NIKE-owned trademarks. The company sells its products to footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops, and other retail accounts through NIKE-owned retail stores and Internet Websites, mobile applications, independent distributors, and licensees. The company was formerly known as Blue Ribbon Sports, Inc. and changed its name to NIKE, Inc. in 1971. NIKE, Inc. was founded in 1964 and is headquartered in Beaverton, Oregon. Company description from FinViz.com.

Expected earnings March 22nd.

Nike has defied gravity recently after being severely depressed back in October. There are multiple reasons. They have received upgrades based on their decisions to reduce their SKUs, limit their number of distributors and require retailers to merchandise more effectively. It did not hurt that Bill Ackman took a minority position and is recommending changes. Lastly, all the Olympic athletes, except for the North Koreans, will be wearing Nike clothes and sports gear. Nike will get a big advertising boost from the games.

Nike shares did not decline materially last week when the Dow was imploding. This suggests they should rise again in a positive market. I am picking an inexpensive option and we will not use a stop loss over the first several days just in case the market volatility continues.

This is a risky position because of the market instability. Do not enter this position if you cannot afford to risk the $2.

Update 2/16: Nike is getting ready to explode according to Stifel. For the 8-week period starting in early February there are more than 200 scheduled sneaker releases with 150 from the Nike and Jordan brands. The releases are scheduled to coincide with the March Madness event in basketball and the hype around the NBA All-Star game on Feb-18th. Stifel said the success of these launches could propel the company for the next year. The analyst raised his price target from $74 to $80 and shares closed at $68 on Friday.

Position 2/5/18:
Long April $70 call @ $1.94, see portfolio graphic for stop loss.


NTGR - Netgear - Company Profile

Comments:

No specific news.

Original Trade Description: February 10th

NETGEAR, Inc. designs, develops, and markets innovative networking solutions and smart connected products for consumers, businesses, and service providers. The company operates in three segments: Retail, Commercial, and Service Provider. The Retail segment offers home WiFi networking solutions and smart connected products. The Commercial segment provides business networking, storage, and security solutions. The Service Provider segment offers made-to-order home networking hardware and software solutions, including 4G LTE hotspots sold to service providers for sale to their subscribers. The company also offers commercial business networking products, such as Ethernet switches, wireless controllers and access points, Internet security appliances, and unified storage products; broadband access products, including broadband modems, WiFi gateways, and WiFi hotspots; and smart home/Internet-of-Things connectivity and products comprising WiFi routers and home WiFi system, WiFi range extenders, powerline adapters and bridges, remote video security systems, and WiFi network adapters. It markets and sells its products through traditional retailers, online retailers, wholesale distributors, direct market resellers, value-added resellers, and broadband service providers worldwide. Company description from FinViz.com

Expected earnings May 8th.

Several weeks ago, Amazon bought Blink. You may not have heard about Blink but they launched in 2016 with an inexpensive wireless camera and video doorbell. This is the hot new sector for video surveillance. You have probably heard about Ring video doorbells, which is a different company.

The point to this commentary is that Netgear is making the very popular Arlo security camera and sales are booming. Netgear also has 48% of the market for home routers.

With Amazon likely to go big in this category after the acquisition of Blink, that means Netgear is suddenly a target. Global Equities said Facebook, Google or even Apple could acquire Netgear because that gives them a top position in the space. Google would be the prime candidate because they could link the Arlo system to Google Home. It would also allow Google access to trillions of terabytes of data related to the home routers and networking equipment. Monitoring those devices would be like keeping their finger on the pulse of technology. They would know how many people are watching Netflix, how much data was being consumed by what subset of users, etc. This could be very important in their planning for the future.

Arlo is an entirely new category for Netgear and a category that is exploding in sales. In their Q4 earnings they said the Arlo cameras posted record sales that exceeded their already optimistic expectations.

In reality, nobody has to buy Netgear for them to succeed. Netgear demonstrated new products at the CES show and the crowd loved them. Apparently, so did investors. They announced the Nighthawk Pro Gaming system of network gear that will cut lag time and enhance multiplayer game play for serious gamers. They also demonstrated the Orbi Wi-Fi system, which has also been very successful. With the rapid ramp of the Arlo video cameras for security, they have completed an entire cloud support system that allows storage of video, multiviewer capability for home monitoring, etc.

Last week Netgear has announced a spinoff of the Arlo security cameras. They will spin less than 20% and retain the rest. The cameras are so popular the IPO should be a big success and a good way for Netgear to monetize their investment. This will provide them a significant amount of capital to expand on their other product lines.

They reported Q4 earnings of 71 cents on revenue of $397.1 million,, up 7.9%. They guided for the current quarter for revenue of $330-$345 million. Analysts were expecting $348.2 million. However, Netgear has beaten estimates for six consecutive quarters so they may have been guiding lower so they can beat again.

The combination of the light guidance and the market declined knocked $15 off the stock in February. Shares appear to have bottomed at $56 and have risen back to $61. This is proving to be a buying opportunity on a previously strong stock.

Position 2/15/18:
Long June $65 call @ $4.00, see portfolio graphic for stop loss.


PYPL - PayPal - Company Profile

Comments:

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

Original Trade Description: February 3rd

PayPal Holdings, Inc. operates as a technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide. It enables businesses of various sizes to accept payments from merchant Websites, mobile devices, and applications, as well as at offline retail locations through a range of payment solutions, including PayPal, PayPal Credit, Braintree, Venmo, Xoom, and Paydiant products. The company's platform allows consumers to shop by sending payments, withdraw funds to their bank accounts, and hold balances in their PayPal accounts in various currencies. PayPal Holdings, Inc. was founded in 1998 and is headquartered in San Jose, California. Company description from FinViz.com.

Paypal shares were crushed last week after Ebay said they were going to phase out the payment processor by 2023. Ebay is going to become the merchant of record (MOR) and handle payments through Dutch payment processor Adyen after 2020. Paypal sold off hard despite the long term transfer.

This is 2018. Nothing is changing for the next two years. In 2021 Ebay will be the "default" payment processor but Paypal will remain an option in the checkout process. Customers with Paypal accounts will more than likely continue to process their payments through Paypal. For Ebay the conversion process is going to take years. Paypal is guaranteed to remain an option on checkout through 2023 or 5 years from now. In reality they will probably always be a payment option on Ebay.

Paypal has more than 200 million users and 18 million retailers that accept Paypal. Ebay cannot just turn them off or purchasers on Ebay would revolt.

The Paypal CEO put it this way. Ebay is 13% of our total payment volume (TPV) and growing at 4% per year. The other 87% of our TPV is growing at 23% per year.

On the positive side once the agreement with Ebay expires in 2020, Paypal can then become the MOR for any number of other retailers. They are currently prohibited from doing that now. The CEO said there are at least 10 top global marketplaces that process tens of billions of TPV per year where Paypal could become the primary MOR. These would be far more valuable than the slow growing Ebay revenue at 4% per year.

The CEO said retailers could now begin to see Paypal take on a more aggressive posture now that the split with Ebay is finally winding down.

Paypal guided for 2018 for revenue growth of 15-17% and earnings growth of roughly 25%. There is nothing wrong with Paypal and the stock was punished unfairly.

Position 2/5/18:
Long April $80 call @ $2.52, see portfolio graphic for stop loss.


QQQ - Powershares QQQ - ETF Profile

Comments:

Dead stop at resistance at 167.50 intraday and still using the 30-day average as support.

Original Trade Description: February 7th

PowerShares QQQ, formerly known as "QQQ" or the "NASDAQ-100 Index Tracking Stock", is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of stocks in the Index. The Index includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.

The Nasdaq rebounded sharply from the initial dip but that does not prevent it from a retest. I am recommending we try to buy any dip retest.

Position 2/8/18 with a QQQ trade at $155.50:
Long Apr $160 call @ $3.98, see portfolio graphic for stop loss.


TGT - Target - Company Profile

Comments:

Target declined after the Walmart earnings on Tuesday but did not decline further today. This shows good relative strength. On Tuesday Target rolled out a new 1,300 plus item collection of decor for the home called Opalhouse. Target called the brand "eclectic" featuring "bold colors, optimistic prints and tons of texture."

Original Trade Description: February 10th

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 October 19, 2017, the company operated 1,828 stores in the United States. Company description from FinViz.com.

Earnings March 6th.

Target is increasing its competition against Walmart and Amazon by acquiring same day delivery company Shipt for $550 million. Instead of just folding the company into Target's structure, they are going to leave Shipt as a separate entity and allow them to continue delivering for the rest of their corporate customers. This additional scale will improve the network and increase the benefits to the 1,400 target stores that will be available under the Shipt service.

Shipt has more than 20,000 "shoppers" that go to the stores and pickup your merchandise for same day delivery. In many cases, such as food, they have your shopping list and they actually go and pickup the items you want and deliver them to you. For Target, the items will be prepackaged and ready at the delivery desk. Shipt customers pay an annual $99 fee for same day delivery and that covers all the retailers in your area that use the Shipt service. Target customers will get an initial 50% discount.

Target also launched Target Restock for next day grocery delivery. Customers go to the Target Restock website and choose from over 15,000 daily use items like cleaning supplies, paper products, baby products, etc. You can load up your "box" with about 45 pounds of products and if you order by 2:PM it will be delivered the next day for $4.99.

Target also launched a "Drive Up" service where you can place your order with the Target App and Target will message you when it is ready. You hit the "I am on my way" button and when you pull into a designated parking spot an associate will deliver your items to your car.

Target is not going to just plod along and let Amazon and Walmart steal market share. They are fighting to make it easy and quick to buy almost anything and get it the same day or next day. Target has more than 10 brands that do over $1 billion in annual sales each. Their Market Pantry brand has more than 2,000 products. Target averages 1.5 million customer visits per day.

Position 2/12/18:
Long March $75 call @ $2.55, see portfolio graphic for stop loss.


V - Visa - Company Profile

Comments:

No specific news.

Original Trade Description: February 8th

Visa Inc. operates as a payments technology company worldwide. The company facilitates commerce through the transfer of value and information among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. It operates VisaNet, a processing network that enables authorization, clearing, and settlement of payment transactions; and offers fraud protection for account holders and assured payment for merchants. The company also offers gateway services for merchants to accept, process, and reconcile payments; manage fraud; and safeguard payment security online, as well as processing services for participating issuers of visa debit, prepaid, and ATM payment products. In addition, it provides digital products, including Visa Checkout that offers consumers an expedited, and secure payment experience for online transactions; and Visa Direct, a push payment product platform, that allows businesses, governments, and consumers to use the Visa network to transfer funds from an originating account to another via a debit, prepaid, or credit card number, as well as Visa token service that replaces the card account numbers from the transaction with a token. Further the company offers corporate (travel) and purchasing card products, as well as value-added services. It provides its services under the Visa, Visa Electron, Interlink, V PAY, and PLUS brands. Visa Inc. was incorporated in 2007 and is headquartered in San Francisco, California. Company description from FinViz.com.

Position 2/9/18 with a Visa trade at $112.50:
Long June $120 Call @ $4.15, see portfolio graphic for stop loss.


WMT - Walmart - Company Profile

Comments:

Walmart (WMT) reported earnings of $1.33 that missed estimates for $1.37. That was a significant surprise. Revenue of $136.3 billion did beat estimates for $134.91 billion. Same store sales rose 2.6% and beat estimates for 2.2% and store traffic rose 1.6%. However, ecommerce sales rose 23% and well below the 50% rise in Q3 and that is a material decline since it covered the holiday shopping quarter. I reported several times in the past that Walmart raised their prices online and they actually point it out on the product page. This item is $15.95 but it is $13.85 in our stores. That is a sale killer for sure. Management guided for full year earnings of $4.75-$5.00 and analysts were expecting $4.91. The company increased its annual cash dividend by 2% to $2.08 or 52 cents per quarter.

Shares fell sharply on Tuesday and then declined another 3% on Wednesday. Telsey Advisory Group reiterated an outperform with a $110 price target. Stifel reiterated a hold with a $99 price target. Several analysts have been calling this a buying opportunity. Shares held at the $92 level most of the day but dropped 50 cents on the closing bell.

Original Trade Description: February 5th

Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. It operates through three segments: Walmart U.S., Walmart International, and Sam's Club. The company operates discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, cash and carry stores, home improvement stores, specialty electronics stores, apparel stores, drug stores, convenience stores, and membership-only warehouse clubs; and retail Websites, such as walmart.com and samsclub.com, as well as mobile commerce applications. It offers grocery products, including meat, produce, natural and organics, deli and bakery, dairy, frozen foods, alcoholic and nonalcoholic beverages, floral and dry grocery, as well as consumables, such as health and beauty aids, baby products, household chemicals, paper goods, and pet supplies; and health and wellness products, which include pharmacy, optical services, clinical services, over-the-counter drugs, and other medical products. The company also provides electronics, cameras and supplies, photo processing services, cellular phones, cellular service plan contracts and prepaid service, movies, music, video games, and books; stationery, automotive, hardware and paint, sporting goods, and outdoor living and horticulture, as well as fabrics, crafts, and seasonal merchandise; apparel for women, girls, men, boys, and infants, as well as shoes, jewelry, and accessories; and home furnishings, housewares and small appliances, bedding, home decor, and toys. In addition, it offers fuel and financial services and related products, including money orders, prepaid cards, wire transfers, money transfers, check cashing, and bill payment. In addition, it offers brand name merchandise, including hardgoods, softgoods, and selected private-label items, such as Member's Mark. It operates 11,593 stores under 63 banners in 28 countries and e-commerce Websites in 11 countries. Wal-Mart Stores, Inc. was founded in 1945 and is headquartered in Bentonville, Arkansas. Company description from FinViz.com.

2/5/18: Buy the market dip tactical trade: Walmart declined to rest on the support of the 50-day average at $100. Until today the stock was showing great relative strength.

2/17/18: Walmart could acquire as much as 40% of India's online retailer Flipkart, up from 20% when the story first broke a couple weeks ago. There was no price mentioned but Softbank bought 20% last year for $2.5 billion. Given the growth and passage of time, Walmart could be looking at spending $6-$9 billion. This would give Flipkart a big boost in the fight against Amazon and it would give Walmart a huge retail outlet in India, the second most populated country. Flipkart has committed to investing up to $5 billion in India to expand its online grocery deliveries. Flipkart already controls 40% of India's online retail sales and has the fashion portals Myntra and Jabong. Morgan Stanley estimates online retail sales in India will be a $200 billion business within 10 years. Walmart already has a $28 million stake in bricks and mortar retailer Shoppers Stop Ltd in India. Flipkart was founded in 2007 by two former Amazon employees.

Position 2/6/18:
Long Apr $105 Call @ $2.50, see portfolio graphic for stop loss.



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