Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/14/2018

Table of Contents

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

Market Wrap

Uncertain Markets Grind Lower

by Richard Cox

Click here to email Richard Cox
Bulls attempted an early-day rally but broader uncertainties weighed on vulnerable companies with global trade exposure.


Markets opened higher in the U.S. as weaker consumer data alleviated fears that the Federal Reserve will pursue an aggressive interest rate tightening policy.

In pre-market trade, U.S. Retail Sales figures were released, showing a seasonally-adjusting decline for the third month in a row. The biggest pre-market gainers in the S&P 500 included Ford Motor Co. (F), which rallied after Morgan Stanley upgraded the stock to overweight. Pre-market losers in the index included Signet Jewelers (SIG), which released an unconvincing restructuring plan to increase internet sales.

Stocks reversed lower toward the middle of the New York session, with all three U.S. equities benchmarks falling into negative territory. Generalized concerns over the potential for increased rate hike scheduling at the Fed is working in combination with geopolitical tensions spurred by hawkish trade rhetoric. Stocks closed near their lows as the S&P 500 lost -0.57%, the Dow Jones Industrials lost -1.06%, the NASDAQ lost -0.19%, and the Russell 2000 lost -0.52% on the session.

Economic Calendar


Today's Economic Data

The U.S. Retail Sales report showed a drop of -0.1% for the month of February (a +0.4% gain was expected). This is the third monthly decline in a row and a suggestion that consumer spending is weakening. These losses are relatively small, however, and follow the spike that was seen in markets toward the end of 2017.

The main points of weakness included automobiles, energy consumption (gas stations), and furniture. If these segments are stripped from the number, the average increase in consumer sales was roughly in-line with expectations for the month (at +0.3%).

Gas station receipts were lower by -1.2%, as prices stabilized from the January increases. Consumer purchases from auto dealers were lower by -0.9% (second-straight month of declines), and Department stores reported a -0.9% reduction in monthly sales.

On the positive side, internet retailers saw sales rise by +1%. Apparel stores, home centers, and sporting goods also reported gains for the month. The total figures from January were also revised higher (to -0.1% from -0.3% previously). The 10-year U.S. Treasury yield showed a slight drop after the release, and the U.S. dollar index (DXY) was little changed.

With the unemployment rate at its lowest levels in 17 years and new tax cuts still filtering through the economy, these weaker sales figures are not overly worrisome. Consumer spending is likely to move higher during the spring months. Longer-term, the issue of market disruption through internet retail remains the key question in deciphering the broader trends in these areas. Overall, this is a somewhat tepid start to the year for retail companies.


The Producer Price Index (PPI) for February was also released in the pre-market session. This measure of inflation at the producer level came in at +0.2% (where +0.1% was expected). These gains come after a -0.4% decline seen in January. But with wholesale prices rising on the longer-term charts, we can see that inflationary pressures are clearly present. The 12-month rate of wholesale inflation is higher by +2.8% (but still below recent highs of +3.1%).


Business inventories came in at +0.6% for the month of January, and the December inventories figures were also revised higher to +0.6% (from +0.4% previously). Sales dropped -0.2% (after a +0.5% gain in December). Auto inventories rose +1.7% in January (after falling -0.3% the prior month).

The gains in inventories and declines in sales raised the inventory-to-sales ratio to 1.34 in January (from 1.33 in December). This number represents the number of months that would be needed to sell all inventory on hand. Last year, the ratio was even higher at 1.37.


Overall, the data had limited market impact on sentiment and stock markets started the trading day in positive territory. Toward the middle of the New York session, the indexes reversed as materials and industrial stocks met heavy selling pressure. Investors are watching for developments out of Washington, as the prospect of new political appointments in the White House could be indicative of future trade policies at the global level. This creates large elements of uncertainty for many different sectors, and there are specific companies (i.e. Boeing, Qualcomm) that seem to be on the receiving end of the market's deteriorating sentiment.

Winners/Losers

Quest Diagnostics (DGX) was upgraded by Morgan Stanley to equal-weight from underweight, with a price target of $95-103 for the stock. Morgan Stanley said DGXis trading at more reasonable valuations (relative to competitors like LabCorp), giving the stock a more balanced risk-reward profile.

Support: 101.85. Resistance: 108.80.


Signet Jewelers (SIG) was the worst performer on the day (down -20.2%). The owner of Kay Jewelers, Zales, and Jared Galleria of Jewelry plunged sharply after the company released a three-year restructuring plan to improve on faltering internet sales. The jewelry retailer did manage to beat earnings estimates with adjusted quarterly profit of $4.28 per share ($4.25 expected), and revenues beat forecasts as well. Same-store sales dropped -5.2%, which was in-line with expectations. Signet also issued a lower-than-expected earnings forecast for 2018.

Support: 32.35. Resistance: 46.10.


Ford (F) was one of the best early performers on the S&P 500, as the stock rallied +3.76% pre-market after Morgan Stanley upgraded the stock to overweight from underweight. The note said that Ford shares have fallen to attractive buying levels and that the company has the strongest earnings prospects it has had in two years.

Support: 10.15. Resistance: 11.70 (200-day moving average).


Boeing (BA) traded down -4.7% at its intraday lows before making a slight recovery into the close (down -2.5% for the session). The stock fell after a report suggested the White House plans to initiate $60 billion in tariffs on Chinese goods. The report outlined potential investment restrictions, indefinite tariffs, and even visa restrictions on Chinese travelers. Uncertainty looks to be the main fear here, as investors contemplate the possibility China will first target the aerospace company in retaliation.

Support: 320 is neckline of a head and shoulders pattern, which suggests a deep collapse if invalidated. A lower right shoulder in the pattern increases probabilities we will see a downside break. Resistance: 337.15.


Qualcomm (QCOM) continued to trade under pressure today after the White House stopped Broadcom's proposed takeover plans on national security grounds. The deal would have been the largest takeover ever seen in the tech industry. But the deal also enhanced concerns that it would give China too many advantages in mobile communications. The main takeaway here is that the Trump administration may be less open to large, transformational trade deals than previously expected. We can also expect speculation about additional trade war scenarios where countries block international deals initiated by the U.S. These stories will not be going away anytime soon.

Support: 49.40. Resistance: 71.30.


Tesla (TSLA) shares plunged toward the end of the session after a negative news report highlighted company inefficiencies. Tesla employees are quoted as saying the company is manufacturing a high ratio of flawed parts and vehicles that need initial repairs. The report goes on to say that Tesla has had to ship some flawed parts to remanufacturing facilities to avoid fully discarding them. Tesla is denying the report. The company is currently under pressure to increase its Model 3 sedan production levels. TSLA lost more than -10% intraday and is trading well-off its June 2017 highs.

Support: 295. Resistance: 358.75.


Alphabet (GOOG) announced that its Google unit plans to ban all cryptocurrency-related advertising, saying the company is approaching cryptocurrencies with extreme caution because of the potential for consumer harm.

Support: 1,050. Resistance: 1,185.80.


The US Dollar (DXY) was little-changed on the session, which is something of a surprise given its broader role in all of the trade tariff discussions.

Currency markets were not heavily influenced by the Russia comments made by U.K. Prime Minister Theresa May prior to the U.S. open, although the tone that is set by the expulsion of 23 Russian diplomats seems to be in-line with the growing nationalist sentiment that is building throughout the world economy. These are the types of macro events that could bring renewed volatility in commodities and foreign exchange instruments in the weeks/months ahead.

Long-term charts in DXY look heavy, as a bearish divergence reading is now visible on the Commodity Channel Index (CCI). Prior levels from 2009 do not seem to be providing much support, and the trend looks firmly pointed toward the downside from here.

Support: 88.25. Resistance: 90.90.


Crude oil was under pressure in the early parts of the New York session after U.S. crude inventories increased more than expected. The report was mixed, however, and showed a larger-than-expected drop in stockpiles of gasoline.

Improved Chinese factory data (and a decline in domestic crude output) added another supportive factor to the oil market, but crude inventories increased by 5 million barrels in the week to March 9 (against analyst expectations of 2 million barrels). The relentless growth in U.S. output weighed on crude prices early, but futures ultimately gained 25 cents (+0.4%) to close at $60.96 a barrel. April gasoline gained 3.8 cents (+1.94%) to close at $1.924 a gallon.

The real question is whether or not the bearish trends can continue, as the case for longer-term rallies continues to mount. For example, recent moves to replace Rex Tillerson as U.S. Secretary of State could have a bullish impact on WTI crude if it means the implementation of additional sanctions on Venezuela. For Iran, these cabinet changes could impact a final decision to not renew sanctions waivers on May 12th (which would end U.S. participation in the Iran nuclear deal). At the moment, the oil market appears to be more interested in the supply story but there is potential for all of that to change in the next few weeks.

WTI crude remains caught in its downtrend channel on the 2-hour charts.

Support: 59.90. Resistance: 64.10, followed by 66.25.


In the main benchmarks, the Dow (DJI) saw most of the selling pressure as both the materials and industrials sectors were sold in heavy volume. Industrial giant Boeing (on its own) cut about 90 points from the blue-chip index, and this is the third consecutive day of losses in DJI.

Support: 24,215. Resistance: 25,450.


The S&P 500 (SPX) handled itself a bit better on the day, but still traded near the lows for most of the session. Broader chart structures largely mimic what is seen in the Dow, however, support levels in SPX look more likely to hold after initial tests.

Support: 2,647.30. Resistance: 2,801.90.


The NASDAQ (IXIC) continues to be the star of the group, closing mostly unchanged at -14.2 points (or down -0.19%). The trend activity in the index has not been significantly damaged by recent trade tariff talks, and it is the only major benchmark to trade above the highs posted earlier in the year.

Support: 2,647.30. Resistance: 2,801.90.


The Russell 2000 (RUT) is another index that is being viewed as at least partially protected from changes in global trade policy. The critical test here will be in whether or not the index is able to surpass its prior highs at 1,616.90. This is the instrument that should be on the radar for traders looking to implement breakout strategies, as we are now trading in close proximity to critical supply levels.

Support: 1,493.70. Resistance: 1,616.90.


Tomorrow's data calendar is relatively light with weekly jobless claims, Philly Fed and Empire State indexes, and the Home Builders index on tap for release. The weekly jobless claims figures are expected to show a small decline of -3k relative to the numbers from last month (231k).

On the whole, markets are likely to remain jittery in this type of environment. There are many unknowns with respect to potential changes in Fed policy, building inflationary pressures within the U.S. economy, and heightened trade rhetoric suggesting the implementation of tariffs.

From a trading perspective, this is a broader scenario that should benefit options investors given the enhanced ability to limit risk and shield against volatility. Technical analysis also goes far in these types of situations, as moves that appear erratic at the fundamental level will often manage to obey support and resistance levels that are outlined on the longer-term time frames.

Limit risk, exercise patience, maximize returns

Richard Cox


New Option Plays

Swimming with Sharks

by Jim Brown

Click here to email Jim Brown

Editors Note:

When activist investors succeed in getting a favorable position we should join in the swim. Elliott Management has seduced the management of Akamai into joining rather than fighting their advances.

 

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


NEW DIRECTIONAL CALL PLAYS

AKAM - Akamai Technologies - Company Profile

Akamai Technologies, Inc. provides cloud services for delivering, optimizing, and securing content and business applications over the Internet in the United States and internationally. The company offers Web and mobile performance solutions, such as Ion, a situational performance solution that consists of an integrated suite of Web delivery, acceleration, and optimization technologies; Dynamic Site Accelerator that helps in consistent Website performance; IP Application Accelerator to enable enterprises to deliver Internet Protocol-based applications; Global Traffic Management, a fault-tolerant solution; Image Manager that automatically optimizes online images; and Cloudlets, which provides self-serviceable controls and capabilities. It also provides cloud security solutions, including Kona Site Defender, Bot Manager, Fast Domain Name System, Prolexic Routed, and Client Reputation; enterprise solutions comprising Enterprise Application Access and Akamai Cloud Connect. In addition, the company offers media delivery solutions, such as adaptive delivery solutions, download delivery solutions, media delivery acceleration solutions, media services, media analytics, and NetStorage, a cloud storage solution. Further, it provides network operator solutions, including Aura Licensed CDN suite of solutions, Aura Managed CDN solutions, and Intelligent DNS Solutions; and professional services and solutions. It sells its solutions through direct sales and service organization; and through active channel partners. The company was founded in 1998 and is headquartered in Cambridge, Massachusetts. Company description from FinViz.com.

Earnings May 8th.

Akamai just agreed to some shareholder friendly actions as prompted by an activist shareholder. Rather than continue to fight them, Akamai agreed to join them in getting the stock price to move up.

The company agreed to work with Elliott Management to increase operating margins become more shareholder friendly. Elliott took a large stake in the company. Akamai added former Amazon chief security officer, Tom Killalea, to the board and another Elliott nominated director will be named later. Elliott believes Alamai's newly formed security division could become valuable given the right direction. The company also announced a $750 million share buyback that will be completed in 2018.

Shares spiked to $78 on the news but the market weakness has knocked them back to $73. Akamai only lost 5 cents on Wednesday and showed good relative strength.

The market appears poised to open lower on Thursday so I am recommending a strike close to the money in hopes we can get a better entry point on the dip.

Buy May $75 call, currently $3.65, no initial stop loss.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Time for a Rebound

by Jim Brown

Click here to email Jim Brown

Editors Note:

The other indexes followed the Dow lower again but with fewer losses. The Dow lost -248 but the S&P only gave back 15 and the Nasdaq 14. The Dow is getting hammered because of a couple of stocks posting large losses, pushing the ETFs lower and damaging sentiment. Boeing was down -$16 intraday and that is roughly the equivalent of 110 Dow points. The Dow has reached critical support at 25,700 and the 100-day at 24,611. With the other indexes holding back, it may be time for the Dow to rally from support.



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

ABBV - AbbVie - Company Profile

Comments:

The company announced a successful Phase III trial for uterine fibroids using the drug elagolix. They are in partnership with Neurocrine Biosciences on this project. Some 76.2% of women tested responded positively to the treatment. Secondary endpoints were also met. Studies show that 20-80% of women suffer from fibroids by age 50. This could be a new blockbuster drug for AbbVie.

Original Trade Description: March 10th.

AbbVie Inc. discovers, develops, manufactures, and sells pharmaceutical products worldwide. The company offers HUMIRA, a biologic therapy administered as a subcutaneous injection to treat autoimmune diseases; IMBRUVICA, an oral therapy for the treatment of patients with chronic lymphocytic leukemia; and VIEKIRA PAK, an interferon-free therapy, with or without ribavirin, for the treatment of adults with genotype 1 chronic hepatitis C. It also provides Kaletra, an anti- human immunodeficiency virus(HIV)-1 medicine used with other anti-HIV-1 medications as a treatment that maintains viral suppression in HIV-1 patients; Norvir, a protease inhibitor indicated in combination with other antiretroviral agents to treat HIV-1; and Synagis to prevent RSV infection at-risk infants. In addition, the company offers AndroGel, a testosterone replacement therapy for males diagnosed with symptomatic low testosterone; Creon, a pancreatic enzyme therapy for exocrine pancreatic insufficiency; Synthroid to treat hypothyroidism; and Lupron, a product for the palliative treatment of prostate cancer, endometriosis, and central precocious puberty, as well as for the treatment of patients with anemia. Further, it provides Duopa and Duodopa, a levodopa-carbidopa intestinal gel to treat Parkinson's disease; Sevoflurane, an anesthesia product for human use; and ZINBRYTA, a subcutaneous treatment for relapsing forms of multiple sclerosis. The company sells its products to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from its distribution centers and public warehouses. AbbVie Inc. has collaboration agreements with C2N Diagnostics; Calico Life Sciences LLC; Infinity Pharmaceuticals, Inc.; M2Gen; and Principia Biopharma Inc. Company description from FinViz.com.

Next expected earnings April 27th.

A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market.

Analysts claim AbbVie's pipeline is the strongest in the industry. The post earnings market drop is a buying opportunity. The company's other drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion.

AbbVie was a spinoff from Abbott Laboratories in 2012 and they are doing great.

ABBV reported Q4 earnings of $1.48 that beat estimates for $1.45. Revenue of $7.74 billion beat estimates for $7.51 billion. The company guided for 2018 adjusted earnings of $7.33-$7.43, up from $6.37-$6.57 and analysts were expecting $6.66.

AbbVie raised its dividend by 35% to 96 cents and announced a $10 billion stock buyback program.

The blowout guidance spiked the shares to $125 from $108. The correction appeared and knocked the shares back to $107. The rebound was immediate and recovered to $121 before the second dip appeared. Shares are back at $120 and this stock is destined to make new highs.

Position 3/12/18:
Long May $125 call @ $3.30, see portfolio graphic for stop loss.


CAT - Caterpillar - Company Profile

Comments:

No specific news. Shares only declined $1 in an ugly market so maybe the worst is over on the tariff woes.

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.


EXPE - Expedia - ETF Profile

Comments:

No specific news. Shares crashed $4 on Tuesday then rebounded $4 today. There wa sno news either day.

Original Trade Description: February 24th

Expedia, Inc., together with its subsidiaries, operates as an online travel company in the United States and internationally. It operates through Core OTA, Trivago, HomeAway, and Egencia segments. The company facilitates the booking of hotel rooms, airline seats, car rentals, and destination services from its travel suppliers; and acts as an agent in the transactions. It serves leisure and corporate travelers, including travel agencies, tour operators, travel supplier direct websites and their call centers; consolidators and wholesalers of travel products and services; online portals and search websites; and travel metasearch websites, mobile travel applications, social media websites, as well as traditional consumer e-commerce and group buying websites. It also engages in advertising and media business. The company was founded in 1996 and is headquartered in Bellevue, Washington. Company description from FinViz.com.

Expected earnings May 10th.

Expedia reported Q4 earnings of 84 cents that missed estimates for $1.16 by a mile. Revenue of $2.32 billion also missed estimates for $2.36 billion. While that seems extremely negative there were some bright spots. Revenue rose 10.9%, gross bookings ros 14% and room nights rose 15%. Revenue at the core brands rose 18% at Trivago, 16% at HomeAway and 18% at Egencia.

The drop in earnings was driven by a significant increase in market costs. The new CEO Mark Okerstrom said "We are now operating with a clear focus on our highest priority markets, making concentrated investments across the platform and changing the pace of adding new properties to our marketplace. These efforts should give us 6% to 11% EBITDA growth in 2018." The travel industry is a $1.6 trillion industry on an annual basis. There is plenty of room for growth.

Expedia plans to double the properties on the core OTA (Online Travel Agencies) portfolio from the current 590,000 including 150,000 HomeAway listings.

They reported earnings on Feb 7th just as the market was crashing. Shares were crushed for a $25 loss to $100. They have rebounded to $106 and multiple analysts have called it a buying opportunity because the increased expenses will lead to increased revenue.

Update 3/10/18: Morning star said Expedia's market position was showing no signs of weakness with solid trends in bookings, take rate, property growth and room nights. The solid metrics suggest the additional spending on marketing is justifies. The websites have more than 600 million unique visitors a month looking at 1.5 million vacation rentals and 440,000 hotel properties. Booking has 550 million monthly visits and 1.6 million properties. TripAdvisor has 450 million visits and 1.15 million hotels and 750,000 vacation rentals.

Position 2/26/18:
Long April $110 call @ $3.10, see portfolio graphic for stop loss.


GRUB - GrubHub - Company Profile

Comments:

Guggenheim reiterated a buy rating but raised the price target to $140 and the highest on the street. Shares closed at a new high in an ugly market.

Original Trade Description: March 3rd.

GrubHub Inc., together with its subsidiaries, provides an online and mobile platform for restaurant pick-up and delivery orders in the United States. The company connects approximately 50,000 local restaurants with diners in approximately 1,100 cities. It offers GrubHub and Seamless mobile applications and mobile Websites for iPhone, Android, iPad, Apple Watch, and Apple TV devices; and operates GrubHub and Seamless Websites through grubhub.com and seamless.com. The company also provides Corporate program that helps businesses address inefficiencies in food ordering and associated billing; and delivery services for restaurants on its platform. In addition, it offers Allmenus.com and MenuPages.com, which provide an aggregated database of approximately 415,000 menus from restaurants in 50 states; Grubhub for Restaurants that allows it to monitor orders through the takeout process; and Website design and hosting services for restaurants. The company was formerly known as GrubHub Seamless Inc. and changed its name to GrubHub Inc. in February 2014. GrubHub Inc. was founded in 1999 and is headquartered in Chicago, Illinois. Company description from FinViz.com.

Expected earnings May 10th.

GrubHub reported earnings of 37 cents that beat estimates for 31 cents. Revenue rose $68 million to $205.1 million and beat estimates for $301.7 million. Active diners rose from 8.2 million to 14.5 million. They guided for Q1 revenue og $224-$232 million and analysts were expecting $226.7 million. They have grown the number of active restaurants from 40,000 to 80,000.

GrubHub announced a partnership with Yum Brands for their KFC and Taco Bell stores. YUM will buy $200 million in GrubHub shares. That will give GRUB cash to expand their network even further. They also have a partnership with Yelp and FourSquare.

Keybanc Capital Markets raised the target price from $105 to $115. The analyst said "the largest direct benefit of the YUM partnership is the incremental gross food sales opportunity, which we estimate could be worth billions of dollars over time."

Shares spiked from $70 to $94 on the earnings and YUM news. They inched up to $97 where they have held for two weeks during a really ugly market. A breakout appears to be imminent.

Position 3/5/18:
Long June $105 call @ $7.17, see portfolio graphic for stop loss.
Optional: Short June $120 call @ $2.47, see portfolio graphic for stop loss.
Net debit $4.70.


HD - Home Depot - Company Profile

Comments:

No specific news. Still falling with the Dow. I looked at adding a put just in case it continues lower but they are too expensive. Shares are right on critical support and we need the Dow to recover to take the pressure off HD.

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.

Update 2/21/18: 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.

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


INTC - Intel - Company Profile

Comments:

Intel shares are holding at the record highs now that the Broadcom acquisition of Qualcomm has taken the pressure off IBM to buy somebody.

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.

Update 2/21/18: 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.

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


JPM - JP Morgan - Company Profile

Comments:

No specific news but weak retail sales along with some other weaker than expected economic reports are calling into question the speed of Fed rate hikes. Slower hikes, means less income for JPM. The Fed meets next week and bank shares should rise in advance of the meeting.

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.

Update 2/28/18: On Tuesday, the CFO raised the outlook on earnings saying pretax profits could rise by 17.5% annually over the next several years. He said pretax net income could rise to a range of $44-$47 billion over three years, up from $24 billion in 2017.

Update 3/7/18: However, because of their past relationship JPM probably has a lead in the move by Amazon to establish hybrid checking accounts with the Amazon brand. The company sent out requests for proposals earlier this year but JPM probably has a head start since they have already partnered with Amazon on the health care project.

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


MSFT - Microsoft - Company Profile

Comments:

No specific news. Shares down from new highs because of weakness in the Nasdaq. The company said it was opening new cloud centers in the Middle East and Switzerland.

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. Actually holding up pretty good despite the declining Dow and problems with Under Armour stinking up the sector. Today's strong earnings by Adidas could help lift the sector.

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.


PYPL - PayPal - Company Profile

Comments:

The Paypal CEO said opportunities abound in overseas markets like India. Customers are skipping over checking accounts and credit cards and going straight to Paypal and digital payment solutions. "The entire financial system's ecosystem is moving, more rapidly than ever before, away from cash and towards digital payments because of the explosion of mobile phones." Shares exploded higher. Paypal has 227 million subscribers and 65% live outside North America.

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:

Minor decline after the strong post correction gains.

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.


SPY - S&P-500 ETF - ETF Profile

Comments:

Only a minor decline after the five-week closing high. The Dow is dragging the market lower and the S&P is resisting but being forced to follow because of BA, CAT, MMM, etc.

Original Trade Description: February 21st

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 -8 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.

Position 2/22/18:
Long April $275 call @ $4.00, see portfolio graphic for stop loss.


V - Visa - Company Profile

Comments:

No specific news. Down in a down market.

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.



BEARISH Play Updates (Alpha by Symbol)

No Current Puts




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now