Option Investor

Daily Newsletter, Saturday, 5/19/2018

Table of Contents

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

Market Wrap

Tick Tock

by Jim Brown

Click here to email Jim Brown

The May calendar is winding down and Memorial Day is the official start of summer.

Weekly Statistics

Thursday Statistics

Fortunately, June is typically a better month for the market than May. Since 1928, the S&P has lost an average of -0.1% in May and gained +0.7% in June. While those are not numbers that will send traders racing to buy something, it is the trend that matters.

The summer doldrums do not really appear until the July 4th weekend. The weeks before and after see volume grind to a halt and there is barely enough to move the market away from the flat line. Unfortunately, volume is a weapon of the bulls and without volume, the sellers gain the advantage.

There are summer rallies. They are relatively rare but when they appear they tend to cause a lot of short covering because the bears are already loading up for the normal Aug/Sep decline. In fact, since 1928 the S&P has averaged a 1.5% gain in July. That is a lot of flat years interspersed with a few major summer rallies. Percentages are from Yardeni Research.

Friday was negative for multiple reasons the largest of which was the return of the China trade worries. On Thursday evening there was a news story saying China had offered a package of trade terms that would cut the trade deficit by $200 billion. The futures rallied. On Friday, China said it did not make that offer and the story was incorrect. The market sold off again. Boeing spiked $7 on the original headline because part of the trade package was a commitment to buy a lot of Boeing planes. The stock did not decline when the headline was rebutted. The Boeing gain added roughly 49 Dow points and that kept the Dow in positive territory at the close.

The Nasdaq never traded in positive territory because of the Thursday earnings from Applied Materials. The chip sector sold off on the earnings commentary.

There were no material economic reports to pressure the market. In fact, the yield on the ten year treasury declined from Thursday's 3.11% to 3.067%. This should have been positive for stocks but the AMAT earnings, China trade and weekend event risk combined to keep the indexes in the red.

The combination of GDP estimates, oil prices, economic volatility, rising dollar, rising inflation and Fed commentary have priced in a 100% chance of a rate hike at the June meeting in three weeks. The September meeting has a 95.4% chance of a hike and the December meeting has risen to 50% chance of a hike.

This week we will get the FOMC minutes from the May meeting and of course, analysts are concerned about the possible emergence of a hawkish bias given the recent economic reports. Fed Chairman Jerome Powell will speak on Friday and that may be the only thing keeping some traders at their desks late in the week. Most will be leaving on Thursday for an early holiday.

The report that raised rate expectations last week was the Philly Fed Manufacturing on Thursday. The headline number spiked from 23.2 to 34.4 and the highest since last May. New orders exploded higher from 18.6 to 40.6. U.S. manufacturing is doing well in the current economic environment.

Ths week we see home sales, both new and existing, and expectations are flat. The rising mortgage rates, limited supply and rising prices may keep sales steady and not rising.

There are three more regional manufacturing reports this week with the Kansas report likely to post a decline. The Kansas region is impacted by auto manufacturing and with Ford shutting down its truck line for a week, the report could see a major decline.

Of the 465 S&P companies that have reported earnings, 78.9% have beaten estimates. That is a record since Factset began keeping records. Q1 earnings growth stands at 26.2% with only 35 S&P companies left to report. Revenue has risen 8.2% and 75.2% of companies have beaten estimates. There have been 48 guidance warnings for Q2 and 35 companies have raised guidance. The current forward PE is 16.6. There are 22 S&P companies reporting this week.

This is retail week for earnings. Highlights are AZO, KSS, TJX, LB, LOW, TGT, BBY, GPS, ROST and FL. There are a few others but they are the smaller chains most people would not recognize. Hewlett Packard Enterprise (HPE) reports on Tuesday along with Intuit and Ctrip.com. Medtronic, McKesson and AutoDesk report on Thursday.

Campbell Soup (CPB) reported earnings of 70 cents on revenue of $2.13 billion. Analysts were expecting 60 cents and $2.13 billion. They guided for 2018 for earnings to fall 5% to 6% to $2.85-$2.90 as a result of the Snyder Lance acquisition. The prior guidance was a decline of 1% to 3%. Analysts were expecting $3.11. Sales are expected to rise 10% to 11%, up from 0% to 1%, due to the acquisition. The company also announced the CEO, Denise Morrison, was retiring effective immediately. Investors did not like the lowered guidance and the CEO effectively bailing out of troubled company. Shares plunged 12% on the news.

The challenge is soup. Millennials do not eat soup. Where soup was a diet staple in the 50s to 80s, the demand for soup has steadily declined. In my local Kroger, they used to have about a 30-foot section dedicated to soup of all kinds with multiple brands, styles and can sizes. Several months ago, I was looking for soup and the shelf display was gone. The new soup section was about 8 feet long and had Campbell and Kroger as the only brands and only in the standard size soup can.

The manager happened to walk by and I asked him where they had moved the other display with all the different kinds of soup. He said they deleted it because soup does not sell. I live in Colorado where it is cold six months of the year. If you cannot sell soup here, the market has truly died and that is the problem with Campbell. They are trying to move into various fresh pack products but it is slow going. The decline in the soup portion of their revenue is offsetting the gain in the fresh products.

Astrazenaca (AZN) reported earnings of 48 cents that missed estimates for 60 cents. Earnings fell 46% on a 38% hit to Crestor sales by new generic drugs. Revenue was $5.18 billion compared to estimates for $5.28 billion. Sales in China rose 31% to more than $1 billion. They guided for the full year for earnings of $3.30-$3.50. The CEO said the patent expirations would be mostly behind them by the end of 2018. New drugs will pick up the slack. Shares dipped at the open but rebounded to close flat on the affirmed guidance.

Deere & Co. (DE) reported earnings of $3.14 that missed estimates for $3.30. Revenue rose $2.5 billion to $9.747 billion but still missed overly aggressive estimates for $9.822 billion. The company said raw material costs were rising along with freight costs. However, they guided for sales to rise 30% for the year and 35% in Q2. The CEO said they were raising prices to combat these problems. The strong guidance caused investors to overlook the earnings miss and the stock spiked $8 and lifted the sector.

The big challenge to the Nasdaq came from Applied Materials (AMAT) earnings on Thursday after the close. The company reported earnings of $1.22 on revenue of $4.57 billion. Analysts expected $1.14 and $4.45 billion. They guided for Q2 earnings of $1.13-$1.21 on revenue of $4.33-$4.53 billion. Analysts were expecting $1.16 on revenue of $4.53 billion. The weaker guidance was due to a slowing market for smartphones. This impacts memory, chips and screen components.

AMAT had a good quarter with sales of tools for making TV screens and smart phone screens rise 53%. Tools for making semiconductors rose 25% with 37% for making NAND chips and 31% for making DRAM chips.

Unfortunately, once the CEO said on the call that demand for smartphone components was falling, especially for high-end models. Excessive inventory in Q2 was going to cause a dip in earnings until that inventory was reduced. He predicted a rebound in Q3/Q4, which happens to be when Apple will release its three new phones. He also said timing and expected volume of smartphones with OLED screens suggest that revenue will decline further in 2019.

All this negativity surrounding high-end smart phones caused the entire sector to collapse. Universal Display (OLED) a maker of OLED screens, declined 6% on the AMAT guidance. OLED has had a tough year falling from $208 to $87 as the various Apple rumors weighed on the stock in Q1. In the earnings call from OLED, the CEO said the industry was seeing some "capacity digestion this year" suggesting there was excess inventory. He also said "the first half of the year is being impacted by the soft premium smartphone market." He said growth should improve significantly in 2019.

When enough of the major players in the sector warn about soft demand and over capacity, you eventually have to believe them regardless of what Apple is saying.

Paypal (PYPL) said it was buying financial technology company iZettle for $2.2 billion. This is the largest acquisition in Paypal's history. This will give Paypal the ability to expand its digital payment service into thousands of brick and mortar retailers in Europe and Latin America. Paypal will gain entry into 11 new markets with the deal. iZettle is currently on pace to process about $6 billion in payments in 2018.

Chip stocks received new coverage from Cowen with Nvidia and AMD taking the lead roles. The analyst said AMD has taken several quarters to ramp up their newest server chips but 2H18 OEM sales should rise sharply to complement cloud growth. He named 8 major cloud companies that will be buying thousands of servers powered by AMD chips. He ranked AMD an outperform with an $18 price target.

He said Nvidia would dominate the AI and autonomous driving markets. Datacenter business and gaming cards may be driving the majority of revenue today but the auto computing business is on the cusp of significant high margin growth. "In our view, no silicon company has the breadth of solutions and partnerships that Nvidia has accumulated for end-to-end autonomous driving solutions. We view Nvidia as the premier AI driven growth story in semis and possibly the entire tech industry." He has an outperform rating and $325 price target.

Crude prices have been holding in the $71.50 range for the last two weeks. There are lots of headlines providing support but very little in the form of real events. Professional traders are holding a very large number of long positions on expectations for a flare up in the Middle East more than likely involving Iran.

With the market struggling I thought we should glance at the various sectors for a clue as to future market direction. The leaders are the energy and technology sectors. The weakest is the financial sector despite rising rates and a Fed that could easily hike four times in 2018. The rest of the sectors are struggling. Materials, consumer discretionary, industrials, etc, are rebounding but not showing any excitement. The tech and energy sectors cannot pull the markets up to new highs on their own. With the lackluster performance of the other sectors, it is going to be a fight for the market to continue higher in the weeks ahead.

We talk a lot about the Volatility Index or $VIX, which is calculated from options on the S&P-500. There is also the $VXN which is for tech stocks on the Nasdaq 100. The VXN has already returned to the pre correction levels with the Nasdaq 100 testing the 7,000 level last week. The market may be struggling but it is not declining and that is a key point shown by the declining volatility indicators.


I had hoped we would be looking at a better setup by this weekend. Unfortunately, it was a negative week for every index with the exception of the Russell. The potential for a trade war with China was a material reason for the market weakness.

On Saturday, the U.S. and China signed a trade agreement where both pledged to reduce the trade deficit with China buying significantly more from the USA. However, this was an agreement without details. Basically they agreed to an impasse and to continue talking out of the public eye. The trade meeting in Washington ended without any specific details. The text reads as follows:

"To meet the growing consumption needs of the Chinese people and the need for high-quality economic development, China will significantly increase purchases of United States goods and services. This will help support growth and employment in the United States." Beijing and Washington agreed to "meaningful increases in United States agriculture and energy exports. The United States will send a team to China to work out the details."

This way both sides could say the meeting was a success without elaborating on any details. This agreement, even as vague as it is, should be a positive for the markets on Monday. Equities will not have the overhang of a possible trade war with China. That may happen eventually if the parties can never agree on the details but that could be many months in the future. For the short term, the trade war headlines should fade.

Despite the headline worries, the S&P managed to hold over the support of the 100-day average. This had been resistance but once over, it became support. The index still needs to move over 2,750 to pull cautious investors back into the market. The 100-day is 2,708 and there is also support at 2,700.

The Dow was rescued from a negative close by the 49-point contribution from Boeing. We should see further gains by Boeing on Monday as a result of the China trade deal because that is big ticket items China can buy to help reduce the deficit.

Unlike the S&P, the Dow is fighting resistance at the 100-day rather than using it as support. That level is 24,850 and there is added resistance at 25,000. If the China trade deal gives the market a boost on Monday, the Dow needs to break over 25,000 and hold it or sellers will be encouraged. The closer we get to the holiday weekend without breaking over 25,000 the more risk we could see. However, Friday's before a 3-day weekend tend to be positive despite the increased event risk and that could help ease any weakness.

The Nasdaq benefitted from some big gains in only a few stocks the prior week. Last week the internals were mostly negative and there were some sporadic gains but there was no concerted effort on a broad market basis. The Nasdaq is suffering from post earnings depression.

Both the Nasdaq indexes have what could be called a head and shoulders pattern. The neckline on the NDX is about 7,015 and a failure to rise above that level could foretell a significant decline. The China deal could lift techs as well since there may be a ZTE component they are not disclosing. Any thawing of trade worries with China will likely have that component since President Trump has already dropped a hint. ZTE buys billions of dollars of networking components from U.S. suppliers so letting them reopen for business is also positive for the trade deficit.

The Russell was by far the strongest index and it has been due to the China trade worries. The small caps are immune to sanctions and tariffs. If that trade cloud has really evaporated we could see the Russell give back its gains as investors rotate back into the big caps. The Russell only gained 1 point on Friday because the China trade meeting was the top political headline. Investors were probably worried a deal would develop.

Monday's direction will probably be determined by the Chinese deal. It will depend on whether investors believe a deal actually exists or did they just agree to continue talking after a stalemate. Deals are difficult to complete under the relentless stare of the TV cameras. Deals are best done in private where there is no outside political pressure. If they are going to work something out in private it would more than likely be beneficial. Investors should know that and it will be interesting to see how the market opens on Monday.

On Sunday, 60 Minutes will do an article on the power of Google and why the search giant may be headed for some serious problems in the future. Companies have come to dread being featured on the show because it normally means uninvited scrutiny and a decline in their stock price. LINK

Enter passively and exit aggressively!

Jim Brown

Send Jim an email


"Let us not seek the Republican answer or the Democratic answer, but the right answer. Let us not seek blame for the past. Let us accept our own responsibility for the future.

John F Kennedy

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

Low Volume Fade

by Jim Brown

Click here to email Jim Brown
The various competing headlines last week combined to produce a minor decline on low volume.

There were numerous headlines dragging down the market but the decline was minimal. The indexes, with the exception of the Russell, appeared to be fading as the week progressed.

Fighting for trader's attention were headlines on the China trade meeting, rising oil prices, rising interest rates, rising inflation, improving economics, spiking dollar, etc. All of these are negative for the market with the exception of improving economics. That may be negative simply because it means the Fed will hike rates faster.

The big cap indexes traded sideways in a tight range with the exception of the big drop on Tuesday. Despite the Tuesday decline the A/D line was relatively flat and holding at recent highs. The low volume accentuates the imbalances. For instance on Tuesday there were 326 decliners on the S&P and 167 advancers. On Wednesday, there were 324 advancers and 173 decliners. That was almost an exact reversal. Dip buyers are alive and well but we do not have any price chasers.

Even though the Nasdaq declined -48 points for the week, the A/D line was strongly positive. The Nasdaq was impacted by losses in a few large cap stocks including AAPL, BIDU, GOOGL, TSLA, etc.

The chart on the S&P is very close to a breakdown, assuming the Chinese trade headlines do not send it higher on Monday. The 50-day average is still declining. The RSI and CCI have rolled over and the MACD is flattening.

The index fell back to use the 100-day as support and the Friday close was only 4 points above that average. Without the Chinese headlines over the weekend I would have expected the S&P to break below support on Monday. It remains to be seen if the headlines will produce a rally.

The Dow chart is similar with the exception the Dow is below the 100-day and trying to break out. This was solid resistance all week. The 100-day was the resistance that stopped the April rally and gave us more than two weeks of declines.

The 24,500 level is critical this week. We need to remain above it if we have any hope of a June rally.

The Nasdaq remains correlated to the semiconductor index. The decline in chip stocks pulled the Nasdaq lower.

The Nasdaq charts both have strong resistance and both could be seen as a head and shoulders pattern. If the indexes cannot rebound to break out of that right shoulder, we could be in for a protracted decline. The 50-day is finally about to cross below the 100-day average and that will be mildly bearish. It has been telegraphed for so long it is old news.

The Russell 2000 broke out to a new high as investors moved into tariff and trade proof stocks. If the China news is seen as a big deal on Monday, the Russell could retrace its gains as investors rotate back into big caps.

The split between Dow and Russell performance has widened significantly over the last two weeks.

Bearish sentiment collapsed last week despite the weak market performance. The bearish reading of 20.6 is the second lowest reading of the year. The neutral reading was over 40% for the third consecutive week. Investors are very uncertain and I am surprised the bearish sentiment was not stronger given the weak indexes.

I am concerned the lack of details in the Chinese trade deal may leave investors disappointed. Without any measurable items, it is just another worthless piece of paper. China is playing us along and using their relation with North Korea as a bargaining chip in the trade negotiations. Had there been some strong details on Saturday I believe the market would have rallied next week. Without the details there are no assurances there is actually a deal. This may sour sentiment. I would be careful with adding long positions until we see how the market reacts.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Analyst Upgrades

by Jim Brown

Click here to email Jim Brown

Editors Note:

Micron received multiple analyst upgrades with high targets last week and a headline decline on Friday could be a buying opportunity.


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


MU - Micron Technology - Company Profile

Micron Technology, Inc. provides semiconductor systems worldwide. The company operates through four segments: Compute and Networking Business Unit, Storage Business Unit, Mobile Business Unit, and Embedded Business Unit. It offers DDR3 and DDR4 DRAM products for computers, servers, networking devices, communications equipment, consumer electronics, automotive, and industrial applications; lower power DRAM products for smartphones, tablets, automotive, laptop computers, and other mobile consumer device applications; DDR2 DRAM and DDR DRAM, GDDR5 and GDDR5X DRAM, SDRAM, and RLDRAM products for networking devices, servers, consumer electronics, communications equipment, computer peripherals, and automotive and industrial applications, as well as for computer memory upgrades; and hybrid memory cube semiconductor memory devices. The company also provides NAND products, which are electrically re-writeable, non-volatile semiconductor memory, and storage devices; client solid-state drives (SSDs) for notebooks, desktops, workstations, and other consumer applications; enterprise SSDs for server and storage applications; cloud SSDs; and multi-chip package and managed NAND products. In addition, it manufactures products that are sold under other brand names; and resells flash memory products that are purchased from other NAND Flash suppliers. Further, the company provides 3D XPoint non-volatile memory products; and NOR Flash, which are electrically re-writeable and semiconductor memory devices for automotive, industrial, connected home, and consumer applications. It markets its products to original equipment manufacturers and retailers through its internal sales force, independent sales representatives, and distributors; and through a Web-based customer direct sales channel, and channel and distribution partners. Company description from FinViz.com.

The chipwreck on Friday from the AMAT earnings, caused Micron to drop -2.4%. Given its recent rebound that was minimal. Earlier in the week Stifel reiterated a buy rating and raised the price target to $101. A day later RBC Capital initiated coverage with a buy rating and $80 target. MU closed Friday at $53.

The long awaited decline in DRAM/NAND prices has failed to appear. Micron did say they thought prices would "normalize" the second half of this year. They still reported blowout earnings because prices have been high for the last year due to shortages.

Micron and Samsung, the two biggest memory producers are being smart and not flooding the market with supply as they would have done in prior years. This keeps the prices stable and they are going to normalize at a higher level.

Analysts expect Micron's revenue to grow 44% in 2018 to $29.3 billion with earnings growth of 121%. Yes, 121%. That is up from estimates in February for 40% sales growth and 102% earnings growth. At the end of 2017 analysts were expecting 26% and 60% earnings growth. Despite this monster revenue/earnings growth the stock only trades at a PE of 6. That is less than Ford for a high growth tech stock.

Earnings June 21st.

Buy July $57.50 call, currently $2.80, initial stop loss $49.65.


No New Bearish Plays

In Play Updates and Reviews

Time Running Out

by Jim Brown

Click here to email Jim Brown

Editors Note:

The calendar is winding down on May and summer is approaching. The big cap indexes are not showing any strength and it looks like investors are already checking out for the summer. Time will tell but the charts are weakening.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

No Changes

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

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

BULLISH Play Updates

ABBV - AbbVie - Company Profile


ABBV will show its progress in the cancer field with more than 30 abstracts to be presented at the annual ASCO conference June 1-5 in Chicago. They will present new drug results in dealing with different types of tumors. This could lift the stock if the news is good.

Original Trade Description: May 12th

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

Expected earnings July 26th.

A lot of companies have 1-2 real drugs in the pipeline that may be approved. Several companies have one drug that could be a blockbuster and reach $1 billion in sales annually. AbbVie has multiple blockbusters in the pipeline and dozens of other drugs already in the market. AbbVie was a spinoff from Abbott Laboratories in 2012 and they are doing great.

ABBV reported earnings of $1.87 compared to estimates for $1.79. Revenue was $7.93 billion, beating estimates for $7.60 billion. Humira, Imbruvica, Lupron, Creon, Synagis, AndroGeol, Duodopa and Sevoflurane sales all came in above expectations. The company raised guidance from $7.33-$7.43 to $7.66-$7.76. They also announced a $7.5 billion buyback starting May 1st.

The company's many new drugs are going to be cash cows. Imbruvica generated $1.8 billion in sales in 2016 and could reach $7 billion annually over the next couple of years. Venclexta was approved in 2016 for leukemia and sales could peak at $3.5 billion a year. An experimental cancer drug called Rova-T could hit $5 billion a year when approved. A psoriasis drug called risankizumab could produce $4 billion a year and arthritis drug upadacitinib could peak at $3.5 billion.

AbbVie's drug Humira is expected to sell more than $20 billion in 2018 after a $18 billion revenue in 2017. The FDA has 10 FDA approved indications giving it a massive patient base. This is just one of AbbVie's billion dollar blockbuster drugs. AbbVie and Amgen reached an agreement on a biosimilar for Humira. Amgen can sell its copy in the US starting Jan 23rd, 2023 and several European countries on Oct 16th, 2018. Amgen will pay royalties to AbbVie for the marketing rights. Both parties canceled legal proceedings regarding existing patents. The marketing agreement grants "non-exclusive" right, which suggests AbbVie will repeat the same agreement with other companies and thereby guaranteeing future royalty streams.

AbbVie has declared war on the Gilead Sciences Hep-C franchise. The AbbVie drug Mavyret has a 97.5% cure rate and only costs $13,200 for four weeks of treatment compared to Gilead's newest drugs at $25,000 for four-weeks. Most patients are cured in 8 weeks but some have to continue for 12 weeks. Gilead's Harvoni was initially $96,000 for a 12-week treatment.

Here is the key point for AbbVie. The company said non-Humira sales are expected to rise from $9.6 billion in 2017 to $35 billion by 2025. The company is launching 20 additional products by 2020 with at least 8 of them expected to generate more than $1 billion in annual sales. These drugs will focus on Alzheimers, womens health and Hepatitis C.

In mid March AbbVie was crushed after they reported disappointing mid-stage results on their Rova-T drug. They were hoping to use the drug in a different application to treat third line small cell lung cancer. The company said it has shifted its focus after a phase 2 trial resulted in a "magnitude of effect across multiple parameters." This is not a setback but a redirection. AbbVie has dozens of drugs in the pipeline with many of them expected to be blockbusters. The company has seen analysts raise earnings estimates 11 times over the last 60 days. Expectations are for 34% earnings growth and 14% revenue growth in 2018.

Shares are recovering from the March drop and have tested the 100-day average twice. A break over that level could trigger short covering.

I am reaching out to August so that earnings expectations are still reflected in the option premium when we exit before earnings.

Position 5/14/18:
Long Aug $110 Call @ $3.50, see portfolio graphic for stop loss.

APTV - Aptiv Plc - Company Profile


No specific news. Minor decline from Thursday's new high.

Original Trade Description: May 16th

Aptiv PLC, together with its subsidiaries, designs and manufacturers vehicle components, and provides electrical, electronic, and safety technology solutions to the automotive and commercial vehicle markets worldwide. It operates through two segments, Signal and Power Solutions; and Advanced Safety and User Experience. The Signal and Power Solutions segment designs, manufactures, and assembles vehicle's electrical architecture, including engineered component products, connectors, wiring assemblies and harnesses, cable management, electrical centers, and hybrid high voltage and safety distribution systems. The Advanced Safety and User Experience segment provides critical components, systems, and software development for passenger safety, security, comfort, and vehicle operation, including body controls, infotainment and connectivity systems, passive and active safety electronics, autonomous driving software and technologies, displays, and systems integration. The company was formerly known as Delphi Automotive PLC and changed its name to Aptiv PLC in December 2017. Company description from FinViz.com.

You have never heard of Aptiv because they were formerly Delphi Automotive. The company split in December 2017. Aptiv has 147,000 employees and operated in 45 countries.

Aptiv reported Q1 earnings of $1.29 that rose 15%. Revenue rose 8% to $3.6 billion. They returned $208 million to shareholders through dividends and buybacks. They guided for Q2 for revenue of $3.5-$3.6 billion and earnings of $1.33-$1.38.

In early May they announced a fleet of 30 autonomous vehicles in Las Vegas on the Lyft network. These are a product of Aptiv's Mobility and Services group. Passengers can opt-in for an autonomous vehicle when they order their ride.

The company has decades of automotive experience and is well suited to competing in the self-driving arena.

Shares spiked significantly after the earnings and flat lined at $94-$95 for a week. Today they gained $1.86 to break out to a new high over resistance from January.

Position 5/17/18:
Long August $105 call @ $1.80, see portfolio graphic for stop loss.

CAT - Caterpillar - Company Profile


No specific news. Shares failed at resistance again but posted a nice $2 gain. The stock remains cheap at 13.9 PE. Competitor Deere (DE) posted an earnings miss but raised guidance and stock recovered from a premarket drop to post an $8 gain. This boosted CAT and the sector.

Original Trade Description: April 25th

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.

In mid February, CAT reported their rolling 3-month sales rose 34% globally. There was a 23% rise in 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.

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.

On April 24th, CAT reported earnings of $2.82 that rose 120% on a 31% rise in revenue to $12.86 billion and they raised guidance. Analysts were expecting $2.11 and $11.58 billion. Everything was great with the stock spiking 4.5% on the news. Unfortunately, on the conference call the CEO said operating margins would be lower for the rest of 2018 because of targeted investments to continue expanding their offerings and services, consistent with our strategy for long-term growth. Shares immediately crashed from the $161 high to close at $144.

I believe this is a buying opportunity. Earnings rose 120%. Not 10% or 20% but 120%. Revenue rose 31%. This company is knocking the cover off the ball. They raised guidance but said "margins" would decline because of investments. That is bullish for real investors.

There is decent support at $144 and with those earnings I would be shocked if the stock declined significantly. CAT has not traded below the 200-day since May-2016.

I am reaching out to August so the options will retain their premium if we get some additional market volatility. Expiration is after the July earnings so that will also support premiums. We can buy time but we do not have to use it. If you want to buy the July strike it is about $1 cheaper but it will evaporate faster since it expires before earnings.

Update 5/9: At the conference this morning the CAT CEO clarified his comment on earnings saying, it was not meant to suggest that markets are peaking. The "high water mark" comment just meant CAT had a very good quarter and earnings made a new record high. Shares rallied $2.68 on the clarification.

Position 4/26/18:

Long Aug $155 Call @ $5.05, see portfolio graphic for stop loss.

MTCH - Match Group - Company Profile


No specific news. Shares closed at a 3-week post crash high. The rebound is still in play.

Original Trade Description: May 9th

Match Group, Inc. provides dating products. It operates a portfolio of brands, including Tinder, Match, PlentyOfFish, Meetic, OkCupid, OurTime, and Pairs. Match Group, Inc. offers its dating products through its Websites and applications in 42 languages approximately in 190 countries. The company was incorporated in 2009 and is headquartered in Dallas, Texas. Match Group, Inc. is a subsidiary of IAC/InterActiveCorp. Company description from FinViz.com.

Match reported earnings on Tuesday of 33 cents that easily beat estimates for 19 cents. Revenue rose 36% to $407.4 million and beat estimates of $386 million. Tinder, their leading revenue generator, added 368,000 paying members beating estimates for 355,000. The CEO said the new Facebook dating service should have no impact on Match because Tinder was the driving force behind their earnings and Facebook has no equivalent application. Match is entrenched and has a loyal following.

The CEO reiterated those comments on Wednesday. Bank of America reiterated a buy rating with a $46 price target.

Match crashed $13 when Facebook made their announcement a week ago. I believe the worst is over since the stock has not decline any further in a week. The close today was a post crash high.

Earnings August 7th.

Position 5/10/18:
Long September $40 call @ $3.70, 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