Option Investor
Newsletter

Daily Newsletter, Wednesday, 4/18/2018

Table of Contents

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

Market Wrap

Back To Fundamentals

by Richard Cox

Click here to email Richard Cox
If this market environment was not already chaotic enough, strap-in: earnings season is now firmly upon us.


Markets are officially back to work, and focused on the fundamentals. To start the day, stock futures pointed toward a higher open - and all three stock benchmarks confirmed with early buying activity. Sellers tried to push stocks lower after 10 a.m. But all of the optimism from yesterday seems to have kept those trades from having any real influence. Stocks traded mostly sideways into the close, as both sides seem reluctant to place larger trade orders until the immediate trend becomes more readily apparent.

Both the S&P 500 and NASDAQ Composite closed in positive territory, while the Dow Jones Industrial Average was the loser on the day. The losses were limited, however, as valuations closed the day roughly where they started. We did see some back and forth action in the indexes, but there was an obvious lack of conviction within the investor majority that stalled prices. There were no top-tier economic releases in the pre-market period, and this may have been another contributing factor.

In terms of market volatility, things were very different in the commodities space, as expected rallies unfolded in several key assets. WTI crude oil broke a clearly defined double-top on the longer-term charts (with gains of more than 3% on the day). This helped commodities bulls as a whole, with correlated assets like silver posting gains of 2.55% on the session.

Economic Calendar


Federal Reserve Beige Book

The Federal Reserve's latest Beige Book showed the U.S. economy is "growing at a modest to moderate pace" in the period from March through early April. Nevertheless, the U.S. dollar has met selling pressure based on expectations that the U.S. trade and federal deficits could grow significantly in coming quarters. The U.S. dollar did see modest gains against a basket of currencies today, aided by higher bond yields and growing probabilities the Federal Reserve will raise interest rates faster than expected. According to today's Beige Book, this could occur based on the fact that the Fed sees signs of ongoing economic growth. If we couple this with the robust consumer inflation figures released last week, there is scope here for hawkish market speculation with respect to interest rate policy.

From a traditional standpoint, the Fed typically considers consumer price stability to be its main goal (and function) within the broader financial markets. But anyone what regularly watches those financial markets knows that the Fed is acutely aware of price activity in the stock markets, as well. This essentially means that the Fed is unlikely to release commentaries that drive volatility in uncertain environments. The Fed is still the real wildcard in terms of its influence on a bullish turnaround in equities, and this is why it will continue to be important to watch their commentaries for further clues.

MBA Mortgage Applications

The MBA Mortgage Applications weekly report came in with gains of 4.9%, which is a strong performance relative to the 1.9% decline seen during the previous week:


Stock Benchmarks

The Dow Jones Industrial Average closed lower by 0.16%, or a drop of 38.56 points to 24,748.07:


The S&P 500 closed higher by 0.08%, or a gain of 2.25 points to 2,708.64:


The NASDAQ Composite closed higher by 0.19%, or a gain of 14.14 points to 7,295.24:


Individual Stocks

Bank of America (BAC) reported quarterly earnings of 62 cents a share. This beat the consensus forecasts by 3 cents per share, with revenue also beating estimates. The strong quarter at Bank of America was propelled by better loan growth and larger deposit figures. BAC is coming into some important long-term resistance levels, as the stock has retraced roughly 61.8% of the decline from 55 to 2.84 (at 35.20). Indicator readings are extended to the topside, and markets have already formed historical resistance ahead of the 2-standard deviation Bollinger Band on the monthly charts. A break of all this would be significant. But if markets get ahead of themselves here and there are no buyers left to send prices higher, it would not be surprising to see a failure here (35.20) on first attempt.


McDonald's (MCD) was downgraded by Stephens to "equal-weight" from "overweight" on the argument that a confluence of one-time promotional initiatives generated gains in comp store sales (unlikely the restaurant chain will be able to repeat these same numbers next quarter). MCD has been on a tear since August 2015. But those rallies were no match for the surprise volatility that came into the market at the beginning of 2018. This sharp reversal at the highs creates strong arguments in both directions. Is the stock a buy at these levels? The outlook remains constructive as long as 148.25 holds support. But a break there could trip stops and send prices much lower very quickly. Next resistance in MCD comes in near 165.10.


General Electric (GE) said that the company will take a charge of $4.2 billion for first-quarter. This comes after an earnings restatement that reduced profits for 2016 and 2017 by as much as 30 cents per share. The restatement is related to updated account standards, and the announcement conforms with prior guidance. GE remains one of my favorite contrarian plays, and anyone developing a dividend portfolio will find it hard to argue with the 3.51% payout. The real question lies in identifying the bottom of a much larger chasm. Bearish momentum continues to stall, and this may wind up giving the market the confidence it needs to move back into the conglomerate. Price support should become visible on any downward approach toward 12.80.


Goldman Sachs (GS) held its position in the headlines, announcing the purchase of personal finance app Clarity Money. This is not a significant story on its own, but it does suggest that the investment bank is making more of a push into retailer banking. On the positive side, the deal will help Goldman's grow its current base in retail banking by as much as 400%.

Of course, the real story was the earnings report released yesterday, which pretty much qualifies as what the kids today call an "OMG." Goldman had a very impressive quarter. Revenues of $10.04 billion (against expectations of $8.74 billion). Earnings per share of $6.95 (against expectations of $5.58). Goldman also increased its quarterly dividend to 80 cents per common share (an increase of 5 cents). This is the type of earnings beat that not many in the market would have thought possible for Goldman Sachs even a short time ago. A break of resistance at 262.10 targets the March 12th highs at 275.31.


IBM (IBM) had no friends today, despite a better-than-expected earnings report from the prior session. The stock posted its worst single-day performance since 2013. IBM beat in both earnings and revenue Tuesday but there were problems with the guidance, as the company said full-year earnings could come in 3 cents below previous estimates. Shares prices fell below 150 after gains of $10 on Tuesday. IBM is now showing double-digit percentage losses over the last twelve months (in an otherwise strong bull market for tech stocks).


Costco (COST) was upgraded to "outperform" from "market perform" by Wells Fargo, citing a positive outlook for rising comp sales, a possible special dividend, and much better trends in memberships. COST has established very strong support for itself, and I expect it is only a matter of time before the next resistance levels are broken. This one is setting up for a pop into the 200s.


Ford Motor (F) announced plans to run a large-scale driverless car network by 2021. It is not difficult to look for the source or impetus for these types of strategic announcements, as the stock has collapsed since the middle of January. There is evidence here, however, that suggests a bottom is forming. F has moved above the 38.2% Fibonacci retracement of that move (at 11.42). This targets the 61.% percent retracement of that same move (at 12.21), which comes in conjunction with historical price resistance near 11.90.


Credit Suisse cut earnings estimates and downgraded Kraft Heinz (KHC) two notches from "outperform" to "underperform." The note cites weaker earnings prospects that are negatively impacted by faltering organic growth strategies. There is nothing resembling an uptrend in this chart, and KHC is looking like a sell on rallies.


Commodities Markets

Oil prices rose to their highest levels since late 2014 after reports indicated U.S. crude stockpiles declined last week. This comes as the market remains on edge over potential supply disruptions in certain oil-producing countries. These moves were widespread across the commodities space, as copper surged 2.6% to $3.18 per pound (which is the highest Level in five weeks). Gold prices rose 0.1% to $1,348.47 per ounce. LME nickel rose 8% to $15,335 per metric ton (the highest level in over three years on the largest jump in over six years).

Commercial crude inventories in the U.S. fell by 1.1 million barrels in the week ending April 13, according to the EIA. Stockpiles of gasoline also fell by 3 million barrels, while distillates fuels (including diesel) dropped by 3.1 million barrels.


For weeks, I have been calling attention to the double-top forming in West Texas Intermediate crude oil. Not surprisingly, this area generated a forceful break that has accellerated gains in short order. Today, WTI crude oil rose 3.4% to $68.76 a barrel:


The impact on commodities has been broad-based. But some assets have gained more than others, and it will be important to watch these areas as trade war news continues to develop. Aluminum prices followed WTI crude oil on a similarly bullish path:


Stock markets were not quite as volatile, as the aggressive traders clearly took a breather today. It looks as though some investors are waiting on the sidelines for more obvious signs of a bullish trend change. Evidence that this trend change is occurring lies in the fact that volatility metrics have fallen back below their yearly averages:


What might be most striking about the chart above is that it compares the measure of volatility both in the U.S. and in Europe - and both of the readings seem to be saying the same thing. Is this a signal that we will see a period of calm in the markets? The next few trading sessions will be highly indicative of whether or not that could actually be the case.

Today, the sector standouts were seen in healthcare, technology services, electronic technology, retail trade, finance, and consumer durables. The losers today were typically found in energy minerals producers, consumer non-durables, and communications. It will be important to remember here that not all sectors will benefit from the rallies (if those rallies are, in fact, unfolding in this part of the year).

If we take a step back and try to look at these markets from a broader perspective, we can see that all of the main benchmarks have moved back into positive territory. On a YTD basis, the Dow is up 0.12%, the S&P 500 is up 1.31%, and the NASDAQ is up 5.68%.

This is not exactly what one would call a "forceful bear market," even though it may have seemed as though we were in the midst of one several times this year. The markets took a breather today because that is what was needed (a period of consolidation). These periods validate gains and bull markets. They are essential parts of the system.

After all, that is what the financial market is: a system. An organism. A living being that needs to pause and rest as much as it needs to thrive and flourish. Without these types of trading scenarios, bull rallies eventually become vulnerable to collapse. This is why trading conditions over the next few sessions will be critically important in terms of how they could influence stock valuations and define sentiment for the remainder of this month.

Limit risk, exercise patience, maximize returns

Richard Cox


New Option Plays

Rebound Underway

by Jim Brown

Click here to email Jim Brown

Editors Note:

Tech stocks are coming back and new highs are not far away. The Q1 earnings cycle is providing the motive power for the tech sector and CRM is riding the wave.

 

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


NEW DIRECTIONAL CALL PLAYS

CRM - Salesforce.com - Company Profile

Salesforce.com, inc. develops enterprise cloud computing solutions with a focus on customer relationship management. The company offers Sales Cloud to store data, monitor leads and progress, forecast opportunities, and gain insights through analytics and relationship intelligence, as well as deliver quotes, contracts, and invoices. It also provides Service Cloud, which enables companies to deliver personalized customer service and support, as well as a field service solution that enables companies to connect agents, dispatchers, and mobile employees through a centralized platform, on which they can schedule and dispatch work, and track and manage jobs in real-time. In addition, the company offers Marketing Cloud to plan, personalize, and optimize one-to-one customer marketing interactions; Commerce Cloud, which enables companies to enhance engagement, conversion, revenue, and loyalty from their customers; and Community Cloud that enables companies to create and manage branded digital destinations for customers, partners, and employees. Further, it provides Quip collaboration platform, which combines documents, spreadsheets, apps, and chat with live CRM data; Salesforce Platform for building enterprise apps, as well as artificial intelligence (AI), no-code, low-code, and code development and integration services, including Trailhead, Einstein AI, Lightning, Internet of Things, Heroku, Analytics, and AppExchange; and various solutions for financial services, healthcare, and government. Additionally, the company offers professional cloud services, such as consulting and implementation services; training services, including instructor-led and online courses; and support and adoption programs. It provides its services through direct sales; and through consulting firms, systems integrators, and other partners. Company description from FinViz.com.

Earnings May 30th.

Salesforce is rebounding strongly and with earnings over a month away they are set to benefit from earnings beats by everyone else. Oppenheimer said they were positive on the sector and the stock. They recommended buying the leader and that is Salesforce. Jefferies expects the stock to gain another $10 to $132 in the short term. They pointed to the many engines of growth powering Salesforce earnings. Field checks revealed enterprise business growth was strong in the Americas and even stronger internationally. In surveys, respondents now pegged Microsoft as a major competitor at below 60% after being over 70% in a prior survey. That means Salesforce is pulling away from Microsoft in market share and customer satisfaction.

Shares have rebounded from $112 to $124 in a choppy market over the last three weeks using the two steps forward, one step back method of growth. Over the last two days the pattern has accelerated and we could be looking at a new high over the next couple of weeks.

Buy June $130 call, currently $3.20, initial stop loss $118.25.


NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays



In Play Updates and Reviews

Earnings Drag

by Jim Brown

Click here to email Jim Brown

Editors Note:

IBM cost the Dow 83 points after losing $12 in the regular session. Without IBM the Dow would have been up 45 points. Actually it would probably have been up more since the negative drag on the ETFs and the market also held the S&P back. With the Nasdaq, S&P and Russell closing mildly positive I am going to call this a win for the bulls. Tomorrow is a new day and IBM will not be the anchor again.



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:

CAT continues to rebound steadily and reached resistance at $156. The was only a slim chance it would return to $160 or greater so I dropped the April $160 call from the portfolio. If we do get a surge from here, remember to close the April position on Friday.

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.

Update 4/4: We currently have an expiring April call on CAT that is not likely to recover after the post tariff news dips. However, CAT shares are so depressed they represent a great opportunity for a long-term investor once this craziness is over. Earnings are April 26th. I am recommending we add a May $155 call and hold over earnings. If they report good earnings again we should get a very nice oversold bounce. The 200-day average should be strong support.

Update 4/11: CAT declared a 78-cent dividend payable May 19th to holders on April 23rd. They have paid higher dividends to shareholders for 24 consecutive years. The earnings date changed to April 24th. Buckingham Research reiterated a buy with a $170 price target saying they were in the early stages of a multiyear earnings expansion story.

Position 4/5/18:
Long May $155 Call @ $2.54, see portfolio graphic for stop loss.

Position 2/6/18:
Closed 4/17: Long APR $160 Call @ $4.03, expired, -$4.03 loss.


CVLT - Commvault - Company Profile

Comments:

No specific news. Another decent gain and another new high.

Original Trade Description: March 21st.

Commvault is a leading provider of data protection, cloud and information management solutions, helping companies worldwide activate and drive more value and business insight out of their data. With solutions and services delivered directly and through a worldwide network of partners and service providers, Commvault solutions comprise one of the industry's leading portfolios in data protection and recovery, cloud, virtualization, archive, file sync and share. Commvault has earned accolades from customers and third party influencers for its technology vision, innovation, and execution as an independent and trusted expert. Without the distraction of a hardware business or other business agenda, Commvault's sole focus on data management has led to adoption by companies of all sizes, in all industries, and for solutions deployed on premise, across mobile platforms, to and from the cloud, and provided as-a-service. Commvault employs more than 2,700 highly- skilled individuals across markets worldwide. Company info from Commvault.

The amount of data stored in computer systems doubles every six months and all that data has to be backed up, normally in several different places. Enterprise customers need to be able to access archived data, ensure its redundancy and analyze the data contained in these massive databases. This is no longer a task for home grown backup systems. Enterprise customers have to have a reliable suite of applications to manage this valuable resource.

Commvault recently partnered with HP Enterprise to be park of their enterprise suite of products. This is going to further expand their market share and name recognition.

The missed by a penny on Q4 earnings and shares tanked. They quickly recovered and appear poised to break out again.

Update 4/11: Comvault announced expanded migration, management, protection and activation of data on Microsoft Azure Stack.

Position 3/22/18:
Long May $60 call @ $2.60, see portfolio graphic for stop loss.


DXCM - DexCom - Company Profile

Comments:

No specific news. Shares rebounding slowly after the dual downgrades.

Original Trade Description: April 1st.

DexCom, Inc., a medical device company, focuses on the design, development, and commercialization of continuous glucose monitoring (CGM) systems in the United States and internationally. The company offers its systems for ambulatory use by people with diabetes; and for use by healthcare providers. Its products include DexCom G5 mobile continuous glucose monitoring system to communicate directly to patient's mobile device; DexCom G4 PLATINUM system for continuous use by adults with diabetes; and DexCom Share, a remote monitoring system. DexCom, Inc. has a collaboration and license agreement with Verily Life Sciences LLC to develop a series of next-generation CGM products. The company markets its products directly to endocrinologists, physicians, and diabetes educators. DexCom, Inc. was founded in 1999 and is headquartered in San Diego, California. Company description from FinViz.com.

DexCom is the leader in continuous glucose monitoring. Last week the FDA approved a new device called the DexCom G6 CGM System. This device can be used by itself of in conjunction with other devices like automated insulin dosing systems. This is the first device of its type to be approved by the FDA.

The features include:

No more finger pricks for testing.
A 28% lower profile than other CGM devices.
Acetaminophen blocking for no medication interference.
Predictive low blood sugar alerts to prevent hypoglycemia before it occurs.
Extended 10-day sensor, 43% longer than prior sensors.
Automatically sends glucose readings to a monitor or smart phone/watch every 5 minutes.
Mobile app sends the monitoring information to up to 5 people.
Customizable alarms and alerts for high and low blood sugar.

I am not a diabetic but I read several comments from diabetics who were praising this device. Analysts believe this could translate into millions of patient upgrades in the coming years. LINK

Investors appear to be excited by the news with the stock rising for the last month with very little volatility related to the market. They are up $20 over that period but are showing no signs of exhaustion. The FDA approval was last Wednesday. Shares are at resistance at $75 and a breakout here could see an extended rally.

Update 4/4/18: Everything was going very well until Goldman Sachs initiated coverage with a sell rating and Guggenheim initiated with a neutral rating on Wednesday. Shares declined -$2.50 on the new coverage. The new coverage was skillfully done with the stock at the resistance highs.

Position 4/2/18:
Long June $80 call @ $3.20, initial stop loss $68.35.


EXPE - Expedia - ETF Profile

Comments:

No specific news. Minor uptick but we are out of time. We are 28 cents in the money so there is still a chance we could see some further gains before expiration on Friday.

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.

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.

Update 3/21/18: Orbitz, a subsidiary of Expedia said 800,000 customer records including payment info were stolen in a cyberattack. The attack happened over the last year but was just discovered last week.

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


JPM - JP Morgan - Company Profile

Comments:

No specific news. The financial sector is still crashing despite good bank earnings. With the June option down to 35 cents I removed the stop loss because we have plenty of time and the remaining risk is minimal.

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.

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.

Update 3/16/18: It was 10-years ago Friday that JP Morgan announced it was buying Bear Stearns for $2 a share. This was less than the value of the Bear Stearns real estate. JPM along with the Fed kept the bank from imploding completely but began an 8-year series of litigations that cost JPM billions. In the end the acquisition of the traders and clients propelled JP Morgan to overtake Goldman Sachs as the biggest trader in bonds. While the acquisition was painful it has helped increase JPM's annual profits from $14 billion to $24 billion over the last ten years.

Update 4/14/18: The bank reported earnings that rose 35% to an all time high on a 10% increase in revenue. The company reported earnings of $2.37 that beat estimates for $2.28. Net revenue was $28.52 billion beating estimates for $27.68 billion. Net interest income rose 9% to $13.5 billion. Lower revenue from investment banking (-7%) was a serious drag on performance.

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


NAV - Navistar - Company Profile

Comments:

No specific news. Holding at 2-month highs.

Original Trade Description: April 7th.

Navistar International Corporation manufactures and sells commercial and military trucks, diesel engines, school and commercial buses, and service parts for trucks and diesel engines worldwide. The company operates through four segments: Truck, Parts, Global Operations, and Financial Services. It manufactures and distributes Class 4 through 8 trucks and buses in the common carrier, private carrier, government, leasing, construction, energy/petroleum, military vehicle, and student and commercial transportation markets under the International and IC brands; and designs, engineers, and produces sheet metal components, including truck cabs and engines. The company also provides customers with proprietary products needed to support the International commercial and military truck, IC bus, and engine lines, as well as other product lines; and a selection of other standard truck, trailer, and engine aftermarket parts. In addition, it designs and manufactures mid-range diesel engines, as well as provides customers with additional engine offerings in the agriculture, marine, and light truck markets; sells engines to original equipment manufacturers (OEM) for various on-and-off-road applications; and offers contract manufacturing services under the MWM brand to OEMs for the assembly of their engines. Further, the company provides retail, wholesale, and lease financing of products of its trucks and parts, as well as financing for wholesale and retail accounts receivable. It markets its commercial products through an independent dealer network, as well as through distribution and service network retail outlets; and its reconditioned used trucks to owner-operators and fleet buyers through its network of used truck dealers. As of October 31, 2017, it had approximately 728 outlets in the United States and Canada, and 87 outlets in Mexico. Navistar International Corporation was founded in 1902 and is headquartered in Lisle, Illinois. Company description from FinViz.com.

Volkswagen bought 17% of Navistar in March 2017 in what both companies thought would produce $500 million in cost savings through synergies. Now that Navistar has turned almost profitable, the odds are good Volkswagen may want to acquire the rest of the company according to Jefferies.

The company posted a loss of 24 cents that beat estimates for a loss of 41 cents. However, revenue of $1.91 billion barely missed estimates of $1.92 billion. The guided for full year revenue of $9.25 to $9.75 billion, up from $9.0-$9.5 billion. They guided for truck deliveries of 360,000-390,000, up from 345,000-375,000. Orders for class 8 trucks jumped 76% in February as the economy prepares to spend their tax cut dollars. Truck revenue rose 21.8% in the quarter with total revenue up 15%.

Gabelli & Company upgraded the stock from hold to buy.

Shares have been rising from an apparent post earnings bottom at $32 despite the ugly market. Options are cheap.

Position 4/9/18:
Long July $37 call @ $2.70, see portfolio graphic for stop loss.


NKE - Nike Inc - Company Profile

Comments:

No specific news. Nike's revolving door saw four more executives leave in review of workplace diversity issues. Shares failed to extend their rebound from the March dip and we dropped the expiring April call this morning. I tightened the stop loss in case the current decline continues.

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.

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.

Update 2/23: Nike reported earnings of 68 cents on revenue of $9 billion, an increase of 7% and beat estimates for $8.8 billion. Analysts were expecting earnings of 53 cents. There was a $1.25 per share hit from tax reform. Shares fell before the report then spiked at the open on Friday before collapsing again with the market.

Update 4/1: Nike and the NFL renewed their partnership through 2028. Nike will supply all 32 teams with uniforms and accessories for the next 10 years. No terms were given. Nike just ousted Adidas as the provider for the NBA with an 8-year deal that reportedly cost Nike $1 billion.

Update 4/4: We currently have an expiring April call on NKE and the stock is rebounding strongly from the correction dip. Earnings are June 1st and I am recommending we add a June call to profit from any breakout over current resistance, which is exactly where it closed today. Any further gains could trigger additional buying. Nike is one of the strongest stocks in the Dow over the last several weeks. They did not decline as far as the other stocks with tariff scares. A breakout appears imminent.

Position 4/5/18:
Long June $70 call @ $2.10, see portfolio graphic for stop loss.

Position 2/5/18:
Closed 4/17: Long April $70 call @ $1.94, expired, -1.94 loss.


NTNX - Nutanix Inc - Company Profile

Comments:

The company said 74% of federal government customers had switched to the AHV hypervisor in 2017. Enterprise cloud OS nodes sold to federal agencies are leveraging AHV compared to 30% adoption worldwide. The company said they signed 20 new federal government customers with billings of more than $1 million each in 2017. That was an 82% increase from the prior year. Shares closed at a new high.

Original Trade Description: April 1st.

Nutanix is a global leader in cloud software and hyperconverged infrastructure solutions, making infrastructure invisible so that IT can focus on the applications and services that power their business. Companies around the world use Nutanix Enterprise Cloud OS software to bring one-click application management and mobility across public, private and distributed edge clouds so they can run any application at any scale with a dramatically lower total cost of ownership. The result is organizations that can rapidly deliver a high-performance IT environment on demand, giving application owners a true cloud-like experience. Company description from Nutanix.

The company posted a net loss of 39 cents compared to 54 cents in the year ago quarter. Free cash flow rose from $7.1 million to $32.4 million. Revenue rose 44% to $286.7 million while billings rose 57% to $227.4 million. They had 8,870 customers at the end of the quarter, a 65% increase. The number of customers billing more than $1 million a year rose 33% to 541.

In late March Goldman Sachs removed Nutanix from their conviction buy list because of the strong gains. Shares faded with the market but have now begun to rebound.

Position 4/16/18:
Long June $57.50 call @ $4.27, see portfolio graphic for stop loss.
Optional position: Short June $70 call @ $1.32, see portfolio graphic for stop loss.
Net debit $2.95.


RHT - Red Hat - Company Profile

Comments:

No specific news. The company is set to host the largest Red Hat conference ever at the 14th annual even in San Francisco on May 8th.

Original Trade Description: April 11th.

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

Red Hat saw revenue rise 22.8% to $772.3 million in Q4 to beat estimates of $753 million. Earnings of 91 cents beat estimates by 10 cents. The company raised revenue guidance for Q1 but maintained earnings guidance. BMO raised the target price to $180 and Stifel boosted their price to $172.

Shares broke through strong resistance at $156 on Tuesday to close at a new high but gave back a little in Wednesday's weak market.

Red Hat has a great chart over the last year and now that it is in new high territory, the gains should continue. This is a true growth stock in the tech sector.

Position 4/12/18:
Long June $165 call @ $4.70, see portfolio graphic for stop loss.
Optional Short June $175 call @ $2.10, see portfolio graphic for stop loss.
Net debit $2.60.


SPY - S&P-500 ETF - ETF Profile

Comments:

Back above the 100-day average but still well off the March highs. We dropped the April $275 call today but there is a slim chance it could be barely in the money on Friday. If the SPY does near $275, watch it carefully and close that April position.

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.

Update 4/4: Finally a strong rebound from support. This could be the launch point for the Q1 earnings. If we are going to have a rally into Q1 earnings, today could have been the start. There was a big rebound from the February support low and we have now had a successful retest of the initial correction. We have an expiring April option and I am recommending we add a May position to capture any earnings rally.

Position 4/5/18:
Long May $270 call @ $4.09, initial stop loss $254.65.

Position 2/22/18:
Closed 4/17: Long April $275 call @ $4.00, expired, -4.00 loss.


V - Visa - Company Profile

Comments:

Visa declared a 21-cent quarterly dividend payable June 5th to holders on May 18th. Shares have rebounded back to resistance and close to a new high.

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.



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