Option Investor

Daily Newsletter, Saturday, 4/21/2018

Table of Contents

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

Market Wrap

Earnings Surprise

by Jim Brown

Click here to email Jim Brown

Roughly 87 S&P companies have reported Q1 earnings growth averaging 28% and the market is down. Surprise!

Weekly Statistics

Thursday Statistics

Just a week ago, the U.S. and allies were bombing Syria on a Friday night. The markets rallied early in the week because that headline threat was over. Unfortunately, that was only one headline.

This week another war flared up and the market sank again. China blocked the Qualcomm/NXP Semiconductors acquisition without any material grounds simply because that would hit back at the U.S. for the tariff attacks. The U.S. hit back with a 7-year ban on U.S. firms exporting components and products to Chinese communications giant ZTE. That means no components from Qualcomm and no operating software from Google for its smartphones. In 2017, ZTE admitted to sending telecom components to Iran and North Korea in violations of sanctions. They agreed to pay $1.19 billion in penalties. The U.S. denial of export privileges is clearly retaliation for the Qualcomm block and suggests the trade war is heating up faster than anyone expected. The markets suddenly developed indigestion and began retracing their gains.

In the Q1 earnings cycle, there were many companies posting great results but there were also a large number of companies posting spectacular declines after their reports. Analysts were especially active with downgrades of the chip sector and chip stocks as well as Apple, the largest market cap company on the Dow and Nasdaq.

The positive news flow turned negative around what is expected to be a spectacular quarter for earnings and stocks lost traction. Add in a rapidly rising yield on the ten-year treasury and weekend event risk and it was a perfect storm for stocks.

The yield on the ten-year rocketed to 2.95% and the highest level since 2014 and very close to a 7-year high. The high close in 2014 was 3.026%. This is widely believed to be the panic point. If the yield touched 3% and then declines, the market will recover. If it busts through 3% and continues climbing, the market is going to react badly. Rising rates cause problems throughout the economy from car loans, mortgages, business loans and even the debt payments on the government debt. The U.S. has enjoyed very low interest rates since 2011 and we ran trillions of dollars in deficits without any material economic harm because of those low interest rates. A rising rate in 2018 could short circuit the current economic rally and kick us back into a recession in 2019. The Fed will have to consider these possibilities when they meet in early May. Recent comments by Fed members, suggests they were ready to accelerate rate hikes rather than maintain their "gradual pace" promises.

There was only one economic report on Friday and it was ignored. The state and local employment report for March showed that unemployment rates were lower in 4 states, higher in 1 state and unchanged in 45 states. Seventeen states reported jobless rate decreases over the trailing 12 months. Hawaii had the lowest unemployment at 2.2% and Alaska was the highest at 7.3%. Seventeen states had lower unemployment rates than the national 4.1% rate.

Next week has a relatively lackluster calendar with home sales and two manufacturing surveys filling out the schedule. The biggest report is the Q1 GDP and consensus estimates are for 2.5% down from 2.9% in Q4. If we actually got the 2.5% rate that would be way over the +0.81% average for the prior 8 years. Q1 is typically a low point for the year as the holiday activity in Q4 subsides and cold weather keeps people indoors.

The Atlanta Fed real time GDP Now is normally high in their forecasts. This year they are predicting a 2.0% growth rate. While 2.5% would be great, I seriously doubt any analyst is going to complain about a 2% rate given the very low numbers over the last 8 years.

The FOMC meets the following week and they are not expected to hike rates at that meeting but the looming cloud of Fed rate hikes will hover over the market even though it should be a benign meeting.

Apple (AAPL) was the biggest weight on the market on Friday. The stock fell $7 and subtracted the equivalent of 50 Dow points and 31.5 Nasdaq points or one third of the Nasdaq's loss and one quarter of the Dow's loss.

The problem started earlier in the week when Taiwan Semiconductor warned that revenue would be down significantly, up to $1 billion, due to a decline in the sales of smartphones. They referenced slow sales of a high dollar phone by a major manufacturer and that is widely assumed to be Apple and the iPhone X. This started the selling earlier in the week and all the component companies declined.

On Friday, a Merrill Lynch analyst said unit sales volume for Q1 could be as much as 5 million units below the consensus estimate of 42.5 million. Since 62% of Apple's revenue comes from the iPhone that would be a major hit to revenue.

Morgan Stanley lowered their forecast from 40.5 million to 34 million, suggesting revenue would decline significantly since they shipped 41 million phones in the year ago quarter. The analyst did recommend buying a post earnings dip and she reiterated her $200 long term price target.

Canaccord Genuity cut their forecasts from 43.7 million to 39.4 million. While Canaccord expects Apple to produce an in line quarter this time they warned that the next quarter could be rough due to over ambitious consensus estimates.

Apple has always said their future was in China because of the large population but the iPhone X is not selling well there and the Chinese government is likely to use Apple as a whipping post in the tariff war.

Recent product leaks suggest Apple is going to back down from their top of the line fully featured $1200 phone and offer several models of a cheaper version. They reportedly have an iPhone X clone with a 6.1-inch LCD screen that they can make for $550 each with one camera and an aluminum body. They are reportedly going to slash the price on the iPhone X but replace it with a top of the line iPhone X Plus starting at the $999 price point.

Another of Apple's problems has been the shortage of OLED screens. Reportedly, Samsung cannot make then in large enough quantities and Apple's own efforts at making the screens has failed for the time being. This is why they are dropping back to LCD screens at cheaper price points.

Nike (NKE) actually posted a gain on Friday despite announcing the exits of 3 more executives, bringing the total to 9. These are not new hires. Brand President Trevor Edwards had been there for 25 years. The press claims the company had gotten complaints about inappropriate behavior in the ranks and they were cleaning house. This is going to lighten their salary cap load a lot but it could also slow down their restructuring. Susquehanna analysts warned there were more departures coming. With that much experience and talent being shown the door, "there will be disruption" according to those analysts. Nike is trying to reach $50 billion in sales by 2020 and this is going remove some critical parts from that Nike machine.

GE reported earnings of 16 cents that beat estimates for 12 cents. Revenue rose 7% to $28.66 billion, beating the estimates for $27.56 billion. Obviously, analysts have been talking about how bad the quarter was going to be ever since it started. This was a case of everyone being cautious.

Power revenue fell -9% while aviation revenue rose 7%. Oil and gas revenue rose 74% and healthcare revenue rose 9%. The CEO said Q1 was just an example of the future growth as their restructuring plan is enacted. While the stock rose slightly on the beat, analysts pondered whether this was as good as it gets. One analyst expected the shares to be firm until the shareholder meeting then retest the lows. The meeting is on April 25th. Investors may remain positive until the meeting then become frustrated with weak guidance.

Stanley Black & Decker (SWK) shares were crushed after posting earnings of $1.39 that beat estimates for $1.36 and rose from $1.29 in the year ago quarter. However, net income fell from $393.7 million to $170.1 million. Revenue was $3.21 billion and beat estimates for $3.1 billion. What killed the stock was lowered GAAP guidance from $7.80-$8.00 to $7.40-$7.60. However, the company maintained its non-GAAP guidance at $8.30-$8.50 and analysts were expecting $8.43. Shares fell more than $10 on the report.

Honeywell (HON) reported earnings of $1.95 that beat estimates for $1.90. Revenue of $10.39 billion beat estimates for $10.02 billion and rose nearly 10% from the year ago level. Aerospace technologies helped offset slow growth in home and building technologies, performance materials and safety and productivity solutions. They raised their full year guidance from $7.75-$8.00 to $7.85-$8.05 and revenue from $41.8-$42.5 billion to $42.7-$43.5 billion. The stock has had a tough 2018 after a strong 2017. Shares rallied $2.50 on the report.

Schlumberger (SLB) reported earnings of 38 cents that beat estimates for 37 cents. Revenue of $7.829 billion barely beat estimates for $7.811 billion. The company said weakness in South America was offset by strength in Asia. The CEO warned that OPEC's cuts had brought the market back into balance but the three years of low prices had left the future global production in doubt. Companies have reduced investment in energy for three years and there is a long lead-time to restart that process.

The CEO said "Venezuela was in free fall, Libya and Nigeria were producing near full capacity, the potential of new sanctions against Iran and rising geopolitical risks made the potential for a global shortfall very real." The only countries with excess future capacity are the U.S., Russia, Saudi Arabia, Kuwait and the UAE. "Without increased E&P spending the world is likely to face shortages" within the next three years.

Skechers (SKX) reported earnings after the bell on Thursday and paid the price on Friday. The company reported earnings of 75 cents and analysts were expecting 76 cents. Revenue rose 17% to $1.25 billion also beating estimates for $1.20 billion. They guided for Q2 sales of $1.12-$1.145 billion and analysts were expecting 1.16 billion. They guided for earnings of 38-43 cents and analysts were expecting 55 cents. The result was not pretty. Shares fell 27% to $30.

With 87 S&P companies reported, 79.3% have beaten estimates. Some 71.3% have beaten revenue estimates. The Q1 earnings growth is expected to be 20.0% even though it is much higher today at a 28% average for the early reporters. Q1 revenue is estimated to grow 7.5%. There have been 73 guidance warnings for Q1 and 61 positive guidance upgrades. The current forward PE is 16.6. There are 181 S&P companies reporting this week including 12 Dow components.

This is the start of the tech earnings cycle with Google, Facebook, Amazon, Ebay, Paypal, Intel, Microsoft and others. Google starts the party on Monday and then six Dow components report on Tuesday, all before the bell. With Google on Monday after the close and six Dow components before the open, Tuesday is likely to be highly volatile.

Jeff Bezos surprised everyone last week when he disclosed in a letter the company had more than 100 million prime subscribers. Previously the subscriber numbers had been a very guarded secret. Since prime subscribers buy more than a regular subscriber it should be no surprise that the company shipped more than 5 billion packages to those members in 2017. Spend a few seconds and contemplate how much cardboard that took for boxes and how many thousands of truckloads of packing material like paper and bubble wrap.

I think this was a gloat for Bezos after President Trump had spent a couple weeks picking on him. If Bezos wanted to run for president, he would be president. Not only could the guy cut costs to the bone and make everything run smoother but would probably make a buck at the same time. Trump should sell him the Postal Service.

I believe Bezos was calmly making a statement that Amazon has 100 million close friends and you better not pick on us. If the president forces the Postal service to raise rates, Amazon could just quit using them. That would cost the USPS billions of dollars in lost revenue while their high costs would remain the same.

Analysts believe this is the year when Amazon shifts into apparel mode. They have already done surveys of prime customers showing they are twice as likely to buy apparel at Amazon than in the past. Shop, click, try it on, send it back for free. There is no risk and far less time involved than going to town and hitting all you favorite stores.

Apple was thought to be the most likely company to hit the $1 trillion level in market cap. Even after the meltdown last week, they still have a $841 billion market cap. Amazon and Microsoft are neck and neck at $750 billion. After Apple's decline, analysts are betting Amazon and Microsoft will beat them and it is a dead even race between those two. My money is on Amazon but Microsoft has 8 billion shares and Amazon only has 485 million. That means a $1 gain in MSFT is worth far more in market cap than a $1 gain in Amazon. About $7.5 billion more. If Amazon returns to $1,600 that would add $36.5 billion to its market cap. Amazon sprints higher and Microsoft plods higher. It will be an interesting tortoise/hare race to watch.

Brent crude rose to $74.07 on comments from Schlumberger, Saudi Arabia and Russia and headlines about falling crude production around the world, production bottlenecks in the Permian, pipeline backlogs from the Canadian oil sands, etc. Geopolitical events like the upcoming decertification of the Iran nuclear deal could also impact available oil on the market. The continued attacks on Saudi Arabian oil facilities have been unsuccessful so far but they only need to get lucky once.

Crude is at levels not seen since 2014 and there does not appear to be any indications of profit taking in the near future. Oil prices always rise by Memorial Day and that is only five weeks away.


I have to admit I am more than a little frustrated by the market action. Typically, it takes 4-6 weeks from the initial dip until a sustained rebound is achieved. Last week was the tenth week since the February bottom and we still do not have a sustained rebound. Given the outstanding earnings expected this quarter, we should have been surging to new highs.

Now that we are entering the heat of the cycle over the next three weeks we are moving ever closer to the post earnings depression cycle. Since January, I have been writing about potential market weakness in late April and May. Given our lack of a sustained rebound, I am beginning to doubt we will move significantly higher by mid May. Any material rally would have to start next week if it is going to have a chance of posting any significant gains over the coming weeks.

The S&P closed twice above 2,700 and the 100-day average but collapsed back below prior resistance at 2,675. There may have been some weekend event risk fears on Friday given the resumption of the tariff talk but the geopolitical issues have faded. There is nothing to prevent a rally other than an irrational fear about 3% yields and a resumption of tariff talk. You would think the importance of the tariff issue would have faded since it will be six months or more before any actual tariffs will be implemented. However, it is the non-tariff retaliation that is weighing on the market.

If we did have another rebound on Monday, I am not sure I would believe it. Last Mon/Tue were outstanding, although on low volume. Another rebound would find the same resistance and bears would be encouraged if volume was still light.

The Dow tried twice to push through the 100-day with no success. The decline put it back below prior resistance at 24,700 and 24,500. Both of those areas will extract a momentum penalty when the Dow tries to rebound above them again.

The Dow is not normally reactive to moving averages but the 100-day has been both support and resistance over the last three months. After multiple failures to cross it, the average becomes stronger because more traders have noticed and are waiting to short it at that level while the bulls are waiting for a breakout over that level to go long.

Friday's afternoon low was -289 and there was only a minor bounce at the close.

The Nasdaq was dragged lower by Apple with a -31 point hit to the index. Despite the -92 point drop, the Nasdaq managed to close above the prior resistance at 7,100 and the 100-day at 7,140. This is a critical level and would be the perfect point for a rebound to start next week. Conversely, a material break below 7,100 would send low conviction investors running to the sidelines.

With a large number of big cap tech stocks set to report next week, they will set the tone for sentiment for the tech sector. Nobody expects any disappointments but there were a lot last week we did not expect either. It has been the guidance that has been tripping up the earnings reporters and causing the big post announcement declines.

The small cap Russell had been surging higher and coming within only a few points of the resistance highs. The return of high yields and high oil prices triggered some profit taking. Interest rates and oil prices are kryptonite for small cap stocks. Support is prior resistance at 1,550.

I am worried about the market's future. We are rapidly running out of April and drawing closer to the summer doldrums. Last year, (past performance no guarantee, etc) the S&P traded in a very narrow 25 point range in May except for the headline drop when Comey released his notes claiming President Trump wanted him to drop the Flynn investigation and begin arresting reporters for publishing leaks. The S&P dropped 50 points in two days. June had a narrow 40-point range. Compared to our recent volatility the market was dormant.

May, June, July and August do not have a good record for stock market performance. Given the recent volatility and extreme uncertainty, this summer may prove to be especially volatile.

North Korea said over the weekend it is suspending its nuclear weapon and missile testing because they have achieved their goals and the country will shift its emphasis towards economic recovery. While the reasons for this change are clear to most, the news could spark an opening rebound on Monday.

I would recommend against entering a lot of long positions on a rebound. One or two days does not make a trend. The indexes need to rebound above current resistance before I would turn bullish. Entering a few small long positions with tight stops could cure the urge to trade without risking a lot of money. Be patient a trend will eventually appear.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"The democracy will cease to exist when you take away from those who are willing to work and give to those who are not."

Thomas Jefferson

If you like the market commentary you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now

Index Wrap

Time is Fleeting

by Jim Brown

Click here to email Jim Brown
The Q1 earnings are here but the expected rally has failed to appear.

The market is not acting like we have 20% earnings growth. The market is acting like earnings growth is rising from 5% to 7%. There is no excitement and no conviction on the part of buyers. Volume has been exceedingly light. Over the last week, volume averaged 6.26 billion shares and on expiration Friday, it was only 6.4 billion shares. It actually declined 150 million shares from Thursday. The Dow was down -289 points at the lows on Friday and even that did not prompt a huge surge.

The A/D line for the total market was 5:2 decliners over advancers and fortunately, the volume was light. Had there been any increase in volume with that ratio the market decline would have been much greater.

You may remember that Monday and Tuesday saw the Dow rise 425 points. That prompted a huge jump in investor sentiment of 11.7% to the bullish camp. This survey ends on Wednesday. Thursday and Friday were both sharply lower. Volume was the lightest on Mon/Tue at 5.96 billion shares per day. This was absolutely no conviction on the part of buyers.

The first two days of the week did help to lift the A/D line on the S&P to a new high but it came back down just as quickly. There is nothing we can derive from this chart that we could not get from the index charts this week.

The Volatility Index declined to 15 early in the week and only rebounded to the mid 16 range even though the markets were selling off. This suggests investors do not believe we are going lower and they are not buying S&P puts OR they are totally complacent because they are not in the market. You only have to buy insurance puts if you are heavily leveraged to the upside.

With market volume so low, I am leaning to the uninvested and complacent excuse.

We had a serious meltdown in the chip sector last week and the $SOX ran away from the Nasdaq. In theory, this suggests the Nasdaq will follow until they meet again sometime next week. The Apple downgrades and rumors plus the Taiwan Semi warning and downgrade, should weigh on the chip sector for a couple more weeks. The pressure may not release until after Apple's earnings in early May.

The chip sector always leads the Nasdaq and the direction is down.

The Nasdaq retraced its early week gains to retest support at 7,111 and then rebound back over the 100-day at 7,140. These are critical levels for next week. The index must hold over the 7,111 level or it could further spook investors causing another big drop.

The Dow fell back below prior resistance at 24,500 after failing at the 100-day on two attempts. The Dow has the most risk because of the narrow composition and the most stocks susceptible to potential tariff retaliation. It is entirely possible we could see a retest of 23,500 if the tariff headlines continue to flow.

The S&P chart is a clone of the Dow only with different numbers. The index traded over the 100-day twice before falling back to close under prior resistance at 2,675 on Friday. This is a critical level and the 100-day at 2,703 has developed even stronger armor after the failure early last week. That will make it tougher to penetrate on the next attempt.

The Russell was the strongest index last week until the oil prices and interest rates spiked. Both are huge headwinds for small cap stocks. The Russell is well over the 100-day but falling back towards the prior resistance at 1,550. The small caps may be tariff proof but they are in danger from high gasoline prices.

I would be cautious about adding long positions until the market finds a direction. We are technically moving higher over the short term but still in a downtrend since January. Unless you are a day trader and quick on the trigger, these 400-500 point swings from day to day is murder. This is why there is no volume. Experienced investors are just waiting for a trend to appear. They have given up buying the dips and are waiting patiently for a sign. April is expiring and the closer we get to May the less likely they will be ready to go long.

I would remain cautious until an actual trend appears.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays


by Jim Brown

Click here to email Jim Brown

Editors Note:

Some companies can remain under the radar but still be the best in their field. Korn Ferry is one of those companies. Most investors have never heard of them.


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


KFY - Korn Ferry Intl - Company Profile

Korn/Ferry International, together with its subsidiaries, provides talent management solutions worldwide. It operates through three segments: Executive Search, Hay Group, and Futurestep. The company provides executive recruitment services that are used to fill executive-level positions, such as board directors, chief executive officers, chief financial officers, chief operating officers, chief information officers, chief human resource officers, and other senior executive officers for clients in the consumer, financial services, industrial, life sciences/healthcare provider, technology, and educational/not-for-profit industries. It also offers talent strategy, succession management, and leadership development, as well as rewards, motivation, and engagement solutions to assist clients with their ongoing assessment, compensation, and leadership development efforts. In addition, the company provides various talent acquisition solutions, including recruitment process outsourcing, project recruitment, professional search, talent consulting and employer branding, and individual professional search and consulting services. It serves public and private companies, and middle market and emerging growth companies, as well as government and non-profit organizations. Korn/Ferry International was founded in 1969. Company description from FinViz.com.

Earnings expected on June 5th.

The company reported Q4 earnings of 70-cents that beat estimates for 59 cents. Revenue was $447.6 million and beat estimates for $416.5 million. They guided for the current quarter for earnings of 69-73 cents with revenue of $448-$462 million. Analysts were expecting $436.9 million.

With the earnings, the CEO stated clearly their current mission. "Today Korn Ferry is truly a global organizational consulting firm. We help companies design their organization - the structure, the roles and responsibilities, as well as how they compensate, develop and motivate their people. As importantly, we help organizations select and hire the talent they need to execute their strategy."

When you hear that Nike terminated 9 of their top level employees you can bet they are turning to Korn Ferry for help in replacing them. This is the top level go to company for executive search and placement.

With employment very tight, a company cannot just place an ad in a newspaper. Top level people are not hired from the paper. They are shopped, tracked and monitored throughout their entire career.

The company is benefitting from the tight labor market and business has never been better.

Buy June $55 call, currently $2.00, initial stop loss $51.85.


No New Bearish Plays

In Play Updates and Reviews

Sentiment Change

by Jim Brown

Click here to email Jim Brown

Editors Note:

In just two days market sentiment has gone from bullish to bearish. The beginning of the week was all rainbows and unicorns with strong gains and a bright outlook. The last half of the week took a turn through an enchanted forest with goblins at every turn. Their spells turned into daily headlines that killed individual stocks and sectors. Sentiment better improve quickly next week or we are going back to retest the lows.

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

EXPE - Expedia
The long position was stopped at the open.

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


No specific news. Resistance at $156 held ahead of earnings next week. This is due to the recurring tariff headlines more than weakness in CAT.

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.

CRM - Salesforce.com - Company Profile


Salesforce is moving to develop a blockchain and cryptocurrency solution that they hope to demo at the Dreamforce 2018 conference in September. With more than 1,500 crypto currencies there needs to be a major app that can communicate in crypto speak.

Original Trade Description: April 18th.

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.

Position 4/19/18:
Long June $130 call @ $3.00, see portfolio graphic for stop loss.

CVLT - Commvault - Company Profile


Comvault extended data protection for government customers using the Amazon cloud. According to Comvault, "Now U.S. government agencies, System Integrators (SI) and private sector contractors can move, manage and use cloud-based data and workloads with increased security, speed, flexibility and reliability."

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


No specific news. Very minor decline.

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


No specific news. Shares dropped with the market at the open and our stop loss was hit immediately. This was a good thing since the option was expiring 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:
Closed 4/20: Long April $110 call @ $3.10, exit $1.05, -2.05 loss.

JPM - JP Morgan - Company Profile


No specific news. Yields on the 10-year rose to 2.95% and financials should have been positive but the market pulled them lower.

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


No specific news. Big decline over the last two days as transport sector crashed.

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.

NTNX - Nutanix Inc - Company Profile


No specific news. Only a minor decline from the 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.

Update 4/18: 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.

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


No specific news. Minor decline from the new high.

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


The market retraced much of its gains from early in the week and resistance at 2,700 on the S&P actually held after what looked like a minor break on Wednesday.

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


Visa was actually a bright spot in an ugly market with a gain instead of a loss. Resistance is holding.

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.

Update 4/18: Visa declared a 21-cent quarterly dividend payable June 5th to holders on May 18th.

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